Lights off: Part II

This article follows on from Part I, which you can find here.

Causes of cost shocks

Although I don't agree with its arguments or conclusions, there is an interesting analysis of energy cost factors in a 2010 AGL Applied Economic & Policy Research Working Paper The Boomerang Paradox: how a nation’s wealth is creating fuel poverty - and how to defuse the cycle.

The authors note that the actual cost stack which makes up an electricity tariff includes power generation, transmission, distribution, retail and other regulated cost components such as metering, renewable energy and government taxes, and make observations on our present energy situation including:

• Australia’s great wealth of energy resources, which have historically been sold to energy utilities at a margin above extraction cost, are now being developed at such scale for export that if they link with global energy indices Australia may suffer a fuel cost shock.
• Power plant costs surged materially over the past decade, as did the cost of money after the financial year 2009 global financial meltdown.
• Network infrastructure is now expanding at record rates to keep pace with rapidly rising peak loads.
• Environmental demands of a comparatively wealthy developed economy have led to community demand for the tightening of performance standards which will cause a technology shift in power generation investments from low cost coal to lower CO2 emitting gas, and increased higher cost renewable capacity.
• The main contributions to the price shocks they envisaged come from the unit cost of gas, network charges and generation plant costs.
• Continuously rising household income and low cost power led to rising residential floor-space and vast increases in use of electric appliances including air conditioners. Peak demand has risen exponentially.

The official line: The Auditor-General’s Review and Reports

In 2008 then Premier Morris Iemma asked NSW Auditor-General Peter Achterstraat to review the privatisation plan after the opposition said it would oppose the sell-off unless that scrutiny was carried out.

The Auditor-General examined a model that would see the sale of electricity retailer Energy Australia by the end of that year, and included a proposed public share offering of a combined entity made up of Integral Energy and generator Eraring Energy in the second half of 2009. The other retailer, Country Energy, was to be sold off, while generators Delta Electricity and Macquarie Generation would be leased out under long-term agreements.

The Auditor-General recommended the NSW government set a reserve price before selling or leasing out its electricity retailers and power generators, saying that no transaction should proceed unless that reserve price was met. He also said the NSW government should look at selling individual retailers and leasing out its individual generators all at the one time, rather than sequentially as had been proposed. Did Roozendaal consider those recommendations?

A new report from the Auditor-General last year noted significant uncertainty about the value of the power-station sales because of the potential future introduction by the federal government of a carbon pollution reduction scheme (CPRS). The Auditor-General said, "I did note significant uncertainty that may affect the value of power-station assets due to the unknown impacts of any future carbon pollution reduction scheme and the government's proposed electricity industry reforms".

Roozendaal obviously didn’t worry about those concerns when he did the deal!

The official line: Roozendaal’s midnight special