Addressing $40 billion electricity waste – yes, minister

With governments scared regulatory changes will see the lights go out and innovation viewed as unnecessary risk by Australia's electricity networks, the status quo remains – to the detriment of all power users.

As reported on Friday in Climate Spectator, the Victorian Competition and Consumer Commission joined a chorus of people stretching back over a decade, recommending reform to how Australia regulates and charges for electricity network infrastructure. The rules are biased towards building additional network capacity and against cheaper alternatives, like energy efficiency and small-scale power generation, which could reduce load on that infrastructure.  

Yet, in spite of lots of government bodies urging reform (see: Electricity market reform – don’t hold your breath), and a huge $40 billion spend on networks leading to surging electricity prices, very little seems to change. Why is that?

Plain and simple, it’s because politicians quite appropriately are extremely afraid of the lights going out.

For politicians and indeed many senior public servants, the electricity system is much like a prestige, very expensive European car. You might find it hard to believe that the dealership is justified in charging $600 for a service that seems to involve little more than a simple oil and filter change for the car. But the dealer’s highly technical explanation for why they charge so much, which you don’t really understand, makes you sufficiently worried that you aren’t prepared to risk the damaging the car by taking it to a non-dealer mechanic who charges half the price for a service.

Consequently anyone that proposes significant regulatory changes to allocate less money on increasing system capacity will struggle against fears the lights might go out. Instead we end up with so-called “trials” of demand management technologies and techniques with catchy titles like, ‘Solar Cities’ or ‘Smart Grid, Smart City’ or ‘Low Carbon Communities’.  Of course all the technologies and techniques being “trialled” have usually been employed in the field for a decade or more, but they do a good job of stopping politicians fiddling with the big levers.

At present electricity network businesses are held highly accountable for two things:

1. Keeping the lights on by ensuring the network has sufficient capacity to cope with peaks in demand; and

2. Keeping the electricity system safe.

The moment networks fail in these two tasks the network owner gets hit by heavy financial penalties. Also, because networks operate under a regulated cost-plus margin model, the more network capacity they build (which happens to reduce the risk of safety and reliability problems), the more they can charge consumers to recover the cost of building this capacity. So overbuilding networks is a win-win for network owners.

What’s more, network companies are attractive to investors, not because they expect them to make huge returns, but because they provide stable, low risk returns.

All of these things together mean that networks aren’t really interested in doing something innovative that might save money. That’s because innovation means trying something unfamiliar for which there is some uncertainty about how it might work – this equals increased risk. And any high financial returns it might provide will soon be clawed back by the regulator in the next regulatory review period. 

Network businesses are good at building and maintaining poles, wires and transformers that ensure we get a reliable and safe electricity supply. We should leave them to do this.  Trying to get them to employ non-network technologies like energy efficiency and small-scale power generation, or shift demand into off-peak periods is like trying to get a square peg to fit into a round hole.  

Proposals for fundamental change of the electricity regulations that might force electricity companies to change, such as advocating the Californian model of electricity regulation, will never be accepted. This is because of fears it will lead to black-outs or involve a highly disruptive transition requiring large amounts of compensation to be paid to electricity companies.

Rather than trying to fiddle with the existing car (the electricity supply system), which is far too important to be allowed to break down, a new car should be produced to run alongside it to reduce electricity demand.

This new car would in involve establishing a market for purchasing reductions in peak demand. A price and target would be set for reductions in demand by each network node, because constraints on the network and the cost of network solutions differ by geographic region. Prices could be set by the Australian Energy Regulator through a benchmark against what augmenting network capacity would cost.  Participation in this market would be open to any company not just electricity network owners.

Network companies would be left to continue to do what they’ve always done – build network capacity to cope with any growth in demand. It’s just the growth in demand would drop over time and therefore so would network expenditure.

Only politicians have the power and freedom to create such a new market. You are wasting your time making submissions to the Australian Energy Market Commission. If a public servant or a politician suggests they’ve dealt with the issue because they’ve tasked the AEMC with undertaking an inquiry into demand management, tell them Sir Humphrey would be proud.

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