Poor decisions by state governments in New South Wales, Queensland and Tasmania drove excessive investment in power networks over the past decade. Consumers in those states now pay $100-to-$400 more for electricity each year than they should. These high prices could lead to inefficient future investments. Governments should take responsibility for fixing this problem and drawing a line under the past.
Consumers connected to the National Electricity Market are paying for a power grid that grew from around $50 billion in 2005 to $90 billion today. The expenditure significantly outstripped growth in population, demand and even peak demand. There have been some improvements in reliability of supply, but not enough to justify the expenditure involved.
We estimate that up to $20 billion of investment in power networks was excessive, mostly in NSW and Queensland. There is little evidence of a similar problem in Victoria or South Australia.
The main causes of over-investment were regulatory incentives and public ownership, and excessive reliability standards. Public businesses responded with substantial investment programs – but they over did it, building more than was needed to meet demand at the time or today.
Publicly-owned network businesses made these investments; they were approved by the Australian Energy Regulator, and were often in response to requirements set by the same state governments that owned them. Although some of the businesses in NSW have since been partially or fully privatised, they were publicly-owned when the investments were made.
State governments can’t turn back the clock but they can still fix the problem. And they should, because if they don’t, consumers will be paying for decades to come for investments that are neither used nor useful. Inefficiently high prices will encourage consumers to overspend on other energy solutions. But that still won’t reduce the burden of paying for the grid – it may instead shift more of the burden to those who can least afford it.
Where the businesses are still public, state governments should make the hard political decision to write down the value of the assets. In NSW, assets should have been revalued before the businesses were privatised. Reversing those sales transactions to force an asset write-down raises too many other problems. In those cases, the government should fund a rebate to compensate consumers for historic over-investment. If the sale proceeds are to be spent on other infrastructure, the government should acknowledge that choice and its consequences.
Governments should resolve historic over-investment and then move to full privatisation of network businesses, to lower costs and prices. And all states should implement their commitment to cost-reflective network pricing, to reduce peak demand and overall network costs.
New rules were introduced recently to encourage more efficient investment and there are signs that these changes will benefit consumers in coming years. Yet it feels too slow. Technology developments and consumer choices are changing the way power is generated, transported and consumed. Some network assets, built for a previous era, will become further under-utilised or ‘stranded’ – and assets being planned today could suffer the same fate.
Allocating and paying for these emerging risks is challenging. Governments must meet this challenge with effective policies and regulations or risk a rerun in even nastier form of the problems identified here.