For some reason, we are happy to trust scientists and experts to develop WiFi, medicines and planes, but ignore them when it comes to the electricity market. In that spirit, Western Australian Premier Colin Barnett has made the bold prediction that power prices will come down when the carbon tax is abolished. "The principle is," he said, "just as the price went up, the price will come down."
This might be true, in principle, but the reality is that the abolition of the carbon tax will only slow electricity price rises. This is because the real driver of retail price increases is the cost of the physical network. The graph, published by RenewEconomy, was created by Energy Australia (to explain its profit slump) and demonstrates why power prices are increasing.
As you can see, the cost of the electricity network is the major component of your electricity bill. This money ultimately finds its way to network companies such as SP Ausnet (ASX: SPN) and Spark Infrastructure (ASX: SKI). The retailers, such as Origin Energy (ASX: ORG) and AGL Energy (ASX: AGK) are not the beneficiaries of the increased prices.
These companies make their money by building the poles and wires that connect generators to customers. For every dollar these companies spend, the amount recouped is considerably more, because they borrow the money, then make a profit on top of that. End users pay for the principal, the interest, and the profit.
As more and more customers take energy efficiency measures and install solar panels, the cost of the network falls more heavily on those who do not have solar panels and do not reduce their electricity usage. This is because (for most retail customers) the network costs are recouped on a per-kilowatt-hour basis. There are currently proposals to charge customers a flat rate for network costs, although I don't envy the politician who would have to explain to solar households that their electricity bills are going to go up for that reason. Such a move is likely to result in some customers going off grid, so it would be a temporary fix, in any event.
Retailers are looking to increase their profits from retail markets, and this will also increase retail power bills. For example, Grant King, the CEO of Origin Energy, was quoted in the Australian Financial Review as saying, "Discounting cost us a lot of money this year and that's to customers' benefit." He went on to say that such discounts were not sustainable. Origin suffered a 15% drop in underlying earnings in FY 2013, largely due to tighter margins.
Foolish takeaway
In the rapidly changing market for electricity, it is hard to pick a winner. I think that listed energy broker Energy Action (ASX: EAX) will continue to gain customers, for whom it saves large amounts of money. This will occur if an increasing number of firms resolve to get the best deal, rather than simply re-sign with their existing power retailer. Energy Action's reverse auction platform, the Australian Energy Exchange, gives it an advantage over smaller energy brokers.
