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The real price of energy and its cost to us

Are we really paying the highest energy prices in the world, or are we just using more than everyone else?


Australians are rightly concerned about how much we pay for the energy we use.

Australian residential consumers have endured a price increase of 56 per cent in real terms, according to an ACCC report from 2007-08, and to 2017-18.

Before, during and since the most recent federal election, this issue has been a key subject of debate, and remains a pain point. Future energy policy and concerns about climate change are among the key issues that have influenced voting intentions.

Our Prime Minister and other politicians say Australians are paying the highest price for electricity and that this has to stop.

But how much truth is there in this statement? Are Australians really paying the highest price for electricity and other energy sources, and if so how can this be addressed?

An obvious answer would be to enact policies to exert downwards pressure on prices. Yet it is often the case that the obvious answers, though perhaps politically attractive, lead to poor or disastrous decisions in the long term.

As to the veracity of the claim that Australians are paying the highest electricity prices in the world, a quick review of data readily available shows that this is not quite true.

Electricity usage and prices vary from state to state, as shown in the table below.

Average electricity usage rates per state in August 2018. Source: Canstar Blue.

How do such usage and prices compare to other OECD countries? Considering the distribution of prices for electricity across European countries, Australian prices do not look very high.

Caption: Electricity prices for households in the first half of 2018. Source: Eurostat

The EU average price is 0.2049 EUR/kWh = 0.323 AUS$/kWh.

The price in Denmark is 0.3126 EUR/kWh = 0.492 AUS$/kWh.

In Germany it is 0.295 EUR/kWh = 0.464 AUS$/kWh.

The latter two exceed South Australia, where our highest price is experienced.

Maybe our wages are lower?

Perhaps Australian salaries are lower and that makes energy costs too expensive. Well, a look at average wages globally puts Australia way ahead of most EU countries.

Nominal wages place us sixth among OECD countries, just behind Denmark (5th) and ahead of Germany (13th). Adjusting for living expenses and using so called “purchasing power parity” (PPP), Australia ranks 10th, still way above most of Europe.

For example, Spain pays 0.2383 EUR/kWh (0.375 AUS$/kWh), and has a PPP of 53,594 AUS$ compared to Australian PPP of 68,373 AUS$.

So, households in Australia are better placed in their incomes than in the EU. This shows that Australians paying a disproportionately high price for electricity is nothing but a myth.

It’s about consumption, not cost

What is happening is that, because of a relatively low prices for energy, its actually consumption in Australia that is disproportionately high.

An average household in Australia uses 6839 kWh compared to 3079 kWh in Germany, 3944 kWh in Spain, or 2432 kWh in Italy. Bearing in mind the local climatic conditions, Australia should certainly compare much better with Italy than with Northern Europe.

It is difficult to make direct comparisons because of different climates and different sources of energy. While the climate in northern Europe is certainly harsher in terms of low temperatures, and gas rather than electricity is the major source of heating, in Australia airconditioning is driven entirely by electricity.

Still, comparing the consumption of electricity for lighting purposes we see that in Australia we use 4941 kWh per household while Germans manage on less than half: just 2161 kWh per household.

Actually, low electricity cost only stimulates more consumption as there is less incentive to conserve. In other parts of the world there’s a lot of investment in energy saving, houses are increasingly well-insulated, and double or even triple glazing is standard.

But in Australia, house insulation is still relatively rare, double-glazing is avoided and heating, ventilation, and air conditioning (HVAC) systems run at full speed summer and winter.

This means the total price Australian households pay for electricity is indeed high; but not because of a high per kilowatt price, but because of inappropriately high overall consumption of energy, which is only stimulated by not so high prices.

How to address this

The market sends strong signals to consumers.

Market mechanisms and price incentives can be effective in changing human preferences and behaviour. Prices can be set to reward specific consumer behaviours and patterns, and penalise others.

There is no surprise that energy consumption per household in countries like Denmark and Germany is low compared to its high use in Australia.

However, we must be careful about simply taxing energy to increase prices. Recent events in France are a good example of how society may react when energy taxes are introduced with no due preparation, justification and care.

The French Yellow Vests/Gilet Jaunes movement began in reaction to rising fuel prices, caused by tax reforms that laid a disproportionate burden on the working and middle classes, especially in rural and peri-urban areas.

While taxing fuel at higher rates is an effective way to decrease fossil fuel consumption and is probably inevitable if we are to address climate change, there is no reason why we should only penalise high consumption without rewarding low consumption at the same time.

As previously shown, the price of energy should be both increased for those with high consumption, while decreased for those who consume little.

There would be less social ground for opposition such as seen in France if the collected fuel taxes were immediately used to subsidise energy saving programs, decreasing the price of public transport, or building infrastructure for cycling or other alternatives to conventional fossil fuel-based transportation.

Taxes should not always be seen as penalties, they can be turned into rewards.

Climate change presents another complicating factor when it comes to attempts at lowering electricity prices. Provision of energy, water and food are intertwined with climate change, and have to be dealt with in an integrated way. This means that we cannot be “technology neutral”, to use a term currently favoured in Australia, in choosing the mechanisms to lower electricity prices. Some discretion should be exercised if we are to lower electricity prices without further damaging the climate.

By lowering energy prices, we are also impacting human behaviour. By paying more per kilowatt we may end up paying less in total, and vice versa, just as we see happening when comparing the energy costs and consumption in Germany and Australia.

By paying more for energy now, we may be saving big on the cost of climate change adaptation in the future.

Dr Alexey Voinov is the director of the Center on Persuasive Systems for Wise Adaptive Living (PERSWADE) at the University of Technology Sydney. Ravindra Bagia is a senior lecturer at the School of Information, Systems and Modelling at UTS.

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Comments

7 Responses to “The real price of energy and its cost to us”

  • Elena says:

    I like the article a lot. I think that it would be nice to consider not only the electricity rates but also service charges from electricity providers. Another thing is that consumption patterns of households might differ (singe/couple/family with kids/etc.), it might be also useful to take it into consideration when developing the policies.

  • Pete Dupe says:

    Great analysis, answered all my unarticulated questions in very accessible language, thanks!

  • Alexey Voinov says:

    Regarding the data, you are correct, it’s not just the lights. If you click on the link provided in the article, you’ll see that the number includes appliances: “Electricity consumption for electrical appliances and lighting per electrified household”. Thanks for the correction. Indeed it would probably make more sense to look at a country that would be closer to Australia in terms of climate. Well, if we choose Italy – the number is 1391 kWh per household – significantly lower than Germany and almost 1/3 of what we have here.

  • Gaetano says:

    I totally agree that air-conditioning, TV screens, electric stoves, computers and the lack of good insulation are main drivers for higher electricity usage but cannot understand how lighting can use an average 4900kwh per household in Australia.

    If I assume an average of 6 rooms (kitchen, dining room, living room and 3 bedrooms) using lighting for an average 5 hours a day, that equates to every room having an average 447w worth of lighting power, which seems an awful lot.since a bedroom would at most have 100w worth of bulbs.

    Could you shed some light on the assumptions for the statement that we use 4900+kWh for lighting?

  • Bruce Easton says:

    i enjoyed the article – thanks for that.

    We certainly use a lot of electricity but I’m not sure about some of your claims though – certainly insulation is not relatively rare, double glazing is getting some pickup but off a low base and HVAC running at full winter and summer – not sure?
    Pool pumps, 2 and 3 fridges, use of tumble dryers and so on – all contribute as well.

    Regardless, nice to burst that balloon of highest prices in the world.

  • Ben says:

    Thank you so much Alexey and Ravindra! You’ve hit the nail on the head. A great summary confirming the work we have ahead of us, with some poignant solutions.

  • Dennis D,Arcy says:

    A very informative and balanced atricle. Australian consumers generally use both electicity and gas and it is the total bill that matters. It would be more informative if the article could be expanded to also show gas consumption, price movements, combined total bills and compare that similarly with a selection of other OECD countries.

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