Published by Australian Financial Review, Thursday 4 February
Just before Christmas, Victorian Energy Minister Lily D’Ambrosio decided that much-needed electricity tariff reform in that state would be implemented on an “opt-in” basis. Although it attracted little notice at the time, this decision sets a worrying precedent and will be an early test for her federal counterpart Josh Frydenberg and the Council of Australian Governments Energy Council’s national reform agenda.
To understand why this is a big deal, a little untangling is required.
The COAG Energy Council is the national body of energy ministers with responsibility for key reforms in the energy sector. One of its key objectives is “to ensure network tariff reform is seen by stakeholders as a key priority for ministers to support the efficient utilisation of the network by consumers, enable the efficient integration of new technologies and lower future network costs”.
To achieve this laudable objective, the Australian Energy Market Commission issued a determination that requires network businesses to develop cost-reflective prices.
During 2015, the Victorian network businesses submitted their proposals to the Australian Energy Regulator (AER). Then, in a letter to the AER dated December 21, the Victorian minister advised of her decision to implement the new pricing arrangements through an “opt-in” approach from 2017 until 2020.
Setback for tariff reform
This decision is a setback for electricity tariff reform. Not only does it lock in unfair tariffs, it sends the wrong signals for new investment. Most of the cost of smart meters will be wasted and an opportunity for lower prices for all Victorians will be missed.
These consequences flow from the minister’s decision because the existing flat tariffs that do not reflect the cost of the network service will remain as the default. The history of reform is that very few consumers opt in to a change even when they would benefit.
And consumers would benefit overall. In a 2014 report for Grattan Institute, Fair Pricing for Power, we found that more cost-reflective pricing could have saved network businesses nearly $8 billion in reduced investment over five years, with the savings passed on to consumers in the form of lower bills. This explains why tariff reform is a key objective on the COAG Reform Agenda.
When the overall benefits to consumers are so positive, it would be much better to make the new, cost-reflective tariffs the default, and give consumers the choice to opt out.
So why has the Victorian government refused to take the lead on tariff reform? A couple of factors might have influenced the minister’s decision.
First, there remains a negative sentiment from the mandated implementation of smart meters in 2009. Victorians have paid more than $2 billion for the rollout of smart meters, but an auditor-general’s report says they have received few benefits. The minister might have decided that another mandated change would be a bad idea.
Remove unfair subsidies
Second, the introduction of more cost-reflective tariffs would remove unfair subsidies between consumers. Currently, consumers whose usage is relatively flat over the day subsidise those whose electricity usage adds disproportionately to peak demand. An analysis by energy retailer AGL indicated that Parents at Home receive the highest level of cross-subsidy, paid for by Households in Hardship and Working Couples. Removing these cross-subsidies would mean that consumers with relatively high demand at peak times, who are not currently paying their fair share of network costs, would lose a cross-subsidy, and face higher bills in the short term. The minister might simply have been averse to creating losers.
Yet the decision contains contradictions. In her letter, the minister asserts: “As the only jurisdiction to have undertaken a rollout of smart meters, Victoria is in a unique position to deploy a range of technologies and services to manage electricity demand.” Using smart meters to help deliver fairer and cheaper electricity depends on cost-reflective tariffs.
In the short term, cost-reflective pricing can mean higher bills for people who use a lot of electricity at peak times. If some low-income households might be disadvantaged, targeted assistance is a better solution than consigning important reform to the too-hard basket.
Australia has national energy markets and co-operative federalism should mean that governments implement agreed reforms in the national interest. Our politicians need to be brave and explain the benefits of reform. To do otherwise sends poor signals about governments’ reform commitment to consumers and businesses in all jurisdictions.