Analysis but little action on energy reform

There have been plenty of reports and analysis on the electricity sector in the past year, now it's time for action.

In a new report on how to reform the electricity system, the Productivity Commission suggested last week that households could save around $100 to $200 a year by installing the next generation of electricity meters and allowing power prices to be more flexible over the course of the day.

The report, Electricity Network Regulatory Frameworks, also recommends that state-owned network businesses be privatised. It suggests changes to how we regulate transmission networks, the high voltage power lines that transport power over long distances or between states. It also encourages governments to review the roles and responsibilities of several regulatory agencies.

The Commission’s report follows the release of a range of reports on electricity networks over the past year. As electricity prices continue to rise even as demand for power falls, the goal of most of these reports is to produce a cheaper, more efficient electricity system. 

In December 2012, Grattan Institute released a report outlining four reforms that could save households an average of $100 a year. It recommended reducing the returns paid to companies that own the ‘poles and wires’ electricity businesses, and more frequent reviews to stop companies from building assets that are not needed.

Grattan Institute also recommended that regulators review how reliability standards are set, a recommendation repeated by the Productivity Commission. Some states currently have regulations that encourage power companies to limit the number of blackouts per year “at any cost”. This is draconian. Both reports suggest that a small decrease in reliability might substantially reduce power prices.

The Productivity Commission report conveys a sense of frustration with the pace of reform: it talks about “adding some urgency to the existing tardy reform process”. It describes how reforms in transmission planning, originally set out in 2002, are unlikely to be realised until 2022.

The frustration makes sense when you realise what’s at stake.

The regulations that govern power networks and enable companies to set power prices are decided on a state-by-state basis. These are reviewed every five years. The current round of reviews will run from this year to 2017.

If reforms are not implemented now, consumers will have to wait another five years before there is another opportunity for change. Meanwhile, over the past five years, home electricity bills in New South Wales have doubled.

Regulatory change is occurring at a glacial pace when compared with the rate of change in the power sector.

Ten years ago, the relationship between households and the power system was much simpler. Power flowed from large power stations, down a system of poles and wires and into homes. A few times a year, someone wandered past your house, checked the meter and sent you a bill.

Today, that relationship is so much more complex. Nearly 10 per cent of all households have their own power stations on their roofs – solar PV systems. For customers with smart meters, readings are not taken four times a year but 48 times a day.

It is not surprising that power companies are scrambling to keep up with a changing system. Power stations and the ‘poles and wires’ of the power network are built to last for decades. But when technology, prices and customer behaviour are moving so quickly, it is all the more difficult to work out what types of assets should be built.

The situation is perhaps even more difficult for regulators. Not only do they have to anticipate the changes but they must also design a system that is fair to both asset owners and consumers. The former need to be able to earn a ‘fair return’ on their assets. But customers should not have to spend decades paying for assets that, it turns out, were not actually needed.

On the consumer side, the pace of change is only speeding up. The changes of the past decade may be just the beginning. Smart meters provide more detail about how we use energy, but in future they could also allow power companies to change the way they bill customers. Customers who use power at times when it costs more to deliver may be charged more. Those who use power in a way that benefits the system may be rewarded.

A raft of technology changes are also on the way and their effects are hard to predict. The number of households with solar PV systems continues to grow. Rising power prices and improvements in battery technology have raised the prospect that some households could choose to go ‘off the grid’.

New Australian standards may transform the role of household appliances in helping to manage our power supply. Some households could choose to let companies turn down their air conditioners a few times a year, in exchange for savings on their power bills.

With so much change going on, we need to get the regulatory system right. There has been plenty of analysis. Now it’s time for governments to act.

Lucy Carter is an Energy Fellow at the Grattan Institute.

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