The Albanese Labor government needs to wise up that the energy network monopolies are about to make their task of re-election much harder.
It is plainly obvious that the Dutton-led Coalition intend to redeploy the marketing campaign so successfully executed by Tony Abbott when he was the Coalition opposition leader.
Abbott effectively exploited the electorate’s concern over rising electricity prices at the time by pinning the blame entirely on Labor’s policy to introduce a carbon price. This time around, Dutton will lay the blame on Labor’s target to expand renewable energy.
The fact that, in both cases, the drivers of the large rises in power prices began unfolding BEFORE emission reduction policies were implemented is not something voters necessarily clue onto.
Those that follow these events closely know that back when Abbott was campaigning first against Rudd and then Gillard, very large rises in electricity network charges were hitting NEM customer bills that had nothing to do with the Rudd/Gillard government.
This spike in network charges (which had a larger effect than the carbon price) was the product of a new regulatory regime implemented by the Howard Government where east coast state governments handed responsibility for network regulation to a new national regulator – the Australian Energy Regulator.
Except, while on the surface the states appeared to no longer be in charge, in reality states had a very large say in the structuring of the regulatory rules and the regulator.
Given several states still owned their power networks, it was like they got to keep the keys to the cookie jar, but with an invisibility cloak now thrown in that obscured them pilfering the cookies. And they stole from that cookie jar with abandon, meanwhile consumers’ draw on network capacity barely grew.
In the present day, the cause of rises in power bills has been large rises in international prices of gas and coal due to Russian withdrawal of supply, as well as reliability issues with coal generators.
While these problems began pushing up wholesale energy contract prices over 2021 and early 2022, before Labor was elected, household bills only started going up in earnest after the May 2022 election. This was then turbo-charged by the severe wholesale market price spike crisis that unfolded just weeks after Labor came to power.
The worst impacts of the spike in international coal and gas prices are now unwinding, with the Australian Energy Regulator’s latest determination on residential electricity price caps noting that baseload futures power contract prices had fallen by between 39% and 48% since the highs observed in 2022.
However, network charges are on the rise again and according to the Australian Energy Regulator (AER), “the easing in wholesale prices has been offset by the pressures currently observed in network prices.”
The Liberal-National Coalition will seek to blame this, too, on renewable energy, with Peter Dutton and Nationals Leader David Littleproud decrying the roll-out of new transmission projects. This is even though almost all the major transmission projects either underway or soon to commence were actively supported by the Coalition when they were in government.
While he was energy minister, Angus Taylor “welcomed” and helped underwrite the new 900 kilometre transmission interconnector between SA and NSW. In the lead up to the 2019 election, Taylor and then Prime Minister Scott Morrison toured Tasmania’s marginal seats vowing to build a second electricity interconnector to the mainland.
In January 2020 the Federal Coalition entered into a funding deal with the NSW Government to upgrade transmission lines across north, central and southern NSW. As part of the 2020 budget, Angus Taylor and a range of National Party MPs announced funding support for an 840km transmission line across inland Queensland which they declared was a “commitment to regional jobs, industry development and affordable reliable power.”
Then, leading into the 2022 election, the Morrison government announced it would underwrite construction works on a major new transmission line between NSW and Victoria. Taylor’s press release at the time spoke glowingly about the benefits of new transmission, stating,
“Our investment in this project will support reliable electricity supply, deliver substantial cost savings and help keep the lights on for Australian families, businesses and industries. This builds on the Morrison government’s record of judicious investment of over $800 million in priority transmission projects recommended by AEMO’s Integrated System Plan – projects that stack up for consumers.”
Of course, marginal voters don’t religiously file away government press releases like I do, so they are unlikely to realise Coalition MPs have all collectively fallen victim to a rapid onset of Alzheimer’s disease.
At the same time, the Albanese government needs to remind itself of what happened to the Rudd-Gillard government. That previous government realised far too late that you need to keep an extremely close eye on network monopolies.
Some significant investments in new transmission capacity are certainly necessary (distribution network investments are more questionable), but this only increases the importance of keeping a close eye on networks’ revenue allowances.
The reality is that our regulatory regime governing energy networks continues to do a very poor job of containing costs for consumers. This has been obscured from view by the fact that network charges over the last few years had been falling (but are now going up). This was not so much due to improvements in networks’ efficiency, but mainly because central banks around the world had pushed interest rates on debt down to very low levels, and the cost of finance is a major driver of networks’ revenue entitlements.
In fact, total factor productivity of Australian electricity networks remains worse now than what it was in 2006. Unfortunately, now that interest rates have risen, the costs of our poor network regulatory regime are making themselves felt again in rising consumer charges.
So how bad is this regime? Analysis by the Institute of Energy Economics and Financial Analysis (IEEFA) of the AER’s Network Performance Reports reveals that between 2014 and 2022 electricity networks captured profits that were 70% higher than what the regulator had originally thought they’d signed-off on. In terms of gas pipelines, the regulator accepted prices that delivered these monopolies profits 90% higher than what the Regulator had expected they’d receive.
What’s happened is these networks have been able to manipulate the regulations and regulator in a way that allowed them to charge customers prices higher than necessary to recover their costs and a reasonable return for investors.
Worryingly, the AER’s response to IEEFA’s findings on electricity networks has been to suggest the scale of these excess profits are little to worry about. Apparently this “outperformance,” as the AER likes to call it, is simply the regulatory regime operating as intended to reward networks for finding ways to reduce their costs.
That would possibly be ok if there was evidence that either: the AER was getting significantly better over time in bringing networks’ revenues down to something close to their actual costs, or; the productivity of networks had shown significant improvement since 2006.
Yet neither point is true.
Given several state governments continue to profit from this arrangement, meaningful reform is unlikely to occur from within the existing regime for governance of the NEM, which is shared across state and federal governments.
This incredibly diluted form of accountability continues to provide a convenient invisibility cloak for some states to raise revenue, while leaving the federal government heavily exposed to blame given the AER is a national regulator.
If the federal government wants to guard itself against the inevitable blame headed its way, it needs to commission an inquiry led by independent experts and supported by the Productivity Commission, as called for by Dr Gabrielle Kuiper.
This inquiry should seek to understand why the move to a national regulator has been accompanied by poor total factor productivity performance while simultaneously awarding high returns to investors (relative to their low risk profile). It should consider the potential to make greater use of competitive procurement processes and utilisation of non-network asset substitutes (such as batteries) to bypass monopoly network service provision.
The inquiry should also consider whether it might be best handing regulation of distribution networks back to each state to provide clearer lines of political responsibility and accountability. Transmission meanwhile could continue to be regulated at a national level by the ACCC.
The Albanese government also needs to be especially wary of distribution networks’ current campaign to extend their monopoly reach into areas that would otherwise expose them to competition, such as batteries. Use of competitive substitutes to networks is probably our best hope of containing their cost impact, something I’ll explore in a subsequent article.
Tristan Edis is a director at Green Energy Markets – a provider of analysis and advice on energy and carbon abatement policy and markets
