Australia's Electricity Networks: The Foundation of our Modern Economy
Sydney
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Introduction
It’s a pleasure to be part of the Smart Networks Summit.
Let me first recognise Andrew Blyth, who isn't here today but who as CEO of the Energy Networks Association (ENA) for the last five years has worked to increase awareness of the importance of our energy networks.
I thank ENA for a timely platform to discuss the value of electricity networks and the investment challenge ahead.
Critical economic infrastructure needs to be paid for, and there is no quick fix to rising electricity prices.
We need to be honest about that.
Success in terms of a regulatory outcome for energy networks hinges on finding the right balance between reliability and cost to the community.
Network investment
There is a looming and significant investment challenge in both electricity generation and networks.
Meeting this challenge is critical to ensuring continued reliability of supply.
As we all know, consumers pay for electricity and a part of that cost includes paying for these investments.
The two go hand in hand and we can't have continued reliability without meeting the costs associated with it.
There are a number of drivers behind these costs including network maintenance and expansion, increased peak demand, and even the fundamentals of our geography and population size.
But there are also measures we can take to improve efficiency, competition and regulation to the ultimate benefit of the consumer.
Today I want to look at some of these, to sketch out the challenges and raise some of the questions governments, regulators, companies and consumers alike need to have on their agendas.
Drivers
The challenge of distance and population
At the time of federation, Edmund Barton, Australia's first Prime Minister, described Australia as "a nation for a continent, and a continent for a nation."
This statement reflects the fact that Australia, geographically, is a massive country.
But we have a relatively small population.
This means that our population density is among the lowest in the world – we have three people per square kilometre of land area. This compares to the United States with 32 and the United Kingdom with 255 people per square kilometre.
Energy networks are the lifeblood of our economy, and in Australia, with fewer people to share the costs of this investment and long distances to cover, network costs will always be a bigger component of bills than they are in nations with greater population density.
That we enjoy such reliability of energy supply over such vast distances is an amazing technical achievement in itself.
Australia’s National Electricity Market is the world’s longest interconnected power grid.
It covers more than 5,000 kilometres - from Port Douglas to Port Lincoln.
The transmission network runs this entire distance and in aggregate is a bit less than 50,000 kilometres in length.
Our distribution infrastructure is much more complex.
At around 750,000 kilometres, it is 17 times longer than the transmission network.
The challenge of ageing assets
Australia has a lot of ageing poles and wires to maintain.
And like all things, these age and require replacement.
A period of significant investment in our distribution assets occurred between 1950 and 1970, and we are now entering a period where these assets must be replaced.
The life cycle of the bulk of these assets has turned full circle meaning the time for large scale investment is again fast approaching – in fact the next 15 years will be critical.
And by large scale we are talking capital investment of around $43 billion in the next four years alone according to estimates by the Energy Supply Association of Australia.
The challenge of increasing demand
But maintaining the status quo is not enough.
We need to strengthen and expand our networks to meet increased demand.
Our nation is wealthier than ever, our standard of living the highest at any point in our history and this manifests itself in the accumulation of more and more electrical gadgets in our households and increased demand for electricity by industry.
In particular, air-conditioner use continues to grow significantly and this is leading to higher peaks in demand.
Meeting peak demand inherently poses costs by building expensive network infrastructure that is barely used - often for only a few hours in the late afternoon on the hottest days of the year.
It is estimated that 25 per cent of retail electricity costs are derived from peak events that occur over a period of less than 40 hours per year.
But all consumers bear the costs of this infrastructure.
Hence, a smarter network that can help us reduce peak demand is an important aspiration.
The result: rising prices
Historically, Australia has enjoyed very competitive electricity prices.
We still have some of the lowest in the developed world.
Reliable, affordable and accessible energy has been critical to our economic development and our international competitiveness.
However, household electricity prices have risen by about 40 per cent over the past three years.
And we expect them to increase in the order of 30 per cent in the next three.
The Ministerial Council on Energy (MCE) has taken steps to increase protections for consumers in the face of these increases, agreeing national electricity and gas laws, and more recently a new national energy retail law.
Jurisdictions will implement the new law from July next year.
This means that for the first time, we will have a national approach to the operating environment for retailing energy, with advanced national consumer protections to help those in hardship.
But this is only part of the solution.
Rising network charges make up about half of our bills.
Businesses are experiencing higher bills too.
Figures around recent and projected price rises are regularly cited in media reports.
What is less frequently mentioned are the costs to consumers and the costs to business from a lack of reliability because of underinvestment.
Lack of reliability in our electricity supply would threaten jobs, threaten businesses and undermine our economic prosperity.
That is why it is so important to get the balance right, why it is vital that we don't stand in the way of required investment and why we must build on previous reforms to keep Australia's energy market one of the best in the world.
Responding to the challenges
So how do we respond to these challenges?
Can we better manage the drivers behind increased network costs?
In my view the answer is yes.
Higher bills may have given these issues a higher profile of late, but they’re not new issues for the Ministerial Council on Energy.
Nor are they new for the institutions which develop, oversee and implement our energy market frameworks.
Bipartisanship characterises the energy reform agenda.
Two decades of reform starting with the Hilmer report have gone into developing a leading-edge regulatory and market framework for Australia’s energy sector – including our networks.
We have made significant reforms in the governance of the National Electricity Market through the creation of three national energy market bodies.
We have moved economic regulation away from state governments to the national Australian Energy Regulator.
The AER is already undertaking work on setting and improving distribution network determinations.
Its current review into the rules will help ensure the right balance in terms of reliability and cost ahead of the next round of determinations.
And we are keeping open further opportunities for improvement through existing MCE processes and the Government's Energy White Paper, should the AER's review be insufficient.
In the last ten years we have also established the Australian Energy Market Commission which operates as the independent rule-maker and advises energy ministers on market development issues.
Consideration of the framework for setting distribution reliability standards – an issue recently flagged by the incoming government in New South Wales – is already on the AEMC’s agenda as part of a broader review and the Ministerial Council on Energy is accelerating the delivery of this work.
It is envisaged this could accommodate the New South Wales government's proposed review.
The AEMC is also considering rule changes that would affect the way distribution networks are planned, including the possibility of using demand response to lower the investment required and benefit consumers.
And finally the work of the Australian Energy Market Operator (AEMO) means the market is more transparent, efficient and forward-looking.
Together these three national energy market bodies provide the framework and foundation for robust energy sector regulation.
They position us well to address some of the other emerging issues.
Productivity gains and network efficiencies must be pursued across the board.
And where that is not the case we must look at why.
For instance, concerns have been raised by New South Wales councils regarding the monopoly provision of street lighting by distribution businesses – which does not provide for the efficiencies that competition can bring.
The work practices of distribution businesses more generally has also been raised, with some retailers concerned about the productivity associated with the monopoly provision of meter reading services.
The existing regulatory appeals process and the weighted average cost of capital applied to network businesses, particularly in relation to state owned businesses is another emerging issue, raised most recently by Ross Garnaut.
Our existing processes and market institutions can facilitate examination of these matters to make sure that our regulatory settings are appropriate while at the same time maintaining much-needed investor confidence.
The experience of individual jurisdictions
Common challenges exist across distribution networks nationally, but between jurisdictions we also see increased network charges being driven in different ways.
For example, in Queensland the independent Somerville Report commissioned by the Queensland Government in 2004 following a run of electricity blackouts during storms and hot weather found that inadequate capital and maintenance expenditure on networks led to poor reliability.
In essence, the report highlighted the need for more investment, for changes and a significant increase in capital expenditure, which ultimately flows through to consumers.
This is of course contrary to some recent suggestions of over investment in distribution networks.
In Victoria we see a different story.
The privately owned Victorian networks have seen a comparatively smaller increase in distribution charges in real terms taking account of inflation.
Looking at one network as an example, we saw Jemena's distribution charges for an average household rise from $270 in 1996 to around $410 today.
And this increase was primarily driven by the roll out of smart meters, whose costs peak in the short term but have the potential to deliver savings over the longer term.
Historically Victoria has a good track record in providing a reliable supply of electricity that meets community expectations.
So in Queensland we see cost increases being primarily driven by the need to invest in networks to improve reliability performance, while in Victorian increases are primarily associated with improving technology.
In New South Wales increased costs are predominantly driven by the need for increased investment to replace ageing assets.
As high level comparisons go, this certainly raises questions of efficiency around public versus privately owned networks – and the benefits each can extend to consumers.
But a definitive answer to this is not possible without more detailed data to allow appropriate productivity benchmarking by the AER.
Building networks for the future energy mix
In addition to these longstanding challenges, new technologies are also testing our networks in new ways.
Storing and transporting energy from renewable sources is challenging, to say the least.
The Australian Government is committed to increasing the commercial deployment of low-emissions technologies.
Mechanisms include the bipartisan expanded Renewable Energy Target, the $5 billion Clean Energy Initiative and the introduction of a carbon price.
Electricity networks of the future will need to support new technologies.
The Australian Government, through the Ministerial Council on Energy, has a busy reform agenda to get networks ready for these challenges.
It is also developing the Connecting Renewables initiative, which provides $1 billion to encourage investment in our transmission networks to facilitate this change in the generation mix.
Despite misrepresentations by some, funding for the Connecting Renewables initiative was provided for in the Mid Year Economic and Fiscal Outlook released in November last year and the recent federal budget did not cut any funding from this commitment.
This initiative must operate in an advanced market framework, so the Australian Government is taking care to consider options that both benefit renewable energy and minimise costs to consumers.
I invite you to be part of the consultation on the design of this initiative, which will begin shortly.
The Government's investment in the Smart Grid, Smart City project is especially relevant to this summit.
This $100 million commitment will help us all understand how to harness smart grid technology at a commercial scale.
The results will inform the business case for the broader adoption of smart technologies and applications.
A consortium led by Ausgrid (formerly EnergyAustralia) will help deliver this project to as many as 50,000 householders in Newcastle, Sydney and Scone over the next two years.
This is exciting technology, with the potential to dramatically improve the way our networks operate.
It will also help us understand the economics of these systems, and empower consumers in managing their own bills.
The road ahead
Next month the MCE will merge with the Ministerial Council on Minerals and Petroleum Resources to become the Standing Council on Energy and Resources.
Energy networks and market frameworks will be high on the Council's agenda.
These issues will also be explored as part of the Government's Energy White Paper.
However, these are not areas where the Australian Government can go it alone.
We need to continue our strong partnership with the states and territories.
States, after all, have responsibility for many of these key issues – and also have a strong interest in keeping bills low and maintaining reliability.
It's not as simple as just looking for lower energy prices. We need to develop and use our networks in a smarter way.
Public information is vital too, and we all have a role to play in this.
We cannot let the community lose sight of the huge investment task in generation and network infrastructure.
I welcome your engagement on all the work I have talked about.
The Government is also continuing its work on a mechanism to price carbon.
In putting together a detailed package, input and advice is being sought from many quarters, including the energy sector.
Given the absolute imperative to bring on new investment in both generation and networks to ensure security of supply, I established an Investment Reference Group to assist with the development of an independent review of investment activity in the Australian electricity generation sector.
Today I am releasing both the independent review, conducted by Deloitte, and the report of the Investment Reference Group.
Importantly they provide an assessment of investment activity in the Australian electricity generation sector in the context of continuing uncertainty around the introduction of a carbon price, and the impacts that this could have on energy security, reliability and electricity prices.
Both reports make for interesting reading, but in many ways the findings of these reports are not surprising.
Contrary to much of the media reporting of recent days there is no recommendation for a $40 a tonne starting price.
As you know investors are focussed on a whole of life analysis for these assets, which is typically in excess of 30 years, and this is the primary focus of the reports.
By far the most important finding from this work is the fundamental importance of getting the right policy in place to bring about transformation in the sector that will deliver abatement while at the same time providing market stability, energy security and reliability.
Conclusion
Ladies and gentlemen, energy networks play a crucial role in bringing reliable energy to households and businesses.
They are the foundation of our modern economy.
Our network regulatory environment has served us well, and collectively we need to make sure that it continues to provide outcomes that maximise the benefit to the Australian economy and community.
Thank you