Government needs to reform the electricity sector to avoid a death spiral.

11 December 2013 — Falling electricity demand that wasn’t seen coming means Australia’s electricity system needs an overhaul, a new report from the Grattan Institute has found.

While household energy use has declined by seven per cent since 2006 – thanks to improved appliance efficiency, energy efficiency standards for new homes and solar – power bills have skyrocketed, with the average yearly bill rising 85 per cent from $890 to $1660.

This cost increase has mainly been due to network costs – upgrading the “poles and wires” needed to get electricity from the generator to the home. However, the decrease in energy use has meant that many of these infrastructure upgrades have now been made redundant.

The Grattan report found that network operators, who receive a regulated return on investment, have also been allowed to set tariffs too high, considering the low risks they face as monopolies.

The report stated this wasn’t a problem when electricity use was rising, but now demand is falling the high cost of the network is spread over a smaller volume of use, and customers are paying for it.

With consumers increasingly turning to solar PV to alleviate rising bills and the coming availability of affordable energy storage, the grid faces a “death spiral” if costs continue to increase and off-grid solutions begin to become attractive.

“A nasty correction is coming and the question is who will pay for it – power companies, governments or consumers again?” said Grattan Institute Energy Program director Tony Wood.

To prevent a death spiral the report suggested that governments must:

  • ensure network companies make future investments that better match future power needs
  • begin reforming network tariffs so the prices companies charge reflect the costs they incur

“Even with these changes, redundant assets may have to be written down, and it’s a hard job deciding who will pay for that,” said Mr Wood.

“Reforms in this area will be neither simple nor painless, but governments must act now to prevent even higher prices and more pain down the track.”

The full report can be viewed here.