Electricity privatisation a ‘spectacular failure’, says report

The privatisation of Australia’s energy networks has been an unqualified and costly failure, according to the findings of a comprehensive new report commissioned by the Electrical Trades Union.

Written and researched by leading Australian economist John Quiggin, the report examines 30 years of Australian energy sector reform and concludes that, overall, it has “failed spectacularly;” driving up costs, destabilising investment and compromising infrastructure and supply.

And the “greatest failure of all”, says Professor Quiggin, has been privatisation.

“Over the past 30 years, the electricity industry has been transformed beyond recognition,” Quiggin writes in the report titled Electricity Privatisation in Australia: A Record of Failure.

“Electricity authorities have been first corporatised and then partially or wholly privatised in several states. A system of electricity supply based on statutory obligations to ensure a safe, and reliable supply has been replaced by a National Electricity Market that is supposed to achieve the same outcome at lower cost and with more choice for consumers. These policies have failed spectacularly.”

Released on Thursday, the report includes a detailed economic examination of the outcomes of power sales in Victoria and South Australia, and finds that many of the claimed benefits of privatisation have not been supported.

“Privatisation, corporatisation and the creation of competitive electricity markets were supposed to give consumers lower prices and more choice, promote efficiency and reliability, and drive better investment decisions,” Professor Quiggin writes.

Rather, states with privatised electricity networks have experienced higher prices, greater customer dissatisfaction, poorer customer service, declining reliability, no improvement of investment efficiency, and reduced productivity.

“After a marked fall in real electricity prices across Australia from the 1950s until the mid-1990s under public ownership, privatisation and the introduction of the National Electricity Market led to a reversal of that trend.

“Prices have risen dramatically. A secure low-cost supply has been replaced with a bewildering array of offers, all at costs inflated by a huge expansion in marketing.

Quiggin is also critical of the flawed design of the National Electricity Market – the core of which was the creation of pool markets, in which generators sell electricity to wholesalers and retailers or directly to customers. In this scenario, he says, prices are highly variable, ranging from zero to $10,000 a megawatt hour (MWh).

Under the pool system, Quiggin notes, the profitability of generators depends heavily on the relatively small number of periods of peak demand.

“With a captive market, generators will be unwilling to close down their plant, even if some output must be sold into the pool at very low prices,” Quiggin says.

“Residential consumers missed out on price reductions, which, because of falling fuel prices and interest rates, they would have received under average cost pricing. By the time the market became fully contestable, much of the current excess capacity had been absorbed and high peak prices became more common.

In the face of these failures, concludes the report, “the response of reformers has been to claim that the only option is to push on with yet more privatisation. …This argument is baseless. Privatisation has produced no benefits to consumers, but has resulted in large fiscal losses to the public.

“It is time to admit that the reform process, as a whole, has been a failure, and that a return to a more centralised system, with public ownership of critical infrastructure, is the only sensible response.”