Power bills could rise more than 20 per cent this year following the expiry of government energy subsidies, which will result in electricity costs snapping back to levels higher than before the relief.
State and federal governments in 2023 introduced rebates for electricity bills to alleviate cost-of-living pressures after annual headline inflation peaked at 7.8 per cent in December 2022. Since then, the federal government has provided $6.8 billion in relief.
Climate Change and Energy Minister Chris Bowen announced a new plan to provide households with energy bill relief in 2026, but energy retailers are already pushing back. Alex Ellinghausen
Labor announced a six-month extension of the rebates ahead of the federal election last May. However, before they expired in late December, Treasurer Jim Chalmers said they would not be extended again.
That move was welcomed by many economists, who argued that the rebates had a distortionary effect on inflation and that the money could be better spent on the energy transition.
But the removal will result in a short-term hit for households. Electricity bills could rise 24 per cent from November 2025 to July 2026, according to figures from the Australian Bureau of Statistics and a forecast by Westpac economists.
For the average three-person household, that equates to a financial hit of about $500 this year.
The Organisation for Economic Co-operation and Development said this week that Australia needed to rapidly ramp up its investment in renewable energy to replace ageing coal-fired generators. Economists said this investment is the driving force behind higher electricity prices.
“The price is not going to go back down to what it was before the pandemic,” Grattan Institute energy and climate expert Alison Reeve said. “That world is gone.”
With headline inflation back above the Reserve Bank of Australia’s target range and a February interest rate hike firming, the government faces yet another year with cost-of-living pressures weighing on households.
Energy Minister Chris Bowen announced on Friday that energy retailers would have five months to come up with a plan to offer households three free daily hours of electricity.
The scheme, called Solar Sharer, would utilise the excess energy produced by rooftop solar in the middle of the day to provide free power to households. It would be an opt-in system only available to people on the default market offer in NSW, South Australia and Queensland.
But energy retailers are already agitating for Bowen to give them more time, claiming the plan has been rushed. If they can get it done, it could ease some of the pressure on power bills for some customers from July.
Westpac economist Justin Smirk said that lower-income households would feel the most pain from higher electricity bills because they are a larger share of their household budget.
Reeve said that it is normal for electricity prices to rise faster than inflation, and that is what consumers should continue to expect this year.
“The biggest thing that has been driving electricity bills up over the past couple of years has been the price of gas and coal,” she said. “Those both went up a lot when Russia invaded Ukraine, and they didn’t come all the way back down to where they were.”
The OECD, in its annual report card for the Australian economy released on Wednesday, said that Australia’s ageing coal-fired power stations had increased electricity market volatility. “Rapid growth in renewable generation will need to be sustained to meet growing electricity demand and replace coal generation.”
The end of the rebates will be closely watched by the Reserve Bank of Australia, as it fights to get inflation back within its target band of 2 to 3 per cent. It was 3.4 per cent in November.
The rebates were designed to artificially force the inflation rate lower by paying utilities companies directly to reduce the bills for consumers. As the subsidies expire, the headline inflation rate will rise.
“All [the rebates] did was shift the impact of the price rises that should have appeared in 2024-25 into 2025-26,” said Smirk, who expects the RBA to look through power price rises as it decides whether to lift interest rates.
The ABS will release inflation data for the December quarter on January 28. Smirk said the rebates expiring would not show up in those figures, but would have an impact in the March quarter.
Source: Nyarlathotep-1