The ACCC's purist energy views rile the gentailers

Buried in the millions of words pouring in to Ian Harper’s review of Australian competition policy is a trenchant battle over the fate of the east coast electricity market and a growing criticism of the main competition watchdog for pursuing a purist view at the potential expense of power reliability.

Supplier concerns about the perspective of the Australian Competition & Consumer Commission are encapsulated by one of the big three ‘gentailers’, EnergyAustralia.

The ACCC stance has placed the east coast electricity market in limbo, EnergyAustralia asserts, with generators unable to further consolidate. They are subject to significant barriers to exit in an environment with far too much capacity.

The thrust of the company’s argument is that Harper’s review could be a circuit-breaker as falling consumer demand, the rise and rise of embedded generation and eye-watering spending on networks combine to make the national electricity market increasingly less fit for purpose.

EnergyAustralia takes aim at the ACCC as the appointed guardian of competition after Fred Hilmer.

The commission, it claims, is failing to take account of the changing dynamics for power generation. By doing so, it is creating barriers to efficient investment and eventually to the interests of consumers it has been set up to protect.

With the emerging development of electricity storage technology, EnergyAustralia says, the “decision of the future” will come down to on-grid versus off-grid supply.

“Fifteen years after its creation, changed market conditions, exacerbated by regular policy interventions by governments, have pushed the NEM to breaking point.”

EnergyAustralia argues there is a fundamental shift in the competitive dynamic of the market that calls in to question the appropriateness of existing regulatory frameworks, including competition laws.

Struggling to achieve an adequate return on investment, generators need a new view of competition, it says.

The picture the company paints of the NEM is a market where annual demand has declined by 10,000 gigawatt hours since 2009, and where imposition of the renewable energy target has distorted price signals and production decisions in a set-up designed to make generators respond to spot values.

The gencos’ response at present, EnergyAustralia says, is to reduce operational costs, primarily through cutting non-essential outlays on maintenance. However, high capital costs and the disaggregated structure of the energy sector are complicating efforts to move to higher ground.

Sustained inadequate returns could threaten the supply sector’s reliability, it claims. The obvious solutions, it adds, are closure of plants and/or consolidation.

But there are two barriers: a “challenging” environment for closure in a business that has high fixed capital costs and is dominated by prices trending towards the short-term marginal cost of operating, and the ACCC’s attitude.

Decisions that could lead to increased efficiency and greater productivity are blocked, EnergyAustralia says, by the commission’s attitude towards competition based on “an arbitrary view of the appropriate number of competitors in the market”.

In New South Wales, for example, the company says, it, Origin Energy and AGL Energy, own 70 per cent of generation capacity and 80 per cent of electricity production following the latter’s purchase of Macquarie Generation in the teeth of ACCC opposition. (This was overturned by the Australian Competition Tribunal.)

However, it argues, this is a market where the big three have strong incentives to sell contracts to all participants. It says the ACCC stance undervalues the contribution of Snowy Hydro and the Delta Coastal gas-fired peaking plant, as well as the competition over the interconnectors between NSW, Victoria and Queensland plus the choice now available to customers of rooftop solar power.

Many markets here have just two large players, it points out, citing the domestic airline industry and the grocery sector.

EnergyAustralia tells Harper that failure by the ACCC to shift its position may require government intervention to co-ordinate a process of efficient withdrawal of excess generation capacity because laws against cartels and collusion prevent the companies from doing so.

Failure to sort out the situation, it warns, may lead to a four-part “sub-optimal” outcome for consumers featuring reduced supply reliability and system security, ongoing investment in the wrong plant mix, excess withdrawal in some jurisdictions and too little in others, and stranding of new generation, resulting in increased carbon emissions.

EnergyAustralia is far from the only power business with these concerns. I expect the problem will get a large amount of attention when I co-chair the Eastern Australia Energy Market Outlook conference in Sydney in mid-September.

This is yet another challenge for the energy ministers under the CoAG umbrella that is not going to go away. It will get worse the longer it lacks decisive attention.

Keith Orchison, director of consultancy Coolibah Pty Ltd, publisher of the This is Power blog and editor of OnPower newsletter, was chief executive of two national energy associations from 1980 to 2003. He was made a member of the Order of Australia in 2004 for services to the energy industry.