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Select Committee on Electricity Prices
25/09/2012
Electricity price increases in Australia

BURN, Dr Peter, Director, Public Policy, Australian Industry Group

REED, Mr Tennant, Principal National Adviser, Public Policy, Australian Industry Group

[14:16]

CHAIR: I welcome representatives of the Australian Industry Group. We have not received a submission from your organisation. Do you wish to make a brief opening statement to the committee?

Dr Burn : We will make a very brief opening statement. Tennant Reed is our resident expert in this area. I expect he will be answering all the hard questions and I will fluff around at the periphery. The Australian Industry Group represents a broad cross-section of businesses: energy users, generators and network providers. We have access to many perspectives on electricity price issues and we are particularly conscious of the needs of trade exposed industries for competitively priced access to secure energy supply.

Our members are very conscious of the rising price of electricity. The intensity of energy use is clearly very uneven across businesses. Rising prices have affected all and have increased the percentage of the revenue that they must spend on energy. We do a fair bit of research in this area and our most recent Energy shock report, which we released earlier this year, showed that between 2008 and 2011 the proportion of businesses spending less than one per cent on energy declined from 50 per cent to 46 per cent and the proportion spending between two and five per cent grew from 14 per cent to 20 per cent, so it is a rising proportional cost on business. We, in the next week or so, will complete another report which is called something like Policies to reduce energy prices. We intend to give that to you as a part of our submission in about a week.

Our key messages are that network costs and costs of peak demand are the single biggest drivers of rising electricity prices—we recognise that—and that energy consumers, from our point of view, and business consumers want reform. That is not something that has come out of politics. The networks are not villains. They deliver a vital service but the system, we think, can work much better. We are strong supporters of the reform proposals that the AEMC has put forward. In our policy document that we will release and give you shortly we have put forward a handful of other recommendations as well.

CHAIR: Thank you.

Senator XENOPHON: Dr Burn and Mr Reed, the AiG is not a small organisation and it represents major industry in this country. Was there a reason why you decided not to provide a written submission? You have done a lot of useful work on this, but we have had submissions from bodies that do not quite have the same resources as you, such as the Public Interest Advocacy Centre. Are you proposing to provide a submission down the track?

Dr Burn : Yes, we are. What we have done is commission some research. We wanted to get that finalised before giving it to you.

Senator XENOPHON: Sure, I just wanted to know.

Dr Burn : So we do intend to give you a submission.

Senator XENOPHON: I just think that your submission would be very useful in addition to your evidence today and I am just going through the Energy shock report that came out. Was that just three months ago? Is that right?

Mr Reed : Yes.

Senator XENOPHON: In terms of the review of the rules, the limited merits review that is being carried out by Professor Yarrow, Mr Egan and Dr Tamblyn, did the AiG make a submission to that review?

Mr Reed : We did not. While we are a very active organisation, the degree of specialised knowledge required for some of these technical aspects and the procedures for partial review of decisions of the regulator are something where even we find ourselves stretched, particularly given the range of energy and climate policy issues—

Senator XENOPHON: Which, paradoxically, was one of the findings of the panel: the complexity and the lack of access to consumers, including your members, in terms of any such review process.

Mr Reed : We have been involved in some discussions with other organisations about the merits of ideas for a formal role for a consumer advocate, including potentially covering business consumers, in the determination process prior to any reform. It is definitely the case that our members, even the largest of them, feel, and are, very distant and divorced from the process by which energy prices and network regulations are set. Undoubtedly for households it is almost impossible to get engagement but it is not easy for business either.

Senator XENOPHON: It is not for me to tell the AiG what to do but they still have not finalised their report and I think that it is going to come out next month so I am sure they would welcome any feedback. Can I go to the issue in terms of the role you see for there to be a national approach. The Independent member for Lyne, Mr Oakeshott, has introduced a private member's bill to say that the electricity market should be regulated at a federal level and bypass the states—in other words a takeover of the state role so that there is a uniform national approach. Does the AiG have a view in relation to having a uniform national approach with respect to electricity regulation?

Mr Reed : I am not actually across the details of Mr Oakeshott's proposal but we do have—

Senator XENOPHON: Perhaps on the general principle.

Mr Reed : We have a national electricity market that covers a significant portion of the nation, not exactly all of us, and there are significant differences between the NEM and the SWIS and the Northern Territory markets. We do have a single national energy regulator and we do have a single set of rules that underpins the NEM and the process by which the regulator has to work, so some of that is already there. We do have differences between the states in terms of reliability standards and things like those and there have been questions raised about whether some of the state standards are too tight, particularly in New South Wales where the degree of reliability that is offered costs more than it is really worth to consumers—and that is a difficult decision. So there is scope for a still more national approach but we are already quite a long way towards a national approach and the question, I guess, is the quality of that approach rather than the uniformity of it.

Senator XENOPHON: Senator Milne earlier today asked some quite pertinent questions about demand management. What strategy, policy or approach does the AiG have on behalf of its members to reduce electricity peak demand? Is there a common theme amongst your members to reduce peak demand?

Mr Reed : There are a number of ways to crack this nut and very few of them are incompatible with each other. One of the most exciting options is at the centre of the AEMC's Power of choice review, which is a mechanism for consumers, whether large consumers or bundled together small consumers, to sell demand reduction into the wholesale market and receive the spot price. There is a lot of work that would need to be done to construct that mechanism in a bullet-proof way, but similar mechanisms operate in other energy markets around the world.

Senator XENOPHON: Which ones, for instance?

Mr Reed : I understand that you can do that in the New Zealand market right now. There is a business called EnerNOC, who may be on the list for future testimony to this committee, who offer aggregator services in three markets currently that I am aware. In the national electricity market they can only aggregate additional small-scale generation. In the WA market they can offer capacity into that state's capacity market. In New Zealand they can offer demand response as well. I think that several of the regional United States markets—

Senator XENOPHON: If you could provide further information on those on notice, that would be useful for the committee's deliberations.

Senator CORMANN: Have you assessed what the overall impact of the carbon tax and renewable energy target are on electricity costs for your members?

Mr Reed : We have surveyed our members several times in recent months on a range of relevant issues. One of the more in-depth surveys that we did with a more limited number of companies asked specifically about cost impacts on electricity and what had been passed through so far, and we got a pretty uniform response with respect to the carbon price of about 2.1 cents to 2.3 cents per kilowatt hour for businesses across a number of states of different sizes. So that was fairly consistent.

We have not done specific research on the renewable energy target with our members. We have certainly spoken with a lot of members who talked to us about their bills, and I can say that they are not happy about any line item in their electricity bills at the moment. It is a slightly more complicated picture for the renewable energy target, because the gross cost of certificate purchase will be usually reported by the retailer to the business customer and, if you put the small-scale and large-scale schemes together, that is approaching in the region of one cent a kilowatt hour.

But there are some countervailing effects from the two components of the RET. So the extra generation that the LRET brings on has to some extent—and there is some controversy over the size—a depressing effect on wholesale electricity prices. Some observers think that that is strongest in South Australia, where most of the wind capacity is, and less significant elsewhere. The small-scale scheme, where most of the activity has been over the last couple of years, may be playing a role there as well—although that is even more complicated to assess.

Senator CORMANN: The Australian Energy Regulator publishes both movement in regulated prices and standing prices across all of the jurisdictions that are part of the national electricity market. For some reason, electricity costs in South Australia and Tasmania are much higher than what they are in the other jurisdictions—Queensland, New South Wales, Victoria and the ACT. Have you got any view as to why that would be the case?

Mr Reed : My understanding is that that has been the case for a long period of time and that there has been some decline in those prices since those regions entered the National Electricity Market.

Senator CORMANN: I am looking at the price changes in 2010-11 and 2011-12. For South Australia it was 18.3 and 17.4 per cent respectively, Tasmania 15.3 and 11 per cent, whereas in the ACT it was 2.3 and 6.5 and it was lower in all the other jurisdictions as well.

Mr Reed : The South Australian market is affected more than some of the other markets are by extreme peak pricing events, which plays a role—

Senator CORMANN: Why is that?

Mr Reed : Partially it is because the interconnector with Victoria which would allow a flow of supply between markets is not large enough to account for the most extreme peak periods. As a result, the market is supply constrained during those times and the price gets to the wholesale price cap at times. We do not have any specific comment to make on this issue, but I would note that the regulator has taken the view that there may be some market power at times being exercised in South Australia. But we do not have any particular insight into that.

Senator CORMANN: In terms of the different elements that put upward pressure on electricity prices, do you see a difference between those electricity price increases that are caused by policy changes that are self-inflicted, like the carbon tax, as compared to those that are essentially based on needing to ensure that the lights stay on and electricity generation continues on?

Mr Reed : Is the question whether—

Senator CORMANN: This sort of committee is all about looking for opportunities to keep electricity prices lower than they otherwise would be. There are different policy changes pursued by different levels of government that have different impacts. One part of it would be governments wanting to make sure that the lights stay on and electricity continues to be available for business, for consumers and so on. The other is to self-inflict price increases through things like carbon taxes and the like. Have you got some views as to how governments moving forward should be approaching the different dynamics from the policy-setting point of view?

Mr Reed : We would like to see downward pressure on electricity prices across the board and for all elements of the system to work as efficiently as they can.

Senator CORMANN: Getting rid of the carbon tax would put downward pressure on electricity prices and would make us, I guess, more competitive vis-a-vis those countries that currently are not facing a self-inflicted costs.

Dr Burn : In the current context we argue for a lower price during the fixed-price period and a faster linking to international schemes. Currently linking is not going to occur until 2015. So we advocate a lower fixed-price period and a move to international linking sooner and think that both of those would lower the price of carbon emissions—

Senator CORMANN: When you say a move to international linking sooner, really what you are talking about is a move to link in with the European emissions trading scheme. But much of what is included under the carbon price in Australia is excluded in Europe, so we would still be at a comparative disadvantage in terms of the impacts on electricity prices, wouldn't we?

Dr Burn : That requires a very close analysis of the European scheme; but that is not necessary to answer the question, because what we would be linking with is the permits, not the base of coverage, in Europe. That would be the relevant variable. The price there is much lower than our $23, and that is the key driver of the impact which that would have on electricity prices. We agree with the broad thrust of the AEMC's recommendations in relation to improved network charges and the scope for better demand management and to reduce demand. We also, in our recent submission on the renewable energy target, have put forward proposals that would lower the price effects of the renewable energy target on energy costs

But, proportionally, I think the gist of your question is: 'What are the main drivers of the cost increase?' As we said in our opening statement, the main drivers of cost increases at the moment are from the network charges rather than any other cause.

Mr Reed : Some elements of the network-related price increase are related to policy—for instance, policy decisions to have particular reliability standards. Whether those are good choices or bad choices, there is scope to improve how the system operates on that front.

Senator CORMANN: Are you aware of any example where the Australian Energy Regulator has ever knocked back a request by one of the network providers for inclusion in their regulatory asset base? Are you aware of any examples where any proposals for investment by network providers have not been allowed to be recouped through increased prices?

Mr Reed : We are not aware of that. It is my understanding that an awful lot of initial decisions of the regulator have not been to the liking of network companies in various respects and that there have been many appeals—and successful appeals—on that basis. But, as to whether they have specifically ruled out items of capital expenditure from the asset base, we are unable to shed any light.

Senator McEWEN: Dr Burn, earlier in your evidence you said that you have evidence that more companies are spending more on electricity. Is that right?

Dr Burn : Yes.

Senator McEWEN: Have you drilled down into that? Do you think it is because the cost of electricity has increased, or is part of it also that their usage has increased? Businesses now have much more technology, they operate 24/7, they operate in areas that have to have air conditioning et cetera. I am just curious as to whether you have delineated cost versus usage.

Dr Burn : We were measuring specifically over 2008 to 2011, and in that period it was driven by prices. I think we find that there are varying impacts on energy intensity with technology and the like. It can work in different ways, and one of the ways is that the economy is evolving away from energy-intensive production into other things so that there is a bigger picture about the economy and the private sector, for example, than that. So I am not too sure. Australia has had for a long time comparatively low energy costs, and that has influenced the shape of our industrial evolution; it has also influenced the incentives to reduce energy and to substitute energy for other things. So our traditional development path, if you like, taking the post-war period view, is, 'Let's go the energy intensive route because that is where it is cheap; labour's not cheap and other things aren't cheap.' But, more recently, energy prices have been rising pretty steeply and that attitude is now changing, as well as other government policies.

Senator McEWEN: But the price of energy overall is still a small proportion of cost outlays for a business when you compare it to staffing et cetera?

Dr Burn : That is right.

Mr Reed : It depends very much on the business. Peter mentioned a report—and this will be no good for those people on the phone—and the chart, which is on page 14 of the report Energy shock, sets out the proportions of businesses spending different proportions of their revenue on electricity. About half the number of businesses are spending less than one per cent of revenue but a quarter of businesses are spending a much more significant amount. So it depends not so much on the size of the business but on the sector and the intensity of energy use associated with that sector.

CHAIR: Would you be happy to table a copy of that report for the committee? Thank you.

Senator McEWEN: You also mentioned earlier that the AiG is interested on behalf of its membership of getting involved in wholesale—working amongst yourselves to purchase electricity at that level. Does that indicate that your members are not maximising their opportunities to work collectively to extract the best possible prices out of energy retailers at the moment? Is that why you want to go down that path?

Mr Reed : We are not proposing to set up ourselves as an aggregator of demand. We do offer energy services to our members but not like that.

Senator McEWEN: You would do it but your members could work together to do that?

Mr Reed : They could work together and they could certainly work together with third-party aggregators or with retailers. Currently, it is possible for businesses to sell demand response but only via their retailer—opening that up and making sure that the incentives are right so that the networks, the retailers, the generators and the users do not lose out from that being taken advantage of. We see great potential. Currently, very little along those lines is happening. One question in our Energy shock survey related to whether businesses are participating in any sort of arrangement to sell demand response. No was basically the answer—nobody was. We had quite a reasonable sample across the country. There is some participation. There is more in WA, with the capacity market there, but very little of it is happening now. We think there is good potential for businesses to individually improve their bottom line by selling some demand response and getting their bills down themselves. But also, if enough businesses take advantage of that then you will start to see the peak prices being shaved a bit and that can only be a good thing for the longer term. It will take some adjusting but we would very much like to see that happen.

Senator McEWEN: Are there any obvious impediments to that happening at the moment?

Mr Reed : There is no mechanism in the National Electricity Market to allow that sale into the spot market or into the wholesale market and get the spot price. It is purely up to arrangements between customers and their retailers and that makes it very hard for very motivated aggregators to do what is clearly possible for them to do.

Senator McEWEN: Thank you.

Senator EDWARDS: Dr Burn, if I could just take you back to your comments earlier in relation to South Australia and we will finish up on that. When you do make your submission, are you intending to have a look at the way in which the states are either advantaged or penalised by their participation in the national grid?

Mr Reed : There is an examination in this report of a breakdown of the sources of price increase state by state over the past five or six years. There is a bit of a difference between the states in the periods for which data is available. It is particularly difficult to get recent data for Victoria, partially due to the deregulated nature of that market. So there will be an examination of the different sources of price increase, but not a great deal of drilling down below that.

Senator EDWARDS: Do you also examine in that document, which I have not read, or do you intend to put in the submission, some recommendations for government policy to try to address these inequities?

Mr Reed : The report itself, the body of the report, is quite flat. It is a contribution to the debate outlining an analysis of where the increases have been, and the bulk of it is a presentation of a large number of practical options for reform, not all of which are compatible with each other. The report itself does not recommend any of them but offers them as food for thought. Some of them are the same as the options that have been recommended by the AEMC in its various reports; others go beyond that. We will have submissions to make on the adoption of some of those options.

Senator EDWARDS: You represent a fairly significant stakeholder in this whole electricity supply issue, given that you are the end user. Is there a growing crescendo, cacophony or whatever you would like to call it of calls for your group to take some action in here in representations to government, and if so what about?

Dr Burn : As I said in the beginning, we have very broad membership, and that membership includes users, generators, network providers and the like. Certainly the users are very concerned about energy prices and would like something to be done about that.

Senator EDWARDS: Distributors are being vilified for being the gold-platers and putting up costs, and they are your members as well?

Dr Burn : We do not join in the vilification but some of those around us—

Senator EDWARDS: No, but it is at the highest level in this country. I go back to the point you made earlier about South Australia. I think you politely put it that in peak times you thought there was some price market leverage, or words to that effect. In my words it is price gouging. They are taking advantage of a lack of infrastructure, with an interconnector not being in place. You talk about Australia having inexpensive energy costs today, but South Australians are paying probably the highest price for energy in the world—if not the highest, then the second highest. I can tell you, from where I come from and Senator Xenophon comes from, the AiG will be very interesting and I await your submission in terms of how we best represent the end users and your other members, who are obviously looking to represent themselves well. Is there any comment you would like to make on that, because I am the last one?

Mr Reed : On the question of the potential exercise of market power, I was referring to statements made by the regulator. Certainly if that was the case, users would be concerned. There are several parties involved in bringing the South Australian context about. The design of the wholesale market appropriately allows for prices to rise, potentially very high if that is what is needed to bring on the supply necessary to meet demand. There is a cap on that, and the size of the interconnector is dependent on other issues entirely. It is the nature of the regulatory structure around transmission and interconnectors and the commercial decisions of the businesses involved there, who are not the same as the businesses—

Senator EDWARDS: So why would they put those things in place which would potentially erode their profit centres?

Mr Reed : Those decisions are being made by other businesses, so I think it is a systemic failure more than the decisions of any one business.

Senator EDWARDS: Are you going to pursue that systemic failure in your submission?

Mr Reed : In the submission to this inquiry?

Senator EDWARDS: Yes.

Mr Reed : I do not think that we will have a very developed contribution to make on that in the very near future, but it is something that we are quite conscious of and on which we will certainly continue consulting with our South Australian members.

Senator XENOPHON: Have a crack at it.

Senator EDWARDS: Just have a crack at it; put a heading and some paragraphs together for me on it.

CHAIR: I have a couple of questions. One of the issues that has come before the committee is time of pricing arrangements—so variable pricing arrangements as a means to drive energy efficiency. In your report it says in the executive summary on page 9 that, of the 77 per cent of businesses who did not actively manage their electricity use in response to pricing arrangements, the majority stated that this was because they did not judge it to be sufficiently important. This is consistent with the finding of a relatively low energy expenditure by many businesses. Do you have a comment to make on that? That would seem to suggest that electricity prices are not the big issue for many businesses that many in the media lately have been making out they are.

Dr Burn : For many businesses electricity prices are not the main issue, but for some businesses their electricity intensity is such that it is a huge issue for them. That is the nature of the demand—the demand is concentrated in a relatively small number of very large users, and so for other businesses it becomes less material, though everything hits the bottom line: if your profit is $10 and your prices go up $10, it does not matter whether it is one per cent of total costs or 50 per cent; it is still going to take your profit out.

CHAIR: In respect of the carbon price, on page 25 of the report it says: 'While the carbon price is just part of this picture'—and this is referring to improved energy efficiency—'the survey results illustrate that many businesses are highly conscious of it in considering efficiency improvements. Sixty per cent of respondents taking efficiency action cited carbon pricing as a very important motivation for efficiency over the next three years and more than 30 per cent labelled it as somewhat important.' That would tend to indicate that the carbon price is doing the job that it is meant to do, wouldn't it—that it is making businesses and participants in the economy aware of energy efficiency and taking action in response to that?

Mr Reed : The report also found that, ranked above carbon price as a motivator for efficiency investments, was the general need for cost reduction and the general rise in electricity and other energy prices. All of those factors loom quite large in the reported decision making processes of members. There were also a number of factors that were making the actions taken on the basis of all of those factors relatively much more significant than in previous years, though still relatively modest—a lot of investigation of efficiency options and low up-front cost investments in energy efficiency—but the bigger projects were generally held back by either the constraints on business capital or the competing needs for the businesses' money and attention. So the carbon price is something that businesses are very conscious of and that they are taking into account when they decide how to spend their capital budgets, but they still have a lot of demands on those budgets and barriers to investment in energy efficiency.

CHAIR: In a pure economic sense, in a market based economy if we are talking about the most efficient means of reducing emissions and changing behaviour over time then a market based mechanism is the way to achieve that.

Dr Burn : We have certainly supported, from first principles, the market based approach to emissions reduction, and that has been a principle of ours for a good six years now and has been a characteristic of our engagement with three different governments on the issue.

On your statements about the impact of the carbon price on behaviour, I should note that that survey and study were done before the introduction of a carbon tax, so it is an anticipated impact. But the overall response to business will be a function of the overall price increase. Businesses are seeking energy efficiency because energy has become more expensive. Regardless of why it has become more expensive, they will be seeking to reduce their electricity use and economise on it in whatever way they can, motivated proportionally by all the factors that are raising prices. We do not think that the carbon price is the main reason for that. We do think, though, that the perceptions and expectations of people at the time of that survey were that the carbon price would have a much bigger impact than it did have and was reasonably modelled to have. So the responses in that survey need to be taken in that context—that there was an expectation of a much bigger price rise due to carbon than was reasonably be expected.

CHAIR: The AiG also received an energy efficiency information grant, I think, to the value of about $1 million to provide information to members regarding energy efficiency. Would you outline how the organisation has used that funding to promote energy efficiency.

Mr Reed : That program of activities is being supervised by other people within Ai Group, but I can talk to that to a certain extent. The activities involved are in development at the moment and will kick off over the next month or two. They involve seminars for businesses across the country providing quite detailed, nitty-gritty information on common energy efficiency opportunities in business; cluster groups of businesses who will share best practices and access to expert energy efficiency advice; a helpline; online videos; and on-site assistance for around 150 sites. So, all up, we expect that several thousand businesses will likely take advantage of these opportunities over the course of the next two years.

CHAIR: You have also been helping some of your member organisations access clean technology grants. Is that correct?

Mr Reed : We have conducted seminars across the country in the lead-up to the introduction of that program urging businesses to take advantage of it. We have conducted a large number of energy audits with individual businesses to identify their opportunities, we have helped several businesses with the application process and we have certainly provided a lot of advice.

Dr Burn : We are very concerned that that program appears to be on pause at the moment.

Senator EDWARDS: We were talking about surveys and things that were done. Have you done any surveys corresponding with the introduction of the carbon tax on business confidence and, indeed, receiverships and bankruptcies in that period?

Dr Burn : We have not done receiverships and bankruptcies, but we keep our finger on the pulse of business activity in manufacturing, services and construction by monthly surveys in each of those sectors. Discerning the cause of things is very difficult. In each of those sectors conditions are very weak and expectations are very poor, so we are keeping very close tabs. In addition, as Mr Reed mentioned earlier, in both July and August we asked questions about people's expectations about their ability to increase their prices and then subsequently their experience in the initial months of increased costs due to carbon. We are scheduled to repeat that exercise in, I think, October and November or November and December to again ask that question to get a picture of the cost impact on our members.

Senator EDWARDS: So their anxiety comes from their inability to pass on the effects of the carbon tax?

Dr Burn : That is a source of anxiety, but the big problem occurred in May, when the global situation worsened markedly. In relative terms that was the big factor in recent confidence outcomes.

CHAIR: We are going to have to leave it there. Thank you, Dr Burn and Mr Reed.

Proceedings suspended from 15 : 00 to 15 : 11