May factors influence how much you pay for electricity – not just how much of it you use. Electricity pricing and gas pricing can be pretty complex, but it can be useful to get an understanding of what drives energy expenses; we’ll try to break down what you need to know and leave out the bits you don’t.
The electricity supply chain
First, a little background…
Electricity supply involves generators, networks and retailers. Each of these links in the chain incurs costs that are ultimately passed onto consumers via power bills.
Most Australians get their power via the National Electricity Market (NEM). The NEM is a wholesale electricity market in which generators sell electricity to retailers, who then on-sell to consumers.
Within this market, prices are determined every five minutes and averaged over each half hour; generators bid how much electricity they are prepared to sell to retailers and at what price for each five-minute interval. Starting from the lowest priced bid, generator bids are accepted by the market operator (AEMO) until the point where there is enough supply to meet demand. The price paid for all electricity in each interval is that of the highest bid accepted.
Wholesale pricing is largely unregulated, and prices vary continually in response to supply and demand. Wholesale prices may go up when:
- demand is high, like on hot days when lots of people are running air conditioners.
- there is a disruption to normal supply, e.g. a main generator or transmission line is not working.
- other external factors – such as a water shortages – drive up generators’ costs.
One key factor in power prices over recent years is the cost of replacing ageing network infrastructure to meet rising consumer demand due to larger home sizes and a marked uptake in electrical appliances (especially air conditioners). Basically, we are using more electricity at peak and some networks may encounter issued coping with it.
Distributors need to build infrastructure to meet energy demand at its forecast peak; i.e. the network needs to be able to cope at times when usage spikes, like on hot days. The forecast peak is considerably higher than average and these spikes occur for less than 100 hours a year; nevertheless, network infrastructure needs to be continually updated to be able to meet demand at these times.
This is a costly business and unfortunately it’s the consumers who may incur some of this cost through higher charges on their electricity bill.
While the fluctuations of wholesale pricing and network costs have a significant impact on your electricity expenses, they aren’t directly reflected in the amount you pay for power on a day-to-day basis.
When you enter into an electricity plan with a retailer, you agree to pay them a particular price for power. You may pay the same set rate at all times or different rates according to the time of day (known as ‘time-of-use’ pricing); either way, these electricity rates are determined by your retail company. In some states, there is more regulation around retail pricing, in other states there is less.
When you pay your retailer for electricity, this is – on average – what you’re paying for:
- 51% Network costs – the cost of building and maintaining poles, wires, meter readers and other items in the distribution network.
- 20% Wholesale costs – the cost your retailer pays for your wholesale electricity.
- 9% Carbon price – the cost passed on by fossil-fuel generators for their carbon emissions.
- 4% Environmental schemes – your retailer’s contribution to compulsory Federal and State Government environmental schemes.
- 16% Retail services – what you pay your retailer for retail services and customer service.
*Averages provided by the Commonwealth Treasury 2012. Individual bills will vary.
How do retailers set electricity prices?
Electricity prices are set so that retailers can recover their costs and make a reasonable margin of profit. This means that increases in wholesale, network and government scheme costs may lead to higher bills for consumers overall
Where there is some wiggle room in terms of consumer pricing, however, is in the cost of retail services. In most states, the electricity retail market is now competitive. Generally, there is a set ‘standard contract price’, which is the basic plan you are likely to be on if you have not negotiated a market contract.
BUT, there are likely to be many more plans available.
Understanding electricity retail plans
The standard contract price is the default plan that many Australians may find themselves on. Even in states where this price is regulated, the default plan is generally among the most expensive
Still, as more customers become aware that electricity retail is now a competitive market, retailers are increasingly creating new plans to try and win customers; for most people, there are dozens of electricity pricing plans to choose from.
But with choice comes added complexity and risk. Electricity pricing plans are generally complicated, and it can be difficult to know which way to go. That’s why companies like GoSwitch emerged. The GoSwitch comparison service collates data from available plans in its database, summarises the small print and shows you an expected dollar amount saving for each plan. The database is continuously updated to make sure consumers have access to up to date information.
The bottom-line – what does it all mean for you?
Many of the big factors behind electricity pricing are beyond the control of the consumer; here’s how you can make the most of the things you CAN control to keep your costs down:
1. Review your electricity retail plan.
Compare the various types of electricity plans and payment options available from the retailers in your area to make sure you’re not paying more than you need to. Retailers are constantly coming up with new plans and special offers, so it’s worthwhile to stay up to date on market and product changes. Some consumers worry they might be ‘locked-in’ to their current plan and unable to switch. This is often not the case and even when it is, contract exit fees are regulated; most of the time the benefits from switching are considerably greater than the cost of early exit. Either way, you get a 10-day cooling off period when you decide to switch that should insulate you from any nasty surprises.
2. Find simple ways to use less.
Cutting down your power consumption isn’t necessarily about ‘going without’. Electricity is an easy thing to waste – a light left on here, an appliance on standby there. If you can increase your awareness of what you’re actually using and make a few small tweaks to avoid wastage, you can cut your costs without impacting your daily life. There are many ways you can save energy – check out our Energy Usage Tips section for ideas. In the meantime, here are three things you can do right now:
- Switch off appliances at the wall when you’re not using them.
- Turn off lights when you leave the room.
- Increase your thermostat temperature by one degree when it’s hot outside, decrease it by one degree when it’s cold.
3. Investigate ‘time-of-use’ pricing.
Consumers with smart meters or interval meters may have ‘time-of-use’ pricing available to them, which means they pay different rates for power at different times of the day. The idea is that customers can shift their usage patterns so they are using less at peak times, when demand and prices are at their highest. The jury is still out on time-of-use plans – some question whether consumers actually benefit from this pricing model; others question the accuracy of the meters themselves. Ultimately, the concept is pretty new, and it seems there may be a few kinks that need working out.