Should state governments write down value of networks? | RenewEconomy

Should state governments write down value of networks?

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If state governments were serious about cutting energy costs to consumers, they would write down the value of their electricity networks. That’s what the media, telco and other industries did when their business models were undermined by new technologies. Instead, they are targeting solar households, and erecting barriers for further cost savings.

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It’s time that Queensland Premier Campbell Newman – and for that matter NSW Premier Barry O’Farrell – came clean with consumers about why consumers are paying huge electricity bills – and why they are not going to fall.

And it’s about time that the two governments considered writing down the value of those networks. It is probably the only way the governments can deliver the cuts to electricity bill that they keep on promising, and provide the incentive for technologies that will revolutionise the way we use energy. Here’s why.

It’s a well established fact that investment in networks have accounted for the majority of the rise in costs in the past four years and, overall, account for more than half of the retail electricity bill.

It doesn’t matter that the $40 billion spending spree on networks is finally grinding to a halt, because the customers will be paying for those upgrades and expansions for years to come.

The problem faced by the state government-owned networks – and for that matter the privately owned networks in Victoria – is that people are now using networks any near as much as the owners and the planners thought they would.

The explosion of rooftop solar PV, the success of energy efficiency schemes and the popularity of energy efficient appliances among savvy consumers is having a dramatic impact on networks, reducing demand by 10 per cent overall and 20 per cent or more in some regions.

This is creating what is known as the “death spiral” – as people use the network less, the revenue needed to match the regulated returns have to be gained from elsewhere. So prices rise and consumers use the network less, extending the spiral.

In the commercial world, when technologies and assets are made redundant by cheaper alternatives, or are clearly going to deliver less revenue than anticipated at the time of the investment, the value of these assets are written down. It’s a book balancing procedure and it happens all the time.

Fairfax wrote down the value of its print mastheads when it saw readers migrating to the web, telcos across the world wrote down the value of their fixed line networks when customers migrated to mobiles, and Kodak …. well, it lost the lot when it didn’t see its customers go digital, and just wrote its film business off completely.

The electricity networks are still essential for the economy, but if the owners reduced the value of their assets, they wouldn’t need to get quite so much money back.  They could reduce the network cost components and deliver real savings on their bills.

Of course, even though it’s just a flick of the pen in the book-keeping, it probably won’t happen, not in the world of regulated, and in this case government owned monopolies. For a start, the state governments in Queensland and NSW depend on those dividends from the network companies to balance their own books.  And O’Farrell might still want to try and sell his networks.

Secondly, it would have a cascading effect –firstly among privately owned network operators in other states – Victoria’s SP Ausnet is in exactly the same situation – who would argue that they made those investments in good faith. They were, after all, approved by the regulator, even if most private analysts believed they many of the additions were surplus to requirements. Ross Garnaut called it gold-plating, and many agree.

So if not write-offs, what are the alternatives to addressing the death spiral? Sadly, that’s not something many people have an answer for just now – although it will be addressed in a new $13 million, three year study on the Future Grid being run by CSIRO and four leading universities.

The government could accept a lower return on their assets, the weighted average capital cost (WACC) return. There has long been an argument that the WACCs have been too high for government owned assets because they have a lower cost of capital in the first place. For the governments, it would cause the same problem.

The networks could, for instance, make a network charge for the owners of air-conditioning systems. It is well established that each 2kW air-con units adds $7,000 in costs, mostly in the form of network upgrades, and the explosion in air-con demand was mostly responsible for the bullish consumption forecasts for the electricity grid, which in turn was used to justify the huge investment in network upgrades –in effect laying the foundations of the death spiral.

It has been calculated that those who don’t have air-con are paying a subsidy of $330 a year to those that do. By and large though, the boom in air-con has been good for business, not just for the networks, but the generators and retailers too.

They are reluctant to cook, or even pluck, the goose that feeds them. But as one technology giveth, in the form of higher consumption from air-cons, other technologies – in the form of solar PV, battery storage, demand management and energy efficiency – taketh away.

For the moment, though, the network hierarchy and their government leaders have picked what they presume to be an easy target, and laid the blame on renewables, and rooftop solar in particular. This is despite the fact that even the Queensland Competition Authority questioned whether targeting one section of consumers is efficient, cost effective, or even legal. The chances are that it will be a large industrial user that would challenge such measures.

Fixed charges have been creeping up on electricity bills across the country to make up for the decline in the number of kilowatt hours consumed, but the Newman government wants to go further, egged on by the Electricity Supply Association of Australia, and hit solar users with special charges. It’s one of a number of tactics being deployed.

The argument is that rooftop solar adds huge costs to the network because of voltage issues, their intermittency, because some areas simply have too much, and because they are not doing anything about the evening peak.

That is hotly disputed by the clean energy industry, and most independent experts. The CSIRO last year suggested that networks should have nothing to fear from solar PV and be able to accommodate 40 per cent penetration levels with little problem – unless there was something else wrong with their assets.

And that assessment was supported by Mike Swanston, the consumer advocate for Queensland distributor Energex, who gave a presentation to Solar 2013 conference last week in which he said that incorporating solar was certainly a challenge, but it was not insurmountable. The “vast majority” of urban networks, he said, were “solid as a rock”  – which is what you would hope after billions of dollars were spent to upgrade them to cope with the boom in air-con.

It should be noted that in some areas, penetration levels are approaching 40 per cent, and weak rural lines do not have as much capacity to absorb large amounts of solar. What is not in dispute is that solar is having an impact on the use of grid-based power. Solar was changing the nature of the game, and causing revenues to fall by reducing demand. In some cases, this fall was more than 20 per cent, which needed to be recovered. It was not so much a technical issue, Swanston said, as a commercial one.

Right now, however, it’s convenient for the conservative governments along the eastern seaboard to blame renewables and other “green” for all sorts of problems  as they rush to reinforce the creaking business models of the incumbents.

In Victoria, there is growing concern that the highly effective energy efficiency scheme will be weakened, Newman has dumped green standards for new homes, and state incentives for renewables. Last week, on the same day that we noted that the price of the state-owned generators had been slashed by falling demand, the state tried to conjure up a solution by requiring the state owned retailer to buy electricity from the state owned generators, rather than on the NEM. All the Coalition state governments want the renewable energy target to be diluted or removed. They are also opposed to the Clean Energy Finance Corporation.

Alan Pears, professor at RMIT, in his submission to the Climate Change Authority lodged this week, said measures such as higher fixed charges are regressive because they also potentially undermine the economics of energy efficiency and other technologies that could be used to reduce or regulate demand. Reducing consumption is one of the principal policy measures proposed by the likes of the IEA to address climate change and the surge in global energy demand.

But Pears noted that the electricity industry – and its policy makers, sees a decline in electricity consumption as a threat to their industry’s viability, so they are working to oppose it. He noted a submission to the Prime Minister’s Energy Efficiency Working Group in 2010 from the owners of the Hazelwood brown coal fired power station. “(We reject) any proposal to introduce climate change policy, under the guise of energy efficiency measures, which has the potential to destroy the value of existing investments in the generator sector,” the owners wrote.

That’s clear enough, and the generators are still at it. This week, with the help of credulous reporting in News Ltd, the owners of the state owned generators in Queensland continued to pedal the nonsense that renewable generation does not lead to a fall in emissions, because fossil fuel generation is required to run all the time in case the wind doesn’t blow or  the sun doesn’t shine. McArdle says that coal generators cannot be switched “off and on”.

The thing is, they don’t need to be switched on and off. They only need to be switched off, and 700MW  of capacity at Tarong has done exactly that. By a striking coincidence, the capacity made redundant at Tarong is about the same as the nominal capacity of rooftop solar that has been added to the grid. The rest has been operating at little more than 50 or 60 per cent capacity, but the efficiency of the plants, or their emissions, does not change greatly at those levels, and any minor increase in emissions intensity is well offset by the benefits of having wind power.

As Stanwell’s own annual report said last year, Its entire capacity was virtually surplus to requirements in 20011/12 – before the solar explosion – because it simply built too much. Insisting that the consumer continue to pay the cost of that poor investment ad infinitum is simply not going to wash – not when the consumer has other options such as solar PV and later, batter storage. Maybe the generators should take a write down too. That won’t happen just yet, because the Queensland government is trying to sell them.

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  1. Stan Hlegeris 7 years ago

    The current Queensland government was elected partly on the promise that it would not sell electricity assets. Looks like they’ll keep that promise as there won’t be any buyers.

  2. Warwick 7 years ago

    It’s true that the WACC for government owned businesses is less than the private sector, so legislated returns mean that the state governments earn an extra dividend because their borrowing costs are low. Additional scrutiny should be applied to regulatory pricing determinations as a result. It is however likely to be naive to assume that these network businesses need to be “written off” especially when PV exports need to go somewhere, when we have the possibility of EV’s placing significant demand on networks and battery storage costs are still more expensive than network connection.
    I am still very curious why no rooftop solar promoter has yet stated that the networks should charge a demand and a fixed charge which is cost reflective and will benefit PV if the consumer reduces their network demand through PV. The obvious question is whether or not PV actually reduces network demand. Are no PV promoters suggesting this model because they realise that that PV production has not reduced network maximum demands for the consumer??? What seems to be overlooked is that a fixed component and a demand component are more cost reflective than the current charges which are largely based on kWh. Changing to this methodology will rightly penalise inefficient airconditioning but will give a benefit only to those PV owners who reduce their network demand but not to PV owners who do not reduce their network peak demands.
    It’s also kind of strange to demand that network businesses should have their returns diminished whilst screaming blue murder when feed-in-tariffs are reduced. Why should only the homeowner who has PV be entitled to guaranteed fixed returns?
    Those of us in the renewable sector need to be honest about the costs and benefits of renewables. Open access to networks should be facilitated and encouraged to allow individuals to make their own choices but supporting a broken pricing methodology by attacking those who suggest change is not in the interests of the community.

  3. Rob Campbell 7 years ago

    The Freight Train is approaching, distributors know this and are stuck between their overlords (government owners) and the realization that a major shift is inevitable. There are already cost effective turn-key residential storage systems designed specifically to time shift the delivery of solar. It can be demonstrated that $1 invested in this can translate to $2 in savings to a network owner. Once this becomes glaringly apparent, the good news is that the distributor can still provide the overlords with a return but from a much lower turnover, maybe perhaps they can share some of the windfall wilth the poor consumers as well. As for the generators TUFF TITTIES, If you bought a Betamax in the months before VHS came out, you made an educated decision, it just happened to be premature, that’s all. (the shareholders did as well).

  4. suthnsun 7 years ago

    Giles, I hear you repeating the ‘blame the air-con users’ argument and I can’t agree. The logic of the argument makes no sense to me on any level. The raison d’etre for centralized utilities is that aggregated demands can be supplied more efficiently than piecemeal supply of individual demands, virtually without qualification within reasonable boundaries. That reason has supported a powerful ‘common good’ argument and substantial privileges to centralized generation and transmission. Those privileges go hand in hand with the responsibility to meet aggregated demand . Except for ‘beyond the boundaries’ demands e.g. Aluminium smelting or no aggregation, there is no reason to relax that responsibility. Decomposing the aggregates to construct an argument is inconsistent with first principles and would lead to ridiculous and perverse results if enacted. Neither does the fact that we now have successful distributed supply alter the fundamental contractual relationship with the utilities but it clearly needs resolution on pricing.

    As to asset write-downs, is it the case that under the current rules an asset write down would necessarily result in lower charges? If as an individual asset owner I recognize an asset is impaired, it won’t necessarily mean that I will then willingly forgo (more) income.

    • Giles 7 years ago

      Not sure i “blame” air con users, but if the govt wants to introduce some form of “user pays” then i think that’s a fair place to start. i don’t think there is any doubt that the network was expanded and upgraded on the basis of their presumed use – and an ignorance of what solar and EE could do.
      As for write-downs – no, there would be no accounting rule for them to even make the write down, let alone the charges. I just threw this out there as an idea. It’s clear that some of Ausgrid’s expansions have been surplys to requirements – $1 billion i think was the number cited by regulator – so why shouldn’t they take that on the chin, rather than the consumer.

      • suthnsun 7 years ago

        “user pays” in that context is based on the same logical fallacy in my view, decomposing the aggregates is not logical (to suit an argument
        with hindsight especially) . Once we start down that road the whole edifice of privilege and responsibility is de-constructed. The misapprehension about network expansion is only aggravated by forcing those who have done as you presumed to pay for a fundamental mistake (that being the mistake that electricity demand is not inelastic and enormous efficiencies were already in the pipeline) .

        Warwick’s suggestion as I understand it is go to peak demand charging per consumer, I suspect aggregated demand response measures such as introduced and incentivized by FERC in US would be a more efficient and equitable model.

  5. Chris Fraser 7 years ago

    I’ll stay agnostic on write downs, but I’m interested on having a grid whose value is reflective on what we all consider it should be. There’s a current problem where the incumbents all consider the grid to be their own private plaything (a conduit to increase their business), and preferably not having the additional utility of PV-fed energy which allowed the grid to be used to compete with them directly.

    There is an allegory with public roads, which have for a long time been considered accessible by all, with registration costs giving perspective to recovering costs from the heaviest users. The problem with this allegory is that light users (being more numerous) have been charged for maintenance out of proportion with the actual wear and damage they cause. I see the heavy grid consumers (the ESAA) jumping on this idea and trying to smear the economic pain among the largest group they can reasonably blame.

    The grid certainly appears to be robust, but this is antithetical to PV owners who need the grid to be smart. Hopefully the CSIRO will see this to permit greater energy source alternatives.

    • Chris Fraser 7 years ago

      If we really wanted to live in a country where the Government prefers to listen to lobby groups (the ESAA) rather than the people, wouldn’t we rather go live the US ?

    • wideEyedPupil 7 years ago

      Correct. Car registrations and the fact that a lot of taxpayers drive cars and consider them irreplaceable are the way roads are financed. This pours money into the pockets of the food and super-junk Duopoly who are essentially sophisticated distribution networks. And Linfox and all the other road transport business that do the damage to our roads and highways.

      Why can’t I use the grid to receive SolarPV electrons from my friends house in the neighbouring suburb while he is away? Why can’t a company put a 200KW solarPV array on their warehouse in some industrial estate send the electrons 20km to their corporate HQ in the CBD? You have to sign on to a boutique retailer like Diamond Energy to do that and they will charge you something for the ‘privilege’.

  6. wideEyedPupil 7 years ago

    “well, it lost the lot when it didn’t see its customers go digital, and just wrote its film business off completely”

    You keep saying this about Kodak Giles. Kodak did see the digital revolution, in fact they started it by inventing the photographic CCD that was used in all early digital cameras. In Australia Kodak had the number one position in sales for near on a decade in consumer cameras. The problems for Kodak were that as you say nothing could be done to save the rivers of gold flowing from print divisions, (although they make/made some of the best digital print ‘instant print’ document presses around). The other problem and why they didn’t survive the transition that they knew they had to make is that there were too many old schoolers within Kodak who had grown fat on a business model that was infallible and laziness and internal politicking was rewarded for decades.

    The old school sabotaged the visionaries within Kodak for the usual reasons based on ignorance and the rest (and Kodak except for it patent library) is history. Search “Willy Shih” and you’ll find some interviews going into more detail. Willy Shih was in charge of digital division from the start and is now at Harvard teaching business.

    He’s been writing on the need for America to return to manufacturing at home as they lose to much competitive advantage by off-shoring and out-sourcing. Apple would seem to agree, Samsung is one of their largest suppliers and is one of their largest Patent infringers and competitors. They are looking to manufacture and do more R&D in the US with so present and more future Macs being made in USA.

    Otherwise a great article as usual! WHen are the MSM going to re-print one of your stories in network costs?

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