Are Australians paying twice as much for electricity as Americans?

Business here and households here, already we’re paying twice the cost of the US for electricity. – Craig Kelly MP, chair of the backbench environment and energy committee, ABC Radio National Breakfast interview, December 6, 2016. (Listen from 7.38)

Environment and energy minister Josh Frydenberg recently left open the possibility of some form of carbon trading in the electricity sector. He later ruled out that option, saying he wanted to keep electricity prices down.

Following Frydenberg’s initial comments, Liberal MP Craig Kelly said businesses and households in Australia are already paying twice as much as Americans for their electricity.

Is that true?

Checking the source

When asked for sources to support his statement, Craig Kelly referred The Conversation to a range of sources, saying that:

… a report titled 2015 Residential Electricity Price Trends lists [on page 212] the average Australian price at 28.72 cents per kilowatt hour for 2014/2015.

In comparison, the US Energy Information Administration lists the average price for residential electricity [in the US] at 10.44 cents for 2014.

Converting 10.44 US cents at A$1/US$0.74 – is the equivalent of 14.11 cents Australia.

So using these sources (in Australian cents) we have 14.11 cents in the USA and 28.72 cents in Australia. Therefore I think to say that “we’re paying twice the cost of the US for electricity” (on average) is pretty much right on the money.

You can read Craig Kelly’s full response here.

Do Australians pay more?

It’s definitely true that Australians pay much more for their electricity than US citizens do (and Australian prices are set to rise even further, according to the Australian Energy Market Commission.

Using OECD data, there’s one measure that says it is twice as much – or at least it was twice as much as recently as 2014. Another measure – a better measure, in my view – shows Australians pay about 50% more than US citizens do for their electricity.

As Craig Kelly notes in his full response, there is significant variation in electricity prices across states and territories in Australia and in the United States, so comparing the two is not a simple matter. The Australian Energy Market Commission’s annual Electricity Price Trends report shows that retail prices in Australia vary from 18.44 c/kWh in the Australian Capital Territory to 29.75 c/KWh in South Australia.

But we can use Organisation for Economic Co-operation and Development (OECD) data on wholesale and retail indices energy prices to check Craig Kelly’s statement.

The wholesale price is the cost of generating the energy that is sent to the grid. Retail prices are what householders are more used to talking about. Retail prices factor in extra costs like transmission and distribution (“poles and wires”), retailer margins and other levies (such as Feed-in Tariff and Renewable Energy Target costs). In other words, it’s what we’re paying on our power bill.

Let’s examine the data.

A tale of two measures

The two measures I have used to compare prices in the US and Australia are called “market exchange rates” and “purchasing power parities”. Craig Kelly’s calculations rely on market exchange rates, so we will start with that one.

Market exchange rates simply means converting the price in one country’s currency to that of another country’s currency, as Kelly did. This measure of comparison is more volatile than purchasing power parity exchange rates.

Using market exchange rates, OECD data show that Australian electricity prices have, in recent years, been approximately twice as high as electricity prices in the US. Recently, the gap has narrowed. In 2015, using market exchange rates, electricity prices in Australia were about 70.3% higher than in the US.

The Australian Energy Market Commission projects that Australian prices will rise even further in coming years.

By converting Australian electricity prices into US dollars (market exchange rates), we can see Australian electricity prices have been an average of twice as high as in the US over the past four years – though the gap narrowed in 2015, down to a 70% difference. Chart provided by author, using data from the OECD.

That broadly supports what Kelly said. But if we use purchasing power parity exchange rates, the data show that Australia’s prices are approximately 50% higher than the US.

Purchasing power parity exchange rates, or PPP, factor in inflation and the cost of living in a particular country, and eliminate differences in price levels between countries. This measure allows a cleaner, less volatile comparison between the US and Australia.

The chart below compares the retail prices of electricity in Australia and the United States when adjusted for cost of living differences using purchasing power parity.

Using purchasing power parity exchange rates, OECD data shows household prices of electricity are approximately 50% higher in Australia than in the US. Chart by author, using data from the OECD.

As the above chart of the OECD data shows, household prices of electricity are about 50% higher in Australia than in the US when you use purchasing power parity data.

Why are the prices so different?

As this chart shows, data from OECD indicate there has been a substantial divergence between Australian and American electricity prices since about 2008.

Retail price index: average power prices for householders in the US and Australia. The year 2000 is indexed to 100 (that is, 2000 = 100) Author provided, using data from the OECD

Wholesale price index: the average price the generators charge to the retailers (or distributors) for the power they put into the grid. The year 2000 is indexed to 100 (that is, 2000 = 100) Author provided, using data from the OECD.

As noted in the preliminary report of the Australian chief scientist Alan Finkel’s review of the National Electricity Market, household energy bills in Australia increased 61% on average between 2008 and 2014.

The main reason for this is the cost of maintaining the electricity network – essentially, the poles and wires that deliver the power. Network costs represent between 45% and 55% of a typical electricity bill. This has been the largest contributor to Australia’s increasing prices over the past six years.

Some observers have said that the “gold-plating” of the network came about because of a regulatory regime that encouraged over-investment in poles and wires. This was been partly driven by an effort to shore up electricity supply and an overestimation of demand.

The US shale gas revolution has also helped keep energy more affordable there than in Australia.

The Productivity Commission reported that, in New South Wales, network costs accounted for 80% of price rises in 2010-11 and 50% of price rises in 2011-12.

Is it really that simple?

Not really. Energy economics is far more complicated than can come across in Kelly’s quick quote or this short FactCheck.

While the Australian price is higher, this doesn’t necessarily mean the cost is higher: Australians use much less energy than Americans. This is because as prices increase, energy productivity and energy efficiency also tend to increase. In total, most countries actually spend a similar proportion of GDP on energy costs.

This holds surprisingly consistent across a range of countries. For example, Japan has high energy prices, but also has high energy efficiency and productivity. Consequently, it spends practically the same amount of GDP on energy cost as the US.

So prices may be higher for individuals, but that doesn’t mean the economy-wide costs are higher. All that said, Kelly was talking about the prices for individuals and business, so that’s what this FactCheck is focused on.

Verdict

If we compare Australian and American electricity prices using market exchange rates, Craig Kelly’s comment is correct: Australia’s electricity prices were essentially double those of the United States as recently as 2014. In 2015, using market exchange rates, the US prices were about 70.3% higher.

If we compare the prices using purchasing parity power exchange rates – which I’d argue is the more accurate reflection of the costs of living in each of the countries – Australia’s prices are about 50% higher than the US.

Overall, Craig Kelly’s broader point is correct: Australians pay a much higher price for their electricity than Americans do. – Dylan McConnell.

Review

I agree with the author’s position that purchasing power parity comparisons are less volatile and more representative of the relativity based on actual living costs. It is true Australian households pay a much higher electricity price than Americans.

There’s one important point I’d add. There is a baseline cost of having a house or business connected to electrical supply, regardless of how much electricity is used. This is called the fixed supply cost. The more electricity a household or business uses, the more the fixed supply cost is diluted in the overall electricity bill. This brings down the cost per kilowatt-hours (kWh).

American households use about twice as much electricity as Australian households. According to the US EIA, average US household electricity consumption in 2015 was 10,812 kWh. 2014 data for Australia shows average Australian household electricity consumption was 5,772 kWh (down from 6,819 kWh in 2008. At 25 cents/kWh that is a saving of $307 for Australians for using less electricity over time).

So we would expect Australian household electricity prices to be higher, because an average Australian household uses less electricity and the large fixed supply costs must be spread across a smaller amount of consumption. This raises the cost per kWh. But because Australians use less, their annual bill may be lower.

Further, in recent years, Australian energy retailers have been raising their fixed supply (or baseline) charges. So small users pay much more overall per unit of electricity they use.

Lastly, it’s worth noting that larger businesses often negotiate much better deals on their electricity prices than householders can. – Alan Pears.

Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at [email protected]. Please include the statement you would like us to check, the date it was made, and a link if possible.

Dylan McConnell has received funding from the AEMC's Consumer Advocacy Panel and Energy Consumers Australia.

Alan Pears has worked for government, business, industry associations public interest groups and at universities on energy efficiency, climate response and sustainability issues since the late 1970s. He is now an honorary Senior Industry Fellow at RMIT University and a consultant, as well as an adviser to a range of industry associations and public interest groups. His investments in managed funds include firms that benefit from growth in clean energy.

This article was originally published on The Conversation. Read the original article.