Energy market reform too hot to handle?

Voter reaction to Julia Gillard's slant on energy market reform will soon be tested at the ballot box. But the onus still lies with state governments to pluck up the courage and deregulate markets.

With as many as one in five east coast households freaking out whenever they receive an electricity bill, it is hardly surprising that power prices have become a political hot potato.

The problem for policymakers is what to do about it and 2013 is a year when their "I feel your pain” attitudes will get put to the acid test: voters’ reaction at the ballot box.

It’s clear from the last five months of 2012, as Julia Gillard latched on to the issue, that spin remains the pollies’ weapon of choice in this arena. But it wears thin as the bills keep rolling in.

Gillard’s promise that residential customers will see a $250 price cut "from 2014” will headbutt reality several times in 2013 as the quarterly bills from energy retailers are lobbed into our mailboxes.

This symbolises the challenge facing not just politicians but all of us with an electricity account: how far and how fast do we want to go to tackle the issue?

The South Australian government has finally plucked up the courage to take a big step.

From mid-year it will throw open its household power market, a move recommended to the Adelaide government by the energy watchdog, the Australian Energy Market Commission, back in 2008.

The jitters politicians get when taking the plunge is well illustrated by the South Australia's energy minister, Tom Koutsantonis, who accompanied the deregulation announcement with a threat: "The government will immediately introduce regulation at the first sign of collusion or any other anti-competitive behaviour.”

The minute the announcement was made the big energy retailers were on the move, offering discounts to householders to win or retain their business once deregulation takes effect.

Estimates of the annual savings for account holders who take up the offers lie in the $180 to $200 range.

This fits with the benefit levels Victorians receive when they shop around – something one in four of them does every year – making their state allegedly the world’s most competitive electricity market.

Cameron O’Reilly, chief executive officer of the Energy Retailers Association, points out that there are now 12 suppliers vying for household and small business accounts in Victoria and the big players’ market share has declined as a result.

Participating in the market, he points out, makes consumers more savvy: in Victoria many are now aware of their options, they better understand the choices they are being offered and the retailers are working to milk available technology to better differentiate their offerings.

Origin Energy, engaged in a tough fight with rivals AGL Energy and Energy Australia for the lion’s share of the east coast market, asserts that more than half of its customers now using an energy management service, which it offers for free, have been able to reduce their power consumption.

The "Origin Smart” system offers registered users a means of interpreting the data from their smart meters, breaking it down into areas of consumption and enabling them to forecast their next bill if they continue at current rates of use.

Origin claims that three-quarters of these consumers have taken action to reduce their bills as a result of what they learned.

Inherent in all this is a free market and the availability of both technology and advice.

While the Weatherill government’s decision is being hailed by the big retailers as creating new momentum for deregulation, customers in the biggest sub-market, New South Wales, can’t expect to see any benefits this year as the O’Farrell government waits for the AEMC to tell it what it already knows: there is sufficient competition available to make it safe to scrap price regulation.

Meanwhile, across the Tweed, the Newman government is trapped by a populist trick of its predecessors of both political shades: there is a huge subsidy built into power bills paid by residents of the south-eastern corner (Brisbane, the Gold Coast etc) to hold down the costs for consumers in the vast rural areas of the state.

When Martin Ferguson gathered the nation’s energy ministers together in Hobart a week after the latest CoAG meeting, the Queensland government declared it "reserved its position” on progressing the reforms Gillard and the premiers had agreed.

The convenient excuse for Newman is that his government is in the middle of a review of the electricity sector – where it owns most of the generation capacity and all the network businesses.

However all the other governments, except Victoria, are still confronted with the next two big steps – how to roll out smart meters and how to change the household tariffs to time-of-use charges.

Here again, Queensland has belled the cat: the state government reckons that the meters could impose a capex cost of up to $2 billion on households, perhaps more. It can’t get Gillard’s government to agree to cost the meter roll-out so it is undertaking its own survey.

The real complication for Canberra and the states is that $48 billion is being invested in networks at present – the regulatory determinations run from mid- 2009 to mid-2014. But this is not the end of the story, even if growth in energy demand is curbed and power peaks are lopped.

As much as a third of the east coast network is at or near the end of its working life and will need to be replaced.

It’s the Australian Energy Regulator’s job to create a less scary path forward from mid-2014 to mid-2019. To keep it focused on the task, the premiers pushed through an agreement at CoAG for the AER set-up to be independently reviewed over the next 18 months.

The political truth for Gillard in an election year is that she can only promise and spin.

Her opponents, led by Tony Abbott, will pledge to kill the carbon price and otherwise fiddle with green schemes to deliver some household savings. But the heavy lifting lies in the states and getting them to deregulate, to facilitate new metering and to change the consumer tariffs makes herding cats look like very easy work.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.