Networks: Compulsory fees not 1st preference, rapid depreciation is

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Networks say they don’t really want to penalise people for leaving the grid. They just want to recoup their costs now, because the assets may not be so useful in the future.

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The Energy Networks Association has responded to RenewEconomy’s story on proposed compulsory connection fees – and penalties to leave the grid – by saying that these options are not its preferred solution to its revenue problems.

The ENA was not happy with the portrayal by RenewEconomy of its preferred choices. Rather than painting the picture as “we want compulsory fees and penalties for leaving the grid” – unless regulators agree to changing rules on depreciation (which we explain later), the ENA would much rather us have painted the picture as: “We want the regulator to change the rules on depreciation, otherwise the only options may be compulsory fees, etc”.

electricity-meter

 

We think it’s a moot point, because it amounts to the same thing, but we understand why the ENA didn’t like the emphasis we put on it. It’s similar to the old threat by generators that things like a carbon price and renewable energy would cause the lights to go out. It’s scare tactics. The reaction by readers was damming and gives just a little taste of the response that such a measure would have. (And there are some very funny analogies that are worth reading).

But the fundamental point is this, and it was emphasised by Paula Conboy, the head of the Australian Energy Regulator, in a speech to an ENA function in Brisbane yesterday, where the ENA released its options paper: the markets are changing, and regulators and networks need to change with it.

That can mean one of two things: erecting walls higher and higher (as some suggest we respond to climate change) or address the fundamental issue – technology and business models that are being rapidly superseded.

There is a huge sunk (spent) investment in networks which should be incorporated into future energy systems. It makes sense. But it comes down to how much of that investment was justified. That influences the pricing, and pricing that infrastructure is the key. Nobody is seriously suggesting that everyone should leave the grid, but unless incumbents adapt, enough people might do so to cause serious problems.

But the last thing that the networks – and their government and private owners – want to do is to write down the value of their assets. They are genuinely worried they will not get their money back. But, as some argue, they probably should not have been allowed to spend that much money in the first place.

As Conboy said: “We are seeing a shift from a centralised electricity supply model to one where consumers will have greater potential to control how their electricity is delivered and consumed.

“New products and services are emerging, including distributed generation and storage options, demand management services such as direct load control, and new business models for selling energy.

“In the past, our regulatory frameworks have generally been able to accommodate or adapt to changes in market conditions. Will this remain the case going forward?”

The AER is under attack from network operators, particularly in NSW, because it has rejected their proposed expenditure plans for the next five-year regulatory period. It says they are way too high, and wants them reduced by $5 billion. The networks – government-owned and up for lease – want to be allowed to spend that money, and pass on the costs (estimated at $500 per household) for fear of blackouts and/or job losses.

Which brings us back to the ENA’s preferred model of accelerated depreciation. Right now, the way the system works, networks are only allowed to “back-end” their depreciation, towards the end of the asset life, which is normally around 30 years.

Accelerated depreciation allows the networks to front end, and essentially recoup more of their investment at the outset. Not a bad move given that the future of the network assets is not as rock solid as it might once have been.

The ENA argues that because interest rates are low, this is a good time to do it. Low interest rates should mean lower financing costs to network operators and therefore lower bills to consumers. But the upshot is, with more rapid depreciation, the costs would be higher than they would otherwise be.

This is a deliberate ploy by the networks to have their assets paid off (by consumers) as quickly as they can. Here’s why, as they explain in their own words:

“If current customers are expected to use the network more heavily than future customers are likely to, current customers should pay relatively more than future customers.”

And why are customers in the future less likely than current ones to use the network? Because of distributed generation such as battery storage.

“An example of this scenario arising is circumstances in which distributed generation and storage provides a significant proportion of network customers with an option to fully or partially bypass the grid,” the ENA writes.

“In this case, the existing regulatory approach would suggest the recovery of total depreciation charges from remaining grid customers. This would effectively represent a ‘double penalty’ likely to fall mostly upon customers with fewer options to bypass the grid.”

So, in the name of inter-generational equity, the ENA wants to get as much money from the grid users now, before that use declines. If only Kodak had cottoned on to that – it could have charged more for its photographic films to maximise revenues before digital cameras came into play.

And there is one big problem. The technology competitors, the developers of battery storage and energy management systems, are moving in the opposite direction.

One of the reasons that solar PV, and now battery storage, was so expensive in the early years was because their developers were keen to recoup their R&D expenses as quickly as they could.

Tesla has turned that model upside down, and is now happy to recoup that R&D in a decade or two. Its competitors will have no choice but to follow. For the networks, that is a major challenge.

Bruce Mountain, from CME Australia, says the networks want all of their money back, “in spite of fact that large amounts of money was spent in the past and was not needed.” That is known as “gold-plating”. The networks insist that the consumer should pay for this expenditure, needed or not, and not the management owners.

Hence the push to get their money back quicker and depreciate the assets more quickly. “The prospect of substantial stranding is increasing each day,” Mountain says, before adding that changing the depreciation measures would be a major adjustment to the regulatory environment. He suspects that the move is being driven by prospective buyers of NSW network assets, and the private owners in South Australia and Victoria.

Claire O’Rourke, from Solar Citizens, says: “Imposing charges like this could accelerate the so-called death spiral, which will result in a very expensive grid for everyone who ends up still connected to it.

“It will wind up causing very serious social equity issues for those people who are left behind. The last thing the network operators should do is to push for something that would accelerate this outcome.”

It’s going to be a fascinating battle.

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12 Comments
  1. Engineer Malcolm 4 years ago

    These network operators should get on the stage of our local comedy club this week.
    How many times have they argued that their expertise lies in the management of long life assets and they’re in it for the long term. Now they want accelerated depreciation on assets like power transformers that were designed to high technical standards for 30+ years lives. Good try – but their Kodak moment has already passed.

    • juxx0r 4 years ago

      We are just lucky that they have some of the cheapest power in the world.

  2. taiyoo 4 years ago

    Interesting to think that in the not too distant future the new norm for the networks will be competing against diesel generators as a backup to solar plus storage. This is what they need to evolve their business model to if they want to survive – being complimentary to solar rather than adversarial.
    Desperate tactics like shifting to fixed demand and/or access charges won’t preserve the existing paradigm. Organisations like the ENA should know this by now and if this is not the advice they are giving to their members then they are doing them and Australia a disservice.

    • juxx0r 4 years ago

      +1000

      The reality is, that it’s very nearly cheaper to power oneself from diesel alone. A diesel/solar/battery hybrid is cheaper long term than electricity from the grid.

      Bottom line is that the grid has failed us.

  3. mick 4 years ago

    any grey nomads here would recognise the same arguments used by caravan parks against self sufficient free campers the result is that the nomads completely ignore hostile council areas to patronise rv friendly towns

  4. Chris Fraser 4 years ago

    So the best strategy for monopoly providers is to resort to federal government type policy platforms. First you scare them and bully them …

  5. john 4 years ago

    Not that long ago projections were that the eastern grid needed 2 power stations.
    1.2 million people got PV.
    The bell curve went to a duck curve.
    So perhaps a bit of reality here 1.2m times about $5k in PV s a large amount of investment.
    NOTE perhaps the figure is a lot higher however just to give some idea that is reasonable.
    These small sums have lowered that expected investment needed however at the same time the transmission grid built has a problem because of the lowering in usage.
    The value of the grid has to be written down.
    For the grid and the retailers to have any survival they have to deal with consumers in a new light this honestly is a Kodak situation for a lot of their customers.

  6. Reality Bites 4 years ago

    Well I say congrats to Giles for actually letting the so called evil utilities” respond. It is not a plot by cigar chomping utility owners, it is public policy approved by State and Federal governments of both LNP and Labor that impose how the utilities can earn money and what they can spend it on.

    • Barri Mundee 4 years ago

      You forgot to mention the gold-plating of networks because the regulators did not really question proposed spending— until very recently.

      • Reality Bites 4 years ago

        Do you remember the blackouts in the late 90’s and early 2000’s? The highly regulated system was put in place by Howard in order to stop the states from using the Utilities as cashcows and not spending money on the networks. Howard put the AER was put in place in 2005 and then for the 6 years of RGR, nothing changed and the regulators insisted that money be spent on infrastructure. Yes you are right that questioning has only occurred recently, which is because the newly elected Abbott government changed the focus of the AER and slashed the capex spend. So it is not the evil utilities plotting against the consumer, it is just another case of Labor incompetence.

  7. Patrick_D 4 years ago

    I run my own business. I love it and I accept the risks and at times, enjoy the rewards.
    I may chose to invest in assets that I plan to monetise through utilising them in service of my customers. If my customers however don’t take up the service and the assets become stranded what do I do?

    1) I accept that I’m responsible for my business investment decisions (right, wrong or indifferent); and
    2) I write off that investment as quick as I can.

    What I don’t get to do is charge my remaining customers for my investment error. That would be socialising my mistake.
    As it turns out my business, like every other business (other than the networks), lives AND dies by its decisions. I’d love to carry on business in a reckless, consequence free environment but I don’t. I operate in what lots of us call the REAL world.

    The networks have made a mistake in their over-investment. They should put on their big boy pants and own it. Like the rest of us.

    We need the strength to resist the political rent seeking that the Networks are engaging in. If our government(s) cannot represent the people and cave into these corporate rent seekers then I’ll express my disgust at the next opportunity to vote.

    • Reality Bites 4 years ago

      Sure Patrick, however the majority of the utilities are owned by the voting public as state entities. All the utilities are also heavily regulated by the federal government AER to the point that they are told what they can charge and how to spend the money. There are hundreds of billions of dollars involved and probably 100,000 employees, so any big changes will impact the whole of the economy. You can express you disgust equally to the successive Labor and Coalition governments who created this situation at the next election.

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