The Energy Supply Association of Australia, or ESAA, is a group whose membership appears to include just about every company that is involved in the generation or distribution of electricity in Australia. They have just released a very interesting discussion paper called, “Who pays for solar energy?” I think it’s very nice of them to put out a report like this and try to educate people, but oddly enough for a group that’s intimately involved with the electricity sector, they somehow neglected to mention several very important benefits that rooftop solar provides Australians. Also, they express concern for low-income households that cannot take advantage of rooftop solar, but then suggest a solution that would hit low-income households harder than high-income ones. How they could have made a mistake like that is beyond me. I can only assume they just didn’t think it through, as I’m sure they couldn’t possibly be motivated only by pecuniary interest.
The paper focuses on network charges which have increased dramatically in Australia over the past five years due to power companies expecting electricity demand to rise and investing heavily in distribution infrastructure, which turned out to be a bad idea when demand dropped instead due to improved efficiency and rooftop solar. But, strangely enough, rather than simply providing a space for ESAA members to apologise for their mistake and the unnecessary hardship they caused Australians, the paper instead decides to blame their customers for not buying enough electricity.
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While I can understand that the ESAA’s members would prefer it if Australians bought more electricity, blaming the customer seems to show a profound lack of understanding of how markets work. If a business loses market share due to competition, they can either win back customers by improving their product or lowering prices, or they can accept that the market has changed and adapt to the new conditions. Blaming the customers for not buying enough may be cathartic if the business happens to be run by five year olds, but never results in a beneficial outcome.
The ESAA blames a very specific subset of customers for the increase in network charges, and these are people with rooftop solar. They say they’re acting unfairly because they buy less electricity from the grid and so contribute less to its upkeep. The paper states, and I quote, “Most solar households end up only paying a fraction of their fair share of the cost of maintaining the network.” That is a very interesting position to take, especially when one considers that fact that rooftop solar reduces the need for transmission infrastructure and thus reduces network charges. Australia’s peak electricity demand occurs on hot, cloudless, summer afternoons which is well matched with the output of solar power. Its ability to help meet peak demand was amply demonstrated during the horrid, record-breaking heatwave Australia experienced earlier this year. But for some reason, the ESAA mentions none of this. Nor do they mention the benefit rooftop solar provides consumers by pushing down wholesale electricity prices. Instead, they mention that “millions of dollars” have been spent on upgrades to deal with the inflow of electricity from rooftop solar, but neglect to mention that millions of dollars in upgrades are required whenever over two gigawatts of generating capacity of any sort is added to the grid. And it’s a pity they didn’t give an actual figure, as “millions of dollars” could be as little as 8.7 cents per Australian.
If the ESAA thinks a person who installs rooftop solar is being unfair to other customers because they use less electricity, then logically they must also believe that anyone who buys a more energy efficient appliance, installs insulation, or plays less Dance Dance Revolution, is being unfair to other customers. This is a ridiculous position to take. It would require them to think that electricity companies were being unfair to the oil industry when people started using light bulbs instead of kerosene and that the oil industry was being unfair to whalers when kerosene replaced whale squeezings. It also suggests that if you used to buy every song that Justin Bieber put out but now you only buy the ones that don’t suck, that means you are being unfair to Justin Bieber. After all, the cost of maintaining his image doesn’t go down just because you’re buying less of his music. If they are consistent, the ESAA may think that the fair thing for you to do is compensate Bieber for your improved taste in music.
But maybe buying music from Justin Bieber is the wrong sort of example. After all, there isn’t really a great deal of fixed capital cost involved in buying music downloads. A better example might be milk. After all, a lot of expensive infrastructure is required to get milk from a cow’s teats to your stomach (or wherever it may be that you happen to place your milk). There are farms, and cows, and milking machines, and pasteurisation tanks, and bottling centers, and distribution networks, and so on. An astounding variety of items and people are constantly involved in an elaborate dance just so you can have juice squeezed from a cow on your cornflakes each morning.
So let’s say you start drinking less milk or you stop drinking it entirely. Perhaps you develop lactose intolerance, or maybe you suddenly freak out when you realise you’ve been drinking fluid from a cow’s breasts, or you just go off milk for some reason. (I’ve had milk go off on me, so I can understand if people go off it.) In this case, are you being unfair to other people who still drink milk? After all, if there is a fall in the total amount of milk drunk, then expensive milk-related capital will be used less and that will cause the unit price of milk to increase. There’s no way around that, unless of course the milk industry correctly predicted that there would be a decline in the amount of milk drunk. In that case, they could have run down some of their capital and kept selling milk at the same price as before.
Now, you might ask, how reasonable is it to expect companies to predict changes in the demand for their products? Well, I don’t know if it is reasonable, but I do know that we expect just about every business in Australia to do it, and if they get it wrong, they’re the ones who have to deal with the consequences. If the milk industry over-invested in cows, they wouldn’t get a lot of sympathy if they then blamed Australians for not drinking enough milk.
We shouldn’t make the mistake of pretending there is a free market for electricity, but in Australia, for better or worse, we’ve decided to base our economy on market prices. Now, maybe we could have come up with something better than this — after all, some countries don’t have market economies and they manage. Just look at North Korea. They haven’t had a market-based economy for almost 70 years, and according to their propaganda, they’re doing great! But the fact is, in Australia, market forces guide our economy, and it is a bit late now to suddenly cry that it’s not fair if things aren’t going to one’s advantage. This is especially true if it is coming from people who thought market forces were just dandy when they were acting in their favour.
The ESAA paper says, “Current arrangements are unfair and need to be changed. At the moment, low income households who cannot afford solar, renters and people in apartments pay more to underwrite those customers who can install their own solar system.” The solution they offer to their problem of customers not buying enough electricity is to increase fixed costs while decreasing variable costs. In other words, they want people to pay more simply to remain connected to the grid and pay less for each kilowatt-hour they buy. This proposal is simply environmentally irresponsible, as it decreases people’s incentive to conserve energy when most of Australia’s electricity is still generated by coal. It is also simply bizarre given their professed concern for low-income households, as it would hurt low-income households more than high-income ones because poor people use much less electricity than rich people! How could they possibly have missed this? It is almost as if they don’t really care about low-income households at all but are simply interested in reducing the incentive to install solar power. But I know this can’t be the case because they wrote in their paper that they’re concerned about fairness for low-income Australians. The only way this couldn’t be correct would be if they had developed some sort of way to make words say things that are not true.
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