AEMC – Tell us how to save $11 billion

The Australian energy rule-maker has jumped into the political firestorm that is electricity prices and while it at least acknowledges the problem, its latest paper offers more questions than answers.

On Saturday the Australian Energy Market Commission (AEMC) released the directions paper, Power of choice - giving consumers options in the way they use electricity. This is part of a long-running investigation by the AEMC into the extent to which we might be able to reduce the cost of meeting our electricity needs by getting energy consumers to do things like:

-- Reduce electricity consumption overall through greater energy efficiency.

-- Reduce electricity peak demand by shifting demand to less busy times of the day.

-- Employ small-scale power generation on or nearby to consumers’ premises (‘embedded generation’).

While this seems rather arcane and technical, it plays directly into the political firestorm around cost of living pressures and the fact that Australian householders are paying some of the highest electricity prices in the world. Opposition parties have been fruitfully converting these significant price hikes into major state government election victories, most recently in Queensland. Tony Abbott has also managed to capitalise on the issue by fooling the electorate into blaming these price rises on a carbon tax that doesn’t even exist yet.

Once you get beyond empty state government election promises to resist a carbon tax (for which they plan to do what exactly?), we do have a legitimate problem – extremely expensive electricity network infrastructure that just sits there for most of the year doing nothing. 

The AEMC’s commissioned studies find that in Victoria as an example, by 2020, the top one per cent of forecast peak half hourly periods will equate to 18.8 per cent of Victorian annual peak demand. They estimate that between $3.4 billion and $11.1 billion in network costs could be avoided in the NEM over the period 2011-2030 if demand in the top 1 per cent of peak demand periods could be reduced to the level of the next highest demand period.

I’m afraid the AEMC Directions Paper won’t blow you away with a plan to fix it all within the next 12 months. Instead it raises more questions than it answers. But it is important because it contains an explicit acknowledgement from the AEMC that the current electricity market has in-built structural features that inhibit consumers from employing the dot points listed above, even though they could save us significant amounts of money. Believe it or not, this admission of a problem represents real progress.

Firstly the AEMC has made it clear that pricing signals for small energy consumers are problematic:

“The current network and retail tariffs do not necessarily reflect cost of supply and delivery of electricity. Hence, most consumers currently do not have options to capture the value of DSP actions.”

The AEMC points out that only 12 per cent of small customers (who are major drivers of growth in peak demand) have the meters in place that could support such cost-reflective pricing. What’s also interesting is that even amongst large energy consumers, 14 per cent still operate on old, outdated accumulation meters that don’t know how to tell the time. The AEMC notes that this means:

“Many consumers across the small to medium, commercial and residential sector currently do not have the technology that allows easy access to their real time consumption data. This is likely to limit the extent of DSP opportunities that may be available to them.”

But what is more amazing is that the AEMC also acknowledges that consumers are not perfect calculating machines and we might need further change beyond just price signals:

“Current consumer understanding of energy use and what they need to know for smarter energy consumption decisions is quite low.... [They] Have a low level of interest as electricity is not necessarily considered as a priority “product" to manage in the context of household/business expenditure”

So while more cost-reflective pricing is important, in the AEMC’s view it’s not everything:

“The relevant issue is whether fully cost-reflective price signals would enable the supply chain to act in co-ordinated manner towards efficient DSP opportunities. Our initial view is that an economically efficient level of DSP would not automatically occur as other issues will persist in the market. Issues include a potential lack of clear information available to consumers, high transaction costs, insufficient access to capital, materiality and split incentives.”

Also the AEMC notes that the present regulatory rules and structures governing retail and network businesses mean that these businesses are unlikely to take the initiative to roll-out smart meters themselves and even if they were rolled out, other constraints exist that inhibit them from being used properly:

“Retail and network businesses play a key role in promoting DSP outcomes. We have found that there are opportunities to improve incentives and remove restrictions for these market participants.”

While the 241-page report falls well short of what many advocates of energy efficiency and distributed generation would like, acknowledgement of a problem is the first step towards resolution. However, as I’ll reveal tomorrow, progress in this whole area has been glacial and the huge increases in network charges means we need to be moving faster.