Newman's power price band-aid

The landslide defeat of the Labor government in Queensland at the weekend will have one immediate effect on electricity supply: a popular but strategically misplaced move by in-coming Premier ‘Can-Do' Newman to freeze the state's standard domestic tariff, reducing, he claims, residential power bills by $120 a year.

As it happens, the last week of the Queensland election campaign – with the result heavily influenced, according to voting booth exit polls, by community concerns over the cost of living – coincided with the publication by the Australian Energy Market Commission of a 241-page ‘Power of Choice' commentary pointing towards real ways of addressing network costs, the key issue in current power bill increases.

In essence, the AEMC is pushing further forward the concept that power tariffs should vary according to the time of day and season – i.e. they should be very expensive when weather dictates maximum consumer use of electricity for living comfort – and raising the prospect that network operators could remotely switch off appliances such as household air-conditioners and pool pumps when demand passes a certain point with consenting consumers getting lower tariffs.

The time-of-use tariffs and intervention steps, of course, require the roll-out of smart meters across the east coast, a challenging task as the pursuit of the measure has been demonstrating in Victoria over the past two years.

No current estimate of the capital cost of smart meters across the east coast is available – an estimate of about $7 billion was made at a time when the Victorian roll-out was claimed to cost $800 million. This has turned out to be nearer $2 billion.

The state of the debate – fuelled by recent claims from large energy users about the comparative costs of power in Australia versus other countries that are disputed by electricity suppliers but have been heavily promoted in the media – leaves policymakers, driven by the political imperative to be seen to be addressing voter concerns, to turn to steps like ‘Can-Do's' tariff freeze and the O'Farrell government's efforts to find $400 million for consumer handouts through playing with the structure of its network businesses.

The bedrock of the dilemma is spotlighted by the AEMC in its latest paper: “Retail prices have risen by a nation-wide average of around 30 per cent over the past three to four years and are expected to continue to rise by around 37 per cent out to 2013-14.

“This is the equivalent to a price increase in the total residential electricity price of 8.34 cents per kilowatt hour between 2010-11 and 2013-14.”

What this represents for a household with a couple of air-conditioning units, plasma TV and so forth, using about 8,000 kWh a year, is a rise over four years of about $667 in the power bill – which would have stood at $1,200 in 2010-11.

Back in November 2010 I was one of the few media writers to highlight a two-page commentary by Macquarie Bank that is critical to understanding the cost of living situation. (If you put the bank's name and “Power surge” in to Google Search, this note is still accessible.)

What the bank said, in short, is that 15 months ago householders were confronted by the sharpest annual increase in the utility bills' share – power, gas and water – of our national CPI since 1983 and that their council rates were going up fast as well.

The other critical political factor is petrol prices. They have nothing to do with electricity bills, but they are an additional, essentially non-discretionary, burden for most households – and they are probably aggregating twice the cost of annual average residential power purchases.

Add up all the energy bills for a typical Aussie household and I suspect you get no change out of $6,000 a year.

In these circumstances you must expect the owners of hip pockets to be less than happy with every imposer of cost.

The bleeding obvious in this stuation, as the AEMC points out, is that the pressure, as far as electricity prices are concerned, is going to continue out to 2013-14 because of existing regulatory and policy decisions.

(In fact, of course, the problem will roll on beyond this point because we are en route, as Port Jackson Partners have predicted, for a range of reasons towards residential power bills in 2017 being double what they were last year.)

Against a backdrop of what voters have now done to Labor governments in New South Wales and Queensland in the past year, this is not exactly good news for Julia Gillard and her advisers as they confront a late-2013 federal election.

What odds would you place, therefore, on a strong political drive, spearheaded by the federal government, to push ahead with ‘smart meters' and time-of-use charges over the next 12-18 months?

Don't hold your breathe is my advice.

Much has been made in some quarters of a trend downwards in average household power consumption on the east coast since 2009, but apart from the need to service supply to new suburbs and inner-urban higher-density housing developments as well as to replace ageing equipment, the big ongoing requirement for network capex is peak demand – which is climbing inexorably.

On the east coast, using the Energy Supply Association load forecasts from last year (a new one will be published in mid-2012), peak demand could be close to 50,000 MW by 2019-20 on present trends. It stood at just under 40,000 MW in 2010-11.

Peak demand nationally has grown 70 per cent in 20 years – a key element in the requirement for network capital outlays, which in NSW alone, the biggest area of expenditure, is seeing $22.4 billion being spent in total between 2005 and 2014.

Add Queensland and the 10-year network outlay figure for these two states nears $40 billion.

As these states are set to be the political killing grounds for the 2013 federal election, this is not irrelevant information.

The AEMC reports that national networks now include $11 billion worth of assets that are used for only 100 hours a year.

It says that peak demand growth is responsible nationally for 44.7 per cent of current distribution business capex (adding up to $16 billion of the present tranche of spending) and 52.5 per cent of transmission capex (adding up to $5.3 billion).

AEMC says that the vast majority of households do not have adequate information or knowledge about the costs of their consumption and/or the metering technology that could give them more information.

A big part of the problem identified by the commission is the lack of incentive to invest in installing smart meters.

The AEMC points out that consumers do not have sufficient information to assess costs and benefits. Retailers do not have any certainty that they will retain a customer long enough to recoup the meter costs. Networks do not have certainty that they can recover the installation investment through the regulatory process.

Hello! Do you detect a large-scale failure of policymaking here?

I certainly do and, of course, when the music stops at election time, the politicians' knees jerk and we get ‘Can-Do' type solutions.

Except that it's not a solution. It's a band-aid.

The underlying problem remains.

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.