Business Environment Profiles - Australia
Published: 18 December 2024
Electricity service price
155 Index
0.6 %
This report analyses the price of electricity. The price of electricity is measured by the electricity input price index for manufacturers and is sourced from the Australian Bureau of Statistics. This measures the price of electricity delivered to factories and includes all related costs such as network fees and non-deductable taxes. The historical data for this report uses the average value of a quarterly index over each financial year and is measured in index points.
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IBISWorld expects the electricity service price index to increase by 4.9% in 2024-25, to reach 154.9 index points. Prices in the National Energy Market (NEM) expanded over the first six months of the year, with Black Coal generated electricity prices (38.9% of total energy generation) expanding by over 30.0%. Wind (15.1% of total) and Hydro (6.8%) have also increased by 13.8% and 46.6%, respectively, through the first two quarters of 2024-25. These higher procurement costs have translated to higher downstream service prices. Electricity demand across the NEM also increased by 3.4% in Q3 2024 compared to Q3 2023, placing further upwards pressure on electricity service prices. Prices are expected to remain high over the second half of the year, particularly if downstream demand continues to escalate.
The electricity service price has surged over the ten years through 2024-25. Higher natural gas prices increased input costs for generators, placing upwards pressure on the costs of electricity generation. Australia has targeted liquefied natural gas (LNG) export opportunities, exposing previously low domestic gas prices to global market forces and boosting gas prices. The closure of the coal-fired Liddell Power Station in April 2023, which supplied baseload power to New South Wales and issues with the electricity grid's reliability, particularly in South Australia, have offset further pricing declines across the electricity supply chain over the past few years. The unpredictability of wholesale prices has also significantly hindered potential reductions in electricity service prices. Retailers are often reluctant to lower their prices proportionately when wholesale electricity prices take a sudden dive, primarily because of the highly uncertain and risky nature of the market conditions in which they operate. This makes retail prices stickier than those in wholesale markets.
The price of electricity for industrial firms includes generation, network, and environmental costs, as well as margins for electricity retailers. According to the ACCC, over the decade through 2017-18, electricity transmission and distribution costs accounted for 38% of the increase in electricity prices. Environmental costs accounted for 15%, while retail expenses accounted for 8%. Wholesale electricity prices accounted for 27% of the growth in final prices. The remaining 13% is attributable to growth in retail profit margins. The ACCC deemed the growth in electricity prices to be a result of overinvestment in electricity transmission and distribution networks by private firms that sought to maximise their return on their assets, which energy market regulators guaranteed. As a result of this overinvestment, the AER placed limitations on the maximum allowable revenue for several operators. This move has successfully curtailed price growth, as electricity service prices are only expected to grow by 8.8% between 2017-18 and 2024-25, compared to the growth rate in excess of 100.0% witnessed in the decade prior.
The pandemic had a moderate impact on the energy market in Australia. Energy demand from commercial operators affected by pandemic-related lockdowns dropped, leading to the electricity service price falling over the two years through 2020-21. However, these declines were partially offset by a spike in household-level demand. Since March 2022, the global coal and natural gas supply has been significantly constrained because of the Russia-Ukraine conflict. Russia is a major exporter of thermal coal and natural gas. The sanctions imposed on Russia in response to the conflict caused the prices of coal and natural gas to rise, placing upward pressure on costs for electricity service providers in 2021-22 and 2022-23, a trend that was passed on to consumers. Disruptions caused by natural disasters like flooding also adversely impacted coal miners' operations, reducing coal supply and placing further pressure on electricity service prices. Nonetheless, as supply conditions stabilised, coal prices have trended downwards. Fewer weather-related disruptions improved operating conditions for coal miners, prompting them to ramp up production in 2023-24, bolstering coal supply. Similarly, natural gas prices have fallen as new supplies from the United States have eased supply issues caused by the Russia-Ukraine conflict. These falling input costs over 2023-24 placed downwards pressure on prices across the electricity supply chain, causing a decline in final service prices. Despite the decline, prices remained elevated due to the dramatic surges experienced in the preceding two years.
The Australian national electricity market has gradually shifted from centralised large fossil fuel-based generation to an array of smaller-scale wind and solar generators and demand response practices. Australia's gradual shift to renewable energies has placed downwards pressure on electricity service prices, given their relatively lower costs compared to fossil fuels. The proportion of electricity generated by renewables jumped from around 22.6% in 2019-20, to more than 35.0% in 2023-24, with this percentage expected to continue to trend upwards in 2024-25. These cost reductions have benefited downstream users, including manufacturers. Overall, IBISWorld forecasts the electricity service price index to expand at a compound annual rate of 0.6% over the five years through 2024-25.
The electricity service price index is forecast to decline 5.3% in 2025-26, to reach 146.7 index ...
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