Picture ‘remains a poor one’

A speech about the “enormous pain” for consumers in our “complicated and undoubtedly political” energy market by Rod Sims, chairman of the Australian Competition & Consumer Commission, to the Energy Users Association earlier in May deserves more media attention than it got — which is certainly a lot less than the ongoing  stoush between the Coalition federal government and AGL Energy over Liddell, a sideshow for most consumers in the here and now.

Even so, I doubt the big players in the energy sector and their lobbying bodies missed Sims’ tart comment, reinforced in a media statement about the talk, that “the market is working extremely well for energy companies, but is working badly for commercial and industrial users. It is (they) who need us to find solutions; the energy companies don’t have as strong an incentive to fix the problem.”

The commission’s report on electricity at the end of next month will surely stir the pot to a much larger extent, but, in the meantime, his EUAA commentary contains stuff that needs to be better appreciated by the general community, who are not as seized as they should be, I think, of the fact that (as Sims puts it) properly managing energy policy is “one of our defining economic challenges for the century.”

Not surprisingly, given his audience, Sims’ focus for the talk was on “C&I” – commercial and industrial customers, who account for 60 per cent of the east coast power market and half the gas supply share versus 25 per cent for households.

Apart from the obvious large factories, these consumers include small industrial firms, financial services, commercial building services, construction and retail services, public services and agriculture – the “C” element making up 26 per cent of overall demand.

The “C&I” sector is characterized by usage of more than 100 megawatt hours a year and its members copped a 28 per cent rise in “real” (that is, inflation adjusted) power costs over the best part of a decade to 2015-16. Sims is holding on to the latest numbers for his new report but observes that the big jump in wholesale prices in the NEM in the past 18 months has added “significant pain.”

He points out that “business across all sectors has faced even higher increases over the past 12 months, following renegotiation of long term contracts.”  He adds:  “Many of these businesses cannot pass on the increased costs and are considering reducing staff or relocating overseas. Some businesses have even been forced to close. This is a terrible outcome for these companies, their staff and, ultimately, for the country.”

Past over-investment in networks, he says, is “locked in” and will burden all consumers “for decades” without remedial action.

And then there is the “double whammy,” which Sims declares to be unique to Australia, of gas becoming more frequently the marginal (ie price-setting) source of electricity (especially in South Australia and Victoria) at a time of shortages in supply.

There are other factors, too. Sims comments: “The third area (affecting cost increases) is environmental or ‘green’ schemes aimed at achieving sustainability objectives. Over the past decade, various State and Territory-based environmental schemes have been introduced. For example, in most NEM regions early adopters of solar PV were offered stunningly generous feed-in tariffs of up to 60 cents per kWh. These have been of direct benefit to recipients of the feed-in tariff (solar PV customers) but the costs of the schemes have been passed through to all electricity users. Thankfully, these schemes are generally closed to new customers or have ended.”

And then, of course, there are retailer charges, the butt of so much political and media attention in the past year. They are not as important in the “C&I” sphere as they are for householders but you can be sure they will get a large amount of further fuss next month and thereafter.

Naturally, Sims used the EUAA talk to canvass the broad issues affecting the east coast gas problems, noting that they are expected to be “especially acute” for “C&I” users in South Australia, New South Wales, the ACT, Victoria and Tasmania.

“The ACCC,” he says, “does not weigh into the debate about the environmental issues surrounding (gas exploration) restrictions, but it is our job to point out the consequences of blanket bans on projects, including on conventional reserves, in the form of significantly higher gas costs. (They) also prevent exploration to confirm the existence of gas reserves that, on a robust cost-benefit analysis, would improve consumer outcomes.”

The picture, he adds, “remains a poor one” for “C&I” gas users, the southern market is “incredibly tight” and the issue is “critical,” noting that “at present, Australia’s east coast gas market strongly favours those with gas over those who want it – this must change and on many fronts.”

Considering that the “C&I” sector is a huge source of Australian employment, the impacts canvassed by Sims ought to be top of mind in public debate but they tend not to be in the media accessed by the millions. Back in September, for example, comments by the Australian Chamber of Commerce and Industry received passing attention in the business media but not otherwise: “”We risk a double effect,” the chamber said, “with energy prices hitting investment decisions, affecting demand for labor while also putting pressure on margins impacting the affordability of wage rises.”

With important elections lying ahead federally and in Victoria and New South Wales, this stuff, it seems to me, needs to be far higher on the ladder of serious debate (which is not how I would categorize the dominant Punch-and-Judy show) than it is.

PS: In talking to journalists after the EUAA address, Sims said something that should also be highlighted: “The ‘national energy guarantee’ is not the main game. It’s important but it’s not the main game.”  The bigger picture, he added, is also network costs, the cost of green energy schemes and rising generation and retail costs. There are a few walls I’d be inclined to write this on.

 

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