Barnett's power price blackout

Just how hard it is for politicians to deal with one of the most basic issues of electricity supply has been on display in Western Australia during the state election campaign.

If you want an efficient power system, then a core premise today is that consumers must pay what it costs to produce and deliver electricity.

How otherwise do you achieve the goals of energy efficiency and carbon emissions management?

What comes with this, of course, is the need for a strong, independent regulatory environment in which consumers can have confidence. They want to know that the costs are necessary and well-managed.

Over in the West, the Barnett government inherited two substantial problems from Labor four years ago.

First, the ALP had spent a decade keeping power prices artificially low – to the extent that they needed to rise more than 100 per cent to reach cost parity.

Second, it had botched the reform of the state's power supply so that it was almost impossible for real competition between suppliers to occur.

Faced with a set-up where the state-owned generator Verve Energy – Labor's repository of choice for the costs being piled up under the give-away electricity policy – was drowning in debt, Colin Barnett drove hard for the first three years of his regime.

Household prices were pushed up 57 per cent or about $10-15 a week (depending on demand) – enough to get the media and the householders howling, but still not sufficient to address the need to achieve cost parity.

Spooked by the looming election, and perhaps by an opinion poll in which 70 per cent of respondents said their higher power bills would influence their votes, Barnett chose to limit the latest price rise to just five per cent – which is still enough for the Mark McGowan-led opposition to harp on the issue at every opportunity – and now he has baulked at carrying on the work if re-elected.

In the sole leadership debate of the election campaign, Barnett has denied McGowan's claim (based on state budget modelling) that another 25 per cent rise in power bills will occur in the next four years, saying they would be constrained to “generally rising in line with inflation.”

Back to the future, in other words.

One of the products of the give-away price policy has been that household electricity demand in Western Australia's south-west corner, home to its integrated power grid, has risen from an average of 5,000 kilowatt hours a year to 6,500 kWh over a little more than a decade – driven by the state's mining boom affluence but underpinned by the knowledge that the costs of running air-conditioners and other thirsty appliances are being held down by voter-wary politicians.

At least this was so until Barnett came along, and higher prices have played a role in dampening demand, but the barrage of bad publicity from the re-adjustment has obviously proved too much for him.

The West is a state with a split personality when it comes to energy supply.

North of the South West Interconnected System is the enormous but low-populated mining area where most of the electricity is being self-generated by miners.

The Chamber of Minerals and Energy of Western Australia has estimated that the demand for electricity by the mineral and energy sectors alone will increase by 20,000 gigawatt hours annually over the next 10 years.

This is more than the current total demand for power in the south-west.

SWIS residential users shell out an $80 a year subsidy for householders beyond their grid system and McGowan has sought to woo voters by promising to kill the levy and take the subsidy on as a further taxpayer cost.

Another of the products of a cheap power policy, of course, is an ongoing need to build new generation capacity and it is estimated that some 2,275 megawatts of power plant will have to be constructed in the south-west by 2021 to service growth and to replace clapped-out units needing to be closed.

This is dwarfed by the extra 6,000 MW the mine projects will need, but it is still going to require spending about $5 billion.

And that is only for the power stations.

The government-owned delivery system, Western Power (much maligned in recent times, like its network cousins in the east) reckons that peak demand in the south-west could rise 90 per cent in the next 20 years and that will require spending $21.5 billion on transmission and distribution capacity.

The portion needing to be spent this decade is a topic for much argument, with Western Power (like its cousins) now being told it must not “gold plate” the system.

You do not have to be Einstein to figure out that, under this approach, bigger and worse price shocks eventually await the mums and dads of Perth, Fremantle and the south-west.

In this environment, running away from pricing power at what it costs to produce and deliver is madness but, so long as Labor continues to stand for subsidies (ultimately paid for by taxpayers), the Coalition will only go so far to rectify the situation before panic sets in.

It's apparent from this week's debate that Barnett has decided to focus on the immediate issue of winning another round in government rather than the long-term interests of Western Australian power consumers.

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.