Energy Security has become a literal concern, and WA is not immune

Once Caucus meets tomorrow and the new McGowan Cabinet is decided, the new Energy Minister will need to quickly turn their attention to questions of energy security in Western Australia. As South Australia looks at investing in and owning a new gas power plant and the east coast faces a gas crisis, Western Australia looks like it's sitting pretty. However, whilst national reform is urgent, WA is by no way immune.

You know that energy security has become a sexy term when it’s not just for the domain of market operators and policy wonks, finding its way all the way to the highest office in the land. In the PM’s opening address for the year at the National Press Club, energy security was put front and centre on the policy agenda for the year – as it should be. In its simplest form, energy security is the ability for consumers to have access to reliable and secure energy at affordable prices, with the increasing need for this to be from low emission sources. It’s no longer a hypothetical for Australian business, which has been used to a historic competitive advantage in this area. Over just two months last summer, spot prices for electricity rose 60 per cent in NSW, tripled in Queensland, and more than doubled in Victoria on the back of the pending closure of the Hazelwood coal-fired power station. And let’s not mention South Australia… Australia’s international competitiveness is hurting from high company tax cuts and an inflexible industrial relations system, and to boot, it is now above the OECD average in electricity prices.

 Indeed – energy security took has taken on a literal meaning, with the federal government needing to bail-out South Australia to the tune of $20 million plus operational costs in order to ensure defence and shipbuilder DCNS that secure and reliable energy will be available to build Australia’s future submarine fleet. An energy supply crisis is now literally affecting decisions to secure the future security of Australia. Over the Nullarbor, WA can feel pretty smug about this and ask the question – “if you can’t keep the lights on, why not consider building some of the future frigates and future submarines over ‘ere?”

 A good question, but one that comes with its own dose of hubris. Although WA is in a better position than South Australia and other national jurisdictions, there is an urgency to address fundamental state reforms, which have been lagging because, well, they aint sexy and there ain't votes in it. The Public Utilities Office has carriage of a number of important reforms for years now, and to the State's detriment, some of these reforms were not introduced for debate into Parliament before the election. With the tide turning on energy security nationally, 2017 is the year to get reform back on the agenda to ensure long term energy security for the State.

 There are two key areas of reform. The first is to adopt a constrained network model, which would have occurred had Parliament passed legislation to that affect last year. Stick with me here, and think sexy thoughts. In the absence of the implementation of constrained network access, the State’s ability to safely and securely connect any large scale new entrant generators to the network is limited because of the excessive cost and timeframes involved in reinforcing the network under the current model. Although not formally part of legislation, by design, generators connected to the Western Power network will generally be able to supply electricity without any limitations. This has a number of implications, including difficulty for new projects to connect to the grid (i.e. renewable projects), lack of incentives between generators to behave competitively, and inefficient network investments.

 The other is tariff reform. State residential consumers and small businesses do not pay the true cost of electricity, well, at least not directly. It is hidden in the form of various subsidies and cross subsidies – for example, one subsidy sees Synergy charge non-contestable customers (generally households and small businesses) a fixed regulated price, which is below the cost of what Synergy pays to Western Power. In 2014-15, this was to the tune of more than $500 million. Ultimately, the way prices are charged bears very little relationship to the actual cost of supply. We pay too much for the variable price of electricity (think of this as the actual electricity we use) and not enough for the fixed cost (costs of the grid). What we pay is also not reflective of the fact that it costs more to supply electricity during peak times, which of course is when most people use their electricity. Now, throw into the mix roof top solar and technological development of battery storage; excellent if you've got it, it will reduce your power bills, and deliver environmental outcomes. No doubt, these will be growing importance in our future energy mix, but at the moment, solar panel homes still require connection to the grid, which is a cost not being accurately paid for. With our current structure of cross-subsidisation and tariffs not being reflective of true cost, with every solar panel installed, there is effectively less people paying for network upkeep. Or put another way, an increasing amount of money will need to come from State consolidated revenue to pay for the gap between what Synergy pays to Western Power, and what Synergy charges customers. This is simply not sustainable, and creates serious questions for the long-term security of our grid.

Adjustment will have some short term pain, with price rises for some customers being inevitable. However, through other reform processes such as privatizing Western Power that will make the network operator more efficient, introducing time of use tariffs offering lower prices to shift demand time, and introducing competition in the retail market, there are ways to promote downward pressure on prices, and hence bring relief to adjusting to reform.

]With Energy Security firmly on the political radar for 2017, the time for reform is now.