The Hidden Cost of Infinite Energy (Part 1)
By Ellen FanningFebruary 6, 2012
Soaring power bills are hot today, with the release of Australia’s energy white paper. This February investigation explains why the real cost is in the gargantuan infrastructure we’re building to deal with our unchecked energy use.
The Greening of Rooty Hill
Like most of his patrons, Richard Errington has a pretty good radar for bullshit. As chief executive officer of the infamous Rooty Hill RSL club in the heartland of Sydney, he carries on the larrikin tradition of a place, which sees itself as the Vegas of the West. Amid the humble fibro homes with their cyclone fences, the vast white barn that is the “The Rooty” has been a shining jewel – giving the Bee Gees their first gig, keeping the crooner Kamahl in work during the lean years. It’s the sort of place the late vaudeville performer Maurie Fields would have gone to do mother-in-law jokes and where locals go for air-conditioned respite — a pint and the pokies — on those stinking hot western Sydney days.
It’s not the sort of place you’d think of as leading edge in terms of the food, the entertainment or anything else for that matter. But a few years back, Errington figured out something that’s only now dawning on many Australian households and businesses — the need to do something about crippling increases in the price of electricity.
In 2009, when his power provider announced his million-dollar annual power bill would rise to AUD$1.6 million dollars, Errington declared it “highway robbery” and decided — with no experience in such matters and not an engineer in sight — that he would build himself a state-of-the art, environmentally friendly power plant and generate his own electricity in the basement.
“At the time they said I was a fool. Just interested in being green!” he scoffs. “Now I’m a hero.”
While the rest of us are bewildered by ever-rising energy bills, Errington negotiated his way through the dizzying complexity of Australia’s electricity system and found a way to save himself a couple of million dollars.
The $46 Billion No-one Talks About
It used to be that power bills weren’t that bad. Not the subject of water cooler conversation or a topic that would come up round the barbie. But in the past few years, retail electricity prices have risen about 30 per cent around the country, with bills for customers in NSW increasing 22 per cent in one year alone (2009-2010).
Recently, one respected analyst told Australians to brace themselves for worse to come: power prices could double again in the next six years, with consumers in Brisbane, Sydney and Melbourne to be hardest hit.
And so they call up talkback radio to complain loudly and puzzle out who is to blame. Australia’s carbon tax is a prime suspect even though it has a cast-iron alibi — the tax won’t even be levied until July. The tabloid media want to blame the greenies. Somehow it’s paying the yuppies with the solar panels to produce their boutique green power, which has forced up the bills. But that’s only part of the problem.
The main culprit driving up electricity bills is this: In the five years to 2015, $46 billion will be spent on upgrading and extending Australia’s electricity network to cope with our ever-growing power needs. The cost of all this is being charged back to all households, businesses and industries through their power bills, locking in average annual electricity price increases of more than 10 per cent a year till 2014.
In fact, by 2014 in NSW, the bulk of a customer’s electricity bill — 60 per cent in fact — won’t be the actual cost of generating however much electricity they use. It will just be the cost of shifting the electrons through the grid, down the poles and wires to their home.
You would think that would merit a national debate. After all, it’s costing more than the controversial $42 billion National Broadband Network.
One of the leading voices calling for an urgent review of this expenditure is economist Chris Dunstan. Research Director at the Institute for Sustainable Futures at the University of Technology, Sydney, Dunstan and his research collaborators from the CSIRO and four other Australian universities have spent the past three years assembling what they call an Energy Roadmap for managing Australia’s future energy needs.
Called “Think Small” it’s a detailed plan to drive down electricity bills — and with them carbon emissions — by getting serious about energy efficiency, managing demand for power at peak times and generating cleaner, local sources of power, using the sort of innovative system at the Rooty Hill RSL.
And it’s not some ivory-tower fantasy.
Federal Energy Minister Martin Ferguson, along with many key industry players, came along to the December 2011 launch of the Energy Roadmap. They were told that rather than needing ever more power from massive, coal-fired power stations located well outside Australia’s big cities, in future we may well need less.
“It’s like you’ve got a teenaged family, for years now you’ve been thinking, ‘We need more space,’ so now that the kids are almost grown up and gone, you build another floor on the house,” says Dunstan. “The world is changing and we’re just investing further in 20th century technology as if the 21st century hasn’t happened.”
Our Love Affair with Air Conditioning
It all started with a kind of buying frenzy in Harvey Norman show rooms around the country.
As the cost of air-conditioning units plummeted to about $1,500, the split-cycle dream came within reach for many people. Those systems just sold themselves. Between 2005 and 2011, the number of Australian households with air conditioners jumped from 4.6 million to 6.3 million. Now more than 70 per cent of Australian households have air conditioning, so suddenly we need an electricity system that can cope when everyone turns on those air conditioners at once on a sweltering summer afternoon in the suburbs — without turning anything else off.
It is called peak load. And it happens a handful of times each summer — sometimes for only 40 hours a year in all — mostly between the hours of about 2 and 8pm when Australians arrive home on one of those 35-plus-degrees days.
But the cost of building the extra capacity necessary to deal with those few hours every year is enormous. Federal Energy Minister Martin Ferguson has taken to including in every speech on this issue the following startling statistic: Every time someone in Australia installs a $1,500 air conditioning system, it costs $7,000 to upgrade the electricity network to make sure there’s enough capacity to run that system on the hottest summer day.
In all, the cost of upgrading the network to meet growing peak demand, for air conditioning and other energy hungry appliances, accounts for around a third of the $46 billion being spent on the network over the next few years, according to Chris Dunstan’s “Roadmap”. That’s a staggering $14.9 billion of capacity, which we use for just a few days each year.
What the academics, politicians, industry bosses and lobbyists all agree on is this: the only way to reduce electricity prices is to drive down that peak demand, so that we don’t have to spend some of those billions in infrastructure. Why we haven’t managed to do that over the past few years, as electricity prices have become a hot political issue, is a question worth trying to answer.
George, Master of The Grid
“It’s all well and good to say I’m the big bad guy from the power company,” says George Maltabarow, the chief executive officer of Ausgrid, which operates the largest electricity network in Australia. “But if the lights go out, I’m in the frame.”
Ausgrid supplies 1.6 million homes and businesses in Sydney, the Central Coast and the Hunter region of New South Wales. Its share of the $46 billion national network upgrade is $8.1 billion, to be spent in the five years up to 2013-14.
Across the whole of NSW, that scale of investment by Ausgrid and the other networks is the major factor in driving up average retail electricity prices by as much as 83 per cent over the five-year period.
Given the noisy public backlash over those price rises, it is fascinating to try to imagine the mood in meetings between Maltabarow and the owners of his network, the always-politically-sensitive NSW State Government.
Ausgrid has a pretty simple business model. Mostly, it makes money based on the volume of electricity it sends across its network. But it also can turn a profit from expanding its network, because the regulator allows Ausgrid to levy a healthy 10 per cent return on that capital investment.
But George Maltabarow insists that’s not what is driving him. He says Ausgrid has had to scramble to keep up with peak demand, which has increased 70 per cent over the past 20 years, whereas day-to-day demand for electricity has grown just 30 per cent over the same time period.
“[What] the likes of Chris Dunstan … [don’t seem to have] taken into account is that my job is to make sure that wherever someone turns something on, the power’s there. It’s instantaneous and it’s unforgiving. I can’t control how many heaters or air conditioners or bits of electrical equipment people want to buy and connect. We have to size our system for the hottest day of the year when everybody’s got everything on. That’s the one day we have to plan to meet, otherwise the system will fall over.”
This is not a personal opinion. It is a requirement. Part of the reason electricity costs in Queensland and NSW are increasing more rapidly than other states is that network CEOs such as George are being held to higher standards of reliability, set by State Governments. The Sydney CBD has the highest reliability standards in the country. Critics charge this brings out the worst in network engineers, encouraging them to gold-plate the system.
“Gold-plating implies excessive expenditure,” says Maltabarow. “What I’m talking about is prudent risk management. The costs of a major blackout far outweigh the costs of a little bit too much more investment.”
It is perhaps surprising to learn that George Maltabarow is among that 30 per cent of Australians who do not enjoy the comforts of air conditioning. “I don’t live that far west [in Sydney],” he explains. Given that he spends his days working out how much he is going to have to spend to indulge those of us who do have air conditioning, Maltabarow is not unsympathetic to the idea that perhaps Australians should be forced to manage their demand for electricity.
It’s not as if we don’t know what that feels like. During drought, water use was regulated. Tough new rules were enforced by officers in cars cruising the neighbourhoods, peering through the passenger side windows at the guilty gardener, the furtive car washer or the elderly nostalgic reliving the good old days when he could hose the concrete. Similarly we expect limits on our computer downloads as a normal way of doing business.
But Maltabarow says candidly that in his highly-regulated business he has absolutely no incentive to drive down energy use, which he says frustrates him. “Well, yes it does because we get criticised by people for not doing it. On the other hand, I’m not a charity. I’m a regulated business. And like any business I respond to incentives.”
The Aptly Named Critic
One of George’s most articulate critics is the marvellously named Dr Muriel Watt, an Australian academic with an international reputation who is also the chair of the Australian Photovoltaics Association, which advocates for solar power. “It’s a case of nominative determinism. Your name determining what field you work in,” she says of sharing a name with the Sir James Watt, Scottish inventor and mechanical engineer, who had a unit of energy named after him. He is ”possibly a distant relative. My grandfather was Scottish.”
She has no time for what she sees as the profligacy of big energy. “They don’t want you to use less [power] because they make less money when you use less. The retailers make money so they don’t want you to use less. The generators make money [by selling more]… and the networks make money from every kilowatt hour that goes through their network, so they don’t want you to use less either.”
Watt cites the very different attitudes in Europe. In Italy, she says, if a household exceeds its allocated electricity usage — perhaps by installing too much air conditioning, or some other energy hungry appliances — the lights could well go out and the customer would be forced to pay for a second connection. That would mean steep upfront costs and ongoing charges, which in Australia would translate as a second daily connection fee of anywhere up to one dollar per day. “They’re just brutal over there. Here, that would be unacceptable politically,” Watt says.
In Britain, where Kevin McCloud, the presenter of the TV program Grand Designs, once quipped that most of the 26 million existing houses “are about as well insulated as a rabbit hutch,” the Government has decreed that by 2016, all new houses will need to be zero carbon. That will mean exacting standards for energy efficiency because they will be required to supply as much electricity as they use on average over the day.
“We’ve been lax in Australia,” says Watt, citing the rash of poorly insulated McMansions and other housing thrown up over the past few decades, which will generate huge electricity bills for their owners for years to come.
While building standards are improving, she says, the political fallout over the Federal Government’s “pink batt” rollout means that existing housing stock is not being made more energy-efficient. “No one wants to talk about insulation any more. [But] it’s by far the best thing we should be doing. Slapping PV [solar panels] onto a house that doesn’t worry about energy use doesn’t get you where you want to go.”
Add to that the lax standards for commercial buildings, many of which she describes as horrendous: “Look at all that west-facing glass and no shading. Not sensible at all.
“Everything has been very cheap and easy,” she says, “and it’s not going to be now.”
The Moment of Truth
In fact, we have arrived at a tipping point. Politicians have learned the hard way that electricity can be very dangerous. Their constituents are disgruntled about rising prices, governments in turn are furious with the regulator for greenlighting the $46 billion in capital expenditure in the first place, and the mild-mannered engineers in business suits who run the electricity networks have been startled by the ferocious backlash from customers, urged on by local newspaper campaigns.
But unless something changes, the whole cycle is about to start again.
The networks companies — hogtied to antiquated rules that require them to supply as much power as individual consumers decide to use — are preparing to apply for the next cycle of network capital expenditure, beginning in 2014.
Once again their catch cry will be “supersize me,” with industry insiders confirming the networks might well want to spend another $40 billion to keep up with what they believe will be galloping demand, not only from all the usual sources but from electric cars, which the industry believes will become increasingly popular in future.
Another five years of network upgrades would lock in another five years of rising electricity prices.
Add to that the impact of the carbon tax from July onwards (add 10 per cent to a retail bill) and the rising cost of green schemes (6 per cent for Canberra’s Renewable Energy Target Scheme alone) and the issue is set to get much hotter, just as the summer of 2013 rolls around and with it, the next federal election.
What is fascinating about this loaded policy issue is that everyone — governments, industry, academics and lobbyists — knows just what to do about it.
Firstly, they agree a way must be found to make Australians get serious about energy efficiency. Chris Dunstan says clear targets and incentives need to be created, to encourage industry. “People need much more information and education about energy efficiency. Not just an insert in their bill listing five things they can do to reduce energy use.”
Secondly, there is a consensus emerging that Australians should be made to pay something closer to the real cost of electricity through time-of-use pricing to flatten out those costly peaks in demand.
The final step would be to remove barriers to generating power closer to where it is used. That would reduce the need to keep investing billions of dollars in the long-distance network, which delivers power from huge, centralised generators all the way to our far-flung cities and towns.
And the signs are that the industry is poised for change. But that won’t be enough. Given the tangle of conflicting interests, any change will require strong Federal political leadership and focus. And they have less than 12 months to pull it off.