An air con: when the poor pay to cool the rich

It's time to put an end to airconditioner injustice. This summer, the two-thirds of NSW households with airconditioners will be cross-subsidised by about the one-third that don't. It's an unfairness that gets much less attention than it deserves.

Temperature control at home was once considered a luxury but most now seem to view it as a modern necessity. Australian households have installed 1.7 million airconditioners in the past five years and the total number of units has doubled in the past decade to about 6.3 million.

But the way the electricity market works means our airconditioner fetish comes with hidden costs.

Because each unit draws a lot of electricity they put major demands on the power generation and distribution system when many are switched on at once (a single airconditioner can use the same amount of electricity as 40 fans).

The companies that own and maintain the state's electricity poles and wires have invested huge amounts upgrading the distribution network to cater for the peak demand caused by airconditioners on hot days between 4pm and 8pm. High energy appliances - especially airconditioners - have a bigger impact on peaks in electricity demand than population growth, household size or income.

Every airconditioning unit installed in a home can cost $5000 to $10,000 in network improvements, depending on where the house is located. The surge in demand caused by airconditioners also forces electricity generation companies to temporarily ramp up production on hot days using more expensive methods of making electricity.

But the way Australian electricity consumers are billed means the huge costs of catering for peak demand are spread across all small users through higher average prices. The extra generation and network costs are passed onto every consumer. In effect, those switching on the airconditioner at times of peak demand are not paying for the full cost of their actions and those without airconditioners are paying more than they should.

This system isn't just unfair, it's wasteful because more and more capacity is being installed at great expense but rarely used. About a quarter of retail electricity costs come from peak events over a period of less than 40 hours a year. You don't have to be an electricity industry economist to work out that's inefficient. Last month Julia Gillard likened it to building a 10-lane freeway with "two lanes that are only used or needed for one long weekend".

The state's Independent Pricing and Regulatory Authority estimates the state's poles and wires are costing typical households $654 more a year than five years ago, a rise of 72 per cent above the rate of inflation. Residential consumers in NSW are now paying more than $1100 a year just for the upkeep of the distribution network.

Many households have responded to the recent price spike by moderating electricity use when it's convenient. But on the dozen or so hottest days of the year, those lucky enough to have household cooling still switch on all at once. These two trends in consumer behaviour have made the electricity distribution network even more inefficient because even more capacity is left unused for most of the year.

But there's another pernicious side effect. The less well-off, who generally don't run multiple airconditioners, are cross-subsidising consumers who do. Vulnerable families making do without airconditioning are being put under added financial stress so that others can have their room temperature-controlled.

In parts of Europe households that pay more than 10 per cent of their income on energy costs have long been deemed "fuel poor". This category is now growing in NSW because of the recent surge in electricity prices. Earlier this year, IPART said the proportion of households in the state paying more than 10 per cent of their income in power bills was on the rise. About one in nine households in regional areas will slip into the fuel poor category after the latest round of power price rises.

The airconditioner cross-subsidy exposes a major policy failure. Rather than finding ways to encourage consumers to reduce peak demand, authorities have allowed network distribution firms to build more and more capacity at great cost.

In July, economists at AGL Energy warned that the electricity market was in danger of a "death spiral" as wealthy households use less power on average while poorer families bear the brunt of big network investments to cope with peak demand.

The growing electricity price pain has created some momentum for change. The Australian Electricity Market Commission - the body that makes the rules for the national electricity market - will release its "Power of Choice" review tomorrow aiming to help families and businesses make informed choices about the way they use electricity and manage their bills. Last month Gillard demanded that all Australian governments act on the commission's recommendations "as soon as they are made".

One aim of the review is to reduce the need for additional peak generation and network infrastructure. The business sector, which consumes about 70 per cent of the electricity generated in Australia, could also be encouraged to do much more to reduce electricity use during peak demand periods.

A shift away from flat prices and quarterly billing to smart meters that allow more "time-of-use pricing" will help over time.

But it is worth remembering that if we had resisted the collective desire for household temperature control - like most families in the 1970s and 1980s - every consumer would now have a much smaller electricity bill. The billions spent by state electricity companies catering for electricity demand on a few hot days each year could have been spent improving schools, hospitals and transport infrastructure. And of course, we'd be emitting less carbon pollution.

It is surprising how little the airconditioner boom has been questioned, considering its economic, environmental and social costs.

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