Earlier today, Spartacus published a post on electricity. One of the comments was from someone called Jock. Spartacus hopes Jock forgives him if this bothers, but it seems Jock’s comment is worth its own thread. So here it is verbatim. Thanks Jock.
Ok as a retired utility exec, let me go through this for you all.
Poles and Wires: The Regulator provides a return based on an established WACC. It is placed over an established and agreed RAB (Reg Asset Base) . The reason for the argument over WACC is simple. The Utilities want a reasponable rate of return. The regulators want efficiency, low cost, and near 100% up time. This is another triangle that cant be connected. There are arguments over beta, Risk free rate, debt rates., alpha, Everything in the WACC. The Reg Wacc is supposed to last 4-5 years. But inflation and interest rates change. Equity expectations change. But it is a monopoly asset and so regulation for what is a fairly low rate of return is a heated debate. The Op costs are calibrated and compared to Best Practice. Capex is always a big argument. The reulators want to keep it down as a way of reducing prices. but at the same time they want 100% reliability (a reliability requirement not applied to any other part of the supply chain.) NOW that has all been changed. To date there were rules in place that all worked with but now the Coalition changed them to empower the regulator to simply announce a rate of return that they swa as reasonable. Added to this the LIMITED review allowed previously has been taken away via a slight of hand. The right of review was based on the existing rules. But if their are no rules then there is no basis for a limited judicial review. Good way to screw them all. Not helped because the ACCC used Generation submissions saying they had no time. The reality is that the regulators have masses of info on every….EVERY aspect of Distribution company metrics and returns. Just recently the cretins in the ACCC said they would look at some tax aspects of the Utilities. These have been well and truly known to them for over 15 years. They have worked through them with the Companies and the ATO. The hide. However on the other side, the State owned distributors simply ignored the regulators ruling and did what they wanted.
Generators: In the first iteration of privatisation retailers did not have generation capacity or not enough. They were forced to deal with a price variation of $10000, yes ten thousand dollars a MW ,that is the price range. After being properly burnt by not being able to obtain hedge contracts for NGC in NZ, AGL realised it needed generation. They got burnt a few times in SA. You can lose all your profit in one afternoon if demand from your customers greatly exceeds hedged supply. Unhedged the loss for a retailer is gigantic. Hence all retailers went for vertical integration. This saved them being screwed on the hedges and gave them control over despatch. Then came renewables. They get first dibs on despatch if they are generating. This causes mayhem for the gas and coal generators. How do you not despatch a coal fired generator? I should add that coal and base gas gens always despatch. Renewables were a rent seekers dream. Yoy got subsidies, certificates and first dibs in despatch and the retailers had to take green energy. AND up until now you didnt have to create backup supply!!! Normally a wind generator will produce on average 30% of nominal. But this can range from 0 to 100%. When its under 100% then another plant is needed to supply electricity, bacause them customers out there want power when they turn on the switch (they dont realise its a free option) . A Wind farm SHOULd consist of a cost pie as follows: Capex winf Farm+ subsidies and RET certs+ Cost of gas Back up plant or other “firming” contract + cost of fuel for backup. + OP costs..
As you can see for 100mw of power the capital cost alone is over double straight fossil fuel cost. What a mess. Solar is even worse with idiot politicians allowing ridiculous rates for retailers to buy excess power. All generated when no one needs it. And that is besides the ridiculous subsidies.
Retail. Have to backend all of the above into a retail price. Of course the regulators want start ups and small retailers to be given same deal as majors. But this doesnt take account of credit risk. Or who assumes their customers if they go bust. Im not saying retailers have not seen the plum and done a Jack Horner. But A Gentailer cannot by itself manipulate the market.
I should add that like mortgage rates , retail electricity prices will always congregate around a small price area.
OK thats enough. Sorry its general but it gives a gist of a market and policies that even a bunch of pond scum could have better devised.