Grattan report reveals $20b NEM over-investment

State governments have spent up to $20 billion more than was needed on the electricity grid, and households and businesses are paying for it through their power bills, according to a new Grattan Institute report.

Down to the wire: A sustainable electricity network for Australia shows customers in NSW, Queensland and Tasmania are paying $100-$400 more each year than they should.

The report calls on those state governments to write-down the value of the assets to reduce electricity bills, or give direct rebates to customers.

The cost of the National Electricity Market’s (NEM) power grid rose from $50 billion in 2005 to $90 billion today.

“The expenditure significantly outstripped growth in population, demand and even peak demand,” the report said.

“There have been some improvements in reliability of supply, but not enough to justify the expenditure involved.

“We estimate that up to $20 billion of investment in power networks was excessive, mostly in NSW and Queensland.

“The main causes of over-investment were regulatory incentives and public ownership, and excessive reliability standards.

“Public businesses responded with substantial investment programs – but they over did it, building more than was needed to meet demand at the time or today.”

In 2005, the NSW and Queensland governments required their network businesses to build excessive back-up infrastructure to protect against even the most unlikely events.

At the same time, growth in demand for electricity slowed, as appliances became more energy efficient and more households installed solar panels.

“State governments can’t turn back the clock but they can still fix the problem,” the report said.

“And they should, because if they don’t, consumers will be paying for decades to come for investments that are neither used nor useful.

“Inefficiently high prices will encourage consumers to overspend on other energy solutions. But that still won’t reduce the burden of paying for the grid – it may instead shift more of the burden to those who can least afford it.”

In Queensland and Tasmania, where the businesses are still state-owned, the report called for government to write-down the value of the assets.

This would mean governments foregoing future revenue in favour of lower electricity bills.

In NSW, intervening to revalue the privatised businesses would create too many problems, so the government should instead use the proceeds of the privatisations to fund a rebate to consumers.

The report suggests state governments move to full privatisation, because “evidence shows privatised electricity businesses deliver lower prices for consumers, without compromising reliability or safety”.

“Consumers are copping the bill for the past excessive spending on the electricity grid,” Grattan Institute Energy program director Tony Wood.

“Governments should act now to give some of that money back to consumers, and to ensure we have a more sustainable and affordable electricity network.”

Energy Networks Australia chief executive officer Andrew Dillon said the report correctly concluded that intervention to force write-downs of all network regulated asset bases would not be an effective way to bring consumer costs down.

“Much of the Grattan report’s analysis is based on assumptions that are challengeable, however the message is clear – forcing a broad write-down of all network asset values will inevitably be detrimental to customers, as it increases regulatory risks and financing costs for all network businesses,” he said.

“Make no mistake, higher financing costs will push up network charges and power bills – it’s bad for industry and bad for consumers.

“Network revenues have actually been falling across the country in the past three years. If it wasn’t for these reductions, household power prices would be even higher than they are.’’

Mr Dillon said interference with the regulatory model underpinning long-term investment would send a negative signal about the energy industry’s stability and the broader Australian infrastructure sector.

“All policy makers are rightly stressing the need for certainty to underpin the investment required to help transform our energy grid,’’ he said.

“Our energy networks have a crucial role in supporting the transition to a zero-carbon future and facilitating the technological changes needed to allow better customer choice at the lowest cost.

“Arbitrary interventions that make network businesses riskier investments will impact our ability to deliver energy transformation and projects supporting competition.”