| Fragment- Senate Electricity Prices Report - Review by Selven
Main takeaways/messages from Senate report:
• Should highlight, where appropriate, the positive references for Western Power such as post capital investment review and capacity market which provide for greater network investment efficiency and demand management respectively.
• The report states that (a) peak demand; (b) overestimated demand forecasts; (c) opportunistic profit taking; (d) gold-plating of networks; (e) dividend extraction by state governments; (f) revenue caps causing price to rise when demand falls, as the main factors for electricity price increases in recent years. These causes are largely attributed to electricity networks and the current regulatory arrangements.
• Make reference, where needed, to the Coalition’s statement in report which points out that the report’s recommendations focused on the NEM and not on Western Australia and Northern Territory.
• The report makes reference to a number of ongoing reviews of the electricity market which are looking at reforming the regulation and efficiency especially of the networks to contain price increases. The SCER is expected to report to the COAG in December 2012 on a package of reforms.
• Western Power, where appropriate, should make reference to the quotes and arguments put forward by NEM energy market players on explaining why there was no “gold plating”, peak demand, cost of capital, need to replace ageing assets, required reliability standards, non-network solutions and stringency of current regulation.
• Western Power should also point out that unlike NEM states the rising price of gas and its use in generation has been a major contributor to electricity price increases in Western Australia.
• Western Power should take note of the two major incentives for over-investment identified in the report in terms of price and revenue caps as well as reliability standards leading to possible perverse incentive. We should prepare positions on these issues, especially on the calls for decoupling network revenues and volumes, as they are likely to be main focus of reforms in future.
• The report noted that overall demand in the NEM was falling and in some cases peak demand as well. Western Power should develop positions to address these issues where needed and these may feed into the PUO’s current cost drivers review as well.
• Cost reflective pricing along with smart meters is seen as a key tool in reducing peak demand and the Power of Choice review model on tiered pricing is proposed. Western Power should make reference to this national move towards cost reflectivity to address peak demand and keep watching brief on how this develops in the NEM.
• Other demand management measures such as load control, embedded generation, energy efficiency and demand-side participation have been proposed along with greater consumer protection and education. Western Power should keep a watching brief on these developments and promote these measures if there is net benefit.
• Western Power should take note of the recommendation for the AER to take over central planning for the NEM networks to address efficiency and demand management issues.
Quotes/Extracts from Report
Electricity prices
2.61 An update to the Garnaut Climate Change Review in March 2011 found that:
While the consumption of electricity makes up a relatively small component of a typical household's expenditure, these price rises are putting pressure on lower income household.
3.6 Demand and investment forecasts for electricity networks are based in part on
reliability standards set by the state regulators. Network assets are very long-life assets and the consequences of under-building assets can be catastrophic. Consumers value reliability very highly, but may not wish to pay for this.
Some concerns have been raised that current regulatory arrangements have
made it too easy for electricity network owners to over invest and take increased
profits from guaranteed revenue streams.4 In contrast, there is a genuine need to
replace ageing infrastructure and the costs of capital required to make the investments have increased since the global financial crisis.5 Further information on what investment has been occurring is available from the AER and the Energy Networks Association (ENA).
3.10 Electricity is not alone: prices have also risen for other utilities as shown in
Figure 3.1. The rise in gas, water and sewerage prices has been similar to the rise in electricity prices.
Current Reviews of the electricity market
2.71 The report referred to a number of other reviews of the
electricity market currently underway or recently completed. These reviews include:
• The Productivity Commission's electricity regulation report. Draft report released on 18 October 2012. The final report is expected to be handed down by April 2013.
• The AEMC's Transmission Frameworks Review final report is to be delivered to SCER by 31 March 2013.
• The AEMC's Power of Choice review on enabling consumers more control of their electricity use and demand management in the NEM. A draft
report was released on 6 September 2012; final recommendations will be
presented to SCER on 16 November 2012.
• The AEMC's Review of the Distribution Reliability Outcomes and Standards
draft report will be published in November 2012.
• The Australian Government's Final Energy White Paper which reviews
Australia's future energy needs to 2030 and defines a policy
is to be released in late 2012.
SCER will report to COAG at its December 2012 meeting and is expected to offer a package of energy market reforms for consideration.
Key causes of electricity price increases
3.11 A wide range of possible causes for electricity prices have been raised. In this
section, the committee is mainly focussing on residential prices, however, business
prices are mentioned briefly in relation to the separate business and retail prices.
Professor Ross Garnaut informed the committee that:
In my view, there was no good public policy reason for this large increase in prices. It happened because of the way we chose to regulate prices. Contributions to the price increases were made across transmission, distribution and retail. Generation has not been contributing much to the increases. Indeed, if you include electricity prices at a wholesale level—that is, out of the generators, including the carbon price—they are lower in real terms in October 2012 than in 2006-07. So the huge increases in electricity prices in Australia over the past half-dozen years are the result of what has happened in pricing of transmission, distribution and retail margins.9
Demand and demand forecasts
3.18 The National Generators Forum (NGF) informed the committee that in recent
years overall demand for electricity has been falling:
[O]ver the past five years, electricity demand across the national electricity
market has been declining. It has declined by around 3½ per cent over that
time frame. That is due to a range of reasons—notably, the increase in the
retail price of electricity; declining industrial demand; reduced
manufacturing activity; energy efficiency initiatives; and solar PV
systems.17
3.20 The AER also pointed out the forecasts for peak and aggregate demand have
different impacts of electricity prices:
We probably ought to recognise that there are two categories of demand
forecast, and it is important to recognise the distinction. One is peak
demand, and it is peak demand that drives investment. The other is
aggregate demand, and aggregate demand is important for recovering costs,
because you recover over the total demand, and that determines prices.19
3.21 Energex explained to the committee how the falling demand in recent years
had impacted electricity prices.
More recently, deteriorating network utilisation as total energy
consumption has moderated is forcing up network prices as the costs of
providing, operating and maintaining the network are spread over a lower
consumption base whilst maximum demand remains at record levels.20
3.26 The committee also heard a different point of view, suggesting that peak
demand is not increasing and that demand forecasts predicting an increase are
inaccurate.30 Data from the AER indicates that over the last four years (that is, since 2008–09) the level of peak demand is flat or falling for both summer and winter in states serviced by the NEM.31
Cost of capital
3.42 The cost of capital has increased significantly following the global financial
crisis. The AER has approved an increase in allowed returns on investment capital of around 1.9 per cent from 2004–05 to 2008–09. The committee noted that each one per cent increase has been estimated to imply an additional $780 million in interest payments that are passed on to consumers.50 Ergon and Energex described their experiences regarding the cost of capital:
When you look at all our modelling, the major influence on costs and price
at the end of the day is cost of capital. Because our determination was in
2010 and we came off the back of the global financial crisis, the cost of
debt was significantly higher.51
The price that is charged as part of the network charge is effectively a
building block charge, which includes cost of capital, a return of capital
depreciation and operating costs. So a large portion of the charge is in fact
reflective of the cost of capital. That is reset every five years. When you are
in a situation, as we both were in the middle of the GFC, resetting your
regulatory determination and your weighted average cost of capital, that is
where you saw an increase in that cost which flowed through the network
prices at that time.52
Labour costs
3.43 While labour inputs to the electricity sector had been relatively flat between
1996 and 2006, from 2007 onwards they have risen sharply53 due to an increase in the size of the electricity supply industry workforce: since a low of 35 000 employed persons in the November quarter of 2006, the electricity supply industry workforce has increased to 71 900 employed persons in the August quarter of 2012.54 From its examination of the productivity of electricity and other utilities, the Productivity Commission reported that:
The rise in labour inputs is confirmed by examination of company annual
reports, particularly those of the major electricity distribution companies
that collectively account for the majority of labour inputs in the sector.
Labour inputs have been increased to upgrade and augment network
infrastructure, to assist distribution businesses respond to ageing
workforces, and to prepare for skills transfer as older workers retire.55
Commodity and other input prices
3.44 As many coal-fired power stations have co-located coal mines, the input price
of coal has not necessarily been greatly affected by the unusually high export coal and other commodity prices that have occurred in recent years, although some of that commodity price impact is flowing through to consumers.56 The committee was informed about the impact of gas prices to date and potential future impacts:
[W]e have seen significant changes in gas prices in Western Australia over
the last few years, particularly as we have seen gas and coal prices being
determined in a global market. We also see domestic gas demand rising
without necessarily a corresponding rise in supply—hence the cost or price
pressures that were involved in that environment. There is also a lack of
competition in the domestic gas market with the supply side being
dominated by two major suppliers and demand is concentrated effectively
in five key consumers of gas.57
[A]lthough gas prices are rising, there is still a lot of uncertainty as to where
they will be in the medium to long term. If you build a gas fired power
station you are looking to operate it for the next 30 to 40 years, but if you
cannot take a view on what your fuel cost is going to be then you cannot
work out whether you are going to be competitive in the marketplace.58
Revenue and price caps
3.62 The committee heard how revenue caps can cause prices to rise when demand falls. The arrangements with revenue caps were set up some years ago, when there was consistent growth in demand. However, given that revenue is a product of price and demand, fixed revenue caps may cause price rises as demand has fallen in recent times, as explained by the Total Environment Centre (TEC):
Where peak and/or total demand are flat or falling, under a revenue cap,
network revenue remains constant, so networks have an incentive to
encourage more energy saving measures, as any further decreases in costs
result in increases in profits. The downside for consumers is that if demand
proves to be lower than forecast for much of the 5 year determination
period, the networks get a windfall profit, since their revenue was
determined by the original forecast.81
Arguments against gold-plating
3.88 Some of the arguments against the existence of gold-plating include that other methods, such as new minimum service standards and demand reduction activities, have permitted reductions in capital expenditure:
Energex has worked with the Queensland government through the second
Somerville review during 2011 to assess the effectiveness of the security
and reliability standards. As a result of this review, the minimum service
standards have been stabilised or flat-lined and the security standards have
been broadened to provide more efficient options. Together, the adoption of
these changes in conjunction with the forecast moderation in network
demand growth compared to previous forecasts has allowed us to reduce
our capital expenditure over the current regulatory period by a further $850
million. The benefits of these expenditure reductions have been passed
through in our network charges in the form of price discounts in 2012-13.125
3.89 Other arguments against gold-plating having occurred postulate that external
factors beyond the control of the network businesses are to blame:
ENA's submission explains how a perfect storm of high capital costs, higher
government reliability standards, replacement of ageing assets and the need
to service rising peak demand have all combined to push up network costs.
ENA members appearing before the committee have explained that these
factors are likely to moderate in the near term. Many businesses expect that
future cost increases will be in line with inflation or perhaps even lower.126
* * *
[R]egulation to hold down retail electricity prices is self-defeating because
the true costs of electricity need to be met somewhere, either through
electricity prices [or] through the taxation system. Since regulated prices
rarely keep pace with market developments, built up pressures can lead to
sudden changes, larger than those the market would produce.127
Committee comment
3.94 The committee has been informed about a large number of factors which
contribute to electricity prices and recent increases in these. Some of these factors are contested, while others have wider acceptance. For some factors, while the price increases may seem perverse to somebody outside the electricity industry, it is apparent to the committee these have probably arisen as a result of historical technical and regulatory artefacts
Incentives to over-invest in network infrastructure
4.24 The committee received lots of evidence that the current regulatory
framework creates incentives to over-invest in network infrastructure ("gold-plate")14 (see also Chapter 3). Two major incentives to over-invest raised during the course of the inquiry were the rates of return permitted for network service providers (NSPs) and reliability standards.
4.27 It was also argued by the CALC that the revenue generated by NSPs is
facilitated by the current regulatory framework:
At the network level, which is monopoly regulated, price increases are
driven by not only a need for new investment to replace the ageing
infrastructure and the well-documented peak demand problem but also the
regulatory system itself which has been shown to have a limited ability to
limit ongoing cost increases and may actually encourage the building of
assets where cheaper options are possible.17
4.28 Mr Bruce Mountain submitted that the existing regulatory environment is not
working and some significant changes are required.18 Mr Mountain argued that
consideration needs to be given to the ownership structure of network businesses and the continued application of five year price controls.19 He further claimed that:
Institutional arrangements also merit review. Candid consideration of the
political economy of economic regulation by a federal agency, of the
income and profits of state government owned service providers is
needed.20
4.29 Network businesses strongly refuted claims that their rates of return were
inefficient or unreasonable.21 They opined that the current regulatory regime does not encourage over-investment and instead rewards efficient and effective investment:22
…I believe that the regulatory regime at present provides incentives for
businesses to defer capital expenditure rather than to over-invest. In fact,
the transmission businesses have been actively seeking to defer
investments. I give two examples here. Powerlink in Queensland had
diverted construction of its first 500kV circuit by a period of four years.
That is around $380 million to $420 million of expenditure. TransGrid New
South Wales has sought to defer projects. A major supply project to the
west of Sydney was deferred for a year from 2009. We are currently
building a project in Western Sydney which we have pushed back through
contracting demand-side support for it, and we have also just recently
reviewed two major commission line projects in the far north of the state
and on the mid-north coast. We are seeking to defer both of those projects
for a number of years. I would suggest that the incentive regime encouraged
commercially-focused businesses to not build capital expenditure, and the
evidence points to that being a fact.23
4.30 Grid Australia, the peak body representing the owners of all major electricity
transmission networks in the NEM and in Western Australia, argued that the current incentive-based approach to regulation developed over the past 15 years is sound policy.24 According to Grid Australia, the current rules 'largely get the balance right'.25
4.31 Similarly, the Energy Networks Association (ENA), the peak body
representing network businesses, argued that the current system does not allow for
wasteful investment:
…there is a decision made by the regulator about what is an appropriate
level of capital expenditure to make over a five-year regulatory cycle. The
capital budget and the operating budgets are approved by the regulator in
advance on the basis of forecasts. There is not a capacity to simply invent
projects. All the proposals are backed by a solid business case. They are
assessed by the regulator and the regulator has on all occasions reduced
those bids to what they think is the appropriate level. Sometimes those
reductions in the capex budget have been significant; sometimes they have
been as high as 30 or 40 per cent on the basis of the regulator's best
judgement about what the appropriate capital expenditure is.26
4.32 The ENA also argued that government policy should concentrate on the real
causes for higher network costs rather than crudely imposing more regulation on
network businesses.27 The ENA argued that changes to the whole electricity industry are needed to stem increasing electricity costs. According the ENA:
Governments have baulked at introducing the retail price reforms essential
to curbing the growth of peak demand. Mandatory reliability standards have
succeeded in improving service delivery to customers but arguably at a cost
which sections of the community now find difficult to absorb. The roll out
of smart meters, so important to empowering customers, has stopped at the
Victorian border. The regulatory system does not provide the commercial
incentives necessary to accelerate demand side participation.28
4.33 Both the Australian Energy Market Commission (AEMC) and AER believed
that the current regulatory framework incentivises over-investment because of the
relationship between consumption volumes and profits, and the potential for over
recovery of revenue. In the Power of Choice draft report (PoC report), the AEMC
noted that:
[W]hen a network business develops tariffs which are based on
consumption volumes, its profits could depend upon the level of actual
volumes. Under such a tariff structure, the business would have no
incentive to pursue any form of DSP project (or energy efficiency project)
which decreases volumes.29
Reliability standards
4.35 Reliability standards were another commonly cited defence for overinvestment.
31 In response to claims that NSPs are the 'villains of the industry' who
gold-plate and profiteer, Mr Peter McIntyre, Chairman of Grid Australia, retorted:
I would ask on what basis they make that assertion. At a transmission level,
our network in this country is built consistent with the standards that apply
in almost all First World countries. The reliability you get in Australia is
consistent with what you would get and expect in Japan, England, America
or any other First World country. I do not regard that as gold-plated at all.
In fact, the regulatory regime requires us to demonstrate that each
investment is efficient at the time we make it, so in essence I do not agree
with that comment at all.32
Committee comment
4.43 Whilst acknowledging that electricity network infrastructure is a long-lived
capital asset that requires maintenance and upgrading (particularly as it ages), as well as the relationship between reliability standards and network investment, the
committee is swayed by the weight of evidence suggesting that the current regulatory framework not only permits but incentivises inefficient over-investment in network infrastructure. The committee considers that the current regulations, particularly in regard to rates of return, have substantially driven electricity prices directly and have effectively "poured petrol" on other smouldering price pressures .
4.47 With respect to the relationship between network businesses' profits and
electricity consumption, the committee notes the recommendation in the PoC report that 'the pricing principles in Chapter 6 of the NER [dealing with Economic
Regulation of Distribution Services] need to be amended to provide greater guidance on how network businesses should set their tariffs to reflect the costs' in an attempt to decouple network profits from consumption volumes.42 The committee supports attempts to decouple network revenues from energy volumes and therefore recommends that the AEMC implement an appropriate rule change.
Ex post scrutiny powers
4.53 During the course of the inquiry, the committee was informed that the
Economic Regulation Authority (ERA) (Western Australia) has scrutiny powers that enable it to conduct ex post reviews of capex by network businesses in the market it regulates:
…the ERA's powers under the Electricity Networks Access Code allow it to
exclude capital expenditure from Western Power's [the Western Australian
electricity network provider] regulatory asset base that it considers
inefficient. This power, which extends to forecast investment (ex ante), and
to actual investment (ex post), has helped to ensure that capital expenditure
is efficient. By way of example, $261 million ($ as at 30 June 2009) of
72
incurred capital expenditure from the first access arrangement was
disallowed in the second access arrangement decision.43
4.54 It was subsequently recommended to the committee that similar powers be
given to the AER to allow it to scrutinise actual network expenditure against that
forecast.44 For example, Professor Garnaut stated:
…there should be closer interrogation of proposals for investment, and ex
post review of what actually happened in implementation of those proposals
is appropriate.45
Committee comment
4.56 It appears that ex post scrutiny powers would strengthen the AER's ability to
regulate NSPs and network investment. As noted by the AER itself, such scrutiny
powers would also, at least in part, address the current incentives for network
businesses to over-invest in network infrastructure. The committee notes that the
current AEMC Economic Regulation of Network Service Providers rule change
proposes to give the AER the ability to conduct 'ex post reviews of capex efficiency' and, in the AER's words, this 'approach to ex-post reviews provides an appropriate balance between providing investment certainty for network businesses and providing incentives to invest efficiently'.47
4.57 The committee agrees that the AER should be given ex post scrutiny powers
and therefore supports this proposal in the AEMC rule change.
Peak demand
5.1 As discussed in Chapter 3, a significant trend in energy consumption patterns
has been the growth of peak demand.
5.2 During the course of the inquiry, peak demand was cited as a key driver of
increasing electricity prices and, consequentially, reducing peak demand was
identified as a central tenet of any strategy intended to reduce electricity prices.1 For example, Victorian electricity distribution businesses informed the committee that household electricity consumption has been declining in recent years—a trend set to continue due to 'improving energy efficiency, penetration of rooftop photovoltaic
systems, changing consumption patterns in the industrial sector and the response to higher retail electricity prices'.2 However, these businesses also highlighted that peak consumption has continued to increase 'due largely to increased penetration and use of air conditioning on hot days'.3
5.4 As part of its inquiry into electricity network regulatory frameworks, the
Productivity Commission highlighted that driving demand away from peak periods could negate significant infrastructure costs, a key contributor to rising electricity prices:
Demand-side management aims to reduce network and generation costs by
changing the pattern of consumption. It usually intends to shift
consumption away from peak demand periods, as these drive marginal
generation costs and network augmentation. One of the criticisms made by
Garnaut (2011) is that network investment has been used too readily in
Australia to meet rising peak demand (notwithstanding static or even falling
overall electricity consumption), when demand-side management might
have been more efficient.
While estimates vary across jurisdictions, around 25 per cent of retail
electricity costs are accounted for by temperature driven peak demand
events that occur for less than 40 hours per year (NESI 2011). Trials and
case studies of demand-side management identify potential reductions in
peak demand usually in the order of 5 to 40 per cent. Evidence on how this
impacts network spending is limited, but one Australian study suggests
avoidable infrastructure costs of around 5 per cent, simply from delaying
capital investment on a project by one year through demand response
initiatives (CRA 2004).5
Demand management
5.8 The benefits of demand management are well recognised8 and there are a
variety of ways in which demand management can assist consumers to save energy and reduce peak demand. A study by Deloitte on behalf of ESAA provided an overview of the benefits from a number of demand management measures as shown in Figure 5.2. In its draft report, the Productivity Commission estimated that 'critical peak pricing would produce savings worth around $100–$250 per household each year'.9
5.9 During the course of the inquiry, network businesses, consumer advocacy
groups and academics alike recognised the benefits of and role for demand
management. Victorian electricity distribution businesses stated:
While it is early days, demand management will play an increasing role,
enabling a reduction in network augmentation costs by reducing the length
and extremity of peak demand periods.11
5.11 Professor Ross Garnaut was also supportive of demand management activities as part of the solution to address the current Australian system that:
…provides incentives for exacerbating peak demand, because at a time
when total demand is falling the only way that the transmission and
distribution companies can expand the regulated asset base, and therefore
get their guaranteed rate of return over more assets, is by exacerbating peak
demand. In most developed countries efforts are made to diminish peak demand. The
curious Australian approach to this—the idiosyncratic Australian approach
to this—is one reason why the ratio of peak demand to average demand has
been rising quite rapidly in Australia over recent years, when it is falling in
much of the rest of the world. Of course it is hugely costly for electricity
consumers to have this exacerbation of the peaks.13
5.12 The following demand management mechanisms were discussed by report:
• cost reflective pricing and smart meters;
• demand side participation in the wholesale market;
• information and consumer empowerment; and
• a range of technological solutions.
Cost Reflective Pricing
5.16 The AEMC also explained the reason for implementing cost reflective
pricing:
A rationale for implementing cost reflective pricing is that by exposing
consumers to the costs they impose on network and generation, they can
respond in ways to reduce these costs over time. This in turn will reduce
energy bills for all consumers in the long run...
[A] survey of domestic and international trials showed that where
consumers are exposed to time varying prices, peak demand reductions of
up to 30 or 40 per cent could be achieved.18
5.33 EnerNOC described cost reflective pricing as 'economically elegant' but
offered the following caution:
The dynamic pricing approach is widely praised as economically elegant,
and performs well in some trials, but has not been very successful in
practice. The problem appears to be that customers are reluctant to expose
themselves to such volatile prices that they may be unable to afford to run
their air conditioning when they want it most.
When faced with the risk of very high prices, a very large proportion of
customers is likely to opt out of dynamic pricing in favour of flatter price
arrangements which protect against volatile prices. Of course, this
undermines the objective of dynamic pricing. Mandating that dynamic
prices be passed through to customers avoids this issue, but is likely to be a
wildly unpopular policy, and could cause serious issues for vulnerable
customers.39
Committee comment
5.42 The committee recognises the significant benefits that can be delivered by
cost reflective prices and smart meters: given network costs associated with
infrastructure to meet increasing peak demand appear to be one of the most significant drivers of recent increases in electricity prices, it seems that cost reflective pricing and smart meters have a role to play in modifying patterns of electricity consumption and reducing peak load.
Demand Management
5.51 Dr Paul Troughton, Manager of Regulatory Affairs for EnerNOC, described
an example of this type of demand side participation in the wholesale market:
EnerNOC is a demand response company. By demand response we mean
paying electricity users for measured reduction in their consumption at
times when the grid needs it—when either there is a physical issue or prices
are very high. Everywhere around the world that demand response has been
allowed to compete in the market, it has proven to be the cheapest way of
dealing with critical peaks in demand. This is really what the NEM needs.
Peaks are the root of all evil in the NEM at the moment, and they do need to
be fixed. The fundamental idea is that it is much cheaper to pay people who
are willing to change their behaviour for a few hours in a year to do so than
it is to build a load of infrastructure that is only going to be used for those
few hours in the year. 62
5.52 The committee also heard from Dr Troughton that commercial and industrial
demand response has some significant policy and cost of implementation advantages:
The interesting thing about looking at commercial and industrial demand
response, which is what we do, is that it does not need any subsidy and it
does not need a smart meter rollout. It does not need a consumer protection
campaign. It does not impact on vulnerable consumers. It is just about
reaching out specifically to people who are able and willing to make
changes and giving a very pointed incentive to them to do so. 63
Energy efficiency
5.86 Using energy more efficiently can reduce consumers' electricity consumption,
subsequently reducing overall demand and placing downward pressure on electricity prices. Improvements in energy efficiency are often considered to be the "low hanging fruit" of electricity consumption and emission reduction efforts, as they are arguably the easiest, simplest and most cost efficient ways of doing so.94 For example, in 2007 the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) estimated that 55 per cent of Australia's emission reduction target to 2050 could be met through energy efficiency improvements.95
5.87 The positive contribution of energy efficiency was supported by submitters to
the inquiry:
Energy efficiency is the low hanging fruit in the price rise challenge.
Indeed, energy experts worldwide agree that it is by far the best option of
cheaply reducing emissions and dealing with rising bills96
5.88 And:
Energy efficiency has a downward impact on electricity prices in two ways.
First it defers the need to invest in new generation and network capacity.
Second it has a downward impact on wholesale electricity prices due to a
reduction in demand. Energy efficiency is also likely to lead to a reduction
in peak demand.97
5.89 ESAA flagged that further reductions in electricity consumption can still be
derived from improvements in energy efficiency but voiced:
One of the frustrations we have is that the perception of energy efficiency is
things like low-energy light bulbs and televisions which are relatively
second- or third-order ways to save energy. Frankly, the cost of the related
systems—whether Foxtel or other things—is far more substantial than the
energy used to run those appliances. By contrast where you really do want
to focus households' attention is on energy savings in heating air and
water—so, heaters, air conditioners and hot-water systems. With the current
increases in energy bills, households almost invariably benefit from going
to our five-star solar hot-water system or a gas five-star system and
spending a bit extra to get the payback a lot quicker. It is the same with
buying much more efficient heating and cooling for their houses, whether
they rent or own, by spending more on an air conditioner if they can afford
to. We are trying to change that focus from being on things that are
symbolic and small rather than things that actually make a material
difference. It will become an issue that the upfront capital cost of more
efficient technologies by definition tends to be more expensive and it at
least explains what the payback is and why it is still a prudent investment. It
may be that from work on this issue, it will drop out how we can trigger
that smarter purchase.98
Embedded generation
5.101 The role of embedded generation such as co- and tri-generation was
discussed during the course of the inquiry.
5.102 Co-generation is the simultaneous production of electrical energy and thermal energy, and is also referred to as combined heat and power. Tri-generation is the simultaneous production of electrical energy, thermal energy and cooling.116
5.126 The committee is sympathetic to the concerns raised during the course of the
inquiry about impediments to embedded generation, including solar PV, associated with network design, connection and costs, and payments for energy generated and fed into the grid (that is, feed in tariffs). However, the committee also notes that the impacts of embedded generation on the electricity network and centralised generation need to be better understood: both CSIRO and the Smart Grid, Smart City trial are examining these impacts and the committee is supportive of this.
5.127 As the interaction between embedded and centralised generation are better
understood, and given the positive impacts of embedded generation, it is the
committee's view that barriers to its wider implementation—both residentially and
commercially—should be removed.
Lack of attention to Western Australia and the Northern Territory
The Coalition notes that the overwhelming majority of recommendations appear to
apply directly to states that participate in the National Electricity Market (NEM) and not to Western Australia and the Northern Territory, which do not participate in the NEM. For those recommendations that do not specifically refer to NEM jurisdictions, it is unclear whether they apply to non-NEM jurisdictions as well and, if they do, how they would be implemented in those jurisdictions, given their separate and different regulatory arrangements.
As such, it is unclear from the report what the direct or indirect implications of the
recommendations would be for the non-NEM jurisdictions.
Indeed, none of the evidence brought before the committee regarding the regulatory arrangements of non-NEM jurisdictions - including similarities and differences with the NEM and advantages and disadvantages of various arrangements - appear to have been considered in any great detail in the report.
The Coalition considers this is a major oversight.
Recommendations
Price setting and key causes of electricity price increases
Recommendation 1
3.99 The committee recommends that the AER provide an annual report
including detailed quantitative analysis of the components of and contributors to electricity prices.
Comments: This AER review may feed into PUO’s cost drivers review.
Recommendation 2
3.104 The committee recommends that ongoing arrangements be put in place to more effectively scrutinise prices in the overall electricity system, and ensure that price setting for individual components and factors is done in the context of keeping overall electricity prices at a more acceptable level.
Comment: The ERA already does this to some extent.
Regulation of the electricity market
Recommendation 3
4.46 The committee recommends that:
• rates of return for network service providers are estimated using a robust
process based on guidelines developed and reviewed every three years in
consultation with stakeholders;
• the proposed amendments in the AEMC Economic Regulation of Network
Service Providers rule change regarding methods for forecasting return
on capital, return on debt, opex and capex are implemented as part of
that rule change process;
• the AER should also be required to consider forecast totex when making
network determinations; and
• SCER direct the AEMC to examine arrangements for AEMO to be the
single planning agency for the NEM with responsibility for forecasting,
network planning, national reliability standards and operating tenders
for integrated assessment of network and non-network options.
Comment: The move towards centralised planning is something Western Power needs to keep a watch on.
Recommendation 4
4.48 The committee recommends that:
• the AEMC implement the rule change proposed in the Power of Choice
draft report to amend the pricing principles of Chapter 6 of the NER so
that greater guidance is provided on how network businesses should set
their tariffs to reflect costs; and
• the AER implement measures to decouple network revenues and energy
volumes.
Comment: Decoupling network revenue and energy volumes is a main theme of this report and Western Power should keep track of this issue and prepare its positions on this.
Recommendation 5
4.52 The committee recommends that the AEMC set and AEMO implement
national reliability standards that take into account consumers' perceived value of reliability and in a way that is independent of businesses that derive income from network infrastructure.
Comment: Another recurring theme of reviewing reliability standards to discourage “over-investment” is an area Western Power should develop its positions on.
Recommendation 6
4.58 The committee recommends that the proposal in the AEMC Economic
Regulation of Network Service Providers rule change to give the AER ex post
scrutiny powers is implemented as part of that rule change process.
Comment: The proposal for the NEM to adopt Western Australia’s ex-post investment review shows that Western Power’s capital investment undergoes rigorous efficiency scrutiny by the regulator.
Recommendation 7
4.76 The committee recommends that the AER receive additional funding,
expertise and accountability including that in recommendations of the Limited Merits Review Regime Stage Two Report in relation to appeals processes.
No comment
Recommendation 8
4.82 The committee recommends that the AEMC consider how broader
environmental considerations could better align with the operation and
regulation of the NEM.
No comment
DEMAND
Recommendation 9
5.46 The committee recommends that SCER agree to introduce cost reflective
pricing for electricity in conjunction with smart meters in all jurisdictions in the NEM:
• based on the model proposed in the Power of Choice draft report
comprising three consumption bands for large (band 1), medium to large
(band 2) and small to medium (band 3) consumers;
• where smart meters are mandated for consumption band 1, opt-out for
band 2 and opt-in for band 3; and
• accompanied by a comprehensive consumer information and education
campaign funded by the Commonwealth, state and territory governments
during both the planning and implementation phases.
Comment: Western Power should keep track of the development of the tiered cost reflective pricing as proposed by the Power of Choice report as its key tool to address peak demand.
Recommendation 10
5.60 The committee recommends that SCER examine incorporating the
accreditation and regulation of third parties offering demand management
services in the National Energy Customer Framework (NECF).
Comment: Demand management is advocated as another key plank in delaying/reducing costly network augmentation and Western Power should keep track of this issue and develop positions on it.
Recommendation 11
5.130 The committee recommends that SCER:
• examine current barriers to embedded generation, particularly those
related to network design, connection and costs, as well as FiT payments;
• empower relevant state and territory ombudsmen and / or tribunals to
intervene where embedded generators and NSPs are unable to resolve
disputes;
• standardise connection processes for embedded generation in the NEM
and include a requirement for a standard connection protocol and
licencing regime for embedded generation within the NEM;
• direct the AEMC to develop a rule change requiring the release of annual
maps of network constraints and their value by network businesses; and
122
• direct the AEMC to develop a rule change to establish a default system of
location-specific network support payments for embedded generation.
Comment: Western Power should keep track of the issue of embedded generation and its relation to network planning.
Recommendation 12
5.132 The committee recommends that SCER direct the AEMC to:
• review the NER so that network charges for embedded generators reflect
the cost of using only the relevant section of the network; and
• implement changes to the regulatory framework in order to provide
incentives for generators to build in locations where the costs associated
with transmission are reduced.
Comment: Western Power should keep track of the issue of embedded generation and its relation to network planning.
Recommendation 13
5.134 The committee recommends that the AEMC investigate ways in which
greater transparency can be introduced in negotiations between transmission
businesses and generators.
No comment
Consumer Protection
6.35 The committee recommends that NECF is implemented in all states and
territories in the NEM in a way that does not diminish from existing consumer protections and to take effect on or before 1 July 2013.
No comment
Recommendation 15
6.43 The committee recommends that SCER consider establishing a national
consumer advocacy body to represent and support consumers in the NEM.
Specific protections for low income and vulnerable consumers
No comment
|