The complexity of it all

Complexity is never popular in public debate, not with demagogues who just want to slam home their big scary messages and not with more reasonable people who just want a simple answer to what they think is a simple question.  Pauline Hanson’s “please explain” of yesteryear echoes a cry from the heart of ordinary Australia with respect to a whole bunch of issues where there are many shades of grey. This is very much the case with the supply and cost of electricity, now so troubling Australians that the Prime Minister is struggling to surf the waves of a political storm about it.

I coined the acronym “MEGO” during my almost quarter century as a lobbyist for energy investors and suppliers. It stands for “my eyes glaze over” and was borne out of experiencing that effect in a myriad of federal and State MPs and ministers when confronted with an industry explanation of some issue or the other. I recall a senior minister in a federal government practically snarling at me years ago “Orchison, is there any part of your damned industry that isn’t complicated?” (He didn’t say “damned.”) My reply was “No, minister.”

The stabbing point politically in the current energy debate – for both suppliers and politicians – is the assertion that Australians are now paying the world’s highest prices for electricity, about which I wrote here yesterday, seeking to demonstrate that, when you consider where most of us live (ie Victoria, New South Wales and Queensland), this is not correct.

I was reminded in an ensuing tweet by the Energy Networks Australia CEO, John Bradley, that negation of this claim could also be found in a recent Australian Energy Regulator report. And, if you go on the Web to the “State of the Energy Market” annual report of the AER, published in May, you will find a very different picture at page 136 in the form of a comparative bar chart from the one being touted about the media in recent days.

In this diagram, where prices are cast in US cents per kilowatt hour and interpreted on a purchasing power parity basis rather than the currency exchange rates, the ladder of average residential prices for 2015 (which is the most recent year for official global figures) has Australia at 24th and Portugal, Germany, Poland, Italy, Latvia, Turkey, the Slovak Republic, Denmark, Greece and Spain occupying the top 10 places. This chart shows Australia being marginally more expensive than the OECD as a whole and a fair bit less expensive than the UK although a lot more costly than the US and Canada. Even allowing for the latest round of local power price rises (not an area where we are Robinson Crusoe), the picture won’t have changed a great deal.

Now purchasing power calculations – which adjust for differences in nations’ costs of living – are positively despized by some economists and embraced by others. Not being a member of this breed, I can’t take sides – except to point out that our energy regulator sees it as a valid comparator.

I also recall a discussion on the price issue on The Conversation late last year when a federal MP, Craig Kelly, was slamming local suppliers for (he said) charging twice what Americans paid for power. The point was made in response that a higher price doesn’t necessarily mean a higher cost to consumers. Australians, for example, on average use much less energy than Americans – the most recent numbers are 10,800 kilowatt hours annually for a US household versus around 6,000 kWh here.

One of the factors this introduces is that network costs to homes are fixed, so the more energy used, the more the connection charges are diluted in the final bill, lowering the cost per kilowatt hour (which is the basis for the latest shouting about how high our charges are). Did I mention this is all pretty complex?

Then again, the higher prices are, the more likely a country’s consumers are to pursue efficient use of energy. Japan, for example, has high prices — it ranks 16th on the AER ladder — but also has high efficiency and consequently the Japanese spend about the same on energy (in GDP terms) as the Americans.

Australia’s residential energy efficiency performance is comparatively poor and this plays in to the costs we bear for electricity use.

Another issue is the inability of about half of our mass market accountholders to burrow through the maze of energy retailer contract offers to find the cheapest deal that suits their needs (and that last bit is really important). When the current noise subsides, this may turn out to be where the most relief for householders (aka voters) may be gained most quickly. Rod Sims, chair of the Australian Competition & Consumer Commission, which is running a pricing inquiry at present, has promised to “look closely at retailer behavior and offers to see if there are ways to help people find much cheaper plans.”

I suspect there may be more urgency to this focus following this week’s talks between retailers, the Prime Minister, the Treasurer, Scott Morrison, and the Energy Minister, Josh Frydenberg.

Power business complexity, however, is going to be always with us. Just read the AER’s 162-page “State of the Energy Market” report.

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