This is part two of our three part series “how to lose friends and influence energy policy”. In part 1 we undertook a whirlwind tour of the early history of energy, and energy policy in Australia up until the 1990s. In this post we delve into the more recent history of Australia’s energy sector and set the scene for what might be to come as our leaders debate how to mould the future of our energy system.
The Air-Conocene Epoch: 1990s–2000s
As I mentioned at the end of part 1, for most of Australia’s history, energy systems and associated policies have been relatively straight-forward and uncontroversial. The 1990s, however, would prove to be a time of considerable transformation for the Australian energy sector.
Australia’s capital cities had grown, as had our collective wealth, and the Australian dream of owning one’s own home had become a reality for many. This led to a desire to increase comfort in the home, which happened to coincide with two important paradigm shifts:
The first: Low cost manufacturing in Asia brought the cost of air-conditioning (A/C) systems within reach of the average Australian householder, and these were installed en-masse during the Air-Conocene epoch.
The second: Seeking respite from the harsh Australian summer had also made backyard swimming pools a very popular addition to Aussie homes. With pools come pool pumps, which consume electricity. While the energy consumption requirements of pool pumps are somewhat modest at the individual level, at the suburb and city scale pool pumps contribute significantly to overall energy consumption.
What’s more, when such household equipment all turns on at the same time it can push the demand for generation above normal levels prompting energy system operators to dispatch peak generation (AKA “peaker plants”) which are very expensive to operate. When this happens and demand is very high, the massive amount of energy flowing through the system puts stress on the network and its components.
The rapid increase in energy consumption during the 2000s wreaked havoc on energy forecasters.
Such “network constraints” are very expensive to relieve through network upgrades —on the order of several billion dollars spent in the past decade. This is how we’ve solved the problem historically, because these were the tools we had available. Anecdotal reports from one Australian utility suggests the cost of upgrading the network to service newly installed A/C units costed up to five times the cost of the actual A/C systems themselves!
This rapid increase in energy consumption during the 2000s wreaked havoc on the energy forecasters tasked with assessing what the sector would need to accommodate in the years ahead. Perhaps unsurprisingly, they forecasted continued increase in energy demand and the distribution network businesses built their systems out accordingly.
A considerable consequence of the regulatory approach for networks has been described as the “gold-plating” of the grid.
Furthermore, as I alluded to in part 1, the regulatory framework governing the distribution networks gave network businesses strong incentive to do so. The value of the network business increases with every system upgrade, and they earn a regulated return on those investments. This means the main way they can increase their earnings for investors is by spending on new infrastructure. This type of secure investment is particularly attractive to conservative investors like superannuation funds, which is one big reason why they’re willing to pay billions of dollars for distribution businesses.
One consequence of this regulatory approach has been described as the “gold-plating” of the grid, and this in turn has resulted in exceptionally high retail bills, where the proportion of the typical bill going to networks is between 40–60%. Energy consumers like you and I will be paying off these unnecessary system upgrades for more than the next decade and it’s been shown that this has contributed far more to the average bill than renewable energy schemes or retailer price gouging has.
There are two more reasons why the Air-Conocene Epoch was instrumental in forming the foundation of our current techno-political quandary. Firstly, this epoch saw the formation of what we now call the National Electricity Market (NEM). In December 1998 the NEM commenced after seven years of stakeholder engagement and development. This tied together the electricity systems of all of the east coast states plus South Australia, forming the longest interconnected electrical system in the world — from Port Douglas in far north Queensland to Port Lincoln in South Australia and across the Bass Strait to Tasmania. The creation of the NEM facilitated the inter-regional trading of electricity and provided the foundation for the automated control of our energy system by the Australian Energy Market Operator (AEMO).
Secondly, the separation of the monopoly utilities into three main functions (“generation”; “network,” and “retail”) as discussed in part 1, meant that state governments could deregulate the generation and retail components of energy supply. Proponents of deregulation claim that this is a good thing because private companies are generally run more efficiently than government entities and governments don’t need to bear the risks associated with operating complex, specialised businesses. Deregulation also allows for retail competition which has now been implemented in a significant proportion of the Australian electricity market. Retail competition amongst private companies should result in lower costs to consumers because multiple entities vye for new business by offering lowest cost services and value-added products.
Well, that’s the theory at least! You see, in the early 2000s (for NSW and VIC) private retailers were formed, initially from the existing “incumbent” utilities (which became those we know today: AGL, Energy Australia and Origin Energy) and later by new retail businesses entering the market, often with some ownership of generation as well. At the implementation of full retail contestability, customers were put on the books of whoever the incumbent “local” retailer was and to get a better deal, they’d need to switch to another retailer.
Here’s the problem, though: The “local” retailer was also the retailer with the strongest market position and this strength often allowed them (and still allows them) to deliver the most competitive offering. This, and the inherent complexity of energy plans, meant that customers rarely switched. Low switching rates meant retail competition didn’t really live up to the expectations of delivering lower prices and may have served to increase the incumbents’ market power, allowing them to “price gouge”. For some customers this amounts to hundreds of dollars extra on their energy bill each year, so we’re still experiencing the hangover of this failed plan. (In part 3 we’ll discuss why that hangover may continue well into the future.)
The Climacene Epoch: 2000s–present
2007 marked a significant political change for Australia: Kevin Rudd’s Labor government rose to power partly on a firm commitment to addressing climate issues. Indeed, one of Rudd’s first acts as Prime Minister was to ratify Australia’s involvement in the Kyoto Protocol — a full decade after the protocol was adopted. In 2011 Rudd’s successor Julia Gillard implemented her Labor government’s carbon pricing scheme (which the opposition cleverly reframed as the “carbon tax”) putting a dollar figure liability on the books of large greenhouse gas (GHG) emitters. The target of this scheme was a GHG reduction of 5% below 2000 levels by 2020 and 80% below 2000 levels by 2050. The first target was certainly not wildly ambitious and whilst the scheme worked perfectly to support new renewable energy projects, it became the favourite scapegoat for the opposition party’s political campaign. Other factors were certainly at play, but the defeat of the Labor government by Tony Abbott’s coalition party in 2013 marked the death knell of Australia’s carbon pricing scheme, confining it to the history books.
Such brilliant minds as Sir Nicholas Stern and Elon Musk are proponents of environmental taxes for action on climate change.
In its place came the “Emissions Reduction Fund” which is essentially a series of auctions in which the government purchases reductions in GHG emissions from the private sector. That is, the government uses taxpayer funds to pay private companies to reduce their emissions. An economist might look at this scheme and see a lack of incentive for delivery of tangible environmental outcomes, compared to the “carbon tax”. Indeed such brilliant minds as Sir Nicholas Stern and Elon Musk are proponents of environmental taxes for action on climate change.
Regardless, carbon taxes are politically on the nose and the heat was turned up on the climate debate (pun intended) when the Abbott government sought to reduce the national Renewable Energy Target (RET) in 2014. Whilst you may have only heard about the RET recently, it’s nothing new to Australia. It was implemented by the Howard government in 2001 to support investment in the new renewable energy sector. No one envisaged it would be so topical and controversial some 13 years later when Abbott mounted a case to reduce it. The argument for its reduction was founded on seeking lower cost emissions reductions than what renewable energy could provide. This argument ignored the projected cost-curve reductions from renewable energy and in late 2015 renewables became the cheapest form of new generation around the world.
In mid-2015 the renewable energy industry and federal opposition relented and a 2020 RET reduction of 20% was passed by parliament. Why did they relent? The political instability around energy policy instigated an investment climate with such uncertainty that institutions were left paralysed on financing renewable energy projects. Having seen the proverbial policy goal-posts moved time and time again, major industry bodies decided it was better to accept the RET reduction — with at least some degree of certainty — so that new projects could get going. The industry was waiting to employ Australian workers in a new and growing industry. So opposition to the RET seems a strange move for a government chanting the mantra of “jobs and growth”. Alas, it may have marked just the beginning of energy policy steeped in ideology and incumbent power rather than sound economics, as we’ll discuss in part 3 of this series.
The Solar Epoch: late 2000s–present
The aforementioned policy confusion and growing energy prices triggered by epochs past centrifuged into a perfect storm of sorts. The result: it became cheaper to bolt plates of glass to your roof to capture the sun’s energy than it was to buy energy from one’s utility. Whilst this was initially spurred by incentive schemes, those incentives have now been repealed in most parts of the country, but this early momentum has lead to the highest penetration of rooftop solar per capita anywhere in the world, with continued growth.
Australia’s uptake of rooftop solar has been truly remarkable, and has given rise to the “prosumer” — households who both produce and consume energy. While the drivers of prosumer growth are many, for most it’s a confluence of reducing energy costs, independence from the incumbent utility and independent climate action.
But what’s next for the empowered prosumer? Read on in Part 3: The future of energy past for more on this, and more on where our energy sector is heading.
Footnote:
Energy everywhere is driven by three main factors: geography, economics and demographics. Thus, energy history varies by location. This article is based on Australia’s National Electricity Market (NEM) which consists of Queensland, NSW (+ACT), Victoria, South Australia and Tasmania. If you reside in WA, NT or access off-grid power, your energy system likely evolved differently.
Posted by Darius Salgo, CEO of Nexergy.
Want to take back control over who you buy and sell your energy with? Did you know you can trade your energy amongst your family, friends, neighbours and community? Sign up to the preview release of the Nexergy local energy trading app to find out how.
(Oh, and if you found this article valuable, please click 👏 to show your appreciation — or click and hold if you think it’s super special — so others can find it! And please say hi at @WeAreNexergy — we always love meeting new people.)
