What’s really causing power bills to rise?

In recent months, Prime Minister Julia Gillard has taken to highlighting the role of state electricity utilities in pushing up power prices. Average power bills have been rising rapidly — 69% over four years in NSW.

Gillard said on June 14: “The big mass of the costs, coming out of the new investment in poles and wires — something done by state government — doesn't come with real assistance for families and that's a matter for state governments to address.”

On August 7 she said: “These energy price rises are well above the cost of the introduction of the carbon price and taking action on climate change. Nine cents of every dollar in an electricity bill is for the carbon price — and that’s fully compensated — while 51 cents is for the poles and wires.

“Poles and wires” means the electricity distribution network — including infrastructure like substations, as well as actual poles and wires.

Blaming Coalition-led state governments could be a cheap stunt to divert attention from the carbon price, but it has broached an important issue.

In her August 7 speech to the Energy Policy Institute of Australia, Gillard said: “At the heart of all this is a simple market design problem: a clear regulatory incentive to over-invest in infrastructure and pass on costs to consumers.”

The question is how much of this infrastructure is actually needed, and how much is just “gold plating”.

Much of the money spent on energy infrastructure — $46 billion in the past five years — may well be gold plating, but growing peak electricity use is the underlying factor driving these network upgrades.

Energy use tends to peak on hot summer afternoons and evenings. The growth in peak demand has been fuelled in particular by the uptake of air conditioners. Installed air conditioner numbers have more than doubled in the past 10 years.

The Sydney Morning Herald editorialised on August 9: “A regulatory system that sets a guaranteed rate of return on distribution assets encourages the expansion of the asset base.”

In her Energy Policy Institute speech, Gillard also took a potshot at rooftop solar power. “As a recent AGL Energy review noted, while wealthier households can cut power costs through more efficient devices and solar panels, the poorest customers are exposed to the full cost of the increases,” she said.

Yet Gillard’s own electorate, an outer suburban area with a lot of people on low incomes, has one of the highest uptakes of solar panels in Victoria. Clearly, solar is not just for the rich: many people can see the benefits and will install solar (on a repayment plan, if necessary) to save money on their bills.

Electricity demand (other than at peak times) has been falling now for several years. This goes against all previous predictions, which suggested it would continue to grow steadily.

This is bad news for electricity companies whose business model revolves around selling units of electricity.

Booming rooftop solar panel installations are playing a large part in this. Australia is now a world leader in small-scale rooftop solar installations, thanks largely to the feed-in tariff schemes that state Coalition governments are cutting back.

Of course, a lot of lower income households have begged, borrowed and saved to put solar panels on their roofs, too.

Even people who don’t have solar panels are also benefiting from them. Solar panel output is highest on hot sunny afternoons, so they cut out the demand for expensive gas “peaker” power stations. This lowers the wholesale price of power.

Wind farms have a similar effect of lowering wholesale prices, but the effect is spread less consistently over each 24-hour day.

Demand management could eliminate the need for many of the peak upgrades. This could involve installing more solar panels, along with insulating houses and taking energy efficiency measures such as upgrading air conditioners to the latest models.

When this possibility is combined with falling overall demand, it’s very bad news for the big energy retailers: they lose overall sales, and they lose lucrative peak sales as well. The winners would be bill-paying households and the environment.

But higher energy bills could be coming anyway, if gas prices are an indication.

Santos recently produced its first shale gas in South Australia. It predicts the wholesale gas price will double to pay the higher costs of extracting shale gas. This will add $163 to the average South Australian household annual gas bill.

Beyond Zero Emissions have pointed out that this will also add at least $100 to electricity bills, because half of the state’s electricity is from gas.

The federal government’s carbon price makes gas a more economical fuel for electricity generation. But this may cause even higher power bills in the future, unless the movement to build renewable energy is able to stop the rush into gas.

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