August 2012 (chapters added since)
Introduction
The present government interventions in electricity markets, intended to move the industry from coal to renewable energy sources, are responsible for most of the rapidly rising cost of electricity in Australia. These interventions have introduced unanticipated distortions and inefficiencies in the way that electricity is delivered.
Industry experts point to looming problems in supply and even higher price increases.
A 'root and branch' review of these mechanisms is urgently required to prevent ever increasing prices and to prevent further potentially crippling distortions.
If you currently pay an electricity bill or use electricity in your place of employment it is worth gaining an understanding of the key issues surrounding the generation and transportation (transmission) of electricity.
The electricity price we pay our retailer is made up of a number of different components. These are the cost of:
- Transmission and local distribution - local distribution is by far the largest part of the total grid costs - but large transmission projects cause incremental price increases that increase the effective electricity price in your bill;
- wholesale electricity from the National Electricity Market (NEM) - incorporating the cost of fuel and thus the impact of the new carbon tax;
- renewable energy certificates - once known as REC's but now of two kinds: Small-Scale Technology Certificates (STCs) and Large-scale Generation Certificates (LGCs);
- the retailer's costs and overheads (marketing) - this includes additional costs associated with local feed-in generation; principally from rooftop photo-voltaic (PV) solar.
Although some elements of the Australian electricity market operate competitively, there are a number of elements that do not; and some cannot.
In particular, the duplication or multiplication of 'wires and poles' to provide competition in the grid is not considered desirable; both on the grounds of economies of scale and issues around actual physical space required to run competitive wires. This sector is therefore heavily regulated and often in government hands.
The retail sector, while nominally open to multiple competitors, is complicated by one of these retailers usually also being the owner of the local distribution infrastructure.
But generation is generally regarded as a competitive sector, with over 260 large generators contributing to the NEM.
The carbon tax impacts the effective cost of fuel for the largest of these generators. Initial estimates put the tax pass-through cost to consumers at around 2 cents per kWh. But as I will point out this is not presently being felt evenly across all carbon based fuels. There is not a 'level playing field'; because some competitors are enjoying an unfair advantage.
In addition there are distortions introduced by the LGC's. Together with other government interventions, discussed below, these are distorting the marketplace in generation. It is widely reported that investment decisions required for ongoing electricity security have been deferred or even abandoned. Very large plant with long lead-times is involved. This is likely to result in a serious shortfall in capacity in the next decade or two.
Renewable energy certificates are already an important factor in pre-tax price increases and are forecast to become a major part of your electricity bill in future.
Maintaining and expanding local distribution infrastructure is a big part of your bill - as new suburbs are built distribution is increasingly underground raising the overall cost to all consumers.
Transmission grid capital cost and losses are on the increase with the introduction of relatively remote and very variable wind generation and this too pushes up the effective cost of electricity in the NEM.
Mains electricity from the grid comes from a multitude of energy sources. Electricity is simply a convenient way of transporting that energy in a way that is easily converted back to mechanical energy, heat, light, and the motive force to drive electronics.
I argue that it is urgent that the renewable energy target is absorbed into a single carbon reduction initiative, in which no industry sector or consumer is exempt or privileged, similar to that originally proposed by Federal Treasury and the Garnaut committee in 2010.
If you don’t understand where electricity comes from; how it is transmitted or potential technology 'breakthroughs', still in the laboratory, there is a short (simplified) primer on this website.
The ultimate competitor, if the grid fails to supply or if it becomes too expensive, is 'self generation'. I also briefly examine the self generation option in the 'primer'. Read More…