The na­tional en­ergy mar­ket is an ab­ject fail­ure – it's time for a pub­licly owned grid

The Guardian Australia - - Opinion - John Quig­gin

The Greens’ pro­posal for a pub­licly owned elec­tric­ity re­tailer is the lat­est to emerge from across the po­lit­i­cal spec­trum ar­gu­ing for re­newed pub­lic in­ter­ven­tion. The Queens­land La­bor govern­ment has com­mit­ted to the es­tab­lish­ment of a pub­licly owned re­new­able elec­tric­ity gen­er­a­tor, to be called CleanCo. At the fed­eral level, the La­bor leader, Bill Shorten, has re­peat­edly stated that elec­tric­ity pri­vati­sa­tion was a mis­take. The LNP govern­ment is still com­mit­ted to the Snowy 2.0 hy­dro scheme, while the cli­mate de­nial­ist fac­tion wants pub­lic money for a new coal-fired power sta­tion.

This re­newed ap­petite for pub­lic own­er­ship is ac­com­pa­nied by gen­eral recog­ni­tion that the na­tional elec­tric­ity mar­ket has been a com­plete fail­ure. As I dis­cuss in my con­tri­bu­tion to a new book, Wrong Way, How Pri­vati­sa­tion and Eco­nomic Re­form Back­fire, mi­croe­co­nomic re­form has failed in ev­ery part of the elec­tric­ity sup­ply sys­tem.

Un­for­tu­nately, no one has much of an idea what to do about the prob­lem. Restora­tion of pub­lic own­er­ship will help but the sys­tem needs to be re­designed from the ground up. Be­fore putting for­ward blue­prints for a re­design, it’s im­por­tant to con­sider, at a more fun­da­men­tal level, what went wrong.

Cer­tainly, pri­vati­sa­tion was a mis­take and mar­kets haven’t yielded the promised ben­e­fits but elec­tric­ity sys­tems with pre­dom­i­nantly pri­vate own­er­ship and de­signed mar­kets have per­formed rel­a­tively well in some places. For ex­am­ple, the Elec­tric­ity Re­li­a­bil­ity Coun­cil of Texas (Er­cot) has done a good job in man­ag­ing the tran­si­tion from coal-fired power to re­new­ables while hold­ing prices down.

Why has Aus­tralia done so badly? The re­form process in Aus­tralia has treated mar­kets and com­pe­ti­tion as goals in them­selves, rather than as pol­icy in­stru­ments de­signed to pro­duce use­ful price sig­nals and thereby guide in­vest­ment and con­sump­tion de­ci­sions.

The fail­ure to con­sider the ap­pro­pri­ate role of prices can be seen at ev­ery stage in the process, from gen­er­a­tion to re­tail.

Let’s start with gen­er­a­tion. The Aus­tralian Elec­tric­ity Mar­ket Oper­a­tor op­er­ates on the ba­sis of a “spot” or “pool mar­ket”, in which the whole­sale price of elec­tric­ity is set by auc­tions, re­set ev­ery five min­utes. The only ex­cep­tion is in pe­ri­ods of very high de­mand when a mar­ket price cap (MPC) of $14,500 a megawatt-hour (MWh) is ap­plied.

The MPC is typ­i­cally reached on only a few days a year and so, from the per­spec­tive of a mar­ket oper­a­tor, is a rel­a­tively mi­nor in­vest­ment. But it is pre­cisely the peak de­mand on those few days that de­ter­mines the de­sir­abil­ity of new in­vest­ment in dis­patch­able gen­er­a­tion. The im­po­si­tion of the MPC means that there is no ef­fec-

tive price sig­nal to guide new in­vest­ment.

A bet­ter so­lu­tion would be for the mar­ket oper­a­tor to make longterm power pur­chase agree­ments with gen­er­a­tors, based on auc­tions or ten­ders, and then to dis­patch power on an “or­der of merit” ba­sis. The messy prob­lems of re­li­a­bil­ity and peak load would be ad­dressed through co­her­ent plan­ning, while prices would serve to se­cure in­vest­ment in an ap­pro­pri­ate mix of gen­er­a­tion at the low­est pos­si­ble cost. This cost of gen­er­a­tion should of course take into ac­count the cost of car­bon diox­ide emis­sions.

Turn­ing to trans­mis­sion and dis­tri­bu­tion, the big­gest con­trib­u­tor to in­creased elec­tric­ity costs in Aus­tralia has been the mas­sive in­crease in rates of re­turn paid to the own­ers of “poles and wires”. Un­der pub­lic own­er­ship, these as­sets were fi­nanced by semi-govern­ment bonds, pay­ing a small pre­mium over the AAA govern­ment rate. Un­der re­form, they have been paid a much higher “weighted av­er­age cost of cap­i­tal”.

The ap­pro­pri­ate role of prices in a nat­u­ral monopoly ac­tiv­ity such as elec­tric­ity dis­tri­bu­tion is sim­ple. The price should be as low as pos­si­ble, while cov­er­ing the costs of nec­es­sary in­vest­ment. The best way to en­sure this is to shift to a pub­licly owned na­tional grid, re­plac­ing the cur­rent patch­work of pri­vate net­works and the pre-1990s set of dis­parate state net­works. Un­til this can be done, reg­u­lated rates of re­turn should be low­ered to bring costs down over time.

Fi­nally, there is re­tail com­pe­ti­tion. Re­tail price pol­icy should have two goals. The first, ob­vi­ously, is to keep prices as low as pos­si­ble while cov­er­ing the costs of sup­ply. The sec­ond is to al­low con­sumers to man­age their de­mand so as to use more elec­tric­ity when it is cheap. To achieve this with any ac­cu­racy, it is nec­es­sary to use smart me­ters, ca­pa­ble of al­low­ing flex­i­ble pric­ing.

As with ev­ery­thing else, Aus­tralia’s elec­tric­ity re­form­ers made a hash of this. After a ham-fisted at­tempted to force Vic­to­rian con­sumers to pay for new me­ters in 2009, the whole idea was soft-ped­alled. Mean­while, un­der the ban­ner of choice and open mar­kets, re­form­ers pushed ahead with full re­tail com­pe­ti­tion.

Be­fore putting for­ward blue­prints for a re­design, it’s im­por­tant to con­sider, at a more fun­da­men­tal level, what went wrong.

Pho­to­graph: Joe Cas­tro/ AAP

The best way to en­sure prices are as low as pos­si­ble is to shift to a pub­licly owned na­tionalgrid, re­plac­ing the cur­rent patch­work of pri­vate and state net­works.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.