Poles, Wires, Regulators and Middle Men

This is part two of Ben Eltham and Squirrel Main’s breakdown of the Australian energy sector. Part one can be found here.

Transmission and Distribution
Next in the process comes distribution and transmission — the "poles and wires". Again, before the carbon legislation, these businesses had little reason to invest in eco-friendly infrastructure. Take the following chart, which compares the emissions of various network companies in the grid.

New Matilda found that ACTEW and Aurora Energy serve about the same number of customers, yet Aurora has nearly double the carbon emissions per customer. There’s not much anyone can do about this presently. Geography and policy monopolies are the only factors in determining which transmission/distribution company gets to carry electricity in a particular region.

Emissions from distribution networks in eastern Australia. There are wide variations in how polluting they are. Source: New Matilda analysis of NGERS data

Things are different outside the National Electricity Market. In Western Australia’s South West Interconnected System, electricity is traded directly between generators and retailers. At the other extreme, one government utility in the Northern Territory is responsible for generation, transmission and retail. 

A breakdown of the average household electricity bill. Source: Department of Climate Change

Retail

Electricity retailers are those businesses that sell electricity directly to the general public.

Think of them as the talent scouts. Across Australia, more than 33 retailers watch the game, pick what they like, and pass it onto the public. The Garnaut Review notes that retail relationships in the NEM are opaque. Retailers’ main role as far as consumers are concerned is to smooth the big spikes in wholesale electricity prices. They contract for supply in the event of high demand and thereby avoid the impact of high spot prices on consumers. Critically, there is no established mechanism to deal with contract market instability. Deals are made and players are swapped; the talent scouts come out on top while resting unassumingly at the bottom of Australia’s electricity totem pole.

The economic role of retailers is essentially as middle-men, as Giles Parkinson notes in a trenchant recent article entitled "Electricity retailers: do we really need them?". Like health insurers, they don’t create their own product. Instead, they buy and on-sell it. In an open and competitive market, this should mean fierce competition and low margins. But, of course, Australia’s electricity markets are not particularly competitive. Indeed, in many states, government agencies set the prices for electricity, and they mandate a profit margin for retailers as part of their "determinations".

The "gentailers"
As you can see, the structure of the Australian energy industry is pretty complex. Big energy companies have sought to take advantage of this by owning assets up and down the supply chain in profitable ways. These vertically integrated energy companies typically own generation facilities as well as retail businesses (the networks are generally still owned by the state governments). For this reason, they are called "gentailers".

The three big gentailers are Origin, AGL and TRUenergy. All three own substantial generation assets, ranging from coal-fired power stations to wind farms. All compete in the retail market too. There are differences: Origin is heavily invested in coal-seam gas in Queensland, while AGL has concentrated on building up a big portfolio of wind assets. TRUenergy’s retail business appears to exist largely to try and extract further value from some very dirty coal plants in the La Trobe valley.

Origin and AGL in particular are the 900 pound gorillas of the local energy scene, dominating the industry in terms of their market power and, importantly, their lobbying efforts. Origin’s CEO Grant King, for instance, has in recent times been strident in his opposition to the Renewable Energy Target, while many renewable energy generators have had difficulty getting gentailers to purchase their power — they are, after all, competitors.

Air-conditioners are causing your bill shock
What do we use our electricity for? A million and one things, but electricity is a special type of infrastructure, in which a big spike in demand can lead to parts of the grid having to be shut off entirely. Those demand spikes are called "peaks", and when it comes to peak energy consumption, experts are in no doubt about the main culprit: air conditioners in hot summer months (pdf). In the last decade or so, Australians have bought up big on home air conditioning systems. To take one remarkable example, nearly three-quarters of south-east Queensland homes now have air-conditioners, up from only one-quarter just a decade ago.

Peak demand is the main cause of higher electricity prices over the past decade or so. In order to keep air conditioners humming, Australians use a lot of electricity, electricity that must come from the grid. The national grid is built to handle the very highest loads, even if most days that extra capacity is never needed. Perhaps that’s actually what voters want: there are always plenty of complaints when the lights go out. As a result, politicians have designed a system to make sure the infrastructure will keep the lights on. In general, this has meant lots of investment in transmission and distribution.

Transmission Infrastructure

The regulatory mess
Australia’s electricity system is the subject of a complex system of state and federal regulations. Electricity regulation is lot like water: historically a state responsibility, in recent years, federal governments have tried to get more involved in an attempt to solve the entrenched squabbling between jurisdictions that has marred Australian policy in so many areas. Despite this, the states are still largely in charge of the national grid, and remain a key stumbling block to reform of the National Electricity Market.

At the top of the tree sit the National Electricity Rules. In a quirk of federation, these are actually governed by state legislation; the model laws originate from South Australia. The agency that oversees Australian energy regulation is not the federal Department of Energy, but a standing committee of the Council of Australian Governments called the Standing Council on Energy and Resources.

Underneath the Standing Council sit the various government regulators. The top bodies are the Australian Energy Regulator (AER), and the Australian Energy Market Operator (AEMO). The AER is a bit like the ACCC of energy — its role is to set prices and monitor the national wholesale electricity market. AEMO is more like Australia Post — it’s a quasi-privatised body that oversees and operates the National Electricity Market, including the minute-to-minute fluctuations of the grid.

National energy markets are a complex mess of state and federal regulations. Source: AEMO

But wait — there’s more. In addition to this alphabet soup, there are also the federal government’s green policies to consider, like the carbon price and Renewable Energy Target. And scurrying about like cockroaches at the bottom of the power structure are the state and territory regulators, which also play an important role in setting electricity prices in local jurisdictions.

As usual when the states get involved in cross-border public services, the result of this messy structure has been a deeply compromised system. The worst offenders have been Queensland and New South Wales, both of which own significant electricity businesses such as generators and networks, and therefore have a naked self-interest in making money out of electricity assets.

New South Wales, for instance, has the Independent Pricing and Regulatory Tribunal (IPART), a body that acts as both a regulator of monopoly prices, and as a government-owned think-tank on economic policy. In this role, IPART has taken controversial positions on federal energy policy — recently arguing, for example, that the Renewable Energy Target should be scrapped. Queensland, meanwhile, has the Queensland Competition Authority, which recently recommended that Queensland householders be banned from using the electricity generated on their own solar panels.

Green initiatives take the back seat
Across Australia’s energy system, the interests and consumers and the environment generally take a back seat to the interests of the energy industry, especially the state-owned bits of it. The National Electricity Rules, for instance, make no mention of environmental goals such as reducing greenhouse gas emissions in the design goals of the market. They are instead framed around neoliberal principles like creating the most efficient market.

It’s not surprising, therefore, that state regulators have tended to oppose green schemes like solar feed-in tariffs, which do introduce inefficiencies into markets. Another area where regulators have proved compromised is in energy efficiency. So far, there is no incentive for electricity retailers to sell us less power, and every incentive to sell us more. The same is just as true for the poles and wires companies, who make money by building and upgrading infrastructure, and then passing along a cost to the consumer.

The upshot
If your eyes are glazing over, that’s understandable. Energy policy is not exactly sexy. Few ordinary voters have the time to understand it.

But that very opacity is one of the reasons householders struggle to be heard in energy policy debates. Energy policy has traditionally been made behind closed doors, which is why most of us have no idea why our electricity bills have sky-rocketed in the last five years. That’s all changing rather quickly, however, as soaring power bills induce real pain in the community. In the meantime, fossil fuel companies continue to make billions.

In our next piece, we’ll examine Green Power: what is it, what it does, and what it isn’t.