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Feb 22, 2012

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.

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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.

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