Electricity
network services
Long-term trends in prices and costs
Contents
Executive summary
3
Background
4
Trends in network prices and service
6
Trends in underlying network costs
11
Executive summary
EY has been engaged by NSW Treasury to analyse the long-term trends in the prices and
costs of providing electricity network services.
This report summarises the long-term
price and cost performance of electricity
networks or ‘poles and wires’ businesses
in NSW, Queensland, Victoria and South
Australia.
It shows that network prices for typical
residential customers in Victoria and
South Australia have fallen in real terms
since privatisation. By contrast, network
prices in NSW and Queensland have
increased in real terms by over 100%
in the same period. A number of factors
are likely to contribute to this discrepancy
in network price trends.
This report also shows a corresponding
discrepancy in the operating and capital
costs incurred by the businesses. The
privately-owned businesses in Victoria
and South Australia reduced their real
operating costs over the period and they
were able to keep their spending within
the regulatory allowances. The data
illustrates that the Government-owned
businesses did not achieve the same
outcomes.
The evidence does not suggest that
network service levels fell in Victoria
and South Australia; indeed some
key service metrics also appeared to
improve. Consequently, since network
privatisation, residential electricity
customers in Victoria and South Australia
have benefited in terms of both network
prices and service levels.
In more recent times, there have been
significant reforms in NSW and
Queensland conducted by the network
businesses, which appear to have
reduced their underlying costs
significantly, so the upward pressure
on network prices is now easing. In NSW
for example, the distribution businesses
have been merged under one entity and
management has introduced a range
of cost saving initiatives. In November
2013, the then Treasurer indicated that
the businesses achieved total savings of
$1.4 billion in 2011-12 and 2012-13.1
Notwithstanding these cost reductions,
it is widely recognised that it is difficult
to replicate the incentives generated
by private ownership in a Government
ownership setting. The latter typically
places a variety of constraints
or conflicting incentives on network
businesses, which can be difficult
to overcome and can lead to higher
operating and capital costs.
1
NSW Treasury Media Release, ‘Network savings now
10 times above target’, 22 November 2013
Electricity network services Long-term trends in prices and costs
3
Background
Rising electricity prices have been and are likely to remain a significant political, business
and community issue in Australia. There has also been considerable debate about potential
electricity industry reforms in NSW and Queensland.
Terminology used in this report
As a result, NSW Treasury asked EY
to address two questions in relation
to electricity network services:
•
What have been the historical trends
in network prices and network service
levels for typical residential customers
in Australia?
•
What does the publicly available
evidence suggest are the possible
explanations for those trends?
This report relies on publicly available
data to illustrate the historical
performance of certain electricity
network businesses in Australia in terms
of network prices, service levels and
underlying costs. Such information can
provide important evidence to inform the
debate on industry reform. It builds on
work that EY has previously undertaken
on analysing the contribution of network
prices to electricity price increases over
the long term.2
In this report, unless otherwise stated,
the term:
•
‘Network price’ refers to the annual
cost of the network charges paid by
the typical residential customer as
reflected in retail electricity bills
•
‘Retail electricity price’ refers to the
annual cost of the total electricity
charges paid by the typical residential
customer as reflected in retail
electricity bills
•
‘Customer’ refers to the typical
residential customer in each State
who consumes the average volume
in each year
Introduction to electricity
in Australia
The electricity bills that residential
customers pay are made up of the costs
of the various components required to
generate and deliver electricity to homes,
as illustrated by Figure 1.
Figure 1: Electricity bill components
Components of the typical electricity bill
000948756
Wh
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Tra
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t r i b u ti o n
Networks or ‘poles and wires’
2
4
For more information, including detail of the assumptions
and methodology we used, refer to ‘Ernst & Young, Victoria
domestic electricity prices 1996-2010: The contribution
of network costs – A report for the Victorian electricity
network businesses, 9 September 2011’. Available at
http://www.aemc.gov.au/Media/docs/SP%20AusNet9ec43dc9-c71c-451c-aef7-e71a25cc9aa8-0.pdf
as part of a larger document.
Electricity network services Long-term trends in prices and costs
R e t a il
Ot
h er ch arg es
• Feed in tariffs
• Renewable
Energy target
• Advanced metering
infrastructure
charges
Qualifiers
This report analyses the trend in
electricity prices over the long term
in NSW, Queensland, Victoria and
South Australia (i.e. from privatisation
in Victoria until 2013 and from
privatisation in SA until 2011). Costs
are expressed in real 2012 terms for
all States, except in South Australia
where they are in real 2010 terms.
All findings in this report refer to
estimates of the electricity costs paid
by customers in each State, either
expressed on a per megawatt hour
basis, which adjusts costs for the
amount of electricity consumed,
or on a per customer basis.
The period of the results may differ
between each State due to the
availability of data from regulatory
documents, which are typically
produced consistent with the 5-year
regulatory control period applying
in each State.
This report focuses on electricity network
prices, or the component of electricity
bills attributable to the ‘poles and wires’.
This is made up of two types of networks
– transmission and distribution — which
transport electricity from power stations
to homes. It is also important to note that
network prices are only part (typically
between 35-55%) of the final electricity
bill paid by residential customers (see
Figures 2 and 3).
Significant reforms to electricity
networks have been undertaken in some
States in Australia. For example, Victoria
and South Australia privatised their
electricity network businesses in
1995-1996 and in 1999-2000
respectively. In the rest of Australia,
the electricity network businesses remain
Government-owned. The analysis in this
report focusses on the long-term trend
in prices and underlying costs of the
electricity network businesses in NSW,
Queensland, Victoria and South
Australia.
Electricity networks are made up of large
amounts of infrastructure, which are very
expensive to build and to operate, and
have large economies of scale. This
means that electricity network services
are most efficiently delivered by one
supplier. This is what is widely known
as a natural monopoly.
Prices charged by all electricity network
businesses in Australia — whether they
are Government-owned or privatelyowned — are regulated to encourage
efficient investment in and use of the
infrastructure and to manage the risk of
monopoly pricing. In NSW, Queensland,
Victoria and South Australia the
electricity networks are regulated by the
Australian Energy Regulator (the AER),
an independent Commonwealth agency
which is part of the Australian
Competition and Consumer Commission.3
Network prices are usually set for 5-year
periods and are based on the regulator’s
assessment of the efficient and prudent
cost of meeting required service levels.
This report does not analyse the
cost of electricity in the industrial
or business sectors because a similar
analysis is not feasible for several
reasons, including data limitations, the
large number and complex structure
of non-residential tariffs and the
prevalence of individually negotiated
non-standard contracts. Residential
customers comprise around 88% of
customers and 28% of consumption.
3
The AER commenced regulation of these businesses
on 1 July 2008. Prior to its establishment, the electricity
transmission networks were regulated by the Australian
Competition and Consumer Commission and the electricity
distribution networks were regulated by State-based
regulators.
Electricity network services Long-term trends in prices and costs
5
Trends in network prices and service
Summary of impact
on network prices
Table 1: Long-term change in average annual electricity network prices over the period (%)
Government-owned
Table 1 shows the real historical change in
annual network prices paid by the typical
residential customer over the long term.
It illustrates that network prices for
Government-owned businesses have
increased at a faster rate than they
have for privately-owned businesses —
where they have fallen.
Various factors can and do contribute to
the discrepancy (e.g. the starting position in
respect of price levels, the age of the assets
and therefore the need for investment,
service standards etc.). Not all of these
factors are within the businesses’ control.
For example, over some of this period, the
networks in NSW and Queensland have
invested particularly heavily in their
networks.
In contrast, the businesses in Victoria are
approaching a stage in their life cycle
which may require substantial further
investment. South Australia may also have
recently entered a similar stage in their
investment life cycle as is the case in
Victoria.
Network
prices
Qld
Victoria
1996-97 to 2012-13 1996 to 2013
SA
1998-99 to 2010-11
+122%
+140%
-17%
-18%
Source: EY
Impact on electricity prices
It is widely recognised that electricity
prices and bills paid by residential
customers in Australia have increased
substantially, particularly in recent years.
Estimating the typical residential energy
bill is complicated by a number of factors,
such as the introduction of Full Retail
Contestability and the associated
information constraints.
For example, many customers are on
market contracts with their retailer and
pay a lower rate than the standing offer
rate that retailers are generally obliged
to provide.4
4
6
Privately-owned
NSW
1996-97 to 2012-13
The way that retail electricity prices are determined also
differs by State. Retail prices for small customers consuming
less than 160 MWh of electricity per annum (which covers
most residential customers) in Victoria and South Australia
are not regulated. In NSW and Queensland, retail prices for
small electricity customers are currently regulated,
although full deregulation will occur in NSW from
1 July 2014
Electricity network services Long-term trends in prices and costs
Our analysis captures this by using
electricity standing offer retail prices
(which are publicly available) and
adjusting for the average discount
for customers on market contracts and
the estimated proportion of customers
who have switched to a market contract.
Some limited information exists on these
two variables.
This approach to estimating bills
necessarily involves some approximation,
so the absolute level of bills should be
viewed as a broad estimate only.
Moreover, there are a variety of reasons
why total bills will differ between
locations. The focus should therefore be
on the long-term trends in total bills and
the components of those bills, rather
than the absolute levels.
Table 2 represents the change in typical annual retail electricity prices in each State,
and the change in electricity network prices and other costs which make up that
electricity bill over the same period.5
Table 2: Long-term change in average annual electricity prices (%)
Government-owned
NSW
1996-97 to 2012-13
Qld
1996-97 to 2012-13
Privately-owned
Victoria
1996 to 2013
SA
1998-99 to 2010-11
Retail electricity prices
+83%
+57%
+28%
+23%
Network prices
+122%
+140%
-18%
-17%
Non-network costs
plus other costs*
+51%
+11%
+72%
+86%
Source: EY
It illustrates that:
•
Retail electricity prices have risen
significantly over the long term
in all States
•
Network prices have been the major
driver of the increase in electricity
prices in NSW and Queensland
•
Network prices have not been a driver
of electricity price increases in Victoria
or South Australia
Figure 2 shows the long-term change
in retail electricity prices in each State
by component. It also shows the change
in retail electricity prices in real dollar
terms, and highlights what has driven
the change during this period.
5
Various factors can contribute to the change in non-network costs (e.g. wholesale energy prices, environmental schemes,
retailer costs), all of which can vary by State. ‘Other costs’ include AMI charges in Victoria as this is the outcome of specific
policies by the State Government.
Electricity network services Long-term trends in prices and costs
7
Figure 2: Breakdown of long-term electricity prices by State ($ per megawatt hour)
What has happened to prices from 1996-97 to 2012-13?
NSW
350
Retail prices increased by $136 per MWh, of which:
300
250
•
67% came from network prices
200
•
33% came from non-network costs
150
100
Network
Non-network
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1996-97
0
1997-98
50
Electricity cost
Queensland
350
What has happened to prices from 1996-97 to 2012-13?
300
Retail prices increased by $86 per MWh, of which:
250
•
87% came from network prices
•
13% came from non-network costs
200
150
100
Network
Non-network
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1996-97
0
1997-98
50
Electricity cost
Victoria
350
What has happened to prices from 1996 to 2013?
Retail prices increased by $61 per MWh, of which:
300
250
•
7
► 0% came from non-network costs
•
3
► 0% came from AMI costs
•
N
► etwork prices fell by $20 per MWh
200
150
100
Network
AMI costs
Non-network
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1996
0
1997
50
Electricity cost
South Australia
350
What happened to prices from 1998-99 to 2010-11?
Retail prices increased by $36 per MWh, of which:
300
250
200
150
•
1
► 00% of the increase came from non-network costs
•
Network prices fell by $23 per MWh
100
Network
8
Non-network
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1998-99
0
1999-00
50
Electricity cost
Electricity network services Long-term trends in prices and costs
Source: EY. The percentages in this Figure refer to how much network prices
and non-network costs were responsible for the change in retail prices. They differ
from the percentages in Table 1 and 2, which refer to the percentage change in
network prices and non-networks over time.
SA
1998-99 to
2010-11
Current
electricity bill
$1,925
$1,547
$1,495
$1,481
Electricity bill
in 1996/1998
$745
$615
$752
$821
Increase in
electricity bill
$1,180
$932
$743
$660
Current
network bill
$1,069
$836
$595
$636
Network bill in
1996/1998
$343
$217
$368
$501
Increase in
network bill
$726
$619
$227
$135
Source: EY
Figure 3: Network prices as a proportion of typical annual retail electricity bill (%)
70%
60%
50%
40%
30%
20%
10%
NSW
QLD
VIC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0%
2000
Figure 3 shows network prices as a
proportion of the typical residential
electricity customer’s total bill. It
illustrates that in NSW and Queensland,
network prices increased as a proportion
of the total bill. In contrast, network
prices as a proportion of the customer’s
total bill decreased in Victoria and
South Australia.
Victoria
1996 to 2013
1999
As a result, electricity customers in
NSW and Queensland are paying more
in network prices and electricity bills,
compared to customers in Victoria
and South Australia.
Privately-owned
Qld
1996-97 to 2012-13
1998
It highlights that network prices
increased more significantly in NSW
and Queensland than in Victoria and
South Australia.
Government-owned
NSW
1996-97 to 2012-13
1997
Table 3 shows today’s retail electricity
bill for the typical residential customer
compared to that paid in 1996 (and 1998
in South Australia) in nominal terms, the
change in retail electricity bills and the
network component of that bill.
Table 3: Typical annual retail electricity bill ($ per year, nominal terms)
1996
Impact on customer retail bills
SA
Electricity network services Long-term trends in prices and costs
9
Over the long term, real network prices in Victoria and South Australia have fallen.
What about electricity network services levels in these States?
Impact on network service levels
There are often concerns that the
privatisation of services previously
provided by Governments may lead to
declining service levels. The AER
specifically acknowledged these concerns
in its State of the Energy Market Reports,
including in the inaugural 2007 edition6
and also in 2009:
“Noting these caveats, the System
Average Interruption Duration Index data
[SAIDI — a key indicator of reliability]
indicates that since 2000-01 the average
duration of outages per customer tended
to be lower in Victoria and South
Australia than other jurisdictions —
despite some community concerns that
privatisation might adversely affect
service quality.”
6
Australian Energy Regulator, State of the Energy Market
2007, page 159
10
Measures of electricity network reliability
should be interpreted with some care, as
reliability standards can differ between
States and a short time series of data
may not present the most accurate
picture. There are also instances when
one-off events affect the annual service
level performance of network businesses
(e.g. bush fires in Victoria in 2008).
A detailed assessment of network service
levels has not been undertaken as part of
this work. SAIDI is, however, one key
measure of reliability which suggests that
the service levels of the Victorian and
South Australian electricity network
businesses have generally improved. This
is supported by other reports such as the
AER’s 2013 State of the Energy Market
Report7, the AER and ESC’s Electricity
Distribution Business Performance
Report for the Victorian businesses and
ESCOSA’s Annual Performance Report
for the South Australian Energy Supply
Industry.
7
Australian Energy Regulator, State of the Energy Market
2013, page 81
Electricity network services Long-term trends in prices and costs
Trends in underlying network costs
Given the evidence on network prices and service levels, it raises the question:
what has led to the discrepancy in network price performance?
This analysis suggests that there has
been a strong relationship between the
historical network price and underlying
cost performance of the businesses over
the long term.
This discrepancy is likely to have been
driven by many factors (some of which
are not within the control of the
businesses) and we do not attempt to
provide a full explanation. However, one
of the reasons for the discrepancy could
be due to differences in historical
performance in respect of underlying
operating and capital costs.
This report analyses the publicly available
information on the costs incurred by
electricity distribution network
businesses over the period. The analysis
in this section focuses on distribution
only (i.e. it does not cover transmission
due to information constraints) and refers
to the total costs incurred by the
distribution businesses (i.e. to serve all
customers, including residential
customers). It is also worth noting that
the analysis is historical and the
Government-owned businesses are
increasingly driving reforms to reduce
expenditure levels whilst meeting the
required service levels.
In NSW and Queensland, the distribution
networks over the period of the analysis:
•
Increased their underlying operating
costs per unit of energy distributed
in real terms
•
Spent more on operating and capital
costs than the allowances provided
by the regulator over the past two
complete regulatory periods
(which covers a total of 10 years)
In Victoria and South Australia, the
distribution networks over the period
of the analysis:
•
Reduced their underlying operating
costs per unit of energy distributed
in real terms
•
Spent less on operating and capital
costs than the allowance provided
by the regulator over the past two
complete regulatory periods
Electricity network services Long-term trends in prices and costs
11
Operating costs
Table 4 shows the change in real operating
costs of the electricity distribution network
businesses in the three States per unit of
energy distributed.
Figure 4 shows the benefit in terms of
reductions in per unit operating costs that
both the Victorian and South Australian
businesses were able to achieve, which
occurred particularly in the early years
after privatisation. While there has been
some increase in real operating costs
in Victoria and South Australia in recent
years, this is not inconsistent with the
trend in NSW and Queensland (and may
reflect changes in the scope of service
provided or changes in service levels).
Table 4: Change in annual operating expenditure per megawatt hour distributed
over the period (%)
Government-owned
Change in
operating
costs per MWh
Privately-owned
NSW
1999 to 2010
Qld
2002 to 2010
Victoria
1996 to 2010
SA
2000 to 2010
+71%
+96%
-23%
-3%
Note: Only results up until 2010 are presented due to the availability of data.
Source: EY, various regulatory documents
Figure 4: Operating expenditure per megawatt hour distributed (Index, 2002 = 100)
250
200
150
100
50
NSW
QLD
Source: EY, based on various regulatory documents
12
Electricity network services Long-term trends in prices and costs
VIC
SA
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
Comparison against regulatory
allowances
Regulators determine the operating
and capital costs that electricity network
businesses require to provide reliable
services to customers. The operating
and capital cost allowances determined
by the regulator represent the efficient
and prudent costs it considers
appropriate for each electricity network.
It therefore takes into account amongst
other factors, the service levels the
businesses are expected to meet.
Figure 5 compares how the Governmentowned networks and the privately-owned
networks in Victoria and South Australia
performed compared to the allowances
the regulator provided over the past two
completed regulatory periods (i.e. 10
years).8 In other words, it compares their
actual expenditure versus allowed costs.
Figure 5: Actual expenditure versus allowed
costs (%)
Opex
30%
24%
25%
20%
15%
10%
9%
The opposite is true for the privatelyowned networks in Victoria and
South Australia.
5%
0%
-5%
-10%
-10%
-15%
-20%
-20%
-25%
Previous regulatory period
Government-owned
Two regulatory periods ago
Privately-owned
Capex
50%
40%
39%
30%
22%
20%
10%
0%
Figure 5 shows that over the last two
regulatory periods, the Governmentowned networks overspent relative
to their operating and capital
expenditure allowances.
-2%
-10%
-20%
This evidence on the cost performance
of the privately-owned and Governmentowned businesses is likely to provide part
of the explanation for the differences in
the network price trends observed in each
State. For example, the increased capital
expenditure over the regulated allowance
by the Government-owned network
businesses over the past two regulatory
periods equates to approximately $6
billion (or about 20% of the asset base).
This has fed into the network prices and
retail electricity bills paid by all customers.
-17%
-30%
Previous regulatory period
Government-owned
Two regulatory periods ago
Privately-owned
Source: EY, various regulatory documents.
8
This analysis has only been undertaken in South Australia
for the previous complete regulatory period because there
has only been one complete regulatory period under
regulatory decision making.
Electricity network services Long-term trends in prices and costs
13
Restrictions on Report Use
The Report may only be relied upon by NSW Treasury
pursuant to the terms and conditions referred to in our
engagement letter dated 21 February 2014. Any
commercial decisions taken by NSW Treasury are not
within the scope of our duty of care and in making such
decisions, you should take into account the limitations
of the scope of our work and other factors, commercial
or otherwise, of which you should be aware of from
sources other than our work.
14
Electricity network services Long-term trends in prices and costs
15
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