Should state governments write down value of networks?

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.