Calls for power grid overhaul to curb excess investment
Specifically, it wants the guaranteed high returns of the likes of SP AusNet, DUET Group and Spark Infrastructure, which control Victoria's network businesses, holding the likes of Powercor, United Energy and CitiPower, to be cut.
The institute has released a study on the impact of falling demand as the Australian Energy Regulator agreed to a further round of price rises averaging 2 per cent for 2014, down from 5 per cent last year.
"Changes to average network tariffs vary between reductions of $11.40 to an increase of $48.30, depending upon which distributor the customer is connected to," AER chairman Andrew Reeves said.
Recent declines in electricity demand have not led to lower electricity prices, as would occur in most markets, the institute noted. Rather, the average household power bill has risen 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," the institute said.
When consumption falls, power generators must 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."
In all, they take about 45¢ of every dollar spent by the household on electricity.
"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," the institute 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 warned.
To avoid this, the institute said the Australian Energy Regulator, which is an arm of the Australian Competition and Consumer Commission, should cut 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. If companies carried some of the risk of falling demand, they would have stronger incentives to avoid overbuilding."
Frequently Asked Questions about this Article…
The Grattan Institute has found that wholesale reform of electricity distribution is essential to ensure consumers are only charged for the costs incurred. This is to prevent excessive investment that doesn't match demand, which ultimately leads to higher costs for consumers.
Despite a decline in electricity demand, prices have not decreased as expected. Instead, the average household power bill has risen by 85% since 2006, even as demand has recently declined.
Network businesses, which are regulated monopolies, take about 45 cents of every dollar spent by households on electricity. They are not subject to market forces, allowing them to earn excessive profits by setting high tariffs.
The 'death spiral' refers to a situation where rising electricity prices lead to more users disconnecting from the network. This results in the high cost of the network being spread over a smaller volume of users, further increasing prices and potentially causing more disconnections.
The Grattan Institute suggests that the Australian Energy Regulator should cut the rate of return allowed for network companies, given the low level of risk they face. This would reduce the incentive for these companies to overbuild infrastructure.
Network companies are incentivized to build more infrastructure because they do not bear the risk if these assets become redundant. The customer bears all the risk, which encourages companies to overbuild.
Changes in network tariffs can vary significantly, with reductions of $11.40 to increases of $48.30, depending on the distributor. This variability affects how much consumers pay for electricity.
The Australian Energy Regulator, part of the Australian Competition and Consumer Commission, is responsible for setting the rate of return for network companies. It has the power to influence electricity pricing by adjusting these rates.
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