Commentary on the State of the Art in Energy

July 23rd, 2018

This article is intended to give you a factual, technical view of the State of the Grid without bias, political or environmental views.

The ACCC Report

The ACCC released a 400 page report, “Restoring Electricity Affordability and Australia’s Competitive Advantage in early July.

The report has been widely reported and summarised in the media and has a focus on reducing electricity prices.

Here we give a view of how the future might unfold. We would like to point out that, as a small electricity retailer, Pooled Energy does not control any of these things, but that it is the only retailer actively working to bring down your energy usage….as well as your chemical and support costs.

From a purely technical point of view, there are several major issues with the price of electricity:-

1. Amongst all the discussion of market forces and discounting, what is really happening with the underlying cost of electricity?

The simple fact is the underlying cost of electricity is rising and we believe is likely to continue to rise for some years. The reasons for this, include:-

  • Our existing thermal coal power stations, which have supplied almost all our electricity until now, are wearing out and will progressively retire from service. These are low cost as the large capital investment in these generators has long since been recovered and their fuel (coal) costs were, and still are, very low. This is because, in most cases, they were installed ‘on top’ of a coal mine with very low production and transport cost under long term contracts, which are significantly less than the current market price for exported steaming coal.Replacing these coal generators with new High Efficiency/Low Emission (HeLe) coal generators is a very large capital investment and they will have to source their coal from mines at a cost currently approximately more than twice the cost compared with the existing coal based generators.   While a new coal based generator would be somewhat more efficient, the increase in efficiency will not allow it to match the current production costs of electricity of existing coal based generation.   The starting point for electricity generation from a HeLe plant is about twice that of the old coal plants…and rising with the increasing price for coal.In addition to the need for new generation assets, the intermittent nature of renewables due to weather variability, requires substantial investments in Gas based electricity generation, as well as some form of storage to provide stable electricity supply when sun and wind are not available. Gas prices have approximately doubled in recent years and are continuing to rise. Several State Governments refuse to allow gas exploration and there are a range of other issues that are limiting exploitation of potential gas reserves, exacerbating the situation.The widely publicised investment in the Snowy Mountains scheme will add substantial longer term storage to the grid, but at a very substantial, multi-billion dollars cost. This type of “pumped water” storage will have to be extensively supplemented by battery storage which will provide elements of both short term storage as well as stability facilities as the large coal based generation retires, but at (very) high capital and operational costs.The CSIRO and Energy Networks of Australia have recently estimated that the cost of transitioning the Grid to a fully renewables based grid by 2050 is $997 Bn, which is approximately $100,000 per Australian family.
  • As the ACCC report points out, Renewable Energy is much more expensive than many people may believe.   While the production of electricity via large solar powered arrays or wind turbines is now in some instances cheaper than new coal or gas generation , this is only true when the sun is shining or the wind is blowing at the right range of speeds. Calculations of the cost of power need to consider the overall cost, including when the wind does not blow and the sun does not shine. It’s not as if we can easily increase either of those.
  • As pointed out by the ACCC, the true cost of solar and wind energy is currently obscured by generous grants and subsidies, paid for by electricity users, which do not take into account what’s required when there is no renewable power available, e.g. a windless night. On windless nights in South Australia, where there is around 70% renewables generation, they provide backup by running large-scale diesel and gas generation plants, and importing coal based power via an interconnector to Victoria. To help put all this into perspective, the electricity generation component as described above is typically a little more than one quarter of the cost of electricity as delivered to your home.   The remainder are discussed below.


2. What is happening with the delivery system, the Poles and Wires?

The physical distribution of electricity represents about half the cost of electricity and is the major reason for price rises in recent years. The ACCC report identified the cause of the rise in this component, as past excessive investment in Grid infrastructure. They recommended that much of this past investment should now be written off, rather than recovered via electricity charges to consumers. This is quite difficult in NSW as the NSW Government challenged the Regulator in the High Court over this matter in 2015 so that it could write up the cost of the Network before selling most of it off to private interests at a high price. Those private interests, not unreasonably want a return on their investment. The ACCC is therefore suggesting that the NSW Government subsidise electricity cost directly. This recommendation may not be accepted.


3. Gentailer activity

The price of electricity in NSW is largely set by the 3 “Gentailers” (Energy Australia, Origin and AGL), which share some 90% of the retail market and generate some 90% of the electricity. A Gentailer is both a generator and a retailer and this vertical integration is significantly a monopoly, which the ACCC acknowledges should not have been allowed.

The ACCC is concerned that the system is being gamed and that Gentailers are artificially inflating generation costs while offering discounts to below the costs of non-Gentailer retailers. The ACCC feels that this problem is being exacerbated by misleading, confusing and conditional discounts. As a result, it has recommended strong action, including a Regulator determined reference price that allows true comparison of electricity prices, rather than large discounts from inflated starting points.

Pooled Energy is strongly supportive of the ACC in these regards. Uniquely amongst the Retailers, Pooled Energy does not offer temporary or conditional discounts, just ongoing savings in energy and chemical use as well as in labour, and great quality water.


4. “Discounts”

Many reviews by Government and media concentrate on the best available price in the market and compare it to that paid by the average customer, who has no discount, and then imagine that this difference is achievable across the Board.

Since the best discount price, which is used to attract customers, is funded by those with no discount, the achievable reality is that this is a zero sum game. If everybody got a discount, it would be quite small. At present, more than half of electricity customers get no discount, about one-third get a little, and the swinging margin get substantial but temporary and conditional discounts.   If the playing field is levelled in the future by Government action, there will likely be no substantial discounts. Any such levelling would make the Pooled Energy even more attractive due to its reductions in electricity consumption.