Energy wars: retailers attack networks on gold plating

AGL Energy has fired the opening salvo in what is expected to become a fierce turf war between electricity “gentailers” and network operators – and the outcome could be critically important for consumers and households looking to install rooftop solar and battery storage.

AGL Energy has effectively accused some network operators in NSW of trying to “gold plate” their networks, saying that their investment proposals for the next 5 year period are over the top and unjustified, and that they used inflated demand forecasts. AGL lamented that it is the retailers who are experiencing the brunt of the customer backlash against high energy bills.

In recent years, it has been consumers, consumer groups and some energy analysts that have accused the networks of “gold plating”, but AGL Energy’s reaction to the latest pricing proposals is a clear indication that retailers are now being affected.

Network costs are now the biggest component of electricity bills, and some analysts such as the Grattan Institute and the Institute of Sustainable Futures have suggested between one third and one half of the $45 billion investment in poles and wires in the last five years was not needed.

agl network costs

AGL Energy says in a submission to the Australian Energy Regulator that is the retailers who are copping the flak from customers, and it is they who are at risk of losing business as new technologies such as rooftop solar PV and battery storage offer ways around the high cost of network delivery charges.

The submission also reveals that AGL Energy has teamed up with Origin Energy and EnergyAustralia – the other two big gentailers  in the country – to hire independent analysts Oakley Greenwood to critically assess the latest capital expenditure plans of NSW network distributors.

It is the first visible skirmish between the two incumbent pillars of Australia’s electricity industry, and could be a sign of things to come as network operators seek the ability to deal directly with customers.

A core component of the “gentailer” model – generation from centralised fossil fuel generators – is seen as most vulnerable from the growth of renewables and distributed generation (solar, storage and software).

But the other component of the “gentailer” model – retailing – essentially involves little more than the packaging of bills and products (and some price hedging), something that energy service companies and network providers think they could do just as well (bar the price hedging, but not so much would be needed with solar and storage).

Some network operators believe that distributed generation will become the dominant form of energy delivery in the country, and they talk of a series of micro-grids, linked through the network. There is a view that centralised generation could be redundant and retailers will be challenged by a new wave of service providers.

The retailers, on the other hand, have no choice but to incorporate network charges set by the market regulator. The AGL Energy submission reveals the extent to which the soaring network charges – they have more than doubled in recent years – is causing problems for the rest of the market.

The submission rails against various tariff components proposed by the networks, describing many of them as “too high”, “inappropirate”, or “unjustified.” One, for instance, is a proposal to bundle disconnection and reconnection fees, effectively forcing customers to pay for both even if they have no intent to reconnect.

AGL Energy said the soaring network costs had “swamped” any efficiencies been gained in the rest of the market.

This had caused a “large adverse reputational impact” for the energy industry as a whole. “The industry needs to rectify this situation,” it writes.

It noted that the soaring costs had been a major driver of falling consumption and peak demand, and the take-up of alternatives such as solar PV.

“The DNSPs (network distributors) need to make economically sound decisions rather than simply rely on regulated frameworks to provide short-term revenue recovery,” AGL wrote.

“However, the regulatory proposals of the NSW DNSPs are disappointing and do not attempt to wind back the previous imposts on customers, nor appear to address the obvious decline in asset utilisation to any extent.”

“Aggregate operating cost allowances for NSW DNSPs have increased by over 90 per cent in nominal terms over the past two regulatory periods.

“Even a cursory examination of the latest operating expenditures proposed by the DNSPs suggest that, although some efficiency improvements may have been made, they are not significant with the quantum of the proposals largely just a continuation of the levels from the previous period in real terms.”

It accused Ausgrid, for instance, of using summer demand forecasts “well above” industry forecasts (a rise of 4 per cent as opposed to a forecast fall of 5 to 10 per cent), and of high winter demand forecasts too.

It wondered why the operating cost per consumer ranged from $159 to $298 per consumer in Victoria, but double that in NSW. “AGL is unable to understand why,” it wrote.

It also accused the networks of seeing to pocket efficiency savings of more than $100 million a year, rather than pass them on to consumers. AGL said network attempts to “carry over” these savings are “groundless”.

Comments

6 responses to “Energy wars: retailers attack networks on gold plating”

  1. suthnsun Avatar
    suthnsun

    I’m agreeing with AGL on this!!??!! The networks need to show good faith by dumping their regulatory protections (not sure whether they are allowed to currently) In any case, the competitive pressure introduced by distributed generation should be answered most directly by network distributors.

  2. Peter D Avatar
    Peter D

    Why are the regulators not cracking down on reliable and accurate forecasts? I thought their role was to ensure the industry is policed by an independent body and seek justification for expenditure. Hasn’t anything been learnt in the past few years?

  3. Peter D Avatar
    Peter D

    Meanwhile we have a toxic debate on carbon pricing policy in Australia, yet nothing is being done to address significant increases in unjustified network expenditure?! Something is very wrong…..

  4. Rob G Avatar
    Rob G

    So much for cheaper power bills – now the truth about growing electricity costs will be finally understood. It wasn’t the carbon after all, it’s the poles and wires. And oh no! Abbott lied to us again! Voters will ask “Where’s my extra $500 Tony?”

    It’s becoming very clear that those who have roofs should get solar ASAP.

  5. Jason Avatar
    Jason

    This conflict between sections of the industry is indicative of absolute abysmal governance, cross incentives, technological changes and lack of vision! !! This has all the hallmarks of a truly existential crisis where only a bi partisan vision for the entire country energy infrastructure results in all parties sitting down and hammering out how the transition actually happens from centralized fossil fuels to a more distributive renewable based energy infrastructure

  6. Chris Fraser Avatar
    Chris Fraser

    The Gentailers may well be right about excessive network investment, but maybe they don’t quite see how this could ultimately be a positive for their services business. If they are planning on packaging centralised energy, solar, electric applications, efficiency gains and batteries to companies and homes, the size of that service business could ultimately depend on widespread use of the grid. For now it just appears to be more whingeing.

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