In December 2019, we projected household electricity price reductions of up to 20% over the next three years. Our forecasts were based upon modelling showing that substantial additional supplies of low-cost renewable energy entering the market would reduce wholesale electricity prices.
Since then, wholesale electricity prices have fallen significantly as a consequence of the economic and social restrictions imposed because of the CoVID-19 pandemic. Two main drivers are behind this decrease: domestic electricity demand has fallen by between 5 and 10%; and gas prices (which correlate closely with average electricity prices) have fallen from $6-8 per GJ to little more than $2 per GJ, due to the turmoil impacting global oil and gas markets.
However, it is possible these drivers of reduced prices could abate going forward. As economic restrictions are eased, electricity demand will rebound. An easing of restrictions globally would increase global energy demand and in turn gas and other commodity prices. This in turn could push back Australian gas prices and return domestic prices back to at least the medium-term ‘floor’ of the cost of production in Australia, thought to be between $5 and $6 per GJ, consistent with existing forward gas prices.
It is important for policy makers to remain focused on energy markets and the challenge of decarbonisation, and look beyond the immediate impacts associated with CoVID-19. Many countries are beginning to talk about a clean energy-led economic recovery. At a high level, this would involve significant investment in low-cost renewables and electricity networks to reduce emissions and modernise energy systems.
In Australia, there is one potential bottleneck to the transformational investment in a post-CoVID renewables-led economic recovery: large-scale transmission investment in new Renewable Energy Zones (REZs). These transmission lines are the highways that will allow new low-cost sources of renewable energy to connect to the existing electricity grid. The Australian Energy Market Operator (AEMO) has identified many potential REZs through its Integrated System Plan (ISP).
Policy makers are already working on actioning the ISP and in turn facilitating REZ investment, with the Energy Security Board (ESB) to provide advice to CoAG Energy Council this September/October. At the same time, the NSW Government has announced its own REZ strategy: to deliver three REZs in the State’s Central-West, New England and South-West regions.
To enable a smooth and expeditious means of enabling this transmission infrastructure investment, and rather than reinventing the policy and regulatory wheel, an old idea may be worth revisiting (with some tweaks): the scale-efficient network extension (SENE).
Around ten years ago, SENE was introduced to allow transformational, rather than incremental, investment in new transmission infrastructure. The final rule made by the AEMC differed from the initial SENE proposal; the former provided for generators to pay for transmission, consumers would pay for transmission in the latter.
Put simply, the rule involved generation developers funding transmission investment in a particular geographic area, where generators located in that area benefitted from lower grid connection costs due to the economies of scale arising from sizing the transmission system to be large enough for multiple generators to connect. This would ultimately be cheaper for generators than the alternative, existing, incremental investment-based approach to connecting generators to the grid.
While economically elegant (albeit quite complex) in design, in practice SENE has not delivered the kind of transformational investment envisaged. This reflects various practical challenges with implementing SENE, including generator first-mover disadvantage and other co-ordination problems between prospective generation developers which has made the SENE concept unable to be applied practically.
But a slightly tweaked version of SENE can overcome these issues with the original SENE concept, enabling governments to stimulate investment in transmission and new renewable energy: creating jobs and economic activity; reducing emissions; and adding further supply to electricity markets with a view to limiting prices to the long-run equilibrium of the cost of new investment as ageing, less reliable coal-plants close.
Transmission providers would work with electricity generation developers to examine the amount of transmission network infrastructure needed in a prospective REZ, for government consideration. The framework would be relatively simple and based upon the SENE proposal of ten years ago. This is how it could work:
- – The transmission service provider builds infrastructure within the prospective REZ and from the REZ to the shared transmission network.
– At the time of the network investment, a minimum percentage of the infrastructure’s capacity would need to be utilised through committed generation projects. Committed projects are those that are virtually certain to commence operation, having met key commitment criteria (such as acquiring a site and obtaining project financing).
- – The same percentage of the transmission infrastructure’s capital costs would be included in its Regulatory Asset Base (RAB) and recovered through network charges paid by consumers. Consumers would be charged these capital costs as this portion of the network is already being utilised
- – The remaining costs would be funded by government(s). Taxpayers would underwrite the new investment in recognition of the benefit the community receives from decarbonising the electricity system.
- – But as new projects are connected that utilise the shared REZ infrastructure, the transmission provider would use additional funds allowed into its RAB to payout the government’s financial exposure.
Such a proposal would limit the exposure to electricity consumers to the costs of transmission lines being built without ‘generators coming’.
However, arguably the “what if we build it and they won’t come?” concern about stranded or under-utilised REZs is less so today than a decade ago when SENE was proposed. This is because of the significant pressures on industry to de-carbonise, driven by and large by pressure from their shareholders and other investors, and other stakeholders, rather than by governments. These pressures have intensified over time, in part due to concerns about the lack of sufficient climate policy by governments around the world.
All levels of government are currently thinking about how to stimulate the Australian economy in a post CoVID-19 world, but with limited balance sheet capacity. There is substantial scope for using models like the modified SENE concept, that essentially revitalise the concept of private public partnerships (PPPs), to stimulate new investment in transmission infrastructure, stimulate our broader economy, thereby unlocking private sector investment in low-cost renewable energy and modernising and decarbonising our grid.
Alan Rai is a director with Baringa Partners. This article is based on research with Tim Nelson.