Gold-plated networks, not green schemes, drove the electricity-price shock -- and their legacy still burdens every bill.
Introduction
Few issues have generated as much public anger in Australia over the past two decades as soaring electricity bills. In the mid-2000s, household electricity prices were broadly stable and unremarkable. By the early 2010s, however, bills had climbed dramatically, rising far faster than inflation and outstripping wage growth. The sharpest increases occurred between 2007 and 2013, when average retail prices rose by more than 70 per cent.
For years, this surge was blamed on carbon pricing schemes, green energy subsidies, or the rise of rooftop solar. Yet a closer look at the evidence from the Australian Competition and Consumer Commission (ACCC), the Australian Energy Market Commission (AEMC), and the Australian Energy Regulator (AER) shows that the overwhelming culprit was the electricity networks themselves -- the poles and wires that deliver power from generators to homes and businesses.
This blog-post explores the causes of the cost blow-out, the roles of federal and state governments, the regulatory flaws that incentivised over-investment, and why electricity prices remain elevated even after reforms.
The Price Surge of 2007–2013
By the mid-2000s, retail electricity bills for a typical household hovered around \$1,000–\$1,200 per year. A decade later, that figure had ballooned to \$1,600–\$1,800, with some states experiencing even larger jumps. The single biggest component of this increase was network charges -- the fees consumers pay to cover the cost of building, maintaining, and operating transmission and distribution infrastructure.
According to the ACCC, roughly half of the increase in household electricity bills during this period was attributable to network costs. Wholesale generation costs, environmental scheme costs, and retail margins together accounted for the remainder, but none came close to the impact of networks.
The term “gold-plating” entered the public debate. Networks had built vast quantities of new infrastructure, much of which was under-utilised, to meet forecast demand growth that never materialised. Consumers, meanwhile, were left paying the bill.
Why Did Networks Spend So Much?
Reliability Standards
The first driver of the blow-out was political. After high-profile blackouts in the late 1990s and early 2000s, state governments -- particularly in New South Wales and Queensland -- imposed very stringent reliability standards on their networks. These included requirements for "N-1" redundancy (the ability to lose a major line or substation without cutting supply) and rapid restoration times.
Meeting these standards required billions of dollars in new substations, duplicate feeders, and strengthened transmission corridors. While reliability improved, the costs were extraordinary, and in many cases the new assets were rarely used.
Demand Forecasts
In the early 2000s, both regulators and network planners assumed that electricity demand would continue to grow by around 2–3 per cent per year, in line with historical trends. Air-conditioner ownership was booming, and peak demand on hot summer evenings appeared to be climbing inexorably.
Networks built infrastructure to meet these forecast peaks. But after 2008, demand flatlined. Energy efficiency standards, rising prices, and the emergence of rooftop solar all combined to halt growth. The result was a fleet of over-sized networks designed for a demand surge that never arrived.
Regulatory Incentives
The third and most important driver was the regulatory framework itself. Under the National Electricity Rules prior to 2012, the AER was required to set allowed revenues for network companies using a “building block” approach. This guaranteed networks recovery of operating costs plus a regulated return on their capital investment.
Two flaws were crucial. First, the formula for the Weighted Average Cost of Capital (WACC) delivered allowed returns well above the true cost of financing, sometimes around 10 per cent. Second, networks could add almost all capital expenditure into their regulated asset base, meaning consumers would pay for it through higher tariffs, regardless of whether the investment was actually needed.
This created a textbook case of the Averch–Johnson effect: when regulated returns exceed true costs, firms have a strong incentive to over-invest in capital assets (to maximise profits). For government-owned networks in NSW and Queensland, the incentive was even stronger, because state treasuries reaped dividends from the inflated asset bases.
Limited Merits Review
To make matters worse, networks that disagreed with the AER’s determinations could appeal to the Australian Competition Tribunal under a “limited merits review” process. Between 2008 and 2012, networks were successful in more than half of these appeals, often winning higher revenue allowances. This further weakened the AER’s ability to keep costs under control.
Who Is to Blame?
Responsibility for the poles-and-wires blow-out is shared across multiple layers of government:
- State governments (Labor in NSW, QLD, VIC, SA): imposed overly conservative reliability standards; encouraged state-owned networks to expand their asset bases, boosting dividends to state budgets.
- Federal governments (Howard Coalition, then Rudd/Gillard Labor): failed to correct flaws in the national regulatory framework quickly enough. Although the rules were formally written by the AEMC, federal and state energy ministers (through COAG) oversaw the process.
- The regulator (AER): constrained by the rules, it lacked the tools to say no to excessive spending.
In summary, the blow-out was not caused by a single government or party. It was the product of federal–state institutional design, poor forecasting, and political choices to prioritise reliability and revenue over efficiency.
Reforms of 2012–2013
Public outrage over rising bills forced reform. In 2012, the AEMC introduced major rule changes to give the AER more power. The reforms:
- Allowed the AER to take a holistic approach to setting the allowed rate of return, rather than being bound by rigid formulas.
- Gave the AER the ability to conduct ex-post reviews of capital expenditure and disallow inefficient spending.
- Strengthened incentives for efficient investment, including capital expenditure sharing schemes.
- Increased consumer involvement in the regulatory process.
- Tightened the grounds for appeals under the merits review process.
The effect was dramatic. From 2014 onwards, the AER slashed proposed revenues for NSW and QLD networks, and network charges stabilised. The era of runaway gold-plating was effectively over.
Why Prices Remain High
If network costs have been brought under control, why do electricity prices remain elevated? Several factors explain this.
Legacy of Past Investments
Even though new gold-plating has stopped, the billions of dollars invested between 2005 and 2012 remain in the regulated asset base. These assets are depreciated over 30–40 years. Consumers will therefore continue paying for them -- plus the guaranteed return -- until well into the 2030s and 2040s. In other words, the hangover from the binge will last decades.
Wholesale Generation Costs
From 2015 onwards, wholesale prices replaced networks as the main driver of retail bills. The closure of coal plants like Hazelwood in Victoria and Northern in South Australia reduced supply, while the east coast gas market became linked to global LNG prices. As international gas and coal prices rose, so too did the cost of electricity in Australia. The 2022 global energy crisis following Russia’s invasion of Ukraine pushed wholesale prices to record highs, driving retail bills up again.
Environmental Schemes and Transition Costs
Environmental policies add costs, though they are a smaller share of bills. The Renewable Energy Target, state feed-in tariff schemes, and subsidies for rooftop solar and energy efficiency together account for perhaps 5–10 per cent of an average bill. More recently, the cost of building new transmission to connect renewable energy zones has begun to add pressure.
Retail Market Structure
Retail deregulation introduced competition, but also complexity. Retailers bundle wholesale hedging, environmental certificates, and network charges into bills. Retail margins are modest in percentage terms but still contribute to higher effective prices. Regulatory interventions like the Default Market Offer now limit standing charges, but prices remain well above pre-2007 levels.
Structural Demand Changes
Household electricity consumption has flattened or fallen since 2008 due to efficiency gains and rooftop solar. But fixed network costs remain high. With fewer kilowatt-hours sold, those fixed costs are spread across a smaller base, pushing up per-unit prices. This structural effect magnifies other cost pressures.
Quantifying the Contributions
Relative to a pre-2007 baseline, the increase in household electricity bills of roughly \$600–\$800 per year (in real terms) can be attributed as follows:
- Network charges: \$300–\$400 (40–50% of the rise).
- Wholesale generation costs: \$200–\$250 (25–30%).
- Environmental/policy costs: \$50–\$100 (5–10%).
- Retail margins and costs: \$50–\$100 (5–10%).
- Structural demand effects: \$50–\$150 (10–15%).
In short, the initial surge was overwhelmingly network-driven, but wholesale costs and transition pressures have kept bills high since.
Lessons and Outlook
The cost blow-out of 2007–2013 offers several lessons.
- Regulation matters. When incentives are misaligned, monopolies will over-invest and consumers will pay for decades.
- Reliability must be balanced against cost. Perfect reliability is prohibitively expensive; realistic standards are essential.
- Demand forecasting is uncertain. Planning networks on the assumption of ever-rising demand was a costly mistake.
- Transparency and consumer voice are critical. Reforms that empowered the AER and consumers curbed gold-plating.
Looking forward, the energy transition poses fresh challenges. Billions will be needed for new transmission lines to connect renewable energy zones and interconnect states. If regulated sensibly, these investments can be delivered efficiently and equitably. But if past mistakes are repeated, consumers could again face decades of inflated charges.
Conclusion
Australia’s electricity price surge between 2007 and 2013 was not primarily about carbon taxes, green schemes, or rooftop solar. It was about networks, regulation, and incentives. State governments demanded gold-plated reliability; federal rules guaranteed generous returns; and networks, whether state-owned or privatised, took full advantage.
Consumers are still paying for those decisions today, and will continue to do so for decades. On top of that legacy, wholesale fuel costs, plant closures, and transition investments have kept bills high.
The story of the poles-and-wires blow-out is a cautionary tale: once infrastructure is built, its costs are locked in for a generation. Good regulation and careful planning are the only defences households have against repeating history.
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