Is gold-plating of electricity infrastructure an issue?

With today’s sudden media focus on the “gold plating” of electricity infrastructure driving excessive retail price rises, it seems the Federal Labor government has finally woken up and read its own carbon policy blueprint. From the Garnaut Review:

There is a pressing need to revisit the state-owned distributors. There is an unfortunate confluence of incentives that may be leading to significant over-investment in network infrastructure. It is clear from market behaviour that the rate of return that is allowed on network investments exceeds the cost of supplying capital to this low-risk investment. The problems are larger where the networks continue to be owned by state governments. State government owners have an incentive to over-invest because of their low cost of borrowing and tax allowance arrangements. In addition, political concerns about reliability of the network, and about the ramifications of any failures, reinforce these incentives.

A comparison of costs between Victoria, where the network providers are in private hands, and New South Wales and Queensland, where the network providers are in state hands, provides compelling evidence to support this contention. While there are likely to be genuine differences between the states that explain some of these divergences, it is unlikely that these differences explain the majority of them.

Distribution networks are, of course, natural monopolies. So a strong regulatory regime is required to prevent price gouging.

Given the ceaseless attack on the carbon price, why on earth has it taken so long to make this an issue?

Comments

  1. “Given the ceaseless attack on the carbon price, why on earth has it taken so long to make this an issue?”

    The Carbon dioxide tax has provided such a target rich environment , it has taken this long to get around to scrutinize the distributors.

    I see the law of unintended consequences is alive and well with our Govt.

  2. Because we have a reactive government, driven by focus grouping and opinion poll numbers, aided and abetted by our MSM opinion editors (with some exceptions)

  3. As Garnaut mentions, at least some of the difference is driven by factors other than state vs private ownership. Particularly in QLD and NSW, the distribution network must stretch to cover an area that is geographically huge compared to Victoria’s tiny land mass.

    There are probably more steel towers and miles of power line in my part of Queensland than there is in all of Victoria outside of the Melbourne city limits. South Australia’s state-owned network is mostly concentrated in the small south-east corner where 95% of the state’s population lives (since most of the state is a harsh desert) while in Queensland, the population is far more decentralised and the network stretches around 2000km from the Gold coast to Cairns and beyond.

    State vs private is probably a bit of a straw man issue in the case of the grid since comparing Victoria to other states is not entirely comparing apples with apples.

  4. Gold plating my ass.

    How about urban development and carching up with decades of neglect?

    Plus, the design (overhead rather than burried) to me seems to have significant implications as the network grows.

  5. Jumping jack flash

    I think most people accept the official story which is there has been a long period of underinvestment which needs to be made up. This is expected to continue until 2016.

    I believe this was largely due to the cheap air conditioner boom of 2000-2006. I believe electricity companies decided that usage would continue to rise exponentially forever, and planned their infrastrucure upgrades based on these projections.

    However, I have recently seen figures showing a stagnation and decline in electricity usage from around 2008. Perhaps more people are going off grid, or not turning on their cheap air conditioners. Interestingly coinciding with the first of the massive price hikes, and the GFC.

    So the act of upgrading the infrastructure is causing people to use less electricity, negating the reason for upgrading the infrastructure.

    Perhaps their plans should be re-evaluated based on new projections.

    • Your analysis is reminiscent of what has happened with water prices in the ACT. During the drought, there was a vigorous campaign, backed up with well policed usage restrictions, to reduce water usage. It was so successful that the water prices had to be increased drastically to make up the revenue shortfall. We are still getting stung by the fallout.

  6. How about they stop importing 300 000 + new people every year? Big business wants the new consumers and lobby hard for ever increasing levels of immigration but don’t want to pay for the infrastructure. So as per usual the bills and the inconveniences fall to the plebs.

      • I think Dystopian was suggesting that increased population growth requires an additional investment in infrastructure above that required to maintain it, not that we should work to exterminate human kind from Australia.

        This article (http://www.onlineopinion.com.au/view.asp?article=10137&page=0) from Jane O’Sullivan suggests that the annual infrastructure replacement cost is approximately 2%, which I don’t know enough to argue with. Therefore, if you have a population growth rate of 2% as well you need to pay to replace 2% of your infrastructure every year plus also expand the infrastructure by 2% each year to provide for the population increase. Therefore a stable population has infrastructure costs of 2% a year while an increasing population has costs of 2% + the growth rate which in Australia is well above 1% leading to a near doubling of the costs.

        • Population is at the heart of every issue. We all concentrate on GDP growth when really GDP growth per capita would be a better indicator.
          Higher population only serves lazy big businesses which can’t find a better way to grow their profits than to have more customers.
          We also slug ourselves with infrastructure costs and water down the wealth generated by our primary industries.

        • The opinion is interesting, but is there a direct linkage between “population growth” with significant proportion being temporary residents (if international education sector recruits better than now), and need for a definite amount and type of infrastructure?

          For example do not the majority, i.e. Australian citizens and permanent residents also use the same infrastructure?

          What incentive is there for Australia to innovate and improve individual carbon footprints, urban design and transport if we simply do not allow any international students, temp workers, dependents and immigrants into the country (while our baby boomers start retiring)?

          Arguments for stopping what some view as “runaway population growth” are compromised by Australians’ own lifestyles i.e. predilection for large houses and cars in suburbs without adequate public transport etc. while ignoring future issues of energy and oil supply and price?

          • I am not sure but are you arguing that an influx of immigrants forces us to confront our profligate ways? Is that some kind of “Destroy the village to save it” gambit?

  7. Diogenes the CynicMEMBER

    It is amazing that the Federal Government did not cotton onto to this issue earlier…from what I understand the rising prices are baked in until 2014/5 when the next round of “gold-plating” authorisation begins.

    Spending a fraction of the money invested in wires and poles on demand management, ie time of use tariff, smart meters, smart meter displays inside houses, education regarding ACs and electricity use, better insulation in housing etc would eliminate much of the 2-3 day peak across the year that drives the “need” for all of this gold-plating investment. We need to move to a decentralised grid anyway, $45 billion would be an excellent start, rather than ploughing it into more wires.

    The interesting thing is that if nothing happens the market will soon come up with storage solutions that will enable residential and small business units to go off grid as it will save them money – there will then be less and less customers to pay for the “gold-plated” grid.

    • Jumping jack flash

      +1. There certainly needs to be decentralisation of generation. 45 billion would do nicely to set up at least one more generator, possibly more, of whatever variety they decide.

      They’re shooting themselves in the foot at the moment by only upgrading the infrastructure and passing the costs onto the consumer. The consumer is just going to use less, which removes the need for such extravagant upgrades.

      • Decentralisation of the network is one of the major problems, the preliferation of PV’s and excessive feed in tariffs have led to a situation where a network is under utilised during times when the PV’s are producing power but still needs to allow for peak demand at times when PV is not available (Due to PV’s the poles and wires are now not utilised efficiently and those without PV are subsidising those with). Until decentralised storage becomes cheap and efficient enough to permanently lower peak demand cycles this will continue to be a problem. Government policy through the feed in tariff has led to a disater here.

  8. The more I look at that chart, the more I think that the most noticable corellation is that the greater the physical area the network must cover, the more it tends to cost.

    I see that Victoria has around half-a-million more people than Queensland these days (thus more taxpayers) and three-quarters of them are squeezed into the Melbourne area. As I said earlier, compare that with the absolutely huge area and much more decentralised population that the network in Queensland needs to cover. Would simply turning the system over to private providers bring the cost down to Victorian levels without compromising service and system integrity over the longer term? Looks pretty doubtful to me.

    The network needs of Queenland and Victoria are simply so vastly different that attempting to compare the two as though they were much the same thing is either careless or disingenuous and is obviously motivated by a pro-privatisation agenda.

      • The reveiw pays some small lip service to those points and then dismisses them with a wave of the hand. Did Garnaut even bother to mention that around 75% of Victorian electricity consumers live in an area with a 100km or so radius while Queenslands electricity consumers are spread out along a 2000km long stretch?

        You don’t think thats going to require rather more electricty infrastructure per consumer? Garnaut apparently doesn’t since he doesn’t appear to think that the huge differences between Queensland and Victoria in that respect even rate a mention. No, just the implication that privatisation will produce superior results – no evidence needed.

        With more infrastructure needed to reach a smaller number of consumers, how profitable would it be as a private enterprise? Would the same level of service be maintained in less profitable areas?

        Leave it in public hands.

  9. Rumplestatskin

    I agree that these large electricity network investments need better assessment, scheduling, technical input, and regulation, regardless of the ownership structure. After all, given the monopoly structure of the network, there will be perverse incentives for private and public owners.

    But there are many other factors at play, including service standards etc (which have been tightened up lately).

    • Cool thanks AB.

      I’d be amazed if even the new forecasts are correct given the coming/ongoing de-industrilisation and in particular I’m thinking manufacturing (cars plus more), steel, oil refining, maybe aluminium. As our cost base increases it will IMO further reduce our energy needs; consumption could crater?

      On top of that what effect is solar having on the demand? I for one have upgrades all my white goods to 5 star to save and how many others have done the same?

      • I’d doubt that solar is having much effect now, but I think it has a lot of potential to change things in a country like Australia if the cost per cell keeps falling, and especially if cost effective storage becomes available, many could choose to go off-grid.

    • Yes, today’s SMH Op-ed page provided a great contrast – Gittins! droning on and on about FWA vs WorkChoices and Michael West talking about real policy issues that governments can act on.

  10. It is interesting to compare the amount of money that is being poured into electricity infrastructure, with virtually no (until now) public interest or controversy, with the amount of money being spent on the NBN. The NBN is a smaller amount spent over a longer period of time (I believe – happy to be corrected) but attracts so much opprobrium yet (for my money at least) has so much more potential (Yes I realise that’s a controversial opinion but some of my friends had finished watching Breaking Bad on Monday night before I’d even managed to download it!).

  11. It couldn’t possibly have anything to do with the fact that most State governments are now Liberal while the Fed is Labour.

    Liberal can conveniently blame the previous Labor state government for the mess while jacking up electricity prices precisely when Fed Labor introduce a carbon tax.

    There hasn’t been any flood of network failures and demand is actually reducing, yet prices have risen 70%???… it’s become a political football used by bankrupt state governments to ransack the publics pockets while simultaneously sending out anti-carbon tax propaganda.

    This system of government is just ridiculous!

    http://bit.ly/OOyrm2

    • Hear, hear. State Governments are well past their use-by date. The services they deliver are overpriced and ineffective (public transport, water) or they have little or no interest in delivering them (public schools, public hospitals). We should start planning for large regional council conglomerates overseen by the Commonwealth. I know that local councils are hopeless with money but having three layers of government is a 19th century relic and completely unwarranted.

  12. Isn’t expensive electricity infrastructure just the carbon tax we should have had in the first place? Either way, it makes electricity more expensive, its just that the extra money goes to the contractors upgrading the infrastructure instead of low income households.

  13. I wonder how this “gold plating” is going to look in twenty or thirty years, when a substantial chunk of the population has PV systems and are plugging in their electric cars every night to charge ?

  14. Because of decades of neglect, electricity infrastructure (and all other infrastructure) needs significant upgrades. Largest portion of investment money goes for replacement and maintenance – not expansion. Reliable electricity supply is directly supporting around 80% of GDP which means that simple “return on investment” calculations we see around are simply BS. In addition, new safety, and local council rules (rules about new substation appearance and prohibition of overhead transmission line construction) pushes prices up significantly.

    Politician and economist’s view of “gold plating” if clear example of short term interests. It costs much less to build proper and oversized (at the time) substation at once than to come back every few years and do small upgrades. We all understand this issue on other infrastructure projects (building 8 lane free-way is much cheaper than building two 4-lane free-ways ten years apart). Looking through these eyes the best example of “gold plating” would be Sydney Harbour Bridge. Oversized three time when constructed, enabled economy to flourish and city to expand. If it was built smaller for 1930s needs we would needed to build three more bridges since than at cost significantly higher than cost of one “gold plated” bridge.

    On top of all this, federal government plans to charge exuberant fees for decreased reliability from 2014. For example, distributors will be paying millions of dollar in fees every time few thousands of customers lose power for an hour. They have option to invest in-front and keep network reliable or pay hundreds of millions in fees every year – money that does not improve supply at all.

    In past, electricity supply investments were driven by real need and future projections proven right over the time. Investments were regular and distributed over the time. Since politicians started driving the business in 1990s, investments became random, prices increased and reliably decreased.

    http://www.aer.gov.au/sites/www.aer.gov.au/files/Issues%20paper%20-%20service%20target%20performance%20incentive%20scheme%20-%20October%202011.pdf

    Government is demanding suppliers to improve reliability without giving them right to spend money needed for these improvements. Under these conditions, nobody will ever wanted to buy our distributors even if we offer them to private companies for free.

  15. I suspect the supposed gold-plating of infrastructure isn’t the real issue. It’s merely a convienient political bogey man for the new liberal governments who are ideologically committed to selling the distributors after the next election. After all, it isn’t the distributors who are making money out of the massive spend on infrastructure – it’s the government itself. Each year the NSW state government takes a dividend of approx $1billion from the 3 distributors. If the government wanted lower electricity prices they could have it tommorow – just take a smaller dividend.

  16. “Given the ceaseless attack on the carbon price, why on earth has it taken so long to make this an issue?”

    Lol,lol,lol.

    If we just forget for a moment this governments almost complete ineptitude in introducing policy to date, the TD Securities-Melbourne Institute Monthly Inflation Gauge likely holds the answer – and a frightening one it is for the government!

    “Due to the introduction of the carbon
    tax from 1 July, the price of electricity rose by 14.9 per cent and gas and other household fuel prices increased by
    10.3 per cent”

    Now I know all the brain-challenged have swooped on surveys claiming no impact from the carbon tax but, as McKibbin has persistently forewarned, Treasury modelling is flawed and jumps like these to utility prices will flow through.

    A bit late now for the government to peg it back to the States – and who in their right mind thought Gillard the best option to start the spin…just when we were all enjoying the break!

  17. Second time in a week power has been lost for me.

    I wish they would gold plate the electrical infrastructure around my way.