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Want electricity reform? Start by giving power back to the states

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The Conversation

It’s time to take the political heat out of electricity grids. AAP Image/Lukas Coch

It’s time to take the political heat out of electricity grids. AAP Image/Lukas Coch

In 1999, Australians were paying some of the lowest electricity prices in the world. Now they are among the highest. What went wrong?

Back then, the electricity network in the southern and eastern states of Australia had just been reformed to create a regional wholesale market, called the National Electricity Market. Some states – Victoria and then South Australia – privatised their industry. All states then progressively deregulated their retail electricity markets, and transferred the regulation of their remaining network monopolies to two quasi-federal regulatory agencies, the Australian Energy Regulator and the Australian Energy Markets Commission.

These reforms replaced the state governments’ electricity commissions – derided by some as Soviet-style relics – with what was purported to be a dynamic new arrangement of competition and private risk-taking.

The reforms were bolstered by reports by the Industry Commission (now the Productivity Commission) predicting that even though electricity prices were already low, they would fall further as the pressure of competition drove the industry to become more efficient and customer-focused.

The exact opposite happened. The sector’s productivity has declined sharply after tens of billions of dollars were spent on network infrastructure – particularly substations – that are not used at anything like their full capacity, even at the peak of an Australian summer.

But the failures are not just in the regulation of networks. Our retail markets compare very unfavourably with those in other countries, and our wholesale electricity markets seem to be cornered regularly – most recently in South Australia on February 8, where a lack of available generation led regulators to cut the power to some 90,000 customers.

Besides not being cheaper, the system is also no greener or more reliable. The amount of greenhouse emissions per unit of electricity produced has shown little change, and as South Australia has shown, the system can’t always keep the lights on.

Australia is blessed with a surplus of every conceivable energy resource and no shortage of technical and managerial skill. How did it come to this?

Passing the buck

The common factor underlying these failures is accountability. Officials use the phrase “all care and no responsibility” to describe the situation in which politicians become as skilled in finger-pointing as they are in showing empathy for those suffering through power blackouts.

The latest manifestation of this is the mis-characterisation of Australia’s electricity problem as one of renewables versus fossil fuels. In this view, the solution is to turn back the clock to last century’s high-emission technologies (such as coal), despite the clear risk to the private sector of doing so.

What can sensibly be done to get us out of this mess? The real problem is not renewables – it’s poor governance.

Fixing governance problems is hard, but it’s clear which direction we should take. It needs to be made obvious who should be strung up when things go wrong, or covered in glory when they go right. This clarity will in turn deliver the accountability needed to anticipate and solve problems, rather than the buck-passing and blame-dodging we’re seeing now.

The state model

There are lessons to be learned from other comparable federal countries, including Germany, the United States and Canada. They too have regional power markets and retail competition, but they have avoided the bickering between federal and state governments seen in Australia.

Their electricity networks (except interconnectors) and their retail markets are overseen by the states and provinces – as used to be the case in Australia.

When accountability is clearly established, we will know where the buck stops when the lights go out or prices become unaffordable. But under Australia’s current quasi-federal system, there is an irresistible temptation to point fingers and obfuscate if things go wrong.

Politicians past and present created this problem, and they must now rise above it. The immediate task is not to tinker with existing institutions, but instead to make some fundamental changes.

The starting point should be to recognise that electricity supply is the province (under our Constitution) of the states and territories, not the Commonwealth. It would be better to get on with fixing our own back yards than idly waiting and wishing, often without good reason, for “national coordination”.

We should reassign oversight of networks and retail markets back to the states and territories, as used to be the case. Regional transmission interconnection and market operation should continue to be federally coordinated, but the primary responsibility for pricing and reliability must rest with the states. The states might choose to delegate the oversight of various issues to central entities, but these entities must be clearly answerable to those states under the terms of their delegation.

In some respects these will be major changes, and in others, mainly a change of mindset and orientation. But for too long now we have been pushing a model of governance that does not reflect our constitutional responsibilities, and is at odds with the approach adopted in other federal countries.

It has failed and it is time to change. Other nations’ experience can give us confidence that if we make changes we can look forward to vibrant electricity markets that actually work in customers’ best interests.

Source: The Conversation. Reproduced with permission.  

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  • Chris Baker

    What you suggest Bruce makes lot of sense to me. The supply of electricity is a natural monopoly and is not really suited to trying to create a market where none naturally exists. When it was run by the states and their electricity commissions, the primary purpose of those organisations was to provide a reliable and efficient electricity grid for the community. The objective of the organisations, and the purpose of the power stations, was aligned to the best interest of the community they served.

    Now those same power stations have a different purpose: to maximise profits for the owners. The objective of weaving this into a reliable electricity grid is now imposed on those power stations by the market operator. How can it ever work well for us when there is such a misalignment of purpose?

    We saw this in South Australia recently when a Pelican Point generating unit was not available for the market, even though it was easily switched on when instructed to do so by the market operator. This would never have happened when owned and run by the state electricity commission: its purpose was then quite obvious and it would have been used to support the grid. Now its purposes is not so clear, and sometimes its use it contrary to maximising profit for the owner.

    We’ve seen this in Queensland when CS Energy was pinged for misusing Wivenhoe Power station for manipulating the market. The very characteristics that make Wivenhoe fantastic at supporting the grid, that is large capacity and very fast response, also make make it a good tool to manipulate the market.

    And we’ve seen Snowy Hydro and Origin in November scamming the market when there was network constraint on the border. Again a misalignment between their purpose of making high profit and the purpose of providing a reliable and efficient network.

    Clearly the market is not serving us well. I’m with you on giving power back to the states. I’d go even further and put the ownership of the generators back into public hands, and change the mission of government owned corporations from profit to service.

    • I agree. Give the authority back to those that have the responsibility to ensure cost effective reliable electricity for the consumers – the states. Privatisation was a great philosophy but has served us badly and it is now time for a change.

    • Hans the Elder

      Power grids are a natural monopoly. Power production and power retail are not. When one power station can manipulate the market, there is clearly not enough competition.

      • Brunel

        Karl Marx said that capitalism is inherently unstable.

        There were enough electrons to go around, but by hoarding electrons or deliberately shutting down a power station, one capitalist was able to raise the price of electrons for a greater profit.

        Karl said profit is theft. How right he was as far as the electricity market in AUS is concerned.

      • Peter G

        This is an attractive dogma Hans, that has been uncritically embraced by our political class to our detriment. It is now evident that grid management and generation are in competition. Take embedded west facing solar PV for example – it directly displaces transmission capacity, or embedded solar/storage that displaces the lot.
        Today problems come after the multi billion dollar market failure of the ‘monopoly’ regulatory regime that gold plated our grid.
        The State run utilities certainly had their failings (for example ‘capture’ of sate politicians – but now coal miners seem to be exercising ‘capture’ of federal policy today) but with blackouts now concurrent with idle generation could it be any worse?

        • Hans the Elder

          That is why grids should be in public hands, not in the hands of a commercial party with guaranteed profit.

      • Chris Baker

        Hans, I think the manipulation comes more from a generator who owns multiple power stations, and uses them in concert to increase the overall portfolio profit, rather than an individual power station. For example CS Energy mis-using Wivenhoe Power station to maximise profits for its coal fired power stations. If generators such as CS Energy were broken up, even at a the trade desk level, I think it would help a lot. Then each power station would be bid into the market on its own merits rather than in a manipulative manner.

        • Hans the Elder

          Which means that one power generation company has too much market power, in other words there is not enough competition.

    • 小杜 (xiao du)

      The issue is that the suppliers are gaming the market due to badly designed rules. Change the ruleset so that they can’t cheat, and have to play fair.

      Then the market will serve you well.