Energy prices

Energy prices

In the mid-1990’s energy prices in Australia were some of the lowest in the OECD.

I distinctly remember the politicians of the day boasting about how good this was for industry and business and I have to say I bought the argument. Utilities that people have to have should be affordable. The marketing men can persuade me that a Mercedes is so much better than a Hyundai and well worth the price tag because it is a discretionary spend on my part, but water, power and waste removal I must have or we are back in the dark ages.

Twenty years later, the current government has announced a new energy policy that they claim will save the average family $100 a year on their energy bill. This new policy is supposedly a response to the problem that domestic energy prices have risen by 67% in the last decade, and with supply shortages forecast regularly, the medium term economics suggest this annual rate of increase will persist. Energy costs in Australia are now at the top end of the OECD ranks.

Oops.

Australia is also going to struggle to meet emission reduction targets it promised in Paris in part because this cost pressure from energy has become an excuse not to focus on renewables and to continue with power generation with a heavy emission profile.

Oops again.

Lots of rant and rave opportunities here, classic Muppetville. The one I want to unpack is that cost saving, $100 a year for the average family.

Median annual income in Australia is around $81,000 and has been increasing steadily at around 3.5% more than doubling since 1990’s when energy was cheap.

An income of roughly $220 per day is right up there with the highest in the world. Savings on the energy bill proposed by the government is 27c per day, not even the price of a coffee and cookie in a month.

The average household energy bill, on the other hand, is around $4.20 per day and currently increasing at close to 7% or roughly 29c per day.

Phew, that’s a relief. The government policy is going to save the average household most of the money they would have to spend to on the price rises. Superb.

Should average annual income continue to rise at 3.5% the 29c cost saving on energy is further compensated by an additional $7.70 per day in extra income.

This explains why economic growth is so important to governments. Despite inevitable difficulty around the margins, on average it puts money in voters pockets.

It also makes that first ‘oops’ identified earlier a huge blunder.

Energy is literally the engine of economies so to let its costs spiral and allow the security of supply to lapse is stupid however you spin it.

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