We have all the energy resources we need
Australia’s National Electricity Market (NEM) has been temporarily suspended because amongst other things, NEM generators have withheld supply, gas costs for NEM generators have escalated because of a war in Ukraine, and renewable energy generation remains idle because the Australian Energy Market Operator (AEMO) has denied access to the grid.
Fingers are pointed at the previous federal government which spent about a decade attempting to reduce renewable energy investment in Australia. Others have pointed to a fragmented market where state-based systems have gone it alone because of inaction by the federal government leading to baseload shortfalls.
Despite the attribution of blame to multiple entities and parties, there are no simple mechanisms that can resolve the problem and no individuals accountable for the mess. How did we get to this point where we have all the energy resources we need, but we have been at the mercy of price gouging disguised as market-based mechanisms?
Neoliberal economics for provision of utilities, assumes ‘the market’ is the accountable entity
It all goes back to the ideology pursued through the 1990s which led to the corporatisation or privatisation of government-owned commercial (GOC) entities. Electricity industry restructuring involved segmentation of previous vertically integrated electricity commissions into four parts: generation, transmission, distribution, and retail.
The NEM was established with a complex price-discovery mechanism so that generators could compete to dispatch energy at lowest cost. Complex regulatory frameworks were created to control investment and revenue of network monopolies. The simple, cheap invoicing process that had been the responsibility of the utilities was hived off to retailers that were now competing to supply consumers. The assurance that this convoluted structure would deliver lowest possible prices was based on a highly theoretical concept riven with ideology – that competition will always drive down the price, and only the market can be held accountable for actual prices.
But markets can, and do, fail - generally because they require effective oversight to function transparently, and require good information to support decision making. After more than two decades of regulatory, governance, and institutional changes to encourage competitively priced electricity, Scott Morrison, the federal Treasurer in March 2017, directed the Australian Competition and Consumer Commission (ACCC) to hold a public inquiry into the supply, pricing, and competitiveness of retail electricity in the NEM. The ACCC concluded its public inquiry in July 2018. The first paragraph of the report states:
Australia is facing its most challenging time in electricity markets. High prices and bills have placed enormous strain on household budgets and business viability. The current situation is unacceptable and unsustainable. The approach to policy, regulatory design and promotion of competition in this sector has not worked well for consumers (ACCC, 2018, p. iv).
The report attributed high prices to several factors – a loose framework for regulating network monopolies; market power of generators which increases wholesale prices; climate policies like the Commonwealth Government’s Renewable Energy Target (RET) and Queensland Solar Bonus Scheme (SBS) interfering with the efficient operation of the wholesale market; high gas prices increasing the cost of generation; and retailer behaviour which confused customers to increase retail profits. The report recommended an amendment to the Competition and Consumer Act, the effect of which would seek to prohibit behaviour considered to result in price gouging. The recommendations resulted in the Prohibited Energy Market Misconduct Act which came into effect in June 2020.
The ACCC was directed by Scott Morrison to continue its analysis of prices, profits and margins in the supply of electricity to the NEM until 2025. The most recent report from the ACCC released in November 2021 suggested that electricity prices had declined, but were still higher relative to 2007-08, although the ACCC expected further declines in wholesale cost in the coming years to flow through to consumers. And then Russia invaded Ukraine and global energy price volatility arrived in Australia.
Regulation of electricity has not benefitted Australia
The ongoing saga of the NEM is that its problems have been directly related to light regulation of the industry. Research conducted by Associate Professor Nepal indicates strong regulation of privatised electricity supply can result in affordable prices. Over more than 2 decades, Australia has shown little capacity for strong regulation of privatised industries, so it is optimistic that this could be successful. Rod Sims, the previous chairman of the ACCC, points to a lack of a carbon price for directing investment to secure electricity supply and a lack of intervention to reduce gas export capacity. This view effectively supports the argument that Australian Governments have not been able to regulate privatised industries effectively. Only Professor Quiggin, calls into question the effectiveness of an electricity system operated for private benefit and suggests returning the grid to public control.
How can we fix this?
We need to move away from thinking that we can manufacture competition for a public service. Professor Quiggin’s suggestions for transmission to gradually return to state ownership and a single government agency to buy electricity wholesale from generators based on power purchase agreements are a workable way forward. The simplified dispatch and pricing of wholesale supply is particularly relevant as renewable energy becomes the dominant generation because dispatch will be based primarily on resource availability rather than cost/profit motives - Is there any point in forcing solar farms to compete against each other, or against windfarms, when their marginal costs are nearly identical, and the only differentiator is where the sun is shining or the wind is blowing? The only real requirement for competitive bidding in a renewable energy heavy system will be for storage to balance supply, but competing to supply from energy storage would be a small sub-function of supply rather than the dominant mechanism.
If we recall the days of the old state-based electricity commissions, we find that the head of the electricity commission was responsible for the efficient operation of electricity supply and the minister was answerable to the voters. In Australia’s NEM for more than two decades, there seems to be no-one responsible for the problems we now face. That needs to change.
This article was adapted from: Molyneaux, L., and Head, B. (2019) Why information and transparency about electricity matter: Fragmentation of governance and accountability under New Public Management. Australian Journal of Public Administration, 79, 143-164. https://doi.org/10.1111/1467-8500.12404
