Another shocker from power sector

To outsiders, and insiders, the way the national electricity market operates can seem a marvel of the universe - not only in its complexity, but the way commercial realities can be distorted.

For example, who would have thought that wholesale electricity prices could be negative?

Yet this occurs frequently at night, when demand is slight but the wind is blowing. Wind power is generating electricity even though it is of no use to anybody - there is no demand, and what demand there may be is under long-term contract, which means the wholesale price is not reflective of underlying demand.

But the negative price does help to pull down average wholesale prices, prompting those looking at new investment to hold back.

Last week's decision by the Australian Energy Market Operator to back the upgrade of a link between the South Australia and Victorian transmission networks at Heywood looks unexceptional in that it positions the transmission network for future growth.

Yet step back for a moment, and it becomes clear that what is at play is that South Australian households are being asked to foot the bill to upgrade the electricity network so that more electricity can be "exported" to Victoria.

This is great news for the owners and developers of wind farms in South Australia, since it will help to boost their profits, and it will also boost wholesale electricity prices, which will flow through to higher electricity bills over time.

But if the beneficiaries are the owners of the wind farms in South Australia and power users in Victoria, then why aren't these two groups being asked to foot the bill for the full cost of the network upgrades?

Additionally, at a time of weak overall electricity demand - anecdotal evidence from power generators points to ongoing soft demand, irrespective of last week's uptick due to very warm weather - the regulator has put its weight behind the "gold plated" upgrade option at Heywood, $107 million, rather than backing the cheaper upgrade which would cost about $40 million.

One of the difficulties with the electricity market is the collusion of vested interests sitting around the table when these decisions are made. Typically, few outsiders are present to reflect the concerns of the broader community.

The recent Australian Energy Market Commission push to boost community representation during debates is a step in the right direction. But the reality is that the electricity market is complex, replete with vested interests with deep pockets able to distort debate in their favour.

Few outside this inner circle have the time, or the necessary skills, to get across the core issues at stake to be able to push back against the big end of town.

One of the tenets of the world of business is "risk and return".

Yet in the electricity and gas sector, there is precious little risk and plenty of return - and what risk there is, typically of getting a forecast wrong, is explained away by pointing to changed conditions, with consumers left to foot the bill as the consultants go back to reworking their spread sheets.

This is the case with those backing the Heywood interconnector upgrade: there is plenty of reward for negligible risk, since the project's backers are guaranteed a return on any money spent.

The maximum capacity of the proposed interconnect upgrade would only be used for a matter of hours a year, and it would take some years for demand to reach the planned capacity. For the network owners this is of little relevance, since they receive a return on the investment from the time it is installed.

But for those paying for the upgrade - electricity consumers

in South Australia will have to

pick up much of the tab - the

money is spent upfront and will

form part of their power bills for some time to come.

As one of the largest locally

owned wind farm investors, Infigen, put it: South Australia has a

world-class wind resource which will play a significant role in enabling Australia to meet its renewables energy forecasts. But the key is getting this electricity to market, so it can be used by consumers in Victoria and NSW.

The proposed Heywood upgrade will boost interstate capacity by 40 per cent and, while power could flow in either direction, it is readily conceded the flow would predominantly be from South Australia to Victoria.

Consumers in South Australia could be forgiven for thinking the fix is in, since there has been no public debate, or pressure, to undertake a more rigorous assessment.