By John Bradley, Chief Executive Officer, Energy Networks Association
At some point in the last five years, Australia’s energy policy debate started to feel more like an episode of Jerry Springer than the 7.30 Report.
From carbon policy to renewables, from claims of gold-plating to utility death spirals, energy policy debate in Australia is too divisive to advance the long-term interests of consumers. After all, the electricity system represents both one of our most important economic inputs and our society’s largest machine, providing an essential service in real time to almost all businesses and households.
Little wonder then, in this shouty environment, that the recent release of one of the world’s most comprehensive assessments of the energy future was largely ignored by the mainstream media. Australia’s $100 million, taxpayer-funded Smart Grid, Smart City report analysed smart grid energy technology, consumer behaviour and pricing reforms over four years, involving 17,000 electricity customers.
Given the focus on electricity bills, you might have expected wider coverage of the report’s findings – that a smart grid could lower the average bill by $150 per year. Surely, it was major news that without reforms to current electricity pricing structures some electricity customers could end up subsidising others by $420 per year? Well, no.
The Report finds Australia’s current tariff structures and electricity meters may doom consumers to pay $10 billion more than necessary by encouraging over-investment in one part of the system – onsite generation (like solar panels) and storage. This is because today’s volume-based tariffs result in some users paying less than the cost of their network service and so others pay more. Without time-varying tariffs, unfair outcomes also arise if customers add disproportionately to the peak, through large air-conditioning use or in future use of electric vehicles and battery storage.
There was a strong reaction from solar advocates to the Report’s analysis, despite the fact the analysis shows Australian solar panel capacity would increase massively even if fairer tariffs are put in place to protect other users. In fact the study found that the installed capacity of solar panels would increase by 17,000 megawatts in 20 years to be six times the current installed capacity. This outcome represents 90 per cent of the solar increase which occurs without reform but it avoids consumers paying $10 billion more than necessary during the period. While that seems a good policy outcome, cost-reflective pricing is shouted down as ‘anti-solar’ in today’s polarised energy debate.
In another Jerry Springer moment, some energy commentators suggested last year the easy way to lower costs to consumers would be to write down network investments due to declining energy demand. In that episode, no evidence or analysis of the flow-on consequences for electricity customers was provided.
The first detailed economic analysis has been undertaken by the Energy Networks Association and shows that calls for write downs are a chimera for customers. The report Written-Down Value? – Assessing Proposals for Electricity Network Asset Write Downs shows that far from reducing customer prices, asset write downs could see consumers pay over $320 million more per year.
Australia could ruin its hard-won reputation with investors without delivering lower electricity bill outcomes for customers. The research paper conservatively estimates that electricity network charges could increase by up to 7 per cent based on current network investments. In addition, financing costs for future network investment could be $1.8 billion higher over the next decade.
Even in extreme write-down scenarios equivalent to writing off 20 per cent of network assets, the increased cost of financing outweighs any savings to consumers intended from a lower asset base and lower depreciation charges. This conservative analysis does not factor in the potential that investors may require a sovereign risk premium if the current regulatory regime is retrospectively abandoned.
Regulatory write-downs provide more threats than opportunities to consumers, by reversing the other downward pressures on network cost of capital and network prices. By doing so, write-downs are likely to increase, not lower, any risk of a utility ‘death-spiral’ leaving both consumers and investors worse off.
To provide efficient, reliable outcomes for consumers, Australia’s changing energy system needs clear economic signals and neutral market frameworks more than any time in its history. This means an evidence-based policy and regulatory framework which avoids picking winners or plumping for simplistic solutions.
Perhaps it’s time to change the channel.