IPART delivers another free kick on green energy to utilities

The British journalist George Monbiot last week wondered why it was that UK scientists started to sound less like scientists and more like industrial lobbyists once appointed to the role of government advisor. They were, Monbiot contended, all too keen to reflect and justify government policy than provide independent and disinterested advice.

Perhaps the same question could be posed about independent pricing regulators in Australia, who all too often appear keen to simply reflect the policy positions of the state governments that appoint them, and appease the industry that they are supposed to regulate.

The latest example of this emerged last week in the draft review on regulated electricity prices for 2013-16 by the NSW Independent Pricing and Regulatory Tribunal, which used its latest report to demonise green energy support schemes, all the while adding to those costs with some extraordinary decisions of its own.

It may seem a matter of obsessing over details, but the pricing of renewable energy schemes is central to the politics about wind and solar industry in Australia, and its ability to steadily replace the incumbent fossil fuel generators. IPART, it seems, is all too keen to throw fuel on the fire.

IPART, it should be noted from the start, does not appear to like renewable energy. It says the renewable energy target should be repealed, because it distorts the energy market and is not complementary to the carbon price.

That is news to anyone who has studied the scheme, because the way it is designed means that the cost of the RET falls as the carbon price rises. And tiven that IPART also accepts that Australian carbon price will fall to European levels in 2015, one wonders exactly what sort of fuel switching it expects to occur at a price of less than $10/t.

Still, IPART is determined to paint the RET scheme as an un-necessary and expensive burden on consumers, saying it adds “significantly” to electricity prices. The irony is that it is its own decision that are inflating its costs.

For the last few years, as we have pointed out, IPART has allowed utilities to pass on the price of certificates from the small scale scheme at the “clearing house” price of $40 each, even though those certificates have never traded anywhere near this price, and utilities were making a 30 per cent mark up on the market value, and passing that cost on to consumers.

IPART has now changed that, although it seems a case of closing the gate after the horse has bolted – seeing that amount of  STCs (as these certificates are known) to be issued will now slow to a trickle following the winding back of the Federal solar multiplier (from 5x to 1x) and state-based feed-in-tariffs.

Most new certificates issued under the RET scheme in coming years will be issued under the large scale scheme  (LGCs), as more utility scale wind farms – and possibly solar farms – are built to meet the 41,000GWh renewables target for 2020.

So what have IPART done? They’ve allowed utilities to mark up the price they can pass on to consumers for the purchase of these certificates even further. Instead of just passing on the market price, they can pass on something called the “resource cost”. In the latest ruling, this has grown to $51.70/MWH – nearly 30 per cent above the prevailing market price of the LGCs.

The decision has stunned some in the renewables industry. As one angry executive put it: “The cost to a retailer of obtaining LGCs next year can be determined either based on real, factual, historical data, or a Sophisticated Wild Ass Guess of the Long Run Marginal Cost (LRMC) by our highly paid consultant.  IPART has decided to ignore the real market data and instead utilise the wild ass guess.”

The executive noted that IPART and its consultant apparently are not troubled that LGCs have never traded above about $42 in the history of the LRET scheme, nor are they troubled that no one in the industry is forecasting LGCs will rise to this level in FY14 — let alone $51.

He noted that If IPART were to correct this error in their final decision, Origin’s Essential Energy customers would actually see a small decrease in their regulated electricity prices for next year.

“Wouldn’t that be a welcome change for the NSW Government to talk about!,” he said. Not to mention providing another wonderful story for Origin Energy’s lolly wrappers.

But the story gets worse, because IPART has given utilities another free kick at the expense of consumers, all in the name of competition. As we noted last month in our story on the money-go-round on discounts, the pricing regulators allow utilities in Queensland and NSW to charge customers extra money, so the utilities can then use these funds as a kitty to offer “discounts” to other consumers.

IPART says this is all in the name of “competition”, but as it notes in its own report:

“Our decisions mean that in 2013/14, a typical residential customer with annual consumption of 6.5MWh who has not entered the competitive market will pay $143 a year more than the efficient cost of supplying this amount of electricity.”

It should be noted that this cost is nearly double the extra costs of $76 imposed by the RET and energy savings schemes since 2007/08. Indeed, according to its own “data sheet”, the total cost of the large and small scale renewable schemes in 2012/13 is $107 per household, including the 30 per cent mark-up flagged through by IPART.

Ironically, here’s how IPART portrays the price increases – with (IPART supported) rises in the retail margin and renewable costs, but falls in wholesale price, which even IPART recognises is at least partly driven by the proliferation of rooftop solar.

As for the consumer mark-up on “customer acquisition costs”, IPART goes on to say that this customer can always go and find a better offer. But it is not the point. The utilities could hardly have gotten a better deal if they had written the IPART report themselves.