Over investment in the electricity distribution network not such a bad thing?

Possibly more so than any other country, Australia has over-invested in its electricity distribution network, leading former Prime Minister Julia Gilliard to refer to the network as being “gold plated” and contributing to a steep increase in electricity prices. But is this such a bad thing?

Background

In the years leading up to 2008/09 electricity consumption and demand in the National Electricity Market (NEM) were growing steadily at over 2% per annum. In some states, such as Victoria, the growth in demand was extremely strong, averaging over 4% annually in the five years to 2009. With network planning taking place in five year cycles, distribution businesses sought and were granted tariff increases in order to fund the strengthening and expansion of the electricity distribution network in order to cope with the continued anticipated growth in demand.

This growth in demand, however, failed to materialise. Consumption dropped, and as graphed below for the two states with the highest consumption in the NEM, NSW and Victoria, peak demand hasn’t gone much above the 2008 and 2009 peaks and is now lower. (Data sourced from the Australian Energy Market Operator, AEMO)

NSW peak demand 2004 to 31 August 2014. Based on data from AEMO

NSW peak demand 2004 to 31 August 2014. Based on data from AEMO

Victoria peak demand 2004 to 31 August 2014. Based on data from AEMO

Victoria peak demand 2004 to 31 August 2014. Based on data from AEMO

In NSW peak demand to 31 August 2014 is a massive 17% below 2008, and based on the growth in demand that was anticipated back in 2008, is around 25% below what was expected! In Victoria, whilst the demand drop is not as great, based on the previous growth trend of greater than 4% p.a., it’s demand too is also around 25% below earlier expectations.

There are a range of reasons for this drop in demand, which I have discussed elsewhere. Looking at the Victorian graph there appears to be some uncertainty as to whether the drop in demand will continue, however there are a range of reasons as to why consumption and demand in 2020 is unlikely to be much different to demand in 2008 and could even be lower.

Over investment in the electricity distribution network not such a bad thing?

Considering that the retail price of residential electricity has nearly doubled since 2008, this over-investment in the electricity distribution network has been widely criticised.

Billions of dollars have been invested into electricity distribution assets that may well never be used as initially intended.

However, on the other hand, the steep increase in electricity prices has made Australian’s more conscious of their energy use, and to some extent has driven energy conservation. Which is a good outcome from a carbon perspective.

Our economy has not gone into recession, and has remained robust. Tristan Edis at Climate Spectator has clearly shown that only a very small portion of our mining and manufacturing sectors, representing less than 3% of our GDP, depend on energy prices for their competitiveness.

Australia now has a resilient solar PV industry, and had electricity price growth been slower, the overall uptake of solar PV would likely have been lower. High solar demand has also created a highly competitive industry with low installation costs in global terms.The solar genie is well and truly out of the bottle, and this will continue to exert downward pressure on demand and consumption.

Whilst the full electricity price increases could possibly have been avoided, the benefit this has provided in accelerating Australia’s emissions reduction should not be discounted.

An unavoidably inefficient good outcome?

A far more efficient outcome would have been to use the money that went into gold plating the electricity network into supporting the greater uptake of energy efficiency and renewable energy.

However it would have been politically unacceptable to invest more than has already been invested in EE and RE – for many countries, including Australia, steep tariff increases to combat climate change are perceived by politicians as a sure vote loser.

The price elasticity of demand for electricity is assumed to be fairly low, and assumed to be linear. But possibly the reaction is non-linear. That is, if there is an energy price shock, as has occurred in Australia, the resultant reduction in energy consumption is (much) greater than if the price increases had been modest and gradual. Kind of like the boiling frog syndrome – heat up the water too fast and the frog jumps out.

Lessons from Australia for elsewhere

Steep increases in Australia’s electricity prices have been politically unpopular in Australia, yet the economy has remained resilient, and the shock has largely worn off. The rapid price increase, along with a range of other measures, has contributed to a substantial reduction in electricity consumption and demand, reducing carbon emissions.

Electricity tariff increases – whatever the source of the increase – whether through subsidy removal, the imposition of green tariff charges, or as a result of network over investment – if introduced quickly to cause a pricing shock can be effective in reducing electricity consumption and associated emissions.

Politicians and policy makers could well refer to the Australian experience where the pricing shock occurred more by accident rather than design, and look to ways of achieving the same outcome more efficiently.

 

 

Leave a Reply