Electricity cost dissections: do they reveal – or conceal?

What's the 'official family' feeding the punter about cost increases within the National Electricity Market (the NEM)?

'Official' numbers for effects of different cost components on electricity prices in eastern Australia within the NEM have been released.

In an opinion piece in The Australian on 21 August (provocatively entitled: We're quickly reforming the energy markets with ideas, not ideology), the Energy Minister provided a cost breakdown of household power costs.

The Minister apportioned electricity costs as follows:

• Transmission & distribution ('poles and wires'): up to 50%.
• Power generation: up to 30%.
• Power retailers: about 12%.
• Green schemes: up to 8%.

Others, such as the ACCC, have released broadly similar (but far from identical) cost breakdowns.

Recently, transmission/distribution (or 'poles and wires') have copped much of the blame for electricity cost increases according to the ACCC.

Really? Hang on:

• Large-scale grid-based electricity systems like the NEM are, in the economists' jargon, joint products.
• Generation without electricity transmission, distribution, and retail sales is production without customers.
• Retail without generation, transmission, and distribution is customers without a product.
• Generation and retail without transmission and distribution is production and customers but no way of getting them together.
• All elements – generation, transmission, distribution and retail – are inter-connected parts of an essential service.
• Eliminate one (or two), and the whole house of cards collapses. (Really? Try SA last year.)

The 'official family' statistics don't seem very useful. For the current policy debates (sic), do they conceal more than they reveal?

Is there a better way of breaking down sources of electricity cost increases?

What is the current policy debate about cost increases within the NEM? It has a few key components.

The first is: 'What cost increases for electricity have we recorded?'.

The second is: 'What parts of the electricity system are causing these cost increases?'

The third is: 'Are renewable energy sources a major source of cost increases?'

These are inter-connected questions, as are the answers, because generation, transmission, distribution and energy retail are connected, too.

But the quantitative answers provided by the Minister, the ACCC, etc, assume generation, transmission, distribution, and energy retail are separate boxes – cost 'silos' that can be dealt with separately. They assume we can apportion cost increasesexclusively to one of these groups without allowing for how they interact.

This seems unhelpful not only for working out how to address basic cost causes, but also for informing the current energy policy debate (sic).

But it's worse. They actually also break out a separate category for 'renewable energy' or 'green schemes' without saying how that is allocated to generation, transmission, distribution, or retail. I don't know what the estimates for 'renewables' or 'green schemes' mean. Dodgy, maybe?

The basics of the NEM, in my opinion, are these:

• The electricity grid (in this case the NEM) is an interdependent system.
• Generation, transmission, distribution and retail are all links in the chain producing and supplying power to households.
• Bits (generation & retail) are potentially competitive if dividend-hungry governments get out of the way and cease being owners (and make the rules only).
• Transmission & distribution are 'natural monopolies' and need to be regulated as such (as long as rule-making governments don't have dividend 'skin in the game' as government owners, and thus corrupt their rule-making).

But here's the thing: splitting cost components into these separate parts as done now seemingly ignores this fundamental interdependence. They're not additive cost silos: they're connected all the way along the line every bit as intimately as a base-load generator and a home heater. I suspect lots of the new investment in 'poles and wires', for example, is to connect new (often remote?) renewable generation to the grid. Ditto retail costs?

Shouldn't we re-think how we quantify cost pressures in this area?

In the current debate (sic), shouldn't we recognise that a given stream of power generation must usually flow along a given transmission/distribution set of 'poles and wires', and be delivered, via a contract with a retailer, to 'home sweet home'?

So:

• For generation, let's split sources into fossil fuel (coal, diesel, gas, etc), or renewables (solar, wind, hydro, pumped hydro, thermal solar, etc).
• For transmission, let's split costs into (i) those exclusively attributable to fossil fuel generation; (ii) exclusively attributable to renewables; or (iii) those that can't be so apportioned, and must be regarded as 'joint' transmission costs (and split somehow between both).
• For retail, we need to do the generation and transmission cost allocations to get a sensible overall split between fossil fuel energy sources and renewable energy sources (and maybe we end up with three categories here too: fossil fuels, renewables, and joint).

  My instincts suggest that, on this new (and I think more honest) basis:

• Cost increases attributable to fossil fuel power supply will be much less important.
• Cost increases attributable to renewable sources of power will be much more important.

But my instincts aren't important. In an evidence-based world (remember that?) what do the numbers say?

Let's see them. And if we can't see them (because some claim it's 'too hard'?), are we rudderless in an energy policy sense?

Can we measure renewables versus fossil fuels costs in a more transparent way?

If we can't see the 'official' numbers – because the 'official family' claim the numbers are not available – what can we do?

Well, for a start, at the most aggregated level, we have a 'default' - rough justice - transmission/distribution/retail allocation mechanism that is a trivial calculation. But, I think, it's still superior to what's being done now:

§if we know the generation split between renewables and fossil fuel sources (and, roughly, we do, via website monitoring data),

§at the very least, why can't we use that same split for transmission/distribution/retail? They're joint products, after all (I recognise geographical complications, of course),

§if we do so, given the actual need for new investment in transmission/distribution related especially to (often remote) large-scale renewables relative to fossil fuel energy sources, won't we still be understating the share of renewables in cost increases? So won't we still be 'pulling our punches' in terms of claims about the extra costs of renewables?

How much of the last decade or so's asserted 'gold plating' itself is a response to the rush to renewables (plus government hunger for dividends in some cases)?

But it's worse

There's more. Even if I'm right, this is a sort of static accounting of the costs of what's in place. What about the dynamic effects of the investment environment on costs not directly attributable (but indirectly so) to renewables? For example:

• Cost increases attributable to fossil fuels may reflect state policy decisions to ban development of gas resources and some closures of major fossil fuel generators.
• NEM bidding rules (aided and abetted by the RET) might give first call to renewables, thus driving up needed rates of cost recovery over smaller operating times for other sources.
• More generally – and beyond the 'shadow carbon price' implicit in the RET and its ilk, there is the broader, longer-term 'expected carbon price' that long term investors must allow for and which, because of uncertainty about its level and likely path over time, must attract a large uncertainty margin on top.
• Surely all of these should be sheeted home to renewables? If so, the renewables cost share jumps.

I think a lot more transparency in this area is needed.

More later!