Australian consumers have been told to brace for big hikes in their power bills after a watchdog revealed the true costs of overhauling the grid to deal with the renewable energy transition.
In a decision heralded as a landmark, Western Australia's economic regulator this month said the state's major electricity network provider should be allowed to spend $9 billion over the next five years – $1 billion more than it requested.
Network— or poles and wires — costs typically account for up to half the average electricity bill, with the rest made up of costs associated with generation, retailing and environmental policies.
Economic Regulation Authority chairman Steve Edwell said the draft decision reflected the urgent need for upgrades to Western Power's network to ensure it could handle the surge of renewable energy flooding onto the system.
But Mr Edwell, who was also the inaugural chairman of the Australian Energy Regulator, said it was also a sign of what was to come around the country, where poles-and-wires companies face a race against time and a huge increase in costs to make sure they can keep up with the energy transition.
"The period between now and 2027 is pivotal," Mr Edwell said.
"We've got to get it right and we've got to make sure the grid is in as good a shape as it can be to enable this transformation to continue at pace.
"That's the broad context and it's a context which is repeatable across the nation.
"With a whole bunch of new technologies coming in and the generation mix fundamentally changing rapidly, we're in a different paradigm."
Throughout Australia, poles-and-wires companies that transport electricity between generators and consumers are required to have their spending plans vetted by regulators.
This is because network providers are considered what are known as natural monopolies, which would otherwise not face competitive pressures in their spending and pricing decisions.
Biggest shifts at the small scale
Under its draft determination, the ERA said Western Power's five-year spending plans to 2027 would be allowed to rise significantly compared with the past five years.
The watchdog noted that while much of the increase accounted for the effects of higher inflation and interest rates, there also needed to be a "material bump" in spending on new pieces of kit.
Chief among them were renewable technologies such as medium and large-scale batteries to help "firm" the network as the amount of wind and solar on the grid increased.
But Mr Edwell said there was also an allowance for smart meters, which gave those responsible for keeping the lights on much greater visibility over things such as rooftop solar output.
On top of this, Western Power would be allowed to spend more putting power lines underground to reduce the risks from storms, floods or bushfires, while the utility would be able to fast-track the rollout of so-called standalone power systems in regional and remote areas.
Crucially, Mr Edwell said there would also be room for a big bump in spending on cyber security – an area identified as a key risk as things such as smart meters made the grid more vulnerable to attack.
As a result, he said capital expenditure by Western Power would rise from $2.9 billion between 2017 and 2022 to $3.7 billion over the next five years.
"What's happened is the distribution system, the small poles and wires, hasn't had a lot of visibility before," he said.
"In some respects it's been the quiet part of the network – all the action is happening upstream in the transmission area.
"What's happening now with so much solar PV and two-way energy flows and then battery storage ... is that distribution network owners have got to have a lot more visibility over what's happening in that part of the network."
Precedent 'doesn't go far enough'
Matt Rennie, a partner at Brisbane-based renewable energy consultancy Rennie Partners, said he agreed with the need for increased spending on networks but doubted the ERA's decision went far enough.
He said that once inflation was stripped out, Western Power's allowed expenditure was flat or even lower compared with what it was 15 years ago.
Mr Rennie says the pressure for a "step change" in network spending is coming from two sources.
One is the broad move to electrify Australia's economy, which he says will require a massive increase in demand for resources as well as workers.
Second, and just as importantly, was global warming, which Mr Rennie says will require a major increase in expenditure to ensure the grid becomes more resilient.
"I'm of the view they (Western Power) should've asked for more and they should've been given more," Mr Rennie said.
"We know these two things are coming – there's no debate about them. The only question is, 'When are they coming?'"
According to Mr Rennie, there is a disconnect between the ERA's statements about the need for greater expenditure on networks and its decision on Western Power's latest access arrangement.
'Extreme change' won't be cheap
He says the mismatch suggests that regulators across Australia will need to shake up their thinking about what is required to deal with a once-in-a-century transformation of the grid.
"The really interesting thing about the access arrangement decision for me is that the ERA is saying they're allowing for a transformation in the future but there's no increase in real expenditure levels," he said.
"I think our entire system looks back in order to forecast the future.
"And I think the one certainty that we're going to have in the next 10 to 15 years is that everything is going to change.
"The other thing is those networks in the east have been dealing with bushfires, storms, floods, cyclones which all point to the need for network resilience expenditure.
"It means there is a cost to climate change. And it means there is a cost to global electrification. But these costs can't be avoided."
Mr Edwell says the ERA will make a final decision by March.
Longer term, he says regulators will have to contend with the competing needs to cater for the energy transition while protecting households and businesses from wasteful spending.
"That should be a concern to regulators," Mr Edwell said.
"It was certainly an issue for us here.
"I just don't think it's well appreciated by the average consumer – the very extreme nature of this transformation."
