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How the networks blew Australia’s cheap energy advantage

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A new report has highlighted the extraordinary expense Australia’s electricity networks have passed on to consumers to meet demand forecasts that never eventuated. It says the energy market is “not fit” for its stated purpose of providing a benefit to consumers.

The report, Zero Carbon Australia, Renewable Energy Superpower, by Beyond Zero Emissions, shows that networks on Australia’s main grid, the National Electricity Market – which excludes WA, the Northern Territory and off-grid areas like Mt Isa in Queensland – have spent $75 billion on network improvements and expansion in the past 10 years and passed these costs on to consumers.

The spending was justified on demand forecasts that have proven to be outrageously wrong. Indeed demand, far from growing, has barely changed over the past decade. But electricity bills have more than doubled, driven almost exclusively by these soaring network costs, compounded by exaggerated rates of return that benefited the networks and hit the consumer.

network spendingThe spending is highlighted in this graph to the right. The report says the over-investment has been encouraged by the NEM structure, first by the move to “corporatise” utilities and then by distorting their business conditions.

It notes that the networks’ costs to consumers have been further exaggerated  by “Weighted Average Cost of Capital” (WACC) — the interest yield on the assets they held – which is far above the market rate for low-risk assets.

“In order to fully exploit the inflated yields, and hence maximise profits, network businesses have sought to expand their ‘poles and wires’ asset base. To do this, network businesses over-hyped future demand from the grid, in order to be granted expansion approval by the Australian Energy Regulator (AER).”

aemo demand forecastsThis next graph shows those demand forecasts, and what actually eventuated. As the report notes, some $75 billion was invested in transmission and distribution network upgrades, causing the regulated asset base to double to $77 billion by 2014.

The demand forecasts have proved ludicrously wrong. This graph to the right shows how the 2010 forecasts have been wound back. Even the 2014 forecast may be optimistic. And total demand is virtually the same as in 2005. But networks had a strong incentive to produce such optimistic forecasts, because the more they could build, the more revenue they could receive.

“Because network revenue is guaranteed by the regulator, consumers must pay for this new capacity whether they use it or not,” the report notes. “Clearly the demand did not rise in line with projections, but declined.”

The network response to this has been to reject outright any proposals that they should take a write-down on the inflated value of the assets. For the next five-year period, they have attempted to continue their spending spree, and have taken the extraordinary step of taking the Australian Energy Regulator to court after it rejected their spending proposals.

Now, the NSW networks have also flagged a potential “solar tax”, to hit households that export solar back into the grid with extra charges. They flag similar fees for households using battery storage and electric vehicles.

Network spending on electricity have not been the only way that utilities have bled customers. The report says history is being repeated with Australia’s gas system, also governed by the Australian Energy Market Commission according to the National Gas Rules.

“The supply network is being expanded and new unconventional gas supplies are being developed, at great cost, to satisfy projected demand,” it notes.

“Warnings are being sounded that consumers will withdraw from the gas system even more dramatically than the electricity system as a result of rising gas prices and substitution of efficient electric appliances.”

This is known as the “death spiral” and it is likely to happen in the electricity network too, as the plunging cost of solar and battery storage offer alternatives. Which is one reason why networks, not just resisting calls to write down the value of those inflated assets, are talking about compulsory fees even for those who leave the grid, as well as a special tax on the use of solar, battery storage and electric vehicles.

The report says that in the retail market, consumers are also being squeezed. It found that deregulated markets have not resulted in the benefits being promoted by the utilities.

retail margin comparison

This figure above illustrates how. It shows Victoria has the highest retail “margins” of any state.

“The ultimate judgement of market success lies in the value to consumers,” the report notes. “The retail component of Victorian power bills is the most costly in the country and therefore the least successful, no matter what proxy metrics are used to say otherwise.

“Essentially the national energy market structure is not fit for its stated purpose of delivering energy services in the interests of consumers.

“The sector ring fencing and growth focus does not match contemporary technical solutions or customer desires. Unless it is reformed Australia’s domestic energy supply will grow increasingly uncompetitive.”

  

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  • Ray Miller

    The NEM was set up (with high industry input on the rules) costing mega dollars with the promise of massive benefits, reliability etc to the customers is now exposed as a massively inefficient vehicle encouraging sanctioned Cartel behavior. Interestingly the Renewable Energy Target (RET) scheme that was introduced has been extremely effective at minimal cost, has been reviewed within a mm of its life every 5 minutes. The scandal, the NEM spends $75BILLION without any review!
    How can we let this happen?
    The whole “energy system” needs a major independent review to work out the lowest cost and quickest path to zero emissions and the definition of “system” should be dramatically expanded to include the load and energy services so a “true” system can be optimized and effectively manage.

    • MaxG

      We did not let this happen!
      The pollies did!… in bed with industry.
      The agenda is and has been the same for over 50 years: privatise profits, publicise debt/cost. Whatever benefits the consumer needs to be privatised to cash in on the profits… idiotic to privatise quasi monopolies; how it ends was very predictable.

      • Reality Bites

        Mike Baird in NSW has been smart and NSW will benefit from privatising at least 50% of the network, for assets that have an uncertain future and threatened by disruptive technology. QLD succumbed to a Labor scare campaign, plus the unpopularity of Newman and will now be stuck with the power assets. QLD will live to regret that election decision. Private enterprise should work if the ACCC overseas the competitive position, however by definition it is big business and the NSP’s have billions in assets. In the current situation you have Federal and State benevolent bodies, running most of the networks and it is a total balls up.

        • MaxG

          This may well be, however, I argue: if the utilities would have stayed in public hand, prices would not have gone up they way they have; and, it would have been easy to shift to solar and a distributed (democratised) network too. All to the benefit of the consumer, lower cost, and greater control for a renewable direction, and the state collecting revenue from it. Win-win for all.

          • Reality Bites

            Maybe if you are based in Victoria you have a different perspective, however in QLD and indeed, NSW, WA and SA, not the case. The bureaucracy and government manipulation has created the overspend and the high tariffs. The NSP’s are just the fall guys to be whipped by commentators like Giles, however the elected politicians and bureaucrats in AER, QCA, AEMO etc are the ones that made the decisions.

          • Diego Matter

            “Maybe if you are based in Victoria you have a different perspective…”

            The article states the contrary to your perspective – time to change your view?:
            “The ultimate judgement of market success lies in the value to consumers,” the report notes. “The retail component of Victorian power bills is the most costly in the country and therefore the least successful, no matter what proxy metrics are used to say otherwise.

  • Miles Harding

    Malcolm’s Industry Innovation blewprint should be looking in the state’s backyards to do something about this mess.

    Near as I can tell, unless there’s a revolution and major writedowns, any new policy will necessarily compound the bad decisions previously made by letting the industry write their own rules in the first place.

    It would appear that anywhere that industry is permitted to write policy, it will put its own vested interests foremost in that policy, to the detriment of all other parties. There is a clear message to the state and national legislators in this.

    This regressive idiocy in NSW is exactly the sort of consequence of the state not addressing its mistakes:
    “Now, the NSW networks have also flagged a potential “solar tax”, to hit households that export solar back into the grid with extra charges. They flag similar fees for households using battery storage and electric vehicles.”

    • MaxG

      It will not address its mistakes… look how it is accelerating with stupid ideas, such as FTAs. TTPs, Qld mega mines, and the list goes on.

      • Miles Harding

        I suspect so…

  • Math Geurts

    “demand forecasts that have proven to be outrageously wrong. Indeed demand, far from growing, has barely changed over the past decade” ??????

    Actually, demand has grown quite fast from 2005 untill 2009 and declined after the financial crunch untill 2014.

    • Barri Mundee

      I think that statement is true- over the decade electricity demand has barely moved though you are correct about the period 2005-2009.

      • Reality Bites

        Yes and 2009 was when the 2010/15 AER determination was formulated and set for 5 years.

  • Chris Fraser

    The death spiral is uncompetitive, but businesses have resiled to ‘don’t care’. Clearly, they get cynical when they prepare financial plans for PV households to both stay on the grid and leave. I’m still wanting to find out, exactly what is the problem with small generation as they perceive it.

  • orko138

    …and we’ve never heard of the gold plating of the network before? This isnt new

  • James Hilden-Minton

    The first chart is priceless. In addition to all the fine points made here, I wonder how independent power producers react to this. It seems that high network cost just undermines IPP’s connection to the marketplace. It threatens to cut into their share of the revenue and even to become stranded assets.

    Most of the value of a distribution network is derived from connecting producers to consumers at minimal cost. The higher the distribution cost, the more it cuts into the revenue of producers.

    We often hear the utilities claim that ratepayers are responsible for paying for the grid. This is not even half the story. It is producers who most need distribution networks. If you can buy local for less than the cost of shipping a good from a remote producer, then you may not need the wide distribution system so much, but the remote producer sure does. So who pays for the grid? Ultimately the remote producers do.

    • Mike Dill

      You are correct that the producers should be paying for the T&D as it would clearly expose the value of DG and storage.

      There is a concept out there called ‘god pricing’. When the distributed
      generation and storage are less than the cost of fuel the entire
      structure must collapse or completely restructure. At that point even god cannot make the system work, although some people in government may try.

  • john

    The fact that Victoria has the highest Retail Market cost is directly related to the number of private retailers all with their own overheads, a retrograde result directly related to dogma that private is more efficient.
    Delivery of electricity is a service obligation just like roads, water, hospitals, rail, airports, shipping ports or for that matter police.
    Once the profit motive is introduced it corrupts the service obligation.
    The overspend has resulted in distortion of the market price and is only going to encourage a more aggressive off grid situation.
    Solution to this ugly mess.
    1 Write down the value of the built asset.
    2 Ensure that; cost effective introduction of distributed energy augmentation in regional areas; is introduced to reduce transmission loss and further build.
    3 Get rid of parasitical retailers who contribute absolutely nothing to the final cost of power.
    4 Ensure that firm guidelines are put in place that are of benefit of all of society.
    On point (4) remember that the people who live a long way from the power generation assets are subsidised by those near by so my point (2) should be used to lessen this cost.

    • James Hilden-Minton

      John, let me offer an alternative interpretation to your final sentence. It is the power producers that sites generation a long distance from consumers that is being subsidized the most by ratepayers. Distributed generators are not putting this network cost on ratepayers, rather remote generators are.

      We need to deconstruct this idea that ratepayers have any moral obligation to pay for a distribution network. It’s not about one set of ratepayers subsidizing another. It’s about ratepayers subsidizing the assets remote generators need to go to market. In any other industry, we understand that it is the producer of a good that must assure a cost effective means to get that good to market.

      The solution is rather simple. Let local producers trade and bring electricity to market at lower cost. Then the remote producers will put pressure upon distributors to cut their cost.

      • john

        James I hear your argument however the network is a ” service obligation” to provide an equitable power system to society.
        In fact because of distance in the larger states the more populated areas do subsidise the rural people.
        To reduce this cost for all it would be better to introduce generation preferably RE in those areas.
        As to introducing Parasitical Retailers they will only be interested in operating in densely populated areas and contribute nothing at all.
        Look at the Telco situation once again parasitical retailers only service the densely populated areas and leave it to the incumbent to bear the huge cost for the majority of the regional areas.
        The basic problem is well known over spend there is no dodging this problem.

    • Reality Bites

      Hahaha, good one. Yes let’s socialise the system and appoint say a benevolent body to ensure it is all done for the betterment of mankind. World peace next!

      • john

        Facts speak that the cost of retail is highest in Vic.
        Delivery of power is a service obligation.
        As it is now the cost of delivery is paid for by the whole state.
        If one wishes to only deliver service to those who are privileged then this would logically mean closing all services that cost more hardly going to lead to a harmonious situation.
        Either we live in a society that holds together or go back to tribalism make your pick.

  • Barri Mundee

    We need “not for profit” retailers in both electricity and gas. I don’t think there are any though?

  • Shtoney

    One of the key points of the report was indeed $75 Billion had been over-invested in networks, but it identified this as an opportunity;
    How we can use this gold-plated network to wheel distributed renewable generation and power energy intensive industries.

    We have a strong electricity and geographically large network, excellent renewable resources and the knowledge base to develop (restore?) energy intensive industries and export the value added, renewable energy derived products.

    The article missed that.

  • Simon Clough

    Transgrid wanted to build a $175 M transmission line from Dumaresq to Lismore. This would bring in Qld coal fired electricity to Lismore. this huge expenditure and massive environmental destruction was based on a projection of 5% growth rate in the area. This area has rarely hit 0.5%. With concerted community action and support from Lismore City Council we finally go the project dcancelled!

    • Alastair Leith

      while the lunatics are running the asylum the only progress will come from community action like yours, Simon. Thanks for providing a perfect example of what a well organised, informed and visionary group of people can achieve on behalf of all of us. you rock.

  • Reality Bites

    Sorry Giles but you have this wrong. Why paint the actual NSP’s as the villains. Truth is firstly it was mostly State Labor governments that ripped cash out of the networks in the late 1990’s that created the power reviews and a need to protect the power networks. Remember the blackouts in the late 90’s and early 2000’s? Then the Fed’s created the AER as a kneejerk reaction in 2005. So a centrally controlled bureaucracy, what could go wrong!? All worked well, but then Labor was elected federally and no one really looked at the power sector system for 6 years. Everything the NSP’s did was approved by the AER and in addition the various Competition Authorities in the States approved the tariff changes. You would also then need to see how much in dividends was paid out to the State Governments over the successive periods. The NSP’s virtually had little say in what happened and simply got on with maintaining the system and paying dividends to the states. So in reality, the NSP’s have just followed the Federal and State government policies. You also criticise the WACC, however on the one hand you say inflated yields and exploitation and on the other you write articles about disruptive technology and how droves will leave the grid. Are the NSP’s a long term prospect? Would you invest your money in a NSP? If the NSP’s WACC is less than that of the Commonwealth Bank, who is riskier? Don’t forget that the WACC means weighted average cost of capital and therefore it is an average of the expected equity returns, plus the actual cost of debt. Energex’s 2015/16 determined WACC is 5.85%, reduced from 9.76%, that was set in 2010!

  • Phil

    Needs to be some new bumper stickers “off grid and living the dream “. And the other should be “Being poor is being on the grid”

  • Jaeger

    “NEM refroms”?