The Australian Energy Regulator has continued its hard-line attitude to proposed spending by Australia’s grid operators, cutting their proposed budgets by around a third. But it has again ignored proposals that would look to use distributed generation – solar and storage – to reduce demand peaks.
The AER on Thursday delivered its final decision on networks in NSW, Tasmania and the ACT, and also issued preliminary decisions on network spending in Queensland and South Australia.
The big news is that on NSW, it has barely budged from its initial decision last November, when the grid operators wanted to boost spending by as much as 50 per cent, but were slapped down by the AER. It has allowed more expenditure than in its preliminary ruling, but offset that by imposing a dramatically lower rate of return on equity.
The AER argues that the level spending by networks – which has results in huge increases in  bills in recent years – is un-necessary and its ruling will result in significant savings by consumers. It accuses them of having over-optimistic demand forecasts and for being too conservative on risk management.
The networks argue that the budget is not sustainable and will result in thousands of job losses. The NSW government is also facing lower returns on its proposed lease because of the smaller budgets.
Last November, we noted the difference between what the major grid operators in NSW proposed, and the initial ruling by the AER.
This table shows that many of the grid operators adjusted their proposals in the wake of that ruling, but the AER – despite intense criticism from the network sector – has basically refused to budge, allowing an extra $100 million or so to two of the network distributors, and just and extra $11 million to Ausgrid.
| Network business | Segment | Business revised proposal | AER final decision | Percentage difference | Expected bill reduction for average household in 2015-16 |
|---|---|---|---|---|---|
| ActewAGL | Distribution | $863 million | $591 million | -32 per cent | $112 (5.8 per cent) |
| Ausgrid | Distribution | $9754 million | $6576 million | -33 per cent | $165 (8.0) per cent |
| Endeavour Energy | Distribution | $4441 million | $3183 million | -28 per cent | $106 (5.3 per cent) |
| Essential Energy | Distribution | $5546 million | $3826 million | -31 per cent | $313 (11.9 per cent) |
| TransGrid | Transmission | $2906 million | $2189 million | -25 per cent | $25 (1.1 per cent) for both TransGrid and Directlink combined) |
| Directlink | Transmission | $79 million | $69 million | -12 per cent | $25 (1.1 per cent) for both TransGrid and Directlink combined) |
The AER says that this will deliver savings of between $106, or 5.3 per cent, for customers of Endeavour and $313 a year or 11.9 per cent for customers of Essential Energy. Ausgrid customers around Sydney and Newcastle stand to save $165, or 8.0 per cent.
AER chairwoman Paula Conboy repeated her assertions that the distribution businesses in NSW and the ACT are not operating as efficiently as other networks.
“The demand for electricity has fallen and is expected to remain reasonably flat over the 2015 to 2019 regulatory control period,” she said in a statement.
“This puts less strain on the network and requires less investment to provide a reliable supply of energy.” She said the final ruling ensured that only “prudent and efficient costs” are recovered from consumers. Any extra costs will need to be funded by networks, not customers.
This graph here, relating to Ausgrid, show the proposed changes, compared to previous regulatory rulings, and the difference between what Ausgrid wanted to spend in the next five years, and what the AER has allowed.
The AER has also taken a similarly tough ruling on the proposed expenditure from the network operators in Queensland and South Australia.
SA Power Networks will be allowed to recover revenue of just $3.2 billion over the next five years, compared to its proposal of around $4.75 billion. The AER says this will lead to bill reductions of $197 (or 9.8 per cent) in 2015–16.
In Queensland, the AER proposes to cut the budgets of Energex, which looks after Brisbane and the south-east corner, and Ergon, which covers the rest of the state, by around one quarter.
| Network business | Business proposal | AER preliminary decision | Percentage difference | Expected bill reduction for average household in total over 2015-20 |
|---|---|---|---|---|
| Energex | $8432 million | $6528 million | – 23 per cent | $132 |
| Ergon Energy | $8242 million | $6022 million | – 27 per cent | $132 |
And the AER has slashed the allowable rates of return on the networks. This was much criticised in the past, because even government owned entities in NSW and Queensland were allowed double digit rates of return, and consumers were paying for it.
The AER has now slashed these returns to below 6 per cent in some cases, where the networks wanted to retain double digit returns.
But it is on the question of new technologies, and reducing peak demand, that may cost consumers more in the long term. All the major networks have proposed spending under what’s called the Demand Management Incentive Program.
Essentially this deals with means of cutting peak demand – use of more efficient air conditioners and pool pumps, timers and other technologies.
But it is also critical to provide incentives for combining new technologies such as rooftop solar and storage, or to put storage at the network level. The results of trials such as the Solar Cities program at Magnetic island and elsewhere – which have combined energy efficiency, solar and storage – have shown how effective that can be in deferring, or even eliminating, network expenditure.
The networks, and the AER appears to agree, that the current regulations do not provide sufficient incentive to pursue these new ideas and technologies, remembering that the culture around many of these organisations is also wedded to the past.
But the proposals made by the networks have been rejected. The AER says the Australian Energy Markets Commission, which sets tariff policy, is still considering proposals on how non-network alternatives to simply building more poles and wires should be dealt with. (It’s been doing this for at least three years).
Such is the slow pace of change in Australia that the result is that Australian networks have a derisory $4 million of allowed spending on demand management – compared to some $6 billion a year in the US.
The AER decision has also been criticised by the Greens, with NSW leader John Kaye saying the ruling will decimate job numbers, and will simply result in less investment and less skilled workers, being able to deal with the new technologies in the future.
“Electricity prices might fall in the short term but within five years NSW will be saddled with a skills deficit that will condemn the state to becoming an energy technology backwater,” Kaye said in a statement.
“Hollowing out the distribution and transmission workforce to create a temporary dip in power bills represents the worst kind of short term thinking. “In the short term, reliability and service quality will suffer. In the longer term, the state will be badly left behind in the global move to smart grids, local renewable energy trading and household energy storage.”
In the past regulatory rulings made 5 years ago, the AER was criticised for spurring the opportunity to move to a smart grid, and simply incentivising a bigger and dumber grid. The critics will now say that the AER is taking steps to make the grid smaller, but not any smarter.
