Distribution, Gas, Markets, Technology

Energy infrastructure investment a must

The importance of infrastructure investment is something that participants in the gas industry know a lot about. Investment challenges are playing out as decisions are being finalised by the national energy regulator that will critically affect the ability of power networks to raise capital to invest in stronger national grids.

In Australia’s system of energy regulation, the Australian Energy Regulator (AER) has the task of setting an assumed rate of return on investments made in networks. The results of AER’s review of electricity transmission and distribution WACC (weighted average cost of capital) parameters will be an important input into the regulatory environment affecting the regulated network sector. The review has broader significance because the electricity industry provides infrastructure that is critical to the general economic wellbeing of Australia.

The regulator’s draft proposals, released last December, have surprised utilities and capital markets, containing a severe cut to investment returns in the midst of a global financial crisis that is already leading to capital rationing. Through its draft proposals, the energy regulator is effectively signalling a view that Australia needs lower levels of energy infrastructure investment than has previously been seen in the country. The draft decision represents the first critical test for the AER.

Further investment in national and local energy grids currently valued at around $50 billion is crucial for meeting Australia’s carbon reduction goals. The recent Garnaut report and independent analysis from the government’s own infrastructure advisory body points to the need to invest in order to bring sources of renewable energy to consumers and give households access to “˜smarter’ and greener energy choices.

In the face of frozen credit markets and falling equity markets it seems that the AER has assumed that energy infrastructure will find it easier to attract capital, and face lower costs in raising debt. The market’s immediate response to the AER decision is that utility businesses have actually been made riskier by the AER’s proposals – even as the regulator claims they are safe havens.

In the end, it is the community and investors who will face the unintended consequences of any regulatory miscalculation, be it through gas shortages, power blackouts, higher prices, or the loss of investment capital. Those who fund Australia’s energy networks and put their capital at risk could expect regulators to take a fair view of the current cost of capital. This should be based on hard evidence, rather than abstract models. Investors should also have access to efficient mechanisms to quickly adjust incorrect decisions that have the potential to harm the community’s interests. If this doesn’t occur, we all face an increased risk of being left to endure decades of long hot summers, paying for someone else’s errors.

The potential for an incorrect decision to flow on and harm infrastructure investment across water networks, ports, rail and telecommunications is real. Incorrectly identifying this investment setting risks derailing the Federal Government’s efforts to bring forward new infrastructure investment and cushion Australia from the global financial crisis. It also puts at risk the new infrastructure needed to support the development of renewable energy.

If investment is not made in energy infrastructure now, Australia’s ability to withstand the increasing challenges of climate change will eventually prove too much. The community and the Australian economy will pay the cost of poor regulatory settings for infrastructure for decades to come. Energy Ministers can act to permit an independent review of the national energy regulator in order to allow a fair testing of the strength and quality of the assessments that the regulator will make. In this way, there is the opportunity to create a more secure energy future.

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