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Select Committee on Electricity Prices
Electricity price increases in Australia

MACGILL, Dr Iain, Joint Director (Engineering), Centre for Energy and Environment Markets, University of New South Wales

WHITE, Professor Stuart, Director, Institute for Sustainable Futures, University of Technology, Sydney


CHAIR: I welcome Dr Iain MacGill from the Centre for Energy and Environment Markets and Professor Stuart White from the Institute for Sustainable Futures. Thank you for your time this morning. The committee has not received a submission, but do either of you wish to make a brief opening statement?

Prof. White : I would appreciate that opportunity. I can also leave with the secretariat copies of a couple of documents which I will briefly talk about.

CHAIR: Do you wish to table those documents?

Prof. White : Yes, I do. What they represent is the outcome of a major project which we have undertaken over the last three years, ending last December, with CSIRO. It was funded by CSIRO under the flagship collaboration fund with the Energy Transformed Flagship. Five universities were involved including UTS, and our institute led that project. It was called 'intelligent grid' and it was looking at the question of how we can transform the electricity system—it is focused on stationary energy in the electricity system—in order to enable the uptake of decentralised energy, which I will talk about in a moment, and to facilitate reduced greenhouse emissions. That was the objective: three years, $8 million, five universities and the CSIRO.

We produced, amongst many other documents, the Australian decentralised energy roadmap. By decentralised energy we mean energy efficiency, peak demand management and distributed generation. Those three elements, which no doubt you would have heard about in other evidence and will certainly hear about from my colleague, are some of the most important initiatives that we have. Large-scale renewable energy is extremely important for the long-term future. In the short term, the only way we are going to get to the targets quickly enough and to reduce electricity prices, focusing on the objective of this panel, is through the implementation of those three things: energy efficiency, peak demand management and distributed generation.

Our project came up with a road map. You will have heard about the significance of the spending on electricity networks, which has increased to $9 billion a year, or $45 billion over five years—faster and larger than the National Broadband Network. And yet until recently, and thankfully now with this Senate select committee and the attention being paid to the issue, it was largely off the radar. It is a serious issue both for consumers but also for the electricity industry. There is a systemic problem and a structural problem at the heart of the way the electricity system has been set up and the way the institutional arrangements in particular have been set up, and certainly a problem for the environment in terms of increased greenhouse emissions.

So the problem with the increased network spend and the flattening or even decreasing sale of kilowatt hours is a structural issue. It costs you more to sell less of your product, and therefore prices will inevitably spiral. That is not even taking into account a few wild cards that we have, including the great opportunity for people to understand their bills and have control through apps and the like. Electric vehicles and a whole range of different things are coming down the pipeline which could create even more issues.

Our research showed that, if we were to invest significantly in decentralised energy through a range of measures which I will talk about, we would have the opportunity to reduce prices and bills, which is the important thing for customers, and reduce greenhouse emissions. There is potential for up to $3 billion per annum in savings as a result of investment in decentralised energy.

We have summarised the measures as four important things. The first one is targets. We absolutely need to set targets for the reduction in peak demand, which is driving the increase in prices. We need to have reporting against those targets. We need to provide incentives. So what we are proposing is a collaborative fund—roughly $300 million a year would probably suffice—based on equivalent examples in the UK or Canada. There are a whole range of different examples around the world. It would be sufficient in combination to enable us to achieve the deferral of some of the network spend, which would significantly reduce the growth in prices, which is the key objective, but also enable the development of the industry in these areas. The employment implications alone of investment in energy efficiency, peak demand management and distributed generation industry are quite significant.

So we are talking about targets, reporting and direct incentives for the industry to try to implement this. Queensland has come some way towards implementing that through its demand management fund, so there is an example. The other measure is to change the objective of the national electricity law, to include an objective about protection of the consumer against price rises and also protection of the environment, which is currently missing. We have done another piece of research separately which is looking at the problem associated fundamentally with the national electricity law, which is at the heart of some of the difficulties we are facing today.

I will leave it there, because there are time pressures and I am sure there will be opportunity for questions, but I would certainly commend to you both the summary report and the full report of the Decentralised energy roadmap. Of course, there are many other documents that lie behind these, which are on the website.

Dr MacGill : I am with the Centre for Energy and Environmental Markets, at the University of New South Wales, which is an interdisciplinary centre working across engineering, business, economics, science and the social sciences. Researchers associated with our centre have been looking at the National Electricity Market pretty much since it began. We also work internationally, looking at electricity industry restructuring in other parts of the world. I think it is fair to say that in many regards the National Electricity Market is seen as leading practice in electricity industry restructuring, certainly compared with the experience of some other jurisdictions. Over the time period of the market, which is now over a decade, the focus has quite naturally been supply-side oriented and wholesale market oriented. That is pretty much what you see with restructuring—some people prefer the word 'reform'—of electricity industries.

The unfinished business of restructuring has very much been retail markets and network regulation. There are a range of reasons for that. You start with what you have got, and the traditional industry arrangements have also been very supply-side oriented, as we see elsewhere in the world. But I think what we have started to see and what this inquiry and other work underway really highlights is that there is a price to be paid for our failure to engage on the demand side and, of course, the demand-side interface, the retail markets. So the work lies ahead of us.

I have a couple of comments on electricity price increases, as flagged in the terms of reference. In the context of delivered services, which is the national electricity objective, there are actually a lot of prices that are potentially relevant. There are wholesale prices. There are retail prices, which I think are better termed schedules of fees rather than prices in the sense of pricing being where supply meets demand. Our wholesale market has prices. It varies by time, it varies by location, it varies with uncertainty, and there are a range of future prices there which are needed to drive appropriate investment. When you get to our retail market, there is a sort of 'take it or leave it' schedule of fees, it is generally very simplified and it does not really reflect the underlying costs and values of the industry.

There are other relevant prices as well. In terms of energy services, there are the prices of energy efficient equipment, or non-energy-efficient equipment, and new loads which are also part of the set of prices which set the framework within which energy consumers are able to access the energy services they want. Until the carbon price came in, in mid-year, we had actually seen wholesale prices falling in the market for a range of reasons. Reduced demand has clearly been part of that, but expenditure on networks and a range of other things has clearly been driving the retail prices significantly higher, with some more to come. So it is an important area to focus on, but it does sit within a broader context of what we actually mean by price.

So why are those prices going up? It is a very important question. In part, those price increases reflect a very important thing which we have started to do, which is to address the environmental impacts of the electricity industry. When you think about it, the National Electricity Market is Australia's largest environmental externalities market. The environmental impacts of the sector are very significant—about a third of our national greenhouse gas emissions—and, for most of the existence of the National Electricity Market, to a greater or lesser extent we have not really priced those environmental impacts in; they are not seen by participants in the market. So renewable energy targets and a carbon price in some ways just reflect and might best be seen as removal of a subsidy which allowed large emitters to use the atmosphere and cause damage without paying for it. And part of the increases may well be the cycles you see in an industry with long asset life. This has been a big issue in network assets. We tend to have cycles of significant network investment and then cycles where we see less. But certainly a very large part of the price increases has really been market failure in a whole lot of areas, in the way retail competition is structured, in the way networks are regulated—and that is the work ahead of us. It is not necessarily just keeping prices down, but it is getting prices to work in an effective, efficient and equitable way.

CHAIR: Could I ask you to wind up as we have questions and we have limited time.

Dr MacGill : I can wind up right there.

CHAIR: Thank you. We will go to questions. Senator Edwards.

Senator EDWARDS: Have you done any work on the fact that renewable energy targets are driving an economic activity where we purchase renewable energy certificates and that affects the cost of power generation? I am specifically talking about wind, which is three to four times more expensive to generate than traditional coal fired power generation. The effect of that cost is combined with—and here is the second part—the virtual monopolies which we have heard about this morning, the network companies. If they want to dial up an increased capital value of their stock exchange listed companies, they need to increase the turnover of their company. And if you increase the turnover of your company you increase the charges which you apply. If you go to a regulator and say, 'I've got all this renewable energy coming into my system. I need to increase the infrastructure and therefore increase the value of my company because it is getting greater returns,' the regulator will agree because they have all these targets. The effect of this is ramping up the cost of electricity to all the consumers out there. Ultimately we have heard the retailers squeal that it is not their fault—despite their $6 million or $7 million executive pays—but the fault of someone down the line. In actual fact it is the renewable energy certificates which are driving the cost of generated power, which then in turn drives a business case for transmission companies to increase the value of their companies by virtue of going to a regulator and saying, 'We need to transmit this.' Have you drawn that connect?

Prof. White : I know my colleague Dr MacGill will want to add to this. We found that it is not the primary cost driver. You mentioned two things. One is the impact of environmental requirements, of which the mandatory renewable energy target is one. Dr MacGill mentioned in his evidence that that is a factor in the increase in prices, and of course many state based schemes have increased the price. But it is small relative to the network spending. So the second factor you mentioned, about increasing the value of assets and so on, is probably a much larger one. The spending on networks is $45 billion—an awful lot of money, and that swamps the impact of such measures as the mandatory renewable target, the feed-in tariffs and so on, many of which are being phased out in any case. We have done some work on the relative magnitude of the drivers behind the price increases, and our conclusion is very clear that it is actually about the network spend and less so about those environmental initiatives. But I am sure my colleague would like to embellish.

Dr MacGill : I think the issue of wind power highlights this point about the range of prices and the need to think about new technologies coming into the electricity industry in a sort of all-of-picture way. A wind farm, of course, has very low operating costs. It costs less to operate than a coal fired generator. The issue, of course, is the high capital costs of building the plant. Then, in terms of—

Senator EDWARDS: Return on capital deployed thereafter, which is an operating cost, isn't it?

Dr MacGill : To make the point, wind power may actually be driving down wholesale electricity prices. Some of the evidence we have been seeing in South Australia and Victoria shows that when the wind blows wholesale prices come down. That does not mean retail prices come down, and there are a range of reasons for that.

Senator EDWARDS: Are you factoring in the government subsidies on those as well?

Dr MacGill : I am merely speaking to the wholesale prices in the national electricity market. So the subsidy to wind power is being delivered through these certificate values and that is imposed on the retailers and hence on end users directly. So that bypasses the wholesale market. But, to pick up on this point of the network connection, one of the things with renewable energy is that it tends to often be located in places where the network is not strong. So, in some ways, yes, we have a transmission network which was effectively built around the existing generation fleet. If we are looking at large-scale transmission of this electricity industry to lower emissions—we are certainly arguing we should be doing that—then increased network expenditure is a very real possibility.

One thing to flag, of course, is that there are distributed renewable technologies such as photovoltaics, which actually get embedded right at the point of end use. So there are really opportunities even to not impact on networks or, if we do it right, to actually reduce network expenditure through the deployment of those renewables.

Senator EDWARDS: With respect to that, the cost of wind energy has to include what the retailers pass on in their renewable energy certificates. It cannot just be the cost of generation, because that is the cost of renewable energy, isn't it? Do you agree?

Dr MacGill : Absolutely. It is part of the cash stream that we have established—

Senator EDWARDS: Which the consumer pays for, which is why we are here to try to work out why the consumer is getting hooked with such large increases over the last few months.

Senator XENOPHON: Dr MacGill and Professor White: can I go to the issue of renewable energy and, in particular, wind energy. South Australia has got a higher preponderance of wind energy compared with other states and one of the complaints I have heard from the geothermal sector is that that is an actual alternative to baseload coal fired power stations, but they have not had that critical mass to get across the line, if you like, in terms of a large-scale commercial project and the grid connection. Should there be a greater emphasis and incentives for those sorts of renewable energy that can actually replace coal fired power stations in the longer term, compared with wind, which is intermittent in its nature? Does that, in a sense, skew the renewable energy sector in a way that constrains geothermal taking off as many think it should?

Dr MacGill : I think in many ways the experience of wind in South Australia is a testament to the national electricity market arrangements, with fairly minor modifications. South Australia has successfully integrated a very significant level of wind. By world standards it is a high penetration. You are absolutely right, wind is—

Senator XENOPHON: You are aware of the litigation that is about to kick off in South Australia and other states against wind turbines—but that is a separate issue by residents. Sorry.

Dr MacGill : There are a lot of aspects to that deployment. It is highly variable and somewhat unpredictable; there is no doubt about that. All generation has that characteristic, to different extents. For example, one of the largest unexpected and unfortunate things that can happen in the national electricity market is the sudden loss of a large thermal generator. In fact, you can see higher, sudden changes in output of a large 700-megawatt coal fired unit than you can for a wind farm, because you do not tend to lose an entire wind farm all at once. There are some network issues which might result in that.

Senator XENOPHON: But the reliability generally of a gas or coal fired generator is much more reliable than wind energy. Wind energy only has a factor of five per cent reliability, whereas I would imagine thermal generators have a reliability in the high 90s, wouldn't they?

Dr MacGill : There are some real complexities there. Reliability as in whether a wind farm is able to generate if the wind is blowing is very high, because you have got a lot of units and they are reliable. But you are absolutely right in terms of the availability of the resource. That five per cent figure is, I assume, the figure referring to the high probability of availability of wind at times of peak demand, which is a key part of—

Senator XENOPHON: I think that is what is factored in in terms of generation capacity. I think that is the figure that is factored in, but I may stand corrected. How do we get to this issue of geothermal? I think it is in the national interest, because South Australia does have some of the world's best geothermal energy reserves, as do parts of Queensland and New South Wales. How do we tap that—which actually could replace coal fired generators in years to come?

Dr MacGill : A very explicit aspect of the renewable energy target was to encourage low-cost, commercially available technology, which geothermal currently is not. It is still really in the demonstration phase. But when you look at the long-term picture going forward, if we are to transition to a low and eventually zero carbon electricity industry, dispatchable renewables play a vital role in that. So we really need a coherent technology strategy going forward where you deploy the technologies that work and exist, and we are successfully integrating significant amounts of wind, but we are also doing everything we can to confirm the viability or otherwise of hot rock geothermal technologies and other dispatchable renewables.

What we see at the moment is an uncomfortable mix of renewable energy targets driving low-cost deployment of existing technologies and a range of grants schemes and federal government support for geothermal drilling and so on. I would certainly agree we have not got that framework right.

Senator XENOPHON: In your general comments, Dr MacGill, you said that the National Electricity Market is by any measure an internationally regarded example of electricity industry restructuring, which, prima facie, sounds encouraging, but then you go on to say: 'the restructuring process was supply-side and wholesale market oriented. Retail markets remain unfinished business and have performed poorly to date in survey energy use is to effectively, efficiently and equitably to obtain their needed and desired energy services.' In other words, would one summary be that the NEM is a great idea but it has been poorly implemented in terms of the outcomes that we have been seeking?

Dr MacGill : Restructuring is a process, and these things will take time. We have the challenge of almost complete transformation of the electricity industry ahead of us if we are going to address climate change concerns. It is interesting to note that the National Electricity Market can be both an internationally regarded example and still have failed on all of these fronts. Clearly, it has succeeded on many—the lights are staying on—and electricity prices here are still very competitive by international standards, although that has been moving. But this is not an Australian electricity industry problem only; it is really a challenge that electricity industries around the world are facing. It is fair to say that some of those industries are ahead of us in some regards such as renewables; others are clearly behind us. The key point is; the key work of restructuring still remains, and that is to bring the end users formally into the market.

Senator XENOPHON: Finally—and you may want to take this on notice—are you familiar with the limited merits review interim report by Professor George Yarrow, the Hon. Michael Egan and Dr John Tamblyn that was released on 31 August this year? It is quite scathing of the way the rule-setting process is established. Could I perhaps invite you, in so far as it is relevant to your areas of expertise, to comment on that, particularly in respect of the renewable sector.

Dr MacGill : My preference would be to take that on notice.

Senator XENOPHON: Thank you.

Senator McEWEN: There has been a bit of a theme from the coalition senators during this inquiry that sustainable energy, in particular wind farms in South Australia, is causing price rises in that state—

Senator CORMANN: Sorry, Anne, could you perhaps speak up? I cannot hear you.

Senator McEWEN: Suddenly he wants to hear me! What I said, Senator Cormann, is that there seems to be a theme from coalition senators during this inquiry that sustainable energy initiatives, including wind farms in South Australia, are causing price rises in power bills in that state. My understanding is that, of an average consumer's power bill, retail and energy savings schemes compose about 20 per cent of that bill—is that right? I am just curious about what percentage of the 20 per cent you would attribute to wind farms or wind energy. Has anybody done that analysis, or are we all speculating?

Dr MacGill : There are certainly a range of parties that have provided a breakdown of where these electricity price increases are coming from. One thing I would add is that there are some challenges in that exercise, because there are some complexities. As one of the things that has come out in your terms of reference, we lack information on some key areas that are very relevant to try to work out: Is that renewables or is that retailer margin in terms of that price increase? For the specifics, I would prefer to take it on notice and then study it in more detail, but in a general sense I would flag that there is a range of those exercises out there and they have their challenges. But, as Professor White was highlighting, they have clearly put renewables and the energy efficiency schemes as a smaller component of the price rises than the networks.

Prof. White : Yes, our figures would not disaggregate wind from other components of the mandatory renewable energy target and, as Dr MacGill would suggest, that could be quite difficult. I would just reiterate—and I would urge the senators not to get distracted by this—the important thing is the network spend. It is just far and away the biggest component of the bill increase, so it has to be, I would suggest, the most significant thing that you would focus your attention on. Many of the other programs are being reduced, the feed-in tariffs and so on, and there will obviously be a consolidation and shake-out of some of them as part of the introduction of carbon pricing, as there well should. We need to have the most efficient measures, coordinated preferably across the country so that we do not have a patchwork of different measures.

CHAIR: Are you saying that the most efficient measure to reduce emissions is an economy-wide price on carbon?

Prof. White : As a foundation it is necessary, absolutely, but not sufficient. As my colleague Dr MacGill said, for years we have been using the atmosphere as a subsidy. There is no question that it is absolutely necessary to have a price on carbon as a foundation. It is not sufficient, though. If we do not pay attention to these other things then we will have the problem of price increases which have nothing to do with the carbon price and nothing to do with the other environmental initiatives that have been in place for some years through the states and the Commonwealth.

Senator McEWEN: With regard to network pricing, one of the reasons the costs are escalating in that sphere is because as a nation we build the network to deal with peak demand because business or domestic consumers do not want to be left without power. What can we do better to address that side of the equation, the peak demand thing? Can we continue building the infrastructure to deal with peak demand, or do we have to look at it in some other way? Do we have to reduce demand so that the peak is not as high?

Dr MacGill : I might make one very general comment. Professor White's group has done much more detailed work in this. Building both network assets and generation assets for peak demand is really the default strategy in most electricity industries around the world, although a growing number of them are picking up on the point you have raised, that there is a demand side to that equation and there are many opportunities to reduce demand at these times rather than building new assets. Certainly you can address our problems in a measure by just building more networks. That has really been the trajectory we have been on. But that obviously has neglected all of our other opportunities to do it differently and far more effectively and at far lower cost.

Prof. White : There would be three reasons for the increase in terms of network spend. The first one is a quite reasonable replacement of ageing assets. That is definitely a factor. Dr MacGill referred to the cycles of investment. The second one would be the changing standards for reliability of the network, so the standards for reliable supply, which has been a factor in New South Wales and which itself should be subject to scrutiny. We need to make sure we are not gold-plating the system to meet standards which are quite unreasonable and we could actually put in place better measures to ensure that. The third and most significant one, and our estimates are that it is roughly about a third of the spend, is to deal with peak demand. You are absolutely right and my colleague Dr MacGill is absolutely right: this is something that is readily amenable to investment, to very simple, low-cost measures on the demand side. For example, you would be well familiar with some of the trials that have taken place with direct load control. South Australia has been leading some of the work in this in terms of air-conditioning—simple modifications to air-conditioning that enable the compressor to be cycled while leaving the fan on through direct load control. It is a very low-cost intervention, and especially if it is a requirement in new air-conditioning systems can enable that. In a regulatory sense the South Australian government has been leading the way in that regard. There are a whole lot of other measures known as demand-side response where you can aggregate the potential for demand reductions across a whole range of customers, pay them for the trouble and get peak savings dramatically.

What this starts to do is to break down the differentiation between base load and peak load generation because you have another resource in the mix which can be brought on and off at will. We have a lot of experience of those in this country. We have led the way in terms of aluminium smelters as an interruptible load and hot water systems as an interruptible load. But that is just scratching the surface in terms of what is possible. We have developed an electricity system which is largely unchanged for over 100 years and it is essentially a linear system with power stations in La Trobe and Hunter valleys and so on and consumers at the other end. The high cost of getting that energy along that one-way flow is what is starting to manifest here. But we can change that. Through the application of new technology, new systems, new practices, we can make that a two-way flow, a much more robust system, because the electrical engineering part of our research has shown that you can get a more reliable system if you have a more decentralised system.

We can look at embedded generation. A lot of the buildings we can see from here have generating sets in their basements which operate on gas; they can massively reduce the demand for electricity and also reduce peak demand, from direct load control of air-conditioners through to network pricing and a whole range of other soft measures. So there are a huge array of different methods available which can all reduce cost and completely change the way we think about the electricity industry.

Senator McEWEN: So we do not need to build any more coal fired power stations?

Dr MacGill : I would go beyond that. I would say it is not only that we do not need to; we cannot afford to if we are going to address climate change. We should be looking at retiring traditional coal fired power stations, not building new ones. If we are going to continue to use fossil fuels and we are going to address climate change, it is carbon capture and storage. Otherwise, it is just not compatible with our understanding of what needs to be done.

Senator McEWEN: Thank you.

CHAIR: Senator Cormann.

Senator CORMANN: Thanks. I have two questions for the witnesses following up on some of your comments to Senator Xenophon. Firstly, you talked about the need to bring the end consumers into the equation. When you say that, do you mean through increasing price signals at the consumer end?

Dr MacGill : I would put end-user engagement in a much broader perspective than the price they face. Obviously, in many ways, in our electricity industry the end-user engagement at the moment is that things run when you switch them on and off; when you buy something new and you plug it in, it works; and you receive a bill every three months, which you may or may not even look at—you might have set up automatic bill paying; and that is the extent of the relationship. What has emerged in terms of both growing peak demand, with household and commercial equipment that has a very high demand for a very short period of time, like air conditioning, and the need to address our environmental challenges in the electricity industry is that that sort of relationship really needs to be revisited. That does not necessarily mean that every household needs to have a real-time price and a meter sitting in the kitchen, where they are running around turning things on and off in response to that. Obviously, we need to work within the constraints, capabilities and abilities of end users, and they vary enormously. There are some industries that are very engaged; they have an energy purchase manager. Then there are the households—and here I often use the example of my mother. What that speaks to is that the nature of that engagement needs to be much broader than a negotiation over the price that is paid. It is the equipment they buy. It is the way they do their renovations. There is a huge spectrum. We really need to be looking at: what is the right institutional framework for that to happen? Do we just give end users information, and they magically engage and work it all out; or do we accept the reality that in many complex areas of life we have specialised agents to assist in that?

Senator CORMANN: So are you saying that the price signal to the end user is not important, from your point of view?

Dr MacGill : I would say it is part of the overall framework of engagement that we require.

Senator CORMANN: Which includes increased electricity prices.

Dr MacGill : Potentially, absolutely, yes.

Senator CORMANN: This is my final question. You also talked about the fact that we have not got the overall framework quite right. I heard you say that we have essentially got a hotchpotch of incentives and policy initiatives all pulling in different directions, and it is not as efficient as it could be. What would be the ideal scenario from your point of view in terms of getting the framework right?

Dr MacGill : The first thing is that nobody knows what that right framework is. It is inevitably going to be a work in progress, the scale of the challenge we face is so large and there are so many uncertainties. So the first thing I would flag is that there is a key role for process in getting that framework right. If we look at the AEMC's recent draft report we will see that there are some very positive things in there in terms of the process by which, say, network service providers make their decisions—the information that is available, the consultation processes they may go through. But we certainly need to have rule making in the National Electricity Market much more engaged in the role, scope and capabilities of end users. We need far better integration between our external policies, be it carbon pricing, renewable energy targets, energy savings schemes and minimum energy performance standards. They need to be far more coherently integrated in the way we actually do rule making and policy within the National Electricity Market.

CHAIR: You talk about demand-side participation, improving energy efficiency and incentives. There seem to be incentives there in the generation sector with the carbon price and, at the retail end, with the various state schemes and efficiency programs that are being run by retailers. But the missing link seems to be in the middle there in transmission and distribution where we have heard evidence this morning that there may be incentives to go the other way to actually increase the use of electricity. What do we do to improve standards within the missing link in transmission and distribution?

Prof. White : In the context of the Australian decentralised energy roadmap we have talked about the need for collaborative targets. This cannot be done without the industry; it cannot be imposed on the industry. I think there is a strong recognition within the network industry that there are problems with the model. Those cost pressures will certainly be a problem, which is why we are calling for the setting of collaborative targets and performance reporting, which is crucial.

CHAIR: So who should be the collaborators?

Prof. White : Certainly, the network businesses themselves. Obviously, there are a range of stakeholders associated with that. There are a whole range of businesses associated with the demand side that we would be unleashing with that kind of investment. There absolutely need to be resources behind this, which is why we are calling for a partnership fund to ensure that. An approximate estimate is about $300 million per annum, which would leverage an opportunity to defer and therefore save a significant proportion of the investment in the network spend. Any unallocated funds could then be available to other network businesses. So there is a strong incentive both for performance and also to participate in this process. One difficulty we have had with the existing processes for encouraging demand-side participation is that there has been a lack of participation, a lack of engagement by the industry and not a strong enough engagement of pinpointing where you can invest because it is highly spatial. As you can imagine, network constraints occur very differently across the map of our capital cities and large towns. This needs to be built into the business-as-usual case via economic regulation through the Australian Energy Regulator. The structural changes that Dr MacGill is referring to are relatively new. That is what we often forget. Some of these initiatives, the establishment of the Australian Energy Regulator and the institutional regulatory processes are new. There is recognition that they have not necessarily served to keep a lid on this and to scrutinise sufficiently the alternatives between networks quite reasonably going about their business to strengthen networks under the existing paradigms versus a new opportunity for us to do things differently and to say, 'Maybe there is a much more cost-effective way to do this which will benefit consumers, benefit the industry and certainly benefit the environment.'

CHAIR: One final question: the electricity sector was traditionally regulated because of the monopolistic nature of it and the impacts on consumers that could arise because of that. When we talk about energy efficiency, many of the submissions advocate the rollout of smart meters, looking at time-of-day pricing and, you have mentioned in your comments today as well, a greater price signal. The issue that I am having trouble getting my head around is: how do we protect the most vulnerable, particularly low-paid, low-income consumers from those price signals and the adverse effects of those. We talk about reducing peak demand but if you are a low income family with a couple of kids you cannot avoid the fact that you are going to have your peak times for electricity consumption in the morning and in the afternoon when the rest of the economy does. You cannot avoid that, in many respects, if your kids are having showers before going to school, you are making lunches and the television and radio are on in the morning. How do we reduce the impact on vulnerable consumers through incentivising demand-side participation and avoiding some of those adverse effects on them?

Dr MacGill : It is an enormously important and underappreciated aspect of the electricity industry that it has spent most of its 100 or so years in most countries as, in some ways, almost a socialist endeavour, providing an essential public good and having a view of the rights of citizens to have access to affordable energy.

CHAIR: I can remember that when I was a kid there were ads on television encouraging us to buy more electricity and saying how cheap it was! That was only 20 years ago. Things have changed.

Dr MacGill : Absolutely, and this has always been a bit of an uncomfortable question for electricity industry restructuring and a greater role for competition, because markets, inherently, within themselves, do not have an equity aspect to them. They can, under the right set of circumstances, help deliver equity outcomes, but they do not guarantee them in any way at all. I would go further and say that if we cannot manage this transition within the electricity industry in a way which is equitable and protects vulnerable consumers then we probably cannot make the transition, because equity and social consensus are a huge part of this because, as Senator Xenophon and others have raised, with large change come impacts good and bad on different players, and if you cannot establish a consensus on the need for and importance of and ability to change, you cannot make progress.

There is one risk, of course, in saying, 'The vulnerable consumer issue is: "Let's keep electricity prices low for them."' We need to be much more thoughtful about the way we do assist them—and that is a challenge in itself, because they are often in rental properties and things like that; there are lots of things they cannot do; finance is a problem; and it is often the last thing on their minds, with all the other stresses they are under. What is the institutional framework we are going to provide to actually support those people and help them do energy efficiency and so help them get their bills down? In the end it is the bill, not the electricity price. What are our opportunities to help them get their consumption down and to make sure that, when we do target support, it is in a way that does not actually work against these bigger changes that we have to make? But I would totally agree with the importance of it. If we cannot get that right, we are really going to struggle to progress.

Prof. White : I think the solution to this issue is the same as the overall solution, which is that we should not rely solely on time-of-use pricing. As Dr MacGill said, there is a whole range of other complementary measures. If we are implementing demand-side measures then we are providing solutions to reducing bills, and you can quite readily target it. There is lots of experience of this, both in Australia and around the world, where you deliberately target those demand-side programs to the areas of highest network constraint and the areas of highest socioeconomic disadvantage, and then you can target householders with socioeconomic disadvantage in order to reduce their bills because, as Dr MacGill says, it is the bills not the price that matters.

CHAIR: Thank you, Dr MacGill and Professor White. The committee will now take a break.

Proceedings suspended from 12:28 to 13:31