Energy death spiral – consume more, or prices will rise

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!”