IT DOESN’T happen often, but sometimes, somewhere, somebody gives the game away.
This time it was Peter McIntyre from transmission giant TransGrid. The date was July 30, 2009; the venue the Swissotel in Market Street, Sydney; and the occasion, a forum on regulation hosted by the Australian Energy Regulator.
The minutes of McIntyre’s address record him saying that, yes, there had been ”strong underlying growth in consumption of electricity”. However, suggested the up-and-coming executive, ”it is not TransGrid’s role to implement policies to lower demand”.
When he delivered this presentation to his power industry peers, McIntyre was a junior executive: general manager, network development and regulatory affairs, to be precise. He is now TransGrid’s managing director. His elevation, no doubt richly deserved, says quite a bit about the electricity industry and the reasons behind the radical escalation in prices.
Such are the regulatory settings at present that the transmission giants, TransGrid in New South Wales and SP AusNet in Victoria, are paid according to the size of their assets. The more they build, the higher their returns. Same deal for distributors such as Citipower or Ausgrid.
This ”gold-plating” of Australia’s power grid has been well documented here, as has the ”gaming” of the regulator. The paradox of regulated returns is a gaping flaw in the system – and the overriding reason for rising prices.
But what has not been sufficiently recognised is the cure. Apart from an overhaul of regulation to remove the industry’s incentive to overspend, what McIntyre was hinting at that day in Market Street was ”demand management”.
Since then, electricity prices have virtually doubled. According to the Independent Pricing and Regulatory Tribunal, the average bill for an Energy Australia customer in NSW has risen from $943 in 2008-09 to $1812 in 2012-13. A similar tale can be told around the country.
Meanwhile, as prices shot up, consumption actually fell (down 5.3 per cent in TransGrid’s market in the same time frame).
Even the forecasts for the notorious industry ”culprit” for rampaging prices, peak demand, have finally fallen back into line with general demand.
They all got it wrong, in other words. They got it wrong for the current regulatory period, which ends in 2014. And their capital spending for the next period has been swinging on forecasts which are demonstrably wrong.
So, while industry builds supply, and charge for it, neither industry nor government has done nearly enough to tackle the demand side of the equation.
According to a Deloitte analysis from April this year, between $1.5 billion and $4.6 billion could be saved over the next 10 years by doing five things to combat peak demand. These relate to ”time of use” pricing, direct load control of airconditioners and pool pumps, efficiency measures for electric cars and appliances, and further small-scale solar power generation.
For 30 years in Australia, direct load control has been deployed by distributors to control residential hot-water storage systems. Yet only recently has it been trialed for airconditioning and pool pumps, the two main drivers of peak demand over the past decade. Deloitte even says the biggest single savings come from demand management of airconditioners.
And what technology do we require for that? A chip, that’s all. A chip in the compressor of an airconditioner that switches off remotely, for short periods, at times of peak demand. There is little reduction in the performance of the airconditioner as the fan still works and cold air still comes out.
Since 2006, South Australia’s electricity distributor, ETSA Utilities, has conducted a series of direct load control trials. The results showed potential reductions in peak load, for both residential and commercial customers, ranging from 19 per cent to 35 per cent. Such savings, hundreds of millions of dollars, are sufficient to delay the erection of many a transmission line.
The technology is there. But is there the commercial and political will?
These sorts of measures are simply not being adopted because the regulatory regime rewards those who ”gold-plate” their networks. Why save money when your own budget, and perhaps even your career and prosperity, depend on spending as much as you can? It is not TransGrid’s fault, particularly, it is the structure of the industry.
At a forum on demand management only last month, TransGrid gave the game away once again. Demand management, it said, was too risky.
A presentation slide by TransGrid’s Dr Ashok Manglick headed ”Funding of Non Network Options” says clearly in bold: ”Risky business for TNSPs” – that is, transmission and network service providers. Remember, TransGrid and SP AusNet build power lines. That is what they do. That is how they get paid.
When Manglick refers to ”risk”, he means risk to the bottom line, the folding stuff.
The concluding remarks for Manglick’s presentation are just as telling: ”Regulatory framework needs improvement to give commercial incentives to TNSPs for proactively implementing DM [demand management] and energy efficiency projects other than for capex deferral.”
In other words, if you want the right outcome for society and the economy, that is lower energy bills, you will have to change the regime to give us an incentive to get energy demand down. It’s not in our interest.
The ball has now bounced over the net and into the court of regulators and government.