Shining a light on affordable reliable electricity

Last week the Australian Energy Market Operator (AEMO) warned that soon, power supply in the National Electricity Market (the NEM) may not keep up with demand, especially in hot summers.[1] Blackouts and power rationing (euphemistically called 'demand response') may be imposed. If so, this is power market failure.

In 2018 the Australian Competition and Consumer Commission was required to hold a seven-year inquiry into prices, profits and margins for supply of electricity in the National Electricity Market, better known as the NEM. It commenced in August 2018. The ACCC must report every six months until its final report in August 2025. Its terms of reference include five specific items. The first four cover prices, profits, margins, and barriers to entry into the electricity market. The fifth covers effects of actual or mooted NEM policy changes.

The government's seven year inquiry is largely price monitoring and 'jawboning' of power suppliers. The specific items listed in the ACCC's terms of reference are really the wrong way round.

The NEM, and participants' operations therein, are driven by Commonwealth and State energy policies and regulations. These include government ownership of electricity assets, regulation of "natural monopolies", NEM bidding rules, a variety of renewable energy 'targets', and other interventions to encourage or prevent investments in different energy sources.

Step one should be to investigate how these government interventionsaffect power prices via the electricity demand-supply balance. If they are a problem, governments can choose to fix them, of course, delivering lasting improvements in affordable, reliable power.

Step two is to explore other market effects.

Only taking step two puts consequent symptoms before prior policy causes. It invites yet more government and regulatory interventions to suppress price symptoms. This is the 'opioid solution'. Perverse results will follow – again. Yet more investment uncertainty, less – and less reliable – power supply, and higher power prices, are likely.

Are we running out of time for yet another inquiry or review? No. We've had decades of flailing around over energy policy (sic). That continues today, inducing AEMO to warn of looming problems in the NEM. Getting energy policy right is a long term foundation for a more productive, more competitive Australia. That's what Australia needs. We don't need government lip-service to this notion, plus yet more Commonwealth-State blame-shifting and finger-pointing.

Step one, especially, should be a job for the Productivity Commission (PC) rather than the ACCC.

The following should be included in an urgent reference to the PC:

"PC inquiry into electricity supply, reliability, and prices in Australia

I, Josh Frydenberg, Treasurer, … etc.