❓ A parliamentary question regarding the implementation of electricity price reforms, with the Minister responding by outlining past issues and current reform efforts aimed at reducing costs and excess capacity.
AnsweredQoN 227Legislative Assembly
QuestionView source ↗
ELECTRICITY PRICES
227. Mr C.D. HATTON to the Minister for
Energy:
It was very pleasing to hear this
morning's announcement regarding the government's commitment to
delivering lower electricity prices. Can the minister please update the house
on the implementation of recent reforms?
227. Mr C.D. HATTON to the Minister for
Energy:
It was very pleasing to hear this
morning's announcement regarding the government's commitment to
delivering lower electricity prices. Can the minister please update the house
on the implementation of recent reforms?
AnswerView source ↗
Before I get going, on behalf of the
member for Dawesville, I recognise the children from Mandurah Catholic primary
school, who are up there in the gallery.
I thank the member for the question.
Yes, the member got a taste for that, but I will fill in the detail. The member
was not in the chamber at the time, but when we first came to government, the
electricity system in the south west was in disarray. We faced a trajectory of
70 per cent increases in the price of electricity over 10 years. The subsidy
was growing rapidly; it grew from $60 million a year to $450 million. Verve
Energy, the generator, was on the verge of bankruptcy. If it was a private
firm, it would have gone bankrupt. This all came about because of the failed
reforms by the Labor Party in government in 2006.
We have set about reforming this. We
have made substantial changes to the state-owned electricity industry in
Synergy, Horizon Power and Western Power. All major reforms are reducing in the
vicinity of $500 million of costs out of the system. I have already discussed
that in this house. We had a review of what they call the reserve capacity
mechanism. Under the system put in by Labor, people or firms would come forward
and offer generating capacity into the market and get paid to do so. It also
put in an expanded program for what it called demand side management, whereby
people, firms and aggregators were allowed to say that if called upon, they
would turn down electricity or postpone it. We have seen that grow
dramatically. From 2006 to now, we have seen a substantial increase in excess
capacity. We have 1 000 megawatts of excess capacity in the market because of
overcooking the market and promoting the wrong type of capacity. That is
equivalent to supplying electricity to 750 homes on a hot day. That excess
capacity is costing electricity consumers about $116 million. A thorough review
was led by Lyndon Rowe and Ray Challen from the Public Utilities Office,
together with a whole range of other advisers. They made recommendations, which
I have accepted in full, to change the mechanism by which we pay people to put
in capacity. We have done a couple of things. We have changed the price
pattern, which will reduce the price in the first year substantially by about
15 per cent. We have put in a difference price for DSM and capacity. The simple
story is that if we pay a generator to provide capacity, it has to invest, let
us say, $300 million. If we pay someone for DSM, all they have to spend is a few
thousand dollars for organisation. We are reducing the price for DSM; by the
way, last year we paid $67 million for it and did not call on it at all. In the
previous year, we paid $90 million and did not call on it at all. We are
pricing them differently and we are going to an option approach in 2021.
As the member for Collie‑Preston
indicated in his question, I am directing Synergy to reduce its installed fleet
by 380 megawatts; therefore, we will take out of the market 15 per cent of
capacity. The experts tell me that will save $130 million a year in the cost of
electricity. The people opposite, the brains trust—the members for
Cannington and Collie–Preston—say we have the math wrong and
that that will not save anything. But I think I am going to rely on Lyndon Rowe
and Ray Challen to do the math better!
Several members interjected.
Dr
M.D. NAHAN : I would think so. I will rely on Paul Evans and others to do
the math. Price times quantity is a very simple thing. What will happen is that
the price will initially go down and the quantity will eventually go down. When
we multiply those two together, we get $130 million a year. That is reform.
People opposite made the problem and have bagged us on every attempt to reform,
whether it is to Western Power, Synergy, Verve Energy or Horizon Power, and now
their complaint is, ''No change. No savings. Dr Challen''—one
of Western Australia's best economists—''has his math
wrong.'' I think I trust Ray Challen more than the member for Cannington
or the member for Collie–Preston. They are good reforms—I
accept them in full—that will take costs out of the electricity system.
member for Dawesville, I recognise the children from Mandurah Catholic primary
school, who are up there in the gallery.
I thank the member for the question.
Yes, the member got a taste for that, but I will fill in the detail. The member
was not in the chamber at the time, but when we first came to government, the
electricity system in the south west was in disarray. We faced a trajectory of
70 per cent increases in the price of electricity over 10 years. The subsidy
was growing rapidly; it grew from $60 million a year to $450 million. Verve
Energy, the generator, was on the verge of bankruptcy. If it was a private
firm, it would have gone bankrupt. This all came about because of the failed
reforms by the Labor Party in government in 2006.
We have set about reforming this. We
have made substantial changes to the state-owned electricity industry in
Synergy, Horizon Power and Western Power. All major reforms are reducing in the
vicinity of $500 million of costs out of the system. I have already discussed
that in this house. We had a review of what they call the reserve capacity
mechanism. Under the system put in by Labor, people or firms would come forward
and offer generating capacity into the market and get paid to do so. It also
put in an expanded program for what it called demand side management, whereby
people, firms and aggregators were allowed to say that if called upon, they
would turn down electricity or postpone it. We have seen that grow
dramatically. From 2006 to now, we have seen a substantial increase in excess
capacity. We have 1 000 megawatts of excess capacity in the market because of
overcooking the market and promoting the wrong type of capacity. That is
equivalent to supplying electricity to 750 homes on a hot day. That excess
capacity is costing electricity consumers about $116 million. A thorough review
was led by Lyndon Rowe and Ray Challen from the Public Utilities Office,
together with a whole range of other advisers. They made recommendations, which
I have accepted in full, to change the mechanism by which we pay people to put
in capacity. We have done a couple of things. We have changed the price
pattern, which will reduce the price in the first year substantially by about
15 per cent. We have put in a difference price for DSM and capacity. The simple
story is that if we pay a generator to provide capacity, it has to invest, let
us say, $300 million. If we pay someone for DSM, all they have to spend is a few
thousand dollars for organisation. We are reducing the price for DSM; by the
way, last year we paid $67 million for it and did not call on it at all. In the
previous year, we paid $90 million and did not call on it at all. We are
pricing them differently and we are going to an option approach in 2021.
As the member for Collie‑Preston
indicated in his question, I am directing Synergy to reduce its installed fleet
by 380 megawatts; therefore, we will take out of the market 15 per cent of
capacity. The experts tell me that will save $130 million a year in the cost of
electricity. The people opposite, the brains trust—the members for
Cannington and Collie–Preston—say we have the math wrong and
that that will not save anything. But I think I am going to rely on Lyndon Rowe
and Ray Challen to do the math better!
Several members interjected.
Dr
M.D. NAHAN : I would think so. I will rely on Paul Evans and others to do
the math. Price times quantity is a very simple thing. What will happen is that
the price will initially go down and the quantity will eventually go down. When
we multiply those two together, we get $130 million a year. That is reform.
People opposite made the problem and have bagged us on every attempt to reform,
whether it is to Western Power, Synergy, Verve Energy or Horizon Power, and now
their complaint is, ''No change. No savings. Dr Challen''—one
of Western Australia's best economists—''has his math
wrong.'' I think I trust Ray Challen more than the member for Cannington
or the member for Collie–Preston. They are good reforms—I
accept them in full—that will take costs out of the electricity system.
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