Australia's Power Paradox  

The SMH reports that Sydney's heatwave (which has been inducing a lot of lethargy here at Peak Energy headquarters) prompted record power consumption in NSW this week - Third day of heat is the one to beware of. At least we aren't about to be deluged by a flood or trashed by a cyclone, unlike our friends in Queensland.

The weather also pushed electricity consumption to a record level of 14,744 megawatts yesterday. This exceeded the previous summer peak of 14,101MW reached on February 6, 2009, and the state's all-time record of 14,289MW, which occurred during the winter of 2008. The increased use of airconditioners has pushed summer usage to new highs.

Given that building peak generation capacity and the associated transmission infrastructure is responsible for a significant slice of our rapidly rising power bills, you'd think some effort would be out into finding ways to reduce the peak (or follow the load locally by encouraging more solar PV) via demand management. The Climate Spectator has a few words to say about this - The easy way to cut power bills.

Energy highways don’t do pedestrian crossings, roundabouts or traffic lights – what the consumer wants, it gets. So, when they all want it at the same time, the energy market needs a Sydney Harbour bridge the equivalent of 50 lanes wide (actually, pick your own number, but it’s a lot) that will then remain unused for the rest of the year.

All of this costs a lot of money, and it’s the consumer who pays for it. The Australian energy regulator late last year estimated that 10 per cent of the country’s transmission infrastructure – assets worth some $3.5 billion – gets used for less than 1 per cent of the year. The rest of the time it sits idle. Not that this greatly upsets the infrastructure providers in the Australian energy market – the more poles they build and wires they hang, the more money they get. ...

The biggest challenge is how to manage the growth in peak demand, which is growing at a phenomenally faster rate than baseload power. It will come as something of a shock to most consumers that their soaring power bills are not the fault of green energy subsidies, but mostly because of the neighbour’s newly installed air conditioning unit. Or their own.

The conventional view of how to solve this problem has been to implement some sort of congestion tax, to try and reduce the need for a 50 lane bridge across the harbour to a 40 lane, or at least make it really expensive. The inevitable rollout of smart meters in coming years will allow for time-of-use billing. But is it fair?

Two economists working for AGL Energy suggest not, arguing that it disadvantages businesses and the less wealthy – why should these people, they ask, be subject to higher energy prices and cross-subsidise others who decide to switch on their air conditioners all at once?

The AGL economists suggest a more complex billing system that would calculate tariffs not just on the time of use, but the change in use. This protects people who have more-or-less constant usage from the worst price spikes, while imposing greater costs on those who ramp up demand at peak periods because they are switching on air conditioners or other appliances. It sounds immensely complicated, but not beyond the bounds of smart meters, because they are, well, smart. Most of all, smart meters will allow consumers, and producers, to change the way they think about pricing. The days of low-cost energy are over, and they are not coming back.

In the meantime, if you’re struggling through the heat wave and your neighbours switch on the air conditioning, you might as well go round and ask to join them in the cool. After all, you’re paying for it.

The AGL paper referred to above can be found here - A New Approach To Congestion Pricing (pdf).

This paper was the subject of an article in the Climate Spectator last year - Australia's power paradox.

Australians are about to pay the price of cheap energy.

A landmark report by a team of analysts from AGL Energy suggests cheap energy and soaring incomes has lured Australians into larger homes with massive increases household appliances, particularly air conditioners. Now they are exposed to a looming price shock that could send retail energy prices more than doubling in the next five years, sending many homes into “fuel poverty.”

The AGL team led by economist Paul Simshauser identifies four primary causes for surging energy prices. The first is Australia’s great wealth of energy resources, which have historically been sold to energy utilities at a margin above extraction cost, but are now being developed at such scale for export that they have a potential to link with global energy indices and potentially cause a fuel cost shock in the domestic market.

This has already occurred in WA, where domestic gas prices are linked with the export price. AGL says that with a dozen new major gas plants planned in eastern Australia, most of it on the export market, a similar scenario could have a profound impact on energy costs.

The second cause is the rising cost of power plants, which has surged over the past decade, and is now being worsened by the higher cost of capital following the global financial crisis.

Thirdly, network infrastructure is now being forced to expand at record rates to keep pace with rapidly rising peak loads caused mostly by domestic energy use.

The move to lower emission technology is also forcing a shift from coal to gas, and to the increased use of high-cost renewable energy sources, although the AGL report says the impact of climate change and renewable energy policies on electricity prices is minor relative to these other drivers.

AGL has produced the report to argue for a range of policy measures. This includes rebating the estimated $1 billion-plus windfall in GST collections from rising energy prices to needy households, and to encourage the purchase of more efficient appliances by granting special credit policies to low income families.

It also wants prices to be deregulated, allowing for time-of-use tariff structures and the introduction of smart meters – not just so that people can view the the rate and cost of their own usage, but to allow demand management that will help shift consumption away from the peak load times that are adding to overall costs.

“The paradox here is, of course, that rising wealth has actually caused the pre-conditions for fuel poverty,” the report notes.

“In many respects, it’s as if consumers in NSW and QLD have historically been provided with a mispriced illicit electricity drug for long enough to establish a chronic addiction, at which point the price will progressively more than double.”

The report said the overwhelming majority of households will readily adjust their budgets to incorporate rising energy costs, as they are not unusual by global standards. But lower income households would face energy bills that could equate to 10 per cent or more of their household budgets. It estimates more than 340,000 households in NSW and Queensland alone could be tipped into “fuel poverty” – the “boomerang paradox” as AGL calls it.

The report said electricity prices in NSW and QLD have the potential to rise from about $130/MWh in fiscal 2008 to $255/MWh in fiscal 2015. Those prices soared above $300/MWh in its worst case scenario. It could not find a single element in the electricity cost stack that was not increasing at a rate faster than prevailing inflation expectations.

But one of the most material, although least certain, cost shocks could come from the upstream coal seam gas industry and the development of LNG terminals in Queensland. If this causes a link to the oil price, then the cost of existing CSG contracts will be more than doubled when they mature and are replaced with new ones.

And as new generating plant is installed in NSW and Queensland, then the long range marginal cost of baseload gas turbines will set the wholesale market prices rather than coal. In its most simplistic terms, the report said, whole-of-system average cost will rise from the coal-based $44/MWh in fiscal 2008 to a gas-based $71/MWh in fiscal 2015, or up to $98/MWh in a high gas price scenario. When the extremely low load factor of households is taken into account, these numbers ramp up to $100 - $130/MWh, excluding carbon taxation. “Importantly, for the Federal Government, their proposed CPRS and RET are not the cause of fuel poverty.”