Short-term thinking on energy and water is costing NSW consumers billions

The Independent Pricing and Regulatory Tribunal (IPART) provides independent regulatory decisions and advice to protect the ongoing interests of the consumers, taxpayers and citizens of NSW, according to its website. This includes the water and energy industries, among others.
In recent years, IPART have made pricing and regulatory decisions that have made significant impacts on the energy and water industry that suggest a one-year horizon of considerations, and very short-term thinking. Or it may be too heavy a reliance on economics, and an under appreciation of investment and markets.
Recycled water & local water utilities
Let’s start here. Around 90 per cent of our water use could be served by non-potable water. This can include toilet flushing, irrigation, cooling tower use and industrial processes. We don’t need potable drinking water for every use.
Historically we have had ample supply of drinking water, and limited options for recycling water, and it has just been easier to have one supply of water and set of pipes. There are now companies offering to develop own and operate new water recycling and third pipe systems for new residential and commercial property developments.
To make this work financially, these companies have to become the full water utility for the precinct/area, and supply potable, non-potable and waste water services to the customers. This has been enabled through the Water Industry Competition Act (WICA).
Until last year, when a Local Water Utility acts as a water retailer, they can buy from the NSW water utility system at wholesale, and sell retail. Their retail pricing is heavily regulated to ensure consumer protection.
Last year IPART decided that that rather than wholesale pricing, these local water utilities should pay ‘retail minus’. This will stop most new recycled water and local water utility developments, making them unviable.
It was argued that if the regional water utilities are missing out on retail and other revenues due to these local water utilities, this will make water more expensive for the broader water customers.
IPART accepted that in some areas, utilising recycled water via local water utilities saves the broader networks (and water customers) significant amounts of money that would have to be spent on new water infrastructure.
But IPART argue that if water recycling is done and local water utilities are formed in areas where the network has spare capacity, there is no saving, so paying wholesale rates will see a net cost to NSW water customers.
Water recycling and local water utilities are a new industry, innovative and immature. They have to be opportunistic, and find sites to develop where the property developers want to be sustainable and are friendly to water recycling.
Water efficiency, water recycling and local water utilities can save NSW water customers billions in the future as our population and water demands grow, by reducing the need for investment in new water infrastructure like desalination plants, water supply and sewer mains.
IPART could let this nascent industry grow and achieve scale and sustainability, and see it be utilised in areas where the existing network is limited, and avoid billions of new infrastructure. By cutting off a new industry at the knees now, not allowing pilot projects, it is costing NSW water customers billions in the future.
Rooftop solar feed-in tariffs
NSW households are investing heavily in solar power to improve their self reliance, improve their household budgets and finances, and do something good for the environment. It is no easy investment.
Between $5,000 to $15,000 is not cash readily available to most households. When they make this investment decision, they have to consider how long will they stay in the house, how technology will change, how much electricity consumption they will reduce and how much they will save each year.
The best cases I have seen are four to five-year paybacks for solar in NSW. If things change, this could be longer. Considering the average family moves every seven years, it is not an easy decision to make.
A key consideration when assessing an investment in household solar is the value paid (c/kWh) for excess solar production that is fed into the grid. In Victoria, the Essential Service Commission include the value of the wholesale electricity, avoidance of transmission and distribution costs and reduction in health and environmental costs through cleaner air.
NSW IPART only take into account a forecast average wholesale price for electricity for the next 12 month period, transmission and distribution losses and some market charge savings. An analysis for the next year, with no view on the future value of solar to our energy system.
NSW has some big issues coming up in electricity supply. It already is very reliant on importing electricity from Queensland and Victoria, through limited interstate inter-connections, around 10 per cent each year.
And Liddell Power station is schedule to close in four years’ time. The NSW government even had to overrule the EPA to ensure coal supply to Mt Piper Power station to keep the lights on.
The supply and demand balance in NSW is tight. It is reliant on a few large generators and has little contingency if something goes wrong. NSW needs new generation urgently.
In February, Victoria and Queensland have enough renewables under construction at the moment to add 7.3 per cent and 6.4 per cent new supply respectively. NSW only has 4.5 per cent.
In 2017, IPART raised the recommended feed-in tariff for excess rooftop solar supplied into the grid by households, from 5.5-7.2 c/kWh to a range of 11.9-15.0 c/kWh. NSW households reacted, and invested heavily in solar.
While the average size of solar systems used to be 1.5-2kW, I have heard solar companies say their average is now 8kW. In our local bulk in Sutherland Shire, the average in second half of 2017 was 7.2kW. From this, NSW has now caught up to Queensland on a MW of rooftop installed per month basis. Where it should be, considering its larger population and higher electricity prices.
This week, IPART have announced a 3 c/kWh reduction in this range. Ironically (and frustratingly), it is noted that all the solar generation occurs when peak demand occurs, reducing the price of wholesale electricity.
The National Electricity Market has come through with lower prices overall than was forecast. A key element of this is luck. Peak demands in each state have not coincided. When South Australia and Victoria have been hot, Queensland and NSW have been mild. And vice versa.
So, this is where the problem starts. Investing in solar is a long-term decision, with some risks. Households have no ability to agree long-term rates with their retailer, to get certainty of their savings and reduce the risk of their investment. Their savings via solar can go from large to small, based on pricing set by their retailers and IPART.
The feed-in tariff is a signal to solar investment. The current approach by IPART sends a different signal each year, for a long term investment.
What if this IPART decision reduces the investment in rooftop solar? We have seen the impact on pricing by the sudden closure of the Hazelwood Power Station. Six months notice is not enough time for the market to respond through investment in new generation, which takes one to two years, minimum, before the new supply comes online.
There is also the chance that one of our coal power stations could suddenly go out of action. They were never built to run this hard for this long, and their operators are doing an incredible job to keep them going.
The result could be billions of dollars of costs to NSW households and businesses. Well, its historic approach to pricing has already resulted in this, seeing historically high prices now.
Not their role?
IPART’s terms of reference are set and agreed by others. However, IPART also has the resources and expertise to guide the government of the day on what is needed. If they don’t, who will? We need out public institutions to show leadership, not pass the buck.
Economists love free-markets, and think in those terms. Our electricity market is not a free market. A primary reason is that new generation takes years to plan, approve, finance, construct and commission. The market cannot respond and adjust supply and demand instantaneously like a true (theoretical) free market.
If we continue to have a reactive market, where investment only occurs when there is scarcity and prices go very high, then NSW customers will pay a high price.
NSW already spends around $10 billion per year on electricity. Anything more than another 10 per cent increase is billions. Money that goes to existing generators through higher prices, not money that stimulates the economy through spending or investment.
The same goes for our water industry. A short term cost now, can relieve billions in the future. Blind faith that the past represents the future will do the opposite.
If IPART are to truly perform their role to “protect the ongoing interests of the consumers, taxpayers and citizens of NSW”, they need to step out of short term economics, and put our long term interests as a priority.
Jonathan is Director of Prendergast Projects and an independent energy and sustainability consultant.