With Australian electricity prices now approaching world-beating highs, we have on Friday another meeting of the Council of Australian Government (CoAG) energy ministers who have created the current energy catastrophe.
They are to examine the Finkel report into electricity. Among the many counter-productive recommendations this report offered was an increase in the electricity market’s “governance”. This is a demand for even more of the political tinkering which, in the space of just 15 years, transformed the Australian electricity industry from the cheapest in the world to one of the dearest. Distortionary subsidies to renewable energy, which have also undermined reliability, are paramount in this.
Finkel decided that renewables are inevitable (which is why Malcolm Turnbull appointed him) and commissioned economic research to demonstrate that this is so. The modelling showed future lower prices from the substitution of wind/solar for lower cost coal. It did so by using two mechanisms.
First, it has the renewables subsidised and with priority access to the grid, meaning coal powered stations have either to run at a loss or close down. The optimists assume coal will run at a loss in an oversupplied market then close down in an ‘orderly’ manner.
In theory, this allows a second mechanism – forecast cost reductions of wind and solar – to swing in.
One shortcoming of this picture is that if the coal stations hit major expenditure needs at an inconvenient time, they will be forced to close down. This was the case with Hazelwood, which was operating in the face of Worksafe notices and requiring perhaps a billion dollars for new boilers. Finkel’s solution (adopted by politicians) of requiring three years notice of closure is absurd and unworkable.
Moreover, the fabled and imminent onset of cheap renewables will not occur, just as it has not ocurred through the past 30 years of similar erroneous predictions. Ah, but batteries will save the day, I hear some say. But no, they won’t. Batteries are simply a costly way of smoothing out the peaks of renewables’ intermittency.
Compared with the cost of coal at below $50 per MWh for new power stations and less than that for existing ones, wind is at least $90 plus the costs of storage ($14 according to the totally inadequate estimates published by Minister Josh Frydenberg) and requires aditional transmission expenditure.
With current policies having brought wholesale prices to around $100 per MWh, Finkel decided to airbrush from history the sub-$40 prices that prevailed until the renewable subsidies started to bite in 2016.
It is easy to forget the changes that the deregulation of energy created, before politics overturned its competitive nature.
With the reforms initiated in Victoria, some of them even underway from 1990 during a left-wing ALP government’s tenure, management of the power stations (and poles and wires) was taken away from the de facto union control that had developed over the previous quarter of a century. Benefits of the system’s reform were amplified by the privatisations.
Between 1990 and 2002, labour productivity in Victoria’s electricity generators (including contractors as well as employees,) rose from six man years per GWh to 36 GWh. The increased efficiency was also manifest in the generators’ “availability to run” which was lifted from under 80% to 95%, an outcome that effectively increased capacity by one fifth.
As the national market started to emerge, state-owned generators in New South Wales and South Australia were forced to follow the same cost-cutting path that the new rivals in Victoria had pioneered. The outcome was the low prices that did so much to engender the remarkable economic resurrection of Australia in the two decades to 2015.
It is hard to see how this, the free-market norm, can be recaptured. Green activists and subsidy seekers have combined to destroy Australia’s developed endowment of cheap coal-generated electricity.
Even the Australian Energy Market Manager (AEMO), the institution set up provide a technology neutral market management, has been undermined. The present head, Audrey Zibelman, filled the big shoes of predecessor Matt Zema when she came to Australia as a refugee from Hillary Clinton’s presidential defeat. The AEMO role is management rather than policy promotion and Zema was guarded in offering advice which ventured into politics. By contrast Zibelman has flung herself into the political deep end. She has urged the adoption of the 42% renewable energy target favoured by Finkel, lifting the wind/solar subsidised component from its current 9%. At its current level, subsidised wind has already brought a doubling of wholesale prices and an unreliability that has offered an opening for notorious subsidy harvesters, think here of Elon Musk, to offer expensive panaceas.
Ms Zibelman says she wants us to get beyond the point when energy isn’t such an emotional issue. But this is shorthand for saying, “accept my position and let’s move on”. She likens her role with CoAG ministers to that of Google’s management which is “constantly planning and investing in their networks”. It is of course something of a stretch to compare a failed government monopoly institution to a globally successful outfit operating in a highly competitive market.
Energy ministers, with the partial exception of Frydenberg, continue to demonstrate their utter ignorance of markets in general and electricity in particular by rising to support and intensify the on-going market poisoning by government regulatory controls.
Alan Moran is the author of Climate Change: Policies and Treaties in the Trump Era