Australia’s households could face higher electricity costs and rising inflation in 2025. With electricity subsidies ending and energy supply constraints persisting, the Reserve Bank of Australia (RBA) may be forced to lift interest rates. Here’s what you need to know.
Key Summaries
- Retail electricity subsidies worth $9 billion per year are being phased out.
- Retail electricity prices are expected to rise sharply in 2025.
- Inflation could accelerate to 4% or more in the second half of the year.
- RBA may then need to make three 25-basis-point rate hikes.
- The cost of renewable energy is not just the cost of wind and solar,
natural gas is also needed to stabilise renewable energy.
Why Are Electricity Prices Rising?
The government’s decision to remove $9 billion in electricity subsidies will expose households to the true cost of power. Over the past two years, wholesale electricity generation costs have surged by 23%, driven by supply constraints and reduced capacity in New South Wales.
How Will This Impact Inflation?
Electricity prices feed directly into the Consumer Price Index (CPI) with a lag of around two quarters. As subsidies end, retail prices will rise, pushing inflation higher, especially in the second half of 2025. Businesses will face increased costs and pass these on to consumers.
Interest Rates: RBA’s Likely Response
Higher inflation means the RBA will need to act. While some banks forecast small rate hikes early in the year, Morgans expects three 25-basis-point increases in the second half of 2025. This could significantly impact mortgage holders and borrowing costs.
The Role of Renewable Energy and Gas Pricing
Despite claims that renewables are the cheapest energy source, electricity prices remain high because consumers need power 100% of the time. The marginal cost of electricity is set by natural gas, which stabilises supply when renewables cannot meet demand. Global gas prices, influenced by events such as the war in Ukraine, ultimately determine the cost of electricity in Australia.
FAQs
Why are electricity prices increasing in Australia?
Because subsidies are ending and generation costs have risen by 23% over the last two years.
How will this affect inflation?
Consumer prices could rise by 4% in the second half of 2025 as higher energy costs flow through the economy.
Will interest rates go up?
Yes, the RBA may raise rates three times in the second half of 2025 to curb inflation.
Are renewables making electricity cheaper?
Not necessarily. Prices are influenced by natural gas, which sets the marginal cost of supply.
What does this mean for households?
Expect higher power bills and increased mortgage costs if rates rise.
Australia faces a challenging year ahead with rising electricity costs, accelerating inflation, and likely interest rate hikes. Planning ahead is essential for households and investors.
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DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.
