Productivity Commission suggests the neighbour's air con is costly

Why you are paying $10/hr to run your neighbour’s air-con

The Productivity Commission report highlights some of the massive distortions in our energy market, such as the cross-subsidies to users of air conditioners. Sadly, it also reveals some of the wobbly thinking about the solutions. They just cannot get their mind around new technologies and energy systems.


We’re not quite into the scorching summer temperatures peaks, but here’s a thought to help boil your blood the next time you lie on the couch, sweltering in the heat. You’re one of  a minority of households that do not have air conditioning, but you might as well, because it’s costing you pretty close to $10 an hour in those summer peaks to subsidise those that do.

That, at least, is the broad conclusion of the Productivity Commission’s report into electricity prices, which shines a light on a well-known fact that has suddenly become political dynamite – nearly all the electricity price rises in recent years is due to the unbelievably inefficient way we use and supply energy.

Here are a few facts that are probably well known but are worth repeating here.

Around one quarter of all our electricity bills are caused by the cost of the infrastructure we have built to meet the “critical” demand peaks that occur for just 40 hours of the year – almost exclusively when people turn on air-conditioners at the same time to seek relief from those summer temperature scorchers.

The percentage of homes with air-conditioners has jumped from around 25 per cent in 1975 to nearly 70 per cent now, with the percentage nearly doubling in the last decade. Those households which do not have air-conditioning are paying an effective a cross subsidy of $330 for the use of those devices during those 40 hours of critical peak periods.

How does that work? The Productivity Commission produces figures that show each 2kW air conditioning systems requires around $7,000 of added infrastructure investment – made up for $4,000 in distribution (in neighbourhoods), $1,400 in transmission (from the central coal fired power station), and $1,600 in generation costs (gas fired peakers). As the PC points out, air-conditioners are rarely used, accounting for just 20 per cent of total demand, but the majority of peak demand?

What to do? Other have suggested innovative structures such as a voucher system – get the retailers to pay for a visit to the local shopping centre or the cinema where air conditioning runs all the time anyway – or slap a network surcharge when you install an air conditioner.

The Productivity Commission suggests a combination of things – time of use metering to send a price signal, the deployment of smart meters, and demand management. The Productivity Commission estimates that households can save up to $250  a year, even after the cost of smart meters, if deployed properly. Just don’t follow the example of Victoria.

The Productivity Commission also supports reducing the reliability factor of the network, reasoning we might put up with a few hours of blackouts rather than higher electricity bills. An enforced demand management program, if you will. It also recommends the privatization of state-owned utilities, because they are not doing what they are supposed to be doing, looking after their customers. “The overarching objective of the regulatory regime is the long-term interests of electricity consumers. This objective has lost its primacy,” it notes. Too many industry types looking after industry types, in other words, and too busy focusing on their returns by building bigger networks.

That’s all well and good, but the Productivity Commission does struggle to get its mind around distributed generation, particularly in solar PV. Interestingly, it does touch on the subject of which way we should be pointing our PV panels – to the north to generate as many electrons as we can, or to the west to better meet peak demand.

This was a subject raised by WA academic Adam McHugh earlier this month, and also by Energy Australia and solar firm The Solar Guys, in their submissions to the Queensland Competition Authority’s inquiry into feed in tariffs. Their suggestions were for time of use tariffs that affected solar households (either by charging more for grid based power, or paying more for solar exports) to encourage better use at peak periods, and/or the deployment of battery storage – which would solve most problems.

Sadly, the PC doesn’t explore this. It still has a closed mind to solar PV tariffs, wanting to judge them on its estimated cost of abatement. Amazingly, and appallingly, its latest document still hangs on to its discredited claim that the abatement cost of solar PV subsidies ranges between $432 and $1,042 per tonne of CO2 emissions. Discredited by whom? By itself. As we noted at the start of this year, the PC used the Christmas period to quietly concede that it got the estimates completely wrong and the range was more likely to be between $177/t/CO2 and $497/t/CO2. Even though these revised estimates are made redundant by the plunging cost of panels and the reduction in tariffs. Seems like they’ve forgotten already.

Until organizations such as the Productivity Commission get their mind around solar PV – regarded by just about every major utility in the world as the biggest game changer in the industry for the past few decades – then we cannot rely on them to make sensible recommendations. It still suggests solar PV be treated in the same way as a centralized power station, and paid the same rate as a coal-fired generator – even though utilities admit they get an unfair advantage from selling the same electrons to the neighbour at three to four times the price. (Indeed, if you have solar PV and no air-con, and your neighbour has no PV and lots of air-con, you have every right to feel aggrieved. Send them a bill!).

This is part of the problem that Australia faces. The PC urges that reform happens quickly, and that it may be too late to avoid the $40 billion or so of network upgrades that are currently locked into the system.

That’s not good enough. Few of the statistics produced by this report are new. The problem has been known for years. This urgency could have occurred a decade ago. The problem now is that the regulators, and the political decision making across federal and state boundaries, will not be able to keep up with the rapid technological change that is currently taking place. That should be as much of a concern to energy utilities as it is to consumers.

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  1. BC 8 years ago

    Hi Giles,

    Big fan of your commentary,

    About panel orientation – “to the west to better meet peak demand”…”This was a subject raised by WA academic earlier this month,”

    Which academic? I am keen on reading further.

    • BC 8 years ago


  2. Eb Flow 8 years ago

    This DCCEE publication indicates two methodologies for calculating the cost of abatement, Resource (economy cost) or Fiscal (govt cost):
    My PV abatement cost calculations arrive at a negative cost (benefit) for Resource and close to $0/tonne for Fiscal cost of abatement, (zone 2, NSW tariffs, 20 year timeframe). Does anyone have time to check how on earth the PC comes up with a range of $177 to $477/tonne or are they using their own methodology and timeframe?

  3. Warwick 8 years ago

    Which utility admitted to selling “electrons” at 3 to 4 times the price to a neighbour? Or has someone who sells solar panels conveniently forgotten about the expensive network, which seems to be the main point of the article? Unfortunately, the expensive network which is required for air-con is all too conveniently overlooked when considering transferring the energy to a neighbour’s house….it’s the same network…it’s not for free. Ignoring this is misleading…rather like ignoring the cost of pollution when considering the cost of fossil fuels.

  4. Markie Linhart 8 years ago

    This is the point of Smart meters.

    If you just run fans on a hot day and your neighbour the air-con then that’s detected and transmitted and the neighbour is the one who pays for the extra load.

    Get with the programme peeps…

  5. Mart 8 years ago

    The only way to escape this folly is to disconnect from the grid while they still allow you to do so. PV retailers are telling me that enquiries about off-grid systems (PV plus batteries) are on the rise.

    But really, what exactly is the problem? Is it really a problem that most of us have bought air-conditioning systems and now have to pay for the costs of running them? Or is the real problem that electricity bills in the NEM only come every three months? There are countries where you pay a fixed monthly amount with a final credit or debit bill at the end of the year. Monthly billing makes your utility bill less of a shock and better reflects the fairly low percentage of income that most households spend on electricity.

    The reall issue, I think, are those households that don’t have enough money to invest in energy efficiency or PV. They are struggling already and, with a rise of off-grid systems, could be stranded on an increasingly costly remnant grid.

    At least three additional factors would have to be taken into account for a realistic discussion of the future grid:
    – The value of end-of-line properties going off-grid
    – The value of grid-connected battery systems for load balancing
    – The value of electric cars for new electricity demand and renewables storage

  6. Mike Denholm 8 years ago

    Doing a bit of research for a new solar install the question of west or north came up. To me the correct answer was both due to the cheap cost of panels these days but alas I was told not yet due to the limitation of inverter technology. Multiple orientations require multiple inverters making a multi directional system cost prohibitive. I am sure however as the cost of inverters come down direction will no longer be a question.

  7. Frank 8 years ago

    Hi Giles,

    I am also a big fan of your commentary.


    Why isn’t this most important issue more in the headlines of the conventional media?

    It seems to me that the Titanic is sinking but the ship’s PA is simply telling the passengers about salacious affairs on the upper decks. Is this but another variant of cake and circus?


  8. Christina Macpherson 8 years ago

    Just back from a visit to Coober Pedy – it’s hardly a nest of radical environmnental lefties.
    However, 60% of homes are underground. They are well ventilated, attractive and comfortable. But – without any electricity use – remain cool in summer, and pleasantly warm in winter.
    Coober Pedy is just one example of “old fashioned” design. South Australia had small farm windmills providing electricity for decades. Old houses had verandahs and vines covering them.
    Old fashioned design has been carefully forgotten – in the interests of the big energy utilities. Does anyone remember the Victorian State Electricity’s “gold homes” – when all systems like co-generation, heating, cooking, drying washing – were rapidly supplanted by separate energy-gobbling devices for each activity.
    Along with renewable energy, energy efficiency, DESIGN is needed – and of course – solar air-conditioning is a no brainer. Christina Macpherson

  9. Gary 8 years ago

    In reply to Warwick says:
    18 October 2012 at 3:00 PM

    I see your point to a certain degree, however I have several argument against what you say, because I happen to live in very close proximity to several large coal fired power stations, I would have thought we people living in this are deserved a discount on our electricity bill compared to those living much further away? seeing as how it would cost less to provide our power compared to someone living hundreds of kilometers away? for a start the infrastructure required to supply our electricity would be far far less compared to when power is sent long distances from where it is produced, there are also quite substantial losses just getting the power to those living several hundred kilometers away, for instance I am told that they lose around 14% of the power produced in the Latrobe Valley just getting it to Melbourne, Solar on the other hand is often far closer to where the power is required, therefore there are less distribution costs and also less losses involved.

  10. Ronald Brak 8 years ago

    It seems to me the quickest and probably cheapest way to fix the peak demand problem is to hand over a cash bonus to anyone who installs point of use solar with the panels at a suitable orientation in areas that need transmission upgrades. If we had smart meters and spot pricing for homes that would mostly solve the problem, but we don’t and probably won’t for a fair while, so cash bonuses and a phamplet that explains how west orientated solar panels can be a good deal for many households where people are at work and/or school during the day.

    • Frank 8 years ago

      I think the fundamental problem is that the lawmakers ie state governments, have a conflict of interest in that their businesses (fossil generators) are being impacted negatively by renewables and are unable or rather unwilling to act justly in this matter.

      The legislated regulator agencies are hamstrung, quite likely by lack of powers given to them,and are therefore ineffective.

      One has to wonder if this lack of effectiveness was part of some grand plan: Make them look and sound independent and powerful to the public but hobble them in the fine print.

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