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.

… Matters to be examined include the following:

i.All technically feasible energy supply options should be listed. Commonwealth and State policies constraining or proscribing use of any of them should be identified. Explicit or implicit tax- and/or subsidy-equivalent penalties or rewards, by energy source use, should be listed and quantified.

ii.All technically feasible energy supply options should be ranked by (a) maintenance of power reliability, (b) their inherent contribution to grid stability, or their need for additional investments to prevent grid instability, (c) comparable costs for delivery of the same total quantum of reliable power, including reliability costs for additional required generation and storage capacity, (d) comparable emissions intensity, where possible on a full production-supply chain basis, (e) safety, and (f) ease of bringing on new supply quickly after removal of government policy impediments (if any) to their use.

iii.Effects of government-determined energy source restrictions, and policy uncertainty about the overall climate for new electricity supply investment, should be identified and quantified. The extent

to which such restrictions also constrain the operation of existing generation supply (for example, due to inadequate repairs and maintenance) should be determined. Such effects should include, and quantify, (a) reduced operating supply times for fossil fuel generators, both base-load and 'peaker' plant, and their costs, and (b) the size and cost of 'curtailed' supply from solar and wind power.

iv.What are the merits of a national approach to all aspects of energy policy (itself the rationale for the NEM)? What are the problems with States and Territories choosing their own priorities in an interdependent NEM? In particular, should emissions reduction targets be set at the state level or nationally? Does it make sense for individual States or Territories to claim state-specific emissions reductions, when they also rely on fossil-fuelled back-up from other states when the wind doesn't blow and the sun doesn't shine?

Should emissions reductions only be measured NEM-wide?

v.What are the observed average state/territory differences in power prices and power reliability? What are the causes? Are they correlated with higher or lower penetration of renewables?

vi.Beyond government policy and government ownership matters, are there technical barriers to entry resulting in non-competitive power costs and less reliability? Is there a tension between the supply-side scale of the Australian market, and best-practice, lowest-cost, power plant supply scale? What is the best way to deal with any such tension?

vii.Is "vertical integration" between power generators and retailers an intrinsic competition problem? If there is adequate horizontal competition between generators, and also between retailers, should there be concerns about "gentailers" per se? Should policy and regulation focus on ensuring sufficient horizontal competition for both? What barriers to entry prevent this? Can these be removed?

viii.Estimate effects on power prices of all influences in (i) to (vii) These should be quantified separately and in total.

ix.In the light of (i) to (viii), make recommendations for changes to energy policies and regulations, estimating how each would affect affordability, reliability and greenhouse gas emissions.

The draft report is required by 30/6/2020, the final by 31/12/2020."

Bottom line? If Australia is to fix its energy market mess, it must define, quantify, and address its causes. Aren't most directly caused by government policy? These can be reversed – if we want to.

Concentration on market failure symptoms, as now, is really palliative care, not a cure.

[1]2019 Electricity Statement of Opportunities, August 2019, A report for the National Electricity Market, AEMO.