**Poll** Do you think energy prices are too high, about right or too low?

Energy
43

I can only respond for one. How it is now, how that came to be, why it is and what the future needs dictate is more than I can offer.

Whether it’s unnecessary investment depends on the objectives of each PV system owner. Mine were a step towards a lower personal carbon footprint and a lower total cost of energy. As low volume electricity users 6-8 kWh per day averaged the high fixed costs of daily connection were 50% of our billing. PV now meets 50% of our consumption, and the surplus typically offsets import 2 to 1.

Has it has been an unnecessary personal investment, allowing for the cost of money? A maximum of 12c per kWh inclusive of all fixed connection costs would be the cost of supply at which I would have thought twice, if it was purely a short term economic decision. IE The alternatives of green energy or offsets not considered.

There are other consumer costs we incur because supply from the grid does fail. I’ve had the 4 stroke generator out for major outages 6-24hrs. On at least 3 occasions in the previous 4 years. Without it we have no household water pump or treatment.

For the network costs in a typical bill, can I ask if the owners costs and returns required for the current designed network are recoverable at 12c all inclusive of the costs of generation, distribution, metering and retailing?

Are we talking about the return on investment for the Network owner operators? Hopefully the recommendations for the coming years are a decrease.

I do note that the AER-CRG Strategy is about least cost to consumers and provides directions on:

  • Engendering consumer confidence
  • Impacts of prices and price changes
  • Impacts in relation to service standards

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44

Generator capacity on distribution/transmission lines isn’t a good example…as most generator connections will not be running at capacity.

Whether Origin Energy runs their generator below capacity is a decision of the AEMO (market operator) and Origin Energy. AEMO can request higher cost generators not to generate (at capacity) in favour of cheaper generation…to try and push down the energy pool price.

The network up until recently has been designed for N-1 and to meet peak forecast demand based on a number of scenarios (it is worth speaking to a network planner to understand this). Peak demand may only be reached for a few hours each year …either now or in the future…or never if forecasts (loads and generation) change over time.

Australia has prided itself on having one of the most reliable electricity networks anywhere in the world. Consumers have an expectation that electricity will always be available when needed. The only exception is in time of disaster (cyclones/storms, earth quakes, bushfires etc). This expectation of reliability has come at a cost, the network being designed to the highest standard. This means that most of the time the main grid (transmission and distribution) won’t be operating anywhere near capacity. If forecasts aren’t met or changed, this can also affect utilisation of assets.

Transmission/distribution lines also have a design capacity and is driven by the type of line installed. Say a line has a capacity of 500MW, generators and consumers attached to the line won’t be anywhere near this capacity. This is for a number of reasons including that if peak demand say is 123MW, a line can’t be built for 123mW but instead a line with a capacity of 200mW may be the best fit for that part of the network. This creates 67MW of excess capacity.

The media has taken hold of this and called it ‘gold plating’…that the network has excess capacity which the consumer pays for. While forecasts can change and be part of the reason, the real reason for the supplies capacity in the past has been driven by reliability standards and consumer’s expectations.

Before leaving the industry, work has commenced on a risk based approach rather than past reliability standards. This was to try and understand what risk was acceptable and the costs based on risk. It is worth speaking to a network planner to understand how this had progressed.

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45

‘Gold Plating’ to describe over investment is a well established financial idiom. It’s appropriate and succinct. It became common practice to use the term to explain unnecessary expenditure on many projects. In this instance to explain increases in the network costs passed onto electricity consumers.

The ACCC concluded in it’s report in 2018 into the increasing costs of electricity.

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As highlighted it is clearly stated there has been over investment and it has impacted on affordability. The recommended actions of write downs and rebates standout.

We are all free to decide whether this is ‘gold plating’, or polished brown waste. The allure of gold is likely strongest in the eye of the beholder. I’ve a more agricultural outlook.

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46

At the time of the AER resets for the projects, the projects were justifiable based on forecasts, replacements and operations and maintenance.

Some of the main reasons for ‘gold plating’ are covered in my previous post. The media used to gold plating term to indicate that network operators had intentionally overinvested in ‘poles and wires’ as their revenue is based on the asset pool they manage (to maximise their profits). They didn’t intentionally/deliberately overinvest in projects. It is worth noting that the network operator I worked for cancelled and deferred a number of projects during reset periods, as a reflection of changing network conditions - to minimise unnecessary investment in ‘poles and wires’.

47

The Conversation offers a different view.

But why would distributors build far more network infrastructure than they need? And why have government-owned distributors built far more infrastructure than private ones, despite having no more demand?

The answer to this perplexing question is to be found in part in Australia’s “competitive neutrality” policy. This is Orwellian doublespeak for an approach that is neither neutral nor competitive.

It’s best to read the full article for the detailed expose.

While some might question the ACCCs authoritative views or the interests of the media in creating a story, the industry itself has a vested interest in differing. The major protagonists include the State Governments and the Commonwealth competition policy.

I don’t doubt the veracity of what has been said.

All funding proposals make judgements based on assumptions and forecasts. There are always options and a range of values to choose from from best case to worst. There’s always at least one forecast that will deliver the desired outcome.

The least bad assessment might be that everyone involved in analysing and advising at the time, ‘All got it wrong together!’.

As for the AER and the CRG.
As far as I understand their roles, it is outside the capacity of the AER to change the outcome. The AER is restricted by the agreed method of calculating the regulated returns and costs recoverable. @allan.asher51 might be able to clarify the range of the likely percentage change in the value of the payments per kWh pending the current review? Note this amount is different for each state and distribution network business.

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48

From the last couple of posts it seems to me that the idea was still held at the time of that report that the energy flow was still seen as a 1 way process. That is that the large operators didn’t gold plate to ensure a robust bi-directional flow of energy from “consumers” into the grid but only to ensure it flowed only from the big producers outwards. If money had been spent making the network much more capable of handling small scale production supporting the grid then it may have been money well spent.

The ACCC failed to grasp the opportunity to ensure money spent on poles and wires served to improve the system. The AER failed to ensure improvement in the system. How blind were they, completely non sighted I’d say, oblivious to the opportunity to make the network robust to serve properly in the context of household, small scale, and excess to day to day requirements business generation flowing back into the system.

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49

A key point of the reset is that different practicable network options must be considered … not just one favoured by a network operator.

It is a frustrating process from those compiling the reset, as often there are multiple different network solutions to provide the forecasted needs on the network. Each solution (suite of solutions) needs to be considered and assessed.

I should also point out that the example by @allan.asher51 won’t fall under a reset. In relation to generator connection, these are usually dealt with differently and is a commercial agreement between the generator and the network operator. The same applies for large consumers which are connected to the grid (smelters, railways etc).

That isn’t correct. The AER, as part of the Reset review process, commissions it’s own expert consultants to review every component of the lodged reset. This is from forecasts, projects, costs etc. The consultants challenge the information provided and there is a lot of to and fro between parties for justification of the reset application and projects. Quite often projects put forward are not supported by the Reset decision, or the projects are modified to that seen as being reasonable. (This is challenging as quite often changes in projects for a reset period may result in cheaper reset project costs but could be seen as potentially higher long term costs due to rework etc).

The outcome of the reset is that determined by the regular and its consultants using the information provided by the network operators. Quite often the regular doesn’t provide revenue within the reset period for network nominated projects, alternative projects assessed as preferable by the AER/consultants are supported at expense of other projects and projects which are provided may be trimmed of revenue to that to which the regular and its consultants believe is reasonable. Due to changing forecasts, in later years there was a growing emphasis on asset life extension rather than replacement, which in some instances gave time to better understand the changing network conditions.

Network operations are very difficult to appreciate and complex…and often needs a team of experts to fully appreciate its operation and future needs. This is why the regulator, through reset review, engages a team of specialist experts to provide advice on the reset funding application. I suspect that there isn’t one person in Australia who full understands all the workings, forecasts and financial needs of all the network providers.

Possibly how the AER Reset works in a practicable sense isn’t fully understood by those outside the industry and maybe it is the role of the regular to provide information on how it works and why decisions are made. These decisions are focussed on lowering costs to the consumer.

One has to remember that network assets (distribution lines, transmission lines, substations, pipelines etc) have a life of 50+ years. One can’t point the finger at major failures in planning when bi-directional flow networks is a new concept driven in more recently times by dispersed small scale generators.

(Hindsight) criticism is only possible if the future is known.

If bidirectional flows were considered on the network say 20-50 years ago, then there would have been even more criticism of ‘gold plating’ as there was no need for bidirectional flows at those times. This is a limitation of the reset periods and also long term strategic planning as outlined in my first post.

Bidirectional flows principally has resulted from poor government policy in relation to small scale generation (where individual interests have in some ways overtaken over community (infrastructure) interests). The government policies possibly ignored in some ways the lifecycle of the network assets and the impacts by small scale generators. This has lead to the situation where we currently sit.

Edit:

Options for bidirectional flow would have been considered but possibly haven’t been supported as it doesn’t have a sufficient business case. 8-10 years ago network planners were discussing solutions for dispersed small scale generation and residential battery storage (household and EV cars) impacts on the network. There was discussion of options to manage peak demand by home/car battery support. There weren’t any projects in the reset I was involved in to cater for reverse/bidirectional flows, but planners had looked at such options. The AER hasn’t failed because it hasn’t forced investment for bidirectional flows. Possibly the AER should respond to why bidirectional flow projects haven’t got off the ground to allow individual small scale generation owners export as much as they chose. I know what the answer will be as it is unlikely to have changed in the past 8-10 years.

50

Perhaps.
The long reply is very specific.

I found an answer to several questions with the AEMC. Note the graph is a trend report.

(https://www.aemc.gov.au/sites/default/files/2020-12/2020%20Residential%20Electricity%20Price%20Trends%20report%20-%2015122020.pdf).

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I’ve highlighted the trend data for the ‘regulated component’ of the cost for FY just ended. I’ve chosen SE Qld where Energex is the State owned responsible distributor. 11.35c per estimated Regulated network costs out of 22.72c/kWh. Near enough to 50% of the base cost of electricity.

There are full explanations in the [Dec 1920 Residential Electricity Price Trends Report to the Energy Ministers]. This provides further analysis and commentaries for NSW, Vic, Tas, SA, and the ACT.

There is advice on why WA and the NT are not included. Regional Qld covered by the Ergon distribution area is also not included. It is regulated by the QCA (Queensland Competition Authority).

P.S.
It’s interesting to note the anticipated fall of nearly 30% in wholesale costs compared to the prior year.

51

The reach of the ESB established by the Federal Government is very broad. It stretches across the whole of the NEM (National Electricity Market). It’s all about setting the future design of the market, including generation and networks.

Solar PV, Gas generation, Hydrogen production and Electric Vehicles, and anything else that is connected to or might use electricity are all part of the mix.

For consumers what the Government ESB recommends, and how Governments respond will impact consumers directly. The outcomes will be seen in the costs to consumers, as well as choices available to consumers.

The market design project is carbon agnostic. IE It avoids setting targets for carbon reduction. There is a 6 page pictorial based summary that may be of interest.

Minter Ellison have provided a detailed assessment of the report provided by the ESC.

P.S.
There’s a whole new consumer topic likely to emerge from the work of the ESC. Who knows where it will all end up. The differences in attitudes (priorities) of the States when compared to the Federal Govt are significant.

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