Urgent reform needed to shield consumers from yet another round of grid gold plating

Nearly 10 years after a federal government inquiry identified electricity network “gold plating” as a major contributor to bloated power prices in Australia, experts are warning that it will happen again unless urgent reforms are made to the economic regulation of distribution networks.

A new report from the Institute of Energy and Economic Financial Analysis (IEEFA) has found that three distribution network service providers (DNSPs) in some of Australia’s most rooftop solar saturated grids are proposing 20-22% increases in capital expenditure (capex) for the 2025-2030 regulatory period.

Gabrielle Kuiper, IEEFA guest contributor and the report’s author, says it’s unclear why the DNSPs – SA Power Networks, Ergon and Energex, all of which have over 45% of households with rooftop solar, and a growing number of home batteries – are seeking such big increases in capex, when network use is decreasing.

As the report explains, the cost of building, replacing and maintaining the poles, wires and substations of the electricity distribution networks impacts all households and businesses, typically accounting for 25%-35% of electricity bills.

Kuiper says past network over-investment or “gold plating” increased the value of the regulatory asset base per customer by 60% between 2006 and 2015, causing large increases in electricity bills.

And she warns that unless reforms are made to existing regulations, the same expensive mistakes will be repeated – with consumers left to bear the costs at a time they can least afford it.

The fact that this could be happening at the same time as some network companies are seeking to charge solar households for exporting power to the grid – a move they say is necessary to cover growing costs of accommodating rooftop PV on their grids – is particularly galling.

The IEEFA report finds that, historically, the push by network companies to spend more and more on grid augmentation has coincided with a slump in network use, which fell from 57% in 2006 to 39% in 2015.

This has since levelled out, but over the 2006-2022 period the per-customer value of the regulatory asset base rose 34%, while network utilisation fell 15% in absolute terms. In short, consumers are now paying much more for a service they are using less than in 2006.

“The use of distribution networks has been falling as more households and businesses install rooftop solar and purchase more efficient appliances,” Kuiper says.

“We should look to overseas counterparts where distributed network costs are being brought down. For example, in Great Britain, economic regulation enables consumers to be paid to help ease network congestion, by feeding electricity back into the grid from a battery on demand.”

Kuiper says the core issue facing network economic regulation is whether DNSPs are contestable, and not the monopoly businesses they once were.

IEEFA’s report details evidence that distribution networks in remote parts of of Australia are increasingly turning to stand-alone power systems (SAPS) and microgrids, as cheaper and more reliable power supply options.

Augmentation and replacement of networks are also becoming contestable, as consumer energy resources reduce the need for additional network build by providing grid support.

Ross Garnaut, who peer reviewed Kuiper’s IEEFA report, says there has never been a correction to the historic over-investment in distribution infrastructure and the result is inefficient network costs.

“Australian consumers are paying higher prices than they ought to. This is compounded by the fact that consumers cannot be remunerated for providing network services,” Garnaut says.

“We have an opportunity to level the playing field between network services which can be more cheaply provided by household and business-owned distributed energy resources (DER) and those provided by infrastructure build.

“As I identified in my second Garnaut review in 2011, there is a bias towards capex expenditure: ‘These investments have been stimulated by a regulatory regime that provides excessive incentives for investment whether or not it is wanted by consumers.’ This regulatory regime is still in place 13 years later.”

IEEFA recommends the Productivity Commission undertake a first-principles review of the economic regulation of distribution networks, which would identify ways to ensure efficient costs of network services in a market with high uptake of consumer energy resources.