Adversarial politics could give consumers an electric shock

Of all the reviews being conducted on energy-related matters at present, the one about national competition policy chaired by Ian Harper may turn out to have the most oomph.

This ‘son of Hilmer exercise’ -- the 1990s report from Fred Hilmer having been the catalyst for electricity supply disaggregation and the competitive market -- is seen by power players as having the status to capture the attention of chief ministers and their senior colleagues. Accordingly, they are putting in the effort.

The Australian Energy Market Commission, the rulemaker and chief independent adviser of energy ministers, sees the Harper review as an opportunity to sound a warning about the worrying consequences of political game-playing on the electricity market.

In its submission, it tells Harper that climate change policies, such as the renewable energy target and the solar feed-in subsidies, have altered the market’s operation, changing costs and risks and affecting price signals in ways that were not foreseen at the time.

“While it is legitimate for governments to pursue a range of different policy objectives, it is important that this is done in a way that allows different objectives to be effectively reconciled,” warns the AEMC, chaired by John Pierce, who has been head of the federal resources and energy department and of the New South Wales Treasury in his public service career.

Getting this stuff wrong, adds the commission, may undermine future electricity supply reliability.

Take the renewable energy target, it says. “The operation of the RET in its current form has led to wholesale market price outcomes divorced from underlying energy supply and demand fundamentals. Wholesale prices are very low but new generation capacity is still entering the market.”

You can read any number of green boosters crowing about the flattened market prices as somehow representing a triumph for renewables, but the entity trusted by governments of all persuasions to oversee the market sees the RET white-anting the NEM’s central policy objective.

In its earlier submission to the Warburton RET review, the AEMC outlined the cascading consequences of messing with “the efficacy of the price signal”.

Down the track, it said, you first start to see greater wholesale price volatility, then a requirement to increase the price cap to ensure that the peaking gensets needed to maintain supply security can recover their fixed and variable costs.

Then you may see government interference to ensure sufficient capacity is available after closure of thermal plant.

Next up there is more integration of generation and retail as suppliers react to market risks that are too expensive or too difficult to hedge against, so you end up with reduced competition in retail markets.

What you get in the longer run from RET-type intervention in the wholesale market is also a key focus for the Energy Supply Association (which has now absorbed the National Generators Forum) in lobbying Harper.

“Customers may benefit in the short term,” ESAA argues, “but (current wholesale prices are) not a sustainable outcome and there are likely to be adverse long-term consequences relating to poor reliability and under-investment”.

The association asserts that generators are already responding to market conditions by reducing operating costs, primarily through spending less on non-essential maintenance.

To which Energy Australia adds in its submission that the generation sector, where it is a major player, is struggling to realise an adequate return on investment and keep running in to barriers to improving their circumstances.

While ESAA complains that there are significant commercial and financial impediments to generators exiting the market, EnergyAustralia snaps at the Australian Competition & Consumer Commission for hindering mergers and acquisitions.

What Harper and his panel will make of all this remains to be seen.

Competition policy is a very big menu. However, it is likely that Harper will appreciate that energy policy reform needs to figure prominently in what he dishes up.

The big issue after he reports is going to be what the politicians make of his recommendations.

Hilmer’s electricity plan got pursued because Labor and the Coalition (via people like Keating, Goss, Greiner and Kennett) worked co-operatively to make it happen.

Hilmer, in a speech in March, lamented the level of adversarial politics to which we have now descended.

To get to the middle ground now is politically dangerous, he said, and a path that no-one seems to want to tread.

As these submissions to Harper make clear, unless people like Abbott, Shorten, Baird and Newman can take an agreed road, a lot of the intervention stuff that has seemed such a good idea since 2008 is likely to prove mighty uncomfortable for consumers in due course.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.