Executive Summary
There are many reasons for recent large increases in
electricity prices, including the replacement of out-dated infrastructure and
increased peak demand. However, in the committee's view, the most significant
of these is inefficient over-investment in network infrastructure—the poles and
wires.
Current regulation of the National Electricity Market (NEM)
creates a perverse incentive for network businesses to engage in inefficient
over-investment. To deal with this, the committee has made a number of
recommendations to ensure greater scrutiny of network business investment
proposals by the Australian Energy Regulator (AER). These include:
- adoption of new guidelines for assessing rates of return and a
requirement that these guidelines are reviewed every three years;
- changes to the National Electricity Rules (NER) to ensure more
efficient forecasting of capital returns, return on debt, and capital and
operational expenditure as well as decoupling of network revenues from energy
volumes;
- greater guidance for tariff-setting by network businesses; and
- the ability for the AER to conduct ex post reviews of network
business capital expenditure.
The National Electricity Objective (NEO) outlines the
purpose of the National Electricity Law (NEL). To ensure that regulation and
operation of the NEM reflects the current energy policy framework and promotes
broader environmental policy objectives, the committee has recommended that the
NEO is better aligned with these broader policies.
Peak demand has also contributed to recent electricity price
rises. On very hot or very cold days, demand for electricity increases
dramatically. These peak demand events generally occur for less than 40 hours
per year; however, network businesses have been investing in infrastructure to
ensure the electricity grid can handle peak demand and this puts pressure on
retail electricity prices.
To reduce the impact of peak demand events on the system and
subsequently on retail electricity prices, the committee has recommended that
the Standing Council on Energy and Resources (SCER) agree:
-
to the introduction of cost reflective pricing for electricity
consumers, subject to continued provision of a flat, regulated tariff for
vulnerable consumers;
- to the roll-out of smart meters for households and businesses in
certain circumstances;
- that prior to the introduction of these measures, Australian
governments fund and undertake a comprehensive consumer education and
information campaign; and
- to introduce changes to the regulation and operation of the NEM
that would encourage and allow consumers, or authorised third parties, to sell
their demand in the wholesale electricity market.
Many residential and commercial electricity consumers are
installing embedded generation (for example co- and tri-generation and solar
photovoltaic generation) in their homes and businesses: this has a positive
impact on both electricity prices and the environment. The committee heard that
network design, connection and cost barriers currently impede energy produced
via embedded generation being fed into the grid. The committee believes that
SCER should examine these barriers and consider appropriate regulatory and
operational reforms to encourage the connection of embedded generation to the
electricity grid.
Most residential consumers are poorly informed when it comes
to retail electricity arrangements, the price of electricity and how their
electricity consumption impacts on their bill. As a consequence, consumers have
been unable to choose retail electricity offers better suited to their needs or
modify their electricity consumption in ways that would help minimise their
electricity costs. Further, and also to the detriment of consumers, their
interests are poorly protected and represented in the NEM. To address this, the
committee supports the introduction of the National Energy Customer Framework
(NECF) and has recommended that all states and territories adopt these model
laws by 1 July 2013. The committee has also recommended establishment of a
national consumer advocacy body to promote the interests of electricity
consumers in NEM regulation and decision-making.
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