Fairly unfair – Energy Network price setting

Gold plated networks practice stopped, and cost reflective price setting will be the market policy. Yes, prices will rise. However prices will be controlled in a fair way it is said. It is an interesting game and thinking about it you realise it is ‘business as usual’ with an appropriate spin for self fulfilling prophesies. Actually it could be prophecies as it depends on if you are using the term as a verb or noun. For instance whether you are forewarning of significant price increases with callous regard to the customer, or anticipating being able to inspire the process of one or more messages that have to be communicated on behalf of the ‘good’.

Previously Co2land org wrote that the question that is most difficult is are you pro-business or pro-market. We have found a new term for the customer as a position description ‘pro-sumer’, and the position is the customer must be the one that willingly pays. We won’t bore you with theories of elastic and inelastic demand as this is a supply side argument. However, we might suggest you develop an instinct that identifies what can be summed as – ‘The rustling of the leaves tells a story, warns of a danger, and a lot of … is going on’. Beware you might not like what you see and the problems are in the detail. So what is the story behind it all?

The story is the players displaying how they justify the costs of reliability of supply. It is not about balancing the supply and demand for more efficient and reliable source of supply. A little more explanation please we hear you say. The business and the market of the energy supply is a supply side focus. That is why the energy companies are called, in the rules, the supplier, and where the customer might curtail or offer low volume generation into the supply is called the provider. Where the customer consumes they are called the user, or more recently termed the ‘pro-sumer’ where they make smart choices. All very simple is it not!

It remains at issue is your network charges will rise regardless.

The questions are how much and why is the political term ‘gold plated’ being used to substitute for what was called redundancy in the past – In this case we explain: “Redundancy is the duplication of critical components or functions of a system with the intention of increasing reliability of the system, usually in …” Source en.wikipedia.org/wiki/Redundancy_(engineering).

The remainder of the story uses other sources as follows: http://www.canberratimes.com.au/act-news/actewagl-says-power-supply-in-canberra-at-risk-20141127-11uyv7.html

, and

http://www.goulburnpost.com.au/story/2726997/australian-energy-regulator-clamps-down-on-network-charges/?cs=12

, and

http://reneweconomy.com.au/2014/regulator-slaps-down-networks-on-more-attempted-gold-plating-22048. Also AEMC paves way for changes in network pricing for solar, air-con.

The network view:

ActewAGL: Chief executive officer Michael Costello says the draft decision from the Australian Energy Regulator does not make sense, and could lead to catastrophic failure.

“We not objecting to a reduction in price, …What we are objecting to is the degree of the reduction, and the fact it threatens reliability, stability and, if it does go far enough, the safety of the network.”

Energy Networks Association head John Bradley said the “unsustainable” spending cuts could compromise reliability, safety and efficiency outcomes for customers. “If implemented, these funding cuts put at risk key consumer outcomes relating to safety, maintenance and outage response times,…Consumers end up paying more under this kind of ‘roller-coaster’ regulation where underspending is followed by higher cost catch-up spending and political intervention.”

The Regulatory View:

Australian Energy Regulator (AER) chair Paula Conboy says under new rules the regulator’s focus is squarely on outcomes for energy consumers, for a safe and reliable network. “So we have to ask ourselves, why should customers be required to pay more?….. Our draft decisions propose lower allowed revenues for transferring electricity and gas, which, if implemented, should result in lower energy bills for end users in the ACT and NSW,… These reductions would be followed by small increases in each of the three subsequent years [in line with the yearly Consumer Price Index]…. Network charges on bills have inflated with extravagant spending – or gold-plating on poles and wires – in recent years and now account for 50 per cent of an energy bill issued to NSW users.”

RenewEconomy asked Conboy if the network revenue application were simply a case of them prosecuting “business as usual” rather than the transformation – the “prosumer revolution” – identified by new AER chief executive Michelle Groves, the chief executive of the AER.

Groves said last month:  “The electricity industry certainly is changing. In fact it is not much of a stretch to say that the next couple of decades will witness something of a revolution in the way small customers interact with the electricity industry. In the future there will be more scope for even the smallest energy users to become active participants in the energy market.”

Conboy said we would have to ask the networks if they were focused on business as usual.

In a separate announcement, the Australian Energy Market Commission (AEMC) said new pricing rules will begin on December 1.

“By having prices that reflect the costs of different patterns of consumption, we are giving consumers clearer choices as we develop a more efficient, incentive-based network regulation framework,” AEMC Chairman John Pierce said .

The Users View: Large, SME, Domestic Advocates.

Gabrielle Kuiper, senior policy officer at the Public Interest Advocacy Centre, said the AER’s draft decisions were welcome news to the increasing number of NSW families struggling to stay on top of soaring energy costs. Dr Kuiper also said there was room for improvement in regards to the allowed rate of return – the forecast of the cost of funds a network business requires to attract investment in the network.

Oliver Derum, another senior policy officer at the advocacy centre, said energy prices could drop even further if the NSW government before the proposed lease of the networks writes down previous over-investment by the networks. “That could cut bills further by hundreds of dollars a year. We would urge the NSW government to consider this option as part of the sale process,” he said.

The Parkinson Report says (Giles Parkinson that is), “The draft rulings are part of a big game between the networks and the regulators over how much they can spend on upgrades, charge for maintenance, and for the cost of capital. The networks have a history of asking too much, and while the AER has sought to cut them down in the past, they have often been over-ruled, or forced to compromise on appeal.

(The AER decides how big the revenue pie will be for the networks. In an associated decision, the Australian Energy Market Operator has confirmed new rules that will require networks to introduce “cost reflective” tariffs, which will likely mean higher fixed and/or demand charges, which could affect households with solar arrays)… Hence the focus on this new round, particularly in light of the incursion of solar and battery storage into the grid, and the emergence of a new decentralised energy model. The AER, in its draft decisions, said that its estimate should result in a lowering of electricity costs, rather than a rise if the networks were allowed to have their way”.

Co2Land org review:

It all looks too much like they want your energy supply to be viewed as a commodity attached to a financial service. You see a commodity price can be manipulated as a means of control. If you lose control the networks cannot keep the growth numbers where they want them – ‘business as usual’.

Look further at the network lobby group, the Energy Networks Association, which has never conceded gold plating in the past, wants solar incentives reduced, higher fixed charges to consumers, and argued that it would be too expensive to quit the grid, said the AER ruling threatened the reliability of the network – an old favourite of those arguing against carbon prices, renewable energy, or any much change at all.

Reneweconomy says solar households face inevitable changes to the way their bills are packaged after the Australian Energy Market Commission delivered new rules which will require networks to impose “cost reflective” pricing on networks.

According to the AEMC, the changes will not only cater better to different patterns of consumption, they will benefit all consumers in the longer term as lower peak demand reduces the need for spending on infrastructure, and they will likely result in changes in tariffs to encourage households to avoid switching everything on at peak times, or at least pay for the privilege, and also for solar households. It could, for instance, encourage more homes to install west-facing panels rather than north-facing panels, but the final tariffs will be up to the networks to decide.

Reneweconomy goes on the say: In effect, while the Australian Energy Regulator decides how big a revenue pie the networks can eat – and based on today’s decision it is a lot smaller than last time – the AEMC is proving rules that decide how the networks can slice and dice that pie.

The new rules also affect households with air conditioning units, as the main targets of new tariffs aimed at recovering network revenue.

The arguments all centre on fears of the networks are losing market share, and are keen to get as much “network pricing” out of the pro-sumer as they can. The pricing set and recovered from different consumers, says the AEMC, with the key factor to determine how much consumers pay being their individual usage pattern or load profile.

The bit we love sic most “This rule change will not actually set new network prices – that is a role for the networks themselves and the AER. It does create a new requirement that reveals the cost of people’s energy choices,” AEMC’s Pierce said. Other AEMC quotes “Under these changes, we estimate around 70-80 per cent of consumers would have lower network charges in the medium term…Research undertaken since the draft rules were released for public consultation in August shows network prices are likely to be lower in the long run with cost-reflective prices,…

Research shows average residential charges could reduce by $28 to $145 per year. Households which use power at a steady rate through the day will receive the biggest benefits…Based on Victorian trials, we also found a small business could save up to $2,118 or 34% of its total annual electricity network charges by using less electricity at peak times for just 20 hours per year when networks are congested,…

Once the new rule commences on 1 December 2014 network businesses need to start consulting on their new tariffs and submit draft proposals to the AER in late 2015 for new prices that will start no later than 2017.”

Head spinning – it should be!

Our final word: We suggest it is because the term gold plated is different to redundancy in that the former highlights the risk of stranded assets.

Frailly – the morally weak resistance to Climate Change and Renewable Energy

Frailly might explain the morally weak and the extraordinary resistance of some to climate change and a useful tool in fighting it – renewable energy. You might notice a Minister will flounder and adding insult to injury make confounding and confusing statements, ad hoc, and as the selective audience wants to hear. Authors that have had entrenched positions in the past are now desperate to distant themselves from any association with the evidence they previously exposed. You want some examples?

Adding insult to injury: Federal Environment Minister Greg Hunt is on record as not denying cabinet rolled him on climate change. He has since approved the Carmichael Mine in the Galilee Basin in Queensland. What is confusing is that the mine owners may end up with stranded assets, as the world appears to be turning its back on coal for either environmental or economic reasons. How could that happen, aren’t the Indian owners on top of the game? The answer may be they diversify and spread the risks. It may be they are looking at the risks seriously too, and their significant investment in Australia is under Climate Change risk that cannot be ignored. In particular their investment in and the serious threat to Agriculture. Indian Conglomerate, Olam is reported: http://www.abc.net.au/news/2014-08-10/agricultural-giant-says-climate-change-absolutely-real/5659058 . Olam International chief executive Sunny Verghese has told Landline that agricultural producers and processors need to take action now.

“It is absolutely a reality that climate change is going to significantly impact agriculture,” he said.

“It impacts it both from the nexus it has with water, and the nexus it has with micro-climate as well, so it is probably the most important driver to future agricultural production, productivity and therefore price.”

Mr Vergese was on the Gold Coast this week to address the 2014 Australian Cotton Conference.

His Singapore-based company has operations in 65 countries, and is the world’s biggest trader in cashews, and the second biggest trader in coffee and cotton.

Olam International has had a presence in Australian since 2007; it owns Queensland cotton, manages 12,000 hectares of almond orchards in Victoria and has investments in the grain, wool and pulse industries.

“Mr Verghese said one of Olam’s initiatives to tackle the impacts of climate change was to reduce water consumption.

We have a target that in our tier one manufacturing and processing facilities we will reduce water usage per tonne of product that we supply by 10 per cent by 2015, and in our farms by 10 per cent by 2020,” he said.

“Similarly we can track the carbon dioxide emission that we generate across all our commodities in each country.

Again we have put some hard targets of how we are going to reduce that carbon emission footprint for every tonne that we supply by 2015 and 2020.

My view is that there is no point if I say I’ve generated half-a-billion after tax earnings, but I’ve depleted $200 million of natural capital from the environment.

Because then I’ve got to question myself, what is the point of all this overwhelming effort if at the end of the day you’ve really depleted the natural capital and left a huge bill to pay for future generations?”

Co2Land org is also aware of Indian companies in Iron Ore and other minerals in Australia and you might conclude they are balancing their portfolio as opposed to placing all the eggs in one basket. But are they also positioning themselves to expect trade-offs from the government? You might say – but hang on the government says no assistance will be given to industry. Then again we know the federal government in particular likes to offer diesel credits and subsidies if they contribute to mining! Those subsidies are significant – like $b’s.

Then there is NSW Planning Minister Prue Goward saying she supports sensible renewable energy, then says she resists approvals of new renewable projects! Also representing the Southern tablelands area of Goulburn district is the Federal MP Angus Taylor. He is on record as saying sun and wind energy should not be increased in the southern tablelands. Which ironically is very well suited in terms of sunshine and wind and infrastructure availability. Then it is reported Angus, when speaking on 2WEB – Bourke – and in the Australian Financial Review, recently said that Solar Energy is an important part of the energy mix in regional Australia. He even called for changes to the regulation of electricity distribution network charges. He essentially followed the Grattan Institutes recent report: “The key here is to look for low cost ways to move towards clean energy…Increasingly we are seeing that solar is likely to be the renewable energy to win the race”. Then comes the contentious bit for the network companies: The advantage of rooftop solar is that it doesn’t need the distribution network, which is …very expensive”. Go figure we say!

Then we have Rod Stokes The NSW Environment Minister advocating we will have a demonstration town in NSW that is to be disconnected from the network grid in 2014. It all sounds back to the future does it not? A time back when many towns were not grid supplied in the past, and local government actually were responsible for power generation too. The issue in those days was, and is now the efficiencies needed for payback. CO2Land org recently looked at a Monaro region town that wanted to go fully solar. Think 30 years paybacks. Why? 105 households and backup infrastructure needed for reliable supply. Maybe just a little premature on that proposal as we are sure technology will advance to better suit but sometime later we think.

What all this leads to is sensitivity and concerns. On the one hand you need to keep your customers happy. On the other networks need to either change how they do business or just keep on encouraging the regulator to actively discourage renewable energy. So what are networks going to do? Even that gets confusing – it seems customers don’t want change either, and some say for example: I left the city for a lifestyle change and I buy from the local businesses and I create jobs because of it. Then some company builds a wind farm nearby, and a solar farm is proposed too. I wont have that! Note the ’we’ is missing here, and the local businesses say that the wind and/or solar farm is good for business and workers come in and buy and people come to see the area’s attractions! Even move perverse is many of the objectors tend to be those that were not offered revenue from the project. Even neighbour against neighbour can occur because one allows a tower or panel on their land for a rent and the other missed out. Get it, like not in my backyard, but if you pay me it is OK? We find it interesting that the tree change types are happy that conventional power station plumes can destroy our fertile areas like the Hunter Valley and they don’t care!

Ok, so the answer is go bush and the Southern Tablelands local MP (Angus Taylor) says Solar is fine – in the bush and networks are expensive – sounds a bit of an oxymoron does it not?

Maybe the whole game is to discourage and to make it too hard, or is it just a ruse to confuse? If you want to be confused even further try reading the Business Spectator article: 7 August 2014, it was said “Finally, and perhaps more important than all the other arguments, future private owners of the networks in NSW and Queensland are likely to welcome asset write-downs, if it’s done before they put their money on the table.” The author does seem to suggest it is a plausible argument to suggest brown paper bags work best to influence an outcome? But, if so – won’t there be an inquiry?

Let us read through that story a little more: Why the power networks are wrong about writedowns,     BRUCE MOUNTAIN , 7 Aug 2014. If we select the key phrases:

“The Energy Networks Association has recently released some modelling that suggests consumers will be worse off if stranded network assets are written off. The gist of its argument is that such revaluations are perceived negatively by investors, who then demand a higher rate of return on their investment to compensate them for the risk.

The ENA’s argument seems fallible in a number of respects. Firstly, we need to question its assumption that networks investors have not already been compensated to bear asset-stranding risk. The regulatory calculation of the return on assets is based on an external ‘benchmark’. It is not based on the firms’ actual cost of equity and debt.

Prospective private investors, governments, consumer advocates, retailers (and the Energy Networks Association) might usefully focus on these questions. Better to get with the times than to try to hold back the tide. “

What concerns Co2land org about all this is the need to concentrate on networks as ’the investment problem’? We can understand that others might not be so convinced that we should merely think of networks being a commodity rather than a service. Even if you think of them as commodities – is it right to say – like the energy market can be fixed of its shortcomings, and then quote UK examples of why the problems will continue? Terribly confusing is it not old chap!

CO2Land org and our partners are prepared to accept that it is not solely the networks at fault. We feel certain parallels could be drawn but not one of the solutions can be directed to one side, we need new ideas to be brought forward and resist drawing parallels that do not exist. 

There may be an argument that it is necessary for chaos to exist in regulation land, so things can sort themselves out. But, that wont happen – too easy, Human nature directs it needs to be complicated!

All that put aside: what the networks need is a model to go forward with, so inevitably some write-downs and disquiet will happen. It will not be the end of networks providing they have strategies to move forward in partnership with renewables. Why else would the politicians being expressing they might change their mind, it cannot be all tactics to disrupt and detract progress – could it!