Energy: a public policy disaster

Thanks to 15 years of the wrong objective, energy policymakers have repeatedly failed to effectively address energy market failures – and this is ensuring consumers are paying more than they should be.

The history of energy market reform shows that what began as a broadly based policy agenda has been subverted into a public policy disaster. Energy policymakers have separated energy from the broader policy objectives of governments and society, and have been allowed to get away with it by governments.

Today, the signals sent to NEM participants compete with and conflict with those being sent by other elements of public policy including climate policy, social justice, innovation and industry development.

Energy policymakers have repeatedly failed to deliver effective outcomes to address the failures through a series of steps stretching back more than 15 years.

A Special Premiers’ Conference in November 1990 made formal commitments to develop a National Electricity Market. A further meeting in mid 1991 finalised these arrangements. The Council of Australian Governments (CoAG) has continued to pursue this agenda. The development of National Competition Policy in the early 1990s created a comprehensive national policy framework that supported pursuit of electricity industry restructuring. As part of this process, commitments to offer up to $4.2 billion to states in return for their participation in development of the competitive electricity market were made.

The National Grid Management Council was established to oversee the detailed development of the market framework. It was comprised of five representatives from the existing electricity generation industry and two government representatives (Tasman Institute, 1991). No effective provision for broader community or business involvement seems to have been made. Indeed, the NGMC did not even include its contact details in a number of its discussion papers.

The framework of competition policy proposed by the National Competition Policy Review chaired by Professor Fred Hilmer included recognition of the possibility that some public interest issues, such as environment, may not be adequately dealt with via pure market solutions. The Independent Committee of Inquiry chaired by Hilmer (1993) pointed out:

“Competition policy is not about the pursuit of competition per se. Rather, it seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as the sanctioning of anti-competitive arrangements on public benefit grounds.”

This statement indicates that the structures of competitive market frameworks developed under national competition policy - that is the market rules and price signals themselves, were intended to pro-actively support social objectives (which can be interpreted to include environmental objectives that have broad community support), not just rely on regulatory controls to limit impacts and provide ‘safety nets’.

Consistent with the view put by Hilmer, the federal and state governments specifically recognised the need to address environmental issues in restructuring of the electricity sector when they included as the first objective of the National Grid Management Protocol (NGMC, 1992):

“To encourage the most efficient, economical and environmentally sound development of the electricity industry consistent with key National and State policies and objectives”

Other relevant NGMC objectives were:

“To provide a framework for long-term least cost solutions to meet future power supply demands including appropriate use of demand management” and

“To maintain and develop the technical, economic and environmental performance and/or utilisation of the power system”

Governments failed to incorporate the consideration of social and environmental issues into the energy reform charter given to the National Competition Council, which supervises progress on energy market reform. In contrast, environmental considerations were part of its mandate on water reform (NCC in evidence to Senate Inquiry into Global Warming, 2000). This failure has had clear consequences for the structure of the reformed energy markets, particularly exclusion of criteria beyond ‘economic’ factors.

Major CoAG policies such as climate policy (including both the 1992 National Greenhouse Response Strategy and the 1998 National Greenhouse Strategy, as well as the Ecologically Sustainable Development process) included clear guidance for energy market reform. These were also ignored. In 1993-94, the NGMC considered options for incorporating demand management in the electricity market model, and rejected them all, despite the NGMC Objective’s clear inclusion of DM.

State regulators, such as Victoria’s Office of the Regulator General and, later, Essential Services Commission also had terms of reference that limited consideration of environmental and social issues. Further, the ESC was (and is) required to “facilitate the financial viability of the regulated industries”. This undermines fair treatment of emerging competitors and creates a serious risk of a welfare scheme that protects the existing electricity industry.

For example, the author put a question on the interpretation of this sentence to a senior Victorian energy policy officer in a public forum some years ago. I asked how the ESC might respond if the adoption of measures such as energy efficiency (which is not regulated by ESC) threatened the financial viability of the existing electricity industry that is regulated by the ESC. My concern was that the ESC might be bound to oppose energy efficiency measures. I did not receive a meaningful reply.

In 2001, CoAG proposed a review of progress on energy market reform. Former Howard government energy minister Warwick Parer led this review, which reported to CoAG in December 2002 (IREMD 2002). The review found that “there are many impediments to the demand side playing its true role in the market”. It also noted that “there are some barriers to embedded generation, which limit the benefits that could be gained in this area.” The review also recommended introduction of a greenhouse emissions trading scheme so that electricity prices would incorporate appropriate signals.

This brief history of the early evolution of the NEM shows a serious policy failure. CoAG and energy ministers failed to ensure that energy reform policy reflected broader policy issues, as originally intended. This failure has undermined progress towards a sustainable energy market model, and has strongly favoured the existing electricity industry. It has led to creation of a flawed market model that is now driving up consumer costs.

The consequence of this is that energy market rules, as developed, conflict and ‘compete’ with other major policies, increasing costs, creating confusion and undermining progress in other important policy areas.

The gatekeepers of energy policy have had their opportunity: government must step in to ensure society’s aims are met. The problem is reflected in the wording of the NEM Objective: it requires revision.

Alan Pears is an Adjunct Professor in the Environment and Planning Faculty at RMIT University, an Associate Director at RMIT’s Centre for Design and Director of the company Sustainable Solutions.

This article is an edited extract from his submission to the Senate Inquiry into Electricity Prices.