Analysis of the article
Soaring energy prices in Australia today has become a major cause of concern. Australians now pay one of the highest electricity bill for residential usage in world. Shortage of energy is the main factor contributing to growth in prices. Energy shortage in Australia is quite surprising as the nation is known for its abandoned stock of resources. The transition from coal based energy supply to a renewable one is often held responsible for high electricity bills of Australians (Power-technology.com. 2018). Since several decades, Australia is considered as a lucky country because of the favorable circumstances that contribute to economic prosperity. Australia possesses one of the biggest stock of coal and natural gas of the world. The nation thus is blessed with unrestricted availability of energy resources.
In view of growing concern to global warming and pollution, focus of the world has now shifted to make the energy system decarbonized. In addition to abundant supply of traditional energy source, the nation also has the potential to utilize renewable energy sources. Australia has an estimated amount of 5000 exajoules wind and solar energy resources (Finder.com.au 2018). This is almost 60 percent larger compared to combined supply of coal, oil, gas and uranium resources. Extensive export of energy is another factor that caused supply shortage in the domestic market.
The recent event of soaring energy price in Australia is explained using basic microeconomic concepts of supply, demand and market equilibrium. A recently published article has expressed great concern towards the issue of sky reaching energy prices in Australia. Several factors are discussed to explain the price trend of energy. These include transition towards renewable energy sources, adaptation of climate policy and tendency of energy supplier to export over the need in the domestic market. All the relevant aspects are analyzed with the framework of standard demand and supply model.
Australia though is considered as one of the energy abundant nation, use of energy for residential and commercial usage has now become extremely expensive. People living in eastern states like South Australia, New South Wales, Queensland, Victoria, Queensland and Tasmania constitute the largest electricity market of Australia are the payers of highest bill of residential energy usage globally (Hutchens 2018).
At the top list in South Australia, electricity costs AUS 0.50 per kWh. Queensland, New South Wales and Victoria are among the list of world’s top ten highest paying nation of electricity prices. For European Union, the average price of electricity is around AUD $0.30 per kWh. Consumers in US pay a relatively low electricity price with price lying between AUD $0.10 and AUD 0.20 (Power-technology.com. 2018). As per the published report in June, the national energy market in Australia experienced a hike of 130 percent in the wholesale prices of electricity.
Economic theories to explain high price of energy
The high-energy price not only hurts common people in Australia but also hurt the businesses those are highly energy dependent. Alchin Long Group, an equipment manufacturer of Sydney is considering bringing back Chinese operation to Australia following a huge rise in electricity price (aph.gov.au. 2018). Mining and other companies also express their concern regarding new investment in Australia because of surging cost of one of the primary input.
In economics, market is considered as a combination of group of sellers and buyers engage in exchange of a specific good and service. The main features of a market are existence of a group of buyers and sellers, specific product and voluntary exchange. Market price is the price that exists in the competitive market (Baumol and Blinder 2015). In some markets, there is only one identical price. In case of imperfect markets, similar or differentiated products are sold at different prices. Demand and supply are the two influencing forces of market price.
Demand reflects the relationship between quantity demanded of a good and corresponding market price. The said relationship is further explained by the derived demand curve. It shows the how price is related to the quantity demanded of consumers keeping other factors constant. It is the law of demand that indicates demand and prices of the good are inversely associated. That is demand rises with falls in prices (Sloman and Jones 2017). Demand on the other hand decreases with increase in price. Except price, there are different other factors that affect demand for a product. These factors are income, taste and preferences, price of related goods, expected price in future, population and demographic factors.
Supply on the other hand captures the relationship between supplied quantity and price. The supply curve slopes upward indicating a positive relation between price and supply with other influencing factor remaining the same. Two forces that explain positive relation between supply and associated price are profit motive and increasing marginal costs (Hill and Schiller 2015). Factors other than price that influence supply are price of inputs, technology of production, expectation about price and number of sellers in the market.
The combined forces of supply and demand determine equilibrium position and associated equilibrium price and quantity. Change in demand and supply scenario lead to a change in price and quantity in the market.
The figure above describes attainment of equilibrium in a free market. Under free market situation, combined forces of demand and supply determine the stable equilibrium position in the market (Mochrie 2015). Equilibrium is attained at the point where demand and supply intersect. In the above figure, this occurs at point E. Deviation from equilibrium price leads to either shortage or surplus in the market.
Climate policy and short termism
Except price, a change in demand and supply condition causes a change in equilibrium with an associated change in equilibrium price and quantity (Cowen and Tabarrok 2015). The main factors pushing up energy prices in Australia is the supply shortage of energy for residential and commercial usage. Given below are some factors that drives down the electricity supply in the market.
The transition to a low carbon energy base, lead to an energy shortage following loss of coal based plants and increasing attention to towards renewables. In response to growing adaptation of renewable sources, coal lobbyists and some of the government figures react following political ideology instead of behaving with some economic sense (Twidell and Weir 2015). The left wing ideologists including Malcolm Turnbull, former Prime Minister of Australia aware people regarding future uncertainty and unaffordable energy prices. There is some truth about this claim. Increase irregularity of power due to the dependency on renewable energy and lack of supporting plans lead to power cut in South Australia, one of the leading producers of wind power.
In addition to growing issue of energy transition, there are some policy issues regarding climatic policy. Successive pressures from government regarding climatic policy add to uncertainty regarding future of the energy companies and reduces investors’ confidence to invest further in the company to expand their generation capacity (Abdullah, Agalgaonkar and Muttaqi 2014). Climatic policies are taken in the form of initiatives to carbon pricing and scheme aiming to reduce carbon pollution. Neither of the policy however was effective. Setting of renewable energy target in Australia has attracted investment in favor of renewable energy. The renewable energy target stresses that at least 20 percent of electricity supply in Australia should be generated from renewable energy sources by the year 2020 (Power-technology.com. 2018). This has attracted investment in renewable sources. Such policies however not backed by supporting policies of demand- supply management. The renewable energy target though encourages investment in renewable energy but it distorts investment made for transition from higher to lower carbon technologies. Government provided considerable subsidy to support wind and solar plant installation. The manner in which the subsidy is given was not the right way such that it can boost the capacity of power generator to meet the demand.
Transition to renewable energy resources is not the only source of upward pressure on price. The increasing cost of commodity like natural gas and fuels further adds to increasing cost burden for common people (abc.net.au 2018). The Grattan Institute reported that these costs together account for 40 percent hike in electricity prices in the national electricity market for the period between 2015 and 2017.
The problem of energy shortage is further aggravated by large volume of energy export to other nations. Australia has almost reached in a position where it is likely to surpass Qatar as the one of the leading exporter of LNG to the overseas market of Japan and others. The proportion of energy export in Australia is expected to increase by 80 percent by the year 2020 (Power-technology.com. 2018). As against this, the corresponding proportion of export in US is only 8 percent. The large domestic availability of energy allows American consumers to enjoy a cheaper price of energy. The decision energy firms to supply energy to overseas market creates a considerable energy shortage in Australia and a corresponding increase in energy prices.
The figure below explains how the shortage of energy leads to an increase in energy prices using appropriate framework of demand and supply.
Demand and supply in the energy market is depicted by the curve DD and SS respectively. Equilibrium is at the point E with price and quantity at the equilibrium being P* and Q* respectively. Now, as the above-explained factors cause an interruption in the electricity market, supply of electricity contracts as reflected from the shift of the supply curve to the leftward direction (Moulin 2014). Given the demand, the contraction in supply creates an energy shortage by the amount EF. To meet the demand with limited supply, price in the market increases to P1 and availability o energy reduces to Q1.
Conclusion
As discussed in the article soaring prices of energy has now become one of the major concerning factor in a resource rich nation like Australia. Transformation from traditional to renewable energy sources though mainly held responsible for this there are other factors such as political mismanagement and large-scale export of energy create considerable shortage in national electricity market of Australia. The power shortage results in power outage and rising electricity price.
Some serious reforms are needed in Australia to overcome the ongoing resource crisis. Competition among the energy firms should be encouraged by imposing a restriction on mergers and acquisition. Investment should be made to increase the generation capacity. Government can also put an upper limit on electricity price. The energy producers should be subsidized to recover cost and provide electricity at a relatively cheaper price.
Reference list
Abc.net.au. 2018″One Year On, Victoria Counts the Cost of Hazelwood Closure”. 2018. ABC News. https://www.abc.net.au/news/2018-03-29/hazelwood-electricty-prices-climate-pollution-gas-supply/9599998.
Abdullah, Md Abu, A. P. Agalgaonkar, and Kashem M. Muttaqi. “Climate change mitigation with integration of renewable energy resources in the electricity grid of New South Wales, Australia.” Renewable Energy 66 (2014): 305-313.
aph.gov.au. 2018 “Energy Prices—The Story Behind Rising Costs – Parliament Of Australia”.Aph.Gov.Au.https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices.
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Hill, Cynthia, and Bradley Schiller. The Micro Economy Today. McGraw-Hill Higher Education, 2015.
Hutchens, Gareth. 2018. “Australia’s High Electricity Prices The ‘New Normal’, Report Says”. The Guardian. https://www.theguardian.com/australia-news/2018/jul/01/australias-high-electricity-prices-the-new-normal-report-says.
Mochrie, Robert. Intermediate microeconomics. Macmillan International Higher Education, 2015.
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Sloman, John, and Elizabeth Jones. Essential Economics for Business. Pearson, 2017.
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