Wallowing in a power price death spiral

A new AGL Energy report reveals the extent to which both sides of politics are ignoring the real cause of power affordability problems, as energy hardship moves into a new phase.

Australia’s energy ministers missed an opportunity when they met under the Council of Australian Governments’ umbrella in Darwin last month – and a new paper on the east coast power market highlights just how important it is for them to rethink their attitude.

Meeting as the CoAG energy committee under Martin Ferguson’s chairmanship, the ministers took another peep at the roll-out of smart meters, which has had a troubled history in the pace-setting state, Victoria, and shied away.

Their communique said that, other than Victoria, governments did not expect to pursue smart meters – and therefore the tariff changes that come with them – "in the next few years.”

The problem with this timidity is highlighted in the release on Thursday of a new AGL Energy economics paper by Paul Simshauser and Tim Nelson.

The pair call for the structure of electricity pricing to be overhauled – and they warn of a "death spiral” looming in the east coast market if governments don’t get their act together.

Simshauser and Nelson call for a shift away from flat tariffs and quarterly billing to smart metering, time-of-use pricing and monthly billing to address critical issues in the market.

Politically, what’s important about their new paper is that it brings home to Coalition state governments in the two biggest market regions on the east coast that they face confrontation with the carbon tax’s evil twin, peak power, if they don’t get their acts together.

The Queensland and New South Wales governments will be confident, given the opinion polls, that they will benefit from Tony Abbott moving swiftly on seizing office to kill the carbon tax – but this will not resolve the other problem.

Simshauser and Nelson explain it like this: "The energy market death spiral (results from) peak demand growth continuing unabated while higher (end user) bills lead to reductions in underlying demand at times least inconvenient to consumers.

"Falling base or average energy demand results in higher tariffs because the industry’s heavy fixed costs will be spread across fewer units of output.”

Bad plus bad equals worse, they point out. "Falling throughput leads to tariff increases and rising peak demand – with its consequent new investment – (requires) additional tariff increases.”

Simshauser and Nelson warn: "It is not difficult to see how this could become a vicious cycle in the absence of careful intervention by policymakers and, in particular, the introduction of default time-of-use and critical peak pricing structures.”

Translated for the pollies, the problem here, and especially in NSW, which has by far the largest electricity demand nationally, is that, while average demand is falling for the first time since the second world war (and has been dropping two per cent a year recently in NSW), there is no sign of peak power plateauing.

Quite the contrary.

If current trends are maintained, east coast peak power demand, on the forecast produced by the Australian Energy Market Operator in the past fortnight, is heading towards 44,700 megawatts in 2022 from 38,000 MW today.

This is lower than the Australian Energy Market Commission’s consultants were saying in just December in the "power of choice” review that is underway for energy ministers, but it is still heading north in no small way.

NSW is on track for a peak beyond 15,600 MW (14,500MW today). Queensland for 11,000 MW (just under 9,000 MW today). Victoria for more than 12,000 MW (compared with 9,600MW today).

When you consider that each megawatt of peak demand can require up to $7,000 worth of infrastructure, customers are looking at billions of dollars of new capex outlays and consequently higher charges.

There is another angle to the Simshauser and Nelson review that carries political danger.

The AGL pair, who have the company’s 2.4 million household customers for electricity and gas as a reference base, are pointing out that the energy hardship problem is moving in to a new phase.

It is hardly news that consumers with low incomes are battling to pay their energy bills, but Simshauser and Nelson report a "startling” development: more and more families with two children are being impacted by bill stress – and government assistance and concessions for energy supply are not aimed at them.

About one in four of these households, who make up 27 per cent of residential demand, are having bill payment default problems.

Pensioner households notoriously "go without” to cope with their power bill problems, whether it is skipping meals or piling on clothes in cold weather. This is not a solution for the families with kids.

As Simshauser and Nelson say, "the political economy of energy pricing in Australia has never been so controversial.”

The heat at present is all on Gillard and the federal government, but what this AGL report highlights is that, when both she and her carbon tax are swept away, the 'death spiral' danger will remain – and it will be Coalition governments in the firing line.

There is a whole new cycle of power price increases going to be set off under this scenario and there are no quick fix solutions.

You can’t roll out smart meters across a state at the drop of a hat or stroke of a political pen.

Playing populist games with tariffs, as Campbell Newman is doing in Queensland at present, is not a solution; it will make the problem worse over time.

If you have kids or grandkids, you are probably familiar with the scene in "The Lion King” movie where the wise baboon takes the young meerkat to high ground and urges him to "look beyond.”

That’s the message in this AGL paper for the energy ministers.

Look beyond the carbon tax.

Your Darwin daze will bring you undone if you don’t.

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