How fixed electricity network prices will cause a “death spiral”  

Stephen King, Professor of Economics at Monash University, has published an article outlining trends placing upward pressure on electricity prices, resulting in what he calls the “death spiral”. Responding to The Australian Energy Market Commission (AEMC) Strategy Priorities, King outlines the conflict between the variable price that consumers pay for energy and the fixed costs of maintaining the network.

Our electricity grid infrastructure maintenance costs are covered by increasing the variable price that we all pay for electricity. Consumers pay more if they use more electricity and less if they conserve energy or invest in more efficient technologies or install solar PV systems to generate their own. The remaining fixed price of maintaining the network thus forces the variable price of energy to rise, and those that are hardest hit seek ways of lowering their bills.

Therein lies the problem.

“Of course the rise in price encourages more consumers to adopt power-saving technologies and to install PV systems. So these consumers also reduce their consumption of traditional power,” King explains.

Heavy consumers subsidise a greater percentage of the network operating costs than moderate users, a situation that divides consumers into two groups, “haves and have-nots” as King labels them. In an effort to reduce their energy costs, the “haves” turn to methods of reducing their expenses (LED lighting, solar panels, solar heating/cooling) which spreads the base-level maintenance costs across an even smaller pool of “have-not” consumers, again forcing the price of electricity up. And so on as consumers plunge into the “death spiral” of increasing energy costs.

Finding a solution is difficult. One option would be to have the variable spread of network costs turned back in to a fixed price and all consumers connected to the grid pay an equal share. Fortunately for solar PV customers, recent political turmoil works in their favour. “Network costs make up about 50% of our power bills. It would take a brave minister to tell all those consumers who have spent a lot of money installing solar systems that the savings they thought they would receive have just been reduced by about 50%.” Similarly the proposal would punish lower income families who would then be paying the same network fee as the wealthy regardless of how much power they consumed.

An alternative solution would be to break the regulatory contract between the states and the network operators. “In other words, tell the network owners that, even if they have efficiently built a network based on government-set standards to the government-announced predicted levels of power demand, the government is not going to allow the network owners to receive appropriate compensation for the costs of building the network.” This would mean short-term pain as the incurred costs are absorbed by the taxpayers, either directly in states where the government owns the network or through compensation paid to private network operators (namely, Victoria and South Australia) as they seek compensation for breach of contract.

The lesson to take from this situation, explains King, is that state governments thinking of privatising their network need to consider the pricing problem before doing so. Secondly to the network operators, “don’t assume customers have no options because as technology changes, options appear. Fixed costs need fixed charges.”

But at least we’ll avoid the death spiral.