In this article we give our pick of the top 5 developments in Australia’s electricity sector for 2012–2013.
1. Retail prices – the only way is up (except in South Australia)
Although demand for electricity is down by 4.4% since 2008-20091, the cost of electricity in Australia has increased. According to a study published by the Australia Institute in April 2013 (Australia Institute Study), the cost of electricity has increased by 170% from 1995 to 2012, compared with a 60% rise in inflation over the same period.
The Australian Energy Market Commission (AEMC) released a report in March on household electricity price trends in Australia. The report predicted an average price increase of 14% for households in the year to 30 June 2013. This includes the impact attributable to the introduction of the carbon price, though the main driver of upward pressure on prices is still network costs. The rate of increase in prices is projected to moderate to an average annual rise of 3% for the two years to June 2015, as wholesale prices decline due to reduced demand and increased generation capacity – largely in the renewables space.
Breaking this down state by state (notwithstanding our ‘national’ electricity market):
- Victoria’s Essential Services Commission released a report in May which concluded that despite deregulation, prices have increased by 55-70% in the last 5 years. According to the Commission Victorian retailers’ profit margins account for 20-30% of the higher prices, with the rest of the increase explained by higher network, wholesale and ‘green scheme’ costs. The average gross retail margin in Victoria is 45%2. This is the same as the average in South Australia3. But in South Australia, retail providers have delivered price cuts of 9-16% since retail prices were deregulated in December 20124.
- In New South Wales the average household electricity bill has risen between 37 and 80% in the last 5 years5. In June, the Independent Pricing and Regulatory Tribunal set an average electricity price increase of 1.7% for 2013-2014, below inflation and lower than their April draft decision of a 3% increase. With 40% of the market on regulated contracts, the government seems reluctant to deregulate retail prices. While a recent 2013 AEMC report concluded that competition in New South Wales retail is strong enough to deregulate, it cautioned that deregulation should be accompanied by continued monitoring and the ability to reintroduce price caps if competition becomes ineffective.
- In Western Australia Premier Colin Barnett capped price rises at 5% before the election in March 2013 amid claims that that the state’s budget modelling had power bills increasing by 25% in the next 4 years. Since then Treasurer Troy Buswell has announced that power prices will rise by 4% in 2013-2014, slightly more than the promised price rises ‘at or around’ inflation.
- Tasmania began the 2012-2013 year with a jump in the regulated price of electricity of 10.56%. Premier Lara Giddings attributed more than half of that rise to the carbon tax. On 12 June the State government made submissions to the Tasmanian Economic Regulator recommending that the residential tariff be reduced from 1 January 2014. If accepted, the price fall will be the first in more than a decade.
- In Queensland the current cap on household retail prices will cease on 30 June 2013. From 1 July 2014, regulated prices set by the Queensland Competition Authority will increase by 7-24% (depending upon the category). For the typical residential customer, this equates to an increase of 22%, costing $5.15 a week or $268 a year. However, on 16 June the Queensland government announced a plan to remove price controls in South East Queensland by 1 July 2015 if consumer protection and engagement in the market are judged to be adequate.
2. Productivity – the solution?
So if the carbon tax and ‘network costs’ are to blame for price increases, is productivity the solution?
According to the Australia Institute Study, there has been a productivity slump in the electricity sector. Since June 1995, productivity in electricity, gas and water declined by 24.9% while all other Australian industries saw an increase of 33.6%. The trend is evidenced by the number of managers in the electricity sector, which has increased by 217% since 1997. Contrast this to an increase of only 28% in the number of frontline staff such as technicians and trades’ workers over the same period.
In December 2011 the Australian Government tasked the Productivity Commission with a public inquiry of the regulatory framework of the electricity sector. The draft report was published in October 2012 and presented to the Australian Government in final form in April 2013. The report was publicly released in June 2013. It identifies network costs as the main contributor to price increases which, according to the Productivity Commission, have increased by 70% in real terms from June 2007 to December 2012. The ‘barriers to efficiency’ identified in the report include inadequate demand management, excessive reliability requirements (the so-called ‘gold-plating’), state-based regulatory arrangements, continuing state network business ownership and insufficient resourcing of regulators.
In ‘Power sector under siege’6, we summarised some of the potential solutions proposed by the Productivity Commission in its draft report. They include:
- changing price regulation to ensure all utilities are regulated by a price cap, not a revenue cap and incorporating closer scrutiny of capex overspend
- addressing demand management by requiring distributors to charge retailers for consumption during periods of high demand to force them to adopt time of use tariffs as smart meters are rolled out, and
- reining in costs for excessively high reliability standards by ensuring distribution reliability standards reflect customers’ valuations rather than prescriptive standards.
The Australian Government released its response to the inquiry report on 26 June. The response refers to the ongoing work being progressed by the Standing Council on Energy and Resources, whose reform agenda was developed with the Business Advisory Forum Taskforce in November 2012, and endorsed by the Council of Australian Governments in December 2012. However, the Productivity Commission has criticised both state and federal governments, arguing that the reforms flagged in late 2012 should be accelerated and in any case, do not go far enough.
3. Privatisation – will they or won’t they?
The electricity sectors in Victoria and South Australia are fully privatised. The position in other states is not uniform.
A two year process concluding in 2013-2014 will see the New South Wales government sell its generation assets valued at around $3 billion. The first assets for sale are Eraring Energy and Delta West power stations, whose output is sold to Origin Energy and EnergyAustralia (formerly TRUenergy). The government recently announced that it has reached agreement to sell Eraring to Origin, and according to press reports, a similar announcement is expected in respect of EnergyAustralia and Delta West. Next on the block is Macquarie Generation, reportedly valued at about $2 billion. It has two power stations that could be sold separately or together. The O’Farrell government has flagged that it may seek a mandate to sell distribution assets at the next election in 2015. Retail assets were privatised in 2011 for $5.3 billion.
In Tasmania, the government intends to split, sell and transfer Aurora Energy’s 270,000 existing customers to mainland energy companies. The sale is expected to complete by the time full retail competition is introduced on 1 January 2014, and according to Infrastructure Partnerships Australia could generate between $271 and $326 million. Despite recommendations of an expert panel established by the state, it has stopped short of selling Tasmania’s generation and distribution businesses, estimated to be worth up to $3.97 billion and $3.6 billion respectively.
In February 2013 the Queensland Commission of Audit released a report to the government which recommended wholesale privatisation of the State’s electricity assets. The government responded to the report assuring voters it would not sell any assets in the current term. However, it is currently reviewing its options and will likely seek a mandate to privatise the two generators at the next election, which is scheduled for no later than June 2015. As predicted in our article ‘Privatisation prospects for the Queensland electricity sector’7 the sale of transmission and distribution assets has been ruled out of consideration for the time being. On 16 June the Queensland government announced a proposal to roll the two distribution companies (Ergon Energy and Energex) under the control of a holding company. The proposal remains subject to consultation with parties to respective union collective agreements, including the Electrical Trades Union. According to Energy Minister Mark McArdle, the proposal will improve the efficiency of the network businesses and could lead to savings of $580 million across seven years. Queensland’s retail assets have been largely privatised.
The Western Australian government is heading the other way and considering rolling back energy market deregulation. The plan is to remerge government owned generator Verve and retail provider Synergy, which were previously split in 2006 in an attempt to lower prices. The Chamber of Minerals and Energy (which represents companies such as BHP Billiton and Rio Tinto) says that the merger will deter private investment, undermine progress toward competition and erode certainty in the industry. On the other hand, Energy Minister Mike Nahan believes that the move is ‘a step-back, a reassessment and a move forward’8. According to the government’s strategy paper released in August 2012, the government intends to open up the energy market by 2031. The Minister hinted that they may in the future look at a ‘gentailer’ model, whereby companies are sold with both generation and retail arms.
In a report released in May 2013, the Industry Super Network suggested governments sell existing public infrastructure to super funds to unlock up to $100 billion for cash strapped governments. Australia’s super funds have a natural focus on long-term returns and may provide a middle path that could garner more support for privatisation. By way of example, Industry Funds Management, which is owned by 30 industry super funds, has $46 billion worth of funds under management and has invested in electricity utilities in Germany and the United States of America. With Australia facing a shortfall of $770 billion in infrastructure (not just in the electricity sector) and a total super pool of $1.6 trillion, it seems that the push from these funds to open Australia’s electricity sector for investment is unlikely to go away.
4. Increased interest from Chinese investors
In 2011 China Huaneng Group, China’s largest and state-controlled electricity producer, was the first Chinese entrant into the Australian electricity market. China Huaneng Group purchased a 50% stake in InterGen, a global power generation firm with 11 power plants in three continents, including two coal-fired generators in Queensland.
The newest entrant into the Australian electricity market is the State Grid Corporation of China, a Chinese government owned entity and the world’s largest state utility. State Grid’s offshore expansion arm, State Grid International Development, is charged with buying US$50 billion of power assets outside of China by the end of the decade.
The following stakes in Australian electricity assets were acquired (or are in the process of being acquired) by State Grid in 2012-2013:
- 41.1% of the shares in ElectraNet, a transmission provider in South Australia, for approximately $500 million
- 19.9% of the shares in SP AusNet, an electricity and gas transmission and distribution provider in Victoria, for approximately $824 million, and
- 60% of the shares in SPI (Australia) Assets Pty Ltd (an unlisted company trading as Jemena), an electricity and gas network distribution provider, for an undisclosed amount (valued by Dealogic at $6.7 billion).
There is speculation in the financial press that State Grid may be interested in increasing its stake in ElectraNet.
It will be interesting to see whether other Chinese companies follow China Huaneng Group and State Grid into this space.
5. The shifting sources of generation
The long held theory that renewables (including gas) cannot be used for base load generation is being challenged by the success of renewables. This shift is being largely driven by government policy and technological change. That said, given that the Australian Labor Party and the Coalition are now both moving away from the carbon tax (albeit to differing degrees), it remains to be seen whether the recent growth of renewable generation in Australia will be sustained at the same rate.
Studies in Australia, the United States, northern Europe, the United Kingdom, New Zealand, Portugal, Ireland and Japan have busted the myth that renewable energy sources are too unreliable to form the basis of an energy system for an industrial society9. Two Australian studies10 based on simulations using actual NEM demand data, weather observations and technologies (either in mass or limited production) found that it would have been technically feasible to supply 2010 electricity demand from 100% renewable energy sources with the same reliability as the existing fossil fuelled system.
So what about the cost? According to analysis by Bloomberg New Energy Finance (BNEF) published in February 2013, unsubsidised renewable energy is now cheaper than electricity from new-build coal and gas fired power stations in Australia. Even without a carbon price, wind energy is 14% cheaper than new coal and 18% cheaper than new gas. The BNEF research and analysis shows that since 2011 the cost of wind generation has fallen by 10% and the cost of solar photovoltaics has fallen by 29%. In contrast, the high financing costs for new coal projects is driving the cost of energy from new fossil-fuelled plants higher. That said, this analysis excludes coal-fired power stations whose construction costs have been depreciated – these generators are still producing power at a lower cost than renewables.
With technological advances and cost requirements slowly aligning, it is no surprise that there is speculation of a shift in the sources of generation towards renewables. In November 2012 the Australian Energy Market Operator (AEMO) released a report on the impact of the introduction of a carbon price. AEMO reported that in the first three months of carbon pricing in the period to 18 October 2012 electricity generated from:
- black coal generation fell by 1.9%
- brown coal generation fell by 0.8%, and
- hydro generation increased by 1.8%.
However, more recently the federal government conducted a comparison of daily national electricity market data which shows more pronounced results. According to those results over the first nine months after introduction of the carbon price on 1 July 2012 electricity generated from:
- brown coal fell 13.9%
- black coal fell by 4.7%
- gas and liquid fuel grew by 9.5%, and
- renewable energy sources (including hydro) rose by 28.3%.11
From a global perspective, according to the International Energy Agency’s 2013 Medium-Term Renewable Energy Market Report, renewable energy is the fastest-growing sector in the global power market, and will represent 25% of worldwide energy generation by 2018, up from 20% in 2011. Two-thirds of this growth is expected from non-developed countries, led by China.