Outdated local electricity grid regulations put Australians at risk of overinvestment

May 31, 2024 – (IEEFA Australia): The The Institute for Energy and Economic Financial Analysis (IEEFA) says Australia risks missing a huge opportunity to reduce network costs and reduce electricity bills if it does not reform the economic regulation of distribution networks.

Distribution network charges typically make up 25-35% of electricity bills. The over-investment or ‘gold-plating’ of distribution networks has historically resulted in an increase in the Regulatory Asset Base (RAB) per customer by 60% between 2006 and 2015, resulting in significant increases in customer bills. Currently, many network companies propose increasing investment expenditure by over 20%.

However, distributed energy resources (DERs) such as solar power, batteries and smart devices can provide grid services such as congestion management, voltage control, increasing reliability and network deferral. Enabling DER to provide network services can help everyone reduce network costs.

AND new IEEFA report states that unless reforms to existing regulations are made, the same costly mistakes of the past may be repeated, with consumers bearing the costs.

IEEFA recommends that the Productivity Commission review the basic principles of economic regulation of distribution networks.

Dr. Gabrielle Kuiper, IEEFA guest contributor and report author, says: “The use of distribution networks is falling as more households and businesses install solar panels on their roofs and purchase more efficient equipment. As a result, consumers pay more for a service they use less often.

“We should pay attention to foreign counterparts who are reducing the costs of distributed networks. In the UK, for example, economic regulation allows consumers to pay to reduce grid congestion by feeding electricity back into the grid from a battery on demand.”

In the UK, owners of DERs, such as electric vehicles and smart appliances, can earn up to £33/kW/year in some locations. A 10kW home battery can cost up to £331 per year. By August 2023, UK distribution networks have already contracted 2.4GW of flexibility services for 2023/24.

The fundamental issue facing network economic regulation is whether distribution networks can be challenged. The IEEFA report details evidence that distribution networks are no longer a monopoly in remote areas of Australia. In southwestern Western Australia, Western Power has decided to convert over 52% of its network to an ‘autonomous network’, delivering electricity through autonomous power systems (SAPS) and microgrids.

Network expansion and replacement also become moot as DER could reduce the need to build an additional network by providing network support. There have been previous attempts at DER providing network services in Australia, including: at Projects Networks Renewed, CONSORT, Edge, Edith and Symphony.

NOTES FOR EDITORS

Dr. Kuiper identifies an emerging and worrying risk of future over-investment comparable to that seen around 2006-2015, whereby distribution networks are demanding higher capital allowances, potentially leading to increases in both RAIs and electricity bills .

The main issues related to the current economic regulation of distribution networks are:

• Capital expenditure preferences in spending decisions by Distribution Network Service Providers (DNSPs), likely due to apparently generous returns.
• The regulations have not been updated to add emission reductions to the National Electricity Target (NEO).
• Risk of repetition of overinvestments from 2006-2015 as a result of poor network planning for electrification.
• Lack of support for innovation.
• Windfall profits resulting from the implementation of the regulation and from the regulatory body’s failure to properly manage and monitor the performance.

Read the report: Reforming the economic regulation of Australia’s electricity distribution networks

Contact with the media: Amy Leiper, tel. 0414 643 446, (email protected)

About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) researches issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diversified, sustainable and profitable energy economy. (ieefa.org)