Should households be fined for leaving the grid?

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This provocative suggestion came from the Grattan Institute, which says writedowns of the value of network assets is inevitable. The only question is who should pay: shareholders, taxpayers, or consumers?

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This provocative suggestion came from the Grattan Institute, which says writedowns of the value of network assets is inevitable. The only question is who should pay: shareholders, taxpayers, or consumers?

This week I was having a conversation with a leading utilities analyst and raised the question of electricity network valuations, and whether these needed to be written down, as we suggested in May and on several occasions since, including in a report on the massive grid investment in Queensland.

“I don’t think it has even entered their dreams, let alone their thoughts,” came the response. It’s one of the legacies of a regulated monopoly – there is an absolute conviction that the revenue model is holeproof. If one customers doesn’t pay, then the bill simply gets spread over to the remaining clients. There is another reason too, because state governments still want to sell their networks, and even private networks are trying to attract the attention of international groups, as is the case at SP Ausnet.

Screen Shot 2013-12-10 at 5.42.23 pmBut a new report by the Grattan Institute suggests that situation is untenable over the long term, and network operators, policy makers and network owners, which in many states mean the governments, should be getting their thoughts around the issue of network valuations. According to Tony Wood, Grattan’s energy program director, grid writedowns are all but inevitable. The only question is – who should pay.

The Grattan report – Shock to the System, dealing with falling energy demand – goes through all the reasons why network costs are such an issue – and RenewEconomy believes they are the single biggest issue facing the electricity market today – along with the rapidly declining cost of solar and the emergence of storage. It is an issue that has implications for generators (indeed they are the ones most likely to put pressure on the networks to act, because they are being forced into their own write-downs), retailers, consumers, and governments.

Network owners, the report says, have simply invested too much money in oversizing the networks – a situation that is obvious now that demand is falling, due to a combination of more efficient appliances, energy conservation, rooftop solar and declining industrial use. Even if not a single extra dollar was spent on new grid upgrades and expansion, there is still a massive bill to pay – on regulated returns based around a high cost of capital for investments already made.

As it turns out, some new investment in networks is unavoidable. New houses are built, new lines are needed, older ones need replacing, and even with all the recent investment Australia has been left with a largely dumb grid – that will need upgrading to cope with “smart technologies”, the new bi-directional flow of energy and high levels of solar PV.

That, though, can be managed through some careful thinking about tariffs, and the elimination of deliberate and accidental cross-subsidies (such as the added cost on the network of new air conditioners).

What is more problematic is what to do about the sunk investment. Networks expect to get returns on the $45 billion they have just spent for several more decades, let alone previous investments.

The problem is that the combination of high network costs and falling technology costs for solar – and presumably energy storage – is making it attractive for consumers to either produce their own electricity, or even contemplate leaving the grid, as the CSIRO Future Grid Forum suggested last week.

This, in turn, means extra costs for those remaining – made worse by the closures of large energy users such as Kurri Kurri, and possibly Holden – accelerating a vicious circle that provides yet more incentive for people to find alternatives. The electricity industry calls this the “death spiral.”

“We are in a bit of a nasty place and we’ve got to get out of it,” Wood says. “When you dig yourself into a hole, the best thing to do is to stop digging. Then you work out how to get out.

“You can’t avoid the question and hope it will go away. And there are only so many options.”

The Grattan report says that low network costs will help to keep electricity prices low and improve the competitiveness of electricity supplied through power networks against technologies that could allow consumers to bypass the network.

This is how it describes the problem:

“Making tariffs reflective of the cost of peak demand would provide the right pricing signals for consumers to change their electricity consumption. However, these measures may not be enough.

“The amount consumers are charged for using Australia’s regulated power networks is a reflection of the cost of previous investments. At present, consumers have no choice but to pay for these assets. But in future they may have the means to do so.

A better alternative would involve writing down the value of network assets. This would mean recognising the need for networks to compete with non-network alternatives and reducing the value of the regulated asset base accordingly.

If this were to occur, governments would need to decide who would pay for the asset write-downs. This is not a simple decision, and one that could be faced on multiple occasions in a range of jurisdictions ‑ consumption and peak demand are likely to continue to fall, and with them the value of the network assets.

The cost of asset write-downs will be borne by one of three players:

  • Consumers, already paying for overvalued networks through high electricity tariffs, could pay even more. In the first instance, they would pay through higher prices. If prices reached unsustainable levels, customers disconnecting from the network could also be forced to pay substantial disconnection charges. This would cover the cost of network assets that may be made redundant as a result of a large number of disconnections, but such charges would be likely to be highly unpopular.

  • Private owners of network businesses in South Australia and Victoria could be forced to write down the value of their regulated assets. Existing regulatory frameworks do not envision this prospect, and the risk is not reflected in the rates of return paid to the businesses. Such write-downs could be seen as a real sovereign risk and deter future investment in Australian infrastructure. It could also greatly increase the price that would have to be paid to attract investors.

    • Governments that own network businesses in New South Wales, Queensland, Tasmania and Western Australia could be forced to write down the value of their regulated assets. In Victoria and South Australia governments could pay compensation to privately owned businesses. In both cases, taxpayers would bear the cost.

Actually, Wood says he is not really serious about charging consumers to leave the grid, although such ideas do raise the issue of whether there was an “implicit contract” between the network operator and the consumer. And there are precedents in some areas where consumers are required to pay for the available of utility services (water, sewage) whether they use them or not.

The one saviour for the grid operators could be the electric vehicle, as we have also suggested. While it might be some time away, the arrival of the cost competitive EV is probably going to correspond with the arrival of cost competitive battery storage. This, says Grattan, could be the ‘game changer’ for Australia’s power system, because it would reverse the recent decline in demand and increase the consumption of electricity across the economy.

“The key issue is whether the batteries that power EVs could be charged at times when the network experiences high levels of demand from users. If EVs were charged in off-peak periods, like the middle of the night, they could materially increase the total amount of electricity that could be delivered through the network without creating a need to build more infrastructure. This would allow the cost of building the network to be spread across a larger volume of sales, and help to bring down power prices.”

Battery charging systems could also be programmed to stop charging batteries when electricity demand was high, or even to feed power back into the network. In some cases, this could reduce the need to expand the electricity network to cope with high usage periods, which could help to lower power prices.

That seems a reasonable proposition. You buy some solar panels, and the network operator throws in an EV to encourage you to stay on the grid. Problem solved!

 

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34 Comments
  1. Zvyozdochka 6 years ago

    Unless utilities start (and pretty darn quickly) investing into alternative methods of generation that require storage, the baseload model and the grid that goes with it is over. We’ve already left the grid after 2 years of planning and data collection. It’s been about 6 months I think – not even a hint of running short of electricity. Good riddance!

    • suthnsun 6 years ago

      Zvyozdochka, did you do a conventional levellised cost of energy calculation for your transition, I’d be interested to know what you came up with and the parameters you used?

      • Zvyozdochka 6 years ago

        We’ve calculated it backwards since as if we did the project once, but there was a lot of experimentation. We think no more than 40c/kWh, BUT our house is a Passivhaus-like design which is key to overall energy consumption reduction.

        Importantly, we used our 25-year mortgage to fund all the energy changes, so we effectively pay an additional cost per month, which is lower than our previous monthly energy charges. We’re also fully protected from the rapidly rising energy prices here in Western Australia.

        We did do a pre-interview with Home Beautiful, but the article never appeared. Someday I’ll write it all up.

        • Giles 6 years ago

          We’d love to hear about that. Do an interview – we’re a lot more efficient than home beautiful. Your cost estimates are interesting – The CSIRO report reckoned that is where we would get to in 2040 – it estimates the current costs at three times that

          • Anthony Szatow 6 years ago

            Hi Giles, we are coming out with detailed bottom up scenario modelling and get there by 2020 – the key is the business model. Happy to chat

        • suthnsun 6 years ago

          At my current consumption and costs including $1.20 /day fixed charges we are paying $.383/kWh. If we were hit with a 13% price rise as mooted for Qld we would be well above your 40c/kWh.
          We stick with all electric for convenience but if we replaced our electric cooking with bottled gas (no standing charges) and added some direct PV heating (which I know is feasible and would cost less than 10c/kWh LCOE) then our cost/kWh would be more like 50c already, so competitiveness of electricity is already compromised for us.

          Message to centralized electricity supply industry – you are in great danger of becoming totally uncompetitive.

          I’ll look again at a LCOE estimate for PV +storage when I get time.

  2. barrie harrop 6 years ago

    Its a bit rich.
    They cannot have it both ways without consideration of customer loyalty they will cut you off grid if you do not pay your bill,even elderly customers who need air conditioning in heat ways without a second thought .

    Well they have their comeuppances coming with with the “Distributed Energy” model with large Industrial customers who today can go off grid and save a lot money and have long term energy security at an affordable price.

    • Craig Allen 6 years ago

      Ha ha. Good point. If you install enough PV plus storage to go off grid then don’t pay your next bill, what are they going to do?

      • patb2009 6 years ago

        Come over, break your kneecaps.

  3. barrie harrop 6 years ago

    Its a bit rich.
    They cannot have it both ways without consideration of customer loyalty they will cut you off grid if you do not pay your bill,even elderly customers who need air conditioning in heat waves without a second thought .

    “Distributed Energy” is coming these large customers will not need the grid.

  4. tsport100 6 years ago

    If utilities continue to charge $0.30 kWh (including network access fees) even EVs can’t save them as EV owners will have all the incentive required to buy an already fairly affordable roof-top PV systems (which will presumably only get cheaper) that can easily keep an EV fully charged at average annual mileage.

  5. Chris Fraser 6 years ago

    They had better start making those EVs a competitive option! Ford has a spare assembly line. It would be a welcome thing to see an EV Focus or Falcon.

    Just on the notion of implicit contract. I don’t really see how this could have ever existed. 2006 to 2010 was a period where retailers were actively promoting efficiency, without any performance requirement or limit. So that’s what we did. How could it be then, that they cry over our ability to excel at just that ? It sounds like their left doesn’t know what their right was doing.

    • patb2009 6 years ago

      Ford has a Ford Focus Energi , which is a EV.

  6. Motorshack 6 years ago

    It’s fun listening to all the defiant talk, but personally I would not casually assume that you won’t wind up paying for the grid, even if you no longer use any of the electricity.

    Here in the United States our government very generously gave a cool trillion dollars to the idiots who perpetrated the mortgage scam, because they were, in the now infamous phrase, “too big too fail” (which, of course, really means too well-connected politically to fail). The bankers had to skip just one year’s worth of million-dollar bonuses, while the taxpayers got saddled with the long-term debt.

    Given that many of your electric grids are actually owned by state governments, how likely is it, do you think, that the politicians will simply write down the value of the assets when they have the option of legislating a “solution” to their problem.

    And, yes, you can refuse to pay the bill, but then what happens when you go to, say, renew your driver’s license? You might find that the clerks at the motor vehicle office are prevented from issuing a new license so long as you have unpaid obligations to the state. In general there are likely lots of little pressure points like this, and the government has a whole staff of bright young people well able to identify them.

    Or, from a purely business perspective, suppose that the electricity companies are permitted to go bankrupt, because they no longer have enough revenue to meet all their obligations. In that case, management might well shut down their generators, lay off all the employees, and toss the keys to the bondholders. That won’t bother the folks who are already off the grid, but what about those who have not yet made that move, or who cannot because they live in a rented apartment?

    And then there is the question of actual justice.

    That is to say, seven or eight years ago, when many of these investment decisions were made, there was no cost-effective alternative to the conventional grid, because the drop in solar PV and wind turbine prices, which we now take as obvious, was not foreseen by much of anybody. Hoped for, yes, but guaranteed, no. Plus, there was a century of experience suggesting that electric demand would continue to rise steadily, and again there was no obviously compelling reason to think differently, so responsible managers did what seemed obviously necessary.

    My point here is not that real stupidity should be rewarded blindly, nor that we should create perpetual monopolies that do not serve any useful purpose, but rather that society will not be well served by punishing organizations and individuals who tried to behave responsibly, but then got blind-sided by largely unexpected change.

    After all, if you punish the people who last tried to solve a big problem in a responsible way, who will then be willing to step up and try to solve the next problem that comes along?

    Finally, as an engineer, my reaction to the existence of the conventional grid would be to see what value it still has, and to maximize the return on that asset. Society is probably going to wind up paying for it, one way or another, so you might want to focus on getting your money’s worth.

    • sean 6 years ago

      “suppose that the electricity companies are permitted to go bankrupt”

      then just like every other business who over valued investments which did not show value, they fold and someone buys up the assets for what they are really worth, and the show continues.

      “After all, if you punish the people who last tried to solve a big problem in a responsible way, who will then be willing to step up and try to solve the next problem that comes along?”

      As long as there is the potential for profit, there will always be someone stepping up to the mark. Just look at drug mules transporting where they could get the death sentence.

      Welcome to capitalism. Enjoy your stay.

      What network operators and generators need to focus on is customers who cannot provide for their own needs, or not provide for them economically. Large industrial customers will always need large amounts of electricity. Quit fucking around over a 40 amp residential connection.

      • Motorshack 6 years ago

        Yes, I used to work on Wall Street, so I do understand that many, if not most bankruptcies are “work out” situations, and not a complete collapse of the business in question. And that is especially likely in the case of a public utility on which thousands or millions are utterly dependent.

        My point in putting it that way is that when people talk about punishing the guilty bastards, they need to be careful in assessing guilt, and also in considering all the consequences of putting people into that tight a corner. They may react more viciously than you expect, which is to no one’s benefit.

        As for a profit drawing in more risk-takers, I agree. That will very likely happen. The question is: will they be any more responsible or competent than the last guys? Similarly, will harsh treatment of that last crowd scare off the sort of responsible replacements you might prefer to attract?

        Finally, having been involved in the long-term planning of many telecommunications systems, I am painfully aware how hard it is to predict just what will be necessary and useful five years down the road. Mistakes are very easy to make, and they are often likely to be disastrously expensive.

        What I note about the electric grid is that it only rarely fails, and never for very long, which is a pretty good trick. I would therefore be a little circumspect about bashing the people who managed to do that. They may be dull and a bit behind the curve on renewables, which certainly merits some serious discussion, but they hardly look incompetent. So, it could be a lot worse.

        • patb2009 6 years ago

          I’d suggest that the Utilities need to evolve their business models to a Grid-Connect fee and for providing Voltage and Frequency support and that they are selling “Size of Pipe”, “Flow down pipe”, “Pressure” and “Tone”. That each of these is worth something, and that if they install smart meters they should be able to monitor that as well as monitor outflow into the grid and broker those at up charges.

  7. suthnsun 6 years ago

    If the shareholders have lost out on an investment but they are in a position to enforce a contract with another party ( government(?)) , I guess they will litigate. The important question is , do any of them have a case which could stand up ?
    I suspect not but don’t know. Expecting to get a return through a regulated investment and authorised charges is one thing but I hope noone has been foolish enough to actually guarantee any threshhold returns or income. Every business faces market risks and has to face up to competition and conditions which can arise completely out of the blue. I also suspect there is really no big surprise in the demand conditions but rooftop PV costs will have surprised most.
    The important issue for taxpayers is that governments don’t get sucked into fear campaigns from the industry.
    The industry really needs to cease all the antagonistic, bellicose rhetoric, take stock and start a constructive campaign using all their many advantages of incumbency in a fair , ethical and rational way, hopefully with a dash of flair and creativity to boot. Any relationship requires both parties to fight fair, knowledge about fighting fair is a prerequisite to an enduring relationship. If the grid falls apart we will all lose.

    • Motorshack 6 years ago

      I agree with your comment about having a fair debate, but you may be missing the point when it comes to litigation. Stockholders are assumed to be taking a risk with their money, and have little recourse, because they are going to be first in line to enjoy any profits if the investment goes well.

      Bondholders are another matter. They put their money at risk, and are willing to wait decades for their profits on the loan, yet get no equity stake in any additional profits the system might produce. So, they might well ask the courts for protection in the event of bankruptcy, and there is a lot of precedent to suggest that they will get it.

      This is what I meant in my comment below about society paying for the grid one way or another. If you renege on paying back the bonds, then those financial institutions will lose a hefty chunk of their ability to finance other projects in the future, and that might well impede the very changes that turn out to be most desirable.

      • Motorshack 6 years ago

        Actually, it also occurs to me that many power companies recognized a long time ago that it would be much cheaper and more effective for all concerned to push for more efficiency than it would be to build more generation and transmission capacity.

        Unfortunately, so long as the price of electricity stayed low, the customers were notoriously resistant to such ideas. I was an early adopter myself, but the vast majority of my neighbors would not even discuss it, much less make changes. So, is it any surprise that power company managers had to assume that demand was going to continue to rise for the foreseeable future?

        Again, my point is not to reward stupidity, but who was being stupid in that case?

  8. sean 6 years ago

    EV’s or more refining/manufacturing.

    lets be honest here, residential demand hasn’t dried up that much, but lots of large companies have closed.

    the worlds largest aluminium smelters use about 2GW , the smallest in australia is about 1/5th that size, and as everyone knows, with scale comes decrease in cost.

  9. Robert Johnston 6 years ago

    Coachbuilders adapted from building horse drawn coaches to bodywork for motor vehicles, then Henry put them out of business. They weren’t compensated by there customers or government. Kodak failed to evolve its business and the shareholders suffered. For networks to expect to have their business model and profits on unnecessary assets protected is absurd. They may say that without this they cannot assure the reliable supply of customers – maybe true, but that will just accelerate their total demise. Write downs are reasonable.

  10. Nick Sharp 6 years ago

    “If EVs were charged in off-peak periods, like the middle of the night, …”

    Caution: if solar (PV and thermal with storage) and wind replace coal (which needs to run all night), then off-peak tariffs will likely move to a slot around midday as solar builds up. It might then make sense to arrange for EVs to be charged at daytime work places.

    • Miles Harding 6 years ago

      Particularly the case now, as many feed-in tariffs have been would back to almost zero. It make good sense to not let the joules off the property.

      This also means air conditioners, poll pumps and the like during the day.

  11. Mark Parnell MLC 6 years ago

    Some real challenges ahead here. The problem of “stranded assets” (whether energy or other) has spawned a whole new program at Oxford Uni: http://www.smithschool.ox.ac.uk/research/stranded-assets/
    There is certainly precedent for charging non-users – you pay water and sewerage charges if the pipes go past your house, even if you are self-sufficient in both. Imagine having to pay for a copper phone line you don’t use or the depreciation on the newspaper delivery van that drives past your house without stopping?

  12. MrMauricio 6 years ago

    Yeah-then fine people who use public transport instead of the roads-and people who stop drinking/smoking or eating fresh food instead of McDonalds!!!

    • JohnRD 6 years ago

      We are already “fining” people for using public transport in Brisbane. We charge more for peak hour use of public transport even though this is the time you want people to use public transport as a way to reduce congestion.
      We also “fine” people for having the hide to use public transport when they have an already owned car in the garage. Even in off-peak times the cost of using public transport is many times the cost of running an already owned car over the same distance.

  13. Askgerbil Now 6 years ago

    A large fleet of plug-in electric hybrid vehicles – that can only recharge from the grid during off-peak periods – would solve several problems.
    For one, the cost of the grid would be distributed across a far greater aggregate demand – lowering the unit cost of delivering electricity to all grid users.
    For another, Australia’s growing dependence on imported transport fuel would be eliminated.

    • Giles 6 years ago

      Dear all. Askgerbil Now, congratulations, you posted the 10,000th comment on our website (net of deleted items). Thanks to you and all others for your support and engagement. And no, I don’t have the stats yet of who our most regular commenter is, although I have a few suspects!!

  14. Lifeboatman 6 years ago

    With more & more people seeing the sense of going solar, and the high dollar closing down manufacturing industries, the power generators and grid operators need to find a large new customer to get their businesses back to their liking. Without an alternative, their future is bleak as they will actually be taking on the public in rapidly increasing numbers, and public opinion is a force not to be trifled with, as governments find out at elections!
    An answer could be the construction of a federal electric rail network. This would be a large consumer of energy, get freight off the roads, reducing the use of diesel, helping reduce the effects of global warming. Also, as the Germans are doing, the grid would also be used to distribute the energy around the country from wind & solar farms as they go on & off line due to weather variations in different localities, neutralising the arguments that such generators are unreliable. Australia, being a long continent, East to West, strategically placed solar farms might ensure twenty four hour solar power, following the Sun. As the electrified rail lines need energy, and link the major population centres, it would seem logical to extend the grid along the lines, sharing the build & running cost with the rail operators. Such a scenario would need government participation & imagination, sadly the Abbott government has rejected the possibility of the High Speed Train in the future, demonstrating the imagination of a snail, so it will need the aformentioned power generators & grid operators to investigate the possibilities of such a concept. However, if they formed a consortium and big business backed them, it might be made to work. They could even systematically replace the fossil fired power stations with the new Solar farms and start moving with the times!

  15. Ian 6 years ago

    Investment is needed in large wind turbines to be placed near population centres. When the wind is blowing these could generate renewable electricity. When there is no wind and there is an excess of coal fired electricity, these wind turbines can be converted into giant fans to cool every one down. Another option for the large generators is to use their excessive electricity generation for a refrigeration industry. They could manufacture orange sized ice balls and fire these high into the air so as to land on suburban homes. The subsequent “hail damage” would reduce solar power generation and restore fossil fuel electricity demand.

  16. Anthony Szatow 6 years ago

    It’s often forgotten that the network monopolies, by law, have to make efficient investments in their assets. In theory, the regulator makes sure this happens through price reviews, regulatory investment tests etc…

    So if they have invested in assets that aren’t efficient, and these assets end up stranded, the network companies and the regulator are squarely in the cross-hairs so to speak. They will have no-one but themselves to blame.

    Who pays will be a power struggle and “the people” need to be organised and ready for this – http://energyforthepeople.com.au/2012/08/30/energy-for-the-people/

    My vote is that they let us buy back the grid and give us a good price – after all, we’ve been paying for it all these years…

  17. JohnRD 6 years ago

    The underlying problem the power system was not considered as a whole when decisions were made about what to do with rising peak demand. If we had considered the system as a whole we should have looked at relieving the pressure on the grid by putting rooftop solar or other generating or energy storage capacity between the consumer and the overloaded power lines. Given that the problem was being caused by air conditioners it would have made sense to look at putting air conditioner compressors on controlled power or other approaches to reducing peak air conditioner power demand.

  18. JohnRD 6 years ago

    We talk from time to time about a power price formulae that includes peak demand. However, putting in the meters to do this will cost and cause lots of arguments. (Ex: Is it fair to include peak demands that occur outside of high demand periods?)
    Perhaps the simplest thing would be to licence all air conditioners and have a fixed charge per kW of installed air conditioner capacity? After all most of the recent price rises are due to air conditioning.

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