Trading off reliability and investment in electricity networks

The debate about regulating transmission and distribution assets moved from ‘academic interest’ to ‘headline grabber’ in just a few weeks. My earlier comments are here and here. And as those posts make clear,  the issues are not straight forward.

Before the debate can move forward, however, we need to consider the issue of network reliability and investment. These cannot be separated.  While the PM and some premiers complain about excessive network investment (e.g. here and here) the owner of the Victorian transmission system is facing a class action over inadequate network invetment. There is a trade off between ‘risk’ and ‘reliability’. Before we can decide whether or not there is ‘gold plating’ in electricity networks we need to answer the following question:

What level of transmission and distribution service are consumers and politicians happy to put up with?

Or put another way – are we happy to have power supplies disrupted due to network system failures or have harmful ‘associated events’ (e.g. bushfires) if we also have lower power bills?

At present the electricity networks in eastern Australia are built to a high level of reliability. It takes an extraordinary event to shut down a significant part of the network in any of the eastern states. The networks are designed to meet capacity requirements on even the hottest days when we all want our airconditioners on full power. Particularly in our capital cities. Of course, we pay for this high reliability through the network charges. And it means that almost all of the time, the network will have significant excess capacity.

To paraphrase the PM’s analogy, we have a power network that is like an eight lane highway. Most of the time two lanes will do. Some of the time we need three or four lanes. But maybe once a year, we need all eight lanes to avoid any traffic congestion. And to avoid ‘congestion’ we are paying for the eight lane highway.

So if the politicians want less network investment then they must also answer the critical question of reliability. How often can the lights go out?

It is economically efficient to sometimes have the lights go out – probably more often than they do today. While we do not want to be in India’s situation, it is likely that we have excessive reliability in Australia’s east coast electricity networks. But that is because of the incentives in the regulatory system. It does not pay the network owner to have lower investment and lower reliability. The regulators will not want to take the blame if the network fails (even if it should occasionally fail – just like our roads sometimes end up congested). And there is little demand-side management so consumers do not have any incentive to reduce power consumption when the price of electricity is high and the network is overloaded.

It is easy to blame others for our ‘gold plated’ network, but the simple question that we as power consumers need to answer is – how much are we willing to trade off lower electricity bills with a higher chance of network failure in the middle of summer. Once that question is answered, we can start working out the right number of lanes on the ‘electricity highway’.