Between 2005 and 2015 the value of the electricity grid – the poles, wires and substations that transport electricity from generators into our homes and businesses — increased by $40 billion in real terms. This 70 per cent increase was a major reason electricity bill increased so much over the same period. But while the value of the grid ballooned, our use of the grid grew only modestly. So why all this extra spending on infrastructure? This is the question that the latest Grattan Institute report, Down to the wire, tries to answer.
Spending on network infrastructure is important. When consumers start using more electricity during peak periods – as has happened with the widespread adoption of air conditioning – the existing networks need to expand. When new houses and suburbs are built – as is happening as Australia’s population booms – new infrastructure is needed to connect these households to the grid. And as infrastructure ages, it needs to be replaced.
But our report found, even after taking these factors into account, that network businesses spend up to $20 billion more on infrastructure than was needed. And most of this excess spending occurred in just two states: up to an extra $11 billion in New South Wales and up to $7 billion in Queensland.
Why did the networks overspend? There are a number of reasons
First, expected increases in peak demand never materialised. Everyone thought electricity demand would continue to grow in line with economic growth. But in 2009, electricity demand began to fall and then flatline.
Second, network businesses that are owned by state governments can have different incentives than a privately-owned business.
Publicly-owned businesses may prioritise local procurement over cheaper foreign options. They may, under pressure from their political masters, give priority to making the system even more reliable, rather than seeking to provide electricity at the lowest cost.
That’s what happened in NSW and Queensland. In the middle of the 2000s, the governments of those two states imposed strict reliability standards on their network businesses. They did so in response to some high-profile blackouts and safety concerns, which had attracted a lot of media attention.
As a result, network businesses had to build a lot more stuff to strengthen their networks. Eventually, some of the reliability standards were either removed or eased. But not before the damage was done. The network businesses had already spent up big – and consumers in NSW and Queensland were left with the bill. Consumers in NSW, in particular, have paid an awful lot of money for a quite-limited improvement in reliability.
Of course, politicians want to take action when blackouts occur, as we have seen recently in South Australia. No one wants to be left holding the baby when the lights go out. But immunity from reliability problems doesn’t come for free.
Privatisation of publicly-owned network assets
Grattan’s Down to the wire report shows a common link between the businesses that overspent; they were all publicly owned. This fact does not ‘prove’ that private is better than public; there are a range of factors that together resulted in network businesses overspending. Nonetheless, the evidence suggests privatisation of the electricity businesses in Victoria and South Australia has benefitted consumers in those states.
The businesses in Victoria and South Australia have spent less, maintained decent reliability and kept network costs down, compared to the publicly-owned businesses to their north. That’s why our report recommends the privatisation of remaining publicly-owned network assets.
But even if the businesses are privatised – and this seems unlikely – there is still the issue of what should be done about that $20 billion of unnecessary spending.
The excess investment has made grid-based electricity more expensive than it should be. That will drive more consumers to get off the grid and on to solar power and other off-grid alternatives. And that in turn will mean those consumers who remain wholly reliant on the grid will need to pay still more for their grid-based service.
Only by making sure that the price of grid-based electricity reflects its true value can policymakers ensure efficient investment decisions are made and equitable outcomes achieved.
To this end, we proposed that, where government still owns the network business, they should write-down the value of their assets in line with the overspend. This would not create sovereign risk: as owners, the government can do pretty much what they want to their businesses without creating sovereign risk for privately-owned businesses.
Nor would it require changing the regulatory framework, which could impact on other network businesses in the National Electricity Market.
Paying electricity consumers a rebate
In the case of the recently privatised, or partly-privatised, NSW businesses, the state government doesn’t have such luxury. Changing the value of a privately-owned business creates all sorts of sovereign risk.
So instead, we recommend that the NSW Government pays all electricity consumers a rebate commensurate with the savings consumers would receive had a write-down of the assets occurred. In both cases – for the publicly-owned and privately-owned network businesses – consumers would get a reduction in their bills.
The problem of networks ‘gold-plating’ is not new. But it’s time to draw a line under the problem. Either governments act, or they choose to accept that the excess costs are locked in for consumers.
As for the electricity grid itself, it faces greater challenges.
The grid is likely to remain vital to our future electricity needs. But the way it is used is changing, and how the grid will look in future is a big unknown. Electricity generation is becoming more distributed, more individuals are using the grid to both buy and sell electricity, and some are fleeing the grid altogether.
Working out how we build the right electricity infrastructure in the right places will be vital if we are to avoid a repeat of the massive overspending of 2005 to 2015.
David Blowers is the Energy Fellow at Grattan Institute. The Down to the wire report can be read at www.grattan.edu.au.