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10
Dec
2013

energy_image_web

Shock to the system: dealing with falling electricity demand

Tony Wood and Lucy Carter

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Australians are using less power but paying more for it, with potentially highly damaging consequences for the electricity system,

While the average household has consumed 7 per cent less power since 2006, its average power bill has gone up over the same period by more than 85 per cent: from $890 to $1660 a year.

The decline of manufacturing and a wider restructuring of the Australian economy over the past two decades, coupled with the rise of solar panels and a new breed of energy-efficient appliances, have all helped to reduce electricity consumption.

But prices have stayed high in part because network businesses – which carry power through poles and wires from the generator to the home – have spent billions of dollars on infrastructure that falling consumption has made redundant. A nasty correction is coming and the question is who will pay for it – power companies, governments or consumers again?

Network businesses, unlike electricity generators, are regulated monopolies not subject to market forces.

For years regulators have allowed these companies to earn excessive profits by setting tariffs that are too high, given the low risk they face as monopolies.

This was less of a problem when consumption was rising but when it falls, the high cost of the network is spread over a smaller volume of power use, and everyone pays more.

In response, governments must ensure that network companies make future investments that better match future power needs, and begin the hard task of reforming electricity tariffs so that they better reflect the cost companies incur.

Even with these changes, redundant assets may have to be written down. Who pays for that will be difficult to decide. But while reforms in this area will be neither simple nor painless, governments must act now to prevent even higher prices and more pain down the track.