Ferguson plugged in for a power marathon

The hard yards on easing power pains has begun away from the spotlight and energy minister Martin Ferguson had identified a long and necessarily complicated road to re-invigorating the energy sector.

His announcement of the failure of an attempt to buy closure of some coal-burning power stations has got the limelight, but Martin Ferguson is also working overtime at present to get out key messages on electricity prices in the wake of the prime minister’s “I have a big stick” speech last month.

Julia Gillard has been striving to give the impression that there was little action until she waved her stick, but Ferguson is stressing that the efforts of the Council of Australian Governments’ energy ministers and the Australian Energy Market Commission have been elevated as a priority issue after preparatory work over the past 12 months.

“Get on with it” was a decision by COAG first ministers two weeks before Gillard’s headline-hunting speech in Sydney.

Progress, Ferguson says, will require “co-operation, compromise and commitment” by players across governments – and he is at pains to point out that there is no quick fix to the prices problem.

While upfront, Ferguson has to deal with what Energy Supply Association of Australia describes as an unprecedented wave of uncertainty exacerbated by the Government owned corporation generators (Gencos) closure backflip, his major job remains striving to ensure the delivery end of the power supply chain, where tens of billions are spent, works better and eases consumer budget pain.

In the face of much shouting about “gouging” and “gold-plating” by the electricity networks, some of it from his own leader, Ferguson is carefully refining the explanation of why “poles and wires” costs are increasing.

The east coast network, he points out, is the largest interconnected system in the world. Australia’s grids – the east coast plus islanded networks in the Northern Territory and south-west Western Australia – need the same amount of gear as Britain’s but with a third of the population to share the costs.

(This is a reprise of a point I used to make a decade ago when managing the Electricity Supply Association: you could fit the entire east coast population inside London’s M25 orbital motorway and have room left over for another Sydney. To meet our east coast population needs, the power industry has had to build a system that would stretch from Moscow to Lisbon, a factor that shouldn’t be brushed aside.)

Ferguson points out that sustained growth in the economy and population plus the interplay of higher household and business incomes with the availability of cheaper energy-intensive appliances has resulted in power demand rising steadily – to which has to be added the costs of replacing aged equipment, some of which is 50 years old and more.

Much of Gillard’s sound and fury on 7 August was aimed at New South Wales.

Ferguson notes that the Australian Energy Regulator, the wing of the ACCC that approved the $16 billion current NSW capex outlays, found that almost a third of the state’s current distribution capital expenditure is funding asset renewal and replacement.

He also points out that about a quarter of retail power bills across the country can be attributed to the need to build a supply system that will meet peak demand.

There are twice as many air-conditioners in Australian homes today than a decade ago. “This has huge implications for demand,” he says, “despite Australia having some of the world’s highest energy efficiency standards for appliances."

As well, Ferguson says, the higher reliability standards now employed in NSW and Queensland, and the focus of a lot of the recent finger-pointing, are a response to blackouts and load-shedding incidents in the late 1990s and early part of the past decade.

“I acknowledge states are beginning to tackle these issues,” he adds. “NSW, for example, has asked the Australian Energy Market Commission to compare the costs of different levels of reliability with customers’ willingness to pay for them.”

(In a report just released, AEMC has told the state government that $2.5 billion in capex savings could be achieved over 15 years by reducing network reliability, but cautions that a survey of 1288 NSW customers show that many would require a significant discount on their bill before accepting lower standards and 60 per cent would be prepared to pay at least 1 per cent more for improved reliability. This notionally large cost cut would save NSW householders about $15 a year.)

Just how hard it is to herd the states in to concerted action on power issues is illustrated by the fact that the review chaired by Warwick Parer a decade ago made a set of recommendations to improve market efficiency – and a number of actions have still to be taken.

Ferguson nominates three important areas for a re-invigorated agenda: privatisation, retail market competition and further deregulation.

The introduction of time-of-use pricing, he adds, is an essential step towards addressing peak demand pressures.

And he is signalling a move to get governments to agree to enhance the standing of the AER to enable it to “pursue the public interest on an impartial basis".

While networks remain in state government hands, he says, there needs to be a much greater focus on efficiency, service delivery and cost reduction.

Ferguson notes that the federal government has the Productivity Commission looking at greater benchmarking of networks, but he is urging them to take the initiative “rather than be forced in to providing a better service".

Finally, he is pushing the argument for state governments to minimise policy intervention and ensure transparent pricing signals for investors as well as consumers while ensuring stronger consumer protection through adoption of the national energy consumer framework.

None of this is the stuff of high rhetoric and big headlines – or any headlines at all as the talk Ferguson gave in Sydney last week setting out this agenda has been effectively ignored by the media – but it is the necessary spadework to address power pricing issues in a lasting and effective fashion.

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.

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