A Plan for Affordable Energy
November 2012
Electricity price rises have become a BBQ stopper in much the same way that water shortages were five years ago. Maybe my BBQ conversations are a bit nerdy, but certainly people are more aware of energy prices and energy efficiency than they have ever been before.
Since 2007, electricity prices have risen more than 50 per cent. There has been plenty of debate about the cause of the rises. The best evidence points to high expenditure on electricity distribution networks, the poles and wires bringing electricity to our homes, as a prime culprit. Part of the reason for this is the increase in peak demand, particularly on a few very hot days when everyone turns on their air-conditioners at the same time. As electricity can’t be stored, poles and wires and extra generation have to be built to cope with these ‘super peak’ periods, which may only cover around 40 hours a year, but are responsible for up to 25 per cent of electricity bills.
In some states, Queensland and New South Wales in particular, it has been claimed that electricity bills have been driven up by ‘gold plating’ by the electricity distribution companies building more expensive infrastructure than is really needed. This is not totally surprising as the companies are paid a regulated return based on how much infrastructure they build. The more they build, the more they are paid.
A group of business, consumer and welfare groups have recently commissioned a report on electricity prices that demonstrates that without urgent reforms, electricity bills will continue to rise in the next five years. As well as continuing rises in network distribution costs, there is a likely new culprit – rising gas and coal prices, which will drive up the cost of generation. Despite all the public debate about the carbon price, it is expected to be responsible for only about 10 to 15 per cent of a total increase in the electricity price of more than 100 per cent over a decade.
The business and consumer group includes the Australian Industry Group, the Brotherhood of St Lawrence, CHOICE and the Energy Efficiency Council. They have made a number of recommendations for reform to help make electricity more affordable.
One widely supported reform is to allow big electricity users to sell a reduction in their electricity zuse to the wholesale electricity market at times of peak demand. This would make electricity more affordable for everyone by reducing price spikes during periods of intense demand and by reducing the need to build new generation and network capacity that is only used on a few days a year.
Another reform is to set incentives for distribution companies to reduce their spending on infrastructure by encouraging demand management measures. To do this, there needs to be a shift in the way the distribution companies are remunerated. Distribution company prices are set by using a regulated rate of return on their capital expenditure that is based on how much infrastructure they have built. The companies therefore have an incentive to invest in more infrastructure, which drives up prices. Incentives could be set to encourage distribution companies to be more efficient by setting targets for them to reduce peak demand or by basing their remuneration on the total of both capital and operating expenses.
Another potential cost saver could be reliability standards. No one wants to experience brown-outs but in some cases reliability standards may be unreasonably high. The reliability standards should at least be examined to see if they can be reduced to save costs, while at the same time protecting business and residential customers.
One of the main reasons for the growth in peak demand is that there is no price signal to electricity users about the real cost of using electricity at peak times. Time of use pricing would significantly reduce peak demand because people would have an incentive to cut their use at peak times. However it would be important to ensure that vulnerable households are not disadvantaged. At present we don’t have much information about how time of use pricing would impact on low-income households or other vulnerable customers and this needs urgent investigation.
Retail margins generally only make up a relatively small proportion of electricity bills. In most states there are now numerous retail companies that compete for customers. Victoria is the only state to have fully deregulated retail prices. Interestingly retail price margins have risen faster in Victoria than in other states. Increased expenditure by the retailers on door-to-door selling and marketing may be putting up retail prices in Victoria. These prices should be monitored and evaluated to assess the effectiveness of retail competition and deregulation.
Finally the report recommends that in future, energy consumers – both business and residential – should be given a much greater role in setting electricity prices. This could be achieved through establishment of a national consumer energy advocacy body with a formal role in the price setting process.
Some of these reforms can be implemented quickly and some will take time. But if we don’t start the process now we will lock in billions of dollars of unnecessary infrastructure and higher bills for years to come.
John Thwaites is Chair of the Monash Sustainability Institute and a consultant on sustainability and climate change at Maddocks.
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