How governments have destroyed the world’s most efficient energy market

President Trump has issued his Executive Order “Promoting Energy Independence and Economic Growth”, which rescinds much of the climate change agenda of the Obama Administration. 

It requires all government agencies to review, with the intent to remove within 180 days, regulations potentially burdening the development and use of oil, gas, coal and nuclear energy.  The Order immediately revokes power sector carbon pollution standards, the banning of mining, (including fracking for gas), on Federal lands and the methane emission standards which vastly increased coal mining costs.  The order disbands the Interagency Working Group on Social Cost of Greenhouse Gases and withdraws the $36 per tonne of CO2 guideline cost.  

The order has met with howls of anguish from the usual quarters.  Among the most extreme the Washington Post predictably said it puts the planet on a dangerous pathand GQ said it will put us all under water.

Such ill-informed commentary is easily dismissed as ravings of an ideologically blinkered Trump-loathing media. 

Yet to be determined is whether or not the US will formally pull out of the Paris Agreement and consolidate the effects of the Executive Order. 

The contrast between this facilitative approach to fossil fuel mining and use with the disastrous policies being implemented by Australian Governments could not be greater. 

The nation’s energy policy is in the hands of ideological tyros.

At the federal level Malcolm Turnbull is running the show with the equally green evangelist, his Departmental Secretary Martin Parkinson.

At the state level, we have a Victorian Government desperately promoting wind, to match Greens policies in the hope of retaining threatened inner city seats, while also killing coal, conspiring with the Liberals to close down gas supplies and otherwise using the electricity supply system to provide favours to key support groups.  And in South Australia we have a Premier who has drunk deeply from the well of Commonwealth subsidies, declared his jurisdiction at the cutting edge of the global renewable movement and, in denial of the evidence, is desperately trying to demonstrate the wisdom of this.

Electricity supply.

In a statement plumbing the depths of credibility, the electricity market manager, AEMO, maintains that  the closure of Hazelwood will not compromise the security of the Victoria electricity system nor the broader National Electricity Market (NEM) next summer.  Looking around it says that there are adequate supply sources available to cover the loss of Hazelwood’s 1600 MW of reliable baseload power.

Hazelwood’s closure takes out 11 per cent of the Victorian-South Australian capacity of fossil and hydro availability, 19 per cent of the total if the now short supplies of gas are excluded.  Hazelwood’s closure, having already triggered a doubling of the average wholesale price, places supply on a knife edge, especially when the 2900 MW of wind is not available.

In its final analysis of the events leading to the September 2016 South Australian black-out, AEMO re-affirms that the failure of the wind generators was the cause.  It argues that there are measures that can be taken to mitigate this.  Among these are payments to consumers to lower demand at crucial times and re-engineering the grid to accommodate the policy-induced reduction in fossil fuel energy.

One such proposed grid re-engineering is the South Australian plan to spend $150 million on short term battery storage.  But this would provide a buffer of just 4 seconds; fully supplying itself with wind energy buttressed by battery storage would according to Miskelly and Quirk cost $180 billion – about twice South Australia’s Gross State Product!

South Australia deliberately chose to close off its options of retaining a back-up supply of coal when it prevented the Northern power station from remaining open.  It now says it will build a new gas plant at a cost of $350 million to be used as a reserve unit only.  Good luck with getting the gas for this and in getting a return for the state citizen owners!

South Australia also intends to over-ride the AEMO allocation of electricity between different jurisdictions to ensure that power is delivered from Victoria in time of need.  Victorian Energy Minister Lily D’Ambrosia may be clueless in the economics of electricity supply but she understands the political penalty of Victoria facing black-outs due to electricity being exported to another jurisdiction.  And so the national market would quickly unravel into state autarkies, at least until the Commonwealth invokes Freedom of Trade provisions of the Constitution (s 92) and takes over the market management.

Malcolm Turnbull’s “nation-building” proposals to create a pump storage scheme for the Snowy is an alternative to batteries smoothing the supply but, by losing 20 per cent of available energy in the pumping process, actually reduces the available resource.  Snowy Hydro already has pumped storage and has the option of increasing this but has never done so simply because it makes no commercial sense.  Turnbull’s costing of his proposal at $2 billion is ridiculous and the five year time frame would outlive his tenure of office.

Energy retailing: a smoke screen for policy incompetence

Perhaps under orders, Energy Minister Frydenberg has given the ACCC, under Rod Sims an institution marked by hostility to normal market operations, a task of finding out if the retailers are price gouging.  Frydenberg has cited an analysis from the government’s political adversaries at the Grattan Institute in support of this, saying there could be savings of $250 million a year for Victoria alone if the market was working properly.

With more retailers than in any other electricity market in the world, and with easy entry and smaller retailers going out of business, monopolistic price gouging possibilities defy rational analysis.

The Grattan analysis has this chart

The cause of retail margin increase are solidly down to government regulations which involve costs that must be passed on.  Among these for Victoria are:

• “Customer protection” requirements and hardship provisions
• Disallowance of exit fees
• Requirement to pay above market rates for solar buy-back
• Support for the compulsory roll-out of “smart” metering
• Various regulatory requirements to offer long life lighting and other virtue-signalling favours to customers

The fact is that government policy forcing the replacement of reliable coal plant by unreliable wind at three times the cost is at the heart of the energy crisis we face and Commonwealth measures along these lines are exacerbated by those of the states.

The Trump administration is pushing ahead with policies that will reduce energy costs.  Australia by contrast remains on the path of further penalizing coal and incurring additional costs to facilitate the growth of wind which already requires a subsidy that provides it a price three times that of coal power.  These policies are already exacting huge costs on consumers and industry.