On January 26, 2011, Coles fired the first shot in what would soon be dubbed the “supermarket price wars” by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition.
But now Coles has waved the white flag, indicating a move away from price-based marketing, to a focus on other attributes, such as sustainability, local produce and community.
Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week saying they were:
…no longer able to compete against the domination of the major two supermarkets.
While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed.
How this strategy came about
Supermarkets are now looking beyond price to stand out.
Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain.
These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week.
With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths new campaign features athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.
Meanwhile, Coles have partnered with Uncle Toby’s for their Sports for Schools campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.
By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called “internalisation”. This is where people accept the endorser’s position on an issue as their own.
Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect.
While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes.
But for most Australians, the most visible impact of this crisis has been their ever-increasing electricity bills. Electricity prices have become a political hot potato, and the blame game has been running unchecked for more than a year.
Electricity retailers find fault with governments, and renewable energy advocates point the finger at the nasty old fossil-fuel generators. The right-wing commentariat blames renewables, while the federal government blames everyone but itself.
The truth is there is no silver bullet. No single factor or decision is responsible for the electricity prices we endure today. Rather, it is the confluence of many different policies and pressures at every step of the electricity supply chain.
Four components make up your electricity bill. Each has contributed to this increase.
The biggest culprit has been the network component – the cost of transporting the electricity. Next comes the retail component – the cost of billing and servicing the customer. Then there is the wholesale component – the cost of generating the electricity. And finally, the government policy component – the cost of environmental schemes that we pay for through our electricity bills.
Each component has a different tale, told differently in every state. But ultimately, this is a story about a decade of policy failure.
Network costs form the biggest part of your electricity bill. Australia is a big country, and moving electricity around it is expensive. As the graph above shows, network costs have contributed 40% of the total price increase over the past decade.
The reason we now pay so much for the network is simply that we have built an awful lot more stuff over the past decade. It’s also because it was agreed – through the industry regulator – that network businesses could build more network infrastructure and that we all have to pay for it, regardless of whether it is really needed.
Network businesses are heavily regulated. Their costs, charges and profits all have to be ticked off. This is supposed to keep costs down and prevent consumers being charged too much.
That’s the theory. But the fact is costs have spiralled. Between 2005 and 2016 the total value of the National Electricity Market (NEM) distribution network increased from A$42 billion to A$72 billion – a whopping 70%. During that time there has been little change in the number of customers using the network or the amount of electricity they used. The result: every unit of electricity we consume costs much more than it used to.
There are several reasons for this expensive overbuild. First, forecasts of electricity demand were wrong – badly wrong. Instead of ever-increasing consumption, the amount of electricity we used started to decline in 2009. A whole lot of network infrastructure was built to meet demand that never eventuated.
Second, governments in New South Wales and Queensland imposed strict reliability settings – designed to avoid blackouts – on the networks in the mid-2000s. To meet these reliability settings, the network businesses had to spend a lot more money reinforcing their networks than they otherwise would have.
Third, the way in which network businesses are regulated encourages extra spending on infrastructure. In an industry where you are guaranteed a 10% return on investment, virtually risk-free – as network businesses were between 2009 and 2014 – you are inclined to build, build, build.
The blame for this “gold-plating” of network assets is spread widely. Governments have been accused of panicking and setting reliability standards too high. The regulator has copped its share for allowing businesses too much capital spend and too high a return. Privatisation has also been criticised, which is slightly bizarre given that the worst offenders have been state-owned businesses.
The second biggest increase in your bill has been the amount we pay for the services provided to us by retailers. Across the NEM, 26% of the price increase over the past decade has been due to retail margins.
This increase in the retail component was never supposed to happen. To understand why, you must go back to the rationale for opening the retail sector to competition. Back in the 1990s, it was felt that retail energy was ripe for competition, which would deliver lower prices and more innovative products for consumers.
In theory, where competition exists, firms seek to reduce their costs to maximise their profits, in turn allowing them to reduce prices so as to grab as many customers as possible. The more they cut their costs, the more they can cut prices. Theoretically, costs are minimised and profits are squeezed. If competition works as it’s supposed to, the retail component should go down, not up.
But the exact opposite has happened in the electricity sector. In Victoria, the state that in 2009 became the first to completely deregulate its retail electricity market, the retail component of the bill has contributed to 36% of the price increase over the past decade.
On average, Victorians pay almost A$400 a year to retailers, more than any other mainland state in the NEM. This is consistent with the Grattan Institute’s Price Shock report, which showed that rising profits are causing pain for Victorian electricity consumers. Many customers remain on expensive deals, and do not switch to cheaper offers because the market is so complicated. These “sticky” customers have been cited as the cause of “excessive” profits to retailers.
But the new figures provided by the ACCC, which come directly from retailers, paint a different picture. The ACCC finds that the increase in margins in Victoria is wholly down to the increasing costs of retailers doing business.
There are reasons why competition might drive prices up, not down. Retailers now spend money on marketing to recruit and retain customers. And the existence of multiple retailers leads to duplications in costs that would not exist if a single retailer ran the market.
But these increases should be offset by retailers finding savings elsewhere, and this doesn’t seem to have happened. History may judge the introduction of competition to the retail electricity market as an expensive mistake.
So far, we have accounted for 65% of the bill increase of the past decade, and neither renewables nor coal have been mentioned once. Nor were they ever likely to be. The actual generation of electricity has only ever formed a minor portion of your electricity bill – the ACCC report shows that in 2015-16 the wholesale component constituted only 22% of the typical bill.
In the past year, however, wholesale prices have really increased. In 2015-16, households paid on average A$341 a year for the generation of electricity – far less than they were paying in 2006-07. But in the past year, that is estimated to have increased to A$530 a year.
Generators, particularly in Queensland, have been engaging in questionable behaviour, but it is the fundamental change in the supply and demand balance that means higher prices are here to stay for at least the next few years.
The truth is the cost of generating electricity has been exceptionally low in most parts of Australia for most of the past two decades. When the NEM was created in 1998, there was arguably more generation capacity in the system than was needed to meet demand. And in economics, more supply than demand equals low prices.
Over the years our politicians have been particularly good at ensuring overcapacity in the system. Most of the investment in generation in the NEM since its creation has been driven by either taxpayers’ money, or government schemes and incentives – not by market forces. The result has been oversupply.
Up until the late 2000s the market kept chugging along. Then two things happened. First, consumers started using less electricity. And second, the Renewable Energy Target (RET) was ramped up, pushing more supply into the market.
Demand down and supply up meant even more oversupply, and continued low prices. But the combination of low prices and low demand put pressure on the finances of existing fossil fuel generators. Old generators were being asked to produce less electricity than before, for lower prices. Smaller power stations began to be mothballed or retired.
Something had to give, and it did when both Alinta and Engie decided it was no longer financially viable to keep their power stations running. Far from being oversupplied, the market is now struggling to meet demand on hot days when people use the most electricity. The result is very high prices.
A tight demand and supply balance with less coal-fired generation has meant that Australia increasingly relies on gas-fired generation, at a time when gas prices are astronomical, leading to accusations of price-gouging.
Put simply, Australia has failed to build enough new generation over recent years to reliably replace ageing coal plants when they leave the market.
Is it renewable energy’s fault that coal-fired power stations have closed? Yes, but this is what needs to happen if we are to reduce greenhouse emissions. Is it renewables’ fault that replacement generation has not been built? No. It’s the government’s fault for failing to provide the right environment for new investment.
The current predicament could have been avoided if we had a credible and comprehensive emissions reduction policy to drive investment in the sector. Such a policy would give investors the confidence to build generation with the knowledge about what carbon liabilities they may face in the future. But the carbon price was repealed in 2014 and replaced with nothing.
We’re still waiting for an alternative policy. We’re still waiting for enough generation capacity to be built. And we’re still paying sky-high wholesale prices for electricity.
Green and gold
Finally, we have the direct cost of government green schemes over the past decade: the RET; the household solar panel subsidies; and the energy-efficiency incentives for homes and businesses.
They represent 16% of the price increase over the past 10 years – but they are still only 6% of the average bill.
If the aim of these schemes has been to reduce emissions, they have not done a very good job. Rooftop solar panel subsidies have been expensive and inequitable. The RET is more effective as an industry subsidy than an emissions reduction or energy transition policy. And energy efficiency schemes have produced questionable results.
It hasn’t been a total waste of money, but far deeper emissions cuts could have been delivered if those funds had been channelled into a coherent policy.
The story of Australia’s high electricity prices is not really one of private companies ripping off consumers. Nor is it a tale about the privatisation of an essential service. Rather, this is the story of a decade of policy drift and political failure.
Governments have been repeatedly warned about the need to tackle these problems, but have done very little.
Instead they have focused their energy on squabbling over climate policy. State governments have introduced inefficient schemes, scrapped them, and then introduced them again, while the federal government has discardedpolicies without even trying them.
There is a huge void where our sensible energy policy should be. Network overbuild and ballooning retailer margins both dwarf the impact of the carbon price, yet if you listen only to our politicians you’d be forgiven for thinking the opposite.
And still it goes on. The underlying causes of Australia’s electricity price headaches – the regulation of networks, ineffective retail market competition, and our barely coping generators – need immediate attention. But still the petty politicking prevails.
The Coalition has rejected the Clean Energy Target recommended by Chief Scientist Alan Finkel. Labor will give no guarantee of support for the government’s alternative policy, the National Energy Guarantee. Some politicians doubt the very idea that we need to act on climate change. Some states have given up on Canberra and are going it alone.
We’ve been here before and we know how this story ends. Crisis wasted.
In so doing, the government seemingly sidestepped the need to trigger its own powers to forcibly restrict gas exports.
Sighs of relief all round, then. But here’s the thing: neither the new deal, nor the legislation that governs export controls, actually addresses the issue that is arguably most important to consumers – the high prices Australians are paying for their gas.
This is partly understandable, given that rising global demand has fuelled a lucrative export market. The primary destination is Asia, which will assume more than 70% of global demand. In geographical terms this puts Australian exporters in a very strong position, and by 2019 Australia is forecast to supply 20% of the global market – up from 9% today.
However, the strong global demand for liquefied natural gas (LNG) does not in itself provide the full explanation for rising gas prices in Australia’s east coast gas market. This is caused by a weak regulatory environment.
The Australian Domestic Gas Security Mechanism, which took effect in July 2017, gives the federal resources minister the power to restrict exports of LNG in the event of a forecast shortfall for the domestic market in any given year.
This five-year provision was designed as a short-term measure to ensure domestic gas supply. If triggered, it would require LNG exporters either to limit their exports or to find new sources of gas to offset the impact on the domestic market.
To trigger the mechanism, the minister must follow three steps:
formally declare that the forthcoming year has a domestic shortfall, by October 1 of the preceding year;
consult relevant market bodies, government agencies, industry bodies and other stakeholders to determine their view on the existing and forecast market conditions; and
make a determination by November 1 on whether to implement the measures.
Any export restriction implemented under the ADGSM would potentially apply to all LNG exports nationwide, including those from areas with no forecast gas shortage, such as Western Australia. The minister does have the ability to determine the type of export restriction that is imposed. An unlimited volume restriction does not impose a specific volumetric limitation and can be applied to LNG projects that are not connected to the market experiencing the shortfall. A limited volume restriction imposes specific limits on the amount of LNG that may be exported and may be applied to an LNG project that is connected to the market experiencing the shortfall.
Non-compliance with the export limits imposed on gas projects would have a range of potential consequences for gas companies. These include revocation of export licence, imposition of different conditions, or stricter transparency requirements.
The new deal
The agreement signed with the big three gas producers effectively relieves the government of the need to consider triggering the ADGSM. As such, 2018 has not been officially declared to be a domestic shortfall year.
But the agreement is not grounded upon any specific legislative provision. Therefore it is essentially only enforceable against the gas companies that are parties to it. And in accordance with the private terms and conditions that those companies agree to.
The broad agreement is that contractors will sell a minimum of 54 petajoules of gas into the east coast domestic market (the lower limit of the forecast shortfall) and keep more on standby in case the eventual shortfall turns out to be bigger.
But what about prices?
The deal contains no specific provision regarding domestic pricing. So, although there will be more gas in the domestic market, this does not necessarily mean that the current high prices will drop.
In the short term, the provision of additional supply may curtail dramatic increases in domestic gas prices. However, the gas deal does not address the core problem, which stems from our enormous commitment to LNG exports and the connection of domestic gas prices to the global energy market.
Indeed, the commitments are so great that many LNG operators have had to take conventional gas from South Australia and Victoria to fulfil their export contracts. This has put significant pressure on domestic prices.
The unequivocal truth is that gas prices were much cheaper before the LNG export boom. The only way to achieve some level of protection for domestic gas prices is to implement stronger regulatory controls on the export market. This should involve taking account of the public interest when assessing whether export restrictions should be imposed.
The ADGSM legislation does not incorporate any explicit public interest test, despite the fact that gas is a public resource in Australia and gas pricing is a strong public interest issue.
Compare that with the United States, where public interest is a key principle in assessing whether to approve any LNG exports to countries with no US free trade agreement (such as Japan). Public interest tests in the United States involve a careful determination of how exports will affect domestic supply and the potential impact that a strong export market will have upon domestic prices.
The Australian government’s decision to broker a deal with gas suppliers, rather than extend the long arm of the law, means that regulators will need to keep a close eye on the gas companies to check that they are holding up their end of the bargain.
In the absence of any explicit rules compelling gas producers that signed the deal to provide clear and accurate information and adopt stronger transparency protocols, the ACCC may face a very onerous task.
I don’t often buy music any more. On the odd occasion I may, if I believe the price is reasonable, grab a CD or these days something of the iTunes site. Generally though I stopped buy music a long time ago. Why? Well, in my opinion it was far too overpriced. A CD with just 8 songs on it or perhaps even less than 8, for the price they were charging – no way!
Now I have a subscription to Spotify and I can stream (and save playlists to my lap top) music for a very reasonable price. Not everything is on Spotify, but I will still buy something from iTunes should I wish to – such as a couple of The Voice Australia songs.
For me, buying music or not buying music was never about could I get a pirated version. I stopped buying music because it was too costly to do so. I think the music industry got too greedy.
I think a similar thing with books. Traditional printed books cost too much to buy generally speaking and besides that I’m now a digital geek so ebooks are my thing.
There is no doubt in my mind as to the complete separation of the state and the Christian church. The United States government, the Australian government and all other governments involved in the war against terror are not acting as Christian Crusaders, but as responsible modern nations seeking to bring freedom from terror to oppressed peoples around the world. Having said that, in light of such articles as that previous in this Blog, perhaps it is time that the allies in the war on terror, reassess their policy on Afghanistan (and the same would be true of Iraq and Pakistan). Clearly, should the allies withdraw from the country, it seems relatively clear that it would only be a matter of time before the country moves towards an oppressive Islamic regime.
Why should western nations promoting human rights, democracy, freedom from terror and other worthwhile goals, continue to pour resources (human, financial, etc) into a country where overall, its citizens continue to espouse the rhetoric and policies of the enemy? Already it seems clear that the principles of our freedoms are despised by the vast majority of the Afghan nation. Without a long-term commitment to police the country and keep the policies being promoted by the western allies, there is no point continuing the current mission in Afghanistan (or Iraq, Pakistan, etc). Do we have the capacity and the stomach to pay the price for such a continuing mission, when the undoubted price in human lives, finances and other resources, will continue to mount and become such that our own people will be unable to bear the dearness of the cost?