JOHN QUIGGIN. The case for renationalising Australia’s electricity grid.

The public debate over the problems of electricity supply displays a curious disconnect. On the one hand, there is virtually universal agreement that the system is in crisis. After 25 years, the promised outcomes of reform – cheaper and more reliable electricity, competitive markets and rational investment decisions – are further away than ever.  

On the other hand, proposals to change the situation range from marginal tweaks to politically motivated mischief-making. The preliminary report of the Independent Review into the Future Security of the National Electricity Market, released last year, canvasses such options as the introduction of capacity markets for reserve power, which have done little to resolve problems overseas.Meanwhile, the Turnbull government has used recent failures to score points against renewable energy (hated, for obscure historical-cultural reasons, by its right-wing base) and to promote the absurd idea of new coal-fired power stations.

A sorry state

This debate might make sense if the system had worked well in the past. In reality, however, the National Electricity Market (NEM) never produced lower prices or more reliable power for households.

In the early years of the NEM, reductions in maintenance spending concealed this failure. When new investment became necessary in the early 2000s, the result was a dramatic upsurge in prices. This was primarily because the NEM regulatory system allowed rates of return on capital far higher than those needed to finance the system under public ownership.

Until the 1990s state governments owned and controlled Australia’s electricity grids from power stations to poles and wires. The expansion of interconnections between state networks created the possibility of a truly national network. The Commonwealth and the states could have jointly owned such a network, following the highly successful model of Snowy Hydro.

The creation of the NEM broke this system into pieces. Ownership of generation was separated from transmission, distribution and retail, while maintaining effectively separate state systems. The only national component was at the regulatory level, where two separate national regulators (the Australian Energy Market Operator and the Australian Energy Regulator) overlap with the continuing regulatory operations of state governments.

Most state governments have sold their electricity enterprises wholly or partly. Victoria and South Australia fully privatised their systems by the early 2000s. NSW partially privatised its network business after 2015. Queensland privatised the retail sector but maintained public ownership of the network and some electricity generation.

Contrary to the hopes of the market designers, breaking up these integrated systems has delivered no benefits, while incurring huge costs. Power prices have continued to rise.

These costs have been on display, in dramatic form, in recent system failures in South Australia, Victoria and Tasmania. Everyone has blamed everyone else, and no real change has emerged.

The tragedy is that all this could have been avoided if we had seized the opportunity in the 1990s to build a unified national grid, with a single authority running transmission networks and the interconnectors between them. This would still allow competition in generation, but would abandon the idea of market incentives in the provision of network services.

Electricity networks are considered to be natural monopolies. Unlike other industries, where it makes sense for lots of businesses to compete and drive costs lower, the cost and importance of supplying electricity means it make sense for one business to control the market.

Given this status, this authority should not be a privatised firm or even a corporatised government enterprise. Instead, it should be a statutory authority with a primary mission of delivering energy security at low cost.

This failure was not confined to electricity. Our telecommunications network was also privatised in the 1990s, with the promise that competition would deliver better services. In reality, investment and innovation stagnated. It got to the point where the government was forced to re-enter the market with the National Broadband Network (NBN).

As the NBN example suggests, unscrambling the egg of failed reform will be a complex and messy business. It will have to be done gradually, perhaps beginning with South Australia and Tasmania, the states worst affected by recent disasters. But there is no satisfactory alternative.

Public appetite, lack of political will

An obvious question is whether renationalising the electricity network is politically feasible. While the political class on both sides views privatised infrastructure as an unchallengeable necessity, the general public has a very different view. With only a handful of exceptions, voters have rejected privatisation whenever they have had a chance to do so.

The question of reversing past privatisations is more difficult, and there is less evidence. However, none of the privatisations of the reform era, even those that took place decades ago, commands majority support in Australia.

The question has been addressed by pollsters in Britain, which provided the model for Australia’s energy reforms. The results show overwhelming public support for renationalisation, even though the electricity industry has been in private ownership for decades. Even a majority of Conservative voters support public ownership.

The issue will have its next electoral test in Western Australia, where the Barnett government is proposing to sell its majority interest in its electricity distribution enterprise Western Power. While nothing is ever certain in politics, current polls suggest the government is headed for defeat.

John Quiggin is Professor, School of Economics, University of Queensland. This article was first published in The Conversation on March 6, 2017

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6 Responses to JOHN QUIGGIN. The case for renationalising Australia’s electricity grid.

  1. Jenny Haines says:

    The cost of doing this must be prohibitive? Which is why there should have been more pause for thought before privatising.

  2. paul walter says:

    Marvellous stuff, as ever from Prof. Quiggin.

    Lenore Taylor of the Guardian seems to be the only msm journalist who ever seems to approach these massive wastage problems from a remotely similar standpoint.

    Instead, we get the manufactured brutalities that arise with Asylum Seekers, Penalty Rate cuts and Centrelink, to name three costly issues increasingly clouded in secrecy, let alone more rubbish about the Kardashians on tabloid msm.

  3. Hello John
    Be certain that we are about half way through a program of reform, driven by flawed interpretations of already flawed mantras of the MBA Brigade that will see us go to our inevitable terminal end in about 15 years.
    Before you reject this as simply the ravings of an “ABC leftie”, which I am not, let me give you a postage stamp size summation of what has happened in the arena, in which I do have expertise, the ports of NSW.
    For over 40 years I worked, or should I say was paid, by The Maritime Services Board of NSW to pick up the wreckage left by the various consultants and highly thought of officers “selected on merit” to take up senior management roles.
    Ports are the sole common factor in the cargo distribution system between the grower, miner or manufacturer in our export efforts and must be conceived, located and operated in the best manner for each system.
    Obviously these ports will have differing concepts in order to best serve its particular customers and certainly would not be in “competition” with each other as was dictated by the Board. This bizarre concept was in vogue for all of my years there and went so far as to put identical facilities in all ports so that they could compete on a “level playing field”, a theory of the flat earth society.
    We saw such things as Newcastle engaging a consultant to advise on ways of filching trade out of Botany Bay.
    Created by Act of 1935, basically combining the old Navigation Department and the Sydney Harbour Trust, the intention was to develop a State port authority that, in addition to administering the existing navigation requirements, would ensure the timely provision of facilities genuinely required by the customers and their equitable usage.
    The Board could never grip the concept of a “customer” who may be remote and felt more comfortable dealing with the symboint structure such as the local stevedores.
    In a paper I once presented to an international ports conference I gave the definition of the customer, particularly when you are conceiving a port, as follows “The customer is the individual or organisation whose commercial decision determines the initiation, continuation or termination of cargo movement” This was regarded by the senior ranks as little more than amusing.
    In retirement, I spent much time lobbying the federal government to establish a National Ports Authority largely based on the philosophy of the old loans council, to ensure that our exports were given the best chance possible. In spite of getting support from state and federal Ministers, and even one Prime Minister, I do not have to say how successful I was.
    Perhaps a good example of the thinking came out when the Grain Terminal was being relocated from Sydney to Port Kembla. I simply asked if any consideration had been given to centralising all grain exports in Geelong. The only comment i got was “Geelong is in Victoria”, not a single word on the pros or cons. I simply replied that I must have missed the memo about Victoria moving out of Australia.
    The current leasing arrangements in NSW has certainly put a finality to any of my suggestions and added yet another destructive component to our future.
    Believe me, i could go on for another 100 pages today but just wanted to say that it was not only the electricity grid being demolished, don’t start me on the privatisation of the airports.

  4. Greg Bailey says:

    It is an excellent suggestion made by John to renationalise the electricity utilities. I remember that when the privatizations took place many of us objected to the process for the very reasons John has outlined. But how would ideologically blinkered governments–both Liberal and Labor–fund this denationalisation, given that the privatised companies would want their pound/ton of flesh at the taxpayers’ expense? Two possibilities are perhaps available: firstly, the Future Fund could provide the money to to buy them back, and the nationalised utilities would pay an ongoing dividend to this fund; secondly, in conjunction with the first, all state and federal governments could stop using consultants to give them the advice they want but don’t need–especially since they have a (reduced) public service to call upon. This would likely save them hundreds of millions of dollars a year and could supplement the initial capital payment made by the Future Fund.

    Otherwise it is going to be difficult to see how the renationalisation can take place. Of course, the government could borrow the money at very low interest rates, arguing that the borrowing is for capital purposes, and use the regulated profit made by the new sovereign utility to pay back the interest and the capital.

  5. David James says:

    Simple solution
    Regulate the utilities until they beg to be bought out by the government!

  6. Well can I remember the promises made when diesel buses replaced the electric trams on the streets of Sydney all those years ago. In addition to the economic benefits offered by the buses it was often espoused that they would be so much better for the environment than the trams which, after all, burned coal.
    To now read that diesel pumps are replacing electric pumps to irrigate crops due to the high energy costs is an alert that we never learn from our mistakes.

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