Fattening up the power industry

On Wednesday, January 2, in the Sydney Morning Herald, New South Wales Treasurer Michael Costa criticised opponents of the Government’s plans to “reform” - in fact, to largely privatise - the State’s electricity sector. He spoke of the “clear and irrefutable logic underlying the Government’s decision”.

Unfortunately, the logic behind the Government’s plans, based on the report of the Owen Inquiry into Electricity Supply in NSW, is anything but clear and irrefutable.

First of all, NSW may not need to build a new baseload power station until at least 2017 if more effort is put into energy efficiency programs. This means improving the standards for new buildings and retrofitting old ones, phasing out electric water heaters, mandating overnight switch-offs in office buildings, encouraging more rooftop solar energy generation, and so on. The Government has made positive moves on some of these issues, but much more could be done.

Even if a new baseload station is needed as early as 2014, the cost estimates provided in the Owen Report are speculative. In a research report commissioned by the Public Interest Advocacy Centre, the Institute for Sustainable Futures at the University of Technology Sydney found that the total capital investment required could be as low as $4 billion, comprising $2 billion for a gas-fired baseload plant and another $2 billion to upgrade the state-owned retailers.

Likewise, the estimates of a sale price of $15 billion may be overstated. The more guarantees the Government gives about job security, price regulation and the like, the less attractive the power stations and retail businesses become to potential investors.

And until we know what the carbon price is likely to be under the new National Emissions Trading Scheme, investors are unlikely to pay a premium for a portfolio of coal-fired power stations that could quickly become uneconomic to operate as alternative baseload technologies emerge.

By 2017, the greenhouse-polluting coal- or gas-fired plants favoured by Mr Costa to provide additional energy may be more expensive than solar thermal or geothermal baseload plants.

Next to the issue of the state’s AAA credit rating. Ratings agencies recognise that governments need to fund infrastructure projects, and are more interested in how the debt is managed than in avoiding it altogether. A minor downgrading would have a negligible impact on the state’s finances.

On the other hand, governments can usually borrow money more cheaply than private companies. Either way, it is consumers who eventually pay for borrowings through higher electricity bills, so we are better off repaying government, rather than private, debt.

It may not be necessary for the Government to stump up the money for a new power station anyway. There are two gas-fired plants currently under construction in NSW by private companies. Even better, the German firm Epuron recently announced that it is planning to build the world’s largest wind farm near Broken Hill by 2015, providing about 4.5 per cent of the state’s power needs.

Finally to the impact on consumers. The Owen Report recommends price deregulation: that is, companies should be able to charge whatever they like. To allay concerns, Mr Costa has promised to maintain regulated prices until 2013. But the fine print in the Government’s announcement says “or until it was satisfied that there was sufficient competition in the retail energy market”. In any case, what happens after 2013?

Because the Victorian Government “fattened up” the industry with price hikes to make it attractive to investors before selling it off in the 1990s, retail prices there fell after privatisation before rising again and are now higher than in NSW. Prices in South Australia rose substantially after privatisation in 1999, and likewise remain higher than in NSW.

The latest price determination in NSW already allows companies to charge about 5 per cent a year above inflation, in order to improve their profitability, in the hope that this may eventually lead to more competition and lower prices. In other words, the NSW industry is already being “fattened up” at the expense of consumers, but there is scant evidence that lower prices will eventuate.

Consumers also have reason to be concerned about the security of supply and service standards in a privatised industry. Residents of Auckland and California, who suffered prolonged blackouts in 1997 and 2000, respectively, know what happens when companies driven by the profit motive rather than the public interest skimp on maintaining and upgrading infrastructure. Some state governments in the US are now buying back the electricity industries they had previously sold off.

The Owen Report gave Mr Costa the rationale he needed to justify selling off valuable state assets in order to fund other new infrastructure such as roads. Why it is less important to keep electricity in public hands than roads is not clear. Mr Costa says the issue requires a proper debate. Why, then, is the Government determined to rush through its privatisation plans before Parliament resumes in February?