This week the Australian Bureau of Statistics (ABS) announced its revised weightings for the consumer price index (CPI)[i]. It was the first revision of its kind since 2011. The revision showed the changes in the average cost and consumption of household expenditure items over the past six years.
Given the escalating public debate on electricity prices in Australia, it is interesting to see how much the cost of energy has changed over this time relative to the cost of other household spending.
Although energy bills have been rising in real terms, as a percentage of household spend, the increase is quite modest. For example, in 2011 electricity comprised 1.99 per cent of total household expenditure, whilst gas and other fuels were 0.72 per cent. In the revised 2017 basket of goods, electricity has increased to 2.17 per cent of total household spending, whilst gas and other fuels has increased to 0.87 per cent. This is despite declining household consumption of electricity over this time (due to more efficient appliances and lighting, solar PV uptake and increased price sensitivity).
In other words, the average share of household expenditure on electricity has increased by 9 per cent over the past six years, while gas and other fuels has increased by 21 per cent. Combined, they now account for, on average, 3.04 per cent of total household spending.
According to the revised CPI basket, this is still well less than household spending on alcoholic beverages (4.49 per cent) or eating out and take-away food (5.88 per cent). Including water rates (1.02 per cent), the average Australian household spends less on utilities than it does on holidays (5.83 per cent) or education (4.27 per cent). Energy takes up less of household spending than other “essential services” like food (16.09 per cent) and housing (18.62).
So why are household energy costs such a hot button issue in Australia?
The things households spend money on sit on a spectrum from essential to discretionary. Food, shelter, energy and water and telephony sit down the essential end of the spectrum, although consumers can exercise some choice around what type of foods they buy, which phone they have and to some extent where they live. Energy is a relatively fungible purchase (it’s the same electrons or molecules no matter how you buy it) which limits the amount of consumer choice (except for switching energy deals or retailers).
Energy is an enabler for a range of activities and services in the home – heating and cooling, hot water, lighting and cooking. The perceived benefit of energy use is derived through devices rather than directly, it’s in the background of life at home. When energy costs are low or constant, we are probably less likely to notice them. It’s when they increase, even though our behaviour hasn’t changed markedly, that consumers are more likely to question the value of something which is, essentially, ubiquitous.
And there have been some big changes in the cost of energy. The recent ACCC Preliminary Report into retail electricity prices estimates that the price of household electricity increased by 80 to 90 per cent in the 10 years to 2017[ii]. The early drivers of these increases were higher network charges, followed by increases in wholesale market costs. This increase is reflected in the increased relative share of electricity and gas in the basket of goods used to calculate the CPI.
Since 2011 most of the more essential spending by households has fallen as a share of household spending. For example the relative share of household spending on food fell by 4.5 per cent, while spending on communication (phones) fell by 12.1 per cent and spending on mortgages fell by 10.1 per cent. The only major “essential” increase apart from energy in the share of household spending was spending on rents, which increased by 7.6 per cent over the same period.
There are some other big increases in the share of household spending. The share of spending on child care increased by 95.7 per cent since 2011, which, while significant, only impacts a specific sub-section of households. The share of household spending on education increased by 34.3 per cent over the same period. The share of spending on holidays and travel increased by 22.5 per cent since 2011. This is a discretionary spend. People like spending money on travel. It reflects increasing levels of wealth and disposable income. This is similar to the shift towards increased spending on restaurants and take-away food (8.3 per cent relative increase) and a commensurate reduction in spending on food consumed at home.
The CPI is an average of the share of spending of all Australian households. In lower income households, the share of spending on more essential items will be higher, while the share on more discretionary items will be lower. So what seems like modest increases in a relatively small share of total household spending are amplified as household income declines.
Most Australian households outside Victoria are billed for their energy use quarterly, and retrospectively. Most larger household bills (mortgage, rent, insurances, telephony) are paid on a monthly or more frequent basis, which makes them easier to manage and reduces the scale of the bill shock. Accurate, more frequent billing for electricity would be greatly facilitated by increased use of smart meters. In recent discussions with the Federal Government, the industry committed to increased billing frequency, although this requires estimated monthly bills for customers on old analogue meters, which is sometimes followed by a surprise correction because the meter is actually read quarterly.
The ABS basket reflects household spending. But more than two thirds of electricity in Australia is consumed by businesses. Rising energy costs also affect businesses disproportionately. Higher gas prices are impacting sharply on certain types of businesses, which in turn underscores the attention paid by governments to gas and electricity market reform.
According to the ABS CPI revision, electricity is still only around 2 per cent of total average household spending in Australia, while gas is approaching 1 per cent. Both have increased significantly in real terms in the past decade, although these increases pale in comparison to other (more tangible) household spends such as childcare and travel.
These figures are interesting to note, but do not avoid the fact that, as an essential, non-discretionary purchases, energy price rises impact more acutely on lower income and more vulnerable households. It is imperative that the most vulnerable households are assisted in the management of their energy bills, and that all consumers are able to understand how to make the best decisions for their energy needs. This important and ongoing work continues to be a priority for both policymakers and the industry.
[i] ABS Information Paper: Introduction of the 17th Series Australian Consumer Price Index, 2017 640.0.55.001
[ii] ACCC – Retail Electricity Pricing Preliminary Report – October 2017
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