Frogs on the stove – the failure of privatised power

The blame game is on, and the each side of this clearly polarized debate is throwing the baby out with the bathwater. The failure of the electricity supplies in South Australia poses many questions, but there is one answer, give us back our utilities.

As the World’s population evolved from small tribes to community groups, so did the need for essential services. First it was water, then sewerage and, thanks to Thomas Edison electricity. You will have to back to ancient China or Roman times to track the progress of water and sewerage but electricity has a more accurate record. Electricity began as a private enterprise, the technology and then the service had to be sold into a resistive market, frightened of this new magic, the costs and consequences. Only when governments adapted and promoted this new wonder did it thrive and its penetration throughout the West was essentially driven by supply and demand, if a community wanted it they had to make the investment after weighing up the benefits.

In Australia, the communities who purchased this new utility were as small as a town council, as wealth grew in major centres, a disparity emerged between city dwellers and the sparsely populated agricultural regions, causing the government to heavily subsidize the expansion of electricity networks to benefit all of the population, most of which voted in and out these ever expanding governments. No commercial operator would ever make an investment in these huge expanses of assets where positive returns were distant or non-existent.  The beginning of the privatization gamble was in the early eighties, the NSW government went 50/50 on the first four of ten contracted 660MW coal fired generators at Eararing on Lake Macquarie. It wasn’t as attractive as touted and it was then left to the government to complete the other six generators over the next ten years at Bayswater and Mt Piper.

It beggars belief that any government could expect such a vast and heavily subsidized power system as Australia’s to improve or even survive in private hands and what we are seeing now are the consequences of this misguided folly. The establishment of ruling bodies, specifically set up to ensure that private players and government incumbents guarantee supply, coupled with the much touted competitive benefits that never materialized, have ultimately left the National Electricity Network in a dire state. The only way governments can possibly make such a subsidized system attractive to private investors is to remove sovereign risk and/or guarantee compensation should market conditions change, to this end the government has overseen the systematic escalation in pricing of this essential services and the genie is well and truly out of the bottle.

Enter Renewables, when much of this privatization was in full swing, renewables were only emerging, and most investors in fossil generators underestimated the disruption these would have on their virtually guaranteed return on their investment. The situation these investors now find themselves in is that their golden geese have stopped laying on que and, in a desperate attempt to mine for profits they have turned to gas to pump up the bottom line.

The returns from gas are far superior to that of coal and because of the illusion of a competitive market and the quick response of gas, every opportunity to exploit these assets for profit is being taken. Meanwhile no private investment is being considered for new coal fired stations and the operating ones are being run into the ground, and you can’t blame the owners for this.

Where an intelligent government could and should manage coal fired generation and ensure that this is mixed in exact proportions with peaking gas plants, allowing for a seamless progression to renewables, the very thing that can make everything work properly and reliably is being abused, and renewables are getting blamed. Only a few decades ago electricity was almost exclusively from coal fired stations, spinning reserve was required to cope with peaks, hydro and off-peak tariffs complimented this mechanism and it worked under the stewardship of state governments. We now see gas displacing baseload coal generation and the price gouging that goes with it. It seems absolutely absurd that AEMO decided to switch-off up to eighty thousand customers in S.A. citing the cost of generation as a legitimate excuse. Where the privatized nature of the generation mix has, and will continue to maintain and operate only the most profitable of their assets, which is what businesses do, and with AEMO juggling a shrinking number of cheap energy sources and profiteering gas generators there is no other solution for government than to either regain ownership of the generators, networks and even retailers, or at the very least re-enter the generation industry with subsidized coal fired base load which will take this essential gas generation away from base load duties, leaving this valuable resource for supplemental duties for renewables and export. Sovereign risk will then come into play.

Coal must remain the underlying generation source for the N.E.M. in the medium term, without it, gas gougers will continue to distort the electricity market as they are now and prevent the inevitable rise of renewable energy sources, the situation is dire now and there seems no solution from either side of the argument.

It seems the only solution to the current train wreck is for states and even individual communities to “go back to the future” and decouple from this slow motion train wreck!