After what seems like years of wrangling, cost-blow-outs, frustration, and interventions from the market operator and state energy ministers, the Australian Energy Regulator has finally given approval for two major transmission companies to spend $2.3 billion on an important cross-border link.
Project EnergyConnect is being hailed as the biggest new transmission network investment in 30 years, the most important and the most transformational, because of the added security it provides to South Australia and New South Wales and the tens of billions of dollars in new wind and solar projects it will unlock.
It has also brought home the limitations of Australia’s narrow regulatory regime and has led to calls for long-term reforms to the way network investment decisions are made. There wasn’t a hope that such reforms could be delivered fast enough for this project, but there are moves to change the rules – and from both sides of the “who should pay” debate – that could see it addressed soon.
Few people – with the exception of coal generators who fear their assets being crushed by new competition from renewables ,and those who think battery storage might be a smarter and cheaper alternative to massive new links – oppose what is described as the most important new project in the Australian Energy Market Operator’s Integrated System Plan, its 20-year blueprint for a rapid shift to a 90 per cent renewables grid.
But many question why it is energy consumers only who will get sent the bill for the cost of these new network links. In the case of Project EnergyConnect, this will include $1.82 billion that TransGrid has been approved to recoup and along with ElectraNet’s $452 million. The AER itself recognises that consumers in both South Australia and New South Wales will face bigger electricity bills – of up to $22 a year – before longer terms savings kick in as increased supplies of renewables work to lower costs.
But shouldn’t other participants in the energy market who also benefit from these new links – the developers and owners of the wind, solar and storage projects that will be unlocked by this new investment – also share the bill?
That’s the argument put forward by groups such as the the Public Interest Advocacy Centre (PIAC), which calls for such network proposals to better align the parties bearing the costs of the project with those who are also set to receive the greatest benefit.
In a submission to the AER, PIAC noted that while consumers in New South Wales and South Australia are slugged with the costs of the project, most of the benefits are likely to be enjoyed by new generators connecting to the electricity market. It says governments could also pay for at least part of the project.
“Consumers in NSW and SA are not the sole direct beneficiaries of this project and should not carry all the costs. Consumers are also not best-placed to manage or carry the cost of any underutilisation of the asset,” PIAC told the AER.
“The costs for [Project EnergyConnect] would be more efficiently and fairly recovered by socialising some costs through governments and by recovering some costs from connecting generation projects.”
“Funding a portion of [Project EnergyConnect] costs from governments allows these costs to be recovered through a more progressive framework than electricity bills (which can often be regressive and disproportionately impact those least able to afford bill increases).”
PIAC said that it did not oppose the construction of a new network interconnector, but wanted a fairer funding model.
“The energy system is undergoing a rapid transformation that demands tens of billions of dollars in new network infrastructure. This transformation shouldn’t lump consumers with costs they don’t benefit from and risks they can’t manage,” PIAC’s director of energy policy, Craig Memery, told RenewEconomy.
“Recovering costs from parties on a beneficiary-pays basis, and ensuring all groups of consumers who are exposed to costs receive a material net benefit, should be required for large transmission projects to proceed.”
“Transmission investment will continue to be inefficient and expose consumers to higher costs than needed until energy market bodies make comprehensive reforms that reflect the market we’re in today and the clean energy system we need in future.
“That includes changing cost recovery arrangements for interconnectors and for renewable energy zones,” Memery added.
The question of user pays has emerged in some of the deliberations by the Australian Energy Market Commission, and particularly what was described as a ham-fisted attempt to address this through its controversial “COGATI” model that is still being contemplated in various forms by the Energy Security Board.
TransGrid CEO Paul Italiano says such big investments pose problems for companies like his because of the huge up front costs and the insistence by regulators that its returns are “smoothed” over the life of the asset to avoid an up front “bill shock” for the consumer.
TransGrid asked regulators and rule makers if it could fast-track some of the returns to reduce what it saw as the crippling cost of finance, but was refused. The project only got the go-ahead from its board after the Clean Energy Finance Corporation stepped in with a “hybrid” facility that turns out to be the CEFC’s single biggest investment yet.
Italiano told RenewEconomy that the idea of protecting consumers from price shock is a “political construct”, but he is sympathetic to the view of PIAC, and agrees that reform is necessary.
“We strongly support critical analysis of the regulatory regime,” Italiano told RenewEconomy. “We welcome the output from PIAC.
“The challenge is the all regulatory reform requires extensive period of consultation, and that is likely to take longer than the time we have available for this project.”
Indeed, AEMO became so impatient with the regulatory hurdles, and the to-and-fro from transmission companies and the regulators – made necessary it should be said by a big blow out in proposed costs – that it wrote to the AER reminding it of the bigger picture, if it was allowed to look at it.
Note: Out of interest, and given the rising concerns about big towers and transmission lines marching across the landscape from this and other proposed links, we asked Italiano how much more it would cost to put the cable underground.
“A lot more”, was his brief answer. In fact, a multiple of the cost. It’s not because trenching costs a whole lot more, but the cost of the different sort of cables needed to be laid underground, and the massive cost of providing insulation so they don’t overheat.
“It’s extremely expensive to go underground,” Italiano said. “Power lines are like electric fuses … hanging them in the air provides the ability to dissipate that heat. If you put them underground you have to put in complex and expensive insulation around them. That technology is frighteningly more expensive.”