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Power price confusion as carbon policy is fiddled

By Geoff Carmody - posted Monday, 3 September 2012

The Prime Minister has accused the states of increasing electricity prices to milk household budgets to fatten their own budget bottom lines. A Federal-state shouting match has ensued. Meanwhile, two months after it began, the Government has also changed its carbon pricing policy. Confusion reigns.

Let's have a genuinely independent review, with broad terms of reference, of the current rules determining investment in the electricity network's 'poles and wires'. A similar review of the bidding rules under which power generators supply the wholesale market would be useful too.

The Productivity Commission should be involved, including though its current Electricity Network Regulation Review.


Efficient power supply, avoiding 'gold plating' or price gouging, should be the review objective. ('Gold plating' investments exceed those necessary for cost-effective power supply over the demand cycle, including peak demand periods, for given reliability standards.)

The Prime Minister's concern about conflicts of interest between efficient power supply and boosting state budgets can be eliminated without a review. All power generation, transmission, distribution and retail assets still in government hands should be privatized. Where privatization has already occurred, power supply is more cost-effective.

Remaining retail price caps, and any restrictions on time-of-day power pricing, should also be removed ASAP. These restrict market competition and transmission of price signals to power users.

Then governments can concentrate on their proper role: facilitating cost-effective power markets, not using power as a milch cow for their budgets.

This new confrontation, initiated by the Prime Minister, and the Government's latest carbon pricing policy backflip, raise more questions about how Australian greenhouse gas emissions will be reduced.

First, some Economics 101. Increased prices reduce power demand (and thus emissions). Price reductions increase them.


Why prices increase: increased investment in 'poles and wires', increased generation input costs (eg, higher gas prices or regulated renewable energy targets), or the Government/Greens carbon tax, etc., don't affect this conclusion.

Higher-priced power, however caused, is a signal to use less. This is the carbon tax rationale.

The Prime Minister has objected to state price increases 'justified' by the need for increased investment in 'poles and wires', claiming such increases hurt households because they are uncompensated.

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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