Why That Electricity Price Study Can't Be Trusted

We've been flooded with headlines saying that a new study demonstrates Australia has some of the most expensive electricity in the world. While power prices are a concern, the way in which that data has been compiled is also open to criticism.

Picture by Nomad Tales

The study was commissioned by the Energy Users Association of Australia (EUAA), which (as Alex pointed out on this very site) hardly makes it a neutral source. Most coverage has focused on how the study suggests that Australia has some of the most expensive electricity in the world, and the parallel claim that, as the announcement press release put it, "Australia's prices can be expected to increase further and significantly in the next few years, which is likely to make our electricity prices the highest in the world."

I'm all for analysing data and looking at how our pricing compares to the rest of the world, although electricity isn't one of those things we can simply import from overseas to make it cheaper (and it is one of the smallest contributors to typical household budgets). But when you start looking closely at how the EUAA study was assembled, you realise that it isn't actually using data which can reasonably be compared when it produces charts like this:

Here's the big problem. The study claims a comparison of 2011 electricity prices, but that's not actually what it offers. The data for Australia covers the year beginning July 1 2011, which means it includes some projections for what will happen between now and June. The EU data is for the year ending 30 June 2011, so we're already comparing different periods. The data for the US is for the year ending in November 2011, and doesn't eliminate state taxes which affect many regions. Most notably, the data for Canada and Japan (two countries which come out looking cheaper) is from 2010.

How does the study justify this variable use of data periods?

It might be argued that we should have used Australian data for the year beginning 1 July 2010 and ending 30 June 2011. We decided against this because the Australian prices are increasing rapidly while the prices in the comparator countries/regions have been declining or approximately constant.

That reasoning is entirely self-serving, and smacks of "we assume this is happening so we're seeking information that supports that view". Data quoted elsewhere in the paper suggests prices rise and fall in different markets at different rates. Presuming that Australia is going up and that other countries are staying constant, but not actually including evidence demonstrating that, savagely undermines the credibility of the argument.

What makes this even more extraordinary is that the study criticises a recent Bureau of Resource and Energy Economics paper which said Australian electricity prices were lower than the OECD average for using 2010 figures from the Australian Energy Markets Commission (AEMC), rather than 2011 figures. But the Bureau paper compares 2010 numbers across all the regions. It has a consistency the EUAA paper entirely lacks. That renders the comparisons and the criticism somewhat hollow.

And what about the future? The study also projects what will happen to Australian electricity prices through until 2014, which is how it justifies the claim that we may end up with "our electricity prices the highest in the world". But it doesn't actually make any attempt to calculate what will happen to electricity prices in other parts of the world, which would seem the proper basis for making that statement. Indeed it notes that "Price projections for the other countries in the comparison are not known" and adds a note that "prices in these other countries have been stable over the last decade", effectively implying that we can expect no change there.

I can instantly think of one obvious reason that might not be so: Japan's massive reduction in the use of nuclear generation in the wake of the Fukushima Daiichi nuclear disaster is presumably going to see pricing changes (as well as supply issues) in that country for some time. Regardless, with no comparisons actually made to other projected power prices, it's impossible to conclude with any authority that we'll end up being the most expensive.

The study doesn't actually use its own new research for those Australian projections either. Instead it took data from the Australian Energy Markets Commission (AEMC), which has projected potential prices through to 2012-2014. So it's not new data; it's just re-reporting of an existing study.

Finally, buried in the report there's this chart, which suggests that if you adjust the calculated figures using purchasing power parity (which measures which goods incomes in different countries can actually buy) Australia is no longer the most expensive country in the world even now, with Japan and the EU ranking further ahead:

In other words: there's a lot of interpretation involved in those blanket statements (and remember, again, these adjusted figures still aren't actually comparing the same time period, especially in the case of Japan). Perhaps unsurprisingly, there's no in-depth analysis of this chart, beyond a brief suggestion that we'll still end up paying more in Australia by 2014. But again, there's no evidence provided for that assertion in terms of what will happen elsewhere in the world.

Does that mean that electricity prices aren't high? No. But this study doesn't properly make the case that they're high by global standards. It's basically impossible to claim a realistic comparison when you're using data from different years for different countries. Strong claims require strong evidence, not selectively manipulated facts.

EUAA (PDF link)

Republished from Lifehacker

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Comments

    I think another question that needs to be asked is how much people are spending each year on electricity. I would imagine that Canadians would spend more per year on electricity since they have heating costs.

      Most Canadian's use natural gas or heating oil for heating

      Australians spend about just over of 2% of their yearly expenses on average on electricity costs. Most people spend more on take-away food and fine dining by far.

        2%? try 5%.... that is alot, it is almost as much as my budget for food...

    Awesome follow up

      Great point.

      It would be interesting to see a proper study about costs that also included govt subsidies

    that was meant to show up under Blakes comment

    One of the best articles I've read on Giz au in a while. Excellent job Angus and Alex, at dissecting this bullshit "study" to get the facts.

    yeah man, good call. I hate electricity prices as much as the next person, but they shouldn't go all current affair and use dodgy figures from their arse

    The cost must include the reliability (power cuts) and quality (low voltage, fluctuation etc) of the supply. If we include those parameters, Australia should come out on top (as in top notch).

      Have you lives overseas or is that just speculation?
      I lived in Japan from 1996 to 2010 and never had the clock on my microwave reset or the lights go dim due to a power fluctuation. It happens quite often to me here in Melbourne. Having said that, I am being anecdotal and not saying Australia is not as good as Japan, just in my experience it hasn't been(pre-earthquake).
      I hope your observations are also from personal experience or at least a reliable study.

      Top notch? Hardly. In a three-year period in the UK, I think I experienced an overall power-cut once, maybe twice.

      Here in Gymea, NSW, I've seen the power go off four times in the past year, each time for around 40 minutes- and nobody I've spoken to seems to think of this as unacceptable.

      That's not top notch. That's completely shoddy.

    I notice this has a lot less comments than the article that swallowed the lie...I assume this was posted because of all the responses correcting the previous one?

      Nope -- I was working on this for Lifehacker quite independently of the first Giz story, but given the interest in the topic it seemed sensible to cross-post it.

        Well, thankyou for that good sir ; D

        Just happy to see someone actually bother to actually critique material unlike most journos these days, hell it's not even just laziness half the time, it's all about their agenda and they seem to be happy to intentionally put out bogus figures (knowing that the vast majority of the public have very poor math/logic/reasoning skills).

        Oh, and I'm not suggesting the original was that...I'm sure that was just laziness ; D

        But again, thanks for the article :D

    Something we also forget, which I never seem to see mentioned - Australia has an electricity distribution network which covers a larger geographical area per capita. Inherently we will need to pay more to support our distributed population. I consider that an affordable cost trade off for living in Australia.

      On top of all the other cost trade-offs for living in Australia? Paying twice the price for electronics and games, over the odds for fuel, over the odds for 'luxury' goods, for books, for downloads... for anything, essentially, not produced locally, and sometimes for things that are?

      Economies of scale work hard against everything in Australia, and it seems hard to deny that companies take advantage of this to skim still more from us than is needed... that we get so used to paying over the odds, we'll swallow almost anything, price wise.

      Australia's a nice place to live, but I wouldn't want to be punched in the face every morning for the privilege of living here, and I don't think we should put up with being gouged the way we are either.

    A great, intelligent article. I also wonder if they looked at the cost per kilometre of distribution per person/household how bad be would be. Many networks in Australia serve a lower population density, therefore explaining a reasonable excuse for a highr cost.

    I dont quite agree with that. As a whole, yes Australia does have a low population per square kilometre number. However 65-70% of the population lives in Sydney/Newcastle, Melbourne/Geelong, Brisbane, Adelaide or Perth.

      John, the utilities still need to provide service to all people, and have customer charters to do this. Also, prices are kept the same so as to not disadvantage our rural area's. Therefore, the density per km would be VERY low, balancing out the metro congestion. Don't forget this article compares with Japan and other countries that has a much higher total population and lower geographic spread.

        That would make sense for an overall higher cost, but does it really explain the sudden painful leaps in cost that we've been experiencing? Not just a rise over time, but serious major pricing leaps over the last few years?

        The whole thing seems to be a result of companies using the Carbon Tax as an excuse to raise prices, first pre-emptively and then again once the Tax comes in, hoping that we won't notice.

        Well, unless having to run a distributed power grid suddenly got astronomically more expensive in the last few years. Before the Tax even comes in.

    I always find it highly frustrating when such blatant deception occurs.Any so called 'research' with an agenda needs to be purged. Too many willing ideologues jumping to conclusions out there.

    I am the author of this study and I disagree with your critique of it. Here is why:

    1. The issue of a 6 month overlap is unavoidable. The AEMC's data runs for tax years while all the international data runs to calander years. So the choice was to overlap for six months at the beginning or the end. I chose the end because Australian prices are rising while the others are not. A more accurate of the most recent price comparison is therefore to use the latter six month overlap. This is all clearly explained in the report and you critique failed to mention it.
    2. The PPP and 2007 exchange rates are not "buried" in the report. The report is only 13 pages long and they follow the earlier comparisons. It would be inappropriate to start a comparison with PPP followed by market rates of exchange. The standard format for all comparative price analyses is to use market rates followed by PPP. See the IEA report for the default standard.
    3. You have an implied criticism that the report uses the AEMC's numbers. This seems unfounded. They are a recognised regulatory agency. Whose else should the report have used.
    4. You have an implied criticism that the report does not interpret the data. It is not the purpose of this report to interpret the reasons for these outcomes. It is not fair to criticise it for that.
    5. You say that there is no basis for the assertion that prices in Australia will be higher than elsewhere by 2013/14. This is wrong, the basis for this statement is clearly stated in the report - that cost trends in comparator countries continue their trends of the last decade.

    Bruce Mountain 22 March 2012.

      1. I've quoted the explanation (such as it was) in the post. I also notice you don't mention the even more pressing issue of comparing data from 2010 from Japan and Canada with data from 2011 -- more than a six month issue, and the single biggest reason the ranking of countries is in fact nothing of the sort.
      2. Far more emphasis is given to the other figures than the PPP information, and the press announcements around the report make no mention of it. Given that the PPP presents a different view, the lack of emphasis again suggests an attempt to hew what facts we have to a particular view.
      3. The AEMC "criticism" is around the fact that the reporting of the study presents it as new information sourced from the EUAA. (Which is as much to do with media reporting as the study itself, but since most people have read those reports it's worth mentioning).
      4. My criticism is that the report misinterprets the data for what seems to be a specific purpose.
      5. I don't see how this claim stands when your own data shows pricing going both up and down. And it's still no excuse for asserting Australia will be higher than the rest of the world when the rest of the world hasn't been analysed.

        TBH, I don't understand your comment in point 5, Angus. Firstly, where exactly in your paper is the foundation of your statement about prices going "up and down"? Does it indicate the scale of this fluctuation, and the difference, if any, between comparators? I admit I've largely only skimmed the report at this point, so may well have missed things.

        Secondly, from my reading of the paper, (and specifically the data depicted in Figure 2), while all countries experienced fluctuations over the 02-11 period, most other countries were (relatively) stable, while Australia was trending upwards quite dramatically over the period. Obviously everything post the beginning of this year is an extrapolation, but it seems a pretty sound one given the fact that household prices increased seemingly 40% here, whereas the best a separate comparator managed was about 10. Are you disputing the previous year figures, or something else?

          I haven't read the paper but one point instantly catches my attention in your statement. Our prices rose 40% from 02-11..... At the same time our dollar doubled. Does the report factor the fluctuations of the dollar to determine our electricity cost? Purchasing power is going to provide a much more balanced analysis in either event so the report sure appears misleading.

        I have not read the report so I have only read your opinion, the reply of the author and your view that the reports aim is to make the data be viewed in a certain way rather than just be viewed for the conclusion of the data. It would also be appropriate to say whos agenda the report (in your opinion) is working for and what the outcome of skewing the data would be and who is the beneficiary. Using terms like 'suggests an attempt to hew what facts' and 'seems to be a specific purpose' don't add to the credibility of your discussion by citing personal views. If I wanted to play that game then I could 'suggest' that it 'seems' your criticism is skewed towards a specific purpose. I only ask that you point out the errors of the report in actual data that proves your conclusion rather than your opinions which just as much as the reporting agency you claim that is 'hardly a neutral source' are also hardly a neutral source.

    I should also like to comment on the misunderstood comments on customer density. As one of the commentators properly noticed, Australia is a very highly urbanised country and our population density in our main cities - where 75% of our population lives, is far above the average of other developed countries. It is true however that our distribution networks are long. For example, in the NEM it is twice as long per connection as the distribution network in Great Britain. But the additional length in Australia is principally inexpensive Single Wire Earth Return or 11kV networks. These are inexpensive networks. By comparison with other developed countries, our distribution networks are predominately overhead networks, while in Europe in particular they are underground, which typically is at least an order of magnitude more expensive than overhead networks.

      Yet more distortion, or strawmen.

      SWER and 11kV are not at all the same, you can't put those together, 11kV is a normal distribution network, there is nothing fancy about it that makes it comparable to SWER.

      SWER is in fact significantly cheaper, but that in no way offsets the population density disparity where SWER is used.
      Last year we had a flood that was the size of France and Germany combined and it affected around 200 000 people.
      http://www.msnbc.msn.com/id/40858188/ns/world_news-asia_pacific/t/aussie-flood-zone-bigger-france-germany-combined/#.T2tHAhHxox4
      If France and Germany only had 200 000 people combined instead of 146 500 000, and they spread out, do you think they would pay more or less than they currently do for electricity....especially after experiencing wide scale natural disasters on an almost yearly basis.

    Twice in the last month or so (with the second being today) I've had calls from sales reps at Energy Australia, telling me they'd like to talk about how I can save more on my ever-increasing electricity bill. Our electricity bill has barely changed in the last 3 years, and I'm skeptical about changing something that isn't broken, so I've told them I'm not interested.

    The rep says I'm doing well to manage our bill, but we haven't changed out energy habits in the last 3 years. I ranted on about how my power bill hasn't changed, but my gas bill has gone up by about $100 a quarter, but he had nothing for me in that department.

    Does anyone know what options these are that they are offering, to help reduce electricy costs? I haven't bothered listening to the sales rep's spin, as I'm sure it'll be one sided.

    I hate to sound like a conspiracy nut, but it seems like the power companies are just trying to butter us up so that we just accept that they'll have to increase power costs in the future.

    @Angus, have you had a chance to read Andrew Charlton's essay: "Man Made World; Choosing between Progess & Planet" - published in Quarterly Essay Issue 44 Nov2011 - www.quarterlyessay.com ?
    While it seems a little late to publish an essay written about the Copenhagen Climate Conference of 2009 (alot has changed in the 2 years since) - it does present some interesting data and points for consideration.

    Isn't a large portion of the price hike due to network upgrades to handle peak demand? The money would be better spent on demand management...

      Bingo frank. I work for one of the NSW power distributers and I know for a fact that the price rises passed on to NSW consumers was to fund increased spending on the network during this regulatory period. Of course the increased prices have caused a decrease in usage so some of those works aren't even needs anymore ( Australians are very demanding on service and quality levels and we have ever tightening service levels to meet). The redundancy is built into the network to cater for peak loads (i.e. summer holiday 40 degree days when the air con is on full bore everywhere).
      What this means is that in the next regulatory period we won't require as much investment in the network and our internal information is that prices should actually DROP!..... I personally doubt that will happen but does mean they then should stabilise. So the report authors doom and gloom predictions are obvious smoke and mirrors and this articles author is right to challenge their selective pricing investigation.
      And the claims about us being big and spread out are certainly true. One of the NSW distributers claim to be the second largest in the world (by number of assets) it's a big country that we all pay for to ensure power is available to all. A massive network supporting a relatively small population outside a few major cities.

    take it from me, I've paid for electricity in Sydney and four US states. Additionally, I have family and friends in other places. Moreover, I'm involved in the energy business in Australia. The electric rates here are the highest I've paid, and the service is below average, for a major metro area. And I live within 1km of the CBD in a house much smaller than I had in the US.
    My opinion is based on bills I've paid.

    You want proof of our electricity price rises? Just look at the kwh rate on your bill from a few years back compared to a recent bill. I have, and it is an extraordinary increase, around the order of 50%. Can you think of other things such as food which has gone up by this ridiculous amount? I can't. It's an outrage that must be not only stopped but reversed. All essential utilities should be government owned, full stop. Private companies dictating prices for essential utilities, this is the result. Somewhere people are rorting the system and we need a something like a royal commission to get to the bottom of it.

    This is comment in response to Andrew Kidman's response to my comment.

    1. Don't defend your faulty critique by saying you did not go to the original report to get your information. That is your fault for sloppy workmanship. Do not blame your laziness in failing to properly consult the information. You should be more careful before you make unjustified comment.
    2. You are wrong, again, in saying that I did not comment on the 2010 data for Canada and Japan. The report does comment on its and its says that prices in Japan are slightly decreasing and Canada slightly rising and so the 2011 comparison would need to take this into account. Again you have been sloppy, even after I have pulled you up on it.
    3. Your statement that far more attention is paid to other comparisons than PPP is a matter of conjecture of little relevance anyway. PPP is not send down on tablet of stone. It has many comparability issues. If you are not sufficiently skilled in this area, then start with Wikipedia it has sufficient explanation to get you going.
    4. Your accusation of "hewing" facts to suit some ulterior purpose is disparaging and unfounded. You should be more careful before you make such libelous accusations. You know nothing about me. Perhaps you would like to research your subject matter better before swinging wild accusations around.
    5.The report does not purport in any way to have presented new data. To the contrary, the "methodology" section could not be more clear on the data sources used and the way that publicly available data has been turned into information. Again, get your facts straight.
    6. The report makes no claim about prices in the "rest of the world". It is at pains to specifically refer to 91 developed countries, states or provinces. Since these all happen to be developed economies, chances are it is likely to represent the most expensive economies in the world. But I make no such claim myself. Again, get your facts straight.

    Now, finally I would say, a sceptical view of the world and inquiring analysis is to be welcomed. The reason I have bothered to reply to this is, is that to your credit you have at least attempted a critique which is far more than we can say for many, and indeed for some of your fan club who slavishly sucked up what you had to say. But it time for you to raise your game. If you have a serious point, make it carefully and ensure you are well informed. You should apologise to me and your readers for your sloppiness and make sure it does not happen again.

      There is no reason for him to appologise. The report has taken a very selective view of a very VERY complex industry and attempted to paint it as easily comparable. The fact our dollar is crazily high would mean the 2011 exchange based figures aren't very transparent from a historical perspective. The fact that we have to power a few thousand people in wilcannia from power stations in lake Macquarie means our power is ALWAYS going to cost more. Our rates of taxation versus our median wages should certainly be taken into account as that is a very pertinent part of the relative cost of power. Also the percentage of our income that is spent on electricity is also of far greater value as a comparison than raw figures.
      Address these points and then there might be some basis to state that we have abominable electricity prices. While you are at it you might also want to address the fact that our network has been unsustainably maintained for quite some time (at least in NSW) and as I stated the increases were purely to fund the upgrade and maintenance required on the neglected network.
      But we pay more than India..... Yes and what percentage of their disposable income do they have left to blow on entertainment each month?
      Want to compare apples and apples...you need to work much harder.

    What was the motivation behind EUAA releasing this report at this point in time?

    Political pressure against the CT? Smoothing the road for Vic, to expand brown coal mining?

    I think the coal miners in the EUAA need to fess up on the motives behind this report !..

    No need to apologise Angus, you got it just right.

    Many years ago I set the electricity tariffs for the County Council at which I worked.
    All necessary expenditure was taken into account, both to meet current needs and to plan for the future. Those prices were kept at the lowest level because the County Council was a non-profit organisation. It was totally owned by the electricity users in the area covered.
    The same cannot be said today.
    That is the main reason for the price increases.

    Anyone who works in the electrical supply industry will agree with what Maths has said.
    Privatisation is to blame for the majority of all price increases, why have private retailers who provide no actual service???. Network upgrades have been extensive over the last 4-5 years but are always needed, (Queensland) the dangers of 40 year old assets are a lot more obvious when you have to rescue people trapped in vehicles for hours covered in live conductors. In the end the price will continue to rise, but look out if the networks are sold and I wouldn't want to be on the end of a time of use tariff bill either. Both look to be heading to Queensland shortly.

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