Not sure if they’ve tried it on Mythbusters yet, but there is an urban myth that it can take aircraft carriers up to a day to do a U-turn. It’s not true, but the point is, the bigger the beast, the longer it usually takes to turn it around.
Cue one of Australia’s biggest Leviathans, the National Electricity Market, where one of the great conundrums facing postindustrial society (apart from climate change) is being played out. How can we have prosperity without suffering the environmental and other downsides of an endlessly expanding economy?
Or in this case, how can the electricity networks, which make their money mostly by building and maintaining more Big Stuff on the back of increasing peak and total demand, survive and prosper in an era of flat or falling demand?
The critical distinction here is between surviving – covering the cost of providing their services – and prospering – that is, making healthy profits for shareholders. In the case of the NSW networks, Ausgrid alone is expected to earn a profit of $1.1 billion for the last financial year, and the state government estimates it will receive dividends from the three distribution networks and Transgrid of $788 million this financial year. All this while it blames the carbon price for rising bills.
The NSW government is the sole shareholder of all four networks, giving it little incentive to force them to fulfil the objective of the State Owned Corporations Act to “exhibit a sense of social responsibility by having regard to the interests of the community in which it operates,” other than via than by keeping the lights on at any cost.
Given this political context, though, what can be done to change the business model of the networks so that they encourage people to use less electricity? Usually the businesses that make money by doing less or saving something are ancillary to another market, such as recyclers. Conservation of anything seems to go against the grain of a capitalist economy.
I’m not aware of any jurisdiction anywhere in the world that has revolutionised the business model of the energy networks — except where they are run as state-owned, non-profit essential services. Some, though, are better at it than others – the classic example being California, where energy prices are reportedly the highest in the US, but bills are among the lowest thanks to successful energy efficiency programs that have been in place for a generation.
The Australian Decentralised Energy Roadmap estimates that demand management – the “negawatts” saved by encouraging or forcing consumers to use less energy during peak demand periods – currently constitutes less than 1 per cent of the capacity of the NEM (most of that in Queensland), in contrast to over 4 per cent in the US.
There are various reasons for this, chief among them the fact that most demand management and energy efficiency incentives in the NEM are small, piecemeal and short term. In NSW, the Demand Management Incentive Scheme has been little used by networks, because it simply reimburses them for their expenditure on projects that will not earn them any more money in the future.
Instead of finding ways to improve the scheme, in the Framework and Approach paper for the two-year process that will determine the revenue of the electricity distribution networks in NSW and the ACT for 2014-19, the AER proposes to leave it unchanged, using the curious logic that as it is currently under-utilised, there is no need to increase it.
The AER is facing a similar dilemma in deciding whether to apply price or revenue caps on the NSW and ACT networks. Each has pros and cons, but both are largely untested in a world of flat or falling demand. The Total Environment Centre tends to regard revenue caps are the least-worst option, offering fewer opportunities for networks to game the market. At present, the AER is also favouring revenue caps, although it is meeting fierce resistance from the networks. The voice of consumers risks being overwhelmed.
The AEMC is struggling with much the same problem in its Power of Choice review, and has yet to come up with any new initiatives – although it is reputedly working hard on some, which may be why the draft report is over a month late. Among the proposals canvassed to date are introducing escalating network demand management targets (say, 1 per cent the first year, escalating another 1 per cent every year); introducing programs that allow networks to monetise the value of avoided investment, which they would then share with consumers (Ausgrid is a big fan of this approach); and introducing a separate demand management market, into which networks could bid among others, rather than them being the default provider of these services.
The TEC and some other advocates would like to go further, with network revenue being based increasingly on the success of energy conservation and efficiency initiatives, on the assumption of continued falling peak and total demand, with incentives for achieving even lower demand and penalties for overshooting forecasts.
The building block approach to setting network revenue (capex plus opex plus other costs) could then be changed to include conservation and efficiency measures as a revenue stream, rather than a constraint on future capex.
This assumes, of course, that networks, like retailers, have some control over demand (for instance, by incentivising consumers to shift loads during critical peaks), although some demand is clearly beyond their control (they were not directly responsible for the boom in air conditioners). So regulators would have to apportion the responsibility of each part of the supply chain for better demand management and energy efficiency outcomes.
Such reforms are likely to amount to little more than tweaking while electricity networks are run as super-profit-making operations with few environmental responsibilities. Still, there are opportunities right now to move the networks away from a business model that has been causing consumers pain, while being unsuited to the new world of decreasing demand. If you have any better ideas – short of re-nationalising all the networks, or a socialist revolution – please tell us, or make a submission to the AER or the AEMC.
Mark Byrne is energy market advocate at the Total Environment Centre