Don’t let politicians confuse you – the main reason that electricity prices have almost doubled in the last 5 years is due to investment by electricity network companies of $46 billion in 5 years. These organisations are responsible for managing the poles and wires that bring the electricity to our homes and businesses. The carbon price has added 2c/kWh or about 10% of the increase, but that is the extent of it. The real issue is the massive investment in networks, at double the size and rate of expenditure of the NBN, but with almost no public scrutiny.
Even as electricity consumption was declining and peak demand growth flattening, the electricity networks continued to invest. And the cost of the investment now has to be repaid from a reduced volume of sales. While some investment was certainly necessary to maintain power supply reliability and deal with localised growth in electricity usage in specific network areas, a significant proportion will turn out to be simply unnecessary. This over-investment by our electricity industry will prove to be a major mis-allocation of scarce capital funds to build under-utilised assets – the network industry has 54% asset utilisation and falling. Not only has this increased electricity prices, it impacts the overall productivity of the economy. There has been a lot of debate about our declining productivity growth – surely the investment of $46 billion with limited outcomes has not helped this cause!
While it is wonderful to see the Prime Minister calling for very necessary and overdue action by the States and COAG to demand changes in the regulation of the electricity industry, and encouraging to see the push for Australian Energy Regulator (AER) to address over expenditure as part of yesterday’s AMEC announcement, it is too late to save us from the price increases from the spending of the last 5 years. That horse has bolted. And the AER needs to consider the fundamental issues of being closer to customers for forecasting and demand management/distributed generation.
It’s worth considering the causes of these poor decisions.
1. Over the last three years in particular, the networks and the Australian Energy Market Operator (AEMO) have consistently over-estimated the electricity consumption and peak demand growth, by failing to anticipate the consequences of the slowing economy, industry contracting and the impact of price increases on customer demand. Furthermore they ignored the impact of government programs aimed at reducing carbon emissions, including incentives for installing photovoltaic generation and solar hot water on houses, the roof insulation program, increasing appliance efficiency standards and other efficiency programs like the Energy Saving Scheme. Despite all this very predictable change, they continued to predict load growth of 2% p.a. And what happened? Consumption peaked about 3 years ago, and has declined by 3 or 4% since. When AEMO published its latest report at the end of June, it forecast that electricity consumption will be 5.7% lower than estimated for 2011-12 and is forecast to remain flat or declining into 2012-13 despite continued population growth. This means that networks invested heavily to meet growth that did not occur. It is also not widely recognised that the overestimation of load growth resulted in over-investment in power generation capacity. Consumers are also paying for this, though not through direct price increases but in NSW through the impact of reduced dividends to the NSW government – which has flow-on effects to every tax payer in the State.
2. Regulation of the industry needs to be changed. It rewards networks to increase the value of utility assets, as the organisations that own them (in NSW and Queensland, the State governments) earn a regulated rate of return based on asset value. The network rules should be revised so that:
1) a mechanism is introduced into the market to allow businesses to bid in demand reduction,
2) there is an incentive system to network service providers for implementing demand-side management projects, and 3) current barriers for using distributed generation are removed.
3. Current regulation also encourages investment in gold plated reliability, regardless of the cost to customers. We need to look at a balance, where customers accept that there may be a slightly increased chance of an outage but which allows for a lower cost network. Those customers willing to meet higher reliability of supply can always invest at their own cost in reinforcement systems such as distributed generation systems.
4. Another issue is the failure to introduce electricity pricing for all consumers which reflect the real cost of supply during the day and across the year. One major justification by networks for investment was that peak demand is still growing in residential areas. The increasing penetration of air-conditioning units and the tendency to build large houses with more appliances was to blame. Despite this, most residential customers do not experience electricity charges which vary with the time of use in a way that reflects the real cost of supply. If we continue to protect consumers from the high price of electricity in peak hours, we will see more air-conditioning units being installed and running at full output in summer evening peak periods. Customers need to understand the impact of running additional energy-intensive appliances during peak periods. For this to happen, we should roll-out smart meters, in-home displays and move towards more cost-reflective pricing structures (e.g. critical peak pricing).
5. The electricity industry has failed to actively manage customer demand. We know from international experience that utilities can run demand management programs to provide support for clients to reduce their use at less than half the cost of investing in poles and wires. What’s more this investment in reducing demand goes into the pockets of consumers, AND reduces pollution. California invested over $1 billion/year on its customers in this way for 30 years, and has halved electricity use compared to the rest of the USA (and NSW). So even though California has amongst the highest charges for electricity in the USA, people’s bills are the lowest in the country, because they use half the amount of electricity.
We have been promoting the idea of demand management in Australia for decades but instead the focus has been on supply options – at our cost.
6. The Australian Energy Regulator (AER) regulates the investment by network businesses and approve spending for a 5 year cycle for these utilities. At the time of the review of the last 5 year cycle for NSW, we presented to the AER on the benefit of diverting to customers some of the $9 billion that was about to be committed in NSW on poles and wires investment, to instead improve energy efficiency and reduce peak usage. We were informed that they had already approved $5 million for a ‘learning by doing’ fund (despite the case examples of success internationally), yet $5 million compared to $9 billion did not seem to be a balanced approach.
What are we to do about it? There has been a major misallocation of limited capital – our money, resulting in unprecedented price increases. The alternative could have been to invest in customers and reduce demand and customer energy bills in preference to spending on supply poles and wires. We could have provided more ready access to all forms of high efficiency local power generating facilities with the result being a lower cost, less polluting way to meet customers’ requirements for energy services.
Let’s change our electricity from the top down to prevent this happening again.
Jonathan Jutsen, is founder and Executive Director, Energetics.
