06 August 2015
by Giles Parkinson

Networks propose compulsory fees for all – to stop grid defections

The main lobby group for electricity network operators in Australia is pushing for compulsory connection fees for all homes and businesses – even if they are not connected to the grid – and penalties for those who choose to disconnect, as part of a last-ditch effort to protect their declining revenue streams.

The Energy Networks Association says the proposals are deliberately calibrated to stop people from leaving the grid, and kicking off what is often described as the “death spiral”, as the networks seek to recover lost revenues from those consumers who remain.

The change to a decentralised grid, based around solar and storage rather than big centralised generation, is seen as inevitable, and many analysts say that networks – which in Australia account for more than half of most bills following a massive ($45 billion) and questionable spending splurge in recent years – will have to change the way they do business, or even write down the value of their assets.

But the networks are digging in, refusing to countenance write-downs, and now want consumers to pay for the networks whether they use them or not. Alternatively, they want any households that leave the grid to pay their “historic” share of grid capacity as a penalty for leaving.

Grid defection is likely to become a real option for many consumers, because of the huge falls in the cost of rooftop solar PV, and the falling cost of battery storage. Soaring network fees and rising fixed charges is reducing the pay-back for solar-only installations, but is likely to encourage more battery storage.

As well, many households currently receiving high solar tariffs – such as the 160,000 households in NSW – are looking to battery storage to avoid the situation where they are exporting their solar power back to the grid for little or no compensation.

The networks are worried that, as network fees continue to rise and battery storage and solar costs continue to fall, it could be economic for individual households and businesses to quit the grid altogether, rather than pay high fixed charges.

Some analysts say this could happen within years, driven by technology breakthroughs, and the mass-market uptake of battery storage caused by new arrivals such as the Tesla PowerWall. They say it will be accelerated by the recent moves to lift network charges, and to increase the fixed component of those charges, meaning that consumers that use less electricity get hit twice as hard.

To try to stop this, the networks have presented five options to try to shore up the revenues of the networks.

The proposals include:

  1. Higher fees for connection to the grid, which it argues would “reduce the risk of future stranded assets”.

  2. Exit fees, which would charge customers leaving the grid equivalent to their “historic share of network capacity”.

  3. Compulsory “rates” style fees that would charge network fees to all homes and businesses regardless of whether they used the grid or not. “This would recognise the broad community benefit of a ubiquitous grid to all (whether individual users take advantage of the opportunity to connect or not),” the ENA argues. It says it would “potentially avoid inequitable outcomes where some users sought to ‘exit’ the grid, placing an increased burden on those customers remaining connected.”

  4. Increase network charges to “compensate for future stranding risks”. In other words, charge more now in case the networks suffered revenue falls later. This would be done through calculations of cost of capital, but these charges flow through to consumers.

  5. Offer tax advantages such as faster depreciation.

The proposals are likely to be fiercely resisted by consumers, consumer groups and the solar and battery storage industry. Already, the industry is complaining that higher fixed charges, and the introduction of “demand tariffs” in some states are part of a deliberate ploy to make the uptake of rooftop solar unattractive.

Steve Blume, from the Australian Energy Storage Council, says that the response by networks to raise barriers even higher, rather than adapt, will be self-defeating.

A major report in the US last year suggested that network operators should “stand and fight”, even though it recognised that households may not need the grid in the near future, just as telephone customers no longer need fixed lines.

“Rather than recommending a revision of the business model to direct their massive capital and other resources to maintain and grow their business through a distributed renewable energy future they recommended to stand and fight – put up the barriers top protect what they have – with consumers be damned!” Blume said.

“The ENA is taking that same path – making recommendations that are anti-consumer, short-sighted and wrong-headed for its business members too.

“They are right that this will be disruptive and this is the same reason they strongly resist energy efficiency and demand response programs – these reduce revenue and profit. ENAs push to punitive fixed prices and fees will open up the market for competitors who are innovative – even if regulators are slow to remove some of the current barriers to that (such as peer-to-peer trading).”

As the ENA itself admits, a number of these options “obviously would face profound implementation challenges”, not least the “significant consumer resistance” to the proposals for exit fees or compulsory fees.

“Higher connection fees for new customers present difficult equity and hardship issues, while exit fees can be represented as an unfair barrier to emerging competitive technologies,” it notes.

“In part, these options are likely to encounter resistance because they affect only a subset of readily identifiable and specific customers, rather than network customers as a whole.

“This sits uneasily with the fact that the grid has characteristics of a shared ‘public good’. Different perspectives on these mechanisms highlight the potential tensions between the interests of individual customers and collective customers, when determining fair, efficient cost recovery frameworks for network infrastructure.”

As analysts have pointed out on numerous occasions, the issue on cost recovery is whether the original expenditure was justified or not, and how these assets compete with new technologies.

The idea of using compulsory rates, fees, and higher charges to prop up an industry that has been overtaken by new technology is extraordinary, but presented by an industry that has gotten used to almost complete indulgence by the regulators over the last few decades.

But it may be that this is just a “scare tactic” by the ENA to push regulators, and the government, to give them more tax concessions, via accelerated or deferred depreciation.

It acknowledged the difficulties and inequities of the first four options, but says “providing greater flexibility to bring forward or deferring depreciation … better recognises the common contribution of all past and present network customers to the existing network.”

In short, it recognises that it could recover its costs through some accounting procedures, that will inevitably cost the taxpayer. The question is, however, whether it should be allowed to recover some of the sunk costs for assets that are proving to be redundant, or excessive.