Martin Ferguson’s power to the people

With its market-based approach to regulation and pricing, the government has delivered a sensible long-term policy for the country’s energy needs.

Martin Ferguson has the reputation for being one of the more knowledgeable and least political of the Gillard Government’s ministers. Today he launched the government’s energy white paper which, because it represents a long term policy framework that doesn’t involve near term spending, enabled him to buttress that reputation without unduly unsettling his colleagues.

There are a number of core, sensitive and contentious issues being debated among the energy industry interest groups, not the least of which has been the soaring cost of electricity for households and businesses.

The mixture of policies the government has adopted for carbon abatement, the rise of the coal seam gas sector and the development of the massive export LNG sector are also generating controversy.

There are a number of reasons for the surge in electricity prices. Some of them, like the need to invest in reliability of supply, are legitimate. Others, like the ‘’gold-plating’’ of investment by state-owned generators and distributors, regulatory gaming, dividend-stripping by cash-strapped state governments and the distortive effects of the various mandatory renewable energy schemes muddle market pricing signals and add unnecessary costs.

The politicians’ responses to the price rises can inadvertently do further damage to the longer term implications for the economy and consumers.

In Queensland, the Queensland Competition Authority froze retail prices earlier this year and the Essential Services Commission of South Australia announced a draft decision to lower prices. That resulted in Origin Energy and AGL winding back their marketing and discounting and suspending any further investment in those states. That could have consequences for the longer term availability and reliability of supply and ultimately for electricity prices.

Ferguson, in his speech to launch the paper, urged governments at all levels -- and the real issues are at the state level -- to embrace reform to improve regulatory efficiency and stimulate market-based competition and innovation and to show political courage by emulating Victoria and deregulating retail prices.

‘’Short term fixes, such as intervening to hold down prices for temporary relief, might be tempting but it is not in the long term interests of consumers,’’ he said.
‘’It inevitably lowers investment, competition and standards of services. Most critically, as we have recently seen in Western Australia, it creates a larger shock to consumers when the price inevitably catches up with the real cost,’’ he said.

Quite right, although an even bigger shock might come if the lights went out because of a lack of reliable generation or distribution capacity.

On the implications of the rapid development of an export-LNG sector, he said the government acknowledged there would be ‘’tightness’ in the east coast gas market as new coal seam gas and LNG projects ramped up. Critics charge that the deployment of coal seam gas and the gas offshore WA to export markets will result in higher domestic gas prices and argue that some of the gas should be ‘’reserved’’ for domestic markets.

‘’Once again it is the government’s view that this (the response to tightening domestic supply) is best achieved by open and efficient markets, where price is allowed to balance the market and provide incentives for developing new supply.
‘’Interventions such as reservation policies to force price or supply outcomes are more likely to impede than promote supply,’’ he said.

Reserving would also have the effect of diminishing the value the nation, as opposed to the sectoral interests most vocal in advocating it, would receive from exploiting our vast gas resources. It would also muffle the price signal that would stimulate more investment and more gas production.

Ferguson referred to the US shale gas revolution, where high prices drove massive investment, which led to a dramatic increase in production to the point where it produced an energy glut that forced prices back down.

There are vast quantities of shale and other unconventional gases in this country that will only be developed if prices are strong but which could ultimately provide domestic supply and -- as LNG production in the region ratchets up, and some of that US gas enters export markets -- be part of the equation that ultimately produces a better balance between overall supply and demand and disciplines the price.

It is, however, important as Ferguson noted, that the country improves its delivery of energy projects in the face of escalating costs that have made us a high-cost producer of all resources, including (perhaps especially) energy.

While he referred favourably to the government’s clean energy policies and its renewable energy target (and the $10 billion Clean Energy Finance Corp created to appease the Greens) it is arguable that, given there is a carbon tax/price now in place, they will distort the market signals and raise the cost of abatement without increasing the level of abatement.

Ferguson’s general promotion of market-based approaches framed by intelligent regulation as the foundation for long term energy policies, however, is laudable.

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