Possible Future Trends in Residential Electricity Prices 2013-14 through 2015-16: Network Cost Drivers DISCLAIMER This report has been prepared for the Australian Energy Market Commission (AEMC) as an input to a report it is preparing at the request of the Standing Council on Energy and Resources (SCER) on possible trends in residential electricity prices Australia in the three year period from 2013-14 to 2015-16. The analysis and information provided in this report is derived in whole or in part from information prepared by a range of parties other than OGW, and OGW explicitly disclaims liability for any errors or omissions in that information, or any other aspect of the validity of that information. We also disclaim liability for the use of any information in this report by any party for any purpose other than the intended purpose. DOCUMENT INFORMATION Project Network Cost Impacts on Residential Electricity Prices 2013-14 through 2015-16 Client Australian Energy Market Commission Status Final Report Report prepared by Rohan Harris ([email protected]) Lance Hoch ([email protected]) Date 14 October 2013 by Network Cost Impacts on Residential Electricity Prices 2013-14 through 2015-16 14 October 2013 Final Report Table of CONTENTS 1. Executive Summary ................................................................................................... 1 1.1. Background .................................................................................................................... 1 1.2. Overview of scope ......................................................................................................... 1 1.3. Key findings .................................................................................................................... 2 2. Input cost trends ........................................................................................................ 4 2.1. Objective ........................................................................................................................ 4 2.2. The weighted average cost of capital ............................................................................ 4 2.2.1. Overview and review of recent decisions ......................................................................... 4 2.2.2. Possible impact of WACC on future electricity prices ...................................................... 8 2.2.3. Quantitative assessment of the impact of a lower WACC on residential unit prices .... 12 2.3. Labour cost escalators ................................................................................................. 14 2.3.1. Review of recent decisions .............................................................................................. 14 2.3.2. Possible impact of labour costs on future electricity prices ........................................... 15 2.4. Materials cost escalators ............................................................................................. 16 2.4.1. Review of recent decisions .............................................................................................. 16 2.4.2. Impact of exchange rates ................................................................................................ 21 2.4.3. Possible impact of materials costs on future electricity prices ...................................... 22 2.5. Macro-economic drivers .............................................................................................. 26 3. Augmentation and licence driven reliability improvements ...................................... 27 3.1. Objective ...................................................................................................................... 27 3.2. Overview ...................................................................................................................... 27 3.3. Ausgrid ......................................................................................................................... 27 3.4. Essential Energy .......................................................................................................... 30 3.5. Endeavour Energy ....................................................................................................... 31 3.6. ActewAGL .................................................................................................................... 32 3.7. Energex ........................................................................................................................ 33 3.8. SAPN ............................................................................................................................ 35 3.9. TransGrid ..................................................................................................................... 37 3.10. Transend ...................................................................................................................... 39 4. Asset replacement ................................................................................................... 43 4.1. Objective ...................................................................................................................... 43 4.2. Overview ...................................................................................................................... 43 i Network Cost Impacts on Residential Electricity Prices 2013-14 through 2015-16 14 October 2013 Final Report 4.3. Ausgrid ......................................................................................................................... 44 4.4. Essential Energy .......................................................................................................... 48 4.5. Endeavour Energy ....................................................................................................... 51 4.6. ActewAGL .................................................................................................................... 53 4.7. Energex ........................................................................................................................ 56 4.8. SAPN ............................................................................................................................ 59 4.9. TransGrid ..................................................................................................................... 62 4.10. Transend ...................................................................................................................... 65 5. Changes in demand ................................................................................................. 67 5.1. Objective ...................................................................................................................... 67 5.2. Background .................................................................................................................. 67 5.3. Likely trends in residential electricity consumption and impact on average price and pricing ................................................................................................................... 68 5.3.1. Overview .......................................................................................................................... 68 5.3.2. Trends in residential demand by jurisdiction .................................................................. 69 5.3.3. Trends in distribution pricing ........................................................................................... 77 5.4. Quantitative estimate of the impact of changes in consumption on residential unit prices ................................................................................................... 81 6. Conclusions ............................................................................................................. 84 ii Network Cost Impacts on Residential Electricity Prices 2013-14 through 2015-16 14 October 2013 Final Report Table of FIGURES Figure 1: Historic yields on ten-year government bonds ........................................................................... 6 Figure 2: Historic changes in the target cash rate ..................................................................................... 7 Figure 3: Spread between ten-year bond yield and cash rate .................................................................. 8 Figure 4: Forecast GDP .......................................................................................................................... 11 Figure 5: Timelines for AER Determinations .......................................................................................... 12 Figure 6: Real materials cost escalators ................................................................................................. 25 Figure 7: Materials Cost Escalators excluding the impact of forecast changes in the exchange rate .... 25 Figure 8: Consolidated Forecast of SAPN’s Growth Related Capital Expenditure ($000’s 2010/11) ..... 36 Figure 9: Comparison of TransGrid’s updated original capex proposal with the AER draft decision and TransGrid’s revised proposal ($2008 millions) ................................................................................. 38 Figure 10: Transend capital expenditure as proposed in its original 2009 – 2014 Revenue Proposal ($2008 – 09 millions) ................................................................................................................. 40 Figure 11: Ausgrid system asset age profile – replacement cost