Rudd puts electricity reform number 1

Kevin Rudd was accurate in saying electricity reform is needed, but he'll need to overcome vested interests, particularly state governments, who have strangled reform through endless reviews.

In the economics, debt and deficit debate where Tony Abbott failed to turn up (as an aside – how much would it cost to recall parliament just for Kevin Rudd and Tony Abbott to have a debate?), Rudd outlined seven areas of priority reforms to improve productivity. In outlining them he said:

Number one: Domestic electricity price regulation in Australia, and the impact of the current carbon price as well as the future availability of competitively priced domestic gas supplies are high on the agenda.

Australian electricity prices are too high by global standards.

This affects the competitiveness of all firms large and small. Of course it also affects individual consumers.

But before you all start reaching for your revolver on the carbon price, let’s be rational about this: the carbon price at present contributes less than 10 per cent to national electricity prices.

The primary reason for the hike in electricity prices appears to be the current system of national electricity regulation which has allowed excessive rates of return for publicly-owned transmission and distribution utilities which have become cash cows for various state and territory governments.

Rudd is spot on.

As an example, the chart below provides an outline of the various components that sit behind the average Queensland household electricity price. 

The black component on the bottom is the actual cost of generating the electricity, which has barely changed. Yes, the carbon price in grey makes an addition to the cost, as do the renewable energy target in green and the solar feed-in tariff in yellow. But the real issue is the orange of distribution networks – owned by the Newman Queensland government. 

Graph for Rudd puts electricity reform number 1

Source: Queensland Competition Authority data.

The data for NSW and Victorian households are similar.

In Queensland’s case they managed to get the regulator to sign-off on a five-year network investment binge prior to July 2010. This was argued for in part to cope with the growth of air-conditioners.

A few years on and electricity peak demand has decreased by 14 per cent (Energex) and 20 per cent (Ergon) from their forecasts.

What’s more Energex managed to wrangle a 3 per cent premium over and above its actual cost of debt, delivering a windfall gain likely to be around $1 billion to the State Treasury of Queensland. 

Now the regulatory regime that allowed this all to happen wasn’t Campbell Newman’s fault, nor other state Liberal premiers. But both Newman and NSW Premier Barry O’Farrell, who both own electricity networks and generators, have strong incentives to resist reform. Certainly until after they’ve sold off the assets. Private sector energy supply incumbents will also resist reform that would promote greater competition from companies that save energy instead of producing and transporting it.

The issue is not identifying the problems and how to solve them. As I explained in an article back in May 2012, Electricity Market Reform – Don’t Hold your Breath, inquiries and reviews stretching back more than a decade have explained what needs to be done – the most recent being just last week from the Productivity Commission.

Rather the challenge is in overcoming the existing entrenched interests and political cowardice to implement the necessary reforms. Rudd could start by implementing some of the recommendations from his own Prime Minister’s Task Group on Energy Efficiency report which has been left to gather dust.