Discussion paper

Avoiding gridlock: policy directions for Australia's electricity system

11 Dec 2016

Australia’s national energy landscape has been transformed since the creation of the National Electricity Market two decades ago. The rapid uptake of renewable technology and leaps forward in energy efficiency and storage have been game changers for generators, distributors, retailers and consumers of electricity. If harnessed effectively, these changes can move us closer to the sustainable energy system we need to power a decarbonised Australian economy in the 21 st century. But this will only happen if the way we regulate electricity markets keeps pace. This paper argues that an updated approach to regulati on of energy distribution networks is especially vital.

Retail prices for electricity have nearly doubled since 2007. This has increased the cost of living, disproportionately impacting poorer households. It has also increased the cost of doing business for companies, harming the competitiveness and productivity of the Australian economy. The greatest source of this increase in prices has been higher network charges for the construction and maintenance of distribution assets - the poles, wires and other ‘ grid’ infrastructure that sit between the large - scale producers of energy (generators) and the companies that connect houses and businesses (retailers).

In parallel, the price of photovoltaic solar panels mounted on the roof tops of houses to provide an alternative electricity supply system has decreased rapidly. The total capacity of this form of distributed energy generation soared from a negligible amount in 2009 to over four gigawatts by the end of 2014. This is equivalent to 9 per cent of the capacity of large generators in the National Electricity Market (NEM) .

These factors, combined with mandated improvements to the energy efficiency of household appliances, have had major impacts on the energy landscape. The total amount of energy consumed from the grid, despite extensive investment in the grid itself, has declined 7 per cent since its peak in 2008 - 09. In other words, while the fixed costs of grid services have risen, the total volume of electricity through which the distributors can recoup these costs has fallen significantly. This leads to higher tariffs for each unit of electricity consumed.

This creates a positive feedback loop. As retail prices rise, more households will reduce energy consumption by using rooftop solar, battery storage and other technologies, or defect from the grid altogether. This drives prices yet higher, increasing incentives for yet more households to follow suit. This is known as the ‘Death Spiral’ phenomenon. As this cycle takes hold, energy distribution assets price themselves out of the energy provision market. These assets become ‘stranded’ or unable to earn an economic return.

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