If the privatisation of Victoria’s grid is any guide, plans by NSW to sell off its electricity networks will not bring lower prices for consumers.
Victoria privatised in the mid-1990s, yet electricity prices continued to rise and have still roughly doubled over the past five years – in both states.
What is most striking about this industry is that, while prices have soared, demand for electricity has fallen. Peak demand has fallen, too. This puts NSW in a predicament.
The government of Mike Baird has neatly tied the sale of the poles and wires to an enticing infrastructure package. But what are the poles and wires really worth?
The state is selling assets whose value is falling, says industry critic and funds manager Bruce Robertson. And rather than taking write-downs on these assets, transmission network operator TransGrid ”plans to double its asset base and increase revenue by 85 per cent over the next five years” – despite the fall in demand.
Two years ago, Robertson exposed the practice of ”gold plating” – that is, excessive spending on networks. Thanks to the way the industry has been regulated, the more money the operators spend, the more money they make.
Therefore, the higher their forecasts for demand, the more they can justify their spending.
The agency that does the industry forecasting, Australian Electricity Market Operator, noted in its most recent market commentary that ”electricity consumption was 3.5 per cent lower than forecast for the first quarter of 2013-14. This resulted in AEMO revising its demand forecast down by 1.3 per cent for 2013-14.”
This is par for the course.
Growth forecasts have been consistently overcooked year after year, while demand has fallen across the National Electricity Market by 6.5 per cent since 2009-10.
There are a number of reasons for this, among them the shutting of big industrial plants, the incursion of solar power and the dampening effect of hefty power prices on retail demand.
People are simply using less electricity.
The drop-off in demand has been even more pronounced in NSW than elsewhere.
Annual energy in the state has fallen about 11 per cent since its peak in 2007-08.
The peak coincided with a new regulatory period, 2009 to 2014, in which the electricity companies were allowed the largest spend in history, ostensibly to cope with the forecast rise in peak demand – a rise that never came.
Robertson reckons the growth will not return to the grid, so industry will resort to price rises to countervail the fall in demand.
As for the purported efficiencies of privatisation, costs are on the rise for the next few years, further putting upward pressure on power bills.
”Contrary to TransGrid’s claims that it is reducing total capital expenditure by 28 per cent, its regulated asset base is in fact growing – and growing at a handsome rate,” he told Fairfax Media. ”Between 2013 and 2014, its regulated asset base has grown by over half a billion dollars, or growth in just one year of nearly 10 per cent.
”Off this high base, TransGrid wants to grow its regulated asset base by 3.7 per cent a year.
”In the next five years it wants to add a further $1.2 billion to this asset base. All this growth in a market that is rapidly contracting.”
While demand in NSW had fallen about 9 per cent between 2007-08 and 2012-13, TransGrid’s revenue had grown 55 per cent and its regulated asset base (the base of assets on which it earns a regulated return) had grown 61 per cent, Robertson said.
TransGrid claims that it is reducing operating expenditure by $6 million annually but as Robertson points out, operating expenditure is growing.
In the new regulatory period, the five years to 2019, spending is up by 8.7 per cent from the average of the previous period. The latest tactic by industry to pay for its inefficient ways is to change the model for the way in which it charges the customer. The power companies want to move from charging for energy to charging for capacity.
Robertson said this would result in large fixed charges penalising low consumers and rewarding high consumers of electricity.
Along with the transmission assets of TransGrid, the state plans to sell its distribution companies, too, Ausgrid and Endeavour Energy. They, too, have overspent.
The challenge of selling assets against a backdrop of falling demand – and which should be taking write-downs – cannot be underestimated.