Power price confusion as carbon policy is fiddled

Whatever their magnitude, higher prices 'justified' by the need for network investment cannot finance that investment and household compensation as well. Revenue can only be spent once.

The Prime Minister supports price increases attributed to the carbon tax because most households are compensated. Even if they don't reduce their electricity demand, most households won't be worse off. Overcompensation for lower income households means they will be better off, for a while.

The Prime Minister wants lower electricity prices, or smaller future increases, where these are attributable to investment in 'poles and wires', and net increases in post-carbon tax income for many households, allowing them to increase their power (and emissions) consumption. Won't emissions increase?

For power supply, the reasons for price increases can influence emissions reduction outcomes.

Price increases due to Australia's carbon tax can shift power generation input mixes towards lower-emission sources, by making current higher-emission inputs (eg., coal) less price competitive. But the carbon price must be high enough to make such a switch commercially attractive.

Australia's current and projected carbon price is unlikely to induce any significant shift towards lower emission power generation for the foreseeable future – especially after the Government's policy backflip.

Price increases financing investment in upgrading and expanding network 'poles and wires' do not reduce emissions. They can facilitate increased emissions, because of larger power transmission losses (and associated emissions), and to the extent there is increased effective customer demand for power (and emissions) supported by such investments.

Measures eliminating any network 'gold plating' that exists have no obvious emissions reduction effects.

Regulating reductions in power prices might reduce emissions, albeit inefficiently. If lower prices deterred genuinely needed network investments, current power reliability standards could be breached, leading to more power 'brownouts' and 'blackouts'. This conclusion is closely related to policy decisions on reliability standards as well.

Political benefits obtained by forcing reduced power prices might quickly be outweighed by the backlash from less reliable power supply and the economic costs associated with that.

Reduced demand for power and associated emissions at present is the only realistic hope for affecting Australian emissions (ignoring the fact such effects are globally insignificant). But the Prime Minister seems determined to remove price signals inducing such reductions pre-2015, and now, quite possibly, after that as well.

On the supply side, discouraging genuinely needed network investments could reduce emissions by degrading network reliability and forcing reduced power supply through 'brownouts' and 'blackouts'. This could be inefficient and politically unsustainable.