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Parkinson: our cheap grid is letting us down: that’s not smart

Nothing epitomises the challenges of Australia’s future energy needs as the state of the National Electricity Market itself. Since its inception in 1998, the NEM has been lauded by its supporters as one of the most efficient markets in the world – cost effective and reliable, just like an old Austen A4.

But should a grid be celebrated just for being cheap and cheerful? Or for its ability to act in the long-term interests of energy consumers? On this, the position of the NEM is hotly debated, and it quickly boils down to the same issues that characterise the debate around climate and clean energy policies on local, national and international levels: what’s good and cost effective now? And what’s good and cost effective for the future? It’s the eternal battle over the short and long-term benefits and, sadly, the two ambitions don’t easily intersect.

The problem with the NEM is that it is fast losing the very quality of which it boasts – that of being cheap. Significant price rises have been blamed on anything from the carbon price to green energy incentives, but it’s mostly about updating networks to cope with ageing infrastructure and surging demands at a few peak times. The response to the latter has been to simply build bigger and broader, rather than smarter. And it’s led people to contemplate a bitter irony: if the NEM had not concentrated so hard on being lowest cost, it’s quite possible that it wouldn’t be as expensive as it is now, or that it soon promises to be.

The Institute of Sustainable Futures at UTS and the Total Environment Centre have analysed this issue in a study that is combined with a report on the performance of the NEM. The study notes that, when launched in 1998, the National Electricity Objective (NEO) was to serve the “long term interests” of the consumer. But two critical decisions – to remove environmental and social benefits from the list of considerations by the grid’s operator and regulator – have had a profound impact.

Not only has it failed to deliver an environmental and social outcome, it is now failing to deliver on its promise of cheap electricity – and the institute’s Chris Dunstan is sure these factors are linked. “There is solid evidence that focusing on technical issues, to the exclusion of social and environmental issues, has backfired both on environmental considerations and on price,” Dunstan said. “There is a case to be made that if we paid attention to environmental issues and costs, we may well have had less pressure price on consumer costs, because the wholesale electricity price has been flat or downward.”

The survey found that the NEM earns a “B” in categories such as reliability and “customer bills” (defined as cost as percentage of income), and a “C” on customer satisfaction and price, and security. Unsurprisingly, it fails on the criteria that were deliberately excluded from its KPIs – these include a “D” (or poor) for critical issues such as energy efficiency and demand management (which will go directly to the path of future costs), and an “F” (very poor) on environmental performance.

These ratings do not come as a surprise to the industry; they were highlighted in the draft energy white paper late last year. That paper recognised that the NEM had failed to deliver an environmental outcome, and highlighted the problems created by a regulatory structure that simply encouraged operators to build a bigger and broader network, rather than finding smarter, more economical means of managing changing energy patterns.

Energy Minister Martin Ferguson himself highlighted the problems created by the unchecked rush for air conditioning, which added $7,000 to network costs for each $1,500 unit installed in a house. And it recognised, too, that energy efficiency and demand management, two of the critical areas where the NEM is failing badly, provide the cheapest and easiest solutions to rampant peak demand.

In fact, the white paper suggested that measures such as energy efficiency regulation on appliances alone could save 19.5 million tonnes of Co2e at a negative cost to the community of $56/tonne (that is, it saves money). And it canvassed the need to incorporate distributed generation and direct load management, and to force networks to seek demand-side alternatives, rather than just erecting more poles and wires.

This, however, barely touches the surface. Currently, some $45 billion is being spent on grid upgrades across the country in the next five years, despite the fact that groups like the institute have produced reports suggesting that up to a third of this is not needed, if only they embraced and planned for new concepts such as distributed energy and demand management. Some industry experts – such as David Crane, the head of NRG, one of largest utilities in the US – suggest that the whole hub-and-spoke model that has supported the centralised generation system around large coal, gas or nuclear power stations, will be made redundant.

The TEC/ISF report makes some recommendations on how the NEM and the NEO might be reformed to better serve the long-term interests of consumers. It said it could start by collecting data and publishing them in an annual public performance review, and it should extend this reporting to the consumer side of the market, where the NEM effectively operates in a state of ignorance in the current regulatory environment. And, it says, the NEO should be amended to incorporate social and environmental criteria for the long-term interest of consumers, in addition to the existing technical and price criteria.

“The over-reliance on an ‘economic rationalist’ approach to developing and operating the NEM is something that demands greater attention and reconsideration,” the report notes. “The economic rationalist framework does not free policy designers and decision makers from the responsibility of taking the broader context of policy into account. Thus, while the focus on competition and efficiency may have been acceptable when the national regulatory framework was limited to economic functions, the same cannot be said for the current situation. As the national market has expanded to incorporate retail and non-economic distribution functions, the need to expand the definition of the NEO to reflect these significant changes warrants serious attention and consideration by all stakeholders.”

This piece was originally published at Renew Economy.

7
  • 1
    Frank Campbell
    Posted Wednesday, 22 February 2012 at 2:23 pm | Permalink

    yesterday I said here that Crikey was biased and lazy for allowing Parkinson a commenting monopoly on energy policy…

    now it’s a daily dose of Giles the Verbose…

    Parkinson has only one argument: “clean green” renewables are cost-effective and ready to replace fossil fuel powergen.

    This is patently false.

    The govt. knows this, which is why it trumpets the vast expansion of coal, gas etc. The government’s figleafs, “solar flagships” ( two small and very expensive solar plants) are a fiasco- one has been dumped already and the other will soon follow. That geothermal feeling- a billion dollars already wasted on a chimera.

    My favourite Gillard line (apart from “We are us”) is “coal has a fantastic future”.

  • 2
    Mike Flanagan
    Posted Wednesday, 22 February 2012 at 3:21 pm | Permalink

    And there goes F Campbell the fossil fuel mouth piece that lacks credibility and the ability to present any logic to support his assertions.

  • 3
    Jimmy
    Posted Wednesday, 22 February 2012 at 4:39 pm | Permalink

    The biggest thing I take from this article is the wisdom of the NBN, instead of doind what it cheapest and best for now, the NBN builds for the future to prevent things like the issues being experienced by the NEM.

    Frank - So now we should not embrace any energy efficiency initiatives?

  • 4
    Microseris
    Posted Wednesday, 22 February 2012 at 5:12 pm | Permalink

    Both parties are in the pocket of coal and therefore will not look to the future. You only have to listen coal industry stooge Martin Ferguson. This history and the connections go way back when state governments ran energy generation - SEC in Vicco’s case. Coal dictated everything - towns were moved, roads and rivers rerouted, etc. Massive holes were dug and will be left to future generations to manage or remediate. Big coal even boasted they wrote Howard’s energy policy.

    Governments and big business like centralised power generation where everyone is a winner, except the consumer. For the individual there is an alternative if you can afford the set up costs. Get off the grid. No bills, no outages. For the rest, get used to it.

  • 5
    Mike Flanagan
    Posted Wednesday, 22 February 2012 at 5:19 pm | Permalink

    Jimmy;
    I do agree. I believe the NBN is one of the best investment this government has done. It will facilitate the geographic diversity of baseload power supply from a variety of technologies without the necessity to have concentrated massive infrastructures.
    The NBN will be intregal in the management of baseload power generated from a variety of sources and also will be very important in facilitating the adoption of smart meters to minimise connsumption throughout the country.

  • 6
    Roger Clifton
    Posted Wednesday, 22 February 2012 at 9:04 pm | Permalink

    Renewal suppliers who have had the forethought to install storage as well will profit from a free-floating energy market. If prices are allowed to rise sufficiently during periods of high demand, they will allow high-cost suppliers to cover their costs while competing with the gassy closed-cycle-gas-turbines that would otherwise top up supply.

    Such a market would be disadvantageous to renewables suppliers who don’t install storage, so we must expect many noisy voices protesting against the NEM as it evolves. The niche would favour producers who can store energy and then resupply back into the grid at the required power factor — for an appropriate price.

    (Yes, I liked the Austin A40. But I liked the Morris Minor even better - you could swing the passenger seat forward and make love in the backseat at the drive-in. )

  • 7
    jeebus
    Posted Thursday, 23 February 2012 at 11:14 pm | Permalink

    If it truly does add $7,000 to network costs for each $1,500 air con unit, then all of these solar rebates and feed-in tariffs actually make a lot of sense, as solar is generating to its peak efficiency when air-con use is highest.

    My neighbours installed 4 Kilowatts of capacity on their roof for $25k ($17k after the rebate), and have calculated that with the current feed-in tariff in QLD, the system will easily pay for itself before its 10 year warranty expires. And that doesn’t even factor in the skyrocketing growth of power bills.

    Cutting back on the solar subsidies was a shortsighted move, as widely installed solar would greatly restrain the peak rates that all consumers pay for electricity.

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