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Grattan unreliable on electricity networks

March 26th, 2018

The Grattan Institute has just released a report blaming high electricity network costs on public ownership and excessive reliability standards. I commented on a draft of the report, but there wasn’t much change in relation to my comments.

My comments are over the fold. Let me offer the following, slightly ad hominem argument. Grattan has backed the National Energy Guarantee, a radical change in Australia’s energy policy, which was justified mainly by the occurrence of a single blackout in Adelaide. Yet it asserts (without any evidence I can see) that the responses to earlier blackouts in Queensland and NSW represent unjustified “gold plating”.

My comments to Grattan

I should mention that I was involved in the Queensland case as a Member of the Queensland Competition Authority. The sequence of events as I recall it is as follows

1. During the 1990s, there was (as now) a general consensus that the network was gold-plated for excessive reliability

2. In the early years after corporatisation, Energex consistently underspent the investment allowed as recoverable by the QCA, imputing the difference to efficiency gains

3. Following the storms and blackouts in 2004, Energex reversed course, tried to blame the QCA for its previous underspending, and demanded large increases in expenditure, supported by increased reliability standards imposed by the state government

That background informs some of my response to the report

4. The report claims that publicly owned enterprises had special incentives for overinvestment, I see no evidence of this in the record.

5. The point that reliability standards before 2004 were set by networks rather than state governments is a distinction without a difference. These standards were inherited from the period of public ownership.

6. The absence of similar problems in Victoria and SA is primarily a matter of climatic luck – Queensland is much more prone to damaging storms

7. The response to the SA blackout in 2016 inlcuding substantial emergency investment and the Snowy 2.0 suggests that there is nothing special about Queensland and NSW.

8. Based on recent events in Victoria, it seems likely that further distribution failures in extreme weather conditions will produce similar responses. The discussion of bushfires in the report strengthens this view

9. Summing up, the reliability of essential services is always and everywhere seen as the responsibility of governments. In the Australian context, this means state governments.

In this context, I disagree with crucial recommendations of the report

10. The report recommends further privatisation, but no case is made for this

11. Since reliability standards are a matter of political choice, it’s necessary to make the case that standards are excessively high

12. The key problem isn’t the regulated asset base but the fact that the WACC exceeds the cost of capital. That’s why, when privatised, these assets command a substantial premium over the WACC

13. The correct policy response is
(a) to reduce the WACC substantially
(b) to return the entire transmission and distribution to public (preferably national, or joint national-state as with Snowy Hydro) ownership on a statutory authority modle and to abandon the fiction that investment decisions of this kind can be made by profit-driven monopolies (including corporatised GBEs)

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  1. Peter Whyte
    March 26th, 2018 at 12:04 | #1

    I agree, when the regulator allows a guaranteed return on the investment (the transmission system) which is higher than the cost of providing it, then the owner whether private or public will overinvest

  2. Garry Claridge
    March 26th, 2018 at 12:37 | #2

    In the “Conversation” article about the report, this statistic statement concerns me: “… but at significant cost: on average, customers got an extra 45 minutes of electricity a year at a cost of A$270 each.”
    Whereas prior to the network upgrades, we in Maleny experienced significant blackouts often. With one of them lasting four days! Now, blackouts are rare and for short periods. So, for me, it is worth it 🙂

  3. Ronald
    March 26th, 2018 at 14:54 | #3

    As I recall, of all developed nations, only the United States does worse than Australia in reliably supplying grid electricity. I think this would be fine if we were paying prices similar to the United States, but we aren’t. Interestingly enough US states that appear to have the most dispersed populations seem to have low electricity prices, but this might just be a result of my lack of knowledge of US geography and electricity pricing.

    Solar power and battery storage are now so affordable we can take the most difficult and expensive to supply rural homes and communities off-grid, or have their reliance on the grid reduced, at a lower cost than it would be to maintain grid supply that already is not at all reliable by developed country standards. (See Garry’s comment above.)

    So I expect reliability will increase as remote communities are taken off-grid. This may of course be used as an excuse to allow reliability on the rest of the grid to deteriorate.

  4. Tom the first and best
    March 26th, 2018 at 15:08 | #4

    Maybe, in these times of increasingly cheaper solar panels and batteries, the need for the main grid to reach distant towns and isolated properties could be reviewed and replaced with smaller local grids and/or solar and battery subsidies for low to middle income households in remote areas. I read somewhere a while ago that reaching the more isolated parts of the network, combined with uniform pricing, added significantly to power costs in Queensland.

  5. Tom the first and best
    March 26th, 2018 at 15:11 | #5

    My previous post should specify urban Queensland at the end.

  6. March 26th, 2018 at 20:32 | #6

    Another piece of background is that the transition to sustainable energy will imply the electrification of pretty much everything. Without fossil alternatives at the point of consumption, this suggests that reliability stabdards in Australia and the US need to be raised to German and Danish levels. Since they have SAIDI around 10 minutes a year, it’s a change by an order of magnitude. This will cost money. IIRC high reliability depends on complete burial of urban distribution cables.

  7. Ronald
    March 26th, 2018 at 23:56 | #7

    James, while those soggy Victorians and reserved Western Australians (reserved as in they have gas reserved for domestic consumption and not export) may have gas connections its not so common in the rest of Australia to use any energy source in the home except electricity. My parents use LPG for cooking but they’re weird.

    I’m in a population center so blackouts normally never happen and in the rare instances they do people sit around using their laptops and connecting to the internet through their mobile phones. It’s not as large a hardship as it used to be.

  8. Ikonoclast
    March 27th, 2018 at 07:23 | #8

    @James Wimberley

    I’m in favour of complete of burial of urban distribution cables. Along with complete burial of neoliberalism.

  9. Ikonoclast
    March 27th, 2018 at 07:42 | #9

    @Ronald

    I protest. We Queenslanders are much soggier than Victorians. Have you seen our rainfall totals?

    I agree. Gas for cooking is silly except on the back deck where it’s called a barbecue.

    With all our above-ground cables combined with heavy rains and high winds, we Queenslanders have blackouts relatively frequently. We can’t run a fridge in the sub-tropics on a mobile phone and laptop batteries. Domestic solar power is no back-up for blackouts without a great big battery on the wall and a clever inverter as well. Eventually, I will get that wall battery and clever(er) inverter.

    Every region has its challenges. Staying in Montreal in the middle of winter, I used to walk from the shop back to my apartment as quickly as the icy pavement permitted. I wanted to get my milk into the fridge before it froze.

  10. Aardvark
    March 27th, 2018 at 08:56 | #10

    The technical appendix to that report doesn’t demonstrate any compelling basis for the conclusions which are being drawn. The RAB growth occurred due a number of compelling factors including excess demand forecasts by AEMO and inept ex-ante prudency reviews of scope and standard. WACC and government ownership are unlikely to be causative factors of excess RAB growth and the report provides no compelling or statistically robust evidence to that effect. The government owned networks are also those with low connection density covering regional areas and the RAB growth most likely reflects undervaluation of the original asset base (i.e. these regional networks were already subject to subsidies and increasing the DORC valuations would have only increased the size of those subsidies). I suspect if this had been normalised then casual observations on government ownership would be less prominent. However, it is telling that Essential Energy has been able to reduce its FTE count by 38% to now align its opex with that of the private networks.

  11. Newtownian
    March 27th, 2018 at 10:07 | #11

    My only concern with your critique John is you took a report from Grattan so seriously. Maybe things have changed but the last time I looked Grattan’s staff looked to be so intellectually light weight and obsessed only with economic and so of very dubious value.

    ———————————————————-

    But seriously – you are spot on in relation to concerns that so called ‘gold plating’ is actually part of essential protection against ‘hazardous events’ and how neoliberalism’s push to cut everything to the bone makes our society vulnerable to systemic infrastructure failures.

    Failures in the electricity sector are particularly problematic as they can cause cross infrastructure failure cascades which magnify the impacts. The literature on this stuff (which I currently collecting with one particular hazadous event in mind) is not yet comprehensive but there are variious case studies and broader analyses which highlight the vulnerability that independency and complexity confers on out society.

    If you are interested in pursuing this the following might be of interest as they tell the real world story which economics focused groups like Grattan would not have a clue about or more likely not want to know about because they highlights the flaws in their short term economic focused perspective:

    1. The 1998 Auckland power black out – This is a book by a team of Swedish risk managers and far better at passing the laugh test than the official reports. The management failures described make this an excellent study in the failure of neoliberalism driven efficiency and profit maximisation….not least because the Kiwis had to call for expert help because they no longer possessed it……from Oz. The study is also fascinating because it happenned despite the Kiwis having a tick the box civil defense system which seems to have been pretty useless in practice because a. it was too high level in structure and b. being high level it provided not much guidance on how to solve the specific problem which required on ground expertise which had been lost over time.

    NEWLOVE, L., STERN, E. & SVEDIN, L. 2003. Auckland unplugged: Coping with critical infrastructure failure. Lexington, MA: Lexington Books.

    This latter book probably needs to be obtained via interlibrary loan. The others can be sourced via Google/Scholar.

    2. These two studies of the 2002 North American power outage detail how complexity and effciency and probably maximising profits can leave even large grids with much redundancy open to catastrophic failure way beyond the South Australia example

    U.S.-CANADA POWER SYSTEM OUTAGE TASK FORCE 2004. Final Report on the August 14, 2003 Blackout in the United States and Canada: Causes and Recommendations April
    PUBLIC SAFETY AND EMERGENCY PREPAREDNESS CANADA 2006 Incident Analysis Number: IA06-002 Date: August 2006 Ontario–U.S. Power Outage—Impacts on Critical Infrastructure. 67 pp.

    3. An EU metanalysis of how failures in one infrastructure sector cascade onto many others:
    JOHANSSON, J., SVEGRUP, L., ARVIDSSON, B., JANGEFELT, J., HASSEL, H. & CEDERGREN, A. 2015. Review of previous incidents with cascading effects. CascEff Project deliverable report D, 2.

    4. How useful deliberate destruction of grids can been for the military and what a pain in the neck it is to get things working again
    PATTERSON, C. M. 2000. Lights Out and Gridlock: The Impact of Urban Infrastructure Disruptions on Military Operations and Non-Combatants. INSTITUTE FOR DEFENSE ANALYSES ALEXANDRIA VA.

  12. Ronald
    March 27th, 2018 at 10:08 | #12

    I suppose now might be a good time to mention that it is generally not permitted to plug in an electric vehicle that is capable of supplying electricity to the grid. That is, plug it in at all, not just use its ability to supply power to the grid. In Japan they are looking at using Vehicle to Grid to increase grid resiliency. Fortunately, in Australia, we’re not so soft that we want grid electricity all the time and so don’t permit it.

  13. Jandra
    March 27th, 2018 at 11:32 | #13

    The Grattan Institute might as well write prescriptions for the typewriter industry. Comprehending the technological dynamics of electricity generation & distribution has long been beyond the capability of any of its senior management, the various bodies established to attempt to coordinate the industry and/or regulate it. Now it has at last dawned on the GI, et al, that electricity consumers can and do exercise real choices on electricity supply, some ideas are being tossed around. The NEG looks to have a similar prospect for long-term success as NBN’s FTTN. GI’s privatisation option is a pretty ordinary supply-side “reform” at a time when many technological innovations are aimed directly at demand.
    Reminds me of Eileen Shapiro’s excellent book of the 1990s “Fad Surfing in the Boardroom: Reclaiming the courage to manage in an age of instant answers”. 30 years on; still a surfeit of instant answers, precious little managerial courage. Or strategic foresight.

  14. Ronald
    March 28th, 2018 at 09:38 | #14

    Ikono, weather is binary in Queensland, either flood or drought. But in Melbourne they have a third state that they imported from London in 1868 called drizzle. Extremely little rain, but over an extremely long time. Sure, it’s nothing like London drizzle due to shrinkage on the clipper voyage over here, but it means Melbourne dries out less and so is soggier.

    More importantly, it’s a sogginess of the soul I was actually referring to.

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