Network operators respond: A tale of two energy studies | RenewEconomy

Network operators respond: A tale of two energy studies

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Australia’s network operators argue there is no evidence of deliberate over-investment, and the emergence of pro-sumers is a risky proposition.

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In the past week, Australians have seen two very different contributions to energy policy debate – the CSIRO’s Future Grid Forum Report analysing electricity trends to 2050 and the Grattan Institute’s ‘Shock to the System’.

The CSIRO analysis provided detailed projections under four scenarios, following 14 months of integrated modelling overseen by 120 representatives of the energy sector, consumers and other stakeholders. It confronted the potential for significant changes, analysing scenarios in which up to 45% of electricity is generated off-grid and up to one-third of consumers disconnect from the Grid.

By contrast, the Grattan Institute report claimed, without evidence, that network businesses had deliberately overinvested, earned excessive rates of return and breezily called for retrospective asset write-downs to be paid for by investors or taxpayers.

You can guess which study was more widely reported.

The changes in customer demand and technology do create significant challenges for network businesses and consumers. There is the real potential that network utilisation will decline over time as consumers use the same network infrastructure less intensely, to meet peak demand or backup supply.

However, technology is more an opportunity than a threat to network service delivery, as embedded generation can help defer network augmentation driven by peak demand and battery storage and Electric Vehicles may improve the network load profile.

The electricity grid will provide fundamentally different services and enable new markets in the future, but it remains highly competitive as a source of efficient, reliable and safe supply. The most centralised scenario in the Future Grid Forum report actually requires the lowest capital and operating expenditure of all four scenarios and is about $200 billion less than the scenario where one-third of customers disconnect.

The “Rise of the Prosumer” scenario suggests the biggest risk to annual electricity bills for residential customers is irrational overinvestment in onsite generation. In this scenario, which has the highest level of onsite generation (45%), residential bills are about $600 per annum (or 30%) higher by 2050 than the other three scenarios.

However there are real risks for consumers in how we manage the future regulatory environment.

To protect electricity customers, Australia will need a stable investment environment and predictable regulatory framework, where investors are confident to invest in long-life infrastructure.

It’s not logical to claim, as the Grattan Institute does, that network returns are currently too high, while effectively calling for them to be increased in a riskier environment of asset write-downs. The report admits this would ‘greatly increase the price that would have to be paid to attract investors’.

Even in the most decentralised future in the CSIRO modelling over $300 billion in investment will need to be funded and consumers have a direct interest in ensuring Australia can source that capital by providing a stable, low risk environment.

It’s also a little misleading to compare stable network revenues to those in the generation sector, which has the capacity to make unrestricted profits or losses in a competitive market. Network businesses receive very low rates of return from independent regulators on the basis that they are funding long-life infrastructure in a low-risk environment.

Electricity costs will go up – not down – if networks are treated like generators as the Grattan Institute suggests. If network investors required the same risk premium as the electricity generation sector, the cost of finance would be at least $2.8 billion higher over a five-year regulatory period – a hit of at least $60 per year to household electricity bills.

The important take-home message from both reports is that Network Tariff reform is required to ensure fairness and to minimise costs.

The potential for dynamic changes in technology and customer preferences mean tariff structures need to evolve to achieve fair cost recovery from all grid customers as the use of the grid changes over time.

Without tariff reform, there will be distorted incentives for consumers making future energy choices and hidden signals to reduce peak demand, the key driver of network costs.

Network businesses are embracing the potential for change in the role of networks, including new services and connections, new technologies and transformed customer relationships. This is already changing business models and services within the sector.

Network service providers are adopting innovative approaches to planning and operations, including assessing non-network solutions, recognising demand uncertainty by providing more optionality and improving network utilisation.

John Bradley is Chief Executive Officer of the Energy Networks Association

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3 Comments
  1. Chris Fraser 6 years ago

    John you need a stable investment environment, but you shouldn’t be able to invest our contributions how you want. Soon consumers will give you feedback on the prosumer and other models, you will know how to plan the investment and then suggest how we pay.

  2. Robert Johnston 6 years ago

    John, are you seriously daring the broader electricity industry to start compiling a list of examples of network over investment? This commentary certainly feels like it.
    I would have thought the ENA would be a bit more careful given the embarrassment Grid Australia suffered in the media not that long ago. By the way, anyone got the ENA ABN handy?
    When Grid Australia and Transgrid essentially dared, via their arrogant responses to objection to the project, what they thought was a farmer to take them on over the now infamous 330kV Manning upgrade line proposed through his property it resulted in a four corners investigation, numerous newspaper articles and a parliamentary inquiry – oh and eventually a line which was absolutely essential according to Transgrid with no possible alternative, being abandoned as unnecessary when a farmer presented a better analysis of the system needs than the “experts” in Transgrid. I would not mind betting that if that “farmer” wasn’t an analyst and didn’t have a journo mate we would be adding the Manning upgrade to the long list of over investment in our grid.
    When will the antiquated NSP’s and those within them with their antiquated ideas and business models wake up that you can only pretend you are right until someone decides to embarrass you and present the real facts in a very public and embarrassing forum…..
    I guess in the antiquated world of NSP’s and their lobby groups its easy to forget that crowd sourcing analysis via blogs such as Renew Economy for example can pull together a whole lot of examples on a particular topic.
    Now, I’m off to add to my long list of NSP induced over investment, I just came across an example of an NSP requiring over engineering for no real reason on a generator connection. Anyone had that experience?

  3. Diego Matter 6 years ago

    Now this sentence is really interesting:
    “Without tariff reform, there will be distorted incentives for consumers making future energy choices and hidden signals to reduce peak demand, the key driver of network costs.”

    You say that reduced peak demand is the key driver of network costs? You are right. The regulated returns for the over-invested/too big network have to be spread over the remaining demand, which will increase customers bills, what in turn will lower the demand even more.

    The argument of the Grattan Institute is that the now over-invested networks (meaning oversized networks for the declining demand) have to be devalued in order to break this cycle.

    But, as your answer suggests the view of the industry is that instead the tariff structure has to be tweaked in a way to slug customers even more to enable the network operators to keep their guaranteed returns for longer. You admit this by saying “the potential for dynamic changes in technology and customer preferences mean tariff structures need to evolve to achieve fair cost recovery from all grid customers as the use of the grid changes over time.”
    And you’d like to increase demand (via EV) to prevent to fall into the demand death spiral hole even deeper. That will only work if the FIT arrangements will be fair, not as they are now.

    The problem is: Customers now have tools at hand to escape the rising bills with energy efficiency and solar, meaning even less demand, and in the near future residential storage.
    Tell me one reason why customers should play the game in your favour. For the first time they have the possibility to install solar and get cheaper levelized costs for electricity directly from their roof. If the costs on the network side become too big they simply will switch to off-grid soon.

    The CSIRO report doesn’t pick a winner, it’s just representing four scenarios.

    But you try to find arguments in your article that the centralised model is the cheapest. I would argue that the result depends much on the model assumptions.

    One simple error is probably that solar panels only last 25 years. Experience shows that they last closer to 40 years for good quality panels what also suggests a much lower levelized cost for PV produced electricity. This will blow your investments costs for the decentralised model by a big margin and will make a decentralised model much more favorable for the future (a smaller grid will still be there in the future).

    Another error is the demand assumption in the future. When I hear households in Queensland have average annual bills of $2000 to $2200, that gets my hackles up. They just don’t know yet that they easily could halve their consumption (or much more). I know this because I’m an energy efficiency specialist. The consequence of this is that you also can halve the investment costs for the decentralised model. There are of course investments that have to be made for energy efficiency. But these are much lower than the production side. But solar is becoming so cheap, who knows how this will develop.

    It is very interesting that the incumbent industry always refers to models where the demand of today has to be satisfied with something new. But the reality is in my opinion that only half of that or less hast to be produced by renewables.

    To wrap this up: Your answer is clearly a sign that the industry is still in denial and doesn’t want to see the big wave that is coming towards them. You feel secure because the regulator will protect you. But, there’s nothing to stop this wave. Perhaps you should read more articles on Renew Economy. Giles Parkinson is giving away free tips how to adjust to the Industry almost weekly. But I can also see a glimpse of hope for you in your article.

    You also should study the history of renewables in Germany. The FIT creator in Germany Hermann Scheer was predicting this development ten years ago and he was right. The incumbent industry in Germany is already adjusting dramatically. The only difference is that policy makers in Germany are pro renewables, and they are not in Australia. But it doesn’t really matter anymore in Australia (it matters for big centralised plants though), because the levelised costs for locally produced electricity is now so low that it’s a no brainer for households to go for self production.

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