Cut energy bills by ending gold-plated investment - Grattan Institute

Published by the Australian Financial Review, Sunday 25 March

Australians want cheaper electricity. State governments in Queensland, NSW and Tasmania could save consumers $100 to $400 a year by addressing past over-expenditure in their distribution and transmission network businesses.

A new Grattan Institute report, Down to the wire: A Sustainable Electricity Network for Australia, identifies that the cost of the National Electricity Market’s power grid grew from around $50 billion in 2005 to $90 billion today. Up to $20 billion of that was not justified to support population growth, growth in consumption, or even growth in peak demand. Nor was it justified by improvements in reliability.

The over-investment occurred overwhelmingly in Queensland and NSW. The major causes were regulatory incentives and ownership structure, overlaid with excessively high reliability standards. In the early-2000s these governments, concerned about unreliability and under-investment, changed the investment rules that drove the businesses. The system lurched heavily to much higher capital investment, with little consideration of the extent of any benefits to consumers – and whether those benefits would justify the costs. Some businesses were slower than others to wind back their capital investment when growth forecasts turned out to be too aggressive.

The fix is simple but painful.

Where governments still own the businesses, they should write down the value of the assets, which would result in lower electricity bills. In NSW, this should have been done before the electricity privatisation deals. But intervening to revalue the privatised businesses now would create too many problems, so the government should use the proceeds of the privatisations to fund a rebate to electricity consumers.

Of course, it is hard to be precise about the extent of the over-spend and therefore the size of the compensation to consumers. This will necessarily be a political judgement. Some improvement in reliability may have been justified and some investment, surplus at the time, may be in areas where demand will grow in future.

But if governments decide it’s all too hard and do nothing, they should make such a decision public and acknowledge that high electricity prices are paying for other government infrastructure and will lead to poorer investment decisions in the future.

Today’s businesses may argue that our recommendation will destroy the regulatory system or threaten new investment. And they will point to the need for high future return premiums that could cancel any gains. But our recommendation – that the government owners, rather than the Australian Energy Regulator, trigger an asset write-down – is designed to avoid a material threat to the regulatory system. And, correctly aligning risk and reward with efficient decision making is surely a good idea.

Whether these state governments implement our recommendation or not, they should act on two related fronts. First, they should move to full privatisation of the network businesses because evidence shows that privatised electricity businesses deliver lower cost and therefore lower prices for consumers without compromising reliability or safety. Second, all governments should work with the COAG Energy Council of energy ministers to implement cost-reflective network pricing. The current pricing structure for transmission and distribution networks is largely based on throughput whereas the costs are overwhelmingly fixed. Fixing this will reduce unfair cross-subsidies as well as peak demand and overall network costs.

The network businesses and regulators are already grappling with the implications of technology advances, changing consumer choices, and a transition from large, centralised, fuel-based electricity generation to a system with more smaller, distributed, intermittent, zero-marginal-cost generation. In this rapidly changing world some existing network assets may become under-utilised or may even be superfluous to requirements. New network assets may be required, but some will carry high risk of becoming “stranded assets”. Examples include new interstate transmission lines and network extensions to connect solar and wind farms in regional areas to the main grid. The cases will multiply within the terms of current governments.

The central questions for policy makers are: who carries the stranded-asset risk, and how will it be priced. The two answers should be aligned. It will simply be untenable for current and future asset owners to argue that all this risk should be borne by consumers. This is no more credible than the argument by owners of plants emitting greenhouse gases or producing asbestos that they should be exempt from the consequences of pricing or banning those activities.

Past poor decisions by governments and energy regulators have led to a nasty problem for current governments. The solution is most unpalatable for those governments. At the very least, today’s governments need to do the hard work on policy design to avoid even nastier problems for future governments, asset owners and electricity consumers.