Gillard’s energy backflip paves way for market reform

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The federal government wants a COAG agreement by the end of the year on energy market reform. Gillard speaks of recasting the energy industry into a service rather than just a commodity, and of a future of smart grids and smart appliances. But can Labor deliver smart policy?

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Here’s a story about lost opportunity. When the federal government’s climate change advisor Ross Garnaut dared to take on the country’s energy giants and the gold plating of their networks in March 2011, as part of the detailed updates of his climate change review, he was howled down – not just by the industry itself, but by the federal government too.

Professor Garnaut said that electricity networks were effectively price-gouging customers by over-inflating estimates for the construction of poles and wires. He said that the cost of the carbon pricing scheme would be minor in comparison to the cost increases caused by the expansion of the network.

Garnaut was simply repeating what was widely known in the industry. And how right he was. Still, the industry tried to shout him down. Ausgrid CEO George Maltabarrow said there wasn’t a “shred of evidence” for Garnaut’s comments, and every pole and wire that was built was needed to ensure that consumers got security of supply. The federal minister for energy, Martin Ferguson, joined in the fun. “Garnaut does not speak for the government,” he said a few days later. “The regulatory framework for Australia’s energy sector is leading-edge.”

Leading edge for rorters, maybe. That much was confirmed just three months later when the head of the Australian Energy Regulator, Andrew Reeves, admitted the AER was effectively impotent against the bullying tactics of the network operators, most of whom are owned by state governments.

Reeves called for reform to a system that was being effectively gamed at the cost of consumers. He said the system encouraged network operators to submit revenue proposals “that are at the top of, or beyond, what could be considered a range that ‘reasonably reflects’ the required expenditure.” He wanted the AER’s power boosted to be able to resist these demands. Those calls have since grown louder since it was revealed that the industry’s own estimate for demand growth – a measure that has slavishly followed GDP for nearly half a century – were completely out of whack, and demand has actually fallen in the last three years.

It comes as no surprise, then, that as the government finally decides to run with Garnaut’s observations, that it was Prime Minister Julia Gillard who did so, stepping in at the last minute to deliver a keynote speech to the Energy Policy Institute in Sydney on Tuesday. As it turns out, Garnaut was speaking on behalf of the government after all, and 10 years after the Parer review first identified the savings that could be made from a reform of the National Electricity market, the government has decided to act.

“At the heart of all this is a simple market design problem: a clear regulatory incentive to over-invest in infrastructure and pass on costs to consumers,” Gillard told the audience, according to prepared remarks. And, as she noted, energy prices and regulation are no longer the subject of policy wonks and energy conferences. “There’s a very concrete discussion going on at the kitchen table, in the school car park and in the front bar, about this.”

And this discussion should be about massive over-investment. One quarter of all electricity costs are spent to meet peak events that last for less than two days a year in total (or in fact have hardly happened at all in the last three years), and one sixth of our national electricity networks – $11 billion in infrastructure – caters for peak events that last for barely four days per year. “It’s like building a 10-lane freeway – but with two lanes that are only used or needed for one long weekend,” she said, in a variation of the often-used 20-lane Sydney Harbour Bridge analogy.

None of this is new. The Prime Minister’s Task Group on Energy Efficiency delivered in late 2010 said the NEM’s regulatory structure is hindering the take-up of energy efficiency opportunities that it estimated could reduce peak demand by up to 1,300MW. It recommended a focus on demand management, a call echoed by the Alliance to Save Energy, which said that the combined effect of cultural and regulatory barriers meant spending on meeting forecast demand is skewed to the point where 99.8 per cent is spent on increasing supply, and just 0.2 per cent on reducing demand.

What is new is that energy prices are political dynamite, and the government knows that an energy debate is there to be won, but not with the carbon price. Gillard got some free publicity by attacking the (Coalition) state governments over the increase in network costs from their state-owned network operators – which are twice as much as the privatised network operators in Victoria, for instance.

But as easy a target as the state governments are, Canberra (both Coalition and Labor) have done little. The news today is that Gillard is now pushing the states to come to an agreement, through COAG, on a solution before the end of the year – bringing to a head the conclusions of the much-delayed “power of choice” report to be delivered soon by the Australian Energy Market Commission, and the recommendation of the final draft of the Energy White Paper (to be drawn up by Ferguson).

“The inefficiencies that exist in the current system cannot be ignored,” she said, according to an advanced copy of the speech. “I want real decisions this year to guide price determinations beginning next year.” In other words, to at least modify the system before the next five years of regulatory upgrades is locked into the system, and thus avoid a repeat of the $45 billion that is being spent in the current five-year period – much of it for nought.

And it may be that some of her advisors have been reading RenewEconomy. “This is the future of Australian energy market reform,” she said. “New ideas and new understandings of the possibilities smart technology holds. Energy services, not just electricity supply … remaking the mix of power generation … and remaking the networks which deliver power services. More renewable energy, more distributed generation … better management of demand.”

She spoke of smart meters, smart grids and smart appliances. “Picture a smart phone app that means you can load the clothes dryer or a dishwasher before you leave home – and then turn it on when a low-cost rate becomes available during the day.” She even gave a plug for AGL Energy’s push for time-of-use pricing – although that dishwasher may have to come on during the night rather than the day.

Smart technologies, though, need smart policies – and that is where the government is going to meet the point of the greatest resistance, likely from the states, most certainly from the network operators, and other incumbents. The technologies being produced now have the potential to tip the $120 billion electricity industry on its head and completely reconfigure it.

The government blinked when it took on the miners and ended up with a half-baked mineral and resources tax. But it knows it has to act on electricity prices. Failure to do so will reflect badly on Canberra, and Gillard will gladden the policy wonks and the advocates because she has finally opened up the debate that we should be having about power bills: i.e. “How to reconcile clean and affordable power”, instead of the sterile: “should we keep or dump the carbon price?”

It is a crucial shift in the debate. Without it, the entire clean energy agenda (not just the Carbon tax) was likely to be wiped out. By shifting the focus to the main causes of consumer pain, clean energy now has a fighting chance. Gillard has made a start. Will her government have the time and energy to finish the job? Her re-election may depend on it. Pity they didn’t start it when Garnaut gave them the cue.

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5 Comments
  1. Ben Rose 7 years ago

    Great work Giles; this website and Climate Spectator can definitely take some of the credit for the reforms that happen……

    “How to reconcile clean and affordable power”, instead of the sterile: “should we keep or dump the carbon price?”….music to my ears.

    Government advisers read the news from these websites, realize the truth is out and that it will spread by word of mouth, despite the obfuscations of the ‘vested interest’ mainstream media.

  2. Gillian 7 years ago

    Giles, could you clarify — I’m what this means…

    “The news today is that Gillard is now pushing the states to come to an agreement, through COAG, on a solution before the end of the year – bringing to a head the conclusions of the much-delayed “power of choice” report to be delivered soon by the Australian Energy Market Commission, and the recommendation of the final draft of the Energy White Paper (to be drawn up by Ferguson).”

    Does it mean that the negotiated solution will be written into the White Paper as a recommendation? Or does it mean the recommendation of the final draft of the EWP will be implemented? I didn’t know there was a final draft yet.

  3. Chris Fraser 7 years ago

    Consider that States (include possibly self absorbed and antagonistic ones) tends to work inside their respective silos. This creates a triple whammy of self- direction even though stakeholders may be in other states or no coordination with other states on efficient provision of energy to communities outside their borders, unnecessary replication, and setting own poles and wires price increases because they don’t have their own ACCC (IPART is able to advise, but i think powerless to control the NSW agenda on pricing). 

    We do need a better designed grid, but I believe most people would consider a national design approach to be better planning. We would need to be State borderless for the task. This would allow location of generators where the resources (be it sun, wind, wave, geothermal) are most efficient. We need to design for hub and spoke and distributed generation models. We need to include linkages or improved linkages to all states for better access to competitive generators. The only honest broker who could organize it is the Feds. They could create an Authority like the Murray Darling Basin, or a binding Act like the Snowy Hydro Scheme. Either is preferable. It would be made up of technical people and representatives of industry and electorates (does that mean politicians? – well, it was so close to perfect).

    The NSW Government should be careful as i heard today of criticizing electricity increases on costs of the Carbon Tax. Combet was at least able to compensate low to middle income earners for carbon. Did NSW get an offset for poles and wires ? Um, no.

  4. Dr Nick 7 years ago

    “Leading edge”, eh, Ferguson?

    In cricket, a leading edge is a false shot, often when the batsman has been deceived by the bowler, and routinely leads to a dismissal. A Freudian slip analogy?

    Perhaps Ferguson means that our regulatory framework is indeed deceptively bad, certainly to the extent that it encourages network augmentation and values security of supply far and above all other considerations.

  5. Scott 7 years ago

    “Ross Garnaut dared to take on the country’s energy giants and the gold plating of their networks in March 2011, as part of the detailed updates of his climate change review, he was howled down – not just by the industry itself, but by the federal government too.”

    Was the federal government ignoring Garnaut in March 2011 ?
    … or just not wanting to upset the Labor NSW and Labor QLD governments at that time ?

    Its always a shame when politics gets in the way of good policy.

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