MBA 703 The Economic Environment

Trimester 1, 2019
Assignment 1: Economics Case Study
Due on the 8th of April, 2019.

Assignment Overview: This assignment is based on an article published

by Kai Swoboda, titled “Energy prices the story behind rising costs”, in
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices. The article
is attached to this assignment question. I have also uploaded the rubric (i.e.
assessment criteria-which is in Excel format) on the CloudDeakin. Please
read the article and rubric carefully before attempting this exercise. You will
also need to draw on other resources available through the library as well as
external resources. Please note that you need to provide clear references for
your sources when citing research and data.

Learning Objectives: This assignment is designed to encourage you

to think about the application of concepts learned in this unit in a real world
scenario. This assignment, indeed, is interesting as it analyses the rise of
energy price in the Australian domestic market.

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 Assessment: Your score on this assignment contributes towards 15% of
your final score for this unit. Although you can work in a group, this is not
a group assignment and you must submit answers individually. Please
check the Academic Honesty and Misconduct section in the Unit Guide.You
will be graded on your use of appropriate economic theory and concepts,
the clarity of exposition and overall quality of your answers.
Questions: Answer all questions. Limit the word count of your assignment
to less than 1500. Please use diagrams in your answer when appropriate.

1. In your own words, summarise the article. What is the main message
of this article? [3 marks]

2. Despite the fact that Australia has a comparative advantage in energy

sector, why does our energy price keep rising? [5 marks]

3. Do you think that our domestic energy market is transparent? [2

marks]

4. Analyse critically the following statement made by author: “In the

case of gas, prices for households and businesses are expected to increase
significantly in eastern Australia, as the development of new gas export
terminals leads to a tightening of supply.” [5 marks]

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Energy prices—the story behind rising costs – Parliament of Australia 26/12/18, 10)49 pm

Home About Parliament Parliamentary Departments Parliamentary Library Research

Publications Parliamentary Library Briefing Book Energy prices—the story behind rising
costs

Energy prices—the story behind rising

costs
Kai Swoboda, Economics

Key issue
The rate of price increases for electricity and gas is expected to moderate in most
states and territories over the next few years after a period of significant rises. The
federal government is able to directly influence only a small part of price outcomes.
Intergovernmental agreements and action by state and territory governments are the
most important policy levers to curb future price increases.

Electricity and gas prices for manufacturing businesses and households have increased
sharply in recent years and indications are that prices will continue to increase. The
underlying cause of these increases is different for electricity and gas and the
contribution of each factor is also different for each state and territory.

Responsibility for regulating the electricity and gas supply industries is shared between
the Australian and state and territory governments. The Australian Government can only
directly influence price outcomes in a small way. Its key role is in coordinating and
incentivising action by state and territory governments.

Extent of price increases

In real terms—that is, taking into account the general increase in prices across all goods
and services—prices for households increased on average by 72% for electricity and 54%
for gas in the 10 years to June 2013.

Real electricity price increases for manufacturing businesses over the same period have
been of a similar magnitude (60%). For gas, prices for manufacturing businesses have
risen to a lesser extent (29%) (Figure 1).

The increase in real prices after June 2012 of around 14% for household electricity and
13% for household gas is associated with the implementation of a carbon price from July
2013.

The pattern of price increases over the 10 years to June 2013 has differed across states
and territories. In real terms, the rate of increase for electricity has been 30% in Perth,
41% in Adelaide, 73% in Brisbane and 107% in Sydney. For those cities connected to
natural gas networks, household gas price increases over the 10 years to June 2013
have ranged from 40% in Sydney to 78% in Perth.

Figure 1: Real electricity and gas price increases, 2003 to 2013

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices Page 1 of 4
Energy prices—the story behind rising costs – Parliament of Australia 26/12/18, 10)49 pm

Source: Australian Bureau of Statistics.

Factors contributing to price increases and future outlook

There are three major components of a typical energy bill: wholesale costs (covering
electricity being generated or gas being extracted); network charges (paying for the
reliable delivery of energy via power lines or gas pipelines); and a retail margin (paying
for meter reading and other services).

Energy bills can also include components for Australian and state and territory
government-based environmental programs such as those aimed at increasing
renewable electricity generation. The share of each component can vary significantly
across jurisdictions and for different types of customers. However the cost of
transporting energy and wholesale costs typically accounts for around three-quarters of
the final energy bill.

Retailers compete for customers on price and other services in all jurisdictions except
Tasmania. All states and territories except Victoria and South Australia regulate
electricity or gas retail prices in some way. Retail prices incorporate the costs of
maintaining and upgrading supply networks, which are largely set by a single
Commonwealth regulator under nationally agreed rules. The wholesale cost of electricity

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices Page 2 of 4
Energy prices—the story behind rising costs – Parliament of Australia 26/12/18, 10)49 pm

and gas prices is largely set in competitive markets. While major electricity and gas
wholesale markets are connected across some state and territory boundaries, state and
local factors can be an important determinant of wholesale price outcomes.

In recent years, much of the increase in prices has been attributed to the need to invest
in the network component because of previous underinvestment in maintaining the
network or to increase capacity. Also important has been the impact of policies to
address environmental issues.

In the case of electricity, the rate of price increase is expected to moderate in the next
few years. Overall, household electricity prices are expected to increase at an average of
3% over the next year, with outcomes varying across jurisdictions from a high of 16% in
the Northern Territory to a 1% fall in prices in South Australia.

Smaller electricity price increases are largely the result of recent changes to the
regulation of transmission and distribution networks and competition in electricity
wholesale markets due to low demand growth. These may be offset in some jurisdictions
by removing state and territory government interventions that have kept electricity
prices lower.

In the case of gas, prices for households and businesses are expected to increase
significantly in eastern Australia, as the development of new gas export terminals leads
to a tightening of supply. This effect will depend on how quickly new gas resources are
developed.

Proposals to keep further price increases in check have included:

further privatisation of state government-owned electricity networks

adjustments to environmental policies that impact on wholesale energy costs
further retail price deregulation
setting reliability standards based on the value that customers place on network
reliability.

Australian Government influence over retail price outcomes

Australian Government intervention to directly affect retail price outcomes is largely
confined to the impact of the carbon price as well as other renewable energy and energy
efficiency measures. Changes to energy prices from amending these measures (which
would require legislative action) should flow through, to some extent, to end users.

Australian Government action can also be directed at gaining intergovernmental

cooperation to change regulatory outcomes and influence government-owned energy
suppliers. One current policy debate is about the merits of a gas reservation policy to
address price issues that are associated with LNG exports on the east coast.

There are a number of intergovernmental processes, particularly through the Council of

Australian Governments and the two key regulators—the Australian Energy Market
Commission and Australian Energy Regulator—to address some of these issues.
However, it remains to be seen whether they will be effective in containing price
increases in the medium term.

Further reading

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices Page 3 of 4
Energy prices—the story behind rising costs – Parliament of Australia 26/12/18, 10)49 pm

Australian Energy Regulator, State of the energy market 2012, Australian Competition
and Consumer Commission, Canberra, 2012.

Productivity Commission (PC), Electricity networks regulatory frameworks, Inquiry report

no. 62, PC, Melbourne, 9 April 2013.

For copyright reasons some linked items are only available to members of Parliament.

© Commonwealth of Australia

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