Power prices_ time to address the elephant in the room

by | Jul 23, 2013 | Business


Poles and wires: Spending on electricity networks accounted for 54 per cent of the price rise, far more than the carbon tax. Photo: Michele Mossop

Both parties have now handed down their policies on electricity prices. But both are looking straight past the elephant in the room while they remain fascinated by the flea.

The flea is the carbon tax. The elephant is the blow-out in network costs; that is, the poles and wires.

Electricity prices have risen 70 per cent over the past five years, a stupendous amount when you consider that wholesale electricity costs have fallen 40 per cent.

‘Fanciful forecasts’ for energy demand.

Yet the dreaded carbon tax accounted for a mere 16 per cent of this rise while spending on the networks spoke for 54 per cent. When you open that power bill, and recoil in horror, you can be sure that network costs are the principal culprit.

Demonised green schemes have come in for more than their fair share of election talk too, though responsible for just five per cent of the rise, while and retailers’ costs – Origin AGL, Energy Australia and the likes – account for 16 per cent.

In spite of the numbers, and rather than pay much heed to the harrumphing elephant of network costs, politicians of both colours have preferred to squabble over the flea.

Tony Abbott’s Coalition pledges to scrap the carbon tax and Kevin Rudd has moved to neutralise this carbon hobgoblin by promising to scrap it one year earlier than anticipated – in favour of an emissions trading scheme (ETS).

The Coalition has more meat on its policy bone than the ALP. Besides robustly diagnosing the problem – that electricity prices are too high – and tweaking its carbon regime, Labor is sticking to its platform of bringing greater powers to the Australian Energy Regulator and rolling out smart meters. If the Victorian experience is any guide though, smart meters merely deliver higher profits to industry and bigger bills for consumers.

For its part, the Coalition says it will cut green schemes, create a new energy regulator and privatise. The key here would be execution. The present regulatory regime has failed, patently, but how would the new regime work?

As for privatisation, while it is true that power prices have not risen by quite as much in Victoria and South Australia where the state assets have been sold off, they have still risen too far. Theirs may be a modestly superior performance but it remains an abject failure for consumers.

Hypothetical it may be, but it is hard to quibble with the notion that, had we stuck with our old State Electricity Commissions, prices would rarely have risen more than three per cent a year.

Double digit rises in such a basic commodity are not just appalling on a social level but constitute a drag on the entire economy.

But there is good news. Only eight months ago, the kerfuffle over “gold-plating”, or excessive spending by the networks, has led to projects being canned and spending curtailed. Ergo, we can expect a lower rate of increase in our power bills.

In NSW, the latest numbers from IPART (price tribunal) show that regulated retail electricity prices in NSW rise by 1.7 per cent.

This is big news as prices had been forecast to rise this year yet again by double digit percentages. And it has been achieved, not by real reform, but by cuts to budgets and canning marginal projects, or delaying them. The prices still remain too high and – now to the bad news – the industry faces asset write-downs if it is to become efficient.

Herein lies the conundrum politically. Prices have shot too high, based on unrealistic forecasts and excessive spending while demand has fallen. Yet the Coalition, in the states and federally, is chomping at the bit to privatise. Selling off assets in need of billion dollar write-downs at a time of falling demand … let’s just say, it’s a big ask. We the owners, taxpayers, will hardly get a decent price for our assets.

Electricity analyst and industry critic Bruce Robertson – who exposed the energy companies for their excessive demand forecasts last year – says forecasts remain far too high.

“AEMO forecasting has not improved,” says Robertson, pointing to the latest forecasts from the Australian Energy Market Operator (AEMO). “I fear you will be writing the same story next year just as you did last year; the cost to the economy, of this unrealistic forecasting, is measured in the multi billions of dollars.

“Since 2009-10, in just 3 short years, the AEMO has got its forecasts wrong by 15 per cent. Their 2019-2020 forecast has been revised down by 15 per cent in just 3 years and are still far too high. These past mistakes, with the exception of the 2012 and 2013 forecasts, are somewhat excusable. However their 2012 and 2013 forecasts are not.

“A new downward trend in demand is firmly established and the AEMO is dramatically failing to recognise this.”

The solution, says Robertson, is that the sector must take its write-downs (the industry’s regulated returns are based on asset size so a reduction in assets means a reduction in power bills).

“Cheaper electricity would greatly enhance the competitiveness of our economy not to mention stimulate a burdened consumer.

“Every major government enquiry has clearly stated the principal reason for the rises in electricity prices as the gold plating of the network. Over investment in the network has occurred, it is now undeniable and as annual energy and peak demand falls, this over investment is looking increasingly useless.

“The gold plating must be written off. Companies regularly do it when they make investments that do not work out the way they intended. There has been a clear and undeniable change in trend in demand and the industry failed to recognise it when it occurred in 2008/09 and to this day continues to fail to recognise the factors at play: namely excessive price rises, more efficient household appliances, a new generation of lighting with the switch from compact fluorescent globes to LED and the success of government energy reduction schemes. “

John Stanhope has been the latest to call for a review of the industry. His idea to regulate the transmission and distribution companies differently to incentivise them to lower their costs is a good one.

Already though, we have had the Productivity Commission reviews, the Senate inquiry into electricity prices, IPART calling for reform, the AER calling for reform, and so on.

It is action which is now required.

That might start with a full audit of the investment which has occurred over the past five years. The gold-plating needs to be written off. In the meantime, the likes of demand management schemes (centrally controlled chips in aircon units and so forth) may be introduced to lower demand even further.

Combined with energy efficiency measures elsewhere, and the rise of solar – which now pays its way without subsidies – and it is plausible that demand can continue to fall.

Certainly, the latest forecasts from AEMO (see above graphic) are looking just as unrealistic as they have proven in the past. We now live in a world of energy efficient behaviour. The price of electricity simply ran too high.

Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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