No. 168

(ELECTRICITY) POWER TO THE PEOPLE – AT WHAT COST?

STONE the crows! People who do not grasp the cost pay an appalling price for power! No, not the Federal Labor Party – electricity consumers.

If there is one thing that appals everybody, it is the price of power.  According to the feds, in the four years to 2012 there was a 70 per cent average increase in what electricity costs domestic consumers.[i]

There are all sorts of explanations for this. Public sector distributors are gold-plating their networks, encouraged to do so by perverse incentives that deliver big returns on capital investment.[ii] State treasuries cream dividends off the top of provider profits.[iii] The trade unions use privileged positions to protect their members at the expense of everybody else.[iv] As for the carbon tax, the feds say it accounted for only nine per cent of the average bill in the last financial year, but close to one tenth is still a hefty hike.[v]

But, above all, the problem is we get what we pay for and what some of us are prepared to pay for is very expensive indeed.

As the Productivity Commission reported during the week: “Some 25 per cent of retail electricity bills is required to meet a few (around) 40 hours of very high (‘critical peak’) demand each year.” [vi]

There are three obvious options that can cut household electricity bills. Suppliers can reduce investment in reliability and or capacity, to make blackouts business as usual. This might work if they actually passed on the savings to consumers. Alternatively, they can do what they have done in the past, and leave people to cut use across the board in response to price rises designed to deliver for the industry or the unintended consequences of social engineering. Or they can give people the information they need to make informed decisions about their consumption.

The first does not strike the Crows as much of an idea. The UN has undoubtedly established an implied human right to electricity and the idea of load shedding when demand exceeds supply inevitably will politicise electricity. The lights will always stay on for longer in influential areas, and the opportunity for corruption will create a class of power brokers – Lahore shows what can happen when electricity supply is politicised.[vii]

The Productivity Commission makes the point that domestic air conditioning drives super-spikes in demand, with the costs of providing required power spread across the entire network. In consequence, “a low-income household without an air conditioner is effectively writing cheques to high-income users who run air conditioners during peaky periods.”[viii]

The second option would compound unintended consequences, adding to what we are already seeing. As prices rise, what a surprise, consumption falls. As Daniel Palmer puts it, “Electricity demand has been sinking for the better part of four years. Bitter cold or relentless heat, weather extremes appear unable to spur demand – peak or overall – back to where it was pre-GFC”.[ix] Or, he adds, pre-solar panels. The problem with offering people a subsidised alternative to price-rises is that demand for network electricity is driven down while prices are increased for those still on the grid, thus further driving down demand.[x]

The Productivity Commission, in its usual starkly sensible way, sets out the sensible solution – give people the power to tailor consumption to their inclination, to what they will pay to run their aircon, to how much they will mind if they can’t use it in peak periods.[xi] “The price-quality trade-off is invisible to most consumers – most are unaware of the high price they pay in their electricity bills for the excessive reliability resulting from overly stringent standards.” [xii]

We know how to do this, by installing smart meters that tell people how much power they are consuming and what it costs. Ah critics caw, this is but an example of misplaced faith in markets, because meters have failed in Victoria. And so they did, but they need not fail again.

For a start, in Victoria installation was expensive and stuffed up, with consumers copping the cost. And peak market prices applied from seven in the morning to 11 at night, giving consumers no chance of switching consumption to low cost times.[xiii]

And while first generation meters are read manually, mark II models can connect with providers allowing them to meet market needs by testing pricing plans. [xiv] The feds are also spending “up to” $100 million on a smart grid project designed to cut costs by managing infrastructure and to allow consumers with programmable appliances to run them when demand is low. [xv]

Inevitably this will take time, not least to allow for the IT involved to improve, which means a switch to peak-pricing as a way to reduce demand and resulting infrastructure costs will take time. As the PC puts it, a “big bang” rollout of smart meters would likely “fail a cost-benefit test and lead to significant consumer resistance”. [xvi]

However, a rollout will take time – the national electricity network governance structures are labyrinthine. And there will be the inevitable opposition to change from opportunist politicians and the welfare lobby, who will fight the end of retail regulation out of an antipathy to market based reform.

Still, the sooner the process starts the longer reformers will have to build both political case and technical capacity to empower people to only pay for the power they use.

ENDNOTES