What on Earth Is Going on in the Australian Energy Market?

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Tuesday, July 21st, 2015
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There is much ado about nothing in the electricity utility space at the moment.

By this, I am referring to the Australian Energy Regulator’s (AER) recent decisions on electricity distribution network prices for NSW, Queensland, South Australia and soon, Victoria. As these networks have been considered natural monopolies, their revenues and prices have been set by regulators from the time they were privatised (Vic, SA) or corporatised (NSW, Qld, WA, Tas). This was after a period of decades where they were owned and controlled entirely by state governments.

These regulatory decisions come every five years and set the revenues (and end-user prices) for these medium- to low-voltage distribution networks. This time, the AER decisions have been strongly in favour of consumers. Distribution costs account for around 50 per cent of the consumer’s bill. The electricity networks on the receiving end of the decisions are understandably unhappy as the AER decided their revenues should decrease over the next five years.

The NSW networks are particularly unhappy about this, having been handed very strong cuts of from 28 per cent to 33 per cent (across the three government owned network companies) below what they proposed. Their protest might seem reasonable if you don’t take into account that they already received a 100 per cent increase for the prices they can charge between 2008 and 2015. These changes can be seen in the chart taken from the AER’s final decision for Ausgrid, the Sydney and Newcastle area network company. At the end of the five-year period just begun, this means the prices will be still around 40 per cent above network prices in 2005, when the AER took over regulation of network prices from the NSW state regulator, IPART.

ausgrid

To understand the scale of those previous increases, it can be noted the increases over just the last five-year period are around 3.5 to four cents per kilowatt/hour, equivalent to a $35 to $40 per tonne carbon price. The AER has now judged that these increases were effectively unnecessary and one can only conclude that could have been avoided. That means we could have easily absorbed the $23 per tonne carbon price (recently repealed) without having electricity prices as high as they are now.

The NSW networks are now challenging the AER’s NSW decisions in the National Competition Tribunal, arguing that they will lead to increased risk of bushfires and outages, and that they will need to lay off 3,000 employees to absorb these cuts. This challenge is most likely motivated by the NSW state government’s desire to get a good price when it leases some of the assets later this year or next year – a higher revenue stream locked in for five years is worth a great deal!

But is all this ado really the main game for these network companies and consumers? I don’t believe so. It is really just shuffling the deckchairs on the Titanic when it comes to both the future of the network companies and the things the AER is focussing on. This is a bit like a guy looking for his keys under the streetlamp when he lost them up the road, who justifies it by saying “I’m looking for them here because the light is better.”

The future lies in customer side technologies such as solar photovoltaic panels (PV), batteries, energy efficiency, and smart grid based demand management (DM). DM refers to the capability for consumers to control their impact on the grid as a way of minimising their costs. These new technologies are direct competitors to the prevailing model for electricity delivery. They have already had an impact on the electricity volumes of energy delivered by the distribution (and transmission networks), volumes that are down eight per cent since their peak in 2008. Part of this decline is due to the rapid rise of PV from zero megawatts in 2009 to approximately 4,200 megawatts, or 10 per cent of Australia’s electricity peak demand.

With new technologies now providing a viable alternative to supplying electricity the old way – large generators, mostly coal, sending their power over hundreds or even thousands of kilometres through transmission and distribution to a passive consumer – the regulated monopoly nature of the energy infrastructure market is now unravelling. New business models are springing up that can supply an increasing portion of consumers’ energy needs and reduce the need for network capacity. This means that whether demand grows or declines, the centralised distribution networks are no longer the only game in town. They have competition from their own customers and from new businesses enabling these customers to more efficiently meet their energy needs.

This new “Distributed Energy” paradigm is completely left out of the regulatory considerations of the AER and the businesses. Moreover, if the networks don’t adapt, the distribution business are risking accelerating their own demise. This can happen through attempting to maintain revenues through creating new charges such as peak demand charges, or increasing flat annual charges (standing charges, as they are known). These can either push consumers to invest in battery technologies, leading to a reduction in need for the grid, or to disconnecting altogether.

The network businesses must adapt to these trends quickly if they hope to survive. What this means for the businesses is that they need to start cannibalising their own regulated customer base by servicing their customers through a competitive market based service. This is not easy as the market “ring-fencing” rules currently make it difficult, or almost impossible, for the network businesses to directly engage with customers. This must change.

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