Don't fall for the networks' fixed price push

The Australian Energy Market Commission has recently released its draft decision on changes to the rules for the way that network service providers charge consumers for their services. One of the main points in this decision is that network tariffs should vary by time of use.

In the decision the AEMC refers to an illustration a consultant developed for the commission, which concluded South Australian householders with a 2.5kW north facing rooftop PV system will be paying their network service provider $200 less per year but will only reduce network costs by $70 per year. This illustration takes one to the nub of perhaps one of the most interesting and relevant contemporary electricity issues in Australia: stranded assets.

For the sake of argument, let's just assume that these numbers are right. What should we make of these numbers? Can we conclude that SA householders with rooftop PV are free-riding to the tune of $130 per year? In short, I think not.

And here is why.

Let's start by being clear that we are comparing apples and pears. The $200 lower network bill is a reduction in the payment for SA Power Network’s sunk costs. Only a small proportion of the cost of providing network services varies with output. So, most of the $200 is a reduction in the payment that householders are making to SAPN to allow them to recover and profit from past investments.

The $70 reduction in network costs is, however, a saving in future costs; a saving which arises because rooftop PV effectively defers network augmentation.

So we can't call the $130 difference between historic costs and future savings a subsidy, unless we accept that SAPN has a right to recover the $200 that they have lost from the household with rooftop PV. As it stands SAPN does, technically, have this right. The question is, should SAPN have this right?

If we accept that SAPN is a monopoly then, probably, yes – in practice if not in theory (you’d be tilting at windmills to argue the contrary). But rooftop PV is eating away at SAPN’s monopoly. Households with rooftop PV can produce themselves to meet a large part of their own electrical needs, they simply don’t need the services that SAPN has historically provided to them. They need different services from SAPN: back-up when the sun is not shining or to carry away the surplus production when the sun glares down.

This is a very different service from the one-way power flows that the networks were designed to achieve. If SAPN were building the network from scratch knowing that a quarter of their household customers have rooftop PV, it would look very different – and probably much smaller – than the one it has now. In 10 years' time, when many of those households will probably have big batteries, the 'right' network will look even more different.

So, actually, the issue here is who should be bearing the costs of infrastructure that is no longer needed in an industry with an ever-weaker monopoly? Should households with PV be made to pay? Should other electricity users be made to pay? Should shareholders pay?

In a competitive industry, there is no question – shareholders almost always carry the can, that’s the downside that goes with the right to the upside when things go well. In monopolies, consumers typically pay. SAPN, like other network service providers, is entering a middle ground – a monopoly in many areas but, increasingly, not in others. Batteries and other technology developments will surely weaken its monopoly further.

Network service providers’ response to this competition has been to seek to fix their charge. The chief executive of Networks New South Wales has suggested that “really the whole bill should be a fixed charge, like council rates”. Of course, the network service providers want that. If you were running a business selling a service that is increasingly less in demand, would you not do the same?

The AEMC’s suggestion of greater time-of-use differentiation in tariffs to replace, for example, the inclining block tariffs that SAPN currently uses – will surely reduce even further what households with rooftop PV pay. After all, rooftop PV produces a large amount of its output at the times most valued to the system overall.

Lower payments by consumers for stranded assets – as, it might be argued, the AEMC is effectively suggesting – is economically sensible. While networks will want to get the shortfall back from other consumers, consumers themselves obviously don’t want this and it's hard to see retailers sitting idly by while their own services are increasingly priced out of the market by their shippers. It would be a great waste if we duplicated much of our electrical infrastructure just to protect network service providers from technology change.

Owners of stranded network assets will eventually have to bite the bullet. Better sooner rather than later. These are new issues in electricity in Australia, but they are hardly new in other industries or other countries. As Harold Hotelling, a founding father in the theory of utility pricing, noted in 1938 in the context of massive stranded railway capacity in the United States:

 … the fact is that we now have the railroads, and in the main are likely to have them with us for a considerable time in the future. It will be better to operate the railroads for the benefit of living human beings, while letting dead men and dead investments rest quietly in their graves.

Bruce Mountain is director of Carbon and Energy Markets.