How your electricity bill gets worked out

Many of us got a (bill) shock in July when prices spiked. Why aren’t renewables making our bills cheaper? What’s behind the cost of our power?

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The streetlights fizzed and crackled into life moments after the mayoress tweaked the switch-key. Cheers erupted in the town’s steam-powered engine house. Several passersby fled in fright at the unexpected noise. It was November 9, 1888, and Tamworth had just beaten Sydney and Melbourne in the race to light streets with electricity.

It’s been just 135 years since electricity insinuated itself into our lives, replacing gas and steam as the technology du jour. Tamworth’s earlier gaslights “did little more than make darkness visible”, The Sydney Morning Herald reported, while the new electric lights radiated an “even and far-reaching” glow.

Today, we are at another inflection point as we shift from fossil fuels to renewables. Consumers are caught at the crossroads. Cheap, limitless power is a thing of the past.

A rotunda in Sydney’s Hyde Park is lit up in honour of a visit by the US fleet in 1908. Credit: City of Sydney Archives. Image has been digitally altered

The transition to all-renewables will come at a cost for all, even as regulators attempt to cushion us from volatile wholesale prices behind the scenes.

While the cost of electricity has fluctuated in recent years, many of us experienced bill shock last year and again this July when prices suddenly spiked. Indeed, a record number of people complained to the NSW ombudsman about their power bills after charges increased by around 20 per cent overnight. Costs surged in Victoria and Queensland, too.

Why are our electricity bills going up? And can we expect relief any time soon?

First, when did Australia electrify?

In 1904, the Sydney Electric Lighting Station cranked up its coal-fired steam engines to light the city’s first tranche of 343 street lamps. “I have much pleasure in switching on the electric light for the city of Sydney,” declared the lady mayoress. “I trust it will be a boon to the citizens and an encouragement to the enterprise of the city council.”

Melbourne, it must be said, had embraced electricity 10 years earlier when the steam-driven power station on Spencer Street opened for business. Yet, it was the tiny Tasmanian mining township of Waratah, not far from Cradle Mountain, that claimed to have been the first place in Australia to be permanently lit by electricity, with 400 street lights powered, as it happens, by an early hydro plant.

The engine room at the Spencer Street electricity station in 1902. Credit: State Library of Victoria. Image has been digitally altered

Electric lighting quickly became more economical than gas, says Matthew Churchward, senior curator of engineering and transport at Museums Victoria. “With the gas lamps, you literally had to have these lamplighters who walked around the streets with a pole and reached up and ignited each lamp.”

In homes, though, while there were early domestic customers around the turn of the century, electric power took decades to really take off. By 1950, most – but not all – Melbourne houses were wired for electricity, according to Museums Victoria. In post-war Sydney, increasing domestic demand for electric power was curtailed by blackouts.

“Cooking meals, even boiling water for a cup of tea, was often a matter of luck,” writes Kenneth Thornton in his 2015 history of the Electricity Commission of New South Wales. “Households fortunate to have a refrigerator had to contend with perishable foods defrosting when power was unavailable for long periods.”

Today, Tamworth’s nascent power station is a regional museum packed with electrical ephemera, manned occasionally by the ever-helpful Ian Hobbs, 85. “It’s not only Tamworth’s electrical history, it’s Australia’s electrical history,” he says.

Large-scale electricity production compounded in the 1920s and ’30s. Victoria’s Yallourn power station opened in the Latrobe Valley in 1924 to become a vast complex of coal-fired plants; the NSW Bunnerong plant was the largest of its type in the world when it opened in the Sydney suburb of Matraville in 1939. Work began on the Snowy Mountains Hydroelectric Scheme in 1949.

Electricity generation and distribution were state-owned for most of the 20th century, and public corporations still manage these in many states and territories. Victoria and South Australia privatised their assets in the 1990s, while NSW partly privatised theirs in 2010.

Today, many electricity producers sell power at fluctuating prices to retailers (the company you buy yours from) on a wholesale market. This competition, in theory, should make consumers better off, says Tony Wood, the Grattan Institute’s energy program director.

But other aspects of electricity, such as the poles and wires that transmit it and the final total on our bills, are much more regulated (more on that below). “The fundamental thing here is that whatever we do, whether we have a market or not, we’ve got to make sure that people have access to essential services that are part of modern life,” Wood says.

Instead of generating power close to where we live, as we once did, our power supply is now largely dispersed around the country, with the ever-growing raft of renewable projects located where our sunshine, wind and hydro offer the most potential.

Renewables now generate a third of our power. Much more will be needed if we are to meet Australia’s target of net-zero carbon emissions by 2050. Producing the energy to replace that from fossil fuels is one challenge; transmitting it to our cities and storing it for use at night and when the weather isn’t co-operating is another.

One piece of the puzzle recently opened in Mildura, in Victoria’s north: a space-age solar farm with nests of moving mirrors that focus sunlight onto solar modules borrowed from the satellite industry. But instead of just sending power to the grid, where it is worth next to nothing when the sun shines, RayGen’s plant heats up water, stored in underground tanks, that is used to make electricity when it’s at its most valuable. “It’s a really efficient process,” says chief commercial officer Will Mosley.

An aerial view of the RayGen Power Plant Carwarp Project in Mildura. Credit: Eddie Jim. Image has been digitally altered

How does the grid work?

All of these energy sources feed into “the grid”: the network of power plants, soaring pylons, chunky transformers and substations, and street-level connections that deliver power to our homes. Australia’s main grid, called the National Electricity Market, is one of the biggest in the world. It physically connects NSW, the ACT, Victoria, South Australia, Queensland and Tasmania, which joined in 2005-6 when it was linked to the mainland by the Basslink Interconnector underwater cable. Due to their distance from the east coast, WA and the Northern Territory have their own networks.

The grid’s lifeblood is AC power: alternating current. For rock music fans, this is distinct from DC (direct current). The first public electricity system, devised by Thomas Edison in the 1880s, used direct current. Then inventor Nikola Tesla, among others, figured out that alternating current could more practical to transmit over long distances. We still use DC widely, particularly in our electronic devices.

Now, skip this if you passed high-school physics. Otherwise, imagine you’re sitting on the edge of a bathtub. Swish your hand to make a series of waves, a rubber duck bobbing up and down on them. This, very broadly, is like the energy an electricity supplier pushes into the grid: a wave of current that in Australia oscillates at 50 hertz, or 50 times a second, as it does in most places, including Europe and Britain. A handful of nations, such as the US and Brazil, send power down the line at 60 hertz.

Where that wave of energy comes from varies according to the time of day and the weather, upon which most renewables depend: the wind needs to blow to turn the blades on a new-age windmill and a cloud passing across the sun can momentarily tank the amount of energy flowing into the grid from our sea of photovoltaic panels.

In the UK, famously, power companies are on high alert for customers dashing to make a cuppa during television ad breaks.

Old-school coal-fired power stations deliver a reliable supply but aren’t easy to turn off or on in a hurry; gas plants spin up and down more rapidly but are more expensive to operate, especially given the recent increases in the price of natural gas.

Demand is the other side of this delicate equation: it’s typically low on weekdays when many of us are at work, but spikes at dinnertime or on hot days during school holidays when everybody turns on air-conditioners. In the UK, famously, power companies are on high alert for customers dashing to make a cuppa during television ad breaks (a lot of kettles draw a lot of power).

Simon Sarafian, AGL’s general manager of trading, in the company’s dispatch room. Credit: Justin McManus. Image has been digitally altered

Who puts a price on this energy?

Now that we have electricity pulsing through power lines into our homes, who makes it all happen, and at what cost? Enter the (mostly) big power companies.

To see one in action, we visited the headquarters of AGL (formerly Australian Gas Light Company), which controls the most electricity generation in NSW and Victoria. At a dispatch room far from turbines in sun-soaked fields, windy plains and dams, staff peer at monitors displaying temperature, wind and cloud cover, as well as water levels. When conditions are right, they order up juice from any of the nine wind farms, 14 pumped hydro stations, several big batteries and solar plants and a peaking gas station. They then keep an eye on output to make sure it’s at a safe level.

‘You just have to be ready to respond, if there’s cloud cover or a coal unit trips.’

The vast turbines of coal-fired plants, such as the Bayswater Power Station in the Hunter Region and Loy Yang A in Gippsland, are always turning, unless they’re undergoing maintenance. “The reason they never turn off, even if the prices are quite low, is because you’re locked out then for 12 to 15 hours to get it to ramp back up,” says Simon Sarafian, AGL’s general manager of trading. “I would shut it down if I could, but I just won’t get it back for when the market needs it in the peak.”

Choosing when to dispatch what source of energy to the market is a round-the-clock balancing act. “What we watch is hot days – it’s almost battle stations, like what’s going to go wrong,” says Sarafian. “You just have to be ready to respond, if there’s cloud cover or a coal unit trips [goes offline], which has happened … it suddenly gets very expensive if you’re not running, or you’re short.”

In another room, traders wearing headsets scrutinise screens showing the price of electricity and how many people are using it in real time. They have already forecast what customers are expected to do over a day or week. “The best decider of that is what’s the weather, what’s the day of the week,” Sarafian says. They then send offers for their best price to produce electricity at any particular moment – known as the spot price. “If the spot price surprises to the upside, everyone might put more generation in, if the spot price surprises to the downside, you might back off a bit.”

The Australian Energy Market Operator (AEMO) acts as a kind of electrical stock exchange, tallying the offers, not just from AGL but from dozens of major generators. It accepts some, rejects others and thereby orders up power to balance supply and demand across the nation. Energy retailers then buy the electricity to sell to their customers. (Some big companies, such as AGL and Origin, both produce and retail electricity; many more only sell it.)

AEMO matches supply and demand every five minutes.

Deep breath now.

Sometimes, suppliers will bid to pay a price that’s less than zero. That means they are prepared to pay a retailer to take their electricity from them. Why? Usually, because the cost of stopping production is higher than the cost of paying to give it away, such as when you’re running one of those loping coal-fired plants and solar, thanks to a sunny day, is swamping the grid. So you bid to sell power cheap to force other suppliers to bow out first, and you make up the deficit later in the day when prices revert to normal. Then you can start bidding back into profit.

Wholesalers wear the costs of juggling this ever-fluctuating puzzle and the knock-on effects of external events. The war in Ukraine continues to impact the price of natural gas, one of the fuels we use to make electricity; coal prices have varied dramatically in recent years, at one time due to floods in Queensland. But consumers are, for the most part, insulated from this wild ride: we just get a bill, and its maximum possible charge is closely regulated.

So how does my bill get worked out?

Roughly 40 per cent of an electricity bill comes from the wholesale cost of making the electricity, another 35 per cent pays for the delivery network (more on that below) and the rest includes contributing to environmental schemes and costs for the retailer. A small percentage accounts for profits for the retailer.

Gird yourself.

While prices are set on the wholesale market every five minutes and can vary enormously throughout the day, the typical cost of electricity for most consumers is determined only once a year, when the Australian Energy Regulator and several state-based regulators determine the “default market offer”.

This reference price accounts for all the factors that might affect the wholesale price in the coming year, the costs of maintaining and upgrading the network, and surveys from retailers about their operating costs.

The offer is the maximum price retailers can charge per kilowatt-hour (kWh) to consumers who haven’t signed a discount contract, perhaps because they haven’t got around to it, couldn’t be bothered to shop around or don’t understand how billing works. The default offer protects you from being overcharged and acts as a comparison point – a safety net.

If power companies don’t do this or tell customers about it, the ACCC can fine them. The default offers for residential electricity rose more than 20 per cent in most states on July 1. This spike followed several adverse factors, including the Ukraine war that affected coal and gas prices, weather events, unplanned outages at power stations and transportation costs. Still, retailers can offer deals that are below the default offer. It’s a bit different in WA, where the government itself reviews electricity prices as part of its annual budget. This year it capped the rise at just 2.5 per cent and gave all households a bill credit of at least $400.

A wind farm at Emu Downs in WA. Credit: Image has been digitally altered

Why aren’t renewables making our bills cheaper?

Almost one in three Australian households now have photovoltaic panels on their roofs. Renewable energy overall contributed 32 per cent of Australia’s total electricity generation in 2022 including solar at 14 per cent; wind at 11 per cent and hydro at 6 per cent.

If you have panels, you probably know that you don’t get paid much for the electricity you export to the grid: the price, called the feed-in tariff, is typically 5¢ per kilowatt-hour. So how can power companies get away with charging, say, 36¢ per kWh to supply us with grid power in return? The short answer, says Victoria’s Essential Services Commission, “is that the feed-in tariff is going down because electricity prices during the day are going down”.

On a sunny day, you’re lucky to be getting anything at all: that’s when wholesale prices tend to go negative, at least partly because so many of us now have panels. A decade ago, you might have been paid a lot more for your juice, but now competition is fierce.

‘It’s not as straightforward as everything’s cheaper now we’ve got renewables … sometimes it is getting much cheaper to use energy, and other times of day it’s getting more expensive.’

The price we’re charged, meanwhile, usually bakes in the average costs to generate energy and maintain grid stability at all times, not just the hours when renewable output is high. And we still need to pay for the network of wires and poles – a cost that will only grow as we enlarge the grid to make it more renewables-friendly. Which is why, overall, our bills remain stubbornly high.

“We’re not getting the benefit as fast as we might have expected,” says Grattan’s Tony Wood. “You’ll hear ministers, particularly energy ministers, saying how renewables are the cheapest cost of electricity, and that’s true. That’s one of the benefits of having spent a lot of money on renewables over the last 20 years, the costs have come down dramatically, particularly solar and, to some extent, wind. But you still have to get it to your house or business. And the transmission and distribution costs and the storage cost of dealing with the intermittency of wind and solar starts to go up.”

Cheaper ways of generating electricity have nudged some coal-fired power stations into retirement, putting more pressure on the ones that remain. Gordon Leslie, an energy economist at Monash University, says this means there is “essentially less competition” at certain times of day when renewables cannot generate electricity. “So at those times of day we generally see higher prices,” Leslie says. “It’s not as straightforward as everything’s cheaper now we’ve got renewables. It’s actually that sometimes it is getting much cheaper to use energy, and other times of day it’s getting more expensive.”

The regulator’s Wholesale Electricity Market Performance report for 2022 found that, despite the influx of renewables, a few large companies with the potential to exercise market power. “Compounding this issue, base load and flexible generation remain particularly concentrated among a small number of participants, potentially diminishing competition during periods of supply stress and at certain times of day,” the report says. More investment into the grid – such as large-scale batteries that can absorb cheap energy by day and dispatch it in the evening – will introduce more competition.

But while the energy transition, international events and weather patterns all affect our bills, that doesn’t mean it’s completely out of our hands either. For one, people can shop around. There’s a list of basics to saving money on your bills too: draught-proofing, insulation, using energy when it’s cheapest, setting your air-conditioning a little higher and your heating a little lower – it all makes a difference.

If you have solar and a battery you can, in theory, buy – or make – power when it’s cheap, then store it and supply it to the grid when it’s expensive.

If you’re lucky enough to own your own home with its own roof, meantime, solar panels can be very cost-effective. Depending on where you live, how much sunlight your roof receives and the various government incentives available, the payback period for a rooftop solar system could now be as little as three years, according to Finn Peacock, an electrical engineer and founder of the blog SolarQuotes.

Installing a battery is currently a more marginal proposition. “If you’re on a flat-rate tariff, which is when you pay the same for your power 24 hours a day, your battery payback is going to be 15 years-plus,” says Peacock. If you’re on a variable tariff where you’re suddenly charged a lot more at peak times, a battery starts to make more sense economically if you can draw on power you’ve stored, rather than paying for it from the grid during those peak pricing periods. “That’s when you see the really good payback.”

Where it gets interesting, though, is when electricity retailers give households partial exposure to the minute-by-minute wholesale market, which is beginning to happen in Australia. If you have solar and a battery you can, in theory, buy – or make – power when it’s cheap, then store it and supply it to the grid when it’s expensive, pocketing the difference.

Amber Electric, one of the first retailers to attempt this model, charges a flat monthly $19 subscription and allows its customers to choose when they buy or sell power at wholesale prices while protecting them, to some extent, from severe price spikes. “I love the concept,” says Peacock. “They’ve opened up the wholesale market to Joe Bloggs. But it’s a game for advanced players.”

Down the track, says Amber co-founder Chris Thompson, customers should be able to use their electric cars as battery storage, sending power they don’t need back to the grid. Regulatory hurdles need to be overcome, but it is working experimentally now. “We think that’s going to be huge.”

Electric cars could one day be used to store and sell your household electricity. Credit: Getty Images. Image has been digitally altered

Will our bills get cheaper one day?

Today’s grid was not built to capture energy from millions of decentralised producers on wind and solar farms and from rooftops. The Australian Energy Market Operator has forecast it will take $320 billion to get the grid up to speed by 2050. Someone has to pay for this.

As we build out the new network, the cost of wholesale power might well come down, says Wood, but we’re likely to see heavier charges for the part of our bill that pays for the transmission and storage infrastructure. “They’ll probably just, at best, cancel each other out,” he says.

Currently, solar farms in regional areas can struggle to make enough money from all the power they generate when the sun is shining. Says Will Mosley in Mildura: “You saturate the line in the middle of the day and you have to down-rate the value of electricity in that local area. We need to think about it from a structural level around where energy is being generated and being consumed. We either move to a model where we’re exceptionally flexible about when we use power, and we accept that there’s going to be blackouts, or we really think through these kinds of structural issues.”

Much like the switch from gas lighting to electric in the 1880s, “it’s a fundamental change in the technologies,” says John Ward, from the energy systems research program at the CSIRO. To meet our 2050 targets, he says: “We need to be able to operate that system stably and securely at times on 100 per cent renewables in a two- to three-year time horizon.” Behrooz Bahrani, director of Monash University’s Grid Innovation Hub, describes this as “flying with an aeroplane that was built in the 1930s, and as you’re flying, you’re hoping to retrofit this aeroplane with the technology we have invented recently”.

One solution might be making and storing electricity where we need it, using batteries and rooftop panels to generate, use and feed electricity back into the grid for our neighbours. Meanwhile, if we did electrify our entire vehicle fleet and allow it to send power back to the grid, Ward says, “that would actually provide more than enough energy storage needed to achieve that change in our system”.

How we get there, of course, is still a matter of great debate.

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