News

5

An Overview of Electricity Network Financial and Operational Performance

Written by Energy Action

In September 2020 the Australian Energy Regulator (AER) released the first of what is envisaged to be an annual electricity network performance report. In this report, the AER sets out rich and insightful analysis of key operational and financial performance trends.  The analysis and report leverages information the AER collects from electricity networks for the period June 2006 through to June 2020. As a result, it does not have the full impact of COVID-19 in the underlying data; the AER intends the 2021 report to provide more insight and analysis into the implications of COVID-19.

The report covers data for the regulated components only of distribution and transmission networks in the National Electricity Market (NEM). 


Network regulated revenue is reducing

In the last year customers spent approximately $12 billion on network services, this is the lowest level since 2010 when it was $11 billion. Customers are paying less for network services, but this does not always mean there is a reduction in retail electricity bills, as network charges are one component of a customer’s overall bill. It does, however, put downwards pressure on customers’ bills.

Since 2006, network charges increased by 66 per cent in real terms until they reached a peak in 2015 of approximately $15 billion. Post-2015, we saw a considerable step change reduction in network charges of approximately $2 billion driven mainly by reduced interest rates. In addition to the step change, we have continued to see a downward trend in network charges since 2015 almost every year. 

The AER expects the trend of declining network charges to continue as many electricity networks have their allowed revenues reset in lower interest rate conditions.


Network expenditure is also reducing

Unsurprisingly, given network revenues are reducing, so too is total network expenditure. Total network expenditure is the sum of capital and operating expenditures. Since the peak in 2012, overall expenditure levels declined from approximately $13 billion to nearly $9 billion in the most recent period 2019/20. However, there have been some slight increases in network expenditure from 2016 to 2019.

The vast majority of the decline in network expenditure is due to significant reductions of up to 50% in capital expenditure. Operating expenditure has been relatively stable since 2010. The capital expenditure reductions are related mainly to the reduced investment in electricity networks post the ‘gold plating’ era.


Distribution network reliability is improving

This report from the AER focussed on distribution network reliability reflecting the fact that most supply interruptions originate there. Future reports may provide insights into transmission network performance. The AER considers outages from both a duration and frequency perspective, including impacts from significant events such as storms, floods, fires and cyclones.

There is clearly a trade-off between reliability and network investment; the greater investment usually means improved reliability. Notwithstanding the more recent reductions in revenue, distribution network reliability has generally improved in recent years, with outage frequencies reducing steadily since 2010. However, outage durations have been significantly more variable with no clear trend; major events also impact them.

There is also a vast range of reliability between individual network businesses, with a more than 5 to 1 difference between the best performing and worst performing network from a reliability perspective. This is not surprising as reliability outcomes are driven by several independent factors, including the network location (regional versus metropolitan).


Network profitability is reducing

The regulatory framework is designed to provide them with an expected profit margin based on a required return in the market for an investment of similar risk. The expected profit margin, if set appropriately and supported by appropriate incentives, should attract efficient investment.

On a per-customer level profit margins for most networks have declined in the period 2014 to 2019. Distribution networks, on average, have reduced profit margins per customer from approximately $500 per customer per annum to around $350 per customer per annum. For transmission networks, the change was less, from approximately $220 per customer per annum to around $150 per customer per annum. However, there is a wide range of outcomes for each individual network-based again on a variety of independent factors.

Even though profitability is reducing, the AER’s perspective is that based on market evidence, investors appear to view the expected returns from investing in regulated networks as being at least sufficient to attract investment. This may or may not prove to be correct, as some networks are concerned that the required level of expenditure in the coming decade to enable the appropriate uptake of renewable technologies may not be fully recoverable through the current regulatory framework.


Conclusions

The data and transparency provided by these annual reports should help identify trends and impacts on customers and opportunities for improvement. 

If you have any questions or need advice on the optimising your network charges of further information on network issues, please contact your Energy Action account manager.