A milestone!
OPINION: The tension of an Australian election, the lived reality of the climate crisis and the global shocks of Putin’s invasion of Ukraine meant that an important milestone for me was overlooked: my 100th Renew column.
In 2016, Renew published an ebook of my first 75 columns. In that, I wrote eight articles exploring the evolution of Australia’s energy and climate issues from the 1990s to 2016, and many thoughts about our energy and climate future.
Radical change since then has been reflected in my Renew columns. Today, we understand (some of) the fragility of centralised fossil fuel energy supply, and how we are exposed to global market forces and prices. Renewable energy is now the cheapest supply option, but we still don’t drive energy efficiency and productivity at optimal levels.
We have fundamentally shifted climate action from “freezing in the dark” and “destroying our economy” to “smart business action,” “consumer empowerment” and “potential to grow export income and jobs”. We are beginning to recognise that high energy efficiency solutions deliver many benefits beyond saving energy.
We have not, however, confronted the scale of trauma, economic damage and environment loss caused by decades of policy failure, lies and compromise on climate change.
Does returning electricity to public ownership matter?
Recent energy price spikes, closures of smaller energy retailers and the chaos around increasingly unreliable coal power stations have encouraged debate about public versus private ownership. There are no simple answers.
Some publicly-owned electricity generators (such as Snowy Hydro and Queensland generators) have taken advantage of market conditions to charge high prices, just like the private ones. My impression is that state treasuries encourage this as a less visible alternative to increasing state taxes. Ownership is not really the key issue.
State governments have the strongest incentives to ensure affordable, reliable, sustainable energy systems. History has shown that, if the lights go out, state governments lose power. So it is not surprising to see state (and territory) governments aggressively acting to sort out our energy mess.
The present electricity market was designed by economic fundamentalists and privatisation-obsessed politicians. This market design has never worked very well. Its shortcomings have been masked by factors such as the large amount of existing (mainly base-load) generation capacity, a significant increase in plant utilisation and explosive growth of renewable generation, combined with lower-than-expected demand.
Recent global energy shortages and the lived experience of climate change have just exposed the weaknesses. Electricity prices consist of wholesale prices, transmission and network charges, and retailing margins. Goods and services tax and environmental programs also contribute. Wholesale electricity prices are shaped by the “spot” market. This market’s design encourages volatile prices and allows windfall profits. In every five-minute bidding period, the spot price paid to the highest-priced generator needed to maintain supply is also paid to all generators that bid and operate.
When gas or hydro sets a high price, low bidding renewables and coal generators with low operating costs make windfall profits! Over time, this influences all electricity, and the consumer pays. The principle underlying this market is to provide signals to investors to build new supply capacity. This is crude and expensive, and has led to volatility and enormous money flows from consumers to multinational businesses that don’t pay much tax in Australia and have narrow short-term perspectives that distort investment in public interest solutions.
State and territory governments have found that negotiating long-term supply agreements through auctions (for example, ACT and Victoria) can deliver low, stable prices while reducing costs and risk for project developers. Victoria is going one step further by injecting public equity that should deliver solid financial returns to Victorians.
Network (poles and wires) pricing is also problematic. Network operators are regulated regional monopolies that comprise up to half of consumer energy costs. Transmission is highly regulated. They have been “privatised” but not exposed to markets. Indeed, many of our electricity and gas supply assets are now owned by governments of other countries! Networks seem to be very profitable low-risk assets.
Electricity network funding is dominated by “postage stamp” pricing. If I send a letter to a nearby address or far away, I pay the same price for the stamp. That approach is applied to electricity networks. That’s why rooftop solar exports are paid so little, as networks are paid the same price whether you use their infrastructure to deliver power down the street or hundreds of kilometres away! This pricing structure creates an economic barrier to community batteries and other local energy solutions.
In retailing, the competitive model incurs serious costs. Each retailer has highly paid managers, must operate expensive software, and faces significant costs of customer “churn” – consumers switching retailers. Retailers often take advantage of passive or loyal customers with higher pricing – as in many other industries. Default tariffs have been introduced to limit such practices.
Legislation controlling network operators, retailers and other aspects of energy markets exists at state level. So each state has capacity to act independently, which they do. For example, NSW, Victoria, ACT and South Australia have retailer obligation schemes that require energy retailers to fund state government efficiency incentive programs.
Economic analysis and energy policy: building regulation case study
Recent debate about strengthening home building regulations from 6- to 7-Stars provides a worrying perspective on just how the breadth and assumptions in economic analysis can change important policy decisions.
The original consultation Regulatory Impact Statement (RIS) concluded that upgrading from 6- to 7-Stars was terrible economics. It found this would only return a 35 cent benefit for each dollar invested, imposing large costs on the Australian economy.
After a flood of community support for change, a revised RIS was prepared. Now, 7-Stars returned 80 cents per dollar spent at an economy-wide level and, at a household level, it saved $1.30 for each dollar invested. Additional factors were identified that could justify more stringency, including enhanced social equity, amenity, health, resilience to extreme weather events and power outages and meeting future emission reduction commitments.
Comparison of the two reports raises questions:
- Why did the benefit-cost ratio change so much?
- Why is the difference between household outcome and economy-wide outcome so big?
The strong public response to the consultation and emphasis on social justice, health and resilience were critically important. The additional analysis in the revised report should have been done earlier, as it clearly made a big difference.
The second question was answered with: “fixed network and retail costs that are saved by households still need to be recovered by energy retailers,” and, “by using wholesale energy prices (as a proxy for avoided resource costs) and changes in generation and network investment”.
This approach is flawed. It assumes a regulatory change must have no adverse financial impact on the energy supply industry’s profits, and that industry can’t reduce impact through competent innovation – like other industries. Buildings in new developments would reduce required network capacity. New homes in existing areas would free up network capacity for higher density redevelopment and EV charging.
Using a discount rate of 7 per cent per annum for long-lived investments in this economic analysis is ridiculous: many countries use three per cent. Relative to a discount rate of seven per cent, using three per cent values savings 30 years into the future around 3.5 times bigger.
We need a better approach to evaluating the multiple benefits of sustainability measures for regulatory and policy decisionmaking.
This article is republished with permission from Renew magazine.
The storms that hit NSW in February 2009 knocked down 250km of power lines across Sydney, the Central coast and the Hunter and resulted in 139,000 homes without power. This storm was described by Ausgrid as “one of the worst to hit the network in 30 years”. Australia is at risk from further such disruptions because extreme weather events will occur more often and only a small percentage of power, about 6% nation wide, is supplied underground. There seems little government will in increasing this even though it would be beneficial to communities, cost effective and reduce the fire risk created by falling power lines.
In the wake of the NSW bushfire crisis, Four Corners examined almost four decades worth of evidence into the cause and impact of major bushfires concluding some of the most catastrophic bushfires in Australia’s history have been started by powerline failure. If proven, it means 93 per cent of the deaths on Black Saturday – Australia’s worst bushfire disaster – were caused by fires started by powerlines. The program also found power companies have known since 1974 that their lines can cause fires. Power companies have historically settled legal cases made against them, without admitting liability, avoiding critical findings involving negligence.
One option being canvased is for power supplies to be cut during sever weather conditions but both NSW and Victorian authorities believe the benefits of leaving the power on outweigh the risks. They warned that turning power off could cost lives. There is a better way;
The Perth inner suburb of Subiaco has carried out an ambitious program of burying power lines. The program has been a great success, particularly because many of the streets are narrow (10 metres) and the removal of poles has greatly improved their appearance. The City of Subiaco is believed to be the only local authority in Australia which has undertaken undergrounding without subsidy or charges to individual householders. It chose not to impose charges on property owners because of possible conflict between those who agreed to pay and those who did not.
Subiaco found that by removing unsightly poles, and so being able to improve the alignment of footpaths and roads, it increased average property values by $10 000 per lot on properties valued at $200 000 to $300 000. A similar figure is estimated for other parts of Australia. This seems a reasonable return on the $3000 to $4000 per house required for sinking power lines, especially when the intangible benefits are added.
Subiaco’s program began in the 1990’s , and by the middle of 1997 some 35% of the suburb’s streets were free of overhead power lines. The council has spent $5.8 million over nine years, and one benefit which all householders with overhead lines will recognise is that the apparently wanton cutting of street trees to provide clearance from overhead lines is no longer necessary, and trees can be allowed to develop their natural shape.
The options pursued to encourage investment in underground lines vary from State to State in Australia. A survey of distribution systems across Australia reveals a pattern of inertia, with a few modest schemes and pilot programs. In New South Wales, the cost of placing the power supply underground is between $1500 and $2000 per residential lot in new subdivisions, while converting existing suburbs doubles this to between $3000 and $4000. This is considerably cheaper than replacing a pole with costs ranging from $7,000 to $14,000. The open excavation technique previously used to bury underground cables creates disruption to streets, sometimes for long periods. However directional drilling minimises such disruption. The technique involves sophisticated machines that can drill holes up to 250 metres long. The tunnels or conduits can turn corners and can be sunk to any required depth. A smaller drilling machine is used to make the tunnels which take cabling from the street into individual homes.
At a time when Australia needs to increase employment and reduce the threat from climate change surely the undergrounding of power supplies should be a priority.