Briefing Note: Electricity Prices in Tasmania – About The Government Price Cap

Prepared by TasCOSS on 29 May 2017

What happened

State Energy Minister Matthew Groom announced in late April that the government had decided to intervene in the electricity market. The proposed government action is to legislate to cap Tasmania’s wholesale power price at 2% for 12 months, and is intended to protect consumers from an expected price increase of about 15% from July 1.

Why

In Tasmania, the Office of the Tasmanian Economic Regulator (OTTER) is responsible for setting prices annually for both the wholesale price (that Hydro Tas can charge) and the retail margin (that Aurora can charge).  In setting the wholesale price for Tasmania, OTTER is required (under legislation) to consider the wholesale electricity price in Victoria (OTTER also considers other things, such as the cost of generation). The price is regulated because otherwise the wholesaler is a monopoly which could, in theory, charge whatever it likes (since there is no actual market competition for energy in Tasmania). The reason for linking the price to Victoria is that Tasmania is part of the National Energy Market, physically linked through the Basslink Interconnector, and by linking the wholesale price, there is an analogue of market competition that will keep prices down (or so the theory goes).

This was working reasonably well from about 2014 till now, with the new price being reset each year by OTTER, and coming into effect on July 1 each year.

By early 2017, all predictions were that the wholesale electricity price in the National Energy Market was going to increase significantly.

This increase was due to mainland changes such as closing the Hazelwood power station in Victoria and other issues in the national market. The increase was not about any extra costs incurred by Hydro Tas as it generates electricity within Tasmania, so the increase would mean ‘windfall’ profits for Hydro and for the Government shareholders, including the Minister for Energy.

So although there was no spike in the cost to Hydro of generating power, Tasmanians were set to pay a substantially higher wholesale price. Capping the price does not require the Government to find any money – it is ‘revenue foregone’ and was a windfall that the Government was not counting on as income.

The OTTER must regulate in line with legislation that requires it to link the Tasmanian wholesale price to the Victorian wholesale price (through a specific formula designed by Treasury). The Minister intervenes by proposing a legislative override to the OTTER’s Regulatory Instrument – this allows the Minister to issue a different set of instructions to OTTER. The power for the Minister to intervene is in the legislation before the Upper House, the instructions to OTTER will follow once the legislation has passed. (Until the new instructions are issued, OTTER continues to act under the existing regulations – that is, to proceed towards setting a price that will reflect the Victorian wholesale price spike.)

In 12 months’ time, one of three things is likely to happen:

  1. OTTER reverts to acting in line with the current Regulatory Instrument (linking to Victorian wholesale price);
  2. The Minister acts again to impose a cap; or
  3. The Regulatory Instrument is amended in some way.

Note: while not every user of electricity in Tasmania has a regulated price, the Minister has been very clear that the intervention is intended to protect all users (domestic and business) from the price ‘spike’.

What does TasCOSS think?

  • Keeping prices low is a benefit to low income Tasmanians. Intervening to avoid a price shock that is unrelated to the actual costs of producing the power that Tasmanians use seems sensible.
  • Maintaining oversight of the cost of energy to Tasmanian households is important – we would not want to see any reduction to the Regulator’s role in setting prices and providing information.
  • There may be opportunities to reflect on how Tasmania’s wholesale prices are linked to prices in other NEM jurisdictions, and whether in the long term consumers would be better off if these were decoupled, or if a different formula were to be used by the OTTER.