The Australian Energy Market Commission last week rejected a proposal to introduce a new rule known as the Local Generation Network Credit (LGNC) rule, which could have potentially saved energy consumers AUS$1.2 billion.
The purpose of this rule was to incentivise small wind, gas and solar power generators around Australia to export electricity into the grid by paying them credits. Credits would have been paid by businesses consuming electricity on the same (local) network.
Energy value vs. network value
When we talk about energy credits, there is an important difference between energy value and network value.
Energy value is generally set by the electricity retailers, does not fluctuate based on demand (which depends on the time of day) and payments are usually capped for each individual supplier. In contrast, network value is determined by market forces of supply and demand and isn’t capped – so there’s far more opportunity for the supplier to make money.
Consider that at present, electricity retailers pay credits know as “feed-in tariffs” (FITs) to solar households that export power into the network. These credits are based on energy value, so the retailers can effectively choose how much they pay and therefore there is not a lot of incentive for households to “give back”.
The LGNC rule would have been based on network value, and it would have been an important step towards a more sophisticated energy system that rewards small, independent producers of renewable energy, while incentivising businesses to produce some of their own electricity.
According to research performed by the Institute for Sustainable Futures, this rule change would have saved Australian energy consumers AUS$1.2 billion by 2050.[1] How? Because of big business trying to pass on the cost of unnecessary investment in their electricity networks.
The rising cost of network connections
Network charges cover the cost of transporting electricity from the generators to your home or business, by the installation and maintenance of poles and wires. In Australia, these charges make up nearly 50% of electricity costs[2] and have been the main driver for increasing electricity prices over the past 15 years.[3]
This increase has been due to incorrect projections made in relation to the demand for energy. It was expected that demand for electricity would increase significantly more than it actually has. Based on this assumption, large investments were made to increase the capacity the network infrastructure could handle. The fact that increased demand has not arrived has not stopped network businesses from trying to pass on the cost of their unnecessary upgrades to consumers.
Local generation solves the network demand problem
Having one large centralised power supplier means energy has to be transported over longer distances, and can cause congestion problems at peak usage times. Since local generators are physically located much closer to where the energy is consumed, network congestion is invariably reduced, and existing network infrastructure would be far more effective – thus delaying the need for more costly upgrades to the grid.
At present, there is no incentive for local generators to export to the grid due to the way network usage is charged. The cost for network usage remains the same, regardless of whether a generator is sending energy to a building across the road, or to a building on the other side of the state. This is analogous to Uber fixing their prices for all journeys, charging the same to take you around the block or around Australia – it clearly doesn’t make sense.
A system that gives small generators a credit for exporting electricity into their local grid, which will then be used locally (going “around the block”), gives them a more level playing field with large generators who don’t receive the credit because they’re effectively using the entire network (going “around Australia”).
The long-term effect of this change would be to reduce network congestion, which should in turn lead to reduced network costs, as the existing grid is better able to cope with supply and demand.
What’s next for energy consumers?
The Australian Energy Market Commission has a six-week consultation period, and at Bulk Energy we have our fingers crossed that the interests of Australian energy consumers prevail over the demands of big business and this decision is overturned.
[1] http://www.uts.edu.au/sites/default/files/EconomicModellingofLGNC.pdf
[2] http://cmeaustralia.com.au/wp-content/uploads/2013/09/FINAL-PAPER-1-EMPIRICS-.pdf
[3] http://reneweconomy.com.au/2015/how-the-networks-blew-australias-cheap-energy-advantage-24310
