Pearls and Irritations

The need to restructure energy planning and regulation in Australia has been apparent for over a decade, since households and businesses began rapidly installing solar panels on their roofs, flipping the traditional one-way, large-scale supply of electricity into a two-way, consumer-led transition. There needs to be thorough expert consideration on how best to facilitate this transformation.

On 16 September 2024, the Senate established the Select Committee on the Energy Planning and Regulation in Australia to inquire into and report on the institutional structures, governance, regulation, functions, and operation of the Australian energy market.

The complexity and fragmentation of Australia’s energy market governance presents several challenges, including status quo bias, a predominant focus on large-scale generation and supply, slow-moving regulatory processes, and a tendency to prioritise industry preferences over the public good. These issues are common in regulatory systems and are particularly pressing for consumers, especially given the urgent need to reduce carbon pollution.

To quote the late Professor Kirk Smith from the University of California, Berkeley: “The rich will find their world to be more expensive, inconvenient, uncomfortable, disrupted and colourless; in general, more unpleasant and unpredictable, perhaps greatly so. The poor will die.” Many of us are aware that we are already witnessing these ramifications.

At present, the political focus in Australia is on living costs rather than the serious implications of an impending climate crisis. With this in mind, some reflections on the cost of electricity are worthwhile. Discussions around electricity costs sometimes concentrate on the upfront costs of new generation. In terms of the generation component of electricity bills, the following facts are salient:

1. There are capital costs associated with building new generation and storage, as well as implementing flexible demand solutions.

2. Capital investment is necessary as Australia’s aging coal fleet is nearing the end of its operational life.

3. The most economical generation sources are those utilising free fuels, namely wind and solar.

4. We will need to consider additional costs related to electrifying gas usage and transportation, as well as replacing fossil fuel exports with cleaner alternatives such as green ammonia and green iron.

When evaluating the capital costs of generation, it is essential to remember that we cannot compare them to a scenario without emissions reduction targets; that is not a feasible baseline. We are beyond pollution-as-usual.

It is also important to recognise that generation constitutes only about one-third of the average electricity bill.

The largest portion of the electricity system’s costs stems from transmission and distribution networks, which currently have a
total Regulated Asset Base of $105.4 billion and contribute the largest portion of consumer bills. The network requirements will substantially influence the cost differences among future electricity system plans. There are three major network distinctions which are important here:

1. New interstate transmission lines—or interconnectors—are megaprojects, representing the most complex and costly solutions.

2. Transmission extensions and upgrades within states to harness wind and solar resources in regional areas tend to be shorter and less costly.

3. The potential within distribution networks (the local poles, wires and substations). As the Chair of the Australian Energy Regulator (AER) has noted, these networks are currently operating at an average capacity of 43% with considerable headroom for more distributed energy resources.

Imagine the possibilities if we were to expedite the uptake and integration of distributed energy resources such as rooftop solar, electric vehicles, and smart appliances. My analysis for the Institute for Energy Economics and Financial Analysis (IEEFA) suggests that this could yield a net present value benefit of $19 billion by 2040 through reduced centralised generation and storage costs and lower transmission and distribution expenses, as well as $10 billion in reductions in consumer bills due to decreased supernormal profits in generation.

It is essential that we examine costs and benefits holistically, looking at the whole system. This includes how to assist consumers to replace expensive reticulated fossil gas and internal combustion vehicles.

The task is to explore how we can remedy and, where necessary, redesign energy laws, regulations, and institutions to ensure the delivery of clean electricity and the electrification of Australian households, businesses, and vehicles as swiftly as possible, and in the worst case, consistent with Australia’s international commitments. Achieving this within the two-month timeframe of the Senate Inquiry may be quite challenging, and so further, independent examination by the Productivity Commission is recommended.

This article is based on Dr Kuiper’s opening remarks to the Senate Inquiry. Recordings of all evidence to the Inquiry is available online and submissions can be read here.

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