Power prices will be the real test of the carbon tax, by Gujji Muthuswamy

The first real test of whether the public will accept Australia’s carbon tax will be when electricity bills start landing in peoples’ mailboxes after 1 July 2012.

The main issue is that while the carbon tax is set at $23/tonne for 2012-13, the actual carbon tax embedded in the electricity bills will vary from customer to customer. This is the inevitable result of how electricity is produced and brought to the customer’s property, as well as retailers’ buying decisions in the wholesale electricity market.

The way the carbon tax is passed on to electricity customers is likely to be more difficult to explain than the GST ten years ago.

The first issue is the impact of energy lost in the electricity networks. Let us assume that a particular customer consumes about 2000 MWh of electricity in one quarter. Some electricity is always lost in transmission and distribution networks due to the laws of physics. Let’s say we lose 8 per cent in this case, or about 160 MWh.

Therefore, a power station will have to generate 2160 MWh to meet this customer’s requirement, and pay the carbon tax for the resulting greenhouse gas (GHG) emissions. Who will pay for the emissions from generating this extra 160 MWh lost in the electricity networks? The customer, of course.

If one assumes that this power station emits 1 tonne of GHG to generate 1 MWh of electricity, the imputed carbon tax the customer pays after network losses will be about $24.84/tonne – 8 per cent more than the $23. The percentage of electricity lost in networks depends on how far the customer is located from the power stations; the longer the distance, the greater the electricity lost.

The second issue is that each electricity retailer will have a portfolio of purchase contracts with different generators: coal, gas, hydro, wind. Each will have a different emissions intensity (the amount of GHG they emit when producing electricity). The overall emission intensity of the retailer’s contract portfolio will depend on its relative mix of different generator contracts, which could also vary with time as existing generator contracts expire and new ones are entered into.

Don’t forget also that some brown coal generators will be getting assistance in the form of free permits in the early years.

All these factors will affect retailers’ portfolio cost for procuring power. And all will affect the embedded carbon cost in the electricity retail price to the customer.

The third issue is one of transparency, or the lack thereof. Given the highly competitive nature of the energy retail market, retailers will be loath to share their principles and methodologies for including the carbon cost in their final prices to customers.

One can hardly blame them: they also incur costs under the various additional regulations such as the Renewable Energy Target Schemes and state-based energy efficiency certificate schemes. As the proverbial meat in the carbon sandwich, electricity retail businesses face a multitude of risks. The risk premium will have to be eventually borne by the end-customers.

Some electricity retailers may choose to pass on only part of the incurred carbon costs to their customers in an attempt to defend or increase their market share. But this is likely to be a passing phenomenon until a shake-out takes place in the retail market.

Now, all the above factors are legitimate operations of the carbon tax regime and electricity market. But the fact remains that different customers could face different embedded carbon costs in their electricity bills post-July 2012.

As such, there is considerable potential for some customers to feel, albeit wrongly, that they are being over-charged. This could result in many complaints to consumer watchdogs such as the ACCC and the various ombudsmen. These initial “bad” experiences could also adversely affect their perception of the carbon tax, which the government cannot afford, as the carbon tax is likely to be an issue in the next election.

Government and retailers both face the challenge of telling household and small business customers, in simple terms, the complex process of how the $23/tonne carbon tax will be passed on in electricity bills. They should let customers know what they can do in their negotiations with retailers to minimise the impost on their bills. This communication is best done before July 2012 as part of an overall customer education campaign. Otherwise, both government and retailers may face a backlash as bills start to hit letterboxes.

Gujji Muthuswamy is an Adjunct Lecturer in the Faculty of Business and Economics, Monash University and lectures on carbon pricing. He has been working in the Victorian electricity industry for more than 30 years.

This article was originally published at The Conversation.

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