Money

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 at Gizmodo) 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)


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