rss
21

Garnaut – time to write down value of power grids

Print Friendly

As private companies bite the bullet and write off billions of dollars off the value of oil, gas and coal assets in the face of declining demand, plunging costs and the growth in renewable energy sources, a new call has gone out for Australia’s state governments to do the same with their network assets.

Professor Ross Garnaut said forcing high network charges on consumers in the face of declining use of the grid would impose a bigger penalty on consumers and businesses than a consumption tax, or even a carbon price. And it would be less efficient.

Economist Ross Garnaut

Economist Ross Garnaut

Fossil fuel companies have been forced to announce big write-downs in recent weeks, knowing that shareholders would no longer accept current valuations given the plunging cost of renewables, the shift to clean energy sources, and reduced demand levels.

BHP, Santos and Woodside have all flagged billion-dollar write-downs of oil and gas assets, coal mines are being sold – some at peppercorn prices (possibly designed to duck remediation bills) – and even Origin Energy has said it will review the carrying value of its LNG assets, as speculation mounts that it may consider a similar demerger to that put in place by European giants RWE and E.ON.

Garnaut argues that those metrics – falling cost of renewables, reduced demand levels – should be applied to network assets. In a speech to young energy professionals in Perth last week, he particularly pointed to the falling cost of solar and battery storage.

He said the emergence of “decentralised energy” would allow consumers in communities away from the main lines of the network to be serviced “much more cheaply” than from centrally generated power distributed through the grid, and also for lower costs to consumers throughout the state.

But this would only occur if the network was priced properly.

“The first step towards rational pricing is to write down the value of redundant grid capacity – of some investments that have been made redundant by technological and economic change, and others that were redundant when they were made,” Garnaut said.

“This is what the market economy forces in other sectors of the economy where there has been investment in supply capacity beyond demand.”

The network operators – both public and private – have argued strongly against any write-downs, and have not been required to do so because they are largely protected by regulated returns.

powergrid

State-owned networks have been resistant to write downs because they are trying to sell or lease their assets. But Garnaut suggested attempts to retain high values would simply lead to a “death spiral” – where high prices provide big incentives to use the network less.

“Higher prices for electricity is an especially inefficient means to this end (recouping sunk investment),” Garnaut said.

“To the extent that it raises the cost of power to business users, it unnecessarily inhibits the emergence of exports from energy-intensive industries in which WA has comparative advantage.”

“And to the extent that it raises the cost of electricity to households, it reduces the standard of living more than comparable amounts of revenue raised from taxes on carbon externalities, on payrolls, or on consumption more generally.

“With the prices of fossil fuels having fallen dramatically in recent years, and with growing awareness of Australians’ responsibility to do their fair share in a global mitigation effort, a tax on fossil fuel use may be more attractive electorally than the most frequently canvassed alternatives: a higher tax on payrolls or on consumption in general.”

Garnaut’s comments were echoed by a new analysis from Oxford University’s Smith School of Enterprise and the Environment, which identified Australia as an economy most exposed to the “death spiral” of utilities.

“A large country with dispersed populations, plentiful sun, and falling electricity demand spells the perfect storm for Australian utilities,” wrote the authors of the report, called Stranded Assets and Thermal Coal: An Analysis of Environment-related Risk Exposure.

Garnaut’s comments were focused on the WA market, but he said that general themes were applicable also to the National Electricity Market that operates in most of the rest of the country.

“Increased opportunities and interest in opportunities for energy efficiency have contributed to falling demand for power through the networks. So has the falling cost of decentralised solar power generation.

“Technological change and falling cost of capital have introduced opportunities for decentralised solar power generation and storage in batteries to reduce peak demand by electricity users – and therefore reduce demand for investment in increased network capacity.”

But Garnaut said that writing down the capital value of the grid to its “contemporary economic value” was not sufficient. It was important that network pricing structure introduced incentives for efficient investment in the grid in future.

“An economically efficient pricing structure would charge mainly for the use of peak capacity used by firms and households, and avoid purely fixed charges for access to the grid.

“Over time, this would lead to more even use of the grid through the hours of the day and the seasons of the year. It would encourage efficient use of decentralised power generation and storage to minimise overall costs of providing power.

“An economically efficient pricing structure would lead, over time, to the emergence of a new balance between centralised and decentralised power supply that reduced overall costs.”

This has been a contentious point for consumers, and particularly for the solar industry. Network operators, often with the support of state-based pricing regulators, have sought to increased fixed charges.

In those cases where “so-called” demand charges have been imposed, the tariffs have been criticised because they focus on peak use from individual users, rather than network peaks, suggesting that they are more about revenue protection than economically efficient tariffs.

Garnaut said an “efficient, low-cost electricity grid, designed to allow full use of the new technological opportunities in renewable energy and storage and the enhanced potential for low-cost decentralised supply, has a centrally important role in a low-carbon economy.”

And the possibilities there were great.

“Australia has the potential to be even more important in global energy in a low-carbon world,” Garnaut said.

“Amongst the world’s developed countries, Australia has by far the greatest per capita potential for low-cost production of energy from most of the promising renewable sources: solar, wind, deep geothermal, wave and tidal.”

It also had considerable hydro capacity in Tasmania and the Snowy Mountains, strong potential for pumped hydro-electric storage capacity, excellent geo-sequestration potential, great potential for biological sequestration of carbon wastes and rich opportunities for production of biomass and biofuels, as well as minerals – such as lithium, graphite and uranium – that will be used in much greater quantities in the low-carbon economy.

 But Garnaut warned that this would not occur without a change in Australia’s recent political culture.

“Success requires us to stop seeing energy policy and technology choice in partisan political and ideological terms. Success requires thinking on time scales that allow sound policy innovations to remain for long periods.

“Success requires independent citizens to reject government subordination of public to private interests, as powerful players from the old economy seek to block the emergence of the new.”

RenewEconomy Free Daily Newsletter

Share this:

  • Maurice Oldis

    How inconveniently true!!!

  • trackdaze

    The network operater will be emboldend (to maintain the status quo) by the recent uptick in demand in the nem that has come about from the huge quantities of electricity required to produce the lng from gladstone in the last year. Whether this is sustainable is hard to guage given the accelerating shift particularly with the energy intensive motor industry shutting up shop this year and next.

    Similarly they will be salivating over the prospects of increasing electification of transport (and everything else) in tandem with the trend of higher density living (less roofs equals less solar power the minions can produce you see) lending itself to maintaining the status quo.

    Ie. Too big and dumb to change. Will resist until the death.

  • Rurover

    Great summary by Ross Garnaut of what needs to be done by government & private industry to restore equity for consumers and to drive our economic future.
    High grid costs equal high power prices for not just private consumers, but for industry and if we want to be competitive on world markets (not just for exports, but import competing industries), then world parity power prices are critical.

  • JohnRD

    Write downs are long overdue. Most of the upgrades in recent years could have been avoided by targeted installation of rooftop solar. It was obvious then and even more obvious now. The rest of the business world has to live with the results of their mistakes and changes in the business world.

  • Math Geurts

    Indeed, the grid has to be written down completely. The grid has to be payed by all taxpayers. The use of the grid should be free for everybody, whether or not she owns rooftop solar and batteries.

    • humanitarian solar

      It’s not cost reflective to have a free grid as it costs money to run it and not everyone has a grid. So those areas with one need to pay for it. If it becomes evident the grid needs to reverse gears and have a planned retreat, then that is the reality of the making of a new paradigm.

  • humanitarian solar

    Amazing clarity and vision.

  • Phil

    Fabulous report link here that mirrors what is said here and more. Looks like the consumer sheep will continue to be fleeced. That’s the business model big business want’s … at their peril it seems https://scer.govspace.gov.au/files/2015/05/CME-attachment-1.pdf

  • Les Johnston

    Too much red tape and fiscal propping up of inefficient industries. Its past the time the Government should be involved in pandering to vested interests and ignoring the interests of consumers who have to pay the price. Well put together argument.

  • humanitarian solar

    SELL THE GRID/S TO LOCAL CITY COUNCILS.
    What would facilitate the implemention of wind and solar, and harnessing local resources generally, is the selling of State owned grid/s to local City Councils. Only they are best located to administer geographical resources.

  • Reality Bites

    Let me see now, the reality is….. the bidders for Transgrid offered AUD7.4 billion and the book value was $6.191 billion!? The yield on EBITDA for the bid was 9.5% and the AER approved WACC rate was 6.75%!? And Garnaut/Giles want the State Governments to write them down? Those figures indicate that there is still value in the networks and serious buyers will pay to get that value.

    • http://www.reneweconomy.com Giles

      Yeah, and because they are a company then they must know everything and be right. How much did Kennett sell Victoria’s generation assets for? And how much did the new owners have to write down the value. Wasn’t it Ernst & Young that said more than half of all mergers/purchases are dud deals and destroy value because too much was paid.
      But that’s OK for you. A big company pays a lot of money, passes on the costs to consumers like you, and you say hallelujah. Remarkable.

      • Reality Bites

        The true value is the net realisable value from the market. If it was one isolated company then you might have a point but it was a competitive tender. The winner is a syndicate and there were a number of other bidders, all of which have financial backers and advisors. They could all be wrong, maybe….. Actually I was wrong in my numbers, the $7.4 billion figure is in USD, so equals AUD10.258 billion, which is a whopping premium to the book value. How could any utility argue to write down the book value when such deals are being done?

        • http://www.reneweconomy.com Giles

          Kennett sales were results of competitive tenders with all sorts of financial backers and advisors – all incentivised by the highest bids.
          Companies write down their assets when they realise that value of those assets are undercut by cheaper alternatives – kodak, fixed line networks, newspaper titles etc etc.
          With Transgrid, that may come later as they dealing with large transmission lines. With distribution grids, that gonna come a lot quicker, they just don’t like to talk about it, especially when those asset values dictated by a regulator they can snowball with data.

    • adam

      Arent these writedowns predicated on the fact that charges would subsequently be reduced..? I assume current valuations are on continuing levels of regulated return not under a writedown/charge reduction scenario.

      I guess something that was just hinted at (then moved on from) in the article is that the players are protected through regulation/legislation. Presumably if you have a regulated return, which you then require to be reduced there is some sort of sovereign risk/equivalent.

      Sniff test says any writedowns would involve compensation, for both private owned and SOC’s. Although I know very little in this area. Anyone else?

      Alternative is you build in cost reflective pricing, improve investment tests, and sit tight for the gold plating era to become a distant memory (and wear the charges as a result).

      Either way it seems like the consumer/public will pay, the question would just be how.

      • Reality Bites

        The write downs are a fantasy, sort of like the money tree that Labor thinks it has.

      • http://www.reneweconomy.com Giles

        Adam, yes that it the argument of the networks. They say that if you cause write-downs, say by changing the regulatory returns, then you have sovereign risk, and higher yields – therefore higher cost of capital, therefore no reductions. Or variations thereof.
        It is the old argument put about by incumbents, and because of the nature of the asset and the regulatory capture, the networks think they can get away with it.
        But it doesn’t solve the problem highlighted by Garnaut. These are over-priced, probably gold plated assets, that face cheaper competition from new technologies. I don’t think they can ban new technology, so something has to give. Embracing new technology and changing business models might work, but the networks in australia don’t seem to be in any hurry to do so, apart from press releasing about the “consumer”.

  • david_fta

    Actually, the networks themselves might stll have some use – transferring excess power from producer/consumers in sunny, windy areas to consumer/producers in cloudy, still regions …

    … and when the weather changes, and it starts raining on what were sunny areas, and what were rainy areas are now enjoyig clear days? Why, the favour can be returned – again, using the transmission network.

  • humanitarian solar

    Previously it made sense to have States manage grid/s, as centralised distribution could more easily be done on behalf of a State. With a distributed generation paradigm, City Councils are best placed to identify, prioritise and harness the natural resources in the their geographic area. Shifting to City Councils as the administrational authority would also have a democracy building effect within the country, with local voters more able to understand and take interest in the management of their local resources. Local citizens would become more involved in their local community and have a much better assessment of their areas renewable resources. There would be an exponential rise in the economy as the natural resources are more effectively identified and harnessed. Small and medium scale business would flourish and put back more money into local economies.

    • http://www.reneweconomy.com Giles

      Strong arguments in this – Germany and US heading down same track.

  • Kevin Brown

    State Governments will not only never write down the value of their electricity business but they will legislate to protect the profits of private businesses who buy them. Politicians are interested in big business and the backhanders that come along with it. The consumer comes a distant last!

  • Sponsored Links







  • Renew Economy Jobs Board