Paul Keating said “Never get between a premier and a bucket of money”. When it comes to paying for interconnectors, the reverse holds equally true.
The Integrated System Plan (ISP) for as much as $23 billion to be spent over the next 20 years to develop a much deeper National Electricity Market (NEM) transmission grid has opened up an inevitable, and rather unedifying, fight between the states over how to divide the cost pie: each wanting the smallest slice. The Energy Security Board has been given the fraught task of sorting out the squabble[i]. And then to add further confusion to the mix, last week’s federal technology roadmap has opened the door to some Commonwealth funding[ii].
We take a look at how major transmission paths are presently funded, and some options.
The Warring Tribes
At the time of federation, there was a transcontinental telegraph system, so the founding fathers sensibly allocated telecommunications to the Commonwealth in the Constitution. The states have no part in how this document was delivered to you.
However, the concept of electrical power being moved between the colonies was then beyond imagination. Energy was not mentioned in the Constitution and by default went to the states.
Thus, for most of the twentieth century, each state developed its own self-reliant power system and shunned submitting themselves to a national architecture. This led to plenty of amusing anomalies, such as the Hume Power Station on the Murray River having two equal sized units, one connected to New South Wales and another to Victoria, each continuously running at equal output, even when the river was below half-flow. The late Robert Booth captured the theme in the title to his book, Warring Tribes[iii].
Interconnection between Victoria and New South Wales was unavoidable when the Snowy Scheme was constructed. Belated interconnections to South Australia (1989) and Queensland (2000) eventually followed, however state utilities saw these purely to share opportunistic flows between them, and never really as a “national grid”.
How is transmission funded now?
The “shared” network is the vast majority of poles and wires: everything that is not part of a dedicated connection to a single generator or consumer. Shared costs are recovered through complex formulae that ultimately result in it mostly being paid by consumers through smeared energy levies. There is some geographical cost reflectivity, but it’s not particularly pointed.
This sharing occurs intra-state. Shared transmission costs are pooled into one state kitty recovered within that state – even in Victoria where there are multiple transmission owners. Assets supporting interconnection similarly fall along geographical lines, sometimes right up to the last tower on either side of the border.
Thus, although interconnections provide national benefits, their funding is largely local, opening inevitable fairness complaints – why should we be paying for this when it helps someone else?
Whilst states largely pay for everything within their borders, there is, at the margin at least, a small degree of national sharing:
How was Basslink built?
The Basslink cable between Victoria and Tasmania built in 2005 is peculiar on many fronts:
Just after the NEM started, we followed a North American experiment into merchant transmission. This is where entrepreneurs build DC lines purely to profit from the price difference at each end, i.e. the entrepreneurs rather than AEMO retain the settlement residue. This is how Basslink was built, subject to a long-term agreement with Hydro Tasmania. Costs are not recovered from customers so it avoided arguments about which state should pay.
Two other smaller merchant interconnectors were built at a time of enthusiasm for merchant transmission: Directlink and Murraylink. However the experiment is now considered a failure as:
Ultimately Directlink and Murraylink were reclassified as part of the shared network at a written-down value that is now being recovered from customers like conventional network assets.
It seems most unlikely that any of the very expensive interconnectors being proposed in the ISP will be merchant, so the question of who pays is therefore unavoidable.
What is an interconnector anyway?
When thinking about an “interconnector”, most people envisage a discrete transmission line crossing a state border. But, except possibly in the merchant cases described above, this is quite wrong. The Alternating Current (AC) transmission network is a highly intricate spiderweb operating collectively where every link affects every other link. An “interconnector” is in fact only a mathematical construct that exists within AEMO’s dispatch algorithm and settlement systems used to subdivide regional pricing and settlement. And those subdivisions are arbitrary – they have no basis in physics or economics and come about purely through the historical accident of colonisation.
So, when the ISP recommends a new “interconnector”, it is in fact recommending a complicated series of investments strengthening the overall grid – most of which are deep within the states and inseparable from the rest of the network. For example, the transformers at the South Morang Terminal station, in Melbourne’s northern suburbs, are no less a part of the New South Wales to Victorian interconnector as the lines that actually cross the Murray River.
Who pays: An inane issue with a lot at stake
So, following the default expectation that those assets associated with an “interconnector” are paid for by the customers who happen to live in the states in which they are built, anomalies are immediately apparent. For example, the majority of expense associated with Project EnergyConnect, between New South Wales and South Australia, falls in New South Wales. New South Wales customer groups don’t oppose the project, but consider this unfair. Yet on the other hand, if costs were shared according to the relative sizes of the customer bases, it would fall even more strongly upon them.
New South Wales’ geographical shape will always result in the majority of the assets required for an interconnector with any of their three neighbours naturally falling within their borders. So it’s unsurprising it would seek to change this default, whilst the other states would resist.
We could dream of a “one Australia” attitude: AEMO once proposed nationally pooling all transmission costs[iv]. But that utopian vision has problems too. State governments are imposing ever greater parochial variations on the NEM. For example, Victoria recently passed legislation to empower the state minister to direct the construction of transmission assets outside of the NEM’s cost-benefit based planning framework[v]. It would clearly be unreasonable, and a moral hazard, for customers in other states to pay for such follies.
There is no perfect answer here, except to go back in time and alert the founding fathers to the NEM!
The ISP has recommended a future construction of the next Bass Strait cable, Marinus Link, at a cost of around $1.8b (Stage I, with a further $3.2b for Stage II). There is no intention to build it merchant like Basslink, and, being mostly outside state territory, there is not even a default sharing arrangement. The Tasmanian Government’s view is clear, that it will be for the benefit of the NEM as a whole, and as the smallest state, Tasmanian customers should pay much less than half.
TasNetworks has articulated an interesting approach[vi] that includes some good economic rationale married with a great pile of pragmatism. The approach intentionally doesn’t open the pandora’s box of who pays for existing assets – what’s done is done. It also leaves alone the allocation of all shared transmission costs to customers and largely retains the “each state looks after itself” regime. However for new assets that are part of interconnector projects, it proposes costs be shared in a new way.
The NEM’s transmission planning cost-benefit framework[vii] is already supported by economic modelling which is necessary to show that the total market benefits of an interconnector project exceed its cost (with the notable exception of projects directed by the Victorian minister). It does not matter where those benefits fall – it could be customers anywhere, or even generators who benefit from the interconnector.
TasNetworks proposes that the modelling can determine the incidence of the customer benefits, i.e. it can identify which states’ customers benefit and by how much. The relative proportions are then used to determine what shares of the new project will be allocated to each states’ customers.
This seems fair, but it comes with some complexities to be aware of:
The Commonwealth to the rescue?
Many of the intractable difficulties of the Australian federation have been resolved with buckets of Commonwealth money. There are signs of that in last week’s announcements, with federal taxpayers’ money being suggested in order to advance interconnectors. Its early days, but we should be wary of such a white knight:
[iv] Available at https://www.aemc.gov.au/sites/default/files/content/aae7492c-ba7e-417f-a827-2bd6c1e7425a/Australian-Energy-Market-Operator-nbsp%3Breceived-14-February-2013.PDF
[vi] TasNetworks, Discussion Paper: “Beneficiaries pay” pricing arrangements for new interconnectors, available at https://www.marinuslink.com.au/wp-content/uploads/2019/12/attachment-3-cost-allocation-discussion-paper.pdf
[vii] Australian Energy Regulator, Cost Benefit Analysis Guidelines – Guidelines to make the Integrated System Plan actionable, August 2020
The continued fall in minimum demand levels to new record lows in South Australia is raising a new challenge for the market.
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