Call for power reform to curb excess investment

Wholesale reform of electricity distribution is essential to ensure households and businesses are charged only for the costs incurred while moving to limit investments to match demand, research by the Grattan Institute has found.

It wants the guaranteed high returns of the likes of Ausgrid and Endeavour Energy to be cut, which would slash returns to the NSW government from any future privatisation of these businesses.

Recent declines in electricity demand have not led to lower power prices, as would occur in most markets, Grattan noted in a report about the implications of declining electricity demand.

Rather, the average household power bill has risen by 85 per cent since 2006, even as demand has slid more recently.

"Australians are funding billions of dollars of infrastructure that falling consumption has made redundant," it said in the report.

When consumption falls, power generators must either sell at a lower price or reduce output.

"But network businesses - which carry power from the generator to the business or home - are regulated monopolies not subject to market forces," the report said.

In all, they take about 45¢ of every dollar spent by the household on electricity, Grattan noted.

"For years, regulators have allowed these companies to earn excessive profits by setting tariffs that are too high given the low risk they face as monopolies," it said.

But, as electricity demand declines, the high cost of the network is then spread over the smaller volumes used, while continually rising prices may induce some users to disconnect from the network altogether.

"Enough disconnections would trigger a ... 'death spiral'," it said.

To avoid this, the Grattan Institute has called for the Australian Energy Regulator, which is an arm of the Australian Competition and Consumer Commission, to reduce the rate of return allowed for network companies, given the low level of risk they face.

"Network businesses have the incentive to build more infrastructure assets and the customer bears all of the risk if they become redundant," it said.

"If companies carried some of the risk of falling demand, they would have stronger incentives to avoid over-building.

"In exchange, companies may expect that the rate of return on these assets would be adjusted to reflect a higher level of risk."