JOHN QUIGGIN. Australia’s failed energy policy needs more than just a Band-Aid (the Guardian 13.07.18)

Jul 17, 2018

The ACCC report is a mishmash of cognitive dissonance and half-baked suggestions for fixing the unfixable.

For the handful of us who have criticised the national electricity market since its emergence from the Hilmer Review of Competition Policy in 1993, reading the latest report of the Australian Competition and Consumer Commission (ACCC) produces a mixture of feelings. Certainly no one would disagree with:

There are many causes of the current problems in the electricity market. At all stages of the supply chain decisions have been made over many years by many governments that set the Nem on the wrong course.

Going right back to the beginning of this fiasco, the ACCC repeats the standard line that:

For a long period the Nem produced relatively low wholesale prices and affordable prices for end users.

but finally concedes the argument that the cause of this outcome was not the merits of the Nem, but the fact that it was introduced at a time when

The market was oversupplied with generation, which was itself an unsustainable situation.

It’s good to see the ACCC catching up with the obvious. As I wrote 17 years ago in the Economic and Labour Relations Review:

The Australian national electricity market commenced operation in a period of oversupply so that problems of market power and excessive prices have not emerged until recently. It remains unclear whether an electricity auction market can produce adequate incentives for investment while generating appropriate prices for consumers.

Also welcome is the fact that retail competition, the central motivating idea of market liberalisation, has been a disastrous failure. Again the potential problems were obvious 20 years ago, but the protections introduced at the time were totally inadequate. In 2018, the ACCC has finally woken up to the problems:

Retail costs, particularly those associated with acquiring customers (such as marketing and commissions paid to third party comparators) are significant and have been growing since markets were opened to competition.

and the fact that the poor and vulnerable have been particular losers:

Consumers facing particular hardship and socioeconomic barriers to effective engagement in the electricity market are unlikely to get all of the benefits that competition can offer in this market.

Unfortunately, these moments of clarity are the exception in the ACCC report. The report as a whole is a mishmash of cognitive dissonance and half-baked suggestions for fixing the unfixable.

The report offers a string of recommendations for government intervention to fix up various defects in the market, all to be superimposed on recent ad hoc measures such as Snowy 2.0 and the national energy guarantee. Yet there is no questioning of the basic design features of a market that has failed so comprehensively.

The contradictions can be seen particularly in relation to public ownership. For the last 20 years, the ACCC and other Nem boosters have insisted that the only real problem in the market is the absence of comprehensive privatisation. Yet the attempts to salvage the market proposed in this report rely heavily on voluntary actions by Queensland, to break up its electricity generation enterprises and write down the value of its regulated asset base. Of course, the ACCC can’t make such suggestions in relation to the private monopolies and oligopolies that dominate the market as a whole.

The most striking failure of the report is in relation to climate change. It was obvious at the time the Nem was set up in the 1990s that climate change was going to have a big impact on energy policy, but the designers of the market ignored this. Critics have been hammering the point for decades, but the ACCC still seems to regard the issue as “somebody else’s problem”.

The report correctly finds that renewable energy policies have been only a marginal contributor to increases in the cost of electricity. Nevertheless, it proposes phasing out existing policies and replacing them with nothing. The question of how Australia is to meet its commitments to reduce carbon dioxide emissions is not addressed, except with some gestures in the direction of the national energy guarantee.

Presumably the ACCC judged this to be the only politically realistic approach as long as Tony Abbott has this much control over energy policy in Australia. That implied, a policy proposal is unlikely to survive past the next election, let alone until 2030 or 2050 when we need to decarbonise the entire economy.

However, the ACCC model has not even survived a single day. Wednesday’s news reported that the Abbott faction is pushing for subsidies to uneconomic coal-fired power stations, using the report’s proposal to support “dispatchable” power as a pretext. However much it is subsidised, such a policy is bound to increase the cost of electricity and drive the market further into chaos.

At this point, the system can’t be saved with extra Band-Aids. The failed experiment with an electricity pool market must be scrapped and replaced with a power purchase model where a single public authority contracts with generators and manages the system on an “order-of-merit” basis. As experience overseas has shown, such a system would lead to an orderly expansion of renewables and storage, based on a combination of public and private generation.

John Quiggin is an economist at the University of Queensland

This article was first posted in The Guardian.


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