The price of power
- Sunday 27 April 2014 8:05AM
With Australian electricity prices amongst the highest in the world, more and more households are going solar. The big power companies say the Renewable Energy Target is undermining their businesses and they want it wound back. The federal government agrees, so who is to blame for the high price of power? Jess Hill investigates.
Never has it been more expensive to turn on our appliances. In the last few years, our power bills have doubled, making Australia’s electricity prices some of the highest in the developed world.
Prime Minister Tony Abbott blames two things: the carbon tax and the renewable energy target. He says the government’s review of the target will look at its impact on bills, because ‘renewable energy targets are significantly driving up power prices right now’.
From the coal-fired power station point of view, you couldn’t have a worse competitor, because solar is at its best when the market is at its most profitable.
Richard Denniss, executive director of the Australia Institute
But Mr Abbott’s claim that the renewable energy target is expensive is not supported by the data. The Australian Energy Markets Commission says the renewable energy target adds four per cent to the average electricity bill. For an average household, that’s about a dollar a week.
‘For all of the attention that carbon price has got, from the increasing attention the renewable energy target’s got, the main reason that electricity has been getting dearer is the overinvestment in poles and wires, and the fundamental inefficiency in the way that the national electricity market’s working,’ says Richard Denniss, executive director of the Australia Institute.
Federal Treasury estimates that 51 per cent of an average household bill is spent on network costs. Most of that is going towards paying off the $45 billion network companies have spent on updating our poles and wires over the last five years.
This investment was justified by the network companies’ own data, which showed that Australia’s energy demand was going to increase dramatically. But in 2009, just as they were beginning to spend, something unprecedented happened. Energy demand in Australia didn’t go up—it went down. And it’s continued to go down every year since.
Despite the clear reality of falling demand, the network companies insisted that demand was rising, and they carried on investing billions of dollars into the grid. Every dollar of that investment is now being recovered from consumers, via our power bills. Every dollar, plus ten per cent—a guaranteed return granted to them by the regulator.
In 2012, three years after the spending began, the Senate held an inquiry into electricity prices. It was chaired by Labor MP, Matt Thistlethwaite.
‘What we found was those network businesses—that earned the most profits were the ones that invested the most,’ he says. ‘So there was a perverse incentive in the system for an overinvestment in the poles and wires, and that led to dramatic profits for those businesses, but of course it was the consumer that paid for that cost of that additional capital.’
Mr Thistlethwaite says that the inquiry was presented with many examples of infrastructure being built where it wasn’t needed. ‘We discovered a network business that had invested $30 million in a substation in Newcastle, and I actually visited the substation. It wasn’t connected to the grid. The reason why it wasn’t connected to the grid; when the decision was made a couple of years ago to invest in this particular piece of infrastructure, it was projected that the demand would be there. But the demand didn’t eventuate.’
Energy analyst Bruce Mountain from Carbon Market Economics says that although some old infrastructure needed updating, the amount of money wasted on the poles and wires was substantial. ‘I would estimate as an aggregate across the national electricity market, perhaps at least a half of that total spend was not actually necessary, but it does vary by state.’
The staggering rise in electricity prices brought on by this investment has had a rather unintended consequence. ‘Because the price got so high, it made solar even more competitive from the customer’s point of view,’ says David Leitch, a utilities analyst with UBS. ‘Because when you use the solar in your house, you don’t use the wires and poles in the system, so you’re eliminating half the final price.’
The fact that households with solar can save more than half on their power bills has made solar panels an economic choice, not just an ethical one. There are now 1.2 million households getting their daytime power from solar panels.
‘It’s essentially turning households into competitors of the electricity companies, because all of a sudden households are producing electricity, and they’re deciding what to do with it,’ says Mr Leitch. ‘As opposed to just having a choice of take it or leave it from your friendly electricity retailer.’
This article represents part of a larger Background Briefing investigation. Listen to Jess Hill’s full report on Sunday at 8.05 am or use the podcast links above after broadcast.
Solar rooftops are wreaking havoc on the traditional power industry, says Mr Denniss, because they produce the most amount of energy at the time of day when the power industry makes the most money.
‘Solar panels have got this great trick, they make lots of electricity when the sun is shining; that’s when we like to turn our air conditioners on,’ he says. ‘When everybody turns their electricity on at four o’clock on a hot Thursday afternoon, we have enormous demand for electricity for these short periods of peak demand. And that’s when solar panels are at their best.’
‘Solar panels are actually pumping quite a large amount of energy in during these periods of peak demand, and that’s pushing down the peak price. Now that’s great for everybody, except the so-called baseload power stations. Because the baseload power stations used to be able to sell their electricity for a much higher price at four o’clock on that hot Thursday afternoon. From the coal-fired power station point of view, you couldn’t have a worse competitor, because solar is at its best when the market is at its most profitable.’
What that means is that the big coal-fired power plants are earning less for the energy they produce. That’s because Australia has more electricity than it can use.
That’s a big problem, says the federal industry minister, Ian Macfarlane. ‘We’re facing an enormous challenge in terms of an excess generating capacity in electricity in Australia. To be adding large quantities of generation into that situation has to be questioned. The review process will go through those things.’
With energy demand going down, and renewable energy supply going up, Australia simply doesn’t need as much power from fossil fuels anymore. In the last few years, several large coal-fired power stations have been shut down or mothballed.
‘Australia doesn’t need more generation; if we have more wind at the moment, it will displace some other form of generation,’ says Mr Leitch. ‘So no-one wants to be displaced in this world, and we can all understand that.’
That’s one of the reasons why the conventional power industry is lobbying the government to wind back the renewable energy target—known as the RET. The Energy Supply Association of Australia, which speaks on behalf of the conventional power industry, says that now demand has gone down, 41,000 gigawatt hours will represent around 30 per cent of Australia’s energy supply, rather than 20 per cent.
‘The conditions under which the RET was designed no longer exist, and we think the RET is broken and can’t work in an oversupplied market,’ says Matthew Warren, the ESAA’s CEO.
But there has already been a review. At the end of 2012, the Climate Change Authority reviewed the target and recommended that it be maintained. Their review was supposed to provide certainty to the renewable energy industry.
The chair of the Climate Change Authority is Bernie Fraser, a former Reserve Bank governor. He says that just by holding another review, the government has ensured that the 41,000 gigawatt-target won’t be met. ‘Investment is actually being cut back and delayed, and I think because of that, I think it’s apparent now that the 41,000 gigawatts for large renewable energy power plants, is not going to happen. It’s going to be a lesser figure and I think that’s what the opponents, the critics of renewable energy want to see.’
‘Policymakers need to look beyond short-term economic considerations in the interests of some of the big companies to longer-term community interests. And that’s what governments are supposed to do, but unfortunately it’s not happening at the present time,’ he says.
So it’s a bit… well, it’s more than a bit, it’s very disappointing that we’re falling behind, and we are falling behind what many other countries are doing.