COAG’s energy market reforms must protect the poor

For low-income households, energy saving usually means switching off. Will COAG’s reforms give them more options? James Mooney

There is only so much that individuals can do. As energy prices keep climbing, in many households you will find a parent patrolling to check lights and appliances are turned off. Some poorer households are resorting to more creative means.

At the Brotherhood of St Laurence we’ve been collecting stories, including that of “Sarah” - a single mum of two teenagers who, this past winter, went to bed much earlier than she felt like so she could turn off her heater in a bid to cut electricity bills.

The cold, hard truth is that no matter Sarah’s effort, her bills were likely to keep rising. Electricity bills are being forced up by rising peak demand, and a regulatory system that provides incentives for building more, not less, expensive infrastructure. Individual action, however creative, isn’t enough to stem the problem.

On Friday, the Council of Australian Governments stepped in and agreed to a new package of energy market reforms. While households like Sarah’s will benefit, realising savings of A$250 per year suggested by Prime Minister Gillard will be challenging. By striking an agreement, however, the PM and premiers have given impetus to a significant process of energy market reform that will, at the very least, put downward pressure on prices.

The conundrum all consumers face is that billions of dollars are spent by energy networks on infrastructure — generation, poles and wires – that is only needed during these peak demand periods. On hot days, when heavy industry continues to operate and those who have air-conditioners use them, the energy system is pushed to the limit.

Rising peak demand isn’t the only problem. The more electricity networks build, the more they are paid. They have an incentive to build more infrastructure than is needed, leading to higher energy prices. In some states reliability standards have also been increased, forcing electricity networks to spend even more on infrastructure.

COAG’s agreement includes action in five areas, including strengthening the role of consumers in energy regulation and increasing the Australian Energy Regulator budget by A$23 million over five years. The plan also tackles over-investment in energy networks and seeks to provide consumers with greater choice as well as addressing rising peak demand.

In the freshest initiative, COAG committed to introducing a Consumer Challenge Panel; experts providing a consumer perspective in regulatory determinations. Experience from the UK suggests there is value establishing such a body. Most consumer organisations will also be pleased that COAG endorsed the formation of a new national consumer advocacy body.

The reforms with the greatest direct impact on consumers, however, aim to give more choice to consumers through flexible energy prices, smart meters, in home displays and time of use pricing. This could lead to Sarah choosing time-of-use pricing to reduce her electricity bills if she is able to keep her electricity use down at peak times.

Time varying pricing simply involves consumers paying more for their electricity use at times of peak demand. This should reduce consumption at peak times, and reduce the need to build new infrastructure. States agreed to report back to COAG next year about introducing time varying pricing by July 2014. It will be opt-in for small users.

Low income households spend a significantly higher proportion of their weekly expenditure on energy than well-off households. Before this pricing change is introduced, it is essential to ensure they won’t be disadvantaged. The Federal Government should convene a series of forums with consumer and welfare organisations next year to address potential vulnerabilities.

Missing from the COAG agenda, however, were some important areas for reform. When the Brotherhood of St Laurence recently allied with the Australian Industry Group, Choice, and the Energy Efficiency Council to propose a Plan for Affordable Energy. We identified the need to improve energy efficiency programs, which could reduce individuals’ household expenditure and system wide energy.

While such programs do not directly target peak demand, they do reduce overall demand and need for further generation and network infrastructure. More also needs to be done to provide incentives to the networks to be efficient rather than to spend more money on capital investment.

It remains to be seen if COAG’s package can come close to the headline grabbing saving of A$250 per year on energy bills. However, by putting their differences aside, and endorsing a package of energy reforms, the Prime Minister and premiers have given real impetus to energy market reform. It will, at the very least, put downward pressure on rising energy prices.

Through the coming year, further work is essential to ensure the reforms can be equitable for all households, particularly those on lower incomes, who stand to benefit most from lower electricity prices.

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