Caught in a death spiral

As power prices rise, wealthier customers cut use, leaving the poor to pay more.

What’s most terrifying the electricity industry isn’t the threat of price control or a clean energy target or even being forced to keep open power stations that have long since ceased to work properly. It’s not even the government’s inability to come up with a clear set of rules. It’s a fear more primal – the same one gripping the national broadband network, public schools and private health funds. Analysts at AGL Energy call it ‘‘the death spiral’’. US economist Craig Severance coined the term six years ago. ‘‘In this nightmare, a utility commits to build a very expensive new power plant,’’ he wrote. ‘‘However, when electric rates are raised to pay for the new plant, the rate shock moves customers to cut their use. The utility then has no way to pay for the new power plant unless it raises rates even higher – causing a further spiral as customers cut their use even more or walk away.

‘‘In the final stages of that death spiral, the utility’s more affluent customers have drastically cut purchases by implementing efficiency and on-site [solar] power, but the poorest customers have been unable to finance such measures. The utility is then left attempting to collect higher and higher rates from poorer and poorer customers.’’

It’s been playing out in Australia since the late 2000s.

Read Peter Martin’s comment in today’s Melbourne Age - “Caught in a death spiral.”