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Select Committee on Electricity Prices
27/09/2012
Electricity price increases in Australia

DONOGHUE, Mr Kieran, General Manager Policy, Energy Supply Association of Australia

WARREN, Mr Matthew, Chief Executive Officer, Energy Supply Association of Australia

[14:01]

CHAIR: Welcome. Do you wish to make an opening statement?

Mr Warren : I do. First of all, on behalf of the ESAA, I would like to thank the Senate for the opportunity to present to the committee today. We have prepared a few slides to walk through.

Slides were then shown—

Mr Warren : We see that it is an important role for the industry and for this committee to shed light and inform both the parliament and Australians of what is going on and what is driving electricity prices in Australia. We welcome the opportunity to inform on that. By way of clarification, the ESAA is the peak body for the stationary energy sector in Australia, so we represent generators, retailers, distribution businesses and transmission businesses. The companies in the membership represent about $120 billion worth of assets.

The next slide shows how we tracked and laid out the upward trend in electricity prices in capital cities across Australia. Obviously there is a fairly recurrent theme in all of them, although there are differences in the rate of change and the slope of those curves at different times, reflecting the different market conditions and regulatory conditions of each jurisdiction, but the trend is still fairly similar. We are seeing a recent and fairly accelerated upward trend in electricity prices in Australia being recorded throughout the country.

There are two core key drivers for this. The first and most significant is network costs. That is, the replacement of ageing infrastructure. It is really important. It is weakly understood and reflects on the design and nature of the electricity supply infrastructure in Australia. It was not entirely but largely built and redeveloped in the 1960s and 1970s—whether that is power stations or the transmission lines to connect them. They were installed around that time, so the infrastructure is around 40 to 50 years old. A core component of the price increase that we have seen in the last five years is a function of replacing that ageing infrastructure. It certainly could have been replaced over a longer period of time and in some jurisdictions that was done, so the rate of increase has been less acute, but it is simply about the cost of delivering that transformation. The second driver is the cost of supplying power for what we call peak demand, which is those five to 10 days a year. On the mainland of Australia they are the hot days; the summer peaks are the clear peaks. Around 20 to 25 per cent of the generation and transmission infrastructure is designed to supply power for those peak days. Bringing those peaks down is a critical opportunity to reduce the cost of energy to households and businesses in Australia. The third driver is meeting revised reliability standards, which have been put in place by different jurisdictions at different levels, reflecting an appetite to avoid or reduce the risk of blackouts or losses of power, and that comes at a cost.

The second order of increases relates to greenhouse abatement: the introduction of a carbon price, the Renewable Energy Target, the deployment of small-scale renewables and other state-based schemes, but they are a second-order cost priority. On the next slide we break those down to give some order of magnitude. IPART in New South Wales has calculated that the cost of those abatement schemes is $316 a year for a typical New South Wales household. About half of that is the carbon pricing mechanism. The Small-scale Renewable Energy Scheme, which is primarily solar PV, is the next-highest cost contributor at $64, the LRET at $38, the climate change levy at $34 and the Energy Savings Scheme at $13.

Understanding that, we need to focus on what we can actually control. First of all, there is a cyclical nature to the replacement of the infrastructure. We are passing through that at the moment and seeing those costs related to that—that will pass. What we can control are the policy settings to reduce demands on peak demand, because that is clearly the most inefficient and most expensive part of the energy supply network that we can change. We should review reliability standards. Ultimately, that is a decision for consumers and therefore their governments, because they need to make an informed choice about what they are willing to trade off in cost versus reliability. Recently the AMC did an assessment of the reliability standards in New South Wales and calculated that they could be de-tuned at a saving of around $3 to $15 a year per household. Unsurprisingly, you would expect households to say, regarding the small saving, that they would rather keep the reliability, but really that is their choice. You can trade those things off as long as there is an informed discussion.

In terms of greenhouse abatement, this is an issue which is not going the way and which is going to continue in various forms throughout the next generation. It is becoming really important that we deliver that abatement at the lowest cost, and we are still learning how to do that. There have been various schemes and approaches taken which, we are discovering, have a cost impact that was not anticipated. We accept that this is going to continue to happen but we need to keep prosecuting the case at the lowest possible cost.

Trying to illustrate this issue of peak demand is a problem, and the graph on this next slide reflects the two types of demand. The blue line represents the total aggregate demand, the amount of energy being consumed in Australia. Significantly, that has tapered and begun to fall in the last five years while the peak demand, in the red, has continued to increase. We are seeing an emerging gap between the amount of energy used on that handful of very hot days on mainland Australia and the amount of energy used in total. We are happy to discuss the drivers of the fall in aggregate demand, but the truth is they are unclear. There is no data in Australia. There is speculation about the composition, but no one has a really accurate handle on it. Contributing factors include the high Australian dollar reducing the competitiveness of trade-exposed, energy-intense industries, which is a material problem if it continues. Second is the impact of the price effect—as the price of electricity goes up demand falls. The third factor is the impact of schemes like solar PV insulation. The combination of those three factors is bringing demand down and may or may not continue to do so in the future.

The next slide shows that what we need to focus on is the critical peak, which is the gap between average daily load and the maximum daily load on those peak days. It is about finding ways of reducing demand on those hot days, which will do the most to ease energy bills in the future.

The next slide is a useful reminder that when we are talking about peak demand a significant though not sole contributor to that is the deployment of technologies like domestic air conditioners. The rate of penetration of domestic air conditioners in Australia has continued to increase. We may have had a couple of mild summers recently but that has not stopped the number of watts from air conditioning from continuing to increase.

Senator THORP: Do you include cool temperature areas in that as well. I am a Tasmanian.

Mr Warren : It is actually slightly reversed in Tasmania. The winter peak is still the dominant peak in Tasmania. Again, there it is heating technologies which are driving that peak. It is a lower peak than on the mainland for air conditioners because of the range of other options available and the nature of heating in Tasmania. But it is a winter peak in Tasmania, which is different from mainland states.

Mr Donoghue : It is also a different time of day as well. There is a peak early in the morning and then another peak around about 5 pm. Whereas the warmer states tend to see the peak rise up in the early evening at six or seven

Senator THORP: Up in the morning and when home from work—

Mr Donoghue : Yes.

Mr Warren : And again, heating is an easier challenge in that, for a range of historical reasons and the nature of managing heat, there are more advanced technologies that are efficient providers of heat for homes, so it is not as acute a problem as managing air conditioner demand. Fundamentally, the solutions to this are market reform in the regulation of retail prices where competition exists. Right now there is no price signal and no incentive for households to even think about reducing their demand on very hot days. It does not have to be turning off or down their air conditioners; it can be pool pumps being switched on at the same time the kids jump in the pool. There is no reason to think about those kinds of issues and so households do not. We think that there is a lot of low-hanging fruit to make that market far more dynamic. Also we should allow networks to move away from postage-sized one-size-fits-all network pricing to create incentives in those parts of the grid where distributor technologies and other solutions may be far more cost-effective.

In terms of demand side management, direct load control, which is the ability of the network to turn down air conditioners and compensate those households through a different pricing arrangement, is a very valuable technology that can make material savings to household bills. We think that there is a very high likelihood of the rise of distributor generation and storage, and not just solar PV but other technologies complementing that, and that process will continue. How we manage that will be crucial to the affordability of energy in the future.

Mr Donoghue : Just to clarify perhaps on the direct load control: we talk about turning down air conditioners but it is not a case of reducing the levels of comfort that people have. You can cycle air conditioners off for a short period of time without actually affecting the ambient temperature. If you do that over a population of air conditioners to have a third of them off at any one time, you can materially affect the peak without actually affecting people's comfort levels in their homes.

Mr Warren : There is one more slide in your pack, just pointing out the discussion around the effective technologies like solar PV and its impact on the peak demand. The slide there shows the increased deployment of PV on household rooftops in South Australia. You can see a material reduction in the demand for energy in those four years, as shown by the gap between the red line and the blue line. Critically, PV does not deliver that benefit when the sun sets. So the peak that comes in the evening as people come home from work and cook dinner and watch television and do the things they do, and the PV is not helping with that so that peak remains the same and is unaffected by PV. That does not mean that we should not be developing PV as part of the network, but we have to find another solution to manage that peak demand.

Senator EDWARDS: What about the one in South Australia—is that the one with the biggest variance?

Mr Warren : We have that data available and we can provide it for other jurisdictions. Depending on the data source, I think that South Australia has the highest penetration rate of PV now in Australia. If the data is correct, about 28 per cent of eligible households—that is, those that have rooftops—now have solar panels in South Australia. It is a relatively high penetration rate for a technology.

CHAIR: You have said in your submission that retail prices should be deregulated and that state competition will a better deal for customers. What is your view on how you protect vulnerable consumers in a deregulated price market?

Mr Warren : It is interesting. We think that this is a priority and that we need to think this through and it is not as simple as it first looks. We are doing some work on this at the moment. It is necessary but not sufficient to identify typically vulnerable households like low-income households—pensioners. They are part of the equation, but there is another category which we notionally call the working poor, which is households living on the edge of cities, often with one or two incomes but with large houses that are potentially quite leaky and quite reliant on air conditioners, parents who are driving two or three kids to soccer and school, so they are buying a lot of energy in transport fuel and they are buying a lot of energy to keep their house at an appropriate temperature. We think that they could be in just as much stress, if not in fact more stress, because their energy consumption is so much greater, so they are much more susceptible to variations in energy bills, whereas it may be that a high proportion of typically vulnerable low-income households are quite modest energy users and have developed a range of techniques already to manage and modify their energy use. So we have to take a broader approach. We are happy to report back when that work is done to identify that.

I think you need to do that almost ahead of full deregulation so you make sure that you are focused on those who require assistance. We certainly do not think you should use energy prices—to interfere with energy pricing is not the right way—to support those households, because that eliminates the incentive of trying to change and reduce energy consumption at those critical times, but you do need to find ways to make sure that those households are adequately compensated.

CHAIR: Can you tell us when that report will be concluded?

Mr Warren : We cannot, but we are happy to advise when it is.

CHAIR: In your submission—it is on the second page—you say:

To address increasing prices, we urge the Committee to focus on structural policy responses, rather than populist, short term fixes.

Can you elaborate on what you mean by that.

Mr Warren : I suppose a typical example is price freezes or setting prices or sustaining prices below cost.

CHAIR: Like what happened in WA?

Mr Warren : Western Australia has had that for a number of years. It is a legacy issue between governments. Prices were sustained well below cost in WA, and it just meant that the incoming government had to take some tough decisions to bring prices back to cost. You cannot open up markets to retail competition and to deregulation until you have got your prices back to cost, so it is even a step further away from a competitive and transparent market.

Again, in Queensland, the notion that you can freeze electricity prices is no more relevant than that you can freeze food prices or any other costs of living. Governments cannot freeze those. They can temporarily hold them at a level, but, if the underlying costs continue to increase, then at some point you are going to have to realise those costs. That is why we say that the real solution lies in addressing the cost drivers rather than just capping and freezing prices, because that will not address the problem at hand.

Mr Donoghue : And usually the same people who are consumers end up paying; they just pay for the subsidy in their guise as taxpayers.

Mr Warren : Western Australians pay a billion dollars over four years through state taxes to subsidise suppressed electricity prices. There is a high inequity in it because it means that low energy users, if anything, are subsidising high energy users, so you have a perverse counterincentive to reduce energy under that regime.

CHAIR: We have heard a lot from organisations submitting that, in the way the rules are structured at the moment, there are incentives to overinvest or gold plate, particularly amongst distributors. I am just wondering what your view on that submission is and whether or not the current rule changes that are proposed will deal with that problem.

Mr Donoghue : Firstly, I think a lot of the gold-plating argument is based on a mischaracterisation of the way that the current framework operates. Essentially, there are two parts to the process. The first is that the business puts forward its business plan. The regulator scrutinises it and makes the adjustments it thinks appropriate. It is quite clear from the scale of the adjustments that have been made in several recent cases that the Australian Energy Regulator does have the power and the ability to knock back business plans that it believes are excessive.

Once the revenue has been agreed then that is the fixed revenue that is available to the business for the next five years, so it then has the incentive to spend as little as possible in order to still meet all of its requirements and its service targets. This is appropriate, given the nature of electricity sector, which is very heavily regulated in terms of the requirements of safety, security and reliability. If, however, the business can make savings against the amount of revenue, it gets to make extra profit but, crucially, because that information can then be taken into account by the regulator in the next regulatory period, some of those savings will get passed on to consumers in the next regulatory period. It is what is called incentive based regulation, and that is how the incentives work.

In terms of the changes to the rules that have been proposed, we have some concerns that affording greater discretion to the AER is not necessarily going to lead to better outcomes. The difference between the regulator and the business is that the business has to carry out the operations. It is the one that has to meet all of those standards, and there is a risk that the regulator, if they made bad decisions, could leave a business with insufficient funds to properly operate this network.

Senator EDWARDS: So Grid Australia is a member of your organisation and the Energy Retailers Association of Australia are members of your organisation?

Mr Warren : No, they are sort of partner organisations, but they are separate. The ESAA is an overarching body over the entire industry, but there are sectoral groups like Grid Australia, the Energy Retailers Association of Australia and the Energy Networks Association.

Senator EDWARDS: It is a highly fragmented industry, isn't it?

Mr Warren : That is the nature of it, but it is a fairly cooperative relationship between the different parts.

Senator EDWARDS: I just go to your last comment that everything is fine—that it is a heavily regulated industry, that we have the AER, and that people put up their investment propositions, they have input from the AER, they either agree or disagree, they get their investment allowance, they get to put their prices on and everybody lives happily ever after. The AER has been bowled over 22 times out of 34 on appeals.

Mr Donoghue : One way to interpret that is that it is a very good thing that the appeal process exists. The range of matters that—

Senator EDWARDS: For your members?

Mr Donoghue : Yes. The point of the appeal process is to allow for correction of any mistakes by the regulator. In various matters that have gone before the appeal tribunal, in some cases in particular, the regulator have effectively acknowledged their work was not up to scratch and that the figure substituted by the tribunal was therefore more appropriate. No doubt there are other areas on which they disagree and feel that their original decision was correct—it is entirely their right to do so—but this points to the importance of having an appeal process.

Senator EDWARDS: Okay. On Tuesday we heard from Mr Peter McIntyre from Grid Australia, who said that the AER is both under-resourced and lacks the skills to deal with this environment capably. I am paraphrasing, but he did say 'under-resourced' and 'lacks the skills'. Is that something you agree with, or would you like to expand on it?

Mr Warren : Certainly the illustration that the AER has lost on a number of appeals indicates that it would benefit from greater resourcing and technical input in reviewing those matters. The other observation we make is that, rather than changing the rules per se, it is more about changing the structure of the appeals process. We do think there is merit in considering having a counter voice, an advocate, for both industrial and household consumers to make sure that that side of the review and appeals process is considered as well, rather than changing the rules. The rules, we think, are reasonably functional, but it does not hurt to have scrutiny in both directions, as we are used to in an adversarial system.

Senator EDWARDS: Just on that, the witnesses that were here before you, the Consumer Action Law Centre and the Consumer Utilities Advocacy Centre, are those people, aren't they? We do not really need to resource the AER if there are already government-funded NGOs feeding into them. What is falling down here? We have all these people advocating all these things, and you are saying, 'That is what we need,' but we already have them. What is going on? We have a lot of people going to work on a lot of policies, but we are not laying a lot of rubber on the road, are we?

Mr Donoghue : I would observe that, in the case of the current NGO environment, it is quite fragmented, and that may be a consequence of them having historically operated more at a state level, as well as representing different types of consumers. To some extent, it is not for the industry to say exactly how they should organise themselves, but one can see there might be merit in them looking to combine their resources more effectively in order to be able to engage more constructively in the process. And, in order for them to engage in the appeals process, we quite understand that they also need to able to and be encouraged to participate in the original AER process. When it comes to the appeals process, there have been a number of relevant barriers identified, in particular by a report that Professor Allan Fels wrote for the Energy Networks Association that was submitted to the expert panel. The report suggested that it could be appropriate, for example, for consumer advocates to be given a little more time to launch the appeal, to make it easier for them to defray their costs and to potentially lower the hurdle of grounds for appeal in order to encourage greater participation.

The other way to also provide a bit of balance to the appeal is for the AER to use the powers they currently have under the rules—in particular, for electricity under section 71O—to bring other matters to the tribunal's attention after the original appeal has been lodged. That gives them the opportunity to broaden out the appeal to potentially include other relevant matters. But, to date, they have not used that, and the expert panel have expressed some puzzlement as to why they have not, as it is potentially a useful tool for them.

Senator EDWARDS: Okay. According to an Australianarticle on 23 July, a report into the electricity and gas sectors released by you fellows, ESAA, that day revealed:

… Australia's installed electricity supplies increased by 1.5 per cent, or 795 megawatts, in 2010-11—the slowest annual growth since 2005-06.

We heard from a group on Tuesday that demand for electricity is slowing due to a number of factors. But I see from this article, Mr Warren, that you seemed concerned by that. In fact, it says:

… Matthew Warren warned that of more than 200 planned new projects, just a "handful" were under construction and many might never be built. He said the report underlined growing concerns about a "gridlock" in energy investment.

Mr Warren : Yes.

Senator EDWARDS: Do you want to expand on that so we can get all those comments in context?

Mr Warren : Sure. I will deal with two things. First of all, there is efficient fall in demand, where people are using energy more efficiently, and we want to encourage that; and there is bad fall in demand where it relates to the atrophy of key industrial sectors and other business activity in Australia. So fall in demand is a worrying trend where it is being driven largely or significantly by the latter. Whether manufacturing businesses are winding back operations because they are not competitive or are going out of business, that is not the way we want to reduce demand. However, where reduced demand is driven by efficiency, that is good. The industry is not in the business of just selling more energy relentlessly. The way out of this is to use energy more efficiently, because the cost drivers for energy globally, not just in Australia, are increasing, and we are seeing that in the exposure to world gas prices that Australia will encounter soon and the rising cost of other fuels that we are exporting, which has helped the resources boom. We have got to be smarter about this. It is just differentiating those two drivers.

The second concern we have is that the list of projects under development and the lack of development reflects a real investment gridlock in Australia. Conditions are highly uncertain for major infrastructure development in energy generation. Outside of building peak demands which are cost effective, to manage this rising peak demand, and renewable projects behind the renewable energy target, there is not a lot of major investment in Australia.

That is a material issue. We have had flattening demand growth but if demand either increases rapidly or decreases rapidly then we have stresses either way on existing players or in not being able to build new cost-effective capacity to meet that growing demand. So we have a real inability to get projects underway because of financing uncertainty in Australia. It is difficult to see how that is going to be reconciled in the short term.

So in a sense the best-case scenario for Australia is that we manage to stay stable without massive changes in growth, because if we do have them we are going to have real problems in coping with adjusting supply to meet that fall or increase in demand.

Senator EDWARDS: The projects that you talk of are infrastructure projects—

Mr Warren : They are generation projects.

Senator EDWARDS: Yes, they are generation projects. Is it that they cannot be supported from a business case point of view, or they cannot find funding or—

Mr Warren : The funding follows the business case.

Senator EDWARDS: You will never get funding if your business case does not support it.

Mr Warren : That is right. For instance, the reality is, at the moment, with the price of gas globally and where it is going in Australia, we would need a carbon price of around $50 a tonne to build gas base-load power stations. So, to start replacing the existing coal fired fleet of generators requires a carbon price. Now there is no sign globally that that carbon price is approaching, anywhere in the world.

That means that that kind of investment and replacement and shifting to that type of generation is not possible under any conditions that we can see in Australia. At the same time, there is a shadow price on carbon globally, so whatever policy settings are in place by sovereign governments, banks have calculated their own risk profile and their own estimates for what they think the carbon risk is for projects. So it is very difficult to finance new coal fired power stations, because they carry such a material carbon risk for the length and duration of those projects. For that reason, you cannot build anything. You can build renewables behind the RET and you can build peak-load, small peakers, that are expensive—designed to turn on for a few days. They are really more about insurance energy than about base load supply. That is the state of the market in Australia. That is an expensive way out.

The challenge here is that we are trying to avoid expensive solutions, and right now the only things that we are able to develop and build are relatively expensive. So that becomes a big challenge if we are going to have a return—as AEMO currently projects—to energy demand growth in the future.

Senator EDWARDS: This is a significant issue for you.

Mr Warren : Yes.

Senator EDWARDS: So where are you taking this issue. Who is listening to you?

Mr Warren : The real challenge is that we need to first of all find out what we think is driving demand and what is the better projection for demand going forward—because until we get that pegged better we are just guessing. So we are doing work at the moment to do a bottom-up build of energy. Because all of the PV isn't picked up. We can estimate the amount of supply from solar panels, for instance, but it is behind meters, so we have to separate the household consumption out so we can measure that and other energy efficiency schemes and price effects that are going on, and go back to meters to calculate energy consumption by industrial sector so that we can better inform state governments and national governments about trends in geography and trends in industry sectors. That is actually a useful leading indicator on the health of the Australian manufacturing sector.

Senator EDWARDS: It would be very important to get that—

Mr Warren : It has not been done for a number of reasons. It is not easy to do, otherwise it would have been readily available. But we think it is crucial.

Senator EDWARDS: But you are the ones to do it, aren't you?

Mr Warren : We want to do it in conjunction with the Australian Energy Market Operator because they currently provide the best available projections using some top down approach. So it is meeting those two halfway to get the outcomes that actually inform policy debate in Australia. Once we know that we can make better decisions about which side of the ledger we are going to have to manage for if we have continued fall in demand, that becomes potentially an energy security issue. Eventually, if you have weak enough wholesale prices because of an oversupplied market, you get to the point where something has to give and that is the closure of power stations. If you are not controlling the timing of that sort of providing that becomes a material issue too.

Senator EDWARDS: It would certainly be an issue for South Australia.

Senator THORP: I am interested in following up some of the questions of Senator Edwards. You talked about 200-plus projects that are not going ahead. Could you spend a little more time for me on why they are not going ahead?

Mr Warren : First of all, we have flat demand and, secondly, the interesting thing about that list of projects compared to say 10 years ago is that almost all projects now are lower emission technology. So they are gas fired or solar thermal or wind. So we have seen a real wind back. There is a handful of smaller or coal based augmentations, but the market has moved to respond to international conditions and domestic conditions by shifting its focus to lower emissions technology for the future. But that requires a carbon price sufficient to trigger those investments and confidence that the carbon price and its trajectory are going forwards. The carbon price at the moment is not sufficient. It is just not high enough to trigger that switch from coal to gas and, to be honest, there is a lack of certainty about whether that carbon price will remain in place over the time frame of those projects and their development.

Senator THORP: If I understand you correctly, the vast majority of the projects that are not going ahead are around renewable energy.

Mr Warren : Renewables and gas.

Senator THORP: And only a few that are using old coal.

Mr Warren : A handful. And a lot of them are augmenting.

Senator THORP: And the insecurity is coming from people not being sure where we are going with carbon pricing?

Mr Warren : This is a global frustration so it is not unique to Australia. It relates to electricity prices. These are shared problems. Europe is a great example. Within economies within Europe, there is pressure to reduce the supply of certificates in the European emissions trading scheme to push up the value of the certificates to trigger investment in new generation, particularly in Germany where the economy is going strongly because they are selling and exporting manufactured goods behind a weak euro. They would like to see a recovery in the carbon price that can give them the investment certainty to get new generation. There is a lot of pressure within Europe because of cost-of-living pressures and the sovereign debt crisis. The last thing they want is anything to put upward pressure on electricity prices and energy prices.

They have exactly the same challenges that we have here. We all want to move to a decarbonised world. We all want to make that transition as affordably as possible, but because of global shifts in gases, the Deutsche Bank observed in 2008 that the first trigger point for carbon pricing was the gap between the cost of coal-based electricity and the cost of gas-based electricity. That is still the case, but that trigger point has increased because the price of gas has increased in the last five years.

This is the kind of catch 22 that Australia is in. Australia is set to become the world's biggest LNG exporter by 2020. That is a remarkable energy story. The value of those gas exports is well in excess of the gas price currently paid by consumers in Australia. It is supporting our terms of trade. It is crucial. It is one of the drivers why the Australian economy is seen as such a safe haven internationally. The downside of that is that it makes this switch, from conventional to new cleaner—not clean—gas generation, even more expensive and more out of reach, especially in the current cycle of higher energy prices. You could do it, but you would have to put another cost burden on households and businesses at a time when they may be reluctant to wear those price increases.

Senator THORP: Given what you are saying, it does not sound like anyone with a great big old clunker is going to go out and spend money on refurbishing, are they?

Mr Warren : That came up in the discussion about fee for closure which was part of the government's clean energy future strategy. At the end of the day, for whatever reason, the government could not strike a price with any of the generators to close existing generation. We can speculate as to why that was the case, but right now those businesses see that there may be a business case to keep those generators going for an indefinite period, because while this gridlock remains you might need that capacity. We are in a real catch-22 situation with market conditions not presenting in the way that was originally thought would be the case five years ago. No-one anticipated this decline in aggregate demand. Until we have a handle on that we do not know where that is likely to go or whether it is likely to keep going in the future.

Mr Donoghue : Also, although gas prices are rising, there is still a lot of uncertainty as to where they will be in the medium to long term. If you build a gas fired power station you are looking to operate it for the next 30 to 40 years, but if you cannot take a view on what your fuel cost is going to be then you cannot work out whether you are going to be competitive in the marketplace.

Senator THORP: To bring us from the macro to micro, please expand on protecting vulnerable consumers including those you described as the working poor. Please elaborate on the cost of being energy efficient. Where I am coming from is it strikes me that the people who can least afford expensive electricity prices are also the ones that can least afford appropriate appliances, insulation et cetera.

Mr Warren : We think that is true and it was identified in a recent paper produced by Paul Simshauser of AGL. This is potentially a growing problem, so we are working on information sheets at the moment about this and trying to identify how households can save money. One of the frustrations we have is that the perception of energy efficiency is things like low-energy light bulbs and televisions which are relatively second- or third-order ways to save energy. Frankly, the cost of the related systems—whether Foxtel or other things—is far more substantial than the energy used to run those appliances. By contrast where you really do want to focus households' attention is on energy savings in heating air and water—so, heaters, air conditioners and hot-water systems. With the current increases in energy bills, households almost invariably benefit from going to our five-star solar hot-water system or a gas five-star system and spending a bit extra to get the payback a lot quicker. It is the same with buying much more efficient heating and cooling for their houses, whether they rent or own, by spending more on an air conditioner if they can afford to. We are trying to change that focus from being on things that are symbolic and small rather than things that actually make a material difference. It will become an issue that the upfront capital cost of more efficient technologies by definition tends to be more expensive and it at least explains what the payback is and why it is still a prudent investment. It may be that from work on this issue, it will drop out how we can trigger that smarter purchase.

CHAIR: I thank Mr Warren and Mr Donoghue for their attendance.