02 November 2015
by Giles Parkinson

Networks to spend another $50bn on Australia’s dumb and dumber grid

Australian electricity consumers face no relief from their soaring electricity bills, with energy regulators allowing the country’s electricity networks to spend another $50 billion on poles and wires in the next five years.

The decisions – some of them final and some of them draft determinations – will take the total spending on Australia’s networks from 2000 to 2020 to more than $130 billion.

This cost has and will be passed on to consumers – reducing what was once Australia’s competitive advantage of cheap power – although some big businesses will be able to duck the network costs because of favourable deals with utilities.

And what do Australian consumers have to show for it? Analysts and consumer advocates say nothing more than a bigger and dumber grid that appears less prepared than ever for the new technologies that are sweeping the world – rooftop solar, battery storage, electric vehicles and smart technology.

Over the past few months, the Australian Energy Regulator has approved spending totalling $16.4 billion by NSW networks, $12.89 billion by Queensland networks, and $3.8 billion by South Australian networks.

A draft decision allows $10.3 billion to be spent in Victoria, and this will likely be revised upwards, as they always are. Separately, the WA regulator has allowed $6.7 billion to be spent by Western Power from 2012-2017.

All this totals more than $50 billion, and takes total spending to more than $130 billion over a 15-year period, since the Howard government ushered in a new regulatory regime that came into effect in 2006, with the establishment of a national rule maker, the Australian Energy Market Commission (AEMC), a regulator, the AER, and an operator, the Australian Energy Market Operator (AEMO).

The objective was supposedly to “reduce costs through competition and streamlined administration.” But the impact on consumers has been the opposite. Investment has soared due to over-inflated demand forecasts, and bills for consumers have more than doubled.

Their appears to be no change to this trend, and consumer advocates, energy analysts, and many in the industry are aghast at the developments.

They fear that it will accelerate the move to the so-called death spiral, where consumers – distrustful of their utilities, or presented with a more economic alternative to massive network costs with solar and storage – will simply quit the grid.

This will leave remaining consumers struggling to meet the revenue targets of the networks, who are already slicing and dicing tariffs to recover revenue as more households add solar and reduce their total demand from the grid.

Already, major moves have been made to increase fixed tariffs, hit solar households with special fees, or impose “demand tariffs” that could halve the rate of solar installations. Proposals that could have encouraged networks to cut spending and use mechanisms to encourage reduced demand have been postponed for another five years.

Networks have also threatened to impose fines or fees on households that do make the decision to quit the grid. In the meantime, they are pushing to be allowed higher depreciation expenses – effectively allowing their investment to be paid off more quickly – and passing those costs on to consumers.

Consumer advocates note that the electricity networks are rolling out the equivalent of the National Broadband Network every five years, but unlike the NBN it is not making our energy connections any quicker, or any smarter.

Indeed, despite all the talk – from the regulators and the networks themselves – about the “energy revolution” that is supposedly upon us, new technologies are barely mentioned in the spending plans.

The Public Interest Advocacy Centre (PIAC) noted that for the three NSW distributors, climate change was not mentioned once, neither were emissions, nor falling demand. Distributed generation (rooftop solar), battery storage, and electric vehicles got one brief mention each, and EVs only in the cost for assuming higher demand (and higher network costs).

“The lack of reference to the changing context for energy utilities in the proposals is quite startling,” PIAC noted at the time.

The result is pure folly. Despite all the supposed national regulatory reforms imposed over the past decade, it appears to have had no impact.

The cuts imposed by the AER have been cosmetic at best, and largely rest around a lower cost of interest rates. South Australia’s network operator managed to get a 20 per cent lift in its spending allowance after challenging the draft decision.

Where the AER has sought to impose significant cuts, the networks – particularly the government-owned ones in NSW – have embarked on a costly, taxpayer-funded court challenge to overturn the decision.

The NSW government wants the networks to be able to spend as much as they can, so they can then get a profitable return from consumers.

By lifting consumer bills, the NSW government can then pocket more revenue, and lease the networks for a higher fee.

Only the Queensland government has said enough is enough, and told its state-owned networks not to appeal the ruling.

Still, Hugh Grant, the executive director of ResponseAbility, who represented consumers in talks with the AER, says the Queensland determinations are well above efficient levels, in terms of capital spending, operating costs and returns on capital.

Grant says the decisions will result in the Queensland distributors’ prices being retained at excessive levels.

“This is likely to accelerate the emerging network ‘death spiral’ as it will result in the economics of self generation and storage being more attractive to consumers,” he said.

Oliver Derum, from PIAC, which is a party to the court case between AER and the NSW networks, but is trying to get the spending allowance reduced, says the model of economic regulation appears to have failed.

“The networks are a monopoly, and have to be regulated. But we need an effective regulatory framework that is capable of delivering what everyone knows it needs to achieve.

“What I cry out for is for some laws that do what they are meant to do. The networks do not appear to me see the writing on the wall,”
Derum said.

“They can move with this revolution, or go the way with magazine publishers. They are acting like dinosaurs.”