Paul Baxter, Senior Commissioner

Paul Baxter, Senior Commissioner

The Independent Competition and Regulatory Commission

PO Box 975, Civic Square

ACT

2608

Dear Paul

Submission to ICRC Issues Paper Inquiry into Full Retail Contestability for Electricity in the ACT

The Conservation Council of the South East Region and Canberra would like to raise a number issues and make some recommendations relating to the environmental impact of Full Retail Contestability (FRC). Environmental issues fall within the remit of the Commission in three specific areas:

• First, under the point numbered 2 in the Commissions Terms of Reference for this inquiry, identifying and quantifying the costs and benefits (financial and non-financial) flowing from the extension of full retail competition.
• Secondly, the ICRC Act requires the Commission to have due regard to the impact of FRC on ecological sustainability.
• Thirdly, the commission is correct to ask the question would a competitive market provide appropriate signals about energy use and environmental sustainability?

Context

Australia is the world’s highest per capita emitter of greenhouse gases. Despite being a signatory to the Kyoto protocol Australia’s emissions continue to grow. This at a time when cuts of 70% are going to be needed over the next 50 years to avoid potentially catastrophic climate change. A new report, Warnings from the Bush (attached), highlights the potential and actual impact climate change is likely to have on our ecosystems. Households and other small energy users account for over a fifth of Australia’s greenhouse gas emissions with the majority of this pollution coming from the generation and of electricity. Climate change, resulting from the enhanced greenhouse effect is a major environmental challenge that the world will have to deal with for decades to come. Although the ACT is only a small contributor to Australia’s greenhouse gas emissions, we have a responsibility to play our part in their reduction. The consequences for the ACT of climate change are potentially severe. CSIRO projections for the local area suggest a doubling of days over 40 degrees Celsius, more intense and frequent extreme weather events, and increased risk of bush fires within the next 50 years. Full Retail Contestability provides the ACT with an opportunity to put in place systems that can reduce electricity usage and promote the development of renewable energy in Australia. But there is also a high risk that FRC on its own will lead to increased electricity consumption and deteriorating greenhouse emissions.

Issues and Recommendations

Nowhere in the world has FRC, on its own, reduced the environmental impacts of electricity supply. Indeed in most cases the reverse has been true. In the United States and Europe, market liberalisation initially led to cheaper electricity prices and increased consumption. In NSW and Victoria contestability in the commercial sector since 1996 has seen price reductions and a dramatic jump in consumption. NSW retailers have failed to meet annual Greenhouse gas benchmarks every year since 1997. Energy efficiency and demand management programs have been ignored in a competitive market characterised by cheaper prices and ‘limitless supply’. The NSW government has learnt from experience - policies aimed at reducing greenhouse emissions on the one hand, while at the same time contradictory policies driving increased electricity consumption.

In response, the NSW government has just proposed the introduction of binding greenhouse benchmarks with penalties for non-compliance (due to come into force in July 2002).

The Conservation Council proposes that FRC in the ACT should only proceed if it is introduced as a comprehensive ‘FRC policy package’ including a number of key initiatives. Chief among this must be a system of binding greenhouse benchmarks for electricity retailers.

Social Concerns and fuel poverty

Experience following FRC in the UK has shown retailers charging a low rate for metered electricity used but having a very high standing charge. This system discourages energy efficiency measures as it reduces the effectiveness of any measures taken in lowering consumer’s electricity bills. For example:

• A relatively high-income household that invests heavily in energy efficiency by insulating their home and purchasing a solar hot water system may find themselves being penalised as a result.
• Similarly low income households whose electricity usage is low due to lack of finances and a low number of appliances may find themselves unable to reduce costs to any significant degree as the standing charge will remain constant no matter what savings are made to consumption.

Measures in a FRC policy package to combat these problems should include:

• Energy efficiency retrofits should be considered as part of any fuel poverty relief program as they will lead to an ongoing reduction in fuel poverty and reduce greenhouse gas emissions at the same time. This greatly preferable to a series of one off payments that addresses the symptoms not the cause of the problem. This calls for a degree of ‘joined up thinking’ on the part of the retailers and various territory and Federal Government departments.
• Control over the setting of standing charges should be employed to ensure that those low consumers of power such as the environmentally conscious, those on low incomes, empty nesters who’s power consumption has dropped, are not cross subsidising those who use greater volumes.

Cross subsidising

The Conservation Council is very concerned about the use of high energy consuming appliances such as air conditioners being used as an enticement to consumers. This form of cross subsidising can lead to significant increase in power consumption and greenhouse gas pollution.

The ‘FRC policy package’ must include clear guidelines restricting sliding pricing policies allowing cheaper prices for increased demand.

Risks for Greenpower

The introduction of a wide range of green energy products as retailers seek to achieve a market advantage can be extremely confusing for consumers. In the United States, a flurry of new green energy products following FRC was one of the few ways in which customers were persuaded to switch supplier. Far less clear however, was evidence that these programs let to an increase in the total number of green power customers. The US experience suggests that FRC in Australia has the potential to undermine the existing highly reputable greenpower product.

The ACT Government should look closely at schemes such as the UK’s Energy Efficiency Commitment Program that obliges the power utilities to achieve a mandatory level of energy efficiency measures. This type of scheme offers an alternative to consumer led programs and moves the market from the provision of energy to a wider provision of energy services including conservation programs and renewable generation as a part of the mainstream energy mix.

This could be included in the ‘FRC policy package’.

This is clearly a complex but important issue and the Council urges the Commission to seek expert advise on the environmental issues as part of the development of the draft report. The Conservation Council is also happy to discuss the issues further. Please contact Chris Mackenzie Davey on:

02 6247 0877, , or at the address above.

Yours sincerely

Nicola Davies,

Director

February 2002