Current issues in electricity 2012

  • Major change in the world’s established supply systems are driven by growing energy demand, energy security concerns, rising greenhouse gas emissions, local environmental issues, increasing oil prices, international competition to lead in the emerging clean energy technologies.

Decreasing electricity demand

  • Peak demand not reached in the last 3 years
  • Projected to peak but there has not been a hot day in the last three years
  • Global financial crisis
  • Price of fuel (petrol) is increasing
  • Solar PV is increasing and has reached 2GW installed capacity
  • Energy efficiency has increased
  • Decline in manufacturing and industries that are energy intensive

 

Real electricity prices in Australia and the seven major advanced economies, 2006 to 2009, index in US dollars

Increasing Retail Prices (30% rise)

  • $45 billion has been invested in poles and wires which were up to 50-60 years old
    • Criticised because infrastrcture upgrades were driven by government incentives to ensure that infrastructure could meet peak demand.
      • Deloitte analysis from April this year, between $1.5 billion and $4.6 billion could be saved over the next 10 years by doing five things to combat peak demand.
        • ‘Time of use” pricing
        • Direct load control of airconditioners and pool pumps
        • Efficiency measures for electric cars and appliances
        • Further small-scale solar power generation
 8.2 Break down of $100 electricity bill. Source- NewMatilda.Com

Break down of $100 electricity bill. Source: NewMatilda.Com

  • Policy change to include a return on investment clause so that electricity transmission and distribution companies get paid according to the size of their assets. This change made it favourable for distributors to upgrade their assets but also created an incentive for the industry to overspend.
    • Victoria Government guarantees a fixed rate of return to distributors.
    • AEMO found that Ausgrid is overspending. Questions asked if  just one utility in one state is “gold-plating” to the tune of $1 billion in a two-year period, what is the sum of the overspending by the 13-odd network providers nationally?
    • Argued that greater government incentives to reduce energy demand is required
  • Cost of connection has increased
  • Death spiral created as increasing electricity prices are worsen by wealthy households to seek alternative energy sources such as rooftop PV and therefore increasing their energy independence from the NEM
 8.3 Drivers for electricity costs and their contribution to current price rises in 2010

Drivers for electricity costs and their contribution to current price rises in 2010

    • AGL commissioned a paper publish in June 2012 “The Energy Market Spiral of Death – Rethinking Customer Hardship” which concluded the following:
      • Australia’s NEW is at a crossroads with significant cost pressures from all components of the electricity supply chain. Struggling in two speed economy experiencing rapid run-up electricity prices and stagnating domestic energy demand for the first time since World War II
      • Australian energy sector is in the middle of an investment megacycle which is driving above trend electricity tariff increases and have an impact of the trend on Australia’s working poor.
        • 16% of 3.4 milion AGL customers are exhibiting som kind of financial stress
        • 1 in 4 households with single income earner supporting family with children are unable to pay their electricity bills
      • There is virtually no appetite for reform by Australian policymakers in relation to electricity pricing which is inflexible and opaque
      • Strucutre of electricity tariff needs to be overhauled, shifting away from flat prices and quarterly billing, to smart meters, time-of-use pricing and monthly billing to address both the investment megacycle and the incidence of hardship
  • Privatised companies with short term view of market
  • Due to privatisation, prices are unregulated in Victoria but the prices is similar to those in regulated NSW and QLD markets

Feed-in tariffs

  • Announced that Government feed in tariff will reduce again
  • Increase in solar PV and market entry to mature technology
  • Sudden policy changes have influenced uptake by consumers
  • People are confused by the legislative complexity
  • Customer consumption and preferences have changed
  • Potentially should think about other renewable policies

Different market mechanisms have been used to fund utility scale deployment of renewable technologies around the world. The three main types are:

  • Feed in tariff:
    • Market force driver that is deployed using  volume and price mechanisms
    • A price benchmark must be selected
    • If feed in tariff is set at an appropriate price, it will work well. If it is set too high, the market will explode and go unbounded
    • Lack of transparency and communication can lead to fraught debate when the decision to digress the feed in tariff
  • Quotas:
    • Government decides on the volume and the market decides the price
    • Advantages:
      • Government gets the best price
      • Cost is recovered by the retailer and priced through the RET
    • Disadvantage
      • Might encourage one technology over others as market procures the cheapest technology (for example, wind monoculture)
  • Reverse Auctions:
    • Long term contracts to provide clean energy at a fixed price
      • Similar to going to an auction for a house except in this case the lowest price wins as opposed to the highest price, and the idea of that is to then give investors some certainty in terms of a contract under which they could actually invest, that would drive down the cost because they wouldn’t be building in the risk premiums and also it would mean that because they’re competitive, they also have an incentive to drive down the cost as low as possible.
      • The Government would hold auctions in a number of categories – for example, solar or wind – every six months. The winner would get a long-term contract to provide a relatively small amount of electricity.
      • Over time it will become clear which technologies are getting cheaper and working the best. The Government could scale back the number of auctions for the expensive options, or even phase them out altogether, allowing the Government to alter is approach based on the outcomes.
    • Combined best of feed in tariff and quotas
    • Prequalification is required to minimise the risk of delivery
    • Disadvantages
      • Do not guarantee the lowest price for owners
      • May encourage imprudent bidding practices
    • Advantages
      • Drive down cost of renewables technologies over time while providing long term certainty to companies that are deploying them. At the moment, companies are reluctant to deploy renewables becauase they are uncertain about the future of carbon price amongs other things
  Feed in tariff Quotas Reverse Auctions
Countries Europe Australia (LRET), USA (REPS), UK South Africa, Brazil, Australia (ACT)
Deployment volume Market forces Politically determined Politically determined
Price Politically determined Market forces and cap Market forces
Competition No Yes Yes
Cost of scheme Unbounded Bounded Bounded
Ability to track technology improvements Poor Good Good
Technology flexibility Good (diversified) Poor (monoculture) Good (diversified)
Delivery risk (to the government) Low risk Low risk Moderate to high risk
Funding Fiscal Market/Consumer Fiscal 50% and Market 50%

Wind farm 2km legislation and ‘no go’ zones

  • 2011 – State governments amended local goverment planning schemes and state planning provisions to
    • Create wind farm no go zones
    • Stop construction of wind turbines within two kilometres of houses, without the consent of the owner of the home
    • Block construction of wind turbines within five kilometres of major regional centres, a change that had not previously been flagged by the State Government
  • Lost investment in wind energy in Victoria by 50 and 70 per cent and forecasting over $3 billion in investment lost
  • Policy resistance to make it difficult for wind investment which undersells energy at wholesale price
  • Psychological issues correlated to health impacts labelled ‘Fan Death’ / ‘Wind Turbine Syndrome’ (WTS)

Carbon tax impact

  • Carbon tax decreasing emissions and energy intensity
  • Yallourn floods had an impact
  • Media has played a critical role in increasing awareness
  • Carbon tax has affected all people, particularly small business owners
  • Climate works completed a study based on the psychological change as a result of the carbon tax
  • Argument that carbon tax will not decrease carbon emissions in the long run

Renewable Energy Target

The renewable energy target seeks to deliver on the government’s commitment to ensuring that by 2020 the equivalent of at least 20 per cent of Australia’s electricity supply comes from renewable sources.

  • Marketed as 20% of electricity supply from renewables (about 45,000 gigawatt hour) but in the Legislation the target is 45m for LRET and 25m for SRET
  • The Renewable Energy Target is currently under review by the Federal Government’s Climate Change Authority, who has indicated in its preliminary report that it does not intend to recommend any significant changes to the scheme
  • Some energy companies are lobbying hard to have the target scaled back, or even dumped altogether – in order to carve out a bigger slice of the market for other types of energy
  • One argument is that Australia shouldn’t move faster than the rest of the world in moving towards cleaner sources of power
  • Oct 2011 – UNFCC visit is an overriding message that with policy stability and certainty are required to attract serious investment to renewable energy industry. If the Federal Government can resist the urge to make changes to the Renewable Energy Target, the policy stands to unlock a further $18.7 billion in investment.
  • Australia must hold target to remain competitive: The number of countries with renewable energy targets more than doubled between 2005 and 2012, and today just shy of 120 countries now have renewable energy targets in place – more than half the globe. All but one of the G20 countries have some sort of renewable energy policy support and all of Australia’s top ten trading partners have policies to promote renewable energy. Global investment in renewable energy increased by 17 per cent to a record US$257 billion in 2011. This translates to millions of jobs and is the fastest emerging economic opportunity of our time.
  • Australia is comparatively unprepared for economic competitiveness in the low carbon economy.
    • Best positioned: France, Japan, the United Kingdom, South Korea and Germany
    • Behind countries like Argentina, South Africa, Saudi Arabia and Russia and this game of catch-up is costing us in potential investment that is instead going to our global competitors
    • Late adoption of policies supporting renewable energy and low carbon technologies, means Australia is in worse position to enjoy cheaper clean energy, energy security from the rising costs of fossil fuels, develop expertise in new industry and attract investment

Projections and government policies

  • Australia is at a crossroad between RET (permanent structural shift) versus CCS (buying time)
  • Economist view: take the cheapest option but for numerous government incentives to be attractive (MRET, LRET and SRET), investors will need to takea  long term perspective and that requires clear government policy.
  •  Renewable certificates (50% synthetic) have a a high political risk
  • The debate on the renewable market is a essentially a political decision

Electricity market reforms

2012: The Senate Select Committee on Electricity Pricing tabled its report in Parliament on November 1. The inquiry found substantial evidence of failures in the rules and operation of the electricity market, even though the electricity sector says it is taking adequate action to deal with a range of issues.

    • Needed
      • Greater collective responsibility for overall electricity prices
      • Present regulations had driven unnecessary electricity price rises.
      • Stronger regulator is needed as overarching responsibility for Australian energy policy and oversight of the National Electricity Laws and Rules “rests with the Standing Council for Energy and Resources”, a COAG body made up of energy ministers who have failed over many years to ensure the electricity market serves the long-term interests of Australian electricity consumers
      • Moves towards smart meters
      • Range of time-based pricing measures – balanced by protection and support for low income and vulnerable households
      • Allowing third parties to offer demand management services to consumers
      • Providing improved consumer information to support more informed decision-making
    • Issues
      • Slow response to market failures
      • Demand management measures not pursued under present market rules could save $1.6 to $4.6 billion over the next decade
      • Energy efficiency, but suggested the focus should be on areas of major saving potential such as heating, cooling and hot water, rather than “symbolic” areas like lighting and TVs.

 

Sources:

Pears, Alan. 6 November 2012. Who will hold the balance of power on electricity. The conversation

Edis, Tristan. Shock – Greens, Labor and Libs agree on electricity reform. Climate Spectator

Fitzgibbon, Joel. 2 November 2012. Cut the ideology and reduce renewable energy target. The Australian

Green, David. 26 October 2012. On an island crowded with clean energy movers. ABC News

Garnaut Climate Change Review 2011. Update Paper 8: Transforming the electricity sector. Accessed from http://www.garnautreview.org.au/update-2011/update-papers/up8-transforming-the-electricity-sector.html#fig1

 

 

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