The Pears Report: If I ran an electricity network…

Alan Pears

As Australia looks for leadership on energy policy, Alan Pears rates the recent Energy White Paper as a fail. Find out why.

SINCE my last column, we have seen the release of the final Energy White Paper and the report of the Senate inquiry into electricity pricing. The final white paper was substantially improved from the draft. But it still rates a ‘fail’.

The core scenario on which future energy policy is based is the International Energy Agency’s (IEA) ‘New Policies’ scenario, which is pretty much our past growth trajectory. The IEA’s ‘450 ppm scenario’ to limit global warming to around two degrees is largely ignored. The brief discussion on page 204, titled ‘Integrating a Changing Climate into Energy Planning’ focuses on climate adaptation and climate impacts on energy infrastructure. The overall position is that cutting emissions is not the responsibility of the energy sector, but is dealt with by other government agencies and COAG councils!

So the Energy White Paper 2012, Australia’s energy transformation fails to confront fundamentals such as the IEA view that, if we are to limit global temperature increase to near two degrees Celsius, global coal consumption will decline by 30% by 2035 and that less than a third of the fossil fuel industries’ proved resources could be burned without exceeding climate limits.
The white paper encourages people to explore different scenarios with the online eFuture model, developed by CSIRO. Unfortunately, this only allows consumption growth scenarios to be explored.
Among other things, the paper argues that fossil fuels are not being subsidised, and that the generous taxation incentives simply reflect the varying risk profiles of different activities. An interesting interpretation.

As usual, energy efficiency is dealt with last, in 16 of the 227 pages of text.

Overall, this will be an interesting document for historians to look back at when they try to explain to future generations how misguided our society was, and why we failed to manage climate change.

Senate inquiry into electricity pricing

This report is a thoughtful discussion of the shambles that is our electricity market. It has some useful recommendations and is well worth a read. But the Hansard records of the inquiry hearings are much more entertaining.

Hansard shows how, on one hand, the existing energy sector is unanimous that there have been problems but that they are well on the way to fixing them, so they should just be left alone. On the other hand, they blame each other for the problems and express concern about the lack of information on which to base decisions. For example, the head of the Energy Department’s energy division admitted that his department had done no analysis of demand-reduction activities and their relationship to electricity prices (Hansard 25/9/12). How can the department advise its minister, Martin Ferguson, on energy policy without doing this?

Those outside the mainstream energy sector were unanimous that the problems are serious and will require substantial change. For example, demand management expert Dr Paul Troughton estimated that $16 billion had been spent unnecessarily on electricity supply (Hansard p.67 27/9/12).

The depth of the cultural problem in the energy sector is reflected in a comment by Australian Energy Market Commission (AEMC) chair, John Pierce, in the hearings (Hansard 25/9/12). He drew upon a football analogy, suggesting that the energy sector was just one specialist player, and that there were other specialist players responsible for environmental, social and other policy areas. He suggested that it was ridiculous for other players to try to tell a specialist player how to play as part of a team. He saw the role of AEMC as focused on economic efficiency: others should deal with other issues. He saw AEMC’s role as being “to inform other parts of government what the effect on this efficiency objective is of things they are thinking about…”

He, like others in the energy sector, interpreted the energy market objective in very narrow economic terms and saw no role for energy policy people to help other agencies to develop joint policy. No wonder energy policy conflicts with other policies.

While the inquiry and its recommendations are a very useful step, the big question is whether the energy sector will retake control of the agenda through management of the detail of ongoing changes. Or will they review their approach so it meshes with other government policies?

If I ran an electricity network…

Electricity network operators are the whipping boys of the industry, with some justification. But how could networks become part of the solution instead of part of the problem?

At present, the core business of an electricity network is seen as ensuring reliable and safe supply of electricity to consumers from large power stations and measurement of electricity use for billing purposes. They have no direct links to consumers and their culture is based on building and maintaining poles and wires. Regulators treat networks effectively as regional monopolies—although as I have pointed out before, this is incorrect, as they compete with distributed generation, energy efficiency, fuel switching and demand management—so they are able to exert unfair market power. Networks are also paid based on the size of their assets and the amount of electricity supplied through their wires.

The main risk networks now face to their businesses is that use of their capital-intensive networks will decline, while peaks become more significant. Unless regulators agree to them extracting higher charges from consumers or separating payment from electricity flows, this will reduce their profitability.

So if I ran a network, I would broaden its activities into the competitive areas of the energy markets, both wholesale and retail, as well as the energy services market.

I would install regional electricity storage systems, which I could use to store low cost electricity and sell it at premium prices. This technology could be located strategically to also store exports from PV and other distributed energy systems locally, before they complicate the operation of the main network. This would allow ‘smart’ consumer technologies to interact better with existing ‘dumb’ grids, reducing the need for high risk investment in networks.

I would seek a licence to bid demand management into the wholesale electricity market and set up a subsidiary business to develop this market capacity.

I would minimise additional investment in the existing network so that depreciation and other allowances in tax rules would allow reducing returns from them to be managed.

I would set up another subsidiary business to sell in-home and in-business displays and smart controls, on-site electricity storage, PV and stand-alone power systems, initially for fringe-of-grid customers, people in high fire-risk areas and where networks are under stress. This would include allowing consumers to share use of backup generators and storage within local areas. This could include leasing these technologies and providing ongoing fee-based maintenance and monitoring services, so that those with on-site equipment need not be deeply involved in running their energy systems. It might also include using under-utilised grid capacity to provide low cost backup.

For the existing business, I would develop more sophisticated network pricing schemes so that PV, other distributed generators and energy efficient consumers gain benefit from avoiding demand or exporting electricity at times and places of most use to the network. This would encourage PV owners to consider orienting their panels to generate more in the afternoon or to install storage to allow them to complement the grid. This might be done through adding to existing feed-in tariffs at certain times of day or by offering rebates on energy bills based on actual avoided peak demand/exports at critical times.

Remote management of specific equipment such as pool pumps and air conditioners and voluntary limits on peak demand, in exchange for discounted prices, could also be part of the new business model.
Partnerships with welfare groups, community groups and other businesses, as well as separate subsidiary businesses, will be necessary to overcome lack of consumer trust in network operators, cultural barriers and limited internal marketing and sales skills within the network business.

Some elements of this model depend on changes to energy market rules. But government policy makers should be supportive, as the alternative is higher consumer energy costs and potential business failures among network operators.

Alan Pears has worked in the energy efficiency field for over 20 years as an engineer and educator. He is Adjunct Professor at RMIT University and is co-director of environmental consultancy Sustainable Solutions.