By Paddy Manning
HMMM. Climate change is accelerating so we need to spend more money reinforcing the electricity grid that is contributing to climate change.
It's a perverse argument which, thankfully, didn't wash with the Australian Energy Regulator, going by its recent draft decision on proposed expenditure on electricity distribution (the poles and wires) in Victoria for 2011-15.
In a surprise, the AER rejected proposals for $2 billion in capital and operating expenditure by Victoria's five privately owned distribution network service providers - Citipower and Powercor (part-owned by ASX-listed Spark Infrastructure), SP Ausnet, United Energy and Jemena.
Because approved network expenditure is linked directly to electricity prices, the regulator's rejection of these spending proposals will lower electricity prices for Victorian customers in 2011 - by an average of $28 against a typical annual bill of $1200 - then let them drift up by an average of $52.
That's a big difference from the regulator's lenient stance in other states, like Queensland or New South Wales, where it has recently approved electricity price rises of up to 62 per cent. This is galling for Victoria's distributors, but … a win for the environment? A first, curtailing of investment in the grid that delivers climate-busting coal-fired power to every home and business in the state? No, sadly. The AER just called the bluff of distributors that were trying to game the system, says Total Environment Centre energy campaigner Jane Castle.
''The networks have inflated the forecast peak demand in order to build more poles and wires - called gold-plating the system - and the AER has called them on that,'' she says.
''But they still have locked demand management and energy efficiency out, and the incentives for the networks are still perverse.''
To back up a little: forecast spending on Australia's electricity network over the next five years is the country's biggest single-ticket infrastructure item, at an estimated $47 billion.
That takes in high-voltage transmission lines, as well as spending on the distribution network including capital expenditure (new and replacement infrastructure) and operating expenditure (maintenance). It does not count power generation and it does nothing to cut greenhouse gas emissions.
Few people would argue against essential maintenance, but every dollar spent augmenting the network crowds out investment in alternatives like demand management and energy efficiency, which would reduce emissions.
The electricity distributors - regulated monopolies, privately or publicly owned - have a direct incentive to increase network spending. The more spending the AER approves, the more they can charge customers.
Victoria's five distribution businesses proposed total network spending of about $8.4 billion over 2011-15, including capital expenditure ($5.4 billion, a 66 per cent jump on the previous five years) and operating expenditure ($3 billion, a 38 per cent jump).
Prominent reasons included growing peak demand (mainly from continuing installation of airconditioners), extreme weather (storms and heat waves) due to climate change, and ageing infrastructure. (The AER allowed some additional expenditure in areas at high risk of bushfires and will consider further spending once the royal commission reports.)
AER found the distributors models ''cannot be relied upon to give an accurate forecast of future needs''. It approved just $5.6 billion - $3.4 billion in capital expenditure (up 16 per cent) and $2.2 billion in operating expenditure (up 2 per cent).
AER acting chairman Andrew Reeves explains: ''We haven't seen the case for the step-up increases that the firms have proposed.'' The AER does not believe climate change, for example, will have a significant additional effect on Victoria's distribution businesses in the next five years.
In rejecting $500 million in proposed spending on new grid infrastructure, Mr Reeves says, the regulator has sometimes questioned whether distribution businesses have done enough work on assessing demand-management alternatives.
An example was Citipower's proposed Docklands-area substation upgrade, which the AER rejected. Citipower says the AER also rejected a proposal to spend $10 million on voluntary load shedding (paying customers to shift their demand) at the West Melbourne terminal station, where there are concerns about capacity this summer. The environment, or an emissions reduction imperative, simply don't factor in the assessment by the distributor or the regulator.
Mr Reeves says the AER is required to consider the efficiency of proposed network spending, which means the most cost-effective way of meeting customer needs. ''If demand management is a cheaper solution than building grid, then demand management ought to be considered,'' he says.
Sure, it ought to be - but the distributors mainly want to increase profit. Bruce Mountain of Carbon Market Economics says that in Britain, for example, there is an obligation on the electricity market regulator to consider environmental impacts, including greenhouse gas emissions or energy efficiency. There is no such requirement here.
He believes privately owned operators here have more incentive, once network spending is approved, to save money by underspending - booking the difference between regulated charges and expenditure, as income.
The Prime Minister's Task Group on Energy Efficiency, due to report within weeks, is considering reforms to create incentives for demand management.
Rob Murray-Leach, an adviser to the task group and chief executive of the Energy Efficiency Council, says every $1 spent on energy efficiency saves $2 on infrastructure. He wants the distributors to set aside at least 10 per cent of their network spending for demand management - generating billions of dollars of investment. Distribution monopolies that fail to invest would face the threat of competition from energy-efficiency providers offering a cheaper solution than supply-side grid augmentation.
Castle points out that the regulator once fined Energy Australia and Transgrid $34 million for failing to consider demand management while reinforcing the Metrogrid line into Sydney's CBD. The regulator has never rejected proposed network spending on environmental grounds.