Anna Collyer, the chair of the Australian Energy Market Commission (which writes the rules for our energy markets), gave a speech last week where she outlined the Commission’s plan for how we’ll pay for electricity into the future.
Apparently, it will mean we’ll pay for electricity just like how we pay for milk.
In her speech she explained,
“Speaking of ‘hotly contested’ – I’ll come to one of our Pricing Review’s final recommendations soon. And – stay with me here – how it compares to buying milk.
“….at its core, the final report next week [on how the AEMC wishes to restructure electricity pricing] will be about making electricity simpler.
“And it’s in that spirit of simplicity, that I want to talk to you about, milk. Like all products you buy at the supermarket, there are lots of different input costs. Milk comes from a farm. Somebody had to milk the cow. Someone else put it in a carton. Then another had to deliver it to the supermarket. And of course, somebody must maintain that supermarket. All of this gets wrapped up into a simple price of milk when you go and buy it.
“Electricity is the same.”
Collyer didn’t really elaborate much beyond that, but it was enough to get my imagination going.
Now, as you might know, I’ve been an outspoken critic of the commission’s Price Review recommendation detailed in December to shift the way households are charged for the electricity network.
They recommended that network tariffs should be restructured to recover the vast majority of costs through a fixed charge that has nothing to do with a household’s electricity demand.
According to the Commission, this was necessary because lots of people were likely to be adopting solar and batteries, and would no longer pay as much to networks as they used to.
This was going to lead to an increasingly unfair situation where networks would keep hiking up the charges they imposed on all the other households in order to make up for the loss of revenue they used to get from households with solar and batteries.
My view on this matter is that electricity networks should be treated similarly to most other businesses. That is, they get paid by customers based on the level of demand for their service. If customers as a whole need less overall network capacity then they should pay less.
Also, if networks make mistakes where they overestimate customer demand and build too much capacity, then it’s not the responsibility of customers to pay for that mistake.
In other words, networks shouldn’t be able to jack up prices to some customers in order to make up for costs that they can’t recover from other customers who decide to get less of their power from the electricity network.
Please note that this doesn’t mean customers should pay the same price for electricity no matter when they consume it. We don’t pay the same price for an airline ticket no matter when we want to fly or how late we book a flight.
Also when it comes to petrol, we sometimes have to pay more in situations where supply is tight, like recently due to the closure of the Strait of Hormuz.
But here’s the critical thing – if you happen to fly very occasionally and airlines have bought far too many planes, you aren’t expected to pay the same amount as a someone flying every week, and you don’t pay for the full capital cost of all aeroplanes that were bought beyond what customers need, in fact you pay less.
Hotels are similar – prices can vary widely depending on levels of demand (such as holiday surges) but those using hotels less, pay less and they definitely don’t cover for the costs of businesses who built more hotel rooms than needed.
Also, if I get a plug-in hybrid car then the petrol station can’t charge me a special levy to cover all the oil industry’s fixed costs which they can no longer recover from me based on my diminished consumption of petrol.
So if the AEMC really thinks that we should pay for networks just like we pay for milk, then I’m hopeful that maybe they’ve come to their senses on this issue.
You see, my wife drinks a lot of tea and also likes protein shakes. She used to have dairy milk in her tea and protein shakes, but then she switched to soy milk.
Thankfully, when I go to the supermarket to buy some diary milk, there isn’t someone guarding the refrigerator and demanding I pay them a fixed fee for the right to withdraw some milk from the refrigerator to cover all the dairy industry costs that are tied up in fixed assets like land, irrigation infrastructure, milking equipment, refrigerated trucks, and dairy processing factories.
There also isn’t some grumpy bastard hanging out in the soy milk aisle with his shopping trolley piled to the brim with dairy milk accusing me of being a subsidised parasite on the diary industry because I don’t buy anywhere near as much dairy milk as him, and have the temerity to substitute dairy milk with soy milk.
To bring this all back to electricity, our regulatory framework governing electricity networks needs to place some level of responsibility and risk on the shareholders of these networks to manage their costs properly, including anticipating the emergence of technological substitutes.
Customers shouldn’t face a zero-sum game where one household’s gain from new technology must come at another customer’s expense. Meanwhile, the shareholders in networks are treated like some kind of infant who can’t be expected to take any responsibility for the fact they’ve blown the credit card buying way more capacity than they needed to.
Unfortunately, I suspect that when the AEMC say they want electricity prices to be like those for milk they haven’t really thought this through to its logical end.
Instead, what they have in mind is that electricity retailers will act as intermediaries to protect network shareholders and penalise solar and battery owners, all under the guise that this will allow for “simpler” prices. But hopefully I’ll be wrong.
Tristan Edis is Director of Analysis and Advisory at Green Energy Markets. Green Energy Markets assists clients to make better informed investment, trading and policy decisions in energy and carbon abatement markets.
Tristan Edis
Tristan Edis is the Director – Analysis and Advisory at Green Energy Markets. Tristan’s involvement in the clean energy sector and related government climate change and energy policy issues began back in 2000.
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