BARELY A MONTH GOES BY WHEN WE DON’T READ OR HEAR ABOUT HOW ENERGY PRICES ARE SPIRALLING UPWARDS. BUT WHERE DOES THE MONEY GO?
Where does the power in my power bill go?
Some of the money you send to your retailer does the electrons that flow into your gadgets but much of it pays for infrastructure, meter readers, data management and other parts of the power system.
We often hear about the electricity spot or wholesale price. But it’s not the only market price for energy. Retailers (the companies that send you your power bill) can contract directly with generators and effectively bypass the wholesale market.
“Their prices are fixed by regulators as they operate as regulated monopolies”
THE WHOLESALE PRICE
If you’re using power from the National Electricity Market (NEM), that electricity is produced from a number of different generators that bid energy into the system. The supply and demand balance is managed by the market operator, the Australian Energy Market Operator (AEMO). They figure out how much power is needed to supply the market every five minutes and decide which generators get used, based on the cheapest way to supply the market.
Let’s say the market needs 10mWh for the next five minutes and there are five generators in the market. Here’s what the five generators bid into the system:
• Generator 1 can bid 2MWh at $5 and 3MWh at $6
• Generator 2 can bid 1MWh at $2 and 3MWh at $4
• Generator 3 can bid 4MWh at $7 and 3MWh at $10
• Generator 4 can bid 2MWh at $4 and 7MWh at $9
• Generator 5 can bid 6MWh at $8 and 3MWh at $12
In this scenario, the least expensive way to fulfil the 10mWh need would be:
• Generator 1’s 2MWh at $5 bid and 3MWh at $6
• Generator 2’s 1MWh at $2 and 3MWh at $4 bids
• 1MWh of the 2MWh at $4 bid from Generator 4
In this case all three generators will be paid $6 per MWh as there’s no way of tracing which electrons are used.
THE OTHER MARKET
Electricity retailers can enter into contracts with generators that specify that the retailer’s customers will use a certain amount of energy over a period at an agreed price. This protects the retailers and, in theory, us from the price volatility of the spot market.
When you see the electricity price spike, it’s important to realise the spot market is only part of the story.
GETTING THE ELECTRONS TO YOU
Once those electrons are produced, they get to you via the transmission and distribution networks. Those networks cost money to build, maintain and operate. So, their costs get added to our bills as supply charges and you pay them whether you use a single electron or not. Their prices are fixed by regulators as they operate as regulated monopolies.
The distribution networks also collect your meter readings and process the data, so it can be used. So, that’s another thing that needs to be paid for.
DO WE NEED SHOPS?
What value retailers add to the chain other than preparing and sending your bill? Those contracts I mentioned earlier protect us from spot market volatility. Retailers have an invisible role in protecting us from the minute-by-minute fluctuations of the market which can vary between a mandated maximum of $13,500/mWh to a minimum of -$1000/mWh.
They also provide us with a single pint of contact into a complex market in case we have a problem.
WHO GETS THE MONEY?
Retailers only earn margins on power bills of between 10% and 20% typically although, depending on whether you’re taking advantage of discounting that can get a little higher.
The transmission and distribution collect about 40% of what you pay with generators collecting just a quarter of the cash.
Those numbers vary from state to state as the rules for how prices are set vary.
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ANTHONY CARUANA has worked for almost every major masthead in the Australian IT press. As an experienced IT professional – having worked as the lead IT executive in several businesses, he brings a unique insight to his reporting of IT for both businesses and consumers.