Dr Gill Asks: Why Isn’t Electricity Priced as Clearly as Petrol?

The following is a piece by Dr Martin Gill, a CFA representative on a number of Standards Australia Technical Committees. 

Petrol pricing hides a complex global market. Consider the numerous steps in supplying petrol:

  • Crude oil is traded on a wholesale market with prices affected by global events
  • Highly risky searches are undertaken for new sources of crude oil
  • Investors finance the construction of expensive oil rigs needed to extract crude oil
  • Oil refineries forecast the purchase of crude oil needed to meet fluctuating demand for petrol (and other products all of which are affected by global weather events)
  • Shipping companies transport crude oil from the source to the refinery and from the refinery to distribution centres often with long lead times and potential delays
  • Distribution centres sell petrol to petrol retailers
  • Retailers build and maintain petrol stations
  • From source to customer petrol crosses numerous international borders with various Government’s imposing royalties and taxes
  • Consumers buy petrol from their local petrol station

Consumers wishing to lower their petrol costs are presented with a single price from each supplier. Do I want to pay $1.44 per litre here or $1.42 per litre there? 

Australia’s electricity market and the global petrol market are similar. Both involve generators, transport companies, distribution companies and retailers. Despite the significant parallels there is a huge difference in how electricity is sold. Consider the following options:

Option 1:

  • 20% discount off usage charges
  • 26c per kWh (up to 11 kWh/day)
  • 32c per kWh (remainder)
  • $1.20 daily supply charge

Option 2: 

  • 15% discount off total bill
  • 28c per kWh (up to 341 kWh/month)
  • 26c per kWh (remainder)
  • $1.10 daily supply charge

It is virtually impossible to compare the above two prices. For example the discounts can’t be compared because they apply to different parts of the bill and one shows electricity prices increasing as consumption increases while the other shows prices decreasing as consumption increases.

Such complex pricing leaves Australian consumers vulnerable to exploitation with retailers offering high percentage discounts (only on part of the bill) or offering high solar feed in credits (while increasing costs in other areas).

Australian Government regulators are reluctant to introduce simpler electricity pricing. Consumers must therefore learn to compare these increasingly complex retail offers. Protecting consumers relies on consumer education and access to easy to use price comparison tools.

Current price comparison tools are difficult to use. They rely on consumers entering figures from their electricity bill. These figures are often difficult to locate on the bill. It is suggested a simple change to current electricity bills could address this shortcoming.

Adding a new section to electricity bills would simplify the use of tariff comparison tools. The following eight values are suggested:

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This greatly simplifies the use of tariff comparison tools and provides confidence the correct values have been used for the comparison.

The last entry is included to address special solar tariffs offering high solar feed in credits while hiding higher fees in other areas. Analysis of one of these tariffs showed typical consumers were almost $200 a year worse off compared to tariffs with a standard feed in credits.

Further discussion of the proposed changes are included in a submission to the Australian Competition and Consumer Commission which is available from here.