Breaking power link could cost us
Unlinking Tasmania from mainland prices can backfire, explains Phil Bayley
ACENTREPIECE policy for the Tasmanian Government is its commitment to deliver the lowest regulated electricity prices in the nation. Unfortunately, by using arbitrary price caps and a promise to break a longstanding link with national prices (as the Energy Minister referred to on these pages on May 28) the Government has chosen very blunt instruments to achieve this goal.
Most households react to their total bill without understanding the underlying reason these bills have risen, although a third of Tasmanian households are insulated by the Government’s concession scheme.
Power bills have risen for a variety of reasons over the last decade. Network charges comprise nearly half of a typical residential power bill and are independently regulated. Following a decade of capital investment programs to improve network reliability and capacity, network charges have been stable in recent years.
Wholesale costs contribute just over a third of the typical power bill, and are the Government’s chosen mechanism. From the time that Basslink was conceived, a foundation principle that Tasmania’s wholesale price would follow Victoria’s had bipartisan support. The longterm commitment to marketbased pricing is seemingly ignored in the Government’s rush to denounce the market, play politics and legislate the price caps.
The minister asks “why should Tasmanians be paying mainland prices for Tasmanian energy?”
The answer is actually quite simple — in 2006, Tasmania’s connection to the National Electricity Market and the pricing nexus with Victoria was established when Basslink was commissioned. For the next decade, Tasmanians benefited from oversupply in the national market and prices remained below the cost of replacing existing generation.
This period is easily ignored when the impact of rising network costs is conflated with sustained low wholesale prices.
It was inevitable that the market would turn when old, dirty and increasingly unreliable generators were closed. Poor policy at the national level — driven by base politics rather than longterm needs of the community — delayed the new generation and led to the abruptly higher wholesale prices that occurred when Hazelwood Power Station closed last year.
However, the high wholesale price over the past year or so and a relatively stable renewable energy policy environment have provided an incentive for the new generation coming into the market. Some of this is coming into Tasmania, with wind farms committed at Cattle Hill and Granville Harbour and several smaller solar power projects well advanced.
This new supply is already bringing down prices. This is evidence that politicians should allow markets to work.
However, future investment worth many millions of dollars, including Hydro Tasmania’s Battery of the Nation and a second cable to the mainland, could be undermined if the price signal is prevented from working by government policies. It is bizarre that the Tasmanian community expects Hydro Tasmania to use Basslink to benefit from the Victorian market, but now the same market dynamics won’t be allowed to work in Tasmania.
Another unintended consequence of the Government’s policy is that Hydro’s market power could be exacerbated under certain conditions. A competitive wholesale market has proven elusive, but at least Hydro’s behaviour is tightly regulated under the existing arrangements that are being discarded.
The Government has tabled a bill in Parliament to cap power prices, before it removes the nexus with national wholesale prices in 2021.
A basic principle of price caps is that they are expensive and ultimately unsustainable.
It is ironic that our share of the GST is under serious
threat from Western Australia’s heavy lobbying, when power price subsidies in that state cost more than $2 billion over the last five years and were a significant factor in its deteriorating budget position. At least the cost of WA’s subsidies was transparent. No costings have been released for the Tasmanian community to assess.
Hydro chief executive Steve Davy told ABC Radio listeners on Thursday that his business had not costed the policy. This should be the Government’s responsibility.
The cost is real money that would otherwise be available for schools and hospitals, lower state taxes or to fund the ballooning unfunded superannuation liabilities of our state service employees.
With the State Budget about to be released and the legislation about to be debated, the true cost must be explored by Parliament.
We rely on politicians to set long-term energy policies that facilitate a flexible, reliable and low-emissions energy system.
Like many policy interventions, the Government’s energy policy is well-meaning. However, the blunt instrument could be destructive, and its adverse consequences are yet to be recognised and addressed. Through a more rigorous process, hopefully a more creative stance will emerge before the final stage of the policy is implemented in three years.
It is bizarre the community expects Hydro to use Basslink to benefit from the Victorian market, but now the same market dynamics won’t be allowed to work in Tasmania