Who pays for new transmission?

There’s one, unavoidable, simple rule in business life: someone has to pay for it. Every solar farm, power station, smart meter or transmission line has to be paid for by someone. Either consumers or taxpayers. Nothing is free.

The current Grand Designs blueprint for the future of the National Electricity Market is the Integrated System Plan (ISP), developed by The Australian Energy Market Operator (AEMO). The plan maps out a singular vision for the future of clean energy in Australia: most new clean generation coming from large industrial renewable theme parks called Renewable Energy Zones (REZ), and big upgrades of transmission lines between states to move the renewable electricity around.

It sounds great if you are in the business of building renewable generation or transmission. At least 30GW of new renewable capacity will be needed by 2040 and around $25 billion of new transmission lines.

The as yet unanswered question is: who is going to pay for it all?

The first brick in this new Great Wall is the building of a new transmission line between South Australia and NSW. The EnergyConnect project will shift the growing surplus of renewable generation produced in South Australia into NSW, and then sell cheap coal fired electricity back into SA when its dark and still. Sounds like a great plan!

In January 2020 the Australian Energy Regulator (AER) approved the project as a regulated asset, meaning that it would get a guaranteed rate of return based on the amount of electricity moved along it. The charges for transmission are charged to consumers, called TUOS (transmission use of charges). So in this case the industrial and residential consumers on either side of the EnergyConnect transmission line would pay for it.

Since that approval at a cost of around $1.5 billion, the cost of the project has blown out to around $2.4 billion. That’s a big increase. The transmission companies planning to build EnergyConnect now say they are going to need new rules to get the project away because there will be too little electricity moved along it, and therefore producing too little revenue, in the first 30 years of the project.

Wow.

The problem with the new type of transmission lines being proposed is that they will only be used infrequently, just as renewable generation only surges infrequently. The rules to calculate returns on regulated assets like these were drawn up in the late 20th century when the idea of using transmission to balance intermittent renewable generation was not a big idea.

Large industrial customers are concerned that they, along with households, will end up paying steep increases in energy costs to cover the huge asset build being proposed in the ISP. While supporting the decarbonisation of the system, the current approach risks creating expensive and inequitable transfers between different parts of the economy. Winners and losers. And the losers are many of the big manufacturers and households consumers.

Given this is the first of a number of similar projects, these weak investment and returns issues are only likely to increase in the future. This suggests two things: either the ISP, while useful, is perhaps not as visionary as it was first portrayed. Second, if Australia is going to build this scale of transmission, it should accept that this will add to the cost of a renewable system and will require a re-think in who pays for it (TUOS) and how the investment and payment rules work.

A carbon price has long been proposed as the most efficient way to reduce greenhouse emissions to add the true cost of greenhouse gas emissions into investment decisions. In other words, fixing this will cost more. Building a low emissions system without a carbon price doesn’t avoid these costs, if anything it just increases them by inefficiently re-allocating them.