Energy wars: retailers attack networks on gold plating

AGL Energy has fired the opening salvo in what is expected to become a fierce turf war between electricity “gentailers” and network operators – and the outcome could be critically important for consumers and households looking to install rooftop solar and battery storage.

AGL Energy has effectively accused some network operators in NSW of trying to “gold plate” their networks, saying that their investment proposals for the next 5 year period are over the top and unjustified, and that they used inflated demand forecasts. AGL lamented that it is the retailers who are experiencing the brunt of the customer backlash against high energy bills.

In recent years, it has been consumers, consumer groups and some energy analysts that have accused the networks of “gold plating”, but AGL Energy’s reaction to the latest pricing proposals is a clear indication that retailers are now being affected.

Network costs are now the biggest component of electricity bills, and some analysts such as the Grattan Institute and the Institute of Sustainable Futures have suggested between one third and one half of the $45 billion investment in poles and wires in the last five years was not needed.

AGL Energy says in a submission to the Australian Energy Regulator that is the retailers who are copping the flak from customers, and it is they who are at risk of losing business as new technologies such as rooftop solar PV and battery storage offer ways around the high cost of network delivery charges.

The submission also reveals that AGL Energy has teamed up with Origin Energy and EnergyAustralia – the other two big gentailers  in the country – to hire independent analysts Oakley Greenwood to critically assess the latest capital expenditure plans of NSW network distributors.

It is the first visible skirmish between the two incumbent pillars of Australia’s electricity industry, and could be a sign of things to come as network operators seek the ability to deal directly with customers.

A core component of the “gentailer” model – generation from centralised fossil fuel generators – is seen as most vulnerable from the growth of renewables and distributed generation (solar, storage and software).

But the other component of the “gentailer” model – retailing – essentially involves little more than the packaging of bills and products (and some price hedging), something that energy service companies and network providers think they could do just as well (bar the price hedging, but not so much would be needed with solar and storage).

Some network operators believe that distributed generation will become the dominant form of energy delivery in the country, and they talk of a series of micro-grids, linked through the network. There is a view that centralised generation could be redundant and retailers will be challenged by a new wave of service providers.

The retailers, on the other hand, have no choice but to incorporate network charges set by the market regulator. The AGL Energy submission reveals the extent to which the soaring network charges – they have more than doubled in recent years – is causing problems for the rest of the market.

The submission rails against various tariff components proposed by the networks, describing many of them as “too high”, “inappropirate”, or “unjustified.” One, for instance, is a proposal to bundle disconnection and reconnection fees, effectively forcing customers to pay for both even if they have no intent to reconnect.

AGL Energy said the soaring network costs had “swamped” any efficiencies been gained in the rest of the market.

This had caused a “large adverse reputational impact” for the energy industry as a whole. “The industry needs to rectify this situation,” it writes.

It noted that the soaring costs had been a major driver of falling consumption and peak demand, and the take-up of alternatives such as solar PV.

“The DNSPs (network distributors) need to make economically sound decisions rather than simply rely on regulated frameworks to provide short-term revenue recovery,” AGL wrote.

“However, the regulatory proposals of the NSW DNSPs are disappointing and do not attempt to wind back the previous imposts on customers, nor appear to address the obvious decline in asset utilisation to any extent.”

“Aggregate operating cost allowances for NSW DNSPs have increased by over 90 per cent in nominal terms over the past two regulatory periods.

“Even a cursory examination of the latest operating expenditures proposed by the DNSPs suggest that, although some efficiency improvements may have been made, they are not significant with the quantum of the proposals largely just a continuation of the levels from the previous period in real terms.”

It accused Ausgrid, for instance, of using summer demand forecasts “well above” industry forecasts (a rise of 4 per cent as opposed to a forecast fall of 5 to 10 per cent), and of high winter demand forecasts too.

It wondered why the operating cost per consumer ranged from $159 to $298 per consumer in Victoria, but double that in NSW. “AGL is unable to understand why,” it wrote.

It also accused the networks of seeing to pocket efficiency savings of more than $100 million a year, rather than pass them on to consumers. AGL said network attempts to “carry over” these savings are “groundless”.