Carrots, Sticks and Consumers: The Future of Energy

In July 2017, The Warren Centre hosted a forum on the Chief Scientist of Australia Alan Finkel’s report into energy security and policy. The forum aimed to address where energy policy is heading and what are some of the changes that will happen along the journey.

The speakers were:

  • Paul Graham, Chief Economist for Energy at CSIRO and a key leader of the ENA / CSIRO Electricity Network Transformation Roadmap report of 2017; and
  • Mervyn Davies, a leading energy consultant, an expert on energy distribution and a Director of NT Power and Water.

The facilitator was John Blik, National President of the Australian Institute of Energy.

The speakers each gave a 20 minute technical and economic summary and participated in a Q&A session. All three contributors addressed the challenge of the “Trilemma” of policy supporting reliability, affordability, and sustainability.

Mervyn discussed the economic efficiency of energy pricing, addressed current tariff structures, and explained how today’s tariffs do not accurately or fairly assign costs to their sources. A major proportion of electricity transmission and distribution costs are “sunk costs”. These costs, known as residual costs, have no driver, but are currently recovered from consumers via energy (kWh) charges. Mervyn argued that this sends the wrong price signal, is inequitable, and overprices kWh. He argued residual costs would be better recovered through a variety of “non-distortionary” fixed charges.

Currently users of distributed energy are advantaged over other network users. Many, often affluent, users with rooftop solar PV thus pay less for their use of the network, disadvantaging users without rooftop solar who pay a proportionately larger share of the residual costs. This hidden subsidy also distorts the generation mix, in favour of roof top PV over large scale PV and wind. Mervyn argued that pricing needs to reflect the true cost to all users, in order to ensure equity, technology neutrality and optimal use of resources.

A contrary distortion also arises because transmission costs are currently billed to distribution, thereby adding to the residual cost recovery dilemma of the distributors. This arrangement currently advantages remote centralised generation over distributed energy. Mervyn argued that it would be better if transmission costs were to be billed to generation and settled in the market as part of the generator kWh price.

The two actions above (removing residual cost recovery from the kWh price and billing transmission costs to the remote generators) would together provide competitive neutrality between the remote centralised generators and roof top PV. Market Feed In Tariff (FIT) rates would rise.  Policy subsidies and incentives for renewables could thereby become both transparent and technology neutral.

Mervyn also made the point that if the distribution businesses’ residual costs were to be recovered through fixed charges, it would be necessary, in order to gain community acceptance of such change, for disadvantaged users to be granted exemption from the fixed charges and for the charges foregone to be funded as either a community service obligation or higher fixed charges for wider customer base.

Finally, Mervyn urged greater consumer involvement, noting that in the emerging new renewable energy paradigm, there will need to be a transition from “generation that follows the load” to “loads that follow the available generation”.  Customer demand management will become a much more important tool for the management of generator intermittency than it ever has been or will become for the relief of network constraints.

Paul discussed the roadmap to Australia’s energy future, presenting the Energy Networks Australia (ENA) and CSIRO 2050 Roadmap, workshopped with the wider industry from 2015 to 2017. The aim of the Roadmap was to deliver improved customer outcomes relative to today’s poor performing electricity sector. The Roadmap results in lower bills, more customer choice, reduced customer cross subsidies, secure reliable power, and reduces emissions to zero.

To deliver zero emissions the plan targets a high share of variable renewables and examines whether that scenario can deliver reliable power for Australia. The variable renewables included in the model are wind and solar photovoltaic panels, backed up by battery storage (although pumped storage is also acceptable) and peaking capacity (natural gas in the short term and biogas in the long term) for times of extended low renewables output.

The Roadmap model shows peak capital costs in 2030-35 when many fossil fuel generators have retired and new investment needs to ramp up. Customer demand management, which also assists generation system reliability, will “de-scale” current distribution costs. There will be less requirement for distribution infrastructure. If Roadmap milestones are achieved, by 2050 savings at current costs to the “average” bill will be in the order of $400/year.  Paul illustrated several user profiles, emphasizing there is no “average” customer.

The Q&A raised several issues:

  • Overall there is a need to explain clearly and simply to the public why Australia, being energy rich, no longer has cheap power.
  • Similarly, explanations are needed for why Australia’s fossil fuels are currently shipped overseas and yet there are plans to reduce fossil fuel use for domestic energy generation.
  • There are challenges in moving to new models as people often reject change and “naysayers” create negative fears. Hence benefits must be sold well. Discussion and explanations like this forum could assist in explaining the technical and economic aspects of such a complex debate.
  • Currently Australia is moving increasingly towards potentially unfair charging systems with “haves and have nots”. A major disadvantage is created by distributed energy and especially rooftop solar; such users pay proportionately less for distribution charges under current kWh tariffs.
  • A roadmap is necessary. Investments are long term.  With no roadmap or clear long term national energy policy, investment decisions cannot be made, adding further uncertainty and disruption. There are examples where lack of an accepted roadmap has facilitated quick decisions on closures of key power stations, adding to cost blow outs from alternative sources.
  • The Finkel report provides a process and roadmap for Australia’s policy transformation.
  • There needs to be continual community discussion among politicians, consumers and voters.
  • Demand management, strong ancillary services, markets and incentives for other supply balancing generation within a major renewable energy model hold the keys to delivering clean, reliable, and cheap power for industry and consumers
  • Nuclear and carbon capture and sequestration (CCS) were excluded from the ENA/CSIRO analysis as only one roadmap pathway could be included. Nuclear, despite certain apparent attractions, still has political and legal hurdles, while CCS is not a total solution. However renewables are now widely deployed and can readily be modelled. Nevertheless, the Roadmap advocates a technology neutral climate policy.

View a video of the forum

Feedback survey results from the Forum were quite positive, and attendees appreciated the longer term view of the Roadmap for Australia’s energy future and the clarity on reasons to move forward towards its implementation.

Find out more about The Warren Centre and energy policy