Power shakeup

With the implementation of the carbon tax just around the corner, Australia’s big energy players are taking drastic action to cut costs and streamline efficiencies. From July 1, 2012, Australians will begin paying $23 per tonne of carbon – a figure that is expected to raise some $7.7 billion for the government in one year alone and place increasing pressure on the country’s energy infrastructure to keep pace with the push for more eco-friendly generation sources.

In the past two months alone, Tasmania and New South Wales has announced sweeping changes to the structure of their power industries, while in Western Australia, an $8.5 million plan to upgrade the state’s power infrastructure has been quashed to prevent even greater price rises for power in the state.

In this issue of Energy Source and Distribution we take a look at New South Wales, Tasmanian and Western Australia’s cost-cutting plans and ask what the implications will be for the rest of the country.

NSW distributors to merge

New South Wales will merge three of the state’s electricity distributors in a move that will save taxpayers $400 million but cost around 800 jobs.

Under the plan, announced by Energy Minister Chris Hartcher, Ausgrid, Endeavour Energy and Essential Energy will all be merged into a single state-owned organisation, with middle management and other duplicated roles slashed as part of the streamlining. The savings from the move have been earmarked for increased energy rebates for low-income consumers.

“The planned efficiencies do not depend on cuts to frontline positions or services,” Mr Hartcher said. “Maintaining frontline services and jobs is a priority for this government. This reform is about making sure taxpayers and electricity consumers get value for money.”

It is planned for the three companies to be merged under one corporate structure, however they will retain their existing branding. The combined workforce of 13,000 will be cut by 780. The merger does not include high-voltage transmission network TransGrid, which will remain a separate business.

Savings in the streamlining will allow more subsidies under the Low Income Household Rebate, which is currently applied to around 700,000 consumers. More than 540,000 families would be eligible for the new Family Energy Rebate, according to Mr Hartcher, which would start at $75 this year, and rise to $150 by 2014.

But Mr Hartcher said bigger savings would be passed on to all 3.2 million consumers as the reform uncovered inefficiency and duplication.

Energy chiefs are New South Wales’ highest-paid public servants, with Ausgrid boss George Maltabarow earning $882,688 in 2011 and Endeavour Energy’s Vince Graham $736,000. Under the merger, the three boards of directors presiding over the energy companies will be cut to one and the government will dump many of the union officials that it believes are obstructing energy reform.

Government sources expect union opposition to job losses from the restructuring.

Mr Hartcher said the changes would significantly reduce the ability of the three businesses to “gold-plate” their networks through unnecessary investment. The model would cut administration and corporate costs by standardising operations.

The merger will begin on July 1 and follows six months’ work by the Electricity Network Reform Taskforce.

Mr Hartcher formed the taskforce to crack down on waste and mismanagement in the electricity industry, on suggestions the average household bill could hit $2300 by 2014.

The Sunday Telegraph revealed last year that an O’Farrell government intended to merge the three companies and introduce energy rebates for 1.4 million families. The companies have been accused of “gold-plating” their electricity networks and passing the costs on to consumers through higher prices.

The average household bill has risen 37 per cent in the past five years, with the network component increasing by 10 per cent a year in that time.

Consumers face rises of up to 10 per cent from July 1 as well, with the federal carbon tax feared to cost 10 per cent on top of that.

In NSW, disconnections rose 17 per cent to 18,651 during 2010-11 as families struggled to meet energy costs.

“The fact is that electricity bills have increased sharply in recent years and the experts tell us that there is more pain to come,” Mr Hartcher said.

“The cost of distributing electricity – the network costs – accounts for more than half of the increase in household electricity bills. Although we can’t change the increases heading our way thanks to federal Labor’s carbon tax, we are doing everything we can to cushion the blow by reducing the cause of price rises from network costs,” he said.

Tasmania’s power industry dismantled

Tasmania’s expert panel examining the state’s power industry has recommended sweeping changes which would include the dismantling of local giants Hydro Tasmania and Aurora Energy.

The Electricity Supply Industry Expert Panel claims the reforms would deliver up to $240 million in economic benefits over eight years.

The three-member panel recommended the reform following an exhaustive 18-month review into the energy sector in Tasmania amid concerns power prices would rise by at least 20 per cent on July 1.

The panel made four key recommendations including:

• Splitting Hydro’s power generation from its financial trading function, which would then be transferred to three state-owned entities. The panel said Hydro’s current dominance “poses a substantial barrier to sustainable retail entry”.

• Cutting Aurora’s retail business into three equal parts, and at the same time declaring full contestability.

• Merging infrastructure provider Transend Networks with Aurora’s distribution business into a single state-owned entity, with savings estimated at $8 million a year.

• Selling Aurora’s Tamar Valley Power Station, purchased back from Babcock and Brown amid fears of state-wide blackouts.

The panel’s two 750-page reports said only this combination of structural reform would provide genuine retail competition in the state.

Aurora Energy chief executive Dr Peter Davis acknowledged that the report recommendations would have major implications for the company. He also admitted that the market shake up could lead to cheaper power prices for consumers.

“Aurora is at the frontline of the energy sector in Tasmania and we understand the difficulty our customers are facing with prices increases because we see it everyday. We have been clear and consistent advocates for change even if potential changes have major consequences for our company,” Dr Davis said.

“I am pleased that the Expert Panel has also noted Aurora’s efforts to improve efficiencies and commended our recent regulatory proposal to the Australian Energy Regulator, which it said would have the effect of moderating electricity distribution costs.”

Also responding to the report, Hydro Tasmania CEO Roy Adair said the company being stripped of its trading arm was a poor decision.

“In our perspective the costs and risks far outweigh any benefits,” Mr Adair said.

“I am particularly concerned that the options proposed have not been fully evaluated, are unjustified, are costly in terms of implementation and value destruction and have an unacceptably high risk.”

However, Mr Adair also said Hydro Tasmania would work with government to secure the right balance between a safe and reliable energy network and the lowest possible power prices.

Greens MP Kim Booth said he expected the three government businesses to resist change.

“We’ve already been approached by Hydro,” he said.

According to the Electricity Supply Industry Expert Panel’s chairman, John Pierce, however, Hydro Tasmania will remain viable under his plan.

Mr Pierce said Hydro’s commercial success is important but the company must be working in an environment that benefits Tasmania’s power consumers.

“Are you going to make decisions based on the best commercial interests for the Hydro, or what’s in the best long-term interest of Tasmanian consumers and the Tasmanian economy?” Mr Pierce said.

“Depending on where you sit on those two questions will then send you down two very different paths about how you structure the industry.”

In response to the draft report, a number of large interstate retailers were also positive about entering the Tasmanian market.

The panel believes full retail contestability could cut 5 to 10 per cent from Tasmanian household power bills which, by July 1, will average about $2663 a year.

Energy Retailers Association of Australian chief executive Cameron O’Reilly said there was increasing interest in the Tasmanian energy market.

“Given the right market environment, there is good reason to believe competition in Tasmania has the potential to flourish,” he said.

The Australian Energy Market Operator said Tasmanian customers had not achieved the same benefits of competition as in other regions.

The Tasmanian State Government is scheduled to release its position on the proposals at the end of May.

WA power upgrade rejected by regulator

Western Australia’s economic regulator has rejected plans to spend $8.5 billion to upgrade the state’s power infrastructure, in a move aimed to prevent large price rises for power in Western Australia.

State-owned Western Power applied to charge higher tariffs to recoup its proposed infrastructure investment, but the WA Economic Regulation Authority (ERA) says only around $6 billion of the investment is justified.

The ERA said its draft decision means that tariffs based on average network charges should fall over the next five years by 0.4 per cent each year.

Western Power argued that its part of the grid was nearing the end of its useful life and needed a major upgrade to cope with the rapidly expanding Western Australian economy.

Network tariffs make up 40 per cent of power bills.

Do Australians really have world’s highest electricity bills?

Energy suppliers have slammed a report that suggests Australians are paying some of the highest power bills in the world.

The report from the Energy Users Association of Australia (EUAA) found that South Australia, New South Wales, Victoria and Western Australia pay more for electricity than most of the developed world, with the exception of Denmark and Germany.

It says domestic electricity prices have risen by 40 per cent since 2007 and will jump another 30 per cent by 2013/14.

But the Energy Supply Association of Australia, whose members include CitiPower, Energex, InterGen, Origin and TRUenergy, said the EUAA report is “sensationalist”.

Chief executive Matthew Warren said it was designed for “shock and awe” value rather than to help find solutions to rising energy prices.

“We all know energy bills have been rising and they will increase further in the future,” Mr Warren said. “But many of the claims in this report are inaccurate or exaggerated.

“The reality is Australia doesn’t have the most expensive energy prices in the world.”

Adding fuel to the EUAA’s report however, was a new draft determination by the Independent Pricing and Regulatory Tribunal (IPART) that allows for an average price increase of 16 per cent across New South Wales (including inflation) from July 1.

Average price increases will vary for customers of the three regulated electricity retailers as follows:

• Energy Australia customers will see an increase of 19.2 per cent, which translates to an extra $6.50 per week or $338 per year.

• Integral Energy customers will face an increase of 10.3 per cent, which translates to an extra $3.51 per week or $182 per year.

• Country Energy customers will pay 17.6 per cent more, which translates to an extra $7.32 per week or $381 per year.

Responding to IPART’s determination, Energy Networks Australia said there were many factors responsible for rising electricity prices in New South Wales.

“The largest single increase is due to the carbon price which will add 9 per cent to average bills,” ENA CEO Malcolm Roberts said. “Upgrading an ageing electricity network in New South Wales and subsidising solar panels are also adding costs.”

In just two years, for example, the annual cost of the Solar Bonus scheme will increase from $100 million to $400 million. The scheme is funded from a levy on networks.

The state is also undergoing a major re-investment in its ageing electricity infrastructure.

“In 2007, the previous state government introduced higher reliability standards requiring network businesses to accelerate replacement of ageing assets. Many of these assets date back to the 1960s,” Mr Roberts said.

“An independent report to the NSW government has estimated that more than 40 per cent of investment by networks is devoted to replacing assets.

“The result is more reliable electricity supply but at a cost.

“Another pressure on network infrastructure is the need to meet rising peak demand. As households add more energy-hungry appliances, the capacity of networks has to be expanded to meet short-lived spikes in demand.

“It is helpful to see IPART confirm that higher reliability standards and rising peak demand are key factors pushing up infrastructure costs. IPART is right to highlight the need for policy and regulatory changes, such as wider use of smart meters,” Mr Roberts said.

“It is less helpful to see familiar but incorrect claims about how the national system of network regulation works. The evidence is clear – network charges are being driven by real market pressures. Changing the rules will not change the real factors fuelling higher prices.”