Call for power reform to curb excess investment
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."
Frequently Asked Questions about this Article…
The Grattan Institute has called for power reform to ensure that households and businesses are only charged for the actual costs incurred. This is to prevent excessive investment in infrastructure that becomes redundant due to declining electricity demand.
Despite a decline in electricity demand, the average household power bill has risen by 85% since 2006. This is because network businesses, which are regulated monopolies, have been allowed to earn excessive profits by setting high tariffs.
Network businesses, which transport power from generators to homes and businesses, take about 45 cents of every dollar spent on electricity. They are regulated monopolies not subject to market forces, which has allowed them to set high tariffs and earn excessive profits.
The 'death spiral' refers to a situation where continually rising electricity prices lead to more users disconnecting from the network. This further spreads the high cost of the network over a smaller volume of users, potentially leading to even higher prices and more disconnections.
The Grattan Institute suggests that the Australian Energy Regulator should reduce the rate of return allowed for network companies. This is because these companies face a low level of risk as regulated monopolies, and reducing their returns could prevent excessive infrastructure investment.
If network companies carried some of the risk of falling demand, they would have stronger incentives to avoid over-building infrastructure. In exchange, they might expect the rate of return on their assets to be adjusted to reflect a higher level of risk.
Excessive infrastructure investment leads to higher electricity prices for consumers, as they bear the cost of redundant infrastructure. This is particularly problematic when electricity demand is declining.
The Grattan Institute proposes that the Australian Energy Regulator should lower the rate of return for network companies. This would align their incentives with actual demand and reduce the likelihood of over-investment in infrastructure.
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