In a recently released report entitled ‘Shock to the System: Dealing with falling electricity demand’, the Grattan Institute has suggested that while electricity use in Australia is falling, reduced demand has not resulted in price decreases due to the nature of the nation’s energy market.
The report goes on to suggest that this is primarily due to overinvestment in redundant infrastructure and regulators allowing companies to earn excessive profits by setting tariffs that are too high given the low risk they face as monopolies.
The foremost suggestions to remedy this situation as presented in the report are to:
- Ensure that network companies make future investments that better match future power needs.
- Begin the hard task of reforming network tariffs so that prices companies charge reflect the costs they incur.
- Review the value of network assets to decide who should pay for any write-down of surplus infrastructure.
However, power companies have hit back at such proposals.
Energy Networks Association CEO John Bradley the call for retrospective network asset write downs would significantly increase electricity costs to Australian energy users.
“The Grattan Institute report asks the right questions about electricity demand trends but has the wrong answers,” Mr Bradley said.
“It’s not logical to claim 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’.
“The Report’s other proposal is for Australian taxpayers to fund lower energy prices to themselves by paying for asset write-downs.
Mr Bradley said the Report misleadingly compares 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 require the same risk premium as the electricity generation sector, the cost of finance would be at least $2.8 billion higher over a 5 year regulatory period – a hit of at least $60 per year to household electricity bills.”
Mr Bradley said Australia had just seen the most intense period of review of network regulation in its history with studies and recommendations by the Productivity Commission, Australian Energy Regulator (AER), the Australian Energy Market Commission and Independent Panels.
“The Grattan Institute Report calls for changes that have already been made. If businesses are overspending against capital expenditure forecasts they already face the risk of write-downs,” Mr Bradley said.
“Detailed analysis by the Australian Energy Market Commission concluded National Electricity Rules do not provide incentives for NSPs to spend more than their capital expenditure allowance and there was no evidence of over-forecasting by network businesses.”
“Just yesterday, the independent Australian Energy Regulator approved Victorian network tariffs noting it was ‘satisfied that all distributors’ network tariffs are recovering only approved costs and comply with the rules framework’ ” he said.
“Indeed, Victorians have seen a real decrease of 3% over 10 years in standard distribution network charges.”
Mr Bradley said the call for asset write-downs was irresponsible in a sector which relies on capital markets to finance $100 billion in investment supporting Australia’s economy and quality of life.
“No networks expect asset write-downs due to regulatory risk and reckless calls to create that kind of sovereign risk only threaten customer electricity prices in future.”
He also said that investor perceptions of regulatory risk were a genuine threat to the long-term cost of capital in a networks sector which relies on a stable investment environment.
“During recent regulatory policy reviews, independent rating agency Moody’s placed the network sector on a negative outlook and Standard & Poors expressed concern about the potential for regulatory changes to impact the sector.
“Recent analysis by the CSIRO’s Future Grid Forum estimated that Australia needs network investment at least three times the size of the current asset base between now and 2050, even where there are high levels of disconnection and onsite generation.
“Even in the most decentralised future, the CSIRO modelling indicates 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.
Mr Bradley contends that contrary to the Grattan Institute Report network businesses were already reducing expenditure in a falling demand environment.
“The Grattan report claims network businesses have incentives to maximise their asset base and invest regardless of demand.
“In fact, Queensland and New South Wales businesses have cut spending by billions of dollars and total capital expenditure by Australian electricity networks was significantly lower than regulatory allowances in 2010/11 and 2011/12.
“The reality is network businesses must invest to meet projected demand and there are significant economic and social costs if the lights go out,” Mr Bradley said.
Mr Bradley did however allow that the Grattan Institute had correctly identified tariff reform as crucial to ensure fairness in cost recovery as technology and consumer preferences change.
“Network tariffs structures will need to change to reward consumers who help to lower network costs by reducing their contribution to peak demand.
“Frontier Economics has previously estimated that the cost savings of peak demand reduction in the NEM could be up to $12 billion over the next ten years or 9 per cent of expenditure in network and generation infrastructure.”