Power prices - don't expect change

The Conversation

The Prime Minister gave a speech on August 7 entitled Electricity prices: the facts. She explained, correctly, that the costs of transmission and distribution (network costs, otherwise referred to as “poles and wires”) are the major source of Australia's very large electricity price increases since 2007 (since 2004 in NSW).

In policy terms, it was a speech which could and should have been given at any time in the past four years, during which senior political leaders appeared to completely ignore the growing problems with current electricity market arrangements. In political terms, it was a speech she certainly should have given at least a year ago: she needed to explain the wider electricity market framework within which her government proposed to introduce a price on emissions.

That neither she nor any of her ministers have spoken seriously about these issues until now could, at one level, be interpreted as just another example of political ineptitude. But at another level, it manifests a much more fundamental problem – the great unwillingness to make any changes to current electricity market arrangements.

What is the Prime Minister's proposed remedy for escalating network costs? Blame the governments of NSW and Queensland for being hungry for dividends from their publicly-owned electricity network businesses. (They are, just as their Labor predecessors were.) Her response is to threaten them with “stronger powers” for the Australian Energy Regulator.

What will this achieve? Almost nothing. The AER's hands are tied, because it must make its decisions on regulating network costs according to the National Electricity Market Rules and the National Electricity Law under which the rules are made. The Chair of the AER has been asking for changes to the rules to allow more stringent criteria to be applied to price applications by network businesses, but to little avail.

Who makes the rules? The Australian Energy Markets Commission and the Ministerial Council on Energy, to which the Commission reports. The Gillard government (and Rudd before her) could have asked the Commission years ago to examine the case for all sorts of changes to the rules. Needless to say, this did not occur.

The Prime Minister has now said she will ask the states to help her make some changes to the rules, so that the AER can disallow some future applications for further price increases. But, to double up on clichés, this is tinkering at the margin; too little, too late.

We are currently about half way through an approved five-year investment program of $42 billion in transmission and distribution networks in the National Electricity Market (this excludes WA and the NT). The sorts of changes the Prime Minister is seeking might, perhaps, have shaved a few billion off this total. Much more far-reaching changes are required, combining changes to the rules and operating procedures with aggressive adoption of available new technologies.

Residential electricity pricing in SA, controlled by the state government, provides one example of what is wrong with current approaches and what could be done so much better.

In 2004, the Labor government was faced with rapid growth in summer peak demand caused by the uptake of air conditioning. It could have forced those buying large air conditioners to install time-of-use electricity meters and required electricity retailer to charge them higher prices at peak periods. Alternatively, it could have required large air conditioners to be fitted with controls so they could be remotely switched. It could have encouraged retailers to offer customers financial incentives to have their air conditioners switched off for short intervals during extreme peak periods. Each of these approaches would have combined sensible use of economic incentives with new technologies.

Neither approach was adopted. The government sought to address a peak load problem (kW) by increasing the price of electrical energy (kWh) charged to all customers for the entire summer period. Low-income householders without air conditioners have to pay more all summer long because high income households with large air conditioners want to use them flat-out on very hot days.

As a policy response, this one is a treble failure: it provides a negligible economic incentive to change behaviour, it is economically inefficient, and it is socially regressive.

The National Electricity Market provides many such examples of multiple failure. If the Prime Minister were serious about reform of the electricity market she would initiate a comprehensive review. This is not in prospect.

Perhaps we should just be grateful that her speech has raised the political profile of these issues and helped to stimulate a wider public debate.

The biggest defect of the National Electricity Market is its complete absence of policies to reduce emissions, even though electricity generation is the source of over 35 per cent of Australia's emissions. In 2004, under the Howard government, the National Electricity Law was reviewed. The Ministerial Council on Energy (with eight state and territory Labor ministers) explicitly rejected the many submissions calling for environmental sustainability and climate change mitigation to be included in the objectives of the National Electricity Law. The Council said, “Environmental objectives are more appropriately dealt with in other policy instruments”.

Nothing has changed since then. The government's emission pricing policy has been explicitly designed as just such an “other policy instrument”; external to, not integrated into energy (including electricity) policy.

As long ago as 2008 the International Energy Agency (IEA) – hardly a radical organisation – said in its “flagship” publication, World Energy Outlook:

Securing energy supplies and speeding up the transition to a low-carbon energy system both call for radical action by governments at national and local levels … governments have to put in place appropriate financial incentives and regulatory frameworks that support both energy security and climate-policy goals in an integrated way.

The electricity policy debate should be about how to re-design the electricity market institutions to achieve just such an integration with climate policy goals.

Hugh Saddler is a Research Associate at the Centre for Climate Economics & Policy at Australian National University.

This article was originally published by The Conversation. Republished with permission.