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Select Committee on Electricity Prices
02/10/2012
Electricity price increases in Australia

WILLS, Professor Raymond Thomas, Chief Adviser, Sustainable Energy Association of Australia

CHAIR: I welcome Professor Wills, from the Sustainable Energy Association. Do you have anything to add about the capacity in which you appear?

Prof. Wills : I am here representing, as a director, Duda & Wills, a pro bono advocate for the Sustainable Energy Association and in that role taking on the role of Chief Adviser to the association.

CHAIR: Thank you. Do you have an opening statement that you wish to make to the committee?

Prof. Wills : I do. I thank the committee for taking our submission and for making the time to come to Perth to hear what is happening in the Western Australian market. Of course, this is an inquiry of national significance on energy pricing and electricity pricing.

To briefly introduce the Sustainable Energy Association, it is a business chamber that represents around 350 businesses from across Australia. We are headquartered here in Perth, and we have an interest in promoting sustainable energy across all platforms, whether that be architecture, transport, planning, infrastructure, energy generation or energy efficiency. So we have a very broad policy ambit looking at how you actually promote sustainable energy right across the portfolios of the economy. In that context and today in particular, I guess our key message is the need for an open and competitive market in the electricity sector to promote innovation and to promote price competition and price tension in the market to keep prices down and to keep the prices that are being delivered to the customer—whether that be business, industry or the domestic market—competitive.

One of the issues we raised in our submission is the importance of understanding the current data. A number of institutions around Australia currently are still citing data on electricity from a year ago or two or three years ago. If you go to the source of some of those datasets you will find that the data they are actually referring to are not real data but estimates of data. It is really important to note that. The most recent example of that is that last week the Australian Bureau of Statistics put out a new report to indicate that electricity consumption in households is continuing to rise, and that is based on comparisons of data from the last 20 years, ending in 2010-11. If you go to the 2010-11 dataset, you will find that it is sourced from BREE, and if you note the asterisk next to that dataset you will see that the BREE data is in fact an estimate for 2010-11. That is important, because the Australian Energy Market Operator and a number of market operators around Australia right now are reporting that electricity consumption in Australia is falling; it is falling universally across industry, business, domestic customers and commerce. It is falling for quite a number of reasons, including an improvement in energy efficiency that has been rolled out since 2008 across Western economies and globally.

Particularly within Australia, we are seeing falling domestic and commercial consumption because of self-generation through electricity from solar panels. We are seeing improved energy management systems in businesses and households that are reducing consumption as well. There are also some economic factors building on that. For example, some of the downturn in electricity consumption in Victoria and New South Wales is through closure of manufacturing, which is not a good thing.

All of those factors are contributing to a lower energy consumption on grid in 2012 than we have had certainly since 2008 and, in some cases, as low as 2006. So electricity consumption in Australia is falling.

One of the things you would have heard evidence on this morning—I apologise for not being here, because I would have liked to have heard this morning's evidence—is that the poles and wires are particularly important in the pricing of electricity. One of the decisions we are making right at the moment is more investment in poles and wires at a time when electricity consumption is falling, and that electricity consumption is falling at least in good part because of distributor generation from solar that is reducing the impact or the likely impact of need for more poles and wires into the future. That is a fairly long opening statement. I have got more to say but I would like to interact with the committee and I will be quiet and let questions happen.

CHAIR: In your submission to the committee you point to an absence of cost-reflective pricing in the state, and many of the organisations that have been before the committee have submitted that there should be more cost-reflective pricing as a means of driving changes in consumer behaviour. How do we as legislators ensure that vulnerable consumers are protected in that sort of an environment?

Prof. Wills : It is a really important question because, as a sustainable energy association, sustainability of course incorporates environment, social factors and economics, and all of those things need to meet and work together to deliver a sustainable future. For disadvantaged households that question is really important. In the first part, cost-reflective pricing means that, amongst the signals that go to the market, a pricing signal will in fact encourage any consumer to reduce their consumption or at least any consumer that is exposed to that cost. Some consumers may not notice the cost rises when their household or their business is wealthy enough to avoid the concerns of that. But, in the context of delivering assistance to those groups, it is the Sustainable Energy Association's view that that can be done in several ways that do not impact on the price of energy delivered. It is our view that the electricity price at the door should be cost reflective and should allow consumers to feel the cost of that. But, for the disadvantaged household, it is our view that assistance should come after the meter is read and that that should be either in the form of rebates or—in fact, our preferred method—in the form of solar panels. Our view is that, with the rapidly reducing price of solar panels, many of the schemes that are being promoted to offer subsidies directly to a household can be simply delivered by installing solar panels in those households and, in some cases, delivering a third or a half of their energy for free once those solar panels are in place, and offering some certainty in supply that does not rely on direct supply from a retailer in that context.

CHAIR: Has your organisation done any modelling on the cost of widespread installation of solar panels on vulnerable consumers' roofs?

Prof. Wills : We have not done any technical modelling of it but certainly in terms of the concept we have discussed it widely, and I guess the key example is that, in today's market, a one kilowatt system, which could potentially produce 20 per cent of a household's electricity, would cost a little more than $1,000 in the current market. If you take that to a slightly bigger system to supply more of that particular customer's needs, 1½ or two kilowatts, then you may be able to source that en masse for in the range of $1,500 to $2,000. To offer a tangible example of that, currently in the debate within the Western Australian market, the opposition leader has suggested the sum of $200 million might be required to help families in the bush to meet payments on electricity so that we keep the price of electricity in the bush the same as that in the city, while still relieving the city customers of that payment that currently is a cross-subsidy through community service obligation payments. That sum of $200 million is about 100,000 households in the bush. That means that you could put solar panels on every one of those houses for around $200 million.

So it would be a very simple step in a one-off measure that would reduce the impact of everybody's power bill, the impact of supply and the impact of new wires and poles in that same process. Sorry to interrupt.

CHAIR: That is okay. In some of the other states, advocates of renewable energy have submitted that there are organisations that are developing cogeneration and trigeneration plants, particularly for large buildings, but they are unable to connect them to the grid easily and there are barriers to connecting to the grid. Is that a phenomenon that you are seeing happen here in Western Australia also?

Prof. Wills : Yes, it is certainly a nationwide phenomenon, and Western Australia is not exempt. I think one of the challenges with the electricity market as it stands at the moment is that the marketplace is an old marketplace. With the sets of rules that we have created, we largely started the design 100 years ago when we started building large power stations at one end with wires to deliver electricity to a point of consumption at the other. What is happening at the moment is that, with the introduction of new technology, we are seeing electricity generation happen at the other end, so that is causing some complications for what is an old and simple market design.

If I were to offer the analogy of what happened when we broke Telecom into Telstra, at that time with the copper network we did not have any real understanding that mobile phones were coming, but when mobile phones arrived coincidentally at about that same time we said, 'This is a new bit of kit; we're going to create a new market in and around it,' and the market rules were really quite dynamic. We had introduction of wholesale rules for mobile phone delivery, and retailing rules. We had new infrastructure being provided in the form of mobile phone towers. We had a whole very different scenario, and we appreciated that when mobile phones arrived the telecom market had changed. It is my contention that, if we still had Telecom today and I ordered a mobile phone, it would be large and black, it would have 'Telecom' stamped in the corner and phone calls would be $3 a minute. But we did not do that; we created a dynamic market and allowed that to happen.

What we are doing with the electricity market is treating the market as if it is still Telecom that owns the wires, it is a copper network that we own and that is the only way to deliver electricity. As a consequence of that, we have not developed a dynamic market rule set that allows these new technologies to come into market in a way that allows access, generation and distribution across the grid, and we have not freed up that market. So by comparison to the mobile phone market, which is dynamic, we have an energy market which I think is very restricted in its capacity to respond to changes, and it very much favours the model of generation at one point and delivery at another, rather than the dynamic, integrated network that you would expect and that is reflected in the mobile phone market now.

There is just one other analogy I will add there. When we built that mobile phone market, we knew that we needed mobile phone towers. We knew that we needed a new bit of kit in amongst that thing, and it did away with the need for the copper network in many cases. What we have not accepted in the electricity market is that we need to also develop new ways of transmitting and interacting with that power. If you talk to an engineer about the way that the electricity system currently works, it is kind of like a dam with water in it running down a hill to supply a household. The electricity system is so simple that really what happens is that you generate a lot of electricity at one end and it basically flows down to the points of consumption. Because there is a low point in electricity and a high point in generation source, you get a flow of electricity from generation to the consumption point at home or business. Now what we are trying to do is fill that thing up so that there is electricity at both ends. The current system does not suit that, and it is kind of like saying, 'We're going to manage mobile phones by having everybody plugging into the copper network.' You do not have a mobile phone network that way. If we are going to produce distributed generation systems, we have to evolve the infrastructure in and around that electricity, and when we do electricity will be cheaper in just the same way that mobile phones got cheaper. Once we have the right infrastructure, electricity will get cheaper.

CHAIR: Thank you.

Senator LUDLAM: Let us pick up where you left off, then: what does that new kit look like? We can all visualise a mobile phone tower, but are we talking about a million smart meters or is it physical infrastructure upgrades? What do we need?

Prof. Wills : There are a whole range of technology changes that are happening in the market right now that will deliver change without any legislation or any interception from government. At the home level and the business level, there are new devices being built with a technology called ZigBee, which is basically smarts for dumb appliances.

That technology is now being factored into all appliance manufacturing around the world. By the end of this decade, virtually every appliance will come standard with ZigBee. That allows that appliance to be smart. That will interact with the smart meter. That will interact with the smart grid. Those things are happening now; they are just rolling out.

The second part of the question is this: because we have a grid that is built for this sort of downhill flow of electricity from generation point to consumption point, the system that manages it at the substation level is where most of the changes will need to happen over the next decade. Those substations will need to be able to handle this two-way flow as opposed to the one-way flow. That does not necessarily need to be rolled out tomorrow or next year, but it needs to be rolled out in the course of all the network upgrades that we are talking about over the next decade. It also needs to be rolled out with a view in mind that electricity consumption overall will fall because appliances are getting more efficient and because households are managing their electricity better as are businesses.

We are seeing all this very different market dynamic occur and it is occurring at a really rapid pace. If you had asked this question four or five years ago, we simply would not have noticed it in the data. But we can look back from 2012 in the last four years of data to 2008 and see that there has been a dramatic change in the way that electricity has been consumed and used, and that the way that the appliances are making use of it. One simple example: our houses and businesses are being filled with new appliances and, yes, those appliances consume electricity, but for the first time in the history of what we are doing we are starting to see appliances use less electricity than the appliances they replaced. Moving from a desktop PC to a laptop to an iPad, each of those devices uses a third of the energy as the one it replaced. A desktop uses about 240 kilowatt hours a year. A laptop uses about 75 kilowatt hours a year. An iPad uses about 14 kilowatt hours a year. We are starting to see those devices more. It is true with colour TVs. Plasma uses more than LED and more than a three-dimensional TV.

These devices are consuming less electricity, whereas for the last 50 years all we have done is create devices that use more. Huge changes are happening in the marketplace without our intervention simply because of market signals that say that electricity is expensive, that people want to be green and that people want devices that are more conservative in their electricity consumption. That is happening.

The other thing that is happening quite uniquely in households is that those devices are also devices that store their own energy. We are actually starting to get to a point where we have a lot of devices that do not need electricity 24/7. The TV still does, yes, but actually the iPad does not and the laptop does not, and a lot of the other devices that we are starting to interact with only need electricity when they need it, not necessarily 24/7. We are seeing a change in the dynamic of the demand profile of a household or of a business in that same context. There are really dramatic changes happening and that is why it is so imperative that when we talk about the data in the electricity market, we talk about 2012 and certainly not estimates from 2010, and certainly not data from 2009 about what those appliances might have cost because 2012 is offering a completely different reality to those data points.

Senator LUDLAM: The technology stuff is obviously quite exciting from a generation, demand and management side, but I want to bring you to the rules. Your submission focuses mostly on competition and creating competitive tension in the market. We heard from the ERA earlier that it is flawed and it is not ideal. To what degree in a small island network like the south-west of WA will the incumbents see this sort of thing that you are talking about as a threat rather than an opportunity and try to squash it?

Prof. Wills : Anyone that controls a monopoly or an oligopoly that is controlling a marketplace where there is a small number of players, it is quite rational for them to defend that turf. I understand why they are doing it, whether that is at a retail level across grocery chains, whether that is at a banking level or, in this case, whether that is at an electricity level. In the context of the current rules set, the current rules set does still encourage large conglomerations of assets and large generators, and large integrated systems of generation and retail.

The second part to it is that a lot of what is distributed generation through sustainable energy does bring to offer is a very different model where that generation can quite economically, rationally, be owned by a smaller group that can control and interact with that. In the Western Australian context, particularly the regional Western Australian context, that is absolutely brilliant news, because it means that towns can be responsible for their own energy generation, using not imported diesel but local resources, whether it be solar, wind, biomass or potentially even geothermal in those locations that generate local jobs and local access. But they are fighting a battle because their ability to establish those innovative enterprises is in the same way that mobile phone operators in the early days of mobile phones were trying to introduce their own competitive models and do things differently. In the electricity market right across Australia, including Western Australia, that dynamic is not as accessible. They simply cannot enter the market in the same way and in the same way to offer competition and innovation.

Senator LUDLAM: The evidence for this is fairly strong in terms of what we have seen on the east coast, but I am interested in your views on how it is operating here. Why would the state government offer me some kind of decent deal on a feed-in tariff to put PV on my roof? Surely, I am then a direct threat to their business model, just as Nullagine going off the grid is a direct threat to Horizon's business model. How do we align the incentives so that it actually starts to work?

Prof. Wills : There is a challenge for government, especially in the state where the government owns most of the energy generation and most of that revenue stream. The larger challenge is that, if what I am describing is correct and that is that there is falling electricity consumption and so likely consumption on the network, government owned assets over the next five years are likely to fall in value because they will be selling less share of the market. The second part of that challenge of what I am proposing is that not only will there be a smaller share of electricity sold putting pressure on the currently owned assets but if government allows more entry into that marketplace then its revenue base will surely be further eroded as new people come into the market and take a share of that. From a whole-of-economy point of view it means new jobs, it means new enterprises competing for pricing entry points and it means the ability for companies and new companies to be established as part of the process. But the government, particularly in the Western Australian market, needs to let that happen by allowing full retail contestability to allow those innovative businesses to step into the market.

Senator LUDLAM: That is nowhere in evidence, I am afraid. We heard from Ms Nolan this morning, and it all sounds like it is going very slowly—and I think we might have identified why it would be going slowly. I might come back at the end if there is time, Chair.

Senator CORMANN: In relation to this, you mentioned that governments own most of the revenue stream. But when it comes to energy generation it is not as if that is a very profitable revenue stream, is it, because the government is providing a taxpayer cross-subsidy to make up the shortfall between cost-reflective prices and what it is actually charging?

Prof. Wills : Yes, I agree. It is not profitable because government, first of all, is not charging the price of generation, which I fully appreciate is a very politically sensitive issue.

Senator CORMANN: It is not as if the government in Western Australia is taking advantage of owning the revenue stream. In fact, it would be arguable—and some people have indeed argued—that it should be charging enough so that it is cross-reflective. It is not as if the situation is being abused in Western Australia, is it?

Prof. Wills : It is not. The question would be: would private industry run it more cheaply, more cost effectively, than government does? And I think that is a challenge in terms of the instruments of government. Certainly, I believe in free markets, I believe in market competition and I believe that private industry will deliver goods and services at a more competitive price than government can.

There are two places where government belongs in a market. One is where there is market failure. There is no market failure in the sale of electricity. Everybody needs it, so there is no market failure. The second place is where there is an overwhelming public interest. It is entirely appropriate for a government to participate in that market. So the question in this place might be: is government, by participating in this market, keeping the price of electricity down? And the answer is, no; there is cross-subsidy involved from the tax base, which means that we are still paying the true price of electricity—it is just not coming in the price of electricity.

Senator CORMANN: What you are saying is that you pay it either as a consumer or as a taxpayer?

Prof. Wills : My argument would be that, as long as government retains ownership of those facilities, we will not see innovative suppliers or price competition at market. If I can offer one example that would offer a different view of where that could be introduced. In the Western Australian market, the domestic market is not contestable and the only company that can supply you with power is Synergy. Recently, rather controversially, Synergy was seen to be charging the price of carbon on its electricity price for renewable energy supply. As a retailer I think retailers should be able to make decisions about whether or not they believe there is an embedded price of carbon there. I obviously disagreed with Synergy in the context of that particular charge. But what I failed to be able to do as a consumer was that, when that one retailer made that decision, I had no choice of another retailer to go to who might have offered me a new product, a different product, that did not include the price of carbon on my renewable energy.

That is an example of where the lack of the competitive market and the lack of consumer choice means that I am stuck with the decision that one retailer makes. It does not matter whether it is a price on carbon, whether it is on a different tariff structure or whether it is on demand side management.

Senator CORMANN: I do not have that much time, so if we can keep the answers concise that would help me get through some of my questions. You have talked in your opening statement and in your submission about the fact that a lot of the data that commentators rely on is outdated. In fact, you say that many commentaries:

… often fail to appraise the rapid changes in renewable energy pricing now widely reported for 2012, nor do they consider the potential for ongoing rapid price reductions in the deployment of renewable energy into the future.

How much does solar cost per megawatt hour and how does that compare to non-carbon-capture-and-storage coal or gas?

Prof. Wills : Large-scale commercial projects in solar can be in the range of $200 to $250 megawatt hour in 2012 numbers. The projected falls are that, by 2015, we should be able to see numbers in the range of $150 a megawatt hour.

Senator CORMANN: How does that compare to coal and gas?

Prof. Wills : The answer is very difficult to ascertain, simply because we are not building new coal-fired power assets at the moment. So what we are not seeing is commercial numbers on coal-fired power stations today being built with those numbers. We are actually seeing comparisons of energy generation at existing coal-fired plants that were built 10 or 20 years ago that has amortised operating costs, so we are not seeing the true cost of those plants. To compare it to gas-fired power stations, which are being built, they are in the range of $90 to $100 a megawatt hour.

Senator CORMANN: You made comments about what Synergy has said about the impact of the carbon tax. The Economic Regulation Authority of WA is of course an independent authority. In its submission to this inquiry, it has said that the carbon tax adds $16.95 and the renewable energy target adds $10.81 to the per megawatt hour cost of wholesale electricity in Western Australia, which is about 20 per cent of the wholesale cost of electricity in WA. Do you disagree with those figures?

Prof. Wills : No. The measures that have been taken as a part of the renewable energy target have added costs to the system. One thing that has not been considered in appraising those costs is whether there have been any other commensurate price savings as a consequence of integrated renewable energy generation. Currently, in Western Australia 218 megawatts of solar are deployed across rooftops and what we do not know and what has not been appraised, because nobody has done that work, is whether there have been any savings to the network as a consequence of that solar energy generation on rooftops.

I do not challenge the ERA figure in itself, but what I do challenge is the context. We have not actually seen whether the addition of renewable energy has created any cost savings of its own volition of being present in the market.

Senator CORMANN: The ERA say two things in their submission which are rather interesting. Firstly, they say that the cost of electricity 'would have to increase by about 21 per cent to achieve cost reflectivity' and that the carbon tax and the renewable energy target add about 20 per cent to the wholesale cost of electricity.

So if it were not for the carbon tax and the renewable energy target, we would have cost reflectivity now and to the extent that there have to be further increases to get us to cost reflectivity, that is really to play catch-up on the carbon tax and the renewable energy target.

Prof. Wills : The 20 per cent figure is on a full retail recovery, not on the wholesale price.

Senator CORMANN: It is on the wholesale cost of electricity.

Prof. Wills : It is not a figure which moves with the wholesale cost; it is a discrete figure.

Senator CORMANN: Yes, sure.

Prof. Wills : The answer is that—

Senator CORMANN: Sorry. At this time, given that 20 per cent of the wholesale price of electricity, according to the Economic Regulation Authority, is made up by the carbon tax and the renewable energy target, and given that at the same time at this time in order to get to cost reflectivity we would have to increase prices by another 21 per cent, there seems to be a correlation there. On the face of it, there seems to be a suggestion that, if it were not for the carbon tax and the renewable energy target, we would have cost reflectivity now and from here on in you could increase electricity prices in line with inflation, rather than having to play catch-up for the carbon tax on the renewable energy target.

Prof. Wills : That does seem to be a fair point except that we have to remember the reason we have a renewable energy target is to reduce emissions. We need to pay for those emissions because only by creating a market signal are we going to create change in the marketplace. So in the context that we are paying more for electricity at the moment as a consequence of the addition of a carbon price, that is obviously a moot point—we are. That is the whole point of the price. Otherwise, why put a price on? The second part is in the early phase of the development of renewable energy technologies which were more expensive than conventional energy and remain slightly more expensive than conventional energy now, one of the keys was developing any commodity in the marketplace is that every time you double production at a manufacturing facility of a commodity you reduce its production cost by 22 per cent. As we scale up the production of renewable energy, energy from those sources will become cheaper and cheaper over coming years. That will then bring down price pressures and we will, in my view, probably see a peak in electricity pricing by 2015 or 2016.

Senator CORMANN: What proportion of our electricity do you think can be delivered by renewable energy and over what time frame will that be developed?

Prof. Wills : I believe if you look at similar trends in changes in the energy market you see that in 1979 in Western Australia 65 per cent of Western Australian's energy generation came from coal; in 2009, 65 per cent of Western Australia's energy generation came from gas. We had made a substantial transition in the source of energy. I believe those sorts of numbers are equally reflective on renewables. That is a timeframe of 30 years in which we see effectively a two-thirds switch in our energy generation source. I believe the swap to renewables can be done faster because technology is evolving faster. I would suggest a timeframe of 20 to 25 years to get to two-thirds generation.

Senator CORMANN: In your view, what is a better way of encouraging more renewable energy? Do you have a view between the relative efficiency of direct subsidies for the use of renewable energy compared to subsidies for the development of more efficient renewable energy?

Prof. Wills : It leads back to one of your earlier questions, which was the price of renewables. One of the key challenges is that we often compare a wholesale price with a wholesale price, but for a customer the only price that is important is the retail price. We know that a solar panel on a rooftop today of a homeowner will deliver cheaper electricity than they can buy from Synergy. The same is true for business except that there are some impediments for business applying that renewable energy to their rooftops, because of market arrangements that prevent them from doing so. We are seeing a change in the pricing structure and a change in the way people are thinking about the pricing structure—that is, if they can generate themselves and therefore avoid a retail cost for that electricity, then we will see it. What is holding renewable energy back is market constraints. It is market rules that are preventing competition, it is market rules that are preventing innovative market entry. For example, at the moment a business cannot put renewable energy solar panels on its roof and export to grid. Otherwise, they are deemed to be a generator.

The only way for them to do it is to completely assure the network operator that they will not export any electricity back to the grid. That is a constraint that within the current workings of the grid is not technically necessary. In the longer term we will need smarter substations that deal with that import- export of energy, but with the initial introduction of it there should be no impediment to a grid taking on new renewable energy. To keep precise—I have waffled a bit there—the nub of it is it is market design, it is market entry, it is market access and it is the ability for those businesses to step in and innovate with a set of customers, because the market rules currently prevent them from doing so.

Senator THORP: You will be very familiar, I know, with the terms of reference that we are dealing with here. Given your particular area of expertise, is there a single recommendation you would consider most significant for us to make?

Prof. Wills : I will pull up the terms of reference, which I did have in front of me just a second ago.

CHAIR: Perhaps we can provide you with a hard copy.

Prof. Wills : That might be quicker. I should have put my glasses on earlier. Thank you.

Senator THORP: I direct you to a, b, c and d—well, all of them really.

Prof. Wills : Quickly reading down the list, I have already made a statement, and it has been well documented by others, that causes of price rises over the last little while are significant. Because I believe in free market and market competition in this space, I often make the analogy that governments do not grow wheat, governments do not mill wheat into flour, they do not bake bread, they do not sell bread. They might sell bread at a service station, they do not sell petrol, but for some reason governments sell electricity. Electricity is simply a commodity. Governments certainly have a role in making sure that markets are functional, but my view is that in a functioning market they do have a role as a participant in the market beyond that. I think the challenge in that context is that once we see those changes we will see a greater dynamic in the marketplace and better price competition. That is not necessarily being reflected in the NEM on the east coast because we also have dominance of a number of companies which have a particular liking for the particular market model that we currently have.

The next part, which is b, is the changes that need to happen in that space. There needs to be a regularisation of market structures not only in the NEM but also outside the NEM to Western Australia because, if I am a business that works nationally and I have employees in Melbourne and my business in Perth is booming, I would love to be able to put them on a plane and bring them over here and have them work straight away, but because the market rules are different I would need to spend four weeks retraining them to let them understand what custom rules are and what the new pricing structures are. A more uniform marketplace would allow that to happen. I think that is a particularly important role for government.

In terms of options for reducing peak demand, again I think innovative pricing in business is one way of ensuring that. I am aware of companies that want to be ESCOs—energy service companies—that simply deliver energy services, and in the same way that a mobile phone company sells you a mobile phone plan companies want to sell you an energy plan that says your bill each year is going to be $1,400 and I am going to come in and make sure that I manage what your annual bill is by helping you with your energy saving, your demand-side management, and making sure that you work within your cap. In that context that will then drive peak demand. I think one of the other significant changes in peak demand is that we are seeing a rapid ramp-up of solar production of electricity during the daytime and the consequence of this—and this has been documented again by Hugh Sad3er at the University of New South Wales and by the Australian Energy Market Operator—is that we are seeing an increase in electricity production in the middle of the day because of solar and that is actually pushing down the middle of the day wholesale electricity prices. My view is that with another 30 per cent of solar on the grid we could see the cheapest price point for electricity would be in the midday hours, and that would create quite a different change in the terms of the way we consider what is peak demand and when we drive it.

To offer that to an economic manufacturing model, manufacturers have very often sought to do manufacturing at night time and to put night shifts on because off-peak electricity from coal-fired power stations was the cheapest to be had. If we can produce off-peak electricity in the middle of the day between the hours of 9.30 and 3.30 I would say that we would have a huge workforce available to take advantage of that much cheaper power that we would produce during the daytime when the sun is shining. They would be much more socially and family friendly work hours.

In terms of the mechanisms that assist households and businesses, beyond stepping up market reforms, energy efficiency is being driven to us. Australia is not going to really define energy efficiency because markets in China, Europe and the US will drive those with six-star standards and with the green-star standards they have. In that sense we will be a technology taker. We can certainly invent it here and market to the rest of the world but, in terms of the technology that flows into our homes and businesses, that will be determined for us.

With advocacy and communication the web is delivering that for us. We have seen some very different examples just recently of what has happened with Ms Meagher and with Mr Jones. They are two extreme examples of how the web has allowed information to flow through and make people aware of circumstances. I think that making use of social media to get this information out is really critical to that. A government that is savvy of the social media to deliver good information is really critical.

Senator EDWARDS: I want to take you back to some earlier evidence that you gave about the Tariff Equalisation Contribution. Also, in another answer you talked about a $200 million capital cost of producing energy for outlying areas. It seems to me that your contention is that if you phase out the Tariff Equalisation Contribution of $180 million you can actually create independent energy sources by spending $200 million, one-off, where they contribute to the cause. Is that what you are advocating?

Prof. Wills : Exactly that. That sort of quantum of investment is only going to deliver 15 or 20 per cent of the household's cost, but it represents the first 15 or 20 per cent free.

Senator EDWARDS: So, for $1 billion you could do the whole lot. If I spent $1 billion to save $180 million, that would be good business?

Prof. Wills : That would be very good business—a 20 per cent return on investment.

Senator EDWARDS: Who have you put that to?

Prof. Wills : Just about everybody, for the last three years.

Senator EDWARDS: That is your contention—

Prof. Wills : Mind you, three years ago it would not have worked, because it would have been too expensive. The real—

Senator EDWARDS: Using your mobile phone analogy, the cost of all of these independent energy generation centres, like photovoltaic, are coming down.

Prof. Wills : Yes.

Senator EDWARDS: That is your contention. Okay, I have that right. You have been critical of the Chamber of Commerce and Industry talking about the old myths of using state economic regulatory authority analysis. Also, you talk about other commentaries with presently outdated numbers on the cost of renewables. I live in a state where 53 per cent of Australia's wind farms are housed. Regarding the renewables that you talk about, where do they create the efficiencies that you see, and that I am not sure about, because the cost of producing wind energy is three times more than base load traditional forms of producing energy, and you have renewable energy certificates and all of these other things. There must be some fairy paying for this somewhere, is there?

Prof. Wills : I guess the key is that the prices are coming down. To use wind turbines as the example, three to three and a half years ago a wind turbine would have cost you about 1.1 million euros per megawatt. Today it will cost you about 890,000 euros per megawatt. So, the price pressure is continuously going—

Senator EDWARDS: I have not noticed a reduction in—

Prof. Wills : The key is that we spent money up front to put in turbines at a time when they were expensive.

Senator EDWARDS: But they are still putting them out there.

Prof. Wills : And they should be getting cheaper and the price for them should be getting cheaper.

Senator EDWARDS: So our power should be cheaper.

Prof. Wills : The power from new wind farms today will be cheaper than the power of wind farms that were built three years ago.

Senator EDWARDS: So our energy prices should come down.

Prof. Wills : The contribution is reducing, and my view is that by 2015-16 we should see price parity start to swap over so that at that point the price of energy should start to fall. We will still see price gains in the next couple of years, but the increments will slow to a point of peaking and then reducing.

Senator LUDLAM: It is really interesting that you raised that because I just saw a press statement this morning that wholesale electricity prices in Australia have fallen for the first time because of wind but the wholesalers are not actually passing it on to the retailer. So your electricity bill has not gone down.

Senator EDWARDS: Unless you have a standing contract.

Senator LUDLAM: Yes. I am just chipping in.

Senator EDWARDS: How do you respond to the submission of the Chamber of Commerce and Industry Western Australia, in which they call for subsidies currently valued at $2 billion to go through from the period 2012 to 2016 and only to be provided to vulnerable consumers and for the $180 million tariff equalisation to be abolished in favour of direct subsidy from general revenue. If we cannot get what we want with what we talked about, how do you see that?

Prof. Wills : I largely agree with the CCI. I will declare an interest: I used to work for them and I think they are a great institution. I just disagree with them on a few policy settings in relation to this matter. My opening statement was about that pricing. My view is that the price of electricity delivered at the meter should be charged, and you should then look at ways of offering rebates or further assistance directly to the households after that point. What it means in that scenario is that the householder can make decisions about reducing their electricity consumption but, hopefully, still keep the concession that was going to be offered to them anyway so that they have a double incentive not only to minimise their electricity use but to make sure they retain their electricity use they need for their own welfare and make savings that mean they can keep that additional revenue that might otherwise have been paying off an electricity price for them.

Senator EDWARDS: Okay. Have you identified any administrative duplication in the electricity network in Western Australia which you are really quite cross about? This is away from sustainable. Is there fat in the system that you just think is unbearable and you want to get rid of? If you were emperor for the day, you would move in and strike it out.

Prof. Wills : One of the challenges for Western Australia is—and you heard from them today—that we have an Economic Regulation Authority that does the work of a national regulator, we have an Independent Market Operator here looking after the Western Australian market. I think the IMO does a fabulous job and I think Allan Dawson is a great leader of that institution and says very commonsense things. I generally find myself agreeing with both Allan at IMO and Lyndon at ERA. But does a country of 22 million people need a number of regulators at different levels? That is why we need a national energy market. A national energy market does not just end at the Nullarbor. So the challenge for us is how we get that integrated planning across what is a nation of only 22 million people.

Senator EDWARDS: Thank you.

CHAIR: Thank you Professor Wills. I thank all of the witnesses who have appeared before the committee today. That concludes the committee's proceedings today.

Committee adjourned at 14 : 18