We should be paying more for our energy. Here's why

By MILLIE MUROI, Economics Writer

Very few people would agree if I were to say our energy bills should be higher. But what if I told you you’re already paying more than the number you see written on your bills every quarter?

Those relying entirely on renewable energy sources such as the sun to power their homes might think they’re spared. But even the most environmentally conscious among us are paying a higher price than what we see on paper.

Of course, as Rod Sims, former chair of the country’s competition watchdog and Superpower Institute director, said in a speech last month, we couldn’t have gotten where we are without fossil fuels. Coal, oil and gas have helped propel us from city to city, country to country, and even earth to moon. Most of our day-to-day activities would be much harder – if not impossible – without them.

But Sims points out there is no contradiction between enjoying what we have and wanting the world to move away from fossil fuels as fast as possible.

The problem is, humans are generally quite good at procrastinating. Despite the deadline to hit net zero emissions looming closer and clearer, we seem better at ignoring the threat of irreversible climate change than acting on it.

But as economics professor Ross Garnaut puts it, we did not move from the Stone Age because we ran out of stones. We have something to learn from our ancestors’ drive to do things better.

There are a handful of people who still deny the science behind climate change. But there are also plenty of sensible people with reasonable concerns about the best way forward for Australia. Sims outlines several of these worries and why we shouldn’t let them get in our way.

First, the concern that the rest of the world is not moving to net zero, so Australia taking action is pointless.

But just because everyone else is sleepwalking towards a cliff, it doesn’t mean we should follow. In fact, it’s a good time to walk in another direction. It’s also a myth to say no one else is trying or that we’re all lacking in ambition.

As Sims points out, we often hear about China building coal-fired and nuclear electricity generation facilities at a mind-boggling scale. But last year, about 80 per cent of China’s 429 gigawatts of new electricity-generating capacity (roughly enough to power 322 million homes) was solar and wind powered.

And the European Union has had enough appetite (or perhaps courage) to introduce a price on carbon.

Second, some people claim Australia only accounts for about 1 per cent of world emissions, so it doesn’t matter what we do.

The clear moral argument is that we should still play our part. But Sims also points out that when we include exports (Australia is the biggest supplier of coal and gas combined in the world), our contribution to emission is more than three times higher.

From an economic perspective, we’re also throwing away what’s called our “comparative advantage”. That is, because of our nearly bottomless supply of solar and wind, and our relatively small population, we’re actually able to generate clean energy at a lower cost than most other countries – and sacrifice far less in terms of other things we could be doing with our time and resources.

Countries such as China, Japan, South Korea and India face a growing shortage of low-cost green energy to run their economies, meaning there’s a big opportunity for Australia to step in as a supplier.

But Australia also has a chance to step up as a maker and exporter of goods such as iron and steel.

Right now, despite Australia having the ingredients – huge amounts of iron ore, the coking coal needed to turn the iron ore into iron (the metal), and the thermal coal and gas to power the whole process – most of our iron ore is shipped out to, and turned into iron and steel in, north-east Asia.

That’s because all these ingredients are fairly cheap to ship and north-east Asia can produce things at a scale – and therefore low cost – we can’t match.

But as green iron becomes more crucial in the quest for a net zero world, the costs of producing the stuff will change.

The renewable energy needed to create green hydrogen (the replacement for coking coal), and to power the process (instead of thermal coal) are expensive to export – as is green hydrogen. Sims notes exporting coking coal only adds about 10 per cent to the cost of producing iron, while exporting hydrogen instead would just about double the cost.

Rather than sending off all the ingredients, Australians could (and it will make more sense to) make the entire green product here ourselves. What we do now to build this capability will matter hugely – for ourselves, and for the world. By some estimates, Australia producing intensive green exports could slash world emissions by up to 10 per cent.

Third, some people ask why Australia can’t use nuclear energy or carbon capture and storage rather than renewables such as solar and wind power.

The Liberal Party’s resounding defeat, while not purely down to their nuclear policy, was a sign the political appetite is just not there for nuclear. But nuclear and carbon-capture techniques are also very costly.

“Of all the nuclear plants built since 2000 in countries such as the USA, the UK and France, projects have been much delayed and costs have around tripled those first estimated,” Sims points out. “Nuclear energy costs are now three to five times that of firmed renewable energy.”

The possible exceptions to this trend – South Korea and China – have more opaque costings for nuclear and have been helped along by heavy government subsidies.

While carbon-capture costs haven’t yet fallen enough to be a realistic option in most circumstances, and nuclear costs have continued rising, the cost of solar, wind and batteries has fallen rapidly. Solar power in particular could, over the next decade, offer electricity at half the cost of the cheapest available today.

The fourth issue people raise is that green products are expensive. But that is only if you ignore the cost of climate change. The harm to our environment and the possibly irreversible change to our planet are costs that are not reflected in the price we pay for products and energy generated using fossil fuels.

People living in floodplains and farmers facing longer and worse droughts might see these costs most directly, but many of us don’t see it in our everyday lives.

Putting a price on carbon helps to capture this cost. It might drive up the price of some of our goods and services – especially over the short term – but it helps reflect the full consequences and guides businesses and customers to push for cleaner alternatives.

The government providing subsidies – such as payments or grants – to generators of renewable energy and makers of green products could also achieve a similar aim.

Just as gas and minerals have played a huge role in Australia’s economic development, so can exporting green energy-intensive goods. Research by the Superpower Institute’s research lead Reuben Finighan shows the potential export revenue from these goods could amount to roughly the same size as all Australia’s current exports put together, and six to eight times larger than the country’s combined coal and liquefied natural gas export revenue.

That’s if we invest about 5 per cent of our economic output – or gross domestic product – every year for the next few decades. It’s another bill to foot, but as Sims points out, about the same level of investment as when Australia leapt on the Chinese minerals boom two decades ago. We’ve done it before so we can do it again.

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Energy's a big part of living costs, but fixing it won't be cheap

The voters’ insistence that the election campaign must be about the cost of living has been a godsend to both major parties. They can look as if they’re lowering electricity and gas prices and avoid talking about their failure to tackle climate change.

Unfortunately, however, climate change and energy prices are closely connected – which does much to explain why their promises to cut power prices never mean much.

Voters seem permanently obsessed with energy prices, and they’ve figured in most election campaigns for decades. But it’s mainly been smoke and mirrors.

Julia Gillard introduced a tax on carbon in 2012 and, had it survived, we’d now be well advanced in reducing our emissions of greenhouse gases. Instead, Tony Abbott got himself elected partly by his exaggerated claims about what it would do to electricity prices, then promptly abolished it.

Today, Labor is still a supporter of climate action, with a legislated commitment to reduce emissions by 43 per cent by 2030. But it doesn’t want to talk about it because it’s proceeding slowly, and working both sides of the street by agreeing to new coal mines and gas platforms.

I doubt if Peter Dutton’s Coalition wants to talk about climate change either. They claim to believe in climate action, but their new plan to switch from renewables to using taxpayers’ money to build multiple nuclear power stations is really an excuse for doing nothing until those power stations may be built in a decade or two’s time.

The switch to distant nuclear resolves the Liberals’ disagreement with the Nationals who, being close to the mining lobby, have no enthusiasm for the Libs’ commitment to net zero emissions by 2050.

So, let’s not mention any of that. “You say the high price of energy has worsened your cost of living? Well, have we got a deal for you.”

Everywhere you look in this campaign you see one side or the other promising something to do with energy. Labor promises to extend its $75 a quarter discount on electricity bills for another six months until the end of this year.

The Coalition’s promising to cut the excise on petrol and diesel immediately by 25c a litre for a year. And it’s promising to reduce the wholesale price of gas by forcing gas producers to make more of it available to local users rather than exporting so much of it at high prices. (Gas is the most expensive fuel used to produce electricity, so reducing its local price would make power a bit cheaper.)

This has made the gas producers very unhappy. And Peter Dutton hasn’t provided much detail about how his gas plan would work.

Even so, Dutton has brought to light some truths that successive federal governments haven’t wanted us to know.

We’re always being told there’s a great shortage of gas because the three big gas liquefaction plants in Gladstone have lucrative contracts to export it all. But as Dutton has correctly said, there’s still a lot of it that’s uncontracted and so could be diverted for local use.

One way to discourage those companies from exporting so much of our gas would be to impose a tax on those exports, as Dutton has suggested. This has these largely foreign-owned companies reaching for their lawyers.

We always assume that our exports bring us great benefits. Mostly, but not always. We are one of the world’s biggest exporters of liquified natural gas, but research by the Australia Institute has found that no royalties are paid on 56 per cent of the gas we export.

Why? Because of loopholes in our petroleum resource rent tax.

Getting back to our complaints about the cost of energy, Labor’s always telling us that “renewable energy is incredibly cheap because its fuel [sun and wind] is free”.

That’s true, but misleading. At present, our grid of high-voltage power lines run from the coalfields to big cities such as Melbourne and Sydney. Switching from coal to renewables involves building a whole new network of powerlines running from solar and wind farms.

Building all those poles and wires is hugely expensive, and the cost will be passed on to you and me in the electricity prices we pay. Only when the new network’s been paid off will retail prices be a lot lower.

But this is where Labor has played a smart card in this election with its promise to subsidise the cost of adding a battery to your new or existing rooftop solar panels (and maybe the Coalition will announce something similar).

Some people have rooftop solar because they want to play their own part in reducing greenhouse gas emissions. Some people see it as an investment in reducing their electricity bills. And some people have panels because all the neighbours have them.

Whatever the reason, about a third of all Australian homes have rooftop solar which, on a per-person basis, makes us the world’s biggest rooftop solar country. Many people were encouraged to install solar by federal and state government subsidy schemes.

Obviously, the panels produce more power than you need during the day, and none at night when you have many gadgets running, especially in winter. So most people put power into the grid during the day and take it out night.

But the energy experts don’t really see rooftop as a key part of the complex distribution system they’re running, and sometimes rooftop can disrupt it.

So, although Anthony Albanese’s offer to cover up to 30 per cent – or $4000 – of the cost of buying and installing a home battery strikes me as likely to be pretty attractive as electoral bribes go, it will help reduce pressure on the grid.

True, it’s of no benefit to renters, or home owners who can’t afford the cost of panels or a battery. But it’s wrong to imagine it’s only the wealthy who’d benefit. If you’re really rich, you don’t worry how big your power bill is.

And don’t forget this: the more voters who see themselves as the good guys doing their bit to stop climate change, the more likely our politicians are to lift their game.

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The government is timid and uninspired. This budget is a perfect fit

If you’re having trouble working up much interest in the budget, don’t feel bad. It’s not you, it’s the government. So much fuss is made about the annual federal budget that we expect it to be full of major announcements. Well, not this one, and not from a government that never wants to rock the boat.

It is, however, a budget we’ve wished on ourselves. We’ve made it clear that, while ever we’re feeling pain from the cost of living, we’re not much interested in anything else, and an unambitious government has been relieved to take us at our word.

Most of the measures in the budget are small cuts to various charges that affect households’ budgets. The government will be spending more to encourage GPs to bulk-bill their patients and to cut the maximum cost of a pharmaceutical prescription to $25 a pop.

It will extend the electricity bill rebate for the last half of this year, yielding households a saving of $150.

And not forgetting the big one that will make all the difference to the cost of living: indexation of the excise on draught beer will be paused for two years. Anyone who can see the saving per glass gets a prize for exceptional eyesight.

All this is to be done just as soon as we vote to re-elect the Albanese government – except that Peter Dutton has promised a Coalition government would do the same.

Of course, all these measures to ease the cost of living have already been announced, with one exception: a two-stage cut in income tax. Who knew? Surely, that’s something to get excited about?

Well, yes, until you examine the details. When Treasurer Jim Chalmers says the tax cuts are modest, he’s not exaggerating.

It boils down to this: in 15 months’ time, July next year, everyone earning more than $45,000 a year ($860 a week) will get a tax cut of a bit over $5 a week. A year later, they’ll get a further cut of $5, taking it up to $10.30 a week. Part-timers earning between $350 and $860 a week will get an initial saving of up to $5 a week.

Even with this last-minute addition, it’s not hard to believe that, until Cyclone Alfred intervened, Labor was hoping to hold the election in April and leave the budget until later. Why did the delayed election date prompt it to go ahead with a budget when it had nothing much to announce? Law and practice. It had to.

Still, budgets also tell us the government’s latest forecasts for the economy and for the budget bottom line: is the government expecting to spend more than it raises in taxes, or less? More. Every financial year for the next 10.

So the government foresees a decade of budget deficits and further borrowing to cover those deficits. Does it have any plan to correct this? Not that it’s telling us about. My guess is that its policy is to worry about that only after it has been re-elected. If it isn’t, good luck, Mr Dutton.

But since we can’t see further than the cost of living, how are we doing? On the face of it, we’re well over the worst. Over the year to December, consumer prices rose by a modest 2.4 per cent.

The rate of inflation is forecast to stay low, meaning the Reserve Bank is likely to keep cutting interest rates in coming months by a total of 1 percentage point or so, which will take a lot of pressure off people with big mortgages.

The government expects wages to rise a bit faster than consumer prices which, if it comes to pass, will ease the cost of living to a small extent. But if many people still feel it’s a struggle to pay their bills, I won’t be surprised.

Why not? Because, over the five years to last December, consumer prices rose by about 4.5 per cent more than wages did. Until that “wage deficit” is closed, many people will still be feeling the pinch.

This makes it all the more important to understand why the government’s move to continue its energy rebate for another six months isn’t as good as it sounds.

The rebate – which is temporary and paid directly to your electricity retailer – began from July 1 last year. It thus caused quarterly electricity bills to be $75 less than they otherwise would have been.

Its extension for the last two quarters of this year won’t stop your bills being higher than they were because your retailer has increased its prices. But it will stop your bill also being $75 a quarter higher than otherwise. Thanks to generous Anthony and Jim, that unpleasant surprise won’t come until you get your first quarterly bill in 2026. (Come to think of it, maybe the new tax cut is timed to ease the pain of higher power bills.)

As for Trump and his planned trade war, the T-word doesn’t get a mention. Rather, Chalmers worries about “heightened global uncertainty” and “escalating trade tensions”. Why the obfuscation? Maybe Chalmers wants us to see what a great job the government’s done fixing the cost of living and doesn’t want that terrible man raining on his parade.

Actually, it’s too early for concrete actions. We don’t yet know how stupid Trump intends to be, let alone whether the other big economies intend to worsen it by giving as good as they get (otherwise known as cutting off your nose to spite your face).

So right now is the time to think hard about our options, not announce a response. We do know our government won’t be tempted to retaliate, and Chalmers is right to say we must make our economy more resilient to shocks from overseas.

But spending on a new “buy Australian” campaign? It may make uninformed voters feel better, but I doubt it will fix the problem.

This government is timid, uninspired and uninspiring. This budget fits it perfectly.

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