Something fishy with transmission planning

The Australian Energy Market Commission recommended several weeks ago that each state transmission company should be free to ignore the Australian Energy Market Operator's own planning assessment on what transmission lines do and, importantly, don't need upgrading. At present this is the status quo across all states except Victoria.

In Victoria, AEMO determines what transmission lines require upgrading and then the upgrades are put out to open competitive tender rather than controlled by the owner of the transmission system. Our charts of the week illustrate why we should be concerned about this decision.

According to a recently released report by Bruce Mountain of Carbon Market Economics, this decision by the AEMC requires an awful lot more justification and evidence than they've provided to date. Indeed, if anything, we should be moving in the opposite direction with other states adopting Victoria's approach – as recommended recently by the Productivity Commission.

The chart below illustrates why this is a major issue, rather than just some esoteric argument for regulatory economists. Both Powerlink and Transgrid have embarked on some incredible growth in expenditure on their networks, doubling the value of their assets out to 2015 involving $7 billion in capital that energy consumers have to pay for.

Regulated asset base of NEM transmission companies

As regular readers of Climate Spectator would be aware, midway through this year AEMO substantially scaled-down the expected electricity demand growth over the next decade. This is partly due to the electricity system planners being genuinely surprised by changes in our pattern of energy use.

But it's also important to recognise that energy demand forecasts this year were done differently to prior years. In the past each transmission company in the NEM would do their own forecast of electricity demand in their state, which would be provided to AEMO and duly published without AEMO questioning it. This year however, AEMO decided to do its own forecasts.

That we had a huge reduction in expected electricity demand growth at the same time that AEMO did its own forecast is probably no coincidence.

Transmission companies get paid by the size of their asset base (the value of all the equipment they build- poles, wires, transformers etc). If electricity demand is expected to grow significantly then they are authorised to grow their asset base to accommodate the extra demand. This creates somewhat of a conflict of interest, especially if these companies can borrow at the government bond rate and then charge customers at private sector financing costs.

AEMO on the other hand doesn't make any money, nor generate bonuses for staff, based on growing the amount of capital spent on the transmission system.

If we turn to how much money is spent per megawatt of peak demand or per megawatt-hour of energy we see there is significant growth occurring across most states, except Victoria (the blue line of SP Ausnet), which is managing to maintain or even reduce the amount they spend on the transmission system relative to energy demand. 

Regulated asset base (2011$million) per MW of peak demand and per MWh of energy delivered

Note: Blue – Victoria, Black – NSW, Green – SA, Red – QLD, Orange - TAS

If we then turn to forecasting accuracy, across all states analysed they tend to overestimate demand growth relative to what actually eventuates. However AEMO's Victorian forecast tends to be much closer to actual demand than that prepared by the Queensland and NSW transmission companies.

Average annual difference between projected and actual peak demand (MW) over the period from 2006/2007 to 2011/2012