Interpretation of retail electricity bills – Frontier Economics

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We note the opinion piece by Frontier Economics in today’s Australian Financial Review. Different modelling houses regularly apply different modelling approaches and assumptions, which can lead to a diversity of outcomes. In this case, however, we strongly disagree with Frontier’s interpretation of retail electricity bills, in particular Frontier’s omission of the declining cost components of retail electricity bills.

In calculating the impact of the ALP’s Powering Australia Plan on retail electricity bills, we estimate the wholesale component of an average electricity bill (35.5%) to be both the largest and most important component of a retail electricity bill. This component is forecast to decline the most from currently high wholesale prices, and will therefore make the largest contribution to reduced retail electricity bills, at 83% of the total bill savings in 2025.

While Frontier recognises falling wholesale prices, Frontier fails to consider the impact of low-cost financing for well-planned infrastructure spending, which is also projected to reduce the other two main components of an electricity bill – stemming from environmental policy and regulated networks. The Rewiring the Nation policy specifically addresses network costs by accelerating and financing capital intensive infrastructure at lower cost than could be achieved through private borrowing. With the implementation of the Rewiring the Nation policy measure, this infrastructure hurdle is overcome, unlocking a wealth of low-cost renewable resources. Adding large-amounts of renewable energy will not only increase competition, lowering wholesale prices, but also depress environmental policy costs associated with schemes like the Large-scale Renewable Energy Target (LRET) as the supply of renewable certificates is increased, lowering the cost of compliance. We therefore project that all three major components of retail electricity bills will decline under the Rewiring the Nation scenario.

We note the similarity of our findings to numerous other reports, including modelling for the NSW Electricity Road Map[1], which found that while the major driver of retail savings is wholesale costs, low cost infrastructure investment will also result in lower transmission costs, delivering lower cost bills to consumers.

The similarly of our outcomes to other open and transparent modelling contributions speaks to our confidence in the work undertaken, with Frontier’s omission of declining costs for all three major components of retail electricity bills not accurately depicting the impact of the Rewiring the Nation policy.

[1] pp. 54-56 https://energy.nsw.gov.au/sites/default/files/2020-11/NSW%20Electricity%20Infrastructure%20Roadmap%20-%20Detailed%20Report_0.pdf

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