To: The COAG Energy Council Secretariat
Via email: energycouncil@industry.gov.au
From: John Herbst, Port Adelaide SA
Friday the 13th of March, 2015
Dear Sirs,
Thank you for the opportunity to provide public feedback on your consultation paper, “New
Products and Services in the Electricity Market” published in December 2014 by the Energy Market
Reform Working Group. As I’m sure you are aware, the process for regulatory reform can be
sluggish, yet technological growth continues to outpace expectations. We cannot afford to wait for
problems to emerge, thus a proactive approach to regulation is required. I believe this consultation
paper is an important step toward that objective. Many threats to market players and power system
operation have been identified, forecast, and hypothesised, but most-importantly, the authors
recognize that predicted issues are but representative examples of the many possible technological,
structural and strategic changes that could require regulatory reform in the near-term. Regulation
designed for an uncertain future requires a robust, consistent system which does not favour any
particular outcome, especially the status quo.
There are two specific points which I would like to bring to your attention in this introduction, to
maximize their chance of being read.
The first key point is a direct response to your request for feedback on whether regulatory reforms
will be needed to accommodate new products and services. I consider strong, effective regulation
of network and retail pricing essential for the efficient operation of these markets. This is because
network prices define the incentives for customers to adapt. If costs are not signalled properly,
customer decisions will not lead to correct market outcomes. Chapters 2 and 3 expand on this.
Second, the Consultation Paper recognizes that a regulatory framework needs to be based on
“principles that help all parties, including customers, businesses and the regulator, to understand
the goals of regulation.” Current goals consider economic efficiency, but ignore environmental
efficiency. In the near future, global pacts are likely to result in penalties for continued inefficient
levels of pollution and/or carbon emissions… including palpable costs which no one can deny are
real. If Australia makes an international commitment to the environment but the energy sector
refuses to do its part, the total cost of compliance rises and is distributed inequitably and
inefficiently onto other sectors of the economy. Regulation must allow the AER to enforce national
goals. Reform which accounts for environmental objectives will also provide confidence to
negotiators when setting abatement targets.
The National Electricity Objective promotes long-term thinking, thus networks in particular should
be role-models for sustainability, as their monopoly status frees them from competition.
‘Sustainability’ should be a clearly-stated goal of regulation, perhaps even incorporated explicitly
into the wording of the NEO.
Contents
Chapter 1) Identification of Products and Services to Be Regulated: ..................................................... 3
Chapter 2) Regulation of Innovative Retail and Network Tariffs ............................................................ 3
Chapter 3) Protecting Customers from Unfair Transaction Costs .......................................................... 7
Chapter 4) Customers’ Right to Easily Access Interval Data, and Freedom to Share Information. ...... 10
Chapter 5) Barriers to Entry and Ongoing Predatory Costs for New Market Entrants ......................... 11
Chapter 6) Churn. What happens when long-term investments are no longer efficient? ................... 12
Please note that I have used “off-peak controlled load” (OPCL) as a recurring example throughout
this submission. My use of the term refers to systems and tariffs similar to those currently in use,
mainly designed for hot water heating at night, as opposed to any “smart” technology or service. As I
am only aware of the South Australian implementation, please assume that is my intended meaning
in case this policy conflicts with policy of other networks.
Chapter 1) Identification of Products and Services to Be Regulated:
Consultation Question on page 5:
Do these three markets cover all new products and services that could be offered to small
electricity customers?
Response: The definition of an “energy product” or “energy service” is possibly too vague, but I
believe the scope is sufficient to include all products and services which should be included. I am
more concerned about the scope being too broad, drawing in products like batteries and electric
vehicles, which may not be appropriate to include. I cannot identify nor imagine a technology which
would require special regulation and does not fall into one or more of these categories. Of course,
this does not imply that the technology does not or cannot exist. Other submitters will be better
situated to identify potential additions that should be made to the scope.
I believe that it is unnecessary and difficult to sort energy services by specific market category, as the
boundaries of “supply”, “demand management” and “energy information” are not clearly
demarcated. Therefore, I recommend that regulations be made without need to distinguish the
market category of the product or service. At the very least, regulations should be consistent across
these three categories in order to prevent having different rules for similar services. Solar plus
storage is a clear example of a product which crosses category lines, and should not be put at a
disadvantage from being under two sets of regulations. Inspection of a future piece of technology
which can perform different market functions for different customers should also be regulated
similarly regardless of current function.
Chapter 2) Regulation of Innovative Retail and Network Tariffs
The Consultation Paper mentions a current demand management service: the ‘hot water controlled
load tariff’ 1, a type of Off-Peak Controlled Load (OPCL) tariff. The current OPCL tariff in South
Australia overcomes technological barriers by requiring customers to isolate their load on a second
meter. This ensures it runs off-peak, obviating the need for previously expensive time-of-use meters
and other enforcement measures. I am concerned that the authors have simply asserted that the
OPCL tariff should fall under the scope of these retail market regulatory reforms. I believe the issues
with and goals of tariff regulation are inherently different from the issues which will emerge for
other demand-management products and services, to the point that they cannot be resolved under
the same set of regulations.
I wonder whether the Consultation Paper’s authors meant to say that the additional transaction
costs for customers which take up OPCL tariffs are products and services of the demand
management market. The installation of an appropriate tank, electrical isolation, meter installation
and reading, inspection and enforcement of the controlled load are products and services that could
be regulated under demand-management market reforms.
1
Consultation Paper, page 5.
I strongly recommend treating tariffs under different regulations from the other energy products
and services discussed in the Consultation Paper. Retail tariffs define the value of efficiency, thus lie
on the opposite side of the cost-benefit equation from the rest of the consumer products and
services being considered. It is essential that tariffs provide efficient prices signals in order for a level
playing-field for new products and services to exist. I am concerned that the current regulations
have not achieved efficient pricing outcomes, and that better regulation is required for tariffs. The
necessarily strict tariff guidelines would likely be too cumbersome to apply other consumer products
and services. We should avoid over-regulating the Demand Management market. As long as the
players are truly competitive, regulation should require little more than standard consumer
protections. Efficiency solutions which are the most effective and least costly will rise to the top,
unless held back by policy designed to promote something else.
I propose that retail tariffs be regulated using similar principles to those that apply to network
tariffs. While current tariff offerings vary considerably from retailer to retailer, some are inefficient
results of short-term pressures stemming from competition. Brand differentiation, marketing ploys,
and implicit or explicit collusion (the case for many retailers and generators) distort the efficiency of
retail tariffs under the current interpretation of the NER and resulting regulatory framework. For
example, I have heard of a retailer migrating residential customers with Smart meters to a “Daily
Demand Tariff”. The advertised rates look attractive to the naïve consumer, yet can result in priceinstability and customer inability to respond to incentives. This results in inefficient use of the
network, and artificially stimulates consumption. This, in turn, causes increased pollution, waste of
natural resources, higher network costs, and numerous additional flow-on problems.
There is now public debate about whether the AER may factor pollution and its environmental costs
into the efficiency equation. The current interpretation of the Rules is that AER must look only at
economic costs. Thus tariffs with low consumption charges, known to increase our total pollution
levels significantly, are being approved because there is no direct, quantifiable cost at present.
When considering retail market reforms, we should consider the likelihood that Australia will soon
enter some significant international agreements to lower its pollution levels. Should this occur (and
it should!) there would then be a clear economic benefit to removing artificial stimulation of
pollution-creating energy consumption. Present levels of pollution output due to electricity
generation are acknowledged to be higher than what would be efficient if environmental factors
were considered. This fact should be taken into consideration when setting national pollutionabatement targets, and certainly should not be used as an excuse to water-down Australia’s
obligations under any future international agreement. As proposed reforms are meant to be as
general as possible, I expect these reforms to be compatible with the implementation of
environmentally-sound electricity policies which are likely to be necessary under the NEO in the
near-future.
The current system of rule changes in the NEM clearly favours incumbents and needs reform. The
National Electricity Rules make some very strong and broad claims, for example that customers with
small energy generators cannot be treated ‘less favourably’ than others, yet we see discrimination
against solar customers daily across all market States. This has become a barrier to entry and an
ongoing cost borne by solar businesses and their customers.
Another specific proposal I wish to make is that retail tariff reforms explicitly prohibit tariffs which
exploit customers whose demand is highly price-inelastic, whose comprehension is low, or who face
high transaction costs for switching retailer.2 The ability of customers to switch retailer is the main
factor differentiating regulation of retailers from that of networks, but the distinction has not
created the diverse market which the Rules envision. Since the retail electricity market is not
effectively self-regulating, stronger controls are required. It is up to the AEMC to strengthen the
Rules, such that their interpretation and implementation will allow the AER to provide retailers with
incentives which align their profits with the NEO.
To be clear, I believe stronger regulation of retail tariffs would not impact the ability of retailers to
innovate. It seems reasonable for regulatory reforms to directly prohibit tariff designs which work
against the National Electricity Objective while promoting the many ways for different customers to
determine their best strategy for efficiency. Only the customer can identify the tariff under-which it
can optimize its operations most effectively, but it is up to the regulator to ensure that tariff
offerings are efficient rather than demand-stimulating. Current network tariff regulatory upgrades
should bring about more efficient network tariff pricing, which should promote the regulatory goals
for retail tariffs. Removing incentives for retailers to play short-term games would also help achieve
retail tariff efficiency.
Tariffs must be set independently of the solutions designed to respond to them, or conflicts of
interest, collusion, and inefficient pricing results. This leads to inefficient customer behaviour
through distorted incentives in these new markets. For example, a network which over-signals the
cost of Agreed or Peak Demand for business customers causes over-investment in energy storage
and load-shifting where generation would be a more efficient investment. This waste eats through
budgets, leaving less to be spent on real efficiency measures. Right now, a small sports club in SA
can’t spend its $30,000 public grant to install solar panels due to its only tariff option being one with
an invalid, demand-stimulating price-signal3. The club may spend its $30,000 to install storage
rather than solar, as it would receive a much lower price for lowering its individual peak demand.
The problem is that investment which provides the customer the best value does not provide any
actual benefit to the network. The sports club’s peak demand is never in the local or global critical
peak, because the club is closed for most of the summer, and during extreme heat all sport is
cancelled and the lights stay off. The demand spike caused by sports lighting doesn’t actually result
in a network capacity problem, thus there is no benefit to ‘fixing’ it.
There are many businesses in a similar situation, whose demand peaks are uncorrelated with their
neighbours’. Load-shifting would be an absurd and useless practice for these businesses, whereas
generation would still have great value to the network. Efficiency budgets are sucked away and the
customers may even feel like they’ve done a good thing, but absolutely nothing of value has been
accomplished. This is a perverse outcome, and a direct result of an inefficient network price signal!
There is no hard limit to the damage that can be caused by inefficient price signals like this, and
pricing which is not cost-reflective will have customer incentives rewarding absurd or even damaging
2
NER section 6.18.5. Recent amendments have been advertised to the public as “strengthening” Pricing
Principles, so it is safe to assume this protection remains at least as strong as previously defined.
3
See Submission 38 to the Senate Inquiry into the Performance and Regulation of Electricity Networks for
details of this and other network transgressions.
behaviour. Damage is not limited to consumers but also hurts peripheral markets, business
productivity and the State’s ability to promote its goals through grants.
If networks continue issuing pricing and regulatory proposals which overstate problems and
undervalue on-network solutions, this increases the incentive for individual customers to seek
individual solutions. This can result in tremendous inefficiency, but networks have no incentive to
invest their own capital in solutions if they can convince customers to take on the costs themselves.
For example, consider a representative residential 15,000kVA feeder in suburban SA, serving 3,000
households. Let’s assume that at one point last summer, the total demand of these 3,000 customers
reached exactly 15,000 kVA. This indicates the need for the network to do one of 3 things to
maintain reliability…
1) Incentivize customers to reduce individual peak demand,
2) Buffer the load with storage on the network before it reaches the feeder, or
3) Increase feeder capacity (or add a new feeder).
Options 1 and 2 do effectively the same thing, and if the 3rd option were the most efficient then
there would be no need for an ‘innovative’ solution, just more of the same old infrastructure.
There is currently no reason for the network to invest in its own storage if customers can be
incentivized to do it themselves, at their own cost. However, as we just saw in the Sports Club
example on the previous page, individual efforts may not be as effective as a network solution.
While shifting loads out of critical peaks will result in some network gain, the fact that customers
don’t always run their loads in every peak means that batteries on individual residences don’t always
reduce stress on the network by their full kVA output. The statistic for the percentage of utility an
individual battery provides to the network has been named ‘diversity’ in recent publications. Simply
put, if you are home for only half of all heatwaves, but run your full load when you are home, your
diversity would be 50%. This is a topic that requires study far beyond the scope of this submission.
Its value is somewhat subjective, based on the definition of “peak time”, which could be broad (say,
12pm-8pm weekdays) or very narrow (actual critical peaks, which is just a few hours per year in SA)4.
A 2014 study by Energaiea assumed residential Diversity = 0.5, or 50% in SA, but will vary heavily
depending on the time-period chosen as the peak.
An interesting result of diversity is that the sum of individual peak kVA demand is well over the joint
peak demand for any set of customers. Those 3,000 customers jointly using 15,000kVA, likely have
individual peak demands which sum to 25,000kVA or more. Let’s say conservatively that the sum is
just 20,000kVA. If each customer installs 1kw storage to flatten their individual peak, the total
individual peak demand will drop by 3,000kVA, down to 17,000. (this is assuming storage doesn’t run
out during a peak, which would reduce the benefit somewhat). But the benefit to the joint peak
won’t be a full 3,000kVA. The benefit may be as low as half of this, just 1500kVA, but likely closer to
3/4ths, which is 2250kVA. It is certainly an oversimplification to say that the cost of storage remains
fixed in $/kVA terms as scale increases, but if we do make this assumption we can compare the
relative costs of individual vs network storage. In this example, the effect of individuals installing
4
SA Power Networks claims it has a “peaky” global load profile, due to the relatively small number of very hot
days. By contrast, QLD has more hot days, thus the critical peak extends over a wider timeframe.
3,000kVA is equivalent to the network installing roughly 2250kVA, thus it is 25% more efficient for
the storage to go on the network.
Even if you don’t accept these numbers at face-value (and I wouldn’t, given the many assumptions
I’ve just made), the point is that there are efficiencies to be explored and compared on-network vs
off-network, and there need to be incentives in place for networks to solve their own problems
when it’s more efficient than pushing the costs onto customers. This directly affects the market for
new products and services.
One final point about diversity: The kind of calculations I have just made using guesses and
assumptions have never been studied by networks as far as I can tell. As evidence, SA Power
Networks claims it has no individual kVA data to offer the AER in its last RIN response, only joint
peak demand totals. I’m curious how SA Power Networks plans to calculate the correct price for
Demand on its new “cost-reflective” [cough, cough] residential Demand tariff without this data.
Surely using peak transformer or feeder values will result in severe downward bias if used
uncorrected as estimates of sums of individual peak demand. This would inflate calculated price per
kVA required to achieve correct total revenue, thus resulting in a very significant over-collection of
revenue from households which are unfortunate enough to be put onto this tariff. I am only
speculating, of course, and I hope this is not actually the plan.
Chapter 3) Protecting Customers from Unfair Transaction Costs
The National Electricity Rules require that tariffs and charging parameters are set giving
consideration to transaction costs imposed on customers5. The term transaction costs is not defined
in the Rules, but its usual definition is roughly “the difference between the amount paid by the
customer and the amount collected by the seller in a transaction”. This includes peripheral costs,
tangible, intangible, operational or any other cost one can (or even can’t) imagine. Transaction costs
are similar to future technology in this respect, thus require regulation based on protecting against
the unknown. A particular customer may, at any time, identify a cost which was previously not
considered. That cost is just as valid as any other, and should be considered immediately upon
identification.
Transaction costs are relevant to this discussion because a customer’s cost for the products and
services being considered for regulation are really nothing more than transaction costs. If
transaction costs necessary to obtain a low-priced tariff are substantial, the bulk of the benefit will
never reach the customer. ‘Solar leasing’ and other contract-based solutions could suffer from this
problem. Without regulation as energy products and services, small customers may enter a contract
that actually makes them worse off, especially when considering the likelihood of information
asymmetry abuse. We have seen the free-market fail to protect retail electricity customers in the
past, and the lessons should be incorporated into future reforms.
I listed some tangible transaction costs for the OPCL hot water tariff in previous sections, including
the tank, meter, electrical work and compliance enforcement. Customers must weigh these costs vs.
their projected savings, and when summed the costs can lead to customers rejecting the mostefficient option despite the potential benefits to the network due to lack of personal benefit.
5
NER Section 6.18.5. The Dec 1 amendment made this part of the Customer Impact Principle.
Transaction costs can also be intangible and costly. For example, SA Power Networks recently
undertook measures to improve customer comprehension of tariffs, acknowledging that ‘learning
and understanding’ can be a transaction cost that requires mitigation.6 I would also include
operational restrictions stemming from tariffs in the set of significant yet intangible costs. A tariff
which causes customers to restrict their loads at more times than necessary is an excessive
transaction cost. SA Power Networks’ Demand Tariff VLVS demonstrates all of these intangibles for
some customers. VLVS charges business customers based on Agreed Demand, which must be
predicted by the customer before actual use occurs. This imposes very harmful intangible costs on
some of its small business customers, especially those which serve the public and have little control
over their times of heavy Demand. The absurd penalty for a single breech of Agreed Demand can be
several thousand dollars for just a few minutes of non-compliance. Zero-tolerance incentives like this
can make the cost of self-enforcement outrageous for customers attempting to act efficiently.
Customers are told of the extreme risks and penalties during an unfair “negotiation”, where the
network’s goal is to get customers to agree to the highest level of Demand as possible. The
customer’s decision comes down to a choice between a reasonable estimate of peak Demand, which
would be cost-reflective but lacks price stability, vs a safe over-estimate of peak Demand, giving up
the right to cost reflectivity in order to guarantee there won’t be huge penalties added to later bills.
Agreed Demand includes a power-factor calculation, further confusing the issue for customers. This
negotiation must be considered a significant transaction cost, and the price of failing to research the
options is accepting the network manager’s recommendation that you agree to pay a high price
now, rather than trying to be efficient.
Meanwhile, VLVS has an Annual Demand period (what SA Power Networks calls its “peak time”)
which is very large: 12pm-8pm weekdays all summer. It doesn’t matter if it’s 18 degrees out, at
12:01 you must shut down any high-load equipment to demonstrate your compliance or face the
consequences. The fact that it doesn’t hurt the network to finish your morning job that ran long is
irrelevant. I was told that a manufacturing customer was faced with having to scrap a batch of
product or pay the excessive penalty I’ve just described, and the network offered no other option
after recognizing the dilemma. Other customers face problems pricing their own services, especially
when serving customers. The small sports club I used as an example previously has recently installed
publicly accessible lights which run on tokens. If the club were to try to run lights only off-peak, a
member of the public could easily cost the club thousands of dollars by inserting tokens during the
peak period. I’m still trying to figure out how to charge the public fairly for lighting use under VLVS
when 90% of tariff is fixed costs for that customer. It is not possible to avoid these issues without
incurring even more monetary, operational and intangible costs.
Having identified some kinds of transaction costs which could damage particular customers, we can
begin to compare transaction costs of different tariffs. An example of an easy comparison would be
if there were another OPCL tariff option with the same prices as the current OPCL hot water tariff,
but with a different set of technology and policies. If there are lower costs of supporting the new
tariff, that would be a preferable, ‘more efficient’ solution. Unfortunately, as some of these costs
are intangible and variable, the network is not well-situated to estimate these costs for individual
customers. This is at the core of the Power of Choice Review’s recommendation that customers be
given options for different ways to act efficiently through different tariffs which they are allowed to
6
SA Power Networks Pricing Proposal to the AER, 2014-2015, p 70.
choose from. While the network looks only at the status quo and ignores intangible costs
completely when it claims a customer would be “better off” on one tariff or another, customers
have far greater ability to explore ways to adapt, and to weigh the costs of intangible and
operational concerns when making efficiency choices. Customers will be clearly incentivized to
adopt efficient tariffs provided that only efficient tariffs are offered, and the network does not
artificially promote inefficiency through high fixed costs or Ramsey pricing. This is all required for
the new energy products and services market work correctly.
The lack of direct regulation of network policy is linked to many retail price problems associated with
abuse of monopoly and incumbent power, yet another threat to the operation of new energy
products and services markets. Though the AER has the power to examine networks’ yearly pricing
proposals (whether it does is another serious issue which I hope is now resolved), the networks’
internal policies and customer procedures, meant to be manifestations of Proposals, are not
examined by anyone, except perhaps an industry ombudsman whose power to fight for the
consumer is limited. I believe I have identified several customer policies which directly contradict SA
Power Networks claims in its pricing proposals over the past 2 years, yet have been told there is no
authority which will assess these issues and determine the extent to which they significantly impact
customers and markets, and explore which customers face discrimination and harm.
Reform should explicitly promote advancing technology through policy revision which removes
provisions designed to account for lack of such technology. OPCL hot water is an excellent example
of this point. Customers could adopt a tariff similar to OPCL using superior technology (perhaps a
water heater that tracks its own usage?), but network policies generally prevent that sort of thing.
“Smart load control” can allow customers to circumvent arbitrary time-of-day restrictions which are
in place until dynamic tariffs, based on actual network costs, come into the market. This costreflective tariff improvement would allow customers to heat water during the day, provided it is not
a time of network peak, reducing the operational restrictions OPCL customers now face. This is an
example of what I dub a “dominant tariff” made possible by “dominant technology”. A tariff or
technology is dominant over all others if it provides a customer with a dominant strategy for
efficiency. Technology and innovation should continue to provide better and cheaper ways for
customers to create value through efficiency, which in turn provides value to the network and the
new markets for this technology. If networks fail to provide retailers with price-signals which lead to
retailers offering efficient and hopefully dominant tariffs, efficient technology uptake will not occur
as it should. This stunts the market for new products and services, causes inefficient use of the
network, inflates costs and prices, and harms retailers which would otherwise share in the benefit of
a more efficient market.
Chapter 4) Customers’ Right to Easily Access Interval Data, and
Freedom to Share Information.
In South Australia, business customers mainly have interval meters which collect half-hourly data. In
order to access that data, a written request on letterhead must be sent to a SA Power Networks
manager, and that manager manually retrieves and emails the data to the customer. On a smallscale this is not overly cumbersome, and can be more efficient than costly automated schemes if
that data is not requested often. I am concerned, however, that there is growing need for access to
interval data in order for customers to be able to understand their load profile, identify and fix
problems, and make efficient improvements. The current procedure does not allow customers any
way to access data in real-time or near-real-time, and SA Power Networks’ recent Regulatory
Proposal to the AER would bring in new meters which offer no improvement in this respect for
businesses and residents. There is little justification for failing to provide this information, as the
data is stored in the meter and comprises nothing more than a simple list of times, loads, and
possibly power factor. This is about as simple as data gets, thus there are no technical issues with
creating, storing or using that data. Customers simply need a way to get the table from the meter
onto their preferred device. A USB port would work, as would any number of other means including
wireless technology. Security is as simple as installing a lock or requiring a passcode.
While customers rightly have concerns about misuse of load profile data, others believe that the
information asymmetry caused by the current access difficulty is being exploited. Without access to
interval data, customers have extreme difficulty understanding the causes of Demand peaks, and
may be confused about sources of wasteful consumption. Even with this information, it is difficult to
decipher and make proper inferences, but the data does provide useful information when properly
analysed. It is important to note that a load-profile summary provided by SA Power Networks for
small businesses does not provide the information necessary to respond to incentives nor determine
anything about daily, weekly and yearly variability in consumption and peak demand. This can result
in negotiations with networks, for example setting Agreed Demand, lack of information puts the
customer at an extreme disadvantage.
Customers gain great benefits from being able to share their interval data with product and service
providers now, for example when getting quotes for installing solar panels. It is difficult to imagine a
situation where a customer would inadvertently put itself at a disadvantage by providing this
information to a 3rd party, even an unscrupulous one, though I concede it’s possible. I believe
current network policy is unnecessarily cumbersome and is serving to hold back efficient uptake of
technology. Future regulation of information sharing and use must allow customers to provide
vendors with historical and current load profile information in order to maximize the benefit to
everyone.
Current privacy laws and regulations regarding personal information are likely sufficient to cover this
new type of data, and from my experience there is truly little concern about leaks of load-profile
information amongst small customers. This information should be considered no more sensitive
than any other information that customers routinely share when conducting transactions.
Chapter 5) Barriers to Entry and Ongoing Predatory Costs for New
Market Entrants
It is known that the energy market incumbents work together to mutual benefit. To some extent
this can be efficient, for example where economies of scale exist, or where a natural monopoly
occurs and benefits the public. In other cases, the collusion can disrupt efficient markets and hold
back economic and technological growth. Artificial barriers to entry and ongoing predatory costs are
a serious problem for solar businesses at present. Economic arguments presented to the AER by
networks claiming solar has little benefit contain a great deal of bias and misleading inference. I
have gone into great detail about specifics in my submission to the recent Senate Inquiry, and in my
submission to the AER regarding SA Power Networks Regulatory Proposal for 2015-2020, so I will try
to be brief here.
It is known to many that the networks have incentives to hold back distributed energy generation, as
it removes small customer reliance on the network. Proposed policies continue the status quo in SA,
and must be corrected for an efficient solar market to be brought back. Fair payments for avoided
TUOS charges are required to be paid to solar customers, yet are being waved away through
ridiculous arguments like calculating the “solar effect” at time of current Peak Demand rather than
at the time Peak Demand would have occurred were there no solar. This is the basis for the absurd
claim that “solar only shifts the peak, and hasn’t done much to reduce peak demand”. How exactly
does one shift the peak except by eliminating the peak that was there? Mathematically there will
always be a peak, and while incentives need to recognize current conditions, they also need to
reward previous work that has created real savings, leading to far less dramatic network peaks. The
latest concerns about peaks at 11:00pm seem utterly trivial compared to the air-conditioning scare
campaign a few years ago which had some supporting data to go with it. The “peak problem” is
resolving itself thanks to previous incentives that should continue to be paid to those who
responded to them, and must be paid in order to provide confidence to the market.
The uncertainty that networks are injecting into the distributed generation market is causing
increased costs for those businesses and making it more difficult to attract investment. Ironically,
distributors in Queensland, New South Wales and ACT are now complaining about increased costs of
capital and investment due to the policy uncertainty imposed on them by the AER’s enforcement of
the recently-amended National Electricity Rules. The main difference is that the network’s
complaint is theoretical, whereas the policies they impose on many energy market businesses are
truly increasing costs of capital through abusive barriers to entry and ongoing predatory costs.
These problems need to be corrected for a proper peripheral technology and service market to grow
and flourish.
Chapter 6) Churn. What happens when long-term investments are no
longer efficient?
My final chapter is about changing goals, incentives and technology. Whenever customers are asked
to enter lengthy contracts, there is a chance that exogenous changes will distort the value of the
contract from what was expected by both parties. To some extent this cannot and should not be
prevented, as uncertainty is already taken into account when setting contract prices. What must be
stopped is the changing of goalposts by the contract writers themselves in order to prevent any loss
of value from unexpected market conditions. Customers with solar panels have already felt this
effect as they watch the value of their energy eroded by policy designed to charge for anything
except volume. I am very concerned that the virtues of battery storage are the next technology to
go down this path. If I am correct that the cost of peak demand is dramatically overstated by
networks, then the true value of load-shifting is far less than what is being touted now. If the
networks get folks to install load control, but then shift back to consumption-based charges (as I
believe would be efficient and cost-reflective right now), customer investment in load-control would
be devalued severely. This means that all investment in the current markets would have been based
on forecasts which were not fairly presented. This would not be the fault of the sellers of technology
and services, but simply the long-term plan of networks to keep customers from installing
distributed energy generation and focus on the red-herring of peak demand problems instead.
‘I know the above sounds a bit over-the-top, but let me ask a serious question: Why don’t we have
“Water Demand” charges? Does the rate we let water flow from our taps matter in the least? Water
“generation” is just as variable as renewable energy generation, perhaps far more so. What are the
differences which require electricity to be priced so differently, and so inefficiently from an
environmental and natural-resource perspective? I would say it’s because our water network has
reservoirs.
Yet even the water industry is guilty of changing the goalposts on customers wishing to act
efficiently. Those in SA will remember a few years back when those rainwater tanks were supposed
to save so much money on water bills. What are they doing for us now? Did anyone get their
expected value out of them, or were the benefits overstated, based on price forecasts which quickly
were found to be unrealistic? In SA, the water bill is now mainly fixed costs, so it’s an unavoidable
charge no matter how “efficient” you are (and it also promotes waste in that respect). The fixed
component of an essential service utility bill is truly nothing more than a tax, except in SA the
electricity tax gets collected by a partnership of foreign corporations that will always put profit over
the public good. These are companies which have structured themselves to somehow avoid paying
tax money which was handed to them by the AER for that precise purpose. The customers which
care about the future of the nation and wish to invested in technology to act efficiently are losing
out due to the changing goalposts presented by the companies which set the incentives but now
don’t want to pay what they owe to the public.
Finally, there is another aspect of churn to consider, and that is in the future design of our electricity
supply and investment in large-scale solutions. Fledgling energy markets are certainly over-run by
larger players with larger interests than residential load control. As I noted in my submission earlier
today to SA’s Royal Commission investigating the future of Nuclear Power in the state, it is important
that the risks of changing economic conditions are not put onto the public through methods such as
guaranteed generation rates ten years into the future. We must learn from the mistakes of
Germany and other European countries who are now beholden to inefficient generators due to
contractual guarantees made on the assumption that prices would remain similar to current ones.
With renewable energy generation rates estimated to be as low as 2.5c/kwh currently, Germany
pays about twice that to its new coal plant. It is a virtual consensus that this contract was a mistake,
yet current nuclear projects in Europe with 10-year lead-times are also set to receive guaranteed
rates upon completion. When it comes to renewables, our leaders cry “let the market sort itself
out”, so I would simply ask that the same policy apply to Nuclear. To publicize risk for private profits
is irresponsible, unsustainable, and leads to inefficient markets for all energy products and services.
Thank you for the opportunity to submit these thoughts. I apologize that I have not had the time to
make revisions to make points clearer and correct errors. I would gladly honour any request you
may have for me to expand on these topics, in public or in confidence. I am aware that citations are
missing, but should there be doubt about any claim I will gladly reply to a request for the source. I
hope that this has at least provided the Commission with some topics for further exploration.
Sincerely,
John Herbst
Port Adelaide, SA