Australian Energy Regulator (AER) Chairman Andrew Reeves recently told a conference hosted by the Energy Users Association of Australia that national electricity network costs must be reduced to help prevent further increases in electricity prices.

The current National Electricity Rules limit the ability of the AER to determine efficient energy costs, and therefore put upward pressure on energy prices, according to Mr Reeves.

The AER is assessing the improvements that can be made to the regulations to ensure consumers are not paying more than is necessary for a safe and reliable energy supply. Mr Reeves says this review is also looking at the potential to reduce network costs across Australia, which is a major contributor to increases in electricity prices.

“While there is a fundamental need to invest in the networks to meet rising demand, replace ageing assets and maintain reliability, the AER considers that these rules need to be improved to ensure that consumers do not pay more than is necessary,” Mr Reeves says.

The AER has proposed a rule change to ensure that the allowances for the network businesses are no more than necessary. Mr Reeves says that this proposal will be submitted to the Australian Energy Market Commission in late 2011, and the AER will continue to examine ways to ensure that businesses are not rewarded for unnecessary and excessive overspends.

Mr Reeves says “It is important that the regulator has the ability to determine allowances that give the [network] businesses a commercial return to invest to meet needs. The rules must allow the regulator to set allowances based on best practice industry benchmarks.”

The Total Environment Centre (TEC), an independent environmental lobby group focused on research and direct campaign activity, has long held the position that ‘gold plating’ – overinvestment in infrastructure by electricity network companies – has contributed to rising electricity prices.

“TEC’s research has shown that the current National Energy Market regulations provide incentives for transmission and distribution network service providers to ‘game’ the system by over-investing in electricity network infrastructure,” says TEC Executive Director Jeff Angel.

“There is no longer any doubt: electricity prices are going up because transmission and distribution companies are spending too much of their customers’ money on poles, wires and substations, and not enough on demand-side initiatives like demand management and energy efficiency.”

Mr Angel argues that energy efficiency and demand management measures are more efficient than additional or upgraded network infrastructure at meeting peak and rising demand, and are a remedy to rising electricity prices in both the short and long term.

“Demand-side participation lowers the use of fossil fuels and facilitates the transition to an energy system based on renewable technologies,” Mr Angel says. “The task now is to work out how to increase the rate of demand-side participation.” The Energy Networks Association (ENA) says that increased financial investment is needed to meet the challenges of renewing, extending and upgrading Australia’s physical networks, and agrees that this process sometimes involves associated price rises.

“The regulatory rules in place since 2006 have delivered the investments required to meet the challenges of changing energy consumer needs, dramatic increases in household energy demands, enhanced reliability standards and the connection of new renewable sources of energy,” ENA Chief Executive John Devereaux says.

“The electricity networks of 20 years ago were simply not capable of meeting those challenges.

“These outcomes have been delivered in the face of a need to replace a generation of ageing poles and wire assets at a time of unprecedented global capital market disruptions.”

Mr Devereaux says that the ability of network providers to meet these challenges while continuing to deliver well on measures of quality and reliability of supply emphasise the “fundamental robustness” of the current electricity regime.

“Increased investment in energy networks, particularly in response to growing peak demand, has contributed in part to recent electricity price rises, which has placed additional unwelcome financial pressure on some customers and attracted considerable political and media attention,” Mr Devereaux notes.

“This includes increases in network prices (accounting for up to 50 per cent of the final bill) driven by increasing peak demand, ageing asset replacement, higher reliability standards, increases in the cost of capital, and increases in other input costs.

“Some of the not-so-obvious reasons include prices being held artificially low and subsequently adjusted upwards to reflect actual costs, the impact of ‘green’ schemes, and the growing gap between energy volume and peak demand.”

The ENA is encouraging energy network businesses across Australia to address the key issues of rising energy demand and ageing infrastructure, while at the same time continuing to build the foundations for the network of the future.

“All these matters require further investment,” says Mr Devereaux.

“In order to secure it we need to ensure that governments produce clear and enduring policies that enable the regulatory system to encourage investment in our critical infrastructure.”