Energy death spiral – consume more, or prices will rise

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Martin Ferguson departed his portfolio promising that the era of peak network investment was over and that electricity price relief is in sight. Sadly, it’s not. As the AEMC reveals, that network investment relies on people consuming more electricity. If they don’t, electricity prices will rise anyway. Welcome to energy market death spiral.

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One of the last acts of Martin Ferguson’s 5-year career as Federal Resources and Energy minister was to issue a press release on Friday celebrating the fact that the major rises in retail electricity prices were coming to an end. It appeared to be good news – or at least Ferguson said it was – but not if you read the fine print.

Ferguson’s contention was that the big burst in network investment was over,  and electricity price rises from 2013 to 2015 would only be in the order of inflation. But the report by the Australian Energy Market Commission reveals a significant Catch 22 – this would only be true if consumers continued to use more electricity.

If demand reduced – be it through energy efficiency schemes, the reduction of manufacturing capacity, the proliferation of solar panels, or even adoption of the Earth Hour values that the government supported – then network costs would go up. It means that household are faced with a Hobson’s choice –  consume more, and pay  higher electricity bills. Or consume less … and pay higher electricity bills.

Confused? Well, you’re supposed to be. The electricity market is a complex beast and pricing mechanisms are almost impossible to understand. That’s the way that utilities like it: “Confusion is profit”, as one executive admitted recently.

The issue with network costs is that they are not moderating at all. Some $40 billion have been spent and the network operators want their money back, plus the regulated return on their investment that is decided by market regulators. And they will get it.

That means that if consumers reduce demand – as they have so dramatically in the last couple of years – they will be hit by higher charges. The AEMC says so: “If demand is lower than forecast … then network prices … are likely to rise quicker than outlined in this report,” the AEMC writes in the report (but not in its press release, which is why you won’t read about it in the mainstream media).

The cause of this Catch 22 is because total revenues for network operators are set for five years. The recent surge in network investment – which has underpinned the majority of the recent dramatic price rises, but much of which has been criticized as “gold plating” – guarantee a certain return for the network operators. The carbon price was a one-off impact, but payments for network investment is locked in.

“If the actual consumption volumes fall, then the business will increase the price per kWh to maintain its revenue at the allowed revenue,” the AEMC says.  Or, as being proposed in Western Australia and Queensland, the fixed component of consumer bills will rise to make it less attractive for customers to produce their own energy, consume less or even leave the grid. We can see how the Queensland Competition Authority is struggling with this issue here.

You can see where this is heading. Far from being good news, this is actually the canary in the coal-fired power plant and it’s associated infrastructure, the centralized model of generation, distribution and retail. At its worst, it’s an attempt by the AEMC to justify the extraordinary network investment it ushered through to support the most inefficient energy system that was ever invested – a system that uses less than 10 per cent of the original energy burned at its end point – and yet which is lauded as being cheap and efficient.

AGL Energy have coined their own expression for it – the death spiral – signalling what happens when too many people reduce demand, or even leave the grid – leaving network owners with a redundant system. Just look at fixed line telephony.

It is a system that continues to be supported by state energy ministers, who own the assets and don’t want their value trashed as they prepare them for sale. It is not helped by the fact that their views of energy systems are so outdated that our children would be wearing knee-high britches and writing on pieces slate if our education policies dated from the same era.

The solution is obvious to most people around the world: redefine and decentralize the energy market, and focus on energy efficiency. But there is no sign in Australia that the network operators, the generator owners, the grid managers, or the market regulators that have been so captured want to move on quickly from the model of either selling more electrons, or charging more for the electrons they do sell. There is little concept of service, other than that of “reliability” – the criteria that has been abused to perpetuate an outdate business model by spending more on un-needed infrastructure.

This is a critical issue, because under nearly every credible scenario to meet the energy and carbon scenarios of the future, energy efficiency is one of the most significant measures to meet the decarbonisation goal. The world needs to consume anything from one third to one half less of what it would normally be expected to. The IEA says energy consumption across the electricity, building and transport sectors could be reduced by half – leading to even faster growth in GDP, and giving extra time to deal with climate change.

Even Australia’s own energy savings initiative says it would billions, if it was ever implemented. But the impact on utilities of declining demand is already apparent. Energy Australia says average demand from Victorian households fell 10 per cent in the last year alone, blamed this for a sharp slump in earnings. Little wonder the utilities are fighting against energy efficiency schemes, and against the proliferation of solar PV.

Over the next few years, this will be the centre of the fiercest and fascinating of policy battles. In the US, Robert F Kennedy speaks of the “democratisation” of energy systems and how important solar PV and other distributed generation is to break the oligopoly of the fossil fuel industry. The significance of his comments was that it was made jointly with David Crane, the head of the second biggest utility in the US. In Australia, the networks are not thinking along these lines at all, and are focused more on obfuscating the issues. Hence that maxim: “Confusion is profit”

The fossil fuel and nuclear generation lobbies have recently intensified their campaigns against wind and solar because it tips their business models on its head. The foundation of the centralised energy system is on “cheap base load”, but it is entirely reliant on expensive “peak-load” to meet swings in demand, and most recently the increased hunger for air-con ,and delivers windfall profits to all generators when it is switched on. About one quarter of the revenue is delivered in just a few hours of “super peak” conditions. Wind and solar turns that upside down, as we see in our Graph of the Day.

The irony of the AEMC report is that while network and distribution costs will contribute “100 per cent” of the consumer price rises anticipated in the coming few years, the price of wholesale energy is actually going down – thanks to the impact of reduced demand and the impact that solar and wind is having on the wholesale market price (it reduces it and forces the excess of inflexible fossil fuel generation to close down).

Below is the table that the AEMC report has produced that shows the national average price components of the consumer electricity bill.

There are a couple of standouts

– the combined cost of the renewable energy target, the solar scheme and the feed in tariffs is less than a third of the rise in network costs.

– the cost of these green schemes is also offset by the reduction in the wholesale price that it has helped bring about .

– and the cost of these green schemes is considerably less than the retail margin, including the “head room” – the cross subsidy that everyone pays so the energy retailers can offer discounts to a few.

That’s another part of the energy money-go-round – even when you think you are paying less, you are in fact paying more. The current system depends on it. Which is why battery storage, and the prospect that costs will come down considerably, may inspire some to look after their own arrangements and want to leave the grid.

But they probably won’t be able to either, if the network operators have their way and introduce the type of obligated payments that feature in water supply.

As The Eagles wrote in their famous song Hotel California: “You can check-out any time you like, But you can never leave!”

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20 Comments
  1. Anthony 6 years ago

    Get off the grid I say…

  2. Dave Smith 6 years ago

    Giles,

    Energy efficiency is a laudable objective, but it is not a solution to recovering the money that has already been spent on expanding distribution network capacity. That money has gone. It must eventually be recovered from households, either through the electricity bill or through State taxes.

    The horse has bolted.

  3. Simon Mathis 6 years ago

    If we use energy much more efficiently and access clean distributed self generation options then the consequences are clear … less power generated by the incumbent power generators and less energy transported by the utilities and a pricing model.

    If for the general good we accept these outcomes and we don’t wish for existing pricing arrangements to be a barrier to uptake the we have to recognise that the current owners will need to be compensated for the standing of their assets.

    California simlarly struggled with the starnding of power generation assets in late 90’s.

    • John D 6 years ago

      If Australians reduce their petrol consumption, the oil companies would expect a reduction in profits. (If anything, they would also expect a reduction in profit margin because of increased competition) The same is true for most other business’s – including the power generation business.
      Yet somehow people like Simon Mathis want to say that the koala bears in the power distribution system should be compensated for reduced consumption. Worse still, they want to say this when the distribution companies spent their capital on brute force approaches to increasing distribution capacity instead of smarter solutions such as targeted LOCAL power storage and generation.
      Why should these bumbling incompetents be rewarded?

  4. John Clapton 6 years ago

    Once upon a time – in the dim distant past – the cost of the network of poles and wires was an infrastructure cost borne by the government as an essential service to the community and therefore paid for with our taxes.

    Consumers paid for the electricity they consumed at a price that recovered the cost of producing the electricity. Therefore, if the cost of production fell because of renewable technologies or the purchase of cheaper units from solar-cell owners, the cost to consumers would fall.

    All this changed when successive state governments sought to give a false impression of getting smaller by privatizing this essential service and now consumers have to pay for both the infrastructure (over and above their taxes) and the power consumed.

    If the infrastructure costs are fixed, then of course the unit-cost for infrastructure goes up as the our consumption of power goes down.

    How come no-one thought of this in their modelling?

    • David Hamilton 6 years ago

      Good question, John. My answer is that the modellers and the decision-makers were mentally locked into the growth model – the idea that electricity use (indeed, the whole economy) must always get bigger, and that growth is a Good Thing. The idea that electricity demand could actually go down was literally unthinkable and thus did not enter into consideration.

      Giles’s truly excellent piece (one of your very best, Giles) shows that our electricity market, like much of the economy is at heart a Ponzi scheme – an arrangement that requires continuous growth for its stability. Take away the growth, and the cracks soon appear.

      To me it is obvious that in the industrialised countries the growth model is broken; alas that idea is still whispered in corners and not spoken of in polite society.

      • Peter Bergs 6 years ago

        You hit the nail on the head.

  5. Mick 6 years ago

    “..Or consume less … and pay higher electricity bills.”

    This is purely a figment of the current distortive tariff structures – it is just a function of having variable charges for something that is ostensibly a fixed cost.

    Realistically, it should be “or consume less and pay less for the variable component and same amount for the fixed component”.

    If we had cost reflective tariffs, this manufactured and apparent (but not real) increase would not occur (and be an issue).

    Demand (capacity) based charges are needed in order to remove the cross subsidies, and ensure prices are actually cost reflective

  6. Ray Wills 6 years ago

    Raising fixed charges will create the perfect storm – rising electricity prices means right now electricity from solar panels on your roof is cheaper than the grid with a less than 4 year payback for anyone paying 25c + for their electricity (and that’s just about all of us).

    So raise fixed charges to compensate and suddenly storage, energy independence and disconnecting will become more commercially attractive. With rapidly declining costs of storage likely over the next few years, household reliance on electricity utilities could change very quickly.

    Ironically a package of increased fixed charges and decreased consumption charges that seems likely to be orchestrated by the regulators to allow centralised generation on the grid to compete against distributed generation – but to compete, grid retail will have to be less than grid parity for solar…

  7. Mr Mauricio 6 years ago

    Many of us have had a taste of relative independence from the depredations of Big Electricity”.We wont be giving up no matter what they hurl at us in their death throes.How much simpler for them and everyone else to face the future and adapt to it??

  8. Alan Baird 6 years ago

    Here we go again. Our energy pricing is totally ruined but it’s taken years of hard work by pollies with a morality bypass to achieve it. It can be traced right back to the time when privatisation became a cause celebre in the early noughties, and fixed charges became grossly inflated and electricity charges were left on hold. Only when the poles and wires charges are totally transferred to the electricity price can sanity prevail. The state of knowledge of federal politicians was revealed by the little old lady from Western Oz who submitted a bill purporting to show how electricity prices had increased when her CONSUMPTION had. It took the mental giants AGES to twig and was actually presented as evidence (ever-dense?) by the Opposition.
    PS. I’ll bet it wasn’t Martin Ferguson who figured it out for Labor…

  9. Mike 6 years ago

    There is a major caveat to the electrical death spiral of course. EVs. Bring them on.

  10. Martin Nicholson 6 years ago

    Giles, what is distorting this picture is that wind and solar make a considerable contribution to the grid level system cost. So the wholesale prices, with these system costs not included, may well go down but the total cost of electricity is still going up as is clear shown in Figure 3.26.

    http://theconversation.com/counting-the-hidden-costs-of-energy-12710

    • Giles Parkinson 6 years ago

      Yes, Martin, that is the view of the Nuclear Energy Agency, whose study is the source that article. It’s strange that Barry Brook does not draw on the experience of his home state, South Australia, which has not just nearly the highest penetration of wind energy in the world, but also the highest penetration of solar pV. And the conclusion of the australian energy market operator is that it has added virtually nothing to grid integration costs, has not required a single MW of additional peaking capacity, and any new transmission lines have been paid for by the wind developers themselves.
      And it is still laughable that the article should try and pretend that nuclear can be built at an LCOE of around $90/MWh. The situation in the UK suggests that it is at least double that, and as the chairman of the world’s leading nuclear system builder GE said last week, nuclear reactors ain’t gonna get built unless governments use their own balance sheet to insure, finance, and guarantee the output – because the world’s private banks, insurance companies and equipment suppliers like GE are sure as hell not going to risk their own balance sheet on it.

    • Giles Parkinson 6 years ago

      Jenny Reisz also wrote a good piece highlighting what nonsense the nuclear energy agency report was. http://www.businessspectator.com.au/article/2013/3/21/renewable-energy/busting-myths-system-costs-renewables

      • Martin Nicholson 6 years ago

        She did indeed. I trust you went through the comments to that piece and particularly my comment. Jenny did not deny that such system costs exist, in fact she agreed that the balancing costs are inline with the estimates in the OECD report!

        An extract from my comment to Jenny, repeated below, explains why these system costs, including transmission and distribution cost, need to be included in the LCOEs so proper comparison can be made:

        “Yes the wind farms and solar generators pay for these regulation costs so they are internalised but are they included in the LCOEs for these technologies? If not then they should be in the same way as LCOEs should include carbon costs. This will improve cost comparisons analysis between technologies.

        A similar argument can be also be made for grid costs. Whether they are paid for by the generator owner or the grid owner they should be included in the capital costs for all technologies and hence included in the LCOEs.”

        Denying the existence of these costs, just because they were analysed by the NEA, flies in the face of analysis done by ROAM in Australia.

    • Dave Smith 6 years ago

      Martin,

      Your point is a red herring. The major network cost that the article talks about is from distribution. Wind energy does not affect distribution costs. Solar PV may, but is as likely to reduce distribution costs as increase them.

      It is true that new solar and wind capacity is forcing wholesale prices down, but new nuclear would have the same effect.

  11. Ron Horgan 6 years ago

    Giles, would you care to govern the “Lucky Country”?
    I guarantee you at least one vote!

  12. Justin 6 years ago

    Just save up enough money and buy a solar system that can cover all your usage and store some energy away for those cloudy/rainy days and get off the grid. Disconnect! Then we will see who gets the last laugh. Its the same with fuel, invest in a new electric car/outdoor machinery and bye bye fuel profits.

  13. Tim 5 years ago

    Giles can you give some background to the claim that only 10% of the energy burnt is used at the end point? I see high-30s efficiency for the predominant coal-fired generation, maybe 15% T&D losses on a bad day, and a smattering of dumped load at times of excess generation… I’m still only seeing it at around 30%. Where are the top two-thirds of that going?

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