Up, up and away…

Electricity consumers have unfortunately had to get used to different components of their bills shooting up in cost. Early in the last decade it was network charges, in 2017-18 it was wholesale energy costs as Hazelwood closed. While these and environmental charges appear more stable or even declining, there is still one rapidly rising component. At least it is a small one – market operator fees.

AEMO’s job has been getting more challenging and complicated year by year, as the energy transition gathers pace. In recent years, it’s had to expand its forecasting capability to deliver the biannual Independent System Plan (ISP), upgrade its IT systems for five minute settlement and fund Energy Consumers Australia. As AEMO explain in its 20-21 Budget: “the volume of rule changes in the NEM…has tripled in the past three years and virtually all these rule changes directly impact AEMO”.

The growth in AEMO’s revenue and expenditure is illustrated in Table 1 below:

Table 1: AEMO annual budget (ex-Victoria TNSP function) $’000

Source: AEMO budget documents

AEMO was going to increase its NEM fees by 12 per cent in 2020-21, but in the light of stakeholder feedback and the impact of COVID-19, they have reduced the increase to 9 per cent. NEM fees are only around half the total budget but that is where the cost drivers are – gas fees are marginally decreasing.

These material fee increases (NEM fees were up 12 per cent the year before) belie the fact that AEMO is systematically running at a lost. As a not-for-profit, it doesn’t have any pre-existing equity to fall back on, but it can borrow up to $500m from the Commonwealth. Last year’s budget projected borrowings of $247m by 30 June this year, to cover both investment in IT systems and other fixed assets as well as cover the deficits.

There’s more to come. AEMO considers that its IT systems are no longer able to keep up with the rapidly changing demands of the energy systems it oversees and that it needs to invest in a significant upgrade, or “digital uplift”. This will require a doubling of its total expenditure over the coming decade, although as much of this will be capital expenditure, fees will not need to rise as fast as capital expenditure is recovered over several years.

Figure 1 AEMO’s total capital and operating expenditure projections

 

Source: AEMO 2019-20 budget

Fortunately for customers, when these fees are spread across all the energy that is transacted in the NEM each year, it works out a pretty small amount. Some is paid by generators, so the amount paid by customers (usually via retailers) is around $0.38/MWh. Adding in ECA costs and retail contestability fees, a household electricity customer can expect to be paying around $4 a year. For large customers, the fees could run into the thousands of dollars or more but is still only going to be around 1 per cent of the bill. These customers are likely more concerned about the costs AEMO incurs on their behalf procuring emergency reserves each summer.

Customers in the NEM at least benefit from economies of scale compared to the much smaller Western Australian market (WEM). WEM fees add up to just over $1/MWh. However, these fees are paid by both customers and generators, which means that the generators logically will build the fee into their wholesale market bids and the effective cost to customers is likely $2/MWh.

While market participants – generators, retailers and large users don’t publish their own costs of keeping up with the changing energy environment, it’s logical to assume that if it’s more costly for AEMO, it’s more costly for them, too.