The Australian Energy Regulator has publicly conceded what has been known by many but rarely admitted — that Australian consumers are paying way more than they need to for their network and electricity distribution costs.

In an important speech in Melbourne on Monday, the AER chairman Andrew Reeve said he would be pushing for changes to the rules that effectively allowed the network operators to game the system. He said they were putting forward inflated estimates of required capital expenditure, and under the current regulations there was little the AER could do about it.

The impact of soaring network charges on electricity bills has been there for everyone to see — they have accounted for nearly two thirds of the recent surge in customer electricity prices, and more than 50% of total electricity costs. But in the rush to demonise green energy schemes, few have stopped to think about how much of the planned $9 billion annual spend on network upgrades — spending that rivals the NBN in scope but not in public scrutiny — is really necessary to maintain supply, or could be avoided by smarter investments in energy efficiency and demand response management.

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As Climate Spectator pointed out last week, many elements of the National Electricity Market are in dire need of reform. The proposals made by the AER could address at least part of that imbalance.

The role of the regulators and the structure of the rules are coming under intense scrutiny now that state and federal governments are coming under pressure on rising electricity costs, and will continue to do so as a carbon price is introduced and the green energy schemes expanded.

The irony is that the worst offenders of these alleged network rorts might be the state government-owned utilities — particularly those in NSW and Queensland, where the greatest spending and cost increases have been reported. It’s ironic that, while the political masters are feigning concern over rising electricity bills, the network operators they govern are sourcing a new form of indirect tax by securing over-the-top increases in network charges.

As this website has noted on many occasions, part of the problem comes from an industry that rewards participants for simply building more poles and wires, and generating more electrons. The system is incapable of ascribing a value to reducing demand and using energy more efficiency.

This is what Reeves said on Monday about the way network operators submitted their spending targets to the regulator:

“The AER is concerned that there is a systemic bias towards inflated forecasts because of the framework for establishing forecasts of required capital and operating expenditure.

As it stands, the current regime provides network businesses with incentives to submit revenue proposals that are at the top of, or beyond, what could be considered a range that ‘reasonably reflects’ the required expenditure.”

And, he said:

“We … need to be sure that we are only making customers pay the minimum necessary to meet the cost of an efficient service provider for the safe and reliable supply of energy.”

Ross Garnaut picked up on this when he accused the rules of allowing operators to effectively gold-plate their networks. He was howled down by the energy industry.

But IPART also questioned network costs earlier this month when it handed down its recommended price increases. Not only did it find there were no strong incentives to reduce demand, there was concern that networks costs were being driven up unnecessarily. It recommended changes to the regulations of the type that are now being sought by the AER.

Meanwhile, amid all the hand-wringing over rising electricity costs, and the impact of a carbon price and green energy schemes, Australia’s leading investors have argued that further delay in a carbon price will actually push up electricity costs by an extra 20%.

The Investor Group on Climate Change, which represents all the major funds managers in Australia and more than half of the superannuation money invested in the country, commissioned a report from SKM/MMA to analyse what would happen if a carbon price was introduced in 2016 rather than 2012.

It concluded the obvious: it would delay the switch from coal to gas power, result in less efficient power generators to be built, adding $2 billion in additional costs and causing wholesale electricity prices to rise $13/MWh, or 19%, higher than necessary — and average $6/MWh higher in the period from 2016 to 2030.

The SKM modelling shows that a delay will encourage investors to put money into open cycle gas plants rather than combined cycle gas plants because there is less risk. In fact, it predicts 2GW of capacity will be based on OCGT rather than CCGT plants. Open cycle plants, however, are far more expensive (and emissions intensive) to run and are best suited as peaking plants. Combined cycle plants needed for baseload generation are cheaper to run, but cost more to build — money that will not be committed while a carbon price remains in doubt.

This finding is consistent with studies by AGL Energy and Deloitte, and warnings from the likes of Origin Energy and other corporates, and it underlines two key points: that it is ridiculous to suggest that delaying a carbon price can somehow avoid costs; and rather than creating an orderly transition, a delay is likely to create volatile market outcomes.

This is the chief concern of IGCC, and explains why investors are so keen for an early introduction of a carbon price, even if some of the sectors they invest in are not so enthusiastic.

“To make sensible decisions, investors they need to know what costs they are going to have to bear, and if you don’t know that cost then there is high risk of economic shock,” says IGCC CEO Nathan Fabian, “And institutional investors want to avoid an economic shock from either sudden and aggressive reactions from government, or the sudden realisation in a market that there has been serious mispricing of risk of climate change.”

* This article first appeared on Climate Spectator

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Peter Fray
Peter Fray
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