Gillard and Abbott are trading rhetoric at the moment, trying to blame someone for increases in electricity bills. I’m not touching the politics of this issue as I’m pretty confident the political discussion will be neither edifying nor enlightening.
I’ve talked a bit on my other blog about how an electricity bill is structured. This is important background in considering how electricity bills have increased over time.
This pdf, from the NSW Government looking at the drivers behind the recent price rises is pretty unequivocal on the recent causes:
“At least 80% of the percentage increases in the IPART 2010 determination of regulated retail tariffs are attributed to increased network charges.”
There are definitely other contributors; the Mandatory Renewable Energy Target; feed-in-tarrifs for solar panels, in recent times Yallourn powerstation being underwater isn’t helping, and a few other little regulatory odds and ends have contributed. Also, now that the carbon price has been introduced, that will increase bills as well.
The rest of the bill, the cost of energy, hasn’t changed nearly as dramatically in the last few years. A glance through the Australian Energy Market Operator’s numbers at the bottom of the page confirms this.
So why are we suddenly spending so much on the network? Again there are a multitude of reasons; assets reaching the end of their life and needing replacement; and some perverse incentives for State governments to “gold plate” their networks, but that contribution isn’t likely to be too significant. No, the big reason is our increased prosperity and desire to air condition our homes.
This excellent piece from Matthew Wright at Climate Spectator describes the economics of increased air conditioning demand and the corresponding network demand outcomes. Being more of an industrial specialist, I was astonished by the size of some of these numbers. Residential air-conditioning loads across the grid could be as high as 16GW; for comparison, that means if everyone turned on their AC at once, about 16 large coal-fired power plants must ramp up to full power. Off the top of my head 16 is about the number of plants of that size in Australia.
So, when all the consumers suddenly have the capacity to double their electricity consumption with the flick of a switch, what does this do to an electricity network? One of the more illuminating parts of Gillard’s recent speech on this topic was the “Roads are like Electricity Networks” analogy. To avoid congestion (which, stretching the metaphor, means black outs) the network must be sized to handle the maximum possible demand.
Are there alternatives? The Draft Energy White paper puts the electricity network upgrade costs at about $7000 per 2kW (which is pretty standard) air conditioner installation. Since residents aren’t charged connection fees for new big equipment, and nor are they charged demand fees like industrial customers, this extra network construction cost must be averaged across the grid in “network costs”. Even if you don’t have a glorious new LG ArtCool to drop your temperature during the cricket.
One idea is to make customers pay that upgrade cost at the point of sale. “That’ll be $2000 for the Air Con, and $7k for your network upgrade”. While broadly sensible, I doubt many politicians will find quadrupling the sticker price on an air conditioner palatable.
Improve the efficiency of air conditioners? Wright’s article above suggests this approach and I agree it has merit. The problem I see is the political reality of this sort of intervention. The so-called Pink Batts scheme was also designed to address this problem; better insulated houses means lower air con loads and lower peak demand. Further, there is good evidence that it was successful in this aim as electricity use in the NEM (the Eastern states and SA) has decreased for the last three years. There were other factors of course, but on the only metric available it seems successful. But, despite the technical success it was a political disaster for Labor and Peter Garrett. I suspect politicians will be nervy in future about committing to this sort of diffuse incentive for fear of the repercussions. Incentives for solar hot water could also have an impact, and the Small-Scale Renewable Energy Target does help a little in this area. However, as most electricity use replaced by solar is off-peak the peak demand impact is likely to be small.
My preference leans toward a couple of different demand side response ideas. First, and there are various moves afoot to achieve this, a market that trades demand would provide incentives for large industrial users to switch off at times of high demand. This will probably work at lowering demand, but the customers switching off will be the first to benefit financially, with the trickle down to residential consumers likely quite slow.
The standout, and for a number of reasons, is a proper smart meter network. There would be flow on effects, which will make a lot of people grumpy, like time-of-use pricing and perhaps the ability to remotely switch off loads, but it is the most effective way for consumers to make informed decisions about their energy use and costs. The common cry from those opposed is that “it will make me pay more”, which is not entirely true. More accurate would be to say that smart meters COULD make you pay more, but they will also give you powerful tools to pay less.
Trials as part of the Smart Cities program showed customers on Magnetic Island were saving up to $25 a month on their electricity bills, by responding to price signals through their smart meters. Why not let people in the wider network have this opportunity, and if some people’s bills go up, maybe they will have a stronger incentive to curb their energy use?