Regulator publishes 4th annual report on energy sector

The Australian Energy Regulator today published its fourth State of the energy market report. The report provides a comprehensive overview of Australia's electricity and natural gas markets over the past 12 to 18 months.

"The energy sector proved resilient to the global financial crisis in 2010, with continued strong investment in generation and network capacity to meet the pressures of rising electricity demand, ageing infrastructure and stricter government requirements on security, safety and reliability," AER chairman Andrew Reeves said today.

The key issue is the need for substantial new investment in energy infrastructure to maintain a secure, safe and reliable power system:

  • rising demand for power – new dwellings and energy-draining appliances like air conditioners
  • ageing infrastructure from the 1950s to 1970s needs to be upgraded
  • stricter government requirements for secure, safe and reliable energy networks
  • borrowing costs for power businesses have risen due to global financial crisis.

Mr Reeves said the necessary investment to maintain the integrity of the power system is coming through.

"Electricity generation investment is on track to meet peak demand projections and reliability requirements until at least 2013–14. Most of this new capacity relies on gas-fired and wind technology rather than coal," he said.

"Rising investment in gas-fired generation is also driving investment in the gas industry," he added. "Coal seam gas production in Queensland and New South Wales rose by 29 per cent in the year to June 2010 and pipelines are being built or expanded to enable gas to flow into southern and eastern markets. In September 2010, new spot markets for wholesale gas were launched in Sydney and Adelaide to encourage short-term trading for competitive pricing."

Mr Reeves said there is significant new investment in regulated energy networks.

"Electricity distribution investment over the current five year regulatory periods will rise over previous levels by 25–33 per cent in Queensland, 42–103 per cent in New South Wales, 33–59 per cent in Victoria, 88 per cent in South Australia and 69 per cent in the ACT."

Mr Reeves explained this was being driven by a combination of factors which affect all networks to varying degrees.

"Electricity demand is rising, especially on hot weather days when the use of air conditioners causes sharp increases in electricity use. We are also seeing governments apply more rigorous obligations to ensure the networks are secure, safe and reliable. For example, there will be additional costs to meet higher standards for electrical safety, network planning and customer communications in Victoria following the 2009 bushfires.

"This pressure is being intensified by the need to replace ageing assets, given much of the networks was developed between the 1950s and 1970s," Mr Reeves said.

Mr Reeves said the global financial crisis was another significant factor that had increased network costs.

"Higher debt financing costs have increased the revenue requirements of distribution businesses by around 5–9 per cent," he said.

With network costs accounting for around 50 per cent of a typical electricity bill, rising investment and operating costs are affecting energy customers.

"There have been significant increases in retail prices over the past twelve months," said Mr Reeves. "While network costs are a key driver, wholesale energy costs have also risen in some jurisdictions. In addition, climate change policies such as renewable energy targets, incentives for small scale solar generation and energy efficiency schemes have had some impact.

"The AER is strengthening measures to encourage efficient investment. We are expanding our information framework to make the network businesses more publicly accountable for their capital and operating expenditure. The AER also published an extended regulatory investment test in 2010. This test requires electricity transmission businesses to prove the efficiency of new investment, and similar rules will apply to electricity distribution networks."

The State of the energy market is intended to meet the needs of a wide audience, including government, industry and the broader community. The report supplements the AER's extensive technical and compliance reporting on the energy sector.

The Australian Energy Regulator is Australia's independent national energy market regulator. It monitors and enforces compliance with the national legislation governing the electricity and natural gas industries and is the economic regulator of electricity and gas networks in eastern and southern Australia.

The State of the energy market report will be available on the AER website. A limited number of hard copies will also be available.

Issued date: 
15 December 2010
AER reference: 
NR 011/10
Lin Enright, Media 02 6243 1108 0414 613 520
Infocentre general enquiries 1300 302 502