Power struggle

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Reform of energy industry must switch on to consumer needs

In December 2013, I was invited to a meeting of energy ministers from around the country, as part of a roundtable discussion with industry and consumer groups.

The industry reps outnumbered us by about four to one so dominated the conversation, regaling us with stories of the great things they were doing, and how happy their customers were.

I knew this just wasn’t true. When I finally got a word in, I laid out the facts from the latest CHOICE research, which showed that consumers were deeply concerned about rising energy costs, found it too hard to compare energy plans and wanted governments to do something about it.

Sadly, on that occasion, the ministers in the room didn’t want to hear this message.

Four years on, it seems that the tide has turned.

While it is refreshing to see political attention to rising energy bills, the solutions won’t be easy. That’s because the problems in our energy markets stem from more than a decade of failed economic reforms.

Our energy markets have been designed on the 1980s model of competition that assumes that if you build it they will come: if we simply open the market, we’ll end up with lots of firms competing to outdo each other with better offers and/or lower prices.

In theory, this model should work particularly well in a market for a product like electricity, where at its core every provider is pretty much selling the same thing, but our experience shows the flaws in this way of thinking. In the Australian states where competition has been introduced, energy markets are dominated by three big players, who offer a ridiculous array of plans that are impossible to compare.

They have then layered misleading discounts over the top ­– which may only apply to one part of your energy charges or end after an introductory period. Even if you get a good deal, they can then increase your tariff without having to tell you in advance.

These problems could have been avoided. We could have made it easier to compare plans from the start, or forced retailers to provide a comparable price indicator like the comparison rates we use for mortgages. We could have required retailers to tell consumers about price rises in advance.

Even better, we could have created incentives for retailers to do more to help consumers to reduce their energy consumption.

CHOICE generally favours competition. When consumers have genuine choice, this should drive down prices and encourage providers to compete by offering features that consumers value.

But that doesn’t happen automatically. If we want reform to deliver these benefits, we’ve got to design the system with an eye to the consumer experience from the start. I live in hope.

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The consumer canner be the prime motivation for power companies as long as those companies have shareholders. The shareholders will always come first and that means making more profit to returns to them in dividends. The only good thing for the consumer would be that they are shareholders too through their super funds. Doesn’t help pay the power bills though

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Could it also be that we have too many fingers across too many layers? Multiple governments, multiple generators, multiple distributors, multi retailers, multi real and pseudo advisers or consultants.

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As karen_seager noted [quote=“karen_seager, post:3, topic:14584”]
The consumer canner be the prime motivation for power companies as long as those companies have shareholders.
[/quote]

The only way to re-focus on the consumer is for the owners of the power supply chain to be the Governments as their “shareholders” hopefully are their constituents. Once you put any part of that chain in the hands of a non Government entity they are required by the Corporations Act to maximise the profits to Shareholders and consumers then only become the means to garner that profit and are secondary to any other concern.

The current debacle over power is just the reflection of that change from wholly Government owned to a more commercial enterprise system.

There are a few areas of society that should remain in the “peoples hands” and among these , one is power, one is health care, one is water supply, and one I would suggest is communications.

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The entire thing is a rort at the end of the day.

A very small population of businesses generate power, be it coal, wind, hydro, or solar.

Monopolies running networks distribute that power.

Many companies offer and bill for the power under the pretence they are supplying it. The only thing they supply is the invoice.

Faux competition Australian style is grand.

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The POWER belongs in our hands. It needs to be nationalised again.

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Privatisation has failed in many ways and many markets. Energy being clearly one of them.

There is the ownership of the energy resource, eg, fossil fuel itself be that coal, oil or gas. Then there is its extraction and refinement, its distribution and its sale.

In the gas ‘market’, government and the businesses now refer to these businesses as ’Exporters’. That is their ‘Raison D’etre’. They can sell more of it, on easier, long term contracts, at higher average price. Also they want to ‘exploit’ the easy to get gas.

These ‘exporters’ and other related businesses together with the Coalition, are now softening the Australian public up to their agenda, (not ours) ie, Australia should let them export ‘OUR’ easy to get gas, and we should exploit the hard to get gas, ie, fracking and the like, for our domestic needs.

Even in WA where there are some constraints on gas exports, the vast bulk of it is destined for foreigners to benefit from it, eg, >70%. The current WA Energy Strategy, already saying that WA must start to extract and exploit ‘hard to get’, gas.

Can you imagine China or Japan, doing business this way? That is handing over control of such a resource to private international businesses to exploit at will? Why are we Australians? The UK over exploited the North Sea gas fields, thinking it would last for generations, but they are now, just 50 years later, net gas importers!

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One of the main issues is that the electricity network is not seen as a public and essential service any more, either by government or companies.

Having worked for a government owned network provider, the focus was very much on how to maximise network asset value to maximise returns on equity to its shareholder, the state government. Such approach was driven the shareholder as returns boost ability of government to spend money on other things.

Things like life extension of assets, even though cheaper, were less favourable than asset replacement (value of new asset was greater than value of life extended existing asset).

Fortunately in recent years, the regular has cottoned onto this and through its review of network provider resets, has reduced the amount of funds provided for network augmentation. …but the damage had already been done in the decade 2005 to 2014.

All players in the market (generators, distribution and transmission providers, and retailers) have treated the consumer (either individuals or companies) as cash cows as they know that consumers can’t afford not to pay or have electricity. They were also aware gor over a decade that potentially consumersvwill become more reliant on it in the future…through use of electric cars and higher energy reliant devices (e.g, air con).

The other problem is the energy regulated system assumed that there would be a continued increasing demand for electricity like that which occurred up until about 2010. The financial model assumed costs would be evenly spread across users with low real per energy unit cost rises. But, with lower than expected growth in energy demand with the same forecast increase cost of generation/delivery, the higher relative costs are spread over a smaller than forecast pool of energy use, driving up costs higher than would have otherwise been the case.

Add in inconsistent government policy from principally state governments who are responsible for electricity and gas/mining regulation (and federal government for its REC scheme and associated subsidies) , the problems were going to come to a head at some stage.

The only question it it too late as much of the damage has been done and should the taxpayer divert much needed consolidated revenue to further subsidise electricity at the detriment of other essential services?

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Since we need electricity the user has to pay it directly or indirectly through taxes, or a combination.

Your question might be whether electricity should revert to being critical infrastructure operated as a pubic service rather than to what appears to be short term (< decade) market demand. The conservative mindset would rail at the prospect of ‘renewing big government’, and historically voters respond to the whistle of small government, lower taxes as the better and brighter future, all while they are held ransom and complain and are satiated, sometimes, for a brief period.

Would a front bench step up to do their jobs of evidence based policy without partisan pre-determinations of the outcomes without their incessant point scoring mentalities? I doubt 2 of the 3 major parties remember how it has been so long.

Decision making has often become a win-lose for any cause as budget has to be vigorously fought for, not just allocated, and the electorate has been desensitised or over-sensitised to financial limits depending one one’s persuasion, and voters respond accordingly at the polls, often to support the moribund status quo.

Circumstances suggest there could be a case for governments to hire semi-autonomous chief managers as larger councils do, or embrace an honest Westminster system where the Ministers of the day to advice from and work with the public service who operate without fear or favour rather than as objects de politics de jour.

FWIW a related win for ‘our side’, as I learnt from Choice staff has been the energy star system. Apparently TVs of a decade ago were using gobs of power for ever bigger and better pictures, and the trend would have made TVs the #1 electricity user by this decade if the engineers were left to the manufacturers focus on bigger and better and so what if every house needs its own power substation. Some would call that a fail since it reduces profits and thus dividends and spreads infrastructure costs over a small KWH base driving up unit prices, but.

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