Our collective failure in managing the transition of Australia’s energy market from a centrally planned and controlled one, to one with higher levels of decentralised decision making and autonomy, was highlighted dramatically last week with the confirmation by the Australian Energy Market Operator (AEMO) that Australia’s energy demand is way out of sink with what had been forecast. Demand is falling fast at a time when steady growth was predicted.
Many saw this coming and it has sparked a flurry of news for example see here and here. But we need to talk in more detail about the consequences and what changes are needed to minimise the damage that’s coming.
Let’s get back to basics.
Current energy price rises are being driven by investment in network assets and are likely to go on for a few years yet. As energy prices go up and up, and energy users respond by using less, generating their own energy or using their energy more efficiently, the private cost of price rises are avoided for a while, but in the long-run, if demand forecasts are substantially lower than what network companies had predicted, they may well need to re-price their services even more aggressively to recover lost revenue. Why?
Because once a network asset is built, no matter how well utilised it is, the cost of the network must be recovered from those who use it. In a world with rapidly falling costs of solar power, batteries and small scale generation more broadly, this is an enormous problem with consequences to match. Have fear for the last person paying for a million dollar network asset when all their neighbours have decided to go off the grid.
The only way this problem can be solved retrospectively is by socialising the pain – ultimately we will all pay for inefficient energy market investment because the companies fit the too big to fail category. That’s an ugly solution, and hopefully one we can avoid, but it’s one we are heading for.
Why? A few reasons.
Historically, Australia’s energy market institutions have been largely separated philosophically from the policy departments that influence energy market outcomes. In practice, this means energy market institutions have always seen things like pollution and social goals such as affordability and equity as “externalities”, meaning clean energy and energy efficiency rely on someone else being proactive, not the energy market. Social and environmental and outcomes have typically been lost in energy market transition and a carbon price certainly doesn’t solve this problem.
Further reasons are energy market rules and regulation themselves. We’ve debated for years whether or not network companies have an incentive to invest in their assets efficiently or not. With a guaranteed rate of return on capital expenditure, investment in non-network solutions to demand considered operational expenditure, and heavy penalties for poor reliability and security of supply, it is obvious the powerful incentive is to beef up the network at all cost.
But what we don’t often talk about, and the big sleeper issue is that network companies are by law required to seek out and invest in efficient non-network alternatives to meeting energy demand. This means that by law, network companies should be putting money into building management systems, more efficient air conditioners, lighting and other measures that relieve energy demand efficiently. Anyone with operational exposure to energy efficiency knows that:
1. There are loads (pardon the nerdy energy pun) of energy efficiency measures that reduce network demand cost effectively and without risk
2. Network companies typically don’t invest in them
How is it so?
Simply, network companies are not being effectively regulated, and the debate about their incentives just masks this fact. I actually have huge sympathy for the regulator and network companies, they are victims of history and system inertia.
But their respective jobs could be made a lot easier if Australia invested in an independent capability that could model and solve the most efficient way for Australia’s energy demand to be met considering centralised and decentralised options concurrently and the need for social and environmental objectives to be met.
What we have now is the “statement of opportunities” that signals for investment in the energy market while being half-blind from the distribution network down, combined with network companies, consultants and the regulator playing argy bargy once every 5 years.
With modern computing power and a decent data gathering system, it would be relatively straight forward to model the optimal mix of centralised and decentralised solutions to energy demand concurrently– either in the 5-year network planning phases, year to year as network plans are adapted, or case by case as new network investment is considered.
The capability would be used by the regulator to test and inform network planning, and could be used for broader market signaling by AEMO or the AER – identifying opportunities where third parties can provide non-network solutions to alleviate a constraint. Combined with transparent, easily discovered shadow nodal network prices (don’t hit consumers with the price, just tell third parties what they are), it would be a powerful market signal.
Between the CSIRO, universities and consulting houses, there is more than enough capability running around to do this, to do it well, and to make it very cost-effective to run.
More so, it is the only way Australia’s energy market institutions can get on the front foot and start shaping the energy market proactively, rather than being responsive to trends and problems as they emerge.
Will it happen?
I hope so. I have been an advocate for this type of solution as have others, and it was picked up by the prime ministers taskforce on energy efficiency a couple of years ago.
But I fear not. System inertia is a powerful thing. Vested interests either don’t see or don’t fear an ugly transition because consciously or not they know they are too big to fail and behave accordingly.
As Australia locks in more and more inefficient investment in network assets and potentially in the near future, centralised renewables, we have a collective responsibility to remember the last decade, a decade not lost, but a decade that failed to prepare us for the next.
If we continue to fail, the consequences grow exponentially.