Missing a Stitch in Time:
Australia’s Electricity Infrastructure Undermined by $1 Billion Per Year Under Investment
Australia’s electricity industry constitutes a large and critical component of our national economic infrastructure. The industry produces $25 billion per year in value- added. It employs around 50,000 Australians, paying out $6 billion per year in wages and salaries. It makes $45 billion in annual purchases from a diverse and far-reaching supply chain, that provides the sector with inputs ranging from resources to equipment to construction to services.
Most important, of course, the industry literally keeps the lights on: it provides an essential input, electric energy, without which no other industry could function and the safety and comfort of Australians would be immediatel jeopardised. In this regard, electricity is clearly an essential service: a utility vital to virtually everything else that occurs in the economy and society.
Given that critical importance, we would assume that investing in the proper capitalisation, modernisation, upgrading and maintenance of this system would be a top priority of economic policy and corporate decision-making. Unfortunately, however, irrational and unintended consequences arising from the business-friendly, market-driven regulatory regime presently governing Australia’s electricity sector have produced exactly the opposite result. A structural pattern of sustained underinvestment in the upkeep and quality of the transmission and distribution grid is jeopardising the safety and reliability of the network – and harming both the people who work in this industry and the customers they serve.
The present system was established on the assumption that profit-seeking behaviour of private businesses, with appropriate regulatory supervision, will best ensure an efficient allocation of resources, top quality service, and lowest possible prices for consumers. On every one of these grounds, however, the system has failed. Alongside chronic underinvestment in the system’s equipment and reliability, there is abundant evidence of an enormous waste of resources by self-dealing, rent-seeking corporate entities – diverting billions of dollars of expenditure away from necessary upkeep, redirected to ultimately unproductive activities (including overlapping corporate bureaucracies, frenetic selling and re-selling within the industry, and intense financialisation) that have nothing to do with the production and delivery of reliable, affordable energy. The national grid is unable to meet several challenges to its safety and reliability: including its ability to safely withstand extreme heat and severe weather events, and its capacity to adjust to the accelerating roll-out of variable and distributed renewable generation investments. The workforce in the industry has lost jobs and real incomes. And consumers (both residential and industrial) have faced an unprecedented and unjustified inflation of electricity prices.
To be sure, this privatised, fragmented, and badly regulated industry has been consistently and increasingly profitable for its owners. Given the monopoly power these energy businesses have been granted over a critical piece of public infrastructure, these profits are hardly a surprise. What is surprising (and disappointing), however, is how Australia’s regulatory regime has failed to recognise and respond to these perverse outcomes. Despite growing evidence of deteriorating efficiency and reliability, and the inflation of both prices and profits, regulators continue with a business-as-usual approach to managing the industry. This approach routinely turns back legitimate requests for needed upgrades, modernisation, and maintenance on the system’s real capital base – while turning a blind eye to the rampant waste of resources on unproductive and self-serving corporate functions. Given the increasing pressures associated with climate change, more severe and frequent bushfires, population growth, and the shift to renewable generation, this business-as-usual approach cannot continue.
A timeless adage reminds us that ‘a stitch in time saves nine.’ Prudent attention to maintaining productive assets in top quality condition, and upgrading capital in line with new technology and evolving best practices, is a hallmark of efficient and successful management. Australia’s electricity industry is controlled by self-seeking private businesses, and a few state-owned corporations directed to act just like them. They are governed by a regulatory system which places far too much faith in the inherent efficiency of private sector actors. Hence the industry is failing to make that stitch in time. Australians will pay the price for the chronic neglect of proper maintenance and upkeep of our electricity system in many ways: through a system that is inefficient, unreliable, cannot meet the challenges of the coming energy revolution, is unduly expensive to consumers, and which in many cases is unsafe for both workers and the public at large.
This report provides evidence of a pattern of systematic underinvestment in the upkeep and capability of Australia’s electricity grid, drawing on three major sources of data:
- A project to gather original qualitative data from dozens of power industry workers employed on the front lines of maintaining Australia’s transmission and distribution network. Their personal and professional experience attests to a widespread and sustained pattern of underinvestment and neglect, and provides worrisome details regarding the consequences of that underinvestment for the well-being of workers, communities, and the environment.
- A review of other research and findings in the public domain (including several government commissions and inquries) regarding the importance of a top-quality, well-maintained electricity grid for our economy and society. These previous studies have also warned that the current system is falling behind in safe and efficient upkeep of its capital assets.
- A review of available quantitative data – from the Australian Energy Regulator, from the Australian Bureau of Statistics, and from individual companies. This review confirms the steady decline in allocations of real resources to the capitalisation and good operating condition of the transmission and distribution grid. And it documents the erosion of real maintenance and upkeep according to several indicators, alongside evidence of unprecedented inflation in both electricity prices and industry profits.
The main findings of this comprehensive qualitative and quantitative analysis include the following:
- First-hand accounts from dozens of electricity sector workers in various roles and all parts of the country confirm the ongoing failure of the current system to allocate adequate resources to pro-active maintenance, upgrades, and safety, with serious consequences for workers, community safety, and the environment.
- Real spending by the transmission and distribution sectors on operations and maintenance of the grid has been reduced by at least $1 billion per year since 2012.
- Adjusted for inflation and the expanded base of customers in the network, real operating expenditures per customer have declined by 28-33 per cent since 2006.
- Even within that contracting overall envelope of spending on maintenance and operations, several indicators confirm a reallocation of resources away from concrete system operation and maintenance, in favour of corporate overhead functions, re-selling, and financial activities.
- The transmission and distribution system now employs 40 per cent more managers and office-based professionals than electricians.
- Capital investment, spending on materials and equipment, capitalised own-use activity, and employment of electricians, linespersons, and related specialists have all declined markedly in the past several years.
- Fundamental measures of efficiency in the industry (including total factor and average labour productivity) have also deteriorated, dragged down by misallocation of resources to corporate and overhead functions.
- The squeeze on maintenance and upgrading expenses resulting from a combination of AER pressure and corporate profit-seeking has not produced savings for consumers. To the contrary, prices for both residential and industrial users have soared dramatically (almost doubling in real terms) since 2000.
- High electricity prices have boosted revenues and profits in the industry – which have doubled in nominal terms since 2006, and grown substantially as a share of the industry’s total value-added. The AER’s superficial and ineffective oversight processes have not prevented private energy businesses from profiting through underinvestment in the industry’s asset base, and exploitation of consumers andworkers alike.
After reviewing this worrisome evidence of systematic underinvestment in the quality and capability of Australia’s electricity grid, the report concludes with seven concrete recommendations to begin repairing and reversing these irrational and destructive outcomes. These include:
- AER determinations of allowable capital, upgrading and maintenance investments by regulated businesses should be ascertained on the basis of concrete bottom-up auditing of system capability, reliability and performance, undertaken by independent arms-length technical experts. Regulation of capital and maintenance expenditures needs to be ‘grounded’ in analysis of real-world challenges and constraints facing the system – including assessments of additional requirements arising from climate change and severe weather, risk mitigation (including bushfire prevention and vegetation management), and challenges related to the growth of distributed renewable generation. A broader economic benefit test should be applied to ensure the interests of workers and the community are factored into decision-making around capital investments and upkeep.
- Once appropriate levels of system capital and maintenance expenditures have been identified, explicit mechanisms must be established to reflect and recover those costs in regulated electricity prices.
- When adverse events (such as severe weather, bushfires, or other occurrences) necessitate capital or repair expenditures above and beyond previously approved regulated levels, provisions for additional cost recovery must also be accessible.
- Costing of capital installation, upgrading, and maintenance expenditure must take explicit account of the need for high-quality skilled, certified labour to perform that work – including appropriate wages, entitlements and working conditions in line with industry best practices.
- The accelerating transition to renewable energy sources, through both utility- scale projects and distributed sources, poses a unique and historic challenge to the capabilities of the national transmission and distribution grid. The AER, in conjunction with the AEMO and other industry bodies, should undertake a thorough assessment of the investments and system changes that will be required to meet the new requirements of an increasingly renewables-focused power system. This assessment must incorporate a broader economic and social cost-benefit lens, rather than the current narrowly-defined conception of economic costs. The findings of this assessment must then inform the AER’s subsequent determinations regarding allowable capital and maintenance expenditures by regulated businesses.
- Businesses which underspend allowed capital and maintenance budgets should be issued financial penalties which offset the impact of this underspending on their operating margins. This would eliminate the current perverse incentive for private transmitters and distributors to artificially suppress needed maintenance and upgrades in the interests of a short-term bonus over and above their already-substantial profit margins.
- The AER must undertake more detailed reviews of the submitted overhead, marketing, and financial activities of regulated energy businesses. Instead of providing blanket approval for whatever operating expenses companies deem to be in their interests, within an overall ceiling that is not differentiated with respect to specific cost activities, the regulator should focus on reducing the deadweight costs of duplicated, self-serving corporate bureaucracies.
It is past time for those in charge of Australia’s electricity system – both private owners and government regulators – to acknowledge the widening tears in the fabric of this vital public service. And it is well past time for them to begin making the necessary repairs.