What are the possible reasons for the price hike mentioned in the news article?

Discuss the determinants of the ‘price elasticity of demand’ of electricity

 

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Anger as gas retailers lift prices in South Australia

HOUSEHOLDERS will pay about $100 more in gas bills from next week as retailers lift prices up to five times inflation.

The increase for the 400,000 SA households that use gas will take the average annual bill from $815.54 to $913, prompting one welfare group to urge householders to rethink gas as a cheap alternative.

 

Gas retail companies blamed the increased cost of wholesale gas and increased charges by distribution company Envestra for the rise.

 

Uniting Communities energy expert Mark Henley said needy families could no longer be consoled with the fact gas was a cheap option compared to electricity.

 

Mr. Henley said welfare groups would also complain to authorities that the increases made a mockery of claims that gas and electricity prices had increased because of the Federal Government’s now-scrapped carbon tax.

 

Last year, the Essential Services Commission of South Australia allowed gas price increases of 17.7 per cent, partly to cope with the costs caused by the carbon tax on gas companies, but further increases this year will mean companies have pocketed the windfall.

 

“This increase shows that the current orthodoxy is rubbish, that the move to a cap and trade carbon scheme 12 months earlier than planned (when the Rudd Government scraps the carbon tax) will not bring down household energy costs,” Mr. Henley said. “They won’t unless there is strong political pressure applied.”

 

An AGL spokeswoman defended the company’s 12 percent gas price increase, which she said was the smallest of the state’s nine gas retailers.

 

Inflation is running at 2.5 percent.

 

“Approximately 90 percent of the residential gas increase is due to network distributor costs, environmental schemes and the direct cost of gas, which are all beyond AGL Energy’s control,” the spokeswoman said.

 

AGL has half of the state’s gas market. The second-largest retailer, Origin Energy, said it would increase prices by less – 10.2 percent. Another gas retailer, Energy Australia, advertised a 13.5 percent price increase this week, or around $110 each year on average.

 

Gas retailer Alinta Energy will also be increasing prices from next week but would not say by how much.

 

A spokeswoman for Alinta Energy said the bill increases would reflect the increased price the Federal Government’s independent regulator allowed the distributor, Envestra, to charge for wholesale gas from July 1, as well as the increased cost of gas.

 

The price hikes come as the Australian Competition and Consumer Commission warns South Australian householders against so-called “discount offers” from energy companies.

 

South Australian Council of Social Service spokesman Ross Womersley said he had lodged a complaint with the Australian Energy Regulator about misleading “discount” offers that was passed on to the Australian Competition and Consumer Commission.

 

“Our particular problem was with offers advertised by Origin Energy for electricity but for gas and electricity there is no way of comparing price or the product offered,” he said.

 

“Anyone in SA wanting to switch (energy providers) should compare offers at www.energymadeeasy.gov.au ,” ACCC deputy chairwoman Delia Rickard said. “If they are tempted by a discount they should get in writing what the discount is ‘off’ and check for exit fees.”

 

As AGL revealed its 12 per cent gas price rise, it also told The Advertiser electricity prices for 2013-14 would go up 3.5 percent or 1 percentage point above the inflation rate of 2.5 percent.

 

AGL has 30 per cent of household electricity customers in SA and 50 percent of gas customers.

 

A spokeswoman for AGL said the price increases would be rolled out from next week.

 

“The average South Australian household’s costs will increase $1.30 per week for electricity and $1.90 per week for gas,” she said.

 

Instructions:

1. What are the possible reasons for the price hike mentioned in the news article? Use demand and supply models to explain what happens to the consumers after the price hike. Make sure that you clearly state any underlying assumptions in your analysis.

 

2. Draw the demand and supply curves of the electricity and gas (utility) sector in South Australia, explaining whether demand is elastic or inelastic. Discuss the determinants of the ‘price elasticity of demand’ of electricity and gas (utilities) as they apply to consumers, and illustrate the effect of price hike on the total revenue of the energy providers (e.g. AGL, Origin).

 

3. Considering the electricity and gas market in South Australia, assume that the state government has decided to intervene and introduce a ceiling on prices. Illustrate the likely impact of such government intervention on the market. Conclude your analysis with a comment on the benefits and drawbacks of the government’s maximum pricing policy.

 

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