Power bill reform needs a switch in time

Reforming the tariff system will ensure electricity services remain affordable and efficient. But with elections looming, many state governments will be hesitant to take action.

Media obviously finds the topic boring or too complicated, or both, so millions of Australian electricity accountholders are missing the signals: the decades-long way electricity bills are calculated is about to change radically.

Tariffs are at the heart of all of power bills, and how they should be calculated is near the top of the agenda for regulators, energy retailers and network businesses.

It’s a very different story for most policymakers (aka pollies): They have been badly burned over the past three years by the huge increases in power bills and are looking askance at the first of the sharp rises in gas bills that are in motion.

This is the last thing pollies need, especially when the impending change will inevitably require governments to dig deep into their wallets to compensate the many that will be disadvantaged by the move.

If this is the hard place, the rock for policymakers is that they are being told that the ongoing problems of the costs of peak power demand can’t be solved without these steps being taken -- and soon.

The trouble with tariffs is writ large in many of the heavyweight submissions to the Abbott government’s energy white paper process, but it is the timing that is the bugger factor for the state governments on the front lines.

Political leaders in South Australia (now in election mode), Victoria (poll in November), New South Wales (March next year) and Queensland (also 2015) would really rather not step up to the plate on this one just now, although Victoria is better placed than the rest.

Unfortunately for them, the watchdog on whom they are relying to cool the power price debate is at the forefront of telling them they need to get on with the tariff job and related measures.

In a white paper submission, Andrew Reeves, chairman of the Australian Energy Regulator, says that reforms to the way network prices are set have to go ahead.

The AER says a triad of steps is needed to help transform customers’ power world: tariff reform, the roll-out of smart meters and greater focus on demand-side management.

This, of course, is the path the Productivity Commission endorsed in 2011-12 that gave Julia Gillard the peg for promising us all that power price cuts of around $250 a year were just around the corner.

She chose not to dwell on the “how”, and federal and state governments continue to pay lip service to the need to go down this path, but it is almost a given that 2014 is lost as a year for these changes, and 2015 is a big election year for the two largest consumer regions.

The AER’s Reeves says reforms to network prices should be a policy priority.

“Cost-reflective pricing is an efficient way of responding to peak demand,” he writes.

“And, as long as customers face tariffs that do not reflect local network congestion, they will not face the correct incentives for investment in, and use of, local generation and smart devices.”

The present market environment, he adds, “creates great urgency for a system of pricing that moves towards cost-reflectivity.”

The Energy Networks Association, representing the transmission and distribution services that have copped most of the abuse over prices, has a few more thoughts on the subject.

For a start, it wants an end to the reviews and to move on the agenda.

It wants SCER – the Standing Council on Energy & Resources, the CoAG energy ministers’ committee – to meet more often, involve both industry and consumers more and to publish a “reform roadmap.”

The association’s “to do” list for SCER encapsulates why politicians keep crossing the road to avoid the discussion: the roadmap must, it says, include an efficient and fair transition path to cost-reflective power pricing, a “balanced approach” to introducing advanced meters, deregulation of all retail pricing, a process for educating consumers and a close look at consumer hardship programs.

The Energy Supply Association, effectively the Business Council for power and gas companies, goes further. It has produced a helpful set of guiding principles for the policymakers.

Start, it says, by deciding that all customers -- there are nine million east coast residential account holders -- should move on to cost-reflective tariffs as soon as possible.

Agree that customers who are imposing the largest distortions in the network systems (think homes with solar PVs and users of air-conditioning) should not be allowed to choose to stay on existing tariffs.

Accept that the tariff changes must be revenue neutral.

And agree that disadvantaged customers should receive direct assistance from governments rather than special tariffs.

Perhaps the scariest message for politicians is buried in the ESAA submission: while time-of-use charges are a step in the right direction, they may only be an interim solution because they are not necessarily fully cost-reflective.

“Tariffs based on capacity rather than consumption are likely to be the more efficient solutions over the long term. Ultimately, the approach may differ in various parts of the country, depending on variations in climate and availability of alternative energy sources such as reticulated gas.”

The Australian Energy Regulator sums up the driver for all this: “reducing the need to build networks to cater for a relatively small number of peak periods per year.” 

There are billions of dollars of capex caught up in this statement and billions of dollars of customer costs over time, including the charges that fall on struggling manufacturers as costs are spread across the consumer base.

Boiled down, this is a big problem that won’t go away.

It could have been addressed when politicians launched the last big changes to network regulation in the middle of the past decade -- changes that led to a $43 billion capex outlay and contributed mightily to the much-hated price spikes of the past five years.

Their successors today are being told over and over again that now is the time to plan and introduce a new model for how we purchase electricity services.

The longer they procrastinate, the more difficult the issue becomes.

The Centre for Energy & Environmental Markets at the University of New South Wales, in its white paper submission, provides a handy last word: “Affordability should certainly be a key energy policy objective,” it says, “but policy and regulatory arrangements that distort electricity prices by keeping them below their economically efficient levels will adversely impact overall societal welfare.”