Chapter 1: What is the main topic discussed in this episode?
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As solar panels adorn more rooftops and batteries increasingly soak up excess power for later deployment, the way Australians utilise the power grid is shifting dramatically. New modelling released today from the Australian Energy Market Commission imagines an overhaul of electricity pricing that it says could cut costs by billions.
But how do the numbers break down and who might be the winners and losers along the way? Welcome to ABC Business Daily.
I'm Carrington Clark. And I'm Daniel Mercer, the ABC's energy reporter.
Daniel, so good to have you on the podcast today and welcome to the ABC Business Daily family. There's brand new modelling just released from the Australian Energy Market Commission that suggests some major pricing reforms for the electricity network. First, can you give us a run through of what the AEMC is and what it does and why they are releasing this report?
G'day Carrington, and it's nice to be here. Let's hope I can live up to the lofty standards you're setting. Suffice to say, it's one of these organisations, the Australian Energy Market Commission, that most people know nothing about. And most people are probably perfectly fine with that, probably live happier lives because of it, to be honest.
It's sort of the wonkiest of the wonky of energy organisations in the country, arguably. They set the rules that govern the national electricity market, which is the grid that basically covers the eastern seaboard from Queensland down to Tasmania and across to South Australia. It's the country's biggest grid. It services something like 10, 11 million customers.
It's the majority of the country's population and economy. And, you know, in this sort of sprawling electricity system, the AMC is the body that sort of sets the rules that, you know, all the generators have to live by and that sort of sets the rules of the game, as it were.
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Chapter 2: How is the electricity market in Australia changing?
You're quite right, Carrington. I think it's probably worth qualifying everything that we're about to talk about by pointing out that it's the networks we're really talking to here. So the poles and wires companies that transport the electricity from where it's generated to where it's used.
There are obviously other parts of the supply chain that are huge, but we're really talking about the poles and wires here. Basically, it all comes down to the fact
that the way we're using the electricity system is changing as you just alluded to whereas in the past it was all pretty simple people you know sat at the end of the line and bought power when they needed it from the grid it's now much more complex and a much more dynamic picture and just look at the number of households with solar panels from memory i think there are about four million of them across the country so that's one in every three homes which is a pretty staggering figure
And now, thanks to very generous federal government subsidies, you've got people installing batteries on their homes at a breakneck speed as well. There are about a quarter of a million of those, according to recent estimates. And what that means is that many customers are no longer just passive consumers of power as they were in the past. They're active generators and storers of it as well.
They're players in the game. The catch is the way we pay for the grid, the poles and wires part of it, that is, that was based on the old model. And it was a pretty simple model, really. Consumers would buy a kilowatt hour of electricity from the grid. And from that money, the poles and wires companies would recover the lion's share of their costs.
There was always a little bit of fixed costs that we paid. You know, they're sometimes referred to as supply charges and things like that. But most of what we paid depended on how many kilowatt hours we bought. Now, and this is really the guts of the problem currently. Households with solar panels and batteries typically buy far fewer kilowatt hours of electricity from the grid.
So they're hollowing out the business models of the poles and wires companies. And it's a devil of a problem because those households very much still use the grid. They need it more to the point because it allows them to trade effectively their energy. And so how we pay for the grid in this changing context is really a pressing issue, albeit one that's proving very hard to deal with because...
You know, from my own personal experience reporting on energy, this was identified as something that needed to be dealt with at the outset of solar uptake in Australia. And that is 16 or more years ago. People who could see that this was coming down the pike. They knew how tariffs were structured and they knew what the mass adoption of solar and one day batteries would mean for cost recovery.
I mean, it is a fascinating kind of economic problem to try to solve, isn't it? Because on one hand, you are seeing the government actively encourage people to kind of take energy generation and storage into their own hands, right? We have active incentives for people to get solar panels and to get batteries to help Australia transition to a more renewable heavy future.
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Chapter 3: What major pricing reforms are suggested by the AEMC?
That's historically been the case, and that's still kind of the case, generally speaking, these days, because they are such capital-intensive businesses. And it is common infrastructure, it is shared infrastructure that we all use and we all need for a functioning electricity system.
Therefore, how you solve this riddle of redesigning charges, redesigning tariffs and prices so that it is a sustainable business model that can continue to be maintained and have that investment is paramount. But I mean, I've got to say, having reported on this area for quite a while now, I don't know how close we are to an answer, Carrington.
It just seems like whichever way regulators or industry or think tanks or governments turn, there is really strong opposition. I mean...
Well, I think you've got on one hand, right, you've got the people, and I think a lot of people would have been scared by these headlines of thousands of dollars potentially being added to the bills of people who'd gone and purchased their own solar system and their own battery than they would otherwise be paying under the current setup.
those people who have done that investment might think, well, I've done the right thing. I've done exactly what the government's asked me to do.
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Chapter 4: What role does the Australian Energy Market Commission play?
I've spent my own money in order to make myself more self-reliant and to help the renewable transition. And now I'm going to get slugged with this huge fee. But they are at the moment receiving a benefit from being connected to that grid, aren't they?
That they're not paying their share of, or at least that's what some people are saying, that they need to be contributing more because otherwise they're effectively being subsidized by everyone else who's using that grid.
Yeah, and this comes back to the fact that there are mixed signals galore here. As you say, governments have been throwing money at people to put solar panels and now batteries on their properties for a good while, and many people have availed themselves of those opportunities.
But of course, the attractiveness of those technologies, whether it's solar or batteries, has been based on the financial advantages they could provide in that old tariff system, that outmoded, that outdated tariff system that was never really designed to accommodate solar panels and batteries en masse. You know, and that's kind of the nature.
That's why everybody's kind of entitled to feel, you know, either worried or a little bit annoyed in this environment, because on the one hand, they are being told, go and get solar panels, go and get batteries. You know, you're doing the country and the world a favour.
And then on the other hand, they're sort of being told, well, you know, you're not paying for the upkeep of the grid and this is a real problem. We've got to fix it and you've got to pay more and so on and so forth. So it's mixed signals everywhere and people are probably getting a bit of cognitive dissonance. What the AMC in this paper has sort of suggested as, I would say, a...
A fix in the broad sense of the word, because it's not overly prescriptive, Carrington, is that there needs to be much more money recovered from us as consumers through those fixed charges that we pay regardless of how much electricity we buy from the grid.
So, you know, whereas you might be paying a token $1 right now for the right to be connected to the electricity network, perhaps in the future that's, you know, $2 or $3, whatever, a lot more than you're paying now. But conversely, or on the other side of that equation, The AEMC wants to move to a system where we are charged based on when we use power. Much more.
There's much more of an emphasis on essentially time of use or surge pricing.
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Chapter 5: How do solar panels and batteries affect electricity pricing?
They've been unable to. And the formulation of the China Mineral Resources Group was seen as a very clear signal that China was serious about regaining that control. and BHP here was its first really big test. BHP, I'd love to know what you think. Has BHP sort of got everything that it wanted, or is there a bit more devil in the detail here, do you think?
I think you're right. I mean, we don't know the full details of this deal. The concern, of course, was that BHP potentially was going to lose this battle and you would have the price being set by the buyer and that that would have endangered the big profits that BHP has enjoyed and obviously would have put more pressure on Fortescue and Rio Tinto who've struck their own deals.
It appears they at least haven't lost, right? We don't know how big a win this might be, but there was a lot of skin.
A draw, maybe.
Maybe a draw at this point, exactly. But you can't imagine that there won't be continued pressure to come up to some sort of agreement. And again, there are, as you correctly point out, With other commodities, there are longer-term contracts that are put into place to shore up supply for an extended period. The iron ore business, as I understand it, is starting to change shape.
Australia's been very dominant with competition from Brazil, but you're looking at China has invested a lot of money looking to shore up its own supplies of iron ore coming out of Africa, for example. And because they don't want to be so reliant on Australian iron ore because they don't think that gives them a particularly strong position.
And I think as you see more competition potentially come online, that might change the negotiating position for BHP. And maybe you will see attempts once again of changing the structure of how these payments work.
It seems like there's a direction of travel, doesn't it? And that is China is not going to give up getting more control over iron ore pricing. It ceded so much of that control to effectively Australia's miners because of its needs must in the 2000s and the last decade when it just had to get the iron ore for its rapid expansion.
But now that China's economy itself is starting to come off the boil and its population is shrinking and is forecast to shrink staggeringly in the decades ahead, it's going to need less iron ore.
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