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Select Committee on Electricity Prices
09/10/2012
Electricity price increases in Australia

BRAZZALE, Mr Riccardo (Ric), President, REC Agents Association

O'HEHIR, Ms Fiona, Vice-President, REC Agents Association

CHAIR: I welcome representatives from the REC Agents Association. We have received your submission. Do you wish to make an opening statement to the committee?

Mr Brazzale : I thought I would make a couple of observations about what the REC Agents Association does. We represent registered agents under the renewable energy target. We work with solar businesses and their customers to create certificates when solar hot water, solar power systems and energy efficiency activities take place. We have been actively involved in the renewable energy and energy efficiency schemes. It is our customers who provide the services to the end-use consumers. It is this experience and experience in working in the energy industry over a large number of years that we have based our submission on.

The renewable energy target, which is a national scheme, has come in for a bit of criticism from some quarters and is blamed for a large part of the increase in retail electricity prices. While it is clear that the renewable scheme has contributed to rising power prices, it is currently less than 1c per kilowatt hour, which is roughly equivalent to 3.4 per cent of retail prices, and a similar amount is due to state based schemes. Importantly though, the cost of the national renewable scheme is expected to reduce. That is the direct pass through of cost; however, the implementation of solar systems has led to a reduction in electricity demand and we have seen wholesale prices fall quite a lot over the last few years. That is because there has been more competition from generators to meet a lower demand. So renewable energy is actually contributing to lower wholesale prices and the Australian Energy Market Commission in a report released in December 2011—and maybe some other people who have submitted to the inquiry have provided the details of this report—modelled that wholesale power prices are expected to be 1c per kilowatt hour lower as a result of the renewable energy scheme. So when we consider the impact of the renewable energy scheme on power prices we also need to include the wholesale price benefit, not just the cost that gets passed through to retailers.

Finally, we believe that we need to address the rise in peak demand—that is, we need to implement measures that actually reduce rising power consumption. There are lots of options that could be implemented by customers that can be done in a cost-effective way. We believe this needs to be the focus of our attention. In this regard we believe that targets for demand reduction should be in place and electricity network businesses should be able to recover the cost of reducing peak demand just as they would with network investments where this is cheaper than the said network investments.

CHAIR: Thank you. Do you have anything to add, Ms O'Hehir?

Ms O'Hehir : Only to say that the cost of the REC in electricity terms is modest and with the reduction of the multiplier it is expected to reduce even further.

It has been a successful scheme from our side of the fence, because we now have 25,000 people employed in this industry and that can take us forward. When we start to more thoroughly replace coal, we will have a green team behind us. We will not be starting from scratch.

CHAIR: I might begin with the questions. In your submission at point 7, you have a summary of your key points and you state:

We need to move beyond just thinking about providing customers with smart meters and having 'time of use pricing'-this is not specifically addressing the key problem of a serious underinvestment in cost effective demand reduction activities.

What are those cost-effective demand reduction activities that we are not investing in?

Mr Brazzale : In our submission, we did include a case study. It was efficient commercial lighting, as an example. We went through and articulated what the benefits were. What we have seen with a lot of these activities is that there are a number of barriers to the uptake of energy efficiency and demand reduction activities. There is a wealth of research and analysis that has been undertaken on this. We have a mechanism—the National Energy Savings Initiative, which is a COAG initiative—which is looking at the issue.

We are referring to things like commercial lighting and even battery storage technology and more efficient air conditioners. We have included also a list of activities that have been supported under the New South Wales and Victorian energy efficiency schemes. It gives a good indicator of where we are seeing energy efficiency improvements. For a lot of these energy efficiency improvements there is also peak demand reduction. For example, in a commercial building when you put in a more efficient cello or compressed air system that is running pretty well over the period where we have maximum peak, which generally is around three to five o'clock at night. This is on page 8 of our submission.

There are a number of activities at the residential level as well. We have seen stand-by power controls and more efficient lighting. We are now seeing LED technology move ahead in leaps and bounds. And lots and lots of homes have inefficient halogen down-lights that could readily be replaced by LEDs. That could significantly reduce not just energy but the draw on the system during peak periods as well.

Ms O'Hehir : Australia is very slow to change. I was talking to the ABC in Broken Hill the other day and we were saying how kids today think that milk comes from Coles not from cows. The same applies to the adult population, where electricity comes from the wall not from Loy Yang. So these schemes make that connection with people and they become involved and aware of what their consumption is, whereas previously it has always been so cheap that it was never on the agenda.

CHAIR: You mentioned policies to reduce the peak. A lot of advocates and submitters have made the claim that we need to expose consumers to the price reality of electricity through variable pricing, smart meters and the like. One of the things that we are grappling with is how to protect vulnerable consumers if we did that—those who have no choice but to consume electricity during the peak. I wonder whether you have a view on that.

Mr Brazzale : The point I would like to make is that, sure, providing customers with price signals is just an equitable way to allocate fixed costs—that is all we are doing. We have a whole bunch of fixed costs. What we have not addressed though is a much more efficient way to make sure that we do not have those fixed costs in the first place. At best, moving towards more cost-reflective pricing and smart meters give people a signal, but a lot of people are ill-equipped to respond to it, do not understand it or get the signal too late. We think it is an important part but it is not the panacea. Our concern is that a lot of industry is pushing this as the thing that we have to do, when we are still not reducing the growth in peak demand and we are building more poles and wires. So we have not solved that problem.

There are two different issues: one is an equitable allocation of costs and the other is the need to build an efficient system that does not overbill when there are a lot of cheaper options.

With regard to the disadvantage, that is a real problem with cost-reflective pricing, because it is possibly those who are less advantaged who have the least scope to embrace energy efficiency, or better options, and who are stuck with the really inefficient air conditioning or strip heaters and the like. There is a real risk of energy poverty as we move done this path. We also have concerns about whether in the end there is a strong political will to do this. We might move towards it but we cannot see it happening very quickly. We are still at least five years away from having this in place, and what are we going to do in the meantime?

CHAIR: Can you give us an outline of what your organisation does?

Mr Brazzale : Essentially, we would say we are one of the intermediaries involved in the energy sector. In our case, we help solar businesses and energy efficiency companies. When they sell products and services to their customers we help monetise whatever environmental certificates are available. We work to help them access benefits under various government programs. Likewise, some of our clients will then be able to offer cost-effective solutions to consumers.

I will use commercial lighting as an example, although we are more actively involved in the solar industry. In New South Wales you are able to get New South Wales energy savings certificates when you can demonstrate that you have reduced energy consumption. We have seen a lot of businesses get actively involved in commercial lighting upgrades. Our clients will go to, say, a retail business and say, 'You've got really inefficient lighting.' Normally, this is a case study. They will come in and change out the lighting, make it really easy for them and show them a 1½-year payback, or something reasonable, and then we will get all the paperwork and handle the certificate creation. The payback will be reduced because you can get a benefit through this scheme.

Our approach is: why can we not have a similar type of approach with peak demand? If you can demonstrate that you have reduced your peak demand and your draw of power on the system that means the network business does not have to build poles and wires. Why should there not be a mechanism to encourage people to get rid of an inefficient air conditioner and put in more efficient lighting?

CHAIR: What is the impediment at the moment?

Mr Brazzale : There is no scheme.

Ms O'Hehir : There is no scheme to deal with peak demand.

Mr Brazzale : At the moment the commercial incentives of the electricity distributor and the electricity supplier are driven by increasing electricity consumption for their customers—not reducing it. There is no incentive at all—none at all—for a network business to help their customers reduce; they just reduce the return they get on their investment. We have this disconnect, which means no-one is really interested in helping the end consumer reduce their consumption because it is their best interest to sell more.

CHAIR: But isn't it in the interest of the retailer to promote energy efficiency in terms of the RET?

Mr Brazzale : Some retailers have started to enter into this space and are starting to provide services. As an example, in Victoria AGL is now supplying standby power controllers to their customers, which they can take advantage of because there is a scheme in place. They can get some commercial advantage. One of the major disconnects we have with the market at the moment is that the people who could do something in the supply part of industry are normally incentivised to do the opposite, and the consumers are often poorly informed or do not have the capital or the wherewithal and therefore do not do anything. Having intermediaries that can provide specific solutions is a way to deal with this.

Ms O'Hehir : When you are thinking about energy and in particular energy poverty, part of the problem is that the billing cycle is a three-month cycle, so people do not learn that it is on that hottest day that I had the air-conditioning running for 10 hours and I could not sleep and so I turned it back on again, or whatever the situation was. People do not connect consumption to the bill because it is not in real time, it is three months later and they have forgotten that they had the air con on all night because it was 39 degrees. The other thing that causes this industry an issue when we are talking about impediments is the split incentive between the tenant and the landlord. A lot of those technologies do not get taken up because, 'Well, I'm not going to do anything for the tenant because I don't get any benefit' and the tenant is not going to put in more energy efficient lights because there is a capital cost that he cannot recoup from the owner. So we have this push-pull all the time. A lot of the stuff you would think we could roll out effectively is stuck on this issue of the split incentive. If we could get rid of it, that would help.

Senator GALLACHER: My recollection of the situation in South Australia goes exactly along lines you are talking about where we used to get, or still do get, 10 days in excess of 37 degrees. Our electricity supply was faltering, we were having brownouts—we could not guarantee supply. Obviously politically it was extremely sensitive. So we then went to a renewable energy target of 20 per cent, which was subsequently increased to 30 per cent, and that actual period then drove this enormous planning and investment in poles and wires which has culminated collectively in the increase in electricity prices. Is that your understanding of the situation, particularly in South Australia?

Mr Brazzale : There are probably two things that have happened. The rise in peak demand has meant that you have had to supply more poles and wires to get the power to the homes and offices and businesses that are using more air-conditioning. The other thing that has happened is that there has been a significant rollout of wind in South Australia which has worked on reducing the wholesale price. So I think you will find that the South Australian prices now are not that far off the prices in other states whereas historically they had been higher.

Senator GALLACHER: It is a small population and the cost of those renewable energy certificates has meant that electricity in South Australia has increased more than nationally.

Mr Brazzale : I think you will find that it has not.

Senator GALLACHER: The study say 0.7 whereas nationally it is 0.2.

Mr Brazzale : Increase in?

Senator GALLACHER: In the wholesale price. That renewable energy subsidy coming back into South Australia has meant a higher increase in South Australia versus what it is nationally. That is basically on population; we have only got one and a half million people.

Mr Brazzale : I was going to say that the absolute wholesale price has come down. In our submission we have got the pool prices—

Senator GALLACHER: I understand what you are saying, but when people get their electricity bill they get a statutory charge and they have been going up significantly. That is where the subsidies are going in.

Mr Brazzale : Yes, but I think the reason for that is the poles and wires charge, because it has been a massive investment in poles and wires.

Senator GALLACHER: Driven off 10 days of undersupply.

Mr Brazzale : Exactly.

Senator GALLACHER: And the demand from the community for air-conditioning 24/7, when they want it, even if it is only for 10 days of the year.

Mr Brazzale : Yes. I think that is really the challenge we have got. Our view is not how do we work out how best to charge them, which you might want to do, but how do we get them to either behave differently or create incentives for them to change out their air-conditioners. If they put in more efficient air-conditioners, you drop peak demand dramatically. But again why is not the network business doing that instead of building more poles and wires?

Senator GALLACHER: They are making lots of money out of poles and wires.

Ms O'Hehir : The other thing is that historically the power stations and the generators and the retailers at some point were all owned by the states and so there has been a failure to implement infrastructure over many years. So the infrastructure bill we are seeing now is a historical coming to account for things that we failed to do in the past.

Senator EDWARDS: That is not the evidence that Professor Garnaut gave earlier. He says they have overspent on networks.

Ms O'Hehir : Now they are talking about overspending but not historically.

Mr Brazzale : What we have seen even in this regulatory cycle is probably peak demand projections that have been significantly higher and we have seen a lot of investment off the back of that.

A significant proportion of that will be for load growth but there will still be a reasonable amount for refurbishing old assets.

Ms O'Hehir : I think the number is about $40 billion and about $17 billion of that is for peak demand. The $23 billion, the balance, is for network infrastructure and the $17 billion is the expected growth and how to cope with it.

Senator EDWARDS: I refer to some comments from the Energy Networks Association in the Australian on the 7th where they said:

Australia's 800,000 solar powered homes should be slugged more to plug into the main electricity grid, so as to reduce costs for other families.

The Energy Networks Association goes on to say that solar PV has done very little to reduce peak demand and that investment in poles and wires is still required hence the price rises. Do you agree?

Mr Brazzale : No.

Senator EDWARDS: They are not a lightweight organisation. What do you think they are trying to protect?

Mr Brazzale : Without looking at their motives, I had a look at the peak demand historically for New South Wales—not this current year. Peak demand in New South Wales typically happens between three o'clock and five o'clock in the afternoon, when people are coming home and businesses are still operating. At that time, the sun is still out and PV is still producing a significant proportion of its rated capacity. So the numbers do not bear that out. In other words, solar PV is generating a material amount of electricity and some of that is at times when the wholesale price is really high and the demand is really high—granted not all of it, but you cannot say that solar PV is not contributing to it. In the end, what cost is PV imposing on the system? If anything, it is actually leading to lower demand.

Ms O'Hehir : Lower demand and a lower wholesale price.

Mr Brazzale : The challenge I think that the networks have is, as people reduce their consumption or you have self-generation, there is less overall demand to allocate fixed costs. That is the issue.

Senator EDWARDS: You assert it leads to a lower wholesale price. How do you respond then to comments made by the Essential Services Commissioner of South Australia last week on ABC radio about renewable energy that, 'If anything, overall, it's probably contributing to price rises. Renewable energy is a higher cost source of energy. That is why it receives subsidises.'

Ms O'Hehir : That is correct.

Mr Brazzale : That is absolutely correct. I refer you to the AEMC report. One of the consequences of adding more renewable energy and having a reduction in demand is that existing generators have had to compete to supply the load and we have seen lower wholesale prices. Lower wholesale prices is an unambiguous fact. You have look at—

Senator EDWARDS: Ultimately, it pays for the renewable energy certificates that subsidises renewable energy.

Mr Brazzale : End consumers will pay the direct cost through the retailers.

Senator EDWARDS: I know how they get charged. Renewable energy certificates cost money. The Essential Services Commissioner's point is that renewable energy is heavily subsidised. You point out that in South Australia we are some mecca for wind power generation. Professor Garnaut pointed to our high concentration of wind power. It is because we have really lax planning laws and they have been even further relaxed despite the fact that South Australia have already met its renewable targets for 2020. We now carry 53 per cent of wind power. Are you suggesting to me that we lower wholesale prices in South Australia by virtue of the fact that we have renewable energy?

Ms O'Hehir : Yes.

Mr Brazzale : Absolutely.

Senator EDWARDS: Who pays for that? Do consumers across Australia pay for that?

Ms O'Hehir : Yes.

Mr Brazzale : Yes.

Senator EDWARDS: Why is it that the consumers across Australia cannot get the benefit of that wind generated power at times of peak demand?

Mr Brazzale : They are, in fact, because—

Senator EDWARDS: How are they getting it from wind farms, because you have got to switch them off when it is 38 degrees and there is no peak power in the middle of the night.

Mr Brazzale : It is not so much the peak hour because there is a combination of generators that are working. So, solar hot water energy efficiency will also be reducing peak demand. We have got a national electricity market, so there will be price signals from South Australia all the way up to Cape York essentially driven off the same pricing. There will be a disconnect in prices sometimes, but essentially you get a lot of low marginal cost generation in South Australia, even though it might be subsidised—the capital cost is subsidised, but it has got low operating costs, so therefore gets dispatched lots. South Australia is really windy too, don't forget.

Senator EDWARDS: It is not more windy than other places, it is just that it has planning laws that allow for wind farms.

Ms O'Hehir : No, the best wind resource in Australia is the Eyre Peninsula.

Mr Brazzale : It is one of them. There are a few.

Ms O'Hehir : It is one of them.

Senator EDWARDS: That is why they are all in the south-east and the mid-north and not on Eyre Peninsula then.

Ms O'Hehir : The reason—may I?

Senator EDWARDS: Yes, sure. I am trying to flesh this out.

Ms O'Hehir : That is fine. I was on the board of RenewablesSA for four years and the reason it is not on the Eyre Peninsula is we do not have any infrastructure down there to get the energy out. Renewables SA funded a $1 million dollar study with Macquarie Generation, WorleyParsons and Baker & McKenzie, I think it was.

Senator EDWARDS: So you cannot get the energy out of Eyre Peninsula, but we cannot get the energy out of South Australia. Do you know that South Australia has one of the highest electricity costs in the world, and yet we have got 53% of wind power in this country and you are telling me that renewables are driving down prices. What is wrong with this picture? It does not ring true to me.

Mr Brazzale : The wholesale price.

Ms O'Hehir : That is the wholesale price, not the retail price.

Mr Brazzale : We included a report in our submission that tracked the wholesale price through the national electricity market across all states. It is there as a statement, a fact—that is what it is; it is the scheduled price. You can see that over the last five years you have seen a dramatic reduction. In fact, South Australia has had the most dramatic reduction in average wholesale pool prices of any of the states.

Senator EDWARDS: Yet it only went down eight per cent.

Mr Brazzale : That might be the retail price.

Senator EDWARDS: No, that is the wholesale price. That is the Essential Services Commission's recommendation that it drop. I will move on because the chair will pull me up in a minute because I am taking too much time. In your submission to the response to the Climate Change Authority's review of the renewable energy targets, you state:

The roll-out of solar has led to a material reduction in electricity consumption which in turn has contributed to a reduction in wholesale electricity prices.

By how much have they dropped as a result of the renewable energy target?

Ms O'Hehir : $10 a megawatt.

Mr Brazzale : It is really hard to determine—

Senator EDWARDS: I am trying to reconcile that statement that you made and I am trying to understand what you base that assertion on. If I look at ESCOSA's comments and ENA's comments, they really fly in the face of what you are saying.

Mr Brazzale : It is difficult to calculate because it is an after-the-event issue, but I refer you to the Australian Energy Market Commission modelling report that was released in December last year. I brought it with me and will quote from page 25. This is not our report; this is the Australian Energy Market Commission report.

Wholesale electricity prices in the NEM under the reference case are around $40/MWh…

which is—

… $10/MWh lower than wholesale prices under the previous reference case.

They then they go on to explain:

… wholesale prices are depressed by an increased volume of renewable generation capacity which is able to bid in a manner to ensure dispatch as they have an additional source of revenue from the sale of LGCs.

So the modelling that the AEMC and others have done indicates that as a result of the renewable energy target you are seeing in the order of $10 per megawatt hour reduction in prices.

We might estimate that the solar contribution might be about one third, so you could probably claim about $3 to $4 a megawatt hour of that. That would be my estimate of what solar has contributed to lower prices.

Senator EDWARDS: We will make further inquiries. Just by way—

Ms O'Hehir : Would you like us to leave you this copy?

Mr Brazzale : Yes, or you can table it for the inquiry if you want.

Senator EDWARDS: The geographical analysis of solar systems under the renewable energy target report released by the REC Agents Association shows:

… most solar systems (53%) were installed in regional and rural communities with only 43% installed in the major capital cities …

Why do you think that there are more people in rural Australia install solar systems than do in the city?

Mr Brazzale : We tend to think that there are probably a couple of reasons, but the level of solar installations is probably most driven not so much by your disposable income per se but whether you own your own home. This is the split incentive issue that if you do not own your own home you are not likely to do it, and you need to have roof space. And you probably need to be concerned about rising power prices. Where those factors sort of coalesce will be in regional and rural areas.

Senator EDWARDS: So you assert then that regional people own their own homes on the whole, that they are more concerned about their rising prices than their city cousins and that they have more roof space?

Mr Brazzale : I would say that generally that is the case, only because that in the metropolitan area you are likely to have more rental properties, more apartments and smaller homes. You probably have more space to put solar on your roof.

Ms O'Hehir : Also, some of the regional areas have a better postcode factor. They can actually create more renewable energy certificates—

Mr Brazzale : They are sunnier, basically.

Ms O'Hehir : Sunnier.

CHAIR: Can I just put something to you—and this is just me thinking out aloud, it is certainly not something that the committee is looking at. I am thinking about this issue of providing incentives, particularly for homeowners and commercial businesses. If local governments were to offer a discount on rates for energy efficiency—and obviously, there would be a loss of revenue for those local governments associated with that—and if the savings in energy efficiency could be quantified and then the local governments could use that quantification as renewable energy certificates, is that something that your organisation could put together? Is that something that is a possibility?

Ms O'Hehir : The National Australia Bank has looked at a model that is quite similar to that.

Mr Brazzale : And there are a number of councils that have gone out in their local communities and tried to get bulk buying of solar PV and solar hot water so that they could get cost reductions. But I was thinking more even of dealing with the peak demand issue. If you know you have an area that needs more investment in poles and wires or a renewed transformer or something, there would be no reason in fact why a local council could not say to the network business, 'Hang on, instead of building that $2 million transformer how about we pull together a program and roll it out to our local constituents? For example, we will replace their lights and replace their really inefficient air-conditioners with much more efficient ones.' That would work as long as they could recover the cost savings from the network business.

Ms O'Hehir : That would become avoided infrastructure. The technology is coming down the line where, let us say, Energy Australia could ring up Fiona and say, 'If you allow me to turn your fridge off,' once we have smart meters and all of the stuff in place, 'your freezer, your air con and your—

Mr Brazzale : The freezer might not be such a good idea, but certainly, your air conditioner!

CHAIR: Your spare freezer, yes.

Ms O'Hehir : air conditioner off at a peak time, we will give you a one cent discount off your bill per kilowatt hour.'

Senator BOSWELL: The small RETs: you take those to a clearinghouse and they are worth about $40. Is that correct?

Mr Brazzale : Only when the clearinghouse clears, and we probably do not expect that to happen for another six months or so.

Senator BOSWELL: What is the value of them now for the people who come to you?

Mr Brazzale : It is about $31; something like that.

Senator BOSWELL: You are giving $31—

Mr Brazzale : Maybe a little bit less than that—$30.

Senator BOSWELL: Thirty dollars?

Mr Brazzale : Yes.

Senator BOSWELL: How many RETS are banked up?

Mr Brazzale : There are six million in the clearing house and we reckon there might be another six million that are surplus and not in the clearing house.

Senator BOSWELL: You have those, do you?

Mr Brazzale : Not necessarily us.

Ms O'Hehir : Not just us but the market.

Mr Brazzale : Businesses—so, electricity retailers might have bought more than those—

Senator BOSWELL: So, six million in the clearing house and another six million are floating around.

Mr Brazzale : Yes, so another 12 million.

Senator BOSWELL: 12 million out there. How long can they stay out there without being purchased.

Ms O'Hehir : Forever.

Senator BOSWELL: When will demand cut in on them?

Mr Brazzale : We tend to think probably in about six months. We have now seen the multiplier change and we have seen a reduction in the number of installations in the market.

Senator BOSWELL: I am trying to work out your logic. I can understand where you are coming from. You have to heavily subsidise something and you put it in the market, so it crowds out something that is not subsidised.

Mr Brazzale : That is correct.

Senator BOSWELL: Have you ever done an exercise on how much renewable energy is going to cost to add to electricity bills?

Mr Brazzale : Yes. We sort of worked out that the actual cost pass-through that gets added, so the line item, if you had a line item, is about 1c per kilowatt hour at the moment.

Senator BOSWELL: What is that, all up?

Mr Brazzale : Do you mean in total, absolute terms?

Senator BOSWELL: Yes.

Mr Brazzale : You are looking at about—

CHAIR: Perhaps you can take that on notice.

Ms O'Hehir : We are happy to.

CHAIR: We will have to suspend now because question time is about to begin. Perhaps you can provide those questions on notice, Senator Boswell.

Senator BOSWELL: Okay.

CHAIR: Just before we close, was the report that you were referring to from NAB the 2011 Energy Efficiency Opportunities Report?

Ms O'Hehir : No.

Mr Brazzale : No. From the AMC?

CHAIR: No, from NAB.

Ms O'Hehir : No, but I can forward you—

CHAIR: Can you provide to the committee the name of that report, please?

Ms O'Hehir : Yes.

CHAIR: Thank you very much for your evidence.

Proceedings suspended from 13:57 to 15:15