What makes up the cost of retail electricity?

We all receive our electricity bill regularly, but each electron you use follows a journey from generation to travel through the poles and wire infrastructure and is delivered to your home. There are many parties involved in competing this task, as well as huge amounts of capital investment. This blog provides some details on the components that make up your electricity bill.

Generation costs

This is the cost for the company to actually create the electrons to be wired to your home, known as the wholesale power costs. There are many different technologies employed to generate this electricity including coal, gas, hydro, solar and wind. The composition of these generation assets changes over time as National Electricity Market (NEM) operates on a bidding system that rewards the least cost capacity. Recently we have seen the rise of renewable energy generation assets as wind and solar technologies have fallen substantially. Throughout the day the components of generation changes, a great resource to understand this is the OpenNEM. Take a look and you can see how solar and wind are increasingly becoming a more important feature.

Transmission costs

Given the size of Australia, it has one of the longest electricity networks in the world. Transmission infrastructure is connected to the various generation assets and they are required to transmit large voltages of electricity across the country. You will see transmission infrastructure as you drive across the country and they are the very large poles stretch kilometres. The cost of this infrastructure is regulated and can be owned by both private companies as well as government entities.

Distribution costs

The next step in the process to get electricity to hour home is to step down the large voltages to the distribution infrastructure. There are the poles and wires we see connecting all our homes. The NEM is split into 13 different distribution zones and the companies or government entities operating these assets are tasked with ensure the power stays on. The costs associated with this infrastructure is also regulated by the Australian Energy Regulator (AER).

Retailer costs

This part of an electricity bill covers the cost of maintaining customer databases and billing processes at electricity retail companies, as well as marketing to win new customers. There are now more than 45 retailers operating across the NEM, which has increased competition and sought to reduce this component of the bill for consumers. There have been many studies on how much of these costs contribute to your bill. A study by the Australian Competition and Consumer Commission (ACCC) in 2017 indicated these costs accounted for around 25% of an average electricity bill, while a report from the Australia Energy Market Commission (AEMC) indicated retailer costs made up around 12%.

State and federal environmental policies

These costs involve the government-imposed levies to pay for programs such as the Climate Change Fund levy in NSW, the Queensland Solar Bonus Scheme as well as the cost of meeting the national Renewable Energy Target. They make up a small component of our electricity bill and are in place to help promote investment into newer renewable energy technologies. The actual cost varies from state to state. According to a 2018 study by the AEMC, the cost of these environmental schemes makes up about 7 per cent of the average electricity bill. However, now that the Renewable Energy Target has been met, environmental costs are expected to fall significantly in the next few years.