Energy industry needs to focus on consumers, it may need them

RenewEconomy

You hear it quite regularly now from energy utilities: ‘This is all about the consumer, we are focused on what our consumer wants, our products are geared towards changing consumer needs.’

Except that – but for a few tentative steps towards new technologies by some leading players – it’s not, and for the past 100 years it hasn’t been. It’s been all about centralised power and centralised control.

Even in the new paradigm, where the incumbent utilities – networks, generators or retailers, or a combination of both – recognise that consumers now have the technology to make their own choices, and new competitors that will make sure they get them, the shift to a new business or consumer model is begrudging at best.

Nowhere is this highlighted more than in the critical area of the energy industry where the utilities still exercise almost absolute control and influence – with the policy and pricing regulators.

Alan Pears, senior industry fellow at RMIT and one of the leading experts in the field, says policy makers and regulators in the energy sector are failing consumers because they have a history of being ‘gatekeepers’ to the industry and defining their role as protecting the incumbent industry from risks associated with change.

This “sense of entitlement” has effectively led to discrimination against emerging energy solutions, such as rooftop solar PV and now battery storage.

In the past few weeks there have been several clear examples where the regulator – under the weight of hefty submissions from the incumbent utilities – continues to fail the consumer.

In Queensland, the newly formed state Productivity Commission advised the Labor government to back off from its pledge to deliver 50 per cent renewable energy and its commitment to 3,000MW of rooftop solar by 2020, because of its supposed costs. This is despite its own numbers which show the benefits clearly outweigh those costs.

In Victoria, the Energy Services Commission has been asked to investigate its own assessment of a “fair solar tariff” and in its discussion paper declared that it had yet to identify any benefits of distributed generation. The Tasmania Economic Regulator made a similar declaration in its own assessment of that state’s solar feed-in tariffs.

It could be that the people running these regulators fancy themselves as some sort of Horatio Nelson – turning the telescope to their blind eye in the hope of being able to ignore undesirable information (such as the benefits of solar and battery storage) on the presumption of winning some heroic battles (defending the incumbents). If that’s the case, they are deluding themselves and doing consumers, and the economy, a massive disservice.

Not for the first time, these regulators are putting assessments of solar PV and battery storage in the “too hard” basket. Tasmania’s regulator doesn’t even want to consider battery storage for another three years. Victoria’s ESC only wants to make “easily quantifiable” assessments.

Pears is aghast, and suggests that the ESC is being lazy, and has no intention of carrying out the sort of  “comprehensive analysis” that the state government expects.

In his submission to the ESC, Pears points out that guidelines for development of public policy clearly require policy makers to address issues that are difficult or even impossible to quantify. That’s what they are supposed to do with their reports, which often run to hundreds of pages.

The issue is important. Solar tariffs have been cut to the bare bones in most states, roughly equal to the wholesale rate. In no state are any of the benefits credited.

Now, customers in many states are being hit with major rises in fixed and unavoidable tariffs, special taxes that affect solar households are being imposed, and all the while new battery technology and business models such as micro-grids are being rolled out, giving the consumer even more choice.

The response of the industry lobby? Fine the consumer or penalise them in other ways if they dare leave the network. And when the issue is being discussed, the regulators are being accused of excluding the interests of consumers.

“Network operators have been given a false sense of entitlement to a ‘right to make a profit’, regardless of their past poor judgement regarding investment in infrastructure,” Pears writes in his submission to ESC. “There is a risk that the ESC’s approach to this inquiry will reinforce that misguided sense of entitlement.”

Pears asks why consumers installing solar and battery storage should be treated any differently to those choosing to switch from gas cooking or hot water, or installing a big air conditioner without paying the electricity retailer or network operator anything.

Indeed, Pears points out that the gas industry has had a major impact on the profile of demand for electricity through its replacement of electric off-peak hot water services by gas HWS units across most of Victoria.

The gas industry was never expected to compensate the electricity industry for its impact on their costs, nor was the ‘true value’ of gas based on what it saved the electricity industry.

And, as Pears also notes, solar households in Victoria are required to operate under a time-of-use tariff. Yet this rule does not apply to homes with air conditioners, which are responsible for the huge surge in network costs now saddling consumers.

“Consumers face an increasing range of options to use less energy, or to use different forms of energy and energy technologies to deliver these services. Until energy policy is based on energy services, policy will continue to fail to meet community expectations.” he writes.

Pears also talks of the numerous cases where network operators seem to have used their market power to limit competition from emerging alternatives such as cogeneration and rooftop solar, as well as applying high fixed charges that dilute price signals to consumers.

The problem with the ESC’s approach to a fair solar tariff, he says, is that it is seeking outcomes only in terms of benefits to the network, and not to the consumer or society in general.

“This reflects a serious case of ‘regulator capture’,” Pears notes.”Second, it suggests the ESC has not tried very hard to identify broader societal benefits.”

So, to help the ESC find some benefits, here are a couple:

Energy Markets

Downward pressure on wholesale electricity prices – demonstrated to be significant by a number of studies in the recent commonwealth government review process. Incorporating storage and smart management into an integrated DG (distributed generation) package would further enhance this effect.

Reduction of insurance costs for network providers in fire-prone regions, by either replacing power lines, or allowing power lines in high risk areas to be shut down at times of high fire danger (as highlighted in this recent article that showed solar PV and storage could reduce network safety augmentation costs by 90%). And it would reduce exposure to risk for fire fighters and residents in fire-prone regions

Improved system reliability and lower maintenance costs. DG can reduce peak pressures on networks. Where storage is included, it assists with management of maintenance activity by increasing the flexibility for scheduling of repairs by allowing consumers to continue to receive energy services while faults exist. (Ergon Energy says battery storage is reducing network maintenance costs by one-third). And where equipment is appropriately designed and managed, ancillary benefits can be provided, such as voltage stabilisation.

Economic benefits

Studies by both ClimateWorks and the Australian Alliance for Saving Energy have shown that measures that improve ‘energy productivity’, including DG, can contribute to a higher rate of economic growth. And distributed generation offers higher employment intensity, a more diverse range of skills, and wider geographical distribution than in the conventional energy sector.

It creates a different profile of capital requirements, as DG begins to deliver a revenue stream after a short installation process, costs are spread over time and risks are spread by large numbers of small projects, lower risk due to diversity. Much DG capital is provided by ‘retail’ capital providers, which drives increased activity in that sector.

Lower overall energy costs free up funds for investment in other sectors of the economy. A 2014 report by the International Energy Agency suggested that, for businesses, the ‘multiple benefits’ of energy efficiency measures could be as high as 2.5 times the value of the direct energy savings. DG and storage may provide similar or even greater benefits.

Health and other externalities

Pears says it is surprising that ESC seems to have been unable to find any health benefits. The literature is abundant.

One starting point could be the Australian Academy of Technological Sciences and Engineering 2009 paper, The Hidden Costs of Electricity: externalities of power generation in Australia. ATSE suggest an externality cost (excluding carbon) of around $13/MWh for coal powered generation and $1.50-5 for renewables. However, given the age of some of our power stations, this may be higher.

Additional insights may also be provided by review of the costs related to recent mine fires and mine wall collapses in the Latrobe Valley. And Doctors for the Environment Australia have strong interest in energy and climate-related health impacts, and may also be able to assist ESC in identifying relevant research and analysis.

An emerging aspect of the external costs of electricity generation is the concerns about the long-term economic, social and environmental impacts of coal seam gas extraction. Where this is the marginal source of gas for power generation now or in the future, or where DG may replace on-site use of gas sourced from CSG, related long-term costs and impacts are relevant.

Climate benefits

Solar PV is often accused of having a “high cost” of abatement. This ignores the fact that the incentives for the renewable energy target were primarily designed to drive the development of the renewable energy industry.

And most calculations for solar PV are based on the element of deemed abatement over 10 to 15 years of around $40/MWh. Given that solar systems have a much longer life, and that their output is usually much higher than estimated by the Clean Energy Regulator, the real STC price per MWh generated may be more like half of this.

Pears says the ESC must be careful about suggesting that some or all of the STC price reflects payment for the decarbonisation effect of DG. And if it does, it needs to take into account the price that governments are prepared to pay for abatement, through specific schemes like the Emission Reduction Fund (around $13/tonne of CO2e avoided) and the Victorian Energy Efficiency Target (at present about $19/tonne of CO2e avoided), and other studies that put the social and economic cost of carbon at a much higher rate.

As Pears, concludes: Policy makers in the energy sector are being challenged because they have a “history of being ‘gatekeepers’ and defining their role as protecting consumers and the incumbent industry from risk associated with change. This has effectively led to discrimination against emerging energy solutions.”

So, it’s time they consider current and future trends, and think about benefits to consumers, as well as the industry. After all, the industry might need them.

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