Regulated prices, a royal commission, pumping water uphill, more wind — as politicians count numbers and the Prime Minister’s fate hangs in the balance, all these alleged ‘solutions’ and more are being tossed about by people who, quite frankly, should know the one-word solution: competition
Power prices have ignited the current leadership crisis and there are few signs of sufficient understanding of what caused this in the political firmament or, for that matter, in the mainstream media.
Malcolm Turnbull engineered the now comatose National Energy Guarantee to disguise his ideological imperative of a planned energy system that is fundamentally based on those wind/solar/battery technologies he regards as the shape of things to come. He says:
Our primary focus is to bring power prices down.
No single measure can achieve this …. there’s no single reason why power prices have been so high and there’s no single solution. So that’s why we’re taking action right across the board, with retailers, distributors, generators. And together, our measures will deliver cheaper electricity.
Turnbull is thrashing around, looking to place the blame for the energy mess on market manipulation by retailers and deceitful price offerings. His key solutions are
- price fixing disguised as some form of regulation of “standing offers”
- new powers for the ACCC to order separation of vertically integrated firms; and
- underwriting support for some form of new dispatchable energy.
The energy crisis was created by the subsidies to renewable energy, feted at every turn by green activists and supported by all the major research consultancies whose models saw this as a key to lowering prices, on the basis that the subsidised renewables, having their costs covered by subsidies, would bid in the market at very low prices forcing the established players to follow suit. Such regulatory initiatives neatly expropriated the established businesses, especially the coal-fired generators which, like wind generators, have low variable costs but, unlike wind, have long asset lives and do not, of course, get the subsidies.
All the major modelling firms — Frontier, ACiL, Jacobs — forecast that energy prices today would be of the order of $40 per MWh or less, compared to their actual levels of $80. All of them expect the same policies to bring overbuilding of wind with negligible marginal costs again resulting in prices of $40 per MWh two years from now.
Much of this forecasting failure is a result of a fixation by economists on prices being driven by marginal costs. In fact, this is the case only in highly distressed markets where excess capacity is evident – the marginal costs of a BMW X5 and a skinny latte are probably only $20,000 and 50 cents respectively but no such prices prevail.
The prospect of price fixing would be most appealing to the ALP, the Greens and Malcolm Turnbull, and seems to have some attraction for Peter Dutton. Price caps are terrible ideas and inevitably lead to suppression of cost recovery. They are particularly ill-advised in a market such as electricity with dozens of competing retailers and few barriers to entry.
Dutton is also ruminating about taking the GST off electricity, which would do nothing to redress the basic problem, plus establishing a Royal Commission – as if we have not had a constant version of this in the various reviews over the past 10 years.
Beyond talk of price caps, a GST fiddle and yet another inquiry, we need to scotch the panacea of a forced separation of retailers and generators. This coming together of these two market components was never anticipated in the development of the national market but has proven to be highly beneficial as another form of risk defrayment, with risk internalised within the company rather than by contracts at arm’s length. There is sufficient competition in retailing to prevent the vertical integration having the capacity to price gouge.
So what measures are needed? At the Commonwealth level, aside from exiting the Paris Agreement (or just staying in and doing nothing), two sets of policy changes are necessary.
1. Abolish all subsidies including:
- government direct disbursements through the Australian Renewable Energy Agency (ARENA) and the Green Bank (the Clean Energy Finance Corporation)
- cease cross subsidies through the renewables: immediately discontinue the SRES, (roof top solar panel subsidies); cease new subsidies to wind and large scale solar under the LRET, including putting the default cost of failure to meet the obligations at zero, without which the windfarms will continue leeching subsidies from the electricity consumer for the next dozen years
- drastically prune the bureaucracy, including abolition of the Energy Security Board, pare the proven inefficient Canberra bureaucracy, abolish energy economic forecasting bodies in the CSIRO, defund the CO2 CRC (“helping industry to reduce greenhouse gas emissions”), and various other agencies involved in carbon capture and storage (funding of at least $200 million in the pipeline); all of these, like the renewable subsidies have amounted to negative value-adding expenditures.
2. Adopt measures to rectify the destruction of incentives to invest in energy induced by government interventions:
- require AGL to divest Liddell, selling it to the highest bidder
- set up an auction for long term government contracts for dispatchable electricity, a replacement on or near the site of Hazelwood being one with another in Queensland or NSW
- remove any legal impediments to nuclear power, which might be a better option than coal in South Australia.
This still leaves the continued harm of state-based interventions involving residual price capping, and subsidies to wind/solar. The latter are set to be reinforced by measures favouring new transmission lines that subsidise wind and solar installations, measures promoted by the market operator, AEMO, which under current management has extended its powers into advising on policy.
These powers need to be reined-in, and there should be no subsidies to connect remote generation to the markets.
Regrettable though state subsidies are, state government funding limitations reduce their damage. Subsidies, which I estimated approached $5 billion a year in 2016, are dominated by the Commonwealth.
The Victorian Government has an election policy of greatly increasing rooftop subsidies but, under scrutiny, the sum, $1.24 billion over 10 years, amount to a more modest $124 million a year even if all of this is incremental. And the claimed subsidy cost per 4 kW installation at $2225 compares with the ACCC’s estimated subsidy cost of a 5 kW installation in Victoria of $2970 under the Commonwealth scheme, the withdrawal of which the ACCC recommended (not because they oppose subsidies but because they considered it had become unnecessary).
It is difficult to see how the market can be mended without some countervailing intervention in the form of long-term contracts to attract reliable power. Until the green dragons are expunged, prospective investors in coal generation, with its high sunk costs, will observe the expropriation of assets by subsidies since 2001 and require a contract as insurance against a repetition.
This is a far cry from the solution promoted by Turnbull, which is further oversight and direction by government institutions (with an additional $32 million a year budget) to force behaviour that will best be achieved by competition.
You would think a conservative, even an alleged conservative, would know that.
Alan Moran is the author of Climate Change: Policies and Treaties in the Trump Era