How much would Labor's 50% renewable energy policy cost Australian households?

The Labor Opposition’s proposed policy to increase Australia’s renewable electricity generation to 50% by 2030 has drawn the expected response about rising electricity prices.

How large will be the impact of such a policy on household budgets really be?

The first reference point is the ACT government’s estimate of the cost of its policy to source 90% of the territory’s electricity from renewable sources by 2020. It calculates that this will cost the average household an extra A$4.67 per week in 2020 (or A$243 for the year), before declining after that.

The ACT Government based this estimate on an average price of A$90 per megawatt hour (MWh) for renewable electricity, which is in fact slightly higher than the average price in the first round of its reverse auction for wind generation earlier this year.

Now let’s compare that with current electricity prices. In 2014-15, the average wholesale price in the National Electricity Market (NEM) (which covers every state and territory except Western Australia and the Northern Territory) was between A$30 and $40 per MWh, except in South Australia where it was A$53 per MWh because of that state’s reliance on high-cost gas generation.

So taking A$35 per MWh as a reasonable benchmark, the extra cost of renewable supply at A$90 per MWh would be A$55 per MWh, or 5.5 cents per kilowatt hour.

Labor’s proposal is for half of supply to be from renewables, so we can divide this price premium in half, bringing us to 2.75 cents per kilowatt hour as an overall average extra cost. Some extra investment is also likely to be required for new transmission capacity to connect the new solar and wind generators into the grid, together with some storage capacity.

Taking these factors together, a reasonable assumption would be that wholesale market prices would increase by 4 cents per kWh above present levels in every state market except South Australia, where the price rise might be closer to 3 cents per kWh because its energy is more expensive to begin with.

How it will affect the bottom line

How would this price rise stack up against average household power bills? By combining Consumer Price Index (CPI) data on quarterly movements in electricity prices with data from the Australian Electricity Regulator on average retail residential energy prices and residential consumers' power demands it is possible to forecast what will happen to prices in the NEM. (A lack of comparable consumption data prevents a similar calculation for WA and the NT.)

Average annual household expenditure on electricity with 50% renewables in 2030 (prices in 2011-12 dollars).SOURCE, Author provided

The graph shows average annual household electricity bills while the carbon price was in place, and also in the year since its removal (in Queensland, increases in other components of the cost of electricity supply completely offset the savings from the carbon price repeal). It also forecasts what power bills would be in 2030 with 50% renewable electricity if annual average electricity consumption stays the same as in 2013-14 (consumption data for 2014-15 are not yet available). No value is shown for the ACT since, having its own more stringent renewable target, it will be unaffected by the proposed national target for 2030.

It can be seen that cost increases will be relatively small, ranging from A$160 a year in South Australia to A$264 a year in Queensland. If you want to estimate how much extra Labor’s policy might cost you, look at the difference between the light blue and dark blue bars for your state.

But finally, and perhaps most importantly, the graph shows what annual electricity costs would have been over the past year if households had not already made such large reductions in their average electricity consumption since 2009. Average household power use in the NEM states fell by around 13% between 2009 and 2014, except in New South Wales where the fall was 20%.

In every case, with the marginal exception of Tasmania, these reductions achieved annual electricity cost reductions for households which are larger than the cost increase they might experience from a 50% renewable electricity supply.

If politicians were genuine about protecting Australian households from higher electricity prices, they should be ensuring that households continue to build on the consumption reductions they have already achieved. The opportunities are far from exhausted. Governments could enforce the energy efficiency measures that are already in place, extend the regulation of minimum energy performance standards for appliances, and expand the range of programs to help householders improve the lamentable energy efficiency of the average Australian home.

In particular, governments should focus on identifying and providing significant help to the most disadvantaged electricity consumers. There is a relatively small minority of low-income households, many living in rented accommodation, with annual electricity consumption that is very much higher than average.

If implementation of a 50% renewable electricity target is accompanied by policies like this, households could find themselves paying no more for electricity each year after 2030 than they are paying today.

Hugh Saddler is a member of the Board of the Climate Institute.