Additional comments from Senator Nick Xenophon
Public outrage about the massive 40 per cent increase in
electricity prices since 2008 cannot be denied, and is indeed justified. As
acknowledged by the committee in the majority report, it is concerning to see
that disagreement exists within the industry as to the reasons behind the price
increases.
Appropriate data regarding the drivers of increased
electricity costs needs to be recorded and made publicly available to improve
industry accountability and transparency. To that extent I welcome the
important work that has been done by the Australian Energy and Market
Commission (AEMC) to predict the contributions of a number of factors to future
price increases. However it would have been immensely beneficial to this
inquiry if comprehensive data had been made available to explain the huge price
increases of the past five years. Such data should be made available publicly,
and if the industry refuses, it should be mandated in legislation.
Key causes of electricity
price increases
The majority report addressed the main causes of electricity
price increases, however I believe two factors deserve further attention: cost
forecasting and the impact of complying with climate change policies, including
the Renewable Energy Target (RET) and its current structure. I emphasise that
the target itself should not be changed; rather, incentives need to be given
within the RET for baseload renewables such as geothermal.
Cost forecasting
On 2 October 2012 the Essential Services Commission of South
Australia (ESCOSA) released a draft determination on wholesale electricity
costs and the standing contract price. In South Australia, ESCOSA regulates
retail electricity prices for small consumers who are on the standing contract
offered by AGL Pty Ltd. ESCOCA’s draft determination announced a reduction of
8.1 per cent of the standing contract price. The reason for the reduction was
inaccurate forecasting of the wholesale price of electricity. This example
demonstrates how convoluted predicting prices can be, based on rules skewed
against consumers, and how important it is for regulators to have review
mechanisms in place to ensure that price predictions align with actual prices.
Climate and renewable energy policies
At the outset I wish to make it clear that Australia must
take steps to protect our environment and economy from the impacts of climate
change. That said, I have concerns climate and renewable energy policies are
inefficient and may place an undue financial burden on households and
businesses, while not achieving an optimal environmental outcome.
The Large-Scale Renewable Energy Target (LRET) imposes a
legislated target of 41,000GWh of electricity be produced by renewable sources
in the period 2020 to 2030. My issue is not with that target, but the way the
target is achieved through an over-reliance on one form of technology. It
favours a form of technology (wind power, for example) that does not provide
reliable baseload power, and fails to give sufficient support to emerging
technologies such as geothermal and solar thermal, which have the potential to
provide baseload power.
In their submission Major Energy Users Inc expressed
concerns about the impact of state renewable energy incentive schemes:
The cost of these state schemes cannot be under-rated. For
example, the cost of the feed-in tariff scheme used in SA has resulted in
network prices increasing by over 20% in 2012/2013 just to recover the PV
rebate payable.[1]
The REC Agents Association put forward a set of different
figures to describe the impact of renewable energy schemes:
While it is clear that the renewable scheme has contributed
to rising power prices, it is currently less than 1c per kilowatt hour, which
is roughly equivalent to 3.4 percent of retail prices, and a similar amount is
due to state based schemes.[2]
However the Independent Pricing and Regulatory Tribunal
(IPART) states:
In 2011-2012 the cost of complying with the RET adds around
$102 (or around 5%) on average to an indicative regulated electricity
consumer’s bill in NSW. This is significantly higher than was forecast when the
RET scheme was amended in 2009 and 2010 and higher than the estimates referred
to in the Climate Change Authority’s recent issues paper for the RET review.[3]
IPART continues:
Together, the RET and the carbon price add around $270 to a
typical residential consumer’s bill in NSW in 2012/13. As the target increases
each year until 2020, the costs of meeting the LRET are likely to increase
(depending on the price of the certificates). It is possible that by 2020 the
LRET will add more to electricity bills than the carbon price.[4]
However the committee heard the LRET may actually reduce
wholesale electricity prices:
...the extra generation that the LRET brings on has to some
extent – and there is some controversy over the size – a depressing effect on
wholesale electricity prices.[5]
Professor Garnaut also commented:
The steady expansion of renewable energy supplies under the
RET is forcing down wholesale prices, and it is possible, although no certain,
that in the middle of 2015 with the linkage to the European market we would
have a lower carbon price than we do today.[6]
With such disagreement as to the impact of renewable energy
schemes on electricity prices it is unsurprising confusion exists as to the
true cost of these schemes to consumers. Therefore I welcome recommendation 1
of the committee which calls for regular ongoing quantitative monitoring of
contributors to electricity prices, however I believe detailed analysis of past
contributors should also be conducted.
Recommendation: the AEMC conduct a thorough investigation
into the impact renewable energy schemes, both federal and state-based, have
had on electricity prices since 2008, with a view to maximising the
environmental benefits at the lowest cost to consumers. Further, such a review
should investigate the long-term benefits of encouraging investment in baseload
renewables.
Demand management
The committee has engaged in a comprehensive discussion
about how to manage overall demand, and in particular peak demand, in order to
reduce electricity prices. What is apparent in today’s electricity market is
the information vacuum that seems to exist in terms of consumer knowledge of
the industry. Therefore proposals such as mandatory installation of smart
meters must be met with significant efforts by industry and government to educate
the public about demand management initiatives and how they can be used to
reduce power bills.
The fallout from lack of education was expressed clearly by
the Energy Retailers Association of Australia in their discussion about smart
meters in Victoria:
it was done without much consumer involvement, information or
consultation,...(because consumers) got the cost of the meter upfront without
getting any of the befits, (this) has poisoned the environment around (smart
meters).[7]
This example clearly demonstrates that potentially cost
saving technology can be mistrusted or ignored by households due to lack of
consumer education and involvement in the technology’s rollout. Without
appropriate consumer engagement and rigorous legislative safeguards, price
savings may not be achieved.
The committee has recommended the SCER agree to introduce
cost reflective pricing for electricity in conjunction with smart meters in all
jurisdictions in the NEM based on the three tier consumer size model proposed
by the Power of Choice draft report. Should the SCER agree to implement this
model I strongly encourage it to heed the committee’s recommendation that the
rollout be accompanied by a comprehensive consumer information and education
campaign during both the planning and implementation phases.
Consumer protection
The role of the National Energy Consumer Framework and
advocacy groups
The severe impact rising electricity prices has had on
households in undeniable. The committee received evidence from a variety of sources
attesting to the increase in requests for assistance from consumer advocacy
groups, complaints to energy industry ombudsmen and, sadly, utility
disconnections.
Encouraging limited use of electricity can only go so far to
keeping electricity bills low. One submitter described how he was able to keep
his quarterly power bills to $150:
Few Australians would tolerate the self imposed discipline
whereby I achieve that figure: no freezer, no TV, no computer, no washing
machine, no lights, no stove/oven and no hot showers.[8]
In a developed nation such as Australia we should not expect
the financially vulnerable to take such drastic measures in order to pay the
bills. In response to this issue the committee has made two important
recommendations, both of which I fully support.
Recommendation 13 encourages all states and territories to
adopt the National Energy Consumer Framework (NECF), a national regime for the
sale and supply of electricity and gas that contains a number of consumer
protections.
One such protection is for energy contracts to be explained
in terms consumers understand before signing. Recently I was made aware of a
number of people in South Australia who had negotiated a discount on their
electricity rate with their retailer in exchange for signing up to a contract
for a minimum of two to three years. However shortly after they signed the
contract the residents received a letter from their retailer informing them
rates had increased. Unless the resident was willing and able to pay a $75 early
exit fee they were locked into paying higher power prices for the next few
years when they thought they had negotiated a discount.
The NECF should require retailers fully disclose potential
future price increases when asking customers to sign up to minimum term
contracts. Similarly each State should follow New South Wales’ lead and take
steps to ban early exit fees for utility contracts.
The second recommendation by the committee regarding
consumer protection is for the Standing Council on Energy and Resources (SCER)
to consider establishing a national consumer advocacy body to represent and
support consumers in the National Electricity Market (NEM). This body would
restore the focus on the long term interests on consumers in electricity policy
(as per the National Electricity Objective) by representing consumer views to
policy makers as well as provide advocacy and support for consumers.
Financial assistance for meeting rising electricity
prices
Concerns have been raised previously that Federal Government
handouts to low-income earners to compensate for the introduction of the price
on carbon were spent on poker machines. In July this year the Australian
Financial Review reported:
Poker machine revenue in Queensland jumped more than 7
percent in May – when the first Clean Energy payments went out – and rose
almost 12 percent in June year on year.[9]
It is important low income earners receive assistance with
meeting the higher electricity bills, however there must be appropriate
safeguards in place to ensure the money is being spent where it is intended.
State and Federal Governments should give consideration to providing assistance
by way of vouchers payable to utility companies rather than direct cash
payments.
Industry claiming to be victims
The following interchange with the Chief Executive Officer
of the Energy Retailers Association of Australia sets out a position energy
retailers have put to the public that many would consider to lack credibility.
Senator XENOPHON: Further to Senator McEwen's line of questioning,
could you take on notice and provide us details of the form of self-regulation
practices that you have, how you deal with disputes, the number of complaints
you have had and whether you pass on some of the more egregious disputes on to
regulators for formal action? Like Senator McEwen, I have had a number of
constituents who have complained about practices with respect to this. My first
substantive question goes to your submission. On behalf of your members, the
energy retailers, you have basically cried victim. You have said that it is
important that senators understand that the retailers are the billing agent for
the entire electricity industry and the value chain—meaning that they bear much
of the consumer backlash over rising electricity prices. To what extent do you
think that consumer backlash is in part due to AGL boss Michael Fraser's pay
going up 85 per cent from $3.4 million to $6.3 million and that Origin Energy's
managing director Grant King's package is now $8.348 million—a rise of $600,000
in one year?
Mr O'Reilly: I would say to you that we are fortunate that
the two largest energy companies in this country—which are in the top 20 ASX
listed companies—have performed very well in recent years in a very challenging
climate for shareholders.
Senator XENOPHON: That is not my question. I am asking about
the consumer backlash. Do you acknowledge that some of these massive pay rises
by members of your association have caused a degree of that consumer backlash?
Mr O'Reilly: I would say that they are held to account by
their boards, and as the federal government has introduced further powers for
shareholders to look at executive pay, in this case it appears that the board
and shareholders of those companies are happy. These things come to light because
of transparency and reporting of executive salaries, which is a good thing.
Senator XENOPHON: That is not my question. You made an
assertion in your submission that the retailers bear much of the consumer
backlash over rising electricity prices—and you do not consider that the hefty
pay rises given to AGL boss Mr Fraser and Origin's Grant King have anything to
do with that consumer backlash?
Mr O'Reilly: Executive salaries is an issue which is
something that is held to account by boards and by the opportunity for
shareholders to now vote on remuneration reports. These companies are billion
dollar companies upon which we rely to build our future generation and to
provide an essential service. If they are doing a good job then I do not think
that encouraging envy is necessarily a good way to be dealing with the issue of
our rising electricity prices.
Senator XENOPHON: I am not encouraging envy; I am just asking
you whether you acknowledge that when consumers are facing rising power prices
and they see that an energy retailer gets an 85 per cent pay rise—up to $6.3
million—that could fuel part of that consumer backlash.
Mr O'Reilly: I am not accountable for how much my respective
member CEOs get paid. The boards of those companies are and they seem to be
happy with the job they are doing. What I would say is that these companies are
going to play a critical role in building the future generation of this country
and delivering reliable electricity, and I hope they are run by the best people
available who are getting paid appropriate dollars.[10]
Senator Nick Xenophon
Senator for South Australia
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