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August 23rd 2018 print

Alan Moran

A Simple Rx for the Energy Mess

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

agl IIPower 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.

moran chart

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

Comments [11]

  1. Eeyore says:

    He knows it, he chooses to keep the lovies at their ABC happy instead.

  2. LBLoveday says:

    OFF TOPIC

    Peter O’Brien,

    Are you “Peter O’Brien, Kiama, NSW”?

  3. ianl says:

    Well, well … Cormann, Cash, Fifield dump Waffle.

    Still nowhere near any useful detailed policies, of course.

  4. ianl says:

    And now the leftoids squeal and whine, fearful of even the possibility of policy direction change on energy/climate and immigration issues. For myself, I expect little will change in policy or even realpolitik, but this fear of even meagre policy change on those two issues is the real driver of leftoid angst.

  5. Jody says:

    Turnbull was poised and calm today. He has, after all, been surrounded by idiots all his working life and this is no different. He has/had nothing to prove. His leaving will trigger a bi-election, which the Greens will win, and Dutton will lose government – paving the way for Morrison. Shorten would delude himself in thinking he can do any better in a country entirely governed by opinion polls and shock jocks – and 1950s warriors like those who write on here, foul language and all.

    • ianl says:

      You’ve been invited quite a few times to argue actual policy rather than personality, to no avail. It seems it’s just beyond you, which is quite a pity in my view.

  6. ianl says:

    https://anero.id/energy

    As an adjunct to Alan Moran’s article here, the national demand for power on a 24 hour basis ranges between about 30GW and 18 GW according to time of day/night. Peak demand is about 6pm, lowest is about 3am.

    About 75% of demand is supplied through black/brown coal generation and peak methane (natural gas) generation. Another 10-15% is from hydro (although Lake Eucumbene has been reduced to about 25% capacity with the drought in SE Aus and constant hydro use). Wind typically adds about 1% with solar indistinguishable from 0. Constant shortfalls are scrambled from gas peakers or paying industry centres to stop production. Tasmania, SA and Victoria are using diesel generators to try and avoid power losses. SA is on constant interconnector drip from LaTrobe brown coal generators.

    The link at the top may be freely inspected for any 5 minute interval over the 24 hours, with data supplied through the AEMO. Every 24 hour cycle has the same curve shapes and demand/supply ratios with very little variation. To reverse the coal/wind supply figures, an area the size of Victoria needs to be completely dedicated to windmill installations and then the wind spasms need to smooth themselves out magically.

    How many MSM outlets refer to this easy-to-find information ?

  7. Jody says:

    Nobody here gets it or is likely to get it – now or in the future. This country has enormous political stability because of the politics of climate change. A first world nation rich in energy resources was ALWAYS going to endure political instability under such circumstances. You can trace back every rolled PM to the various failed policies on climate; Kyoto, Paris, Emissions Trading, NEG…on and on and on it goes. But the people will not tolerate NOTHING being done – half the population wants action the other half does not. Shorten will be toppled because of the same ideologies. No ‘solution’ suited business – they failed to support the Coalition (last week on a 49/51 winning poll position) either on energy or corporate tax cuts. When business fails to support government you can expect that government to topple and be replaced by ideologues who also are destined NOT to succeed.

    Until the elephant in the room – climate politics – is openly discussed by any leader you need to expect more changes in PM than the Italian government. But this would require more than “Tony, Tony, Tony” and foul invective about Turnbull and Morrison – the former, after all, having seen idiots throughout his entire working life and not surprised by meeting more of them in parliament house.

  8. I was in business for 35 years. Unlike rooftop solar I received no government handout for my capital equipment. Unlike rooftop solar I supplied product 24 hours/day, 365 days per year. Unlike rooftop solar I had to wait for customers to ask for my product – I couldn’t just sell it when I felt like it to people who didn’t want it nor need it. In the end I collapsed financially which is what should happen to rooftop solar. I have absolutely no objection to people generating their own electricity if they pay for it themselves. I myself had a diesel generator capable of taking the full load and I ran it once a month. I never dreamt of forcing people to buy my electricity at a ripoff price just when I wanted some cash.