Grattan Institute calls for electricity distribution reform
Published: December 11, 2013 – 3:00AM SMH
Wholesale reform of electricity distribution is essential to ensure consumers are charged only for the costs incurred, while investment should be limited to matching demand, research by the Grattan Institute has found.
Specifically, it wants the guaranteed high returns of the likes of SP AusNet, DUET Group and Spark Infrastructure, which control Victoria’s network businesses, holding the likes of Powercor, United Energy and CitiPower, to be cut.
The institute has released a study on the impact of falling demand as the Australian Energy Regulator agreed to a further round of price rises averaging 2 per cent for 2014, down from 5 per cent last year.
”Changes to average network tariffs vary between reductions of $11.40 to an increase of $48.30, depending upon which distributor the customer is connected to,” AER chairman Andrew Reeves said.
Recent declines in electricity demand have not led to lower electricity prices, as would occur in most markets, the institute noted. Rather, the average household power bill has risen 85 per cent since 2006, even as demand has slid more recently.
”Australians are funding billions of dollars of infrastructure that falling consumption has made redundant,” the institute said.
When consumption falls, power generators must sell at a lower price or reduce output.
”But network businesses – which carry power from the generator to the business or home – are regulated monopolies not subject to market forces.”
In all, they take about 45¢ of every dollar spent by the household on electricity.
”For years regulators have allowed these companies to earn excessive profits by setting tariffs that are too high given the low risk they face as monopolies,” the institute said.
But, as electricity demand declines, the high cost of the network is then spread over the smaller volumes used, while continually rising prices may induce some users to disconnect from the network altogether.
”Enough disconnections would trigger a … ‘death spiral’,” it warned.
To avoid this, the institute said the Australian Energy Regulator, which is an arm of the Australian Competition and Consumer Commission, should cut the rate of return allowed for network companies, given the low level of risk they face.
”Network businesses have the incentive to build more infrastructure assets, and the customer bears all of the risk if they become redundant. If companies carried some of the risk of falling demand, they would have stronger incentives to avoid overbuilding.”
This story was found at: http://www.smh.com.au/business/grattan-institute-calls-for-electricity-distribution-reform-20131210-2z3ys.html
Electricity pricing faces scrutiny in Grattan Institute report
Will Ockenden reported this story on Wednesday, December 11, 2013 12:42:00
ELEANOR HALL: A report by the Grattan Institute has today warned of a death spiral in electricity markets, unless complicated and expensive regulations are changed.
Because of the way this market is regulated, consumers are now facing the prospect of paying more for electricity despite using less.
As Will Ockenden explains.
WILL OCKENDEN: It’s a common gripe – electricity prices are always going up.
And according to a Grattan Institute report, the bills will continue to rise even if you use less power.
TONY WOOD: Across all of our homes and businesses, our electricity use is actually going down, as you said, for the first time in a long time.
WILL OCKENDEN: It’s causing big problems and was never anticipated by the people who wrote the rules for the system.
It’s also causes a shock for consumers, who are facing the prospect of paying more for electricity despite using less.
The industry terms it a death spiral.
Tony Wood is from the Grattan Institute.
TONY WOOD: The costs of owning that network and building it don’t change, because it’s been built for us if you like, over a long time. And we didn’t think about this. When electricity use was rising it wasn’t a problem. But now what we’re finding is that the cost of that electricity has to be, if you like, spread over fewer and fewer units of electricity that we’re using. So the unit price is going up.
WILL OCKENDEN: For the majority of the 20th century, the production, distribution and sale of electricity worked well.
Electricity networks expanded so the power could keep flowing even during the hottest of days.
It worked because electricity demand was increasing. More power was needed year on year.
TONY WOOD: If a business, for example, closes because times are tough, and we are seeing that in the manufacturing sector, the cost of the network that provided the electricity to those businesses also is spread across all the other consumers. So actual bills go up as we pay for that. Now that’s creating a very, very unusual and difficult problem which no-one had every anticipated.
WILL OCKENDEN: But now electricity usage is falling, everything’s changed. Electricity usage has fallen about 4.5 per cent since 2010.
The Grattan Institute report doesn’t go into the reasons for the decline in detail, but says it’s partly down to more efficient electronics and a switch away from old-school light-bulbs.
In the end, the reason doesn’t matter. The fact is that falling electricity demand has not resulted in lower prices.
And Tony Wood says that’s because the regulatory settings are wrong.
TONY WOOD: Someone once told me if you’re digging yourself into a hole, the first thing you do is stop digging. And what we need to do firstly is stop the expansion of some of that infrastructure in some parts of Australia and hopefully we might start to see some of that. But equally we’re now going to confront what we’re going to do about the fact that we’ve probably already built more wires and poles than we need.
The businesses need to charge us – you, me – on the basis of the load we put on the network. Our peak demand if you like, rather than the total amount of electricity we use. And that will give us the right incentives to start to change the way we use electricity, including things like putting in air-conditioners or putting in solar on our roofs.
WILL OCKENDEN: The Australian Energy Regulator plays a big role in the network pricing structure. And Chairman Andrew Reeves says the current settings do need to be overhauled.
ANDREW REEVES: The important thing is to note that we should be alert to this, that it’s a long way from being alarmed.
WILL OCKENDEN: He says changes are being made.
ANDREW REEVES: We propose changes to the rules to set rates of return that are much closer to the cost of finance of the business. We’ve been producing guidelines and next week we are publishing our guideline which will set out how we intend to set the rates of return for the next round of network price determinations, starting in 2014.
WILL OCKENDEN: Do you admit that the rates of return were set way too high back in 2006 which has led to this problem?
ANDREW REEVES: We were concerned that the rates of return were set too high because the rules set up that pricing structure. We propose changes to the rules and we think that the prices as they are reset should be at lower rates of return.
ELEANOR HALL: That’s Andrew Reeves from the Australian Energy Regulator, ending Will Ockenden’s report.