tag:theconversation.com,2011:/africa/topics/electricity-market-reform-8196/articlesElectricity market reform – The Conversation2021-05-03T06:15:50Ztag:theconversation.com,2011:article/1600832021-05-03T06:15:50Z2021-05-03T06:15:50ZPaying Australia’s coal-fired power stations to stay open longer is bad for consumers and the planet<figure><img src="https://images.theconversation.com/files/398270/original/file-20210503-19-y8zlua.jpg?ixlib=rb-1.1.0&rect=25%2C37%2C4156%2C2720&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australian governments are busy designing the nation’s transition to a clean energy future. Unfortunately, in a misguided effort to ensure electricity supplies remain affordable and reliable, governments are considering a move that would effectively pay Australia’s old, polluting coal-fired power stations to stay open longer.</p>
<p>The measure is one of several options proposed by the Energy Security Board (<a href="https://www.directory.gov.au/portfolios/industry-science-energy-and-resources/department-industry-science-energy-and-resources/energy-security-board">ESB</a>), the chief energy advisor to Australian governments on electricity market reform. The board on Friday released a <a href="https://esb-post2025-market-design.aemc.gov.au/options-paper">vision</a> to redesign the National Electricity Market as it transitions to clean energy.</p>
<p>The key challenges of the transition are ensuring it is smooth (without blackouts) and affordable, as coal and gas generators close and are replaced by renewable energy.</p>
<p>The redesign has been two years in the making. The ESB has done a very good job of identifying key issues, and most of its recommendations are sound. But its option to change the way electricity generators and retailers strike contracts for electricity, if adopted, would be highly counterproductive – bad both for consumers and for climate action.</p>
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<img alt="Electricity lines at sunset" src="https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/398271/original/file-20210503-13-iwavx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">One proposed reform to Australia’s electricity market would be bad for consumers and climate action.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>The energy market dilemma</h2>
<p>The National Electricity Market (NEM) covers every Australian jurisdiction except Western Australia and the Northern Territory. It comprises electricity generators, transmission and distribution networks, electricity retailers, customers and a financial market where electricity is traded.</p>
<p>Electricity generators in the NEM comprise older, polluting technology such as gas- and coal-fired power, and newer, clean forms of generation such as wind and solar. Renewable energy, which makes up about 23% of our electricity mix, is now <a href="https://theconversation.com/up-to-90-of-electricity-from-solar-and-wind-the-cheapest-option-by-2030-csiro-analysis-151831">cheaper</a> than energy from coal and gas.</p>
<p>Wind and solar energy is “variable” – only produced when the sun is shining and the wind is blowing. Technology such as battery storage is needed to smooth out renewable energy supplies and make it “dispatchable”, meaning it can be delivered on demand.</p>
<p>Some say coal generators, which supply dispatchable electricity, are the best way to ensure reliable and affordable electricity. But Australia’s coal-fired power stations, some of which are more than 40 years old, are becoming more <a href="https://www.afr.com/companies/energy/is-this-the-end-of-coal-20210311-p579ym">prone to breakdowns</a> – and so less reliable and more expensive – as they age. This has led to some <a href="https://environmentvictoria.org.au/hazelwood-faqs/">closing suddenly</a>. </p>
<p>Without a clear national approach to emissions targets, there’s a risk these sudden closures will occur again.</p>
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Read more:
<a href="https://theconversation.com/what-is-the-electricity-transmission-system-and-why-does-it-need-fixing-147903">What is the electricity transmission system, and why does it need fixing?</a>
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<img alt="Wind farm near coast" src="https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/398273/original/file-20210503-17-12ctzua.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Wind and solar energy is variable.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>So what’s proposed?</h2>
<p>To address reliability concerns, the ESB has proposed an option known as the “physical retailer reliability obligation”.</p>
<p>In a nutshell, the change would require electricity retailers to negotiate contracts for a certain amount of “dispatchable” electricity from specific generators for times of the year when reliability is a concern, such as the peak weeks of summer when lots of people use air conditioning.</p>
<p>Currently, the Australian Energy Market Operator has <a href="https://www.aemo.com.au/energy-systems/electricity/emergency-management/reliability-and-emergency-reserve-trader-rert">reserve</a> electricity measures it can deploy when market supply falls short.</p>
<p>But under the new obligation, all retailers would also have to enter contracts for dispatchable supply. This would likely require buying electricity from the coal generators that dominate the market. This provides a revenue source enabling these coal plants to remain open even when cheaper renewable energy makes them unprofitable.</p>
<p>The ESB says without the change, the closure of coal generators will be unpredictable or “disorderly”, creating price shocks and reliability risks.</p>
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<img alt="hand turns off light switch in bedroom" src="https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/398274/original/file-20210503-23-xjfom4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The ESWB says the recommendation would address concerns over electricity reliability.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>A big risk</h2>
<p>Even the ESB concedes the recommendation comes with considerable risks. In particular, the board says it may:</p>
<ul>
<li>impose increased barriers to retail competition and product innovation</li>
<li>lead to possible overcompensation of existing coal and gas generators.</li>
</ul>
<p>In short, the policy could potentially lock in increasingly unreliable, ageing coal assets, stall new investment in new renewable energy storage such as batteries and pumped hydro and increase market concentration.</p>
<p>It could also push up electricity prices. Electricity retailers are likely to pass on the cost of these new electricity contracts to consumers, no matter how much energy that household or business actually used.</p>
<p>The existing market already encourages generators to provide reliable supply – and applies strong penalties if they don’t. And in fact, the NEM experiences reliability issues for an average of just <a href="https://www.aemc.gov.au/sites/default/files/2021-03/Review%20of%20the%20Reliability%20Standard%20and%20Settings%20Guidelines%20-%20Consultation%20paper.pdf">one minute per year</a>. It would appear little could be added to the existing market design to make generators more reliable than they are. </p>
<p>Finally, the market is dominated by three large “gentailers” - AGL, Energy Australia and Origin – which own both generators and the retail companies that sell electricity. The proposed change would disadvantage smaller electricity retailers, which in many cases would be forced to buy electricity from generators owned by their competitors. </p>
<p>Australia’s gentailers are heavily invested in coal power stations. The proposed change would further concentrate their market power while propping up coal.</p>
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Read more:
<a href="https://theconversation.com/failure-is-not-an-option-after-a-lost-decade-on-climate-action-the-2020s-offer-one-last-chance-158913">'Failure is not an option': after a lost decade on climate action, the 2020s offer one last chance</a>
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<img alt="warning sign on fence" src="https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=344&fit=crop&dpr=1 600w, https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=344&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=344&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=432&fit=crop&dpr=1 754w, https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=432&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/398275/original/file-20210503-13-w3lu7h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=432&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The proposed change brings a raft of risks to the electricity market.</span>
<span class="attribution"><span class="source">Kelly Barnes/AAP</span></span>
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<h2>What governments should do</h2>
<p>If coal-fired power stations are protected from competition, it will deter investment in cleaner alternatives. The recommendation, if adopted, would delay decarbonisation and put Australia <a href="https://theconversation.com/spot-the-difference-as-world-leaders-rose-to-the-occasion-at-the-biden-climate-summit-morrison-faltered-159295">further at odds</a> with our international peers on climate policy. </p>
<p>The federal and state governments must work together to develop a plan for electricity that facilitates clean energy investment while controlling costs for consumers. </p>
<p>The plan should be coordinated across the states. Without this, we risk creating a sharper shock later, when climate diplomacy requires the planned retirement of coal plants. <a href="https://www.poweringpastcoal.org/">Other nations</a> have acknowledged the likely demise of coal, and it’s time Australia caught up. </p>
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Read more:
<a href="https://theconversation.com/spot-the-difference-as-world-leaders-rose-to-the-occasion-at-the-biden-climate-summit-morrison-faltered-159295">Spot the difference: as world leaders rose to the occasion at the Biden climate summit, Morrison faltered</a>
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<p class="fine-print"><em><span>Daniel J Cass is Energy Policy & Regulatory Lead at the Australia Institute and is on the board of Solar Head of State.</span></em></p><p class="fine-print"><em><span>Joel Gilmore is an Associate Professor at Griffith University and Regulatory Affairs Manager at Infigen Energy, that develops renewable projects and batteries.</span></em></p><p class="fine-print"><em><span>Tim Nelson is an Associate Professor at Griffith University and the EGM, Energy Markets at Infigen Energy, that develops renewable projects and batteries.</span></em></p>A proposal to change the way electricity generators and retailers strike contracts for electricity would be bad for both consumers and climate action.Daniel J Cass, Research Affiliate, Sydney Business School, University of SydneyJoel Gilmore, Associate Professor, Griffith UniversityTim Nelson, Associate Professor of Economics, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1500152021-04-07T12:28:12Z2021-04-07T12:28:12ZTechnology innovation gives government leverage to drive down emissions fast – here’s how<figure><img src="https://images.theconversation.com/files/392038/original/file-20210326-21-16nxk3u.jpeg?ixlib=rb-1.1.0&rect=73%2C110%2C4838%2C3572&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Government policies sparked rapid growth and technology innovation in solar energy, wind energy and battery markets.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/wind-turbine-blades-on-train-royalty-free-image/108124621?adppopup=true">Michael Hall/Getty Images</a></span></figcaption></figure><p>To avert the worst effects of climate change, global greenhouse gas emissions should fall at faster rates than they have risen for over a century. Economies must essentially turn on a dime and then move quickly toward a carbon-free future.</p>
<p>In the U.S., the Biden-Harris administration has <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/27/fact-sheet-president-biden-takes-executive-actions-to-tackle-the-climate-crisis-at-home-and-abroad-create-jobs-and-restore-scientific-integrity-across-federal-government/">recommitted</a> the country to this goal and recently announced <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/">plans for major investments in clean energy infrastructure</a> and research. To succeed, they should use their most powerful tool for amplifying the benefits of each investment: technology innovation. </p>
<p>As <a href="http://trancik.mit.edu/">my research</a> on technology innovation shows, government policies can kick off fast progress. The examples of <a href="https://doi.org/10.1016/j.enpol.2018.08.015">solar energy</a>, <a href="https://doi.org/10.1038/507300a">wind energy</a> and <a href="https://doi.org/10.1039/D0EE02681F">lithium-ion batteries</a> show how the process works. All three technologies improved at exponential rates alongside swiftly growing markets.</p>
<p>These trends were triggered by government policies in a handful of countries that drove global innovative activity and competition for market share, enlisting the creativity of companies and researchers to solve difficult problems, all while creating new businesses and jobs. The innovations occurred from early technology concept to adoption at scale, in engineering and science labs, on manufacturing floors and at construction sites.</p>
<p>Importantly, these examples demonstrated that the choice wasn’t between government intervention and competitive markets; the two together drove progress. Intentionally employing this combined effect is government’s best bet for accelerating progress on climate change going forward.</p>
<h2>Lessons from renewable energy and batteries</h2>
<p>Here’s how the process unfolded for <a href="https://doi.org/10.1016/j.enpol.2018.08.015">solar energy</a>. Starting in the 1970s and extending until the present day, countries including <a href="http://trancik.scripts.mit.edu/home/wp-content/uploads/2015/11/Chart1.pdf">Japan, Germany, the U.S. and China</a> began offering incentives for solar energy. The policies varied, but they all created financial incentives for energy project developers to build solar power facilities. In response, private companies around the world innovated to compete for market share. They improved manufacturing to waste less material and built bigger plants to increase productivity. </p>
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<a href="https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="solar and battery prices over time" src="https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=235&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=235&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=235&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=295&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=295&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393297/original/file-20210402-19-d6maet.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=295&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Solar energy (photovoltaics) and lithium-ion battery costs have dropped precipitously.</span>
<span class="attribution"><a class="source" href="http://trancik.mit.edu/">Trancik Lab</a></span>
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<p>Government research funding was also <a href="https://dspace.mit.edu/handle/1721.1/102237">instrumental</a>, with the U.S. making the largest overall contribution. Research discoveries informed new solar cell materials and panel designs that were more efficient at converting sunlight into electricity.</p>
<p>The resulting exponential trends in solar energy market expansion and cost reduction exceeded the <a href="http://trancik.scripts.mit.edu/home/wp-content/uploads/2015/11/Chart3.pdf">projections</a> of many experts. These trends were mirrored by those in wind energy and, a bit later, <a href="https://news.mit.edu/2021/lithium-ion-battery-costs-0323">lithium-ion batteries</a> for electric cars and other energy storage applications. The details of each technology’s process are different, but in all three cases, <a href="https://www.vox.com/energy-and-environment/2018/11/20/18104206/solar-panels-cost-cheap-mit-clean-energy-policy">government policy</a> was an igniting spark for rapid advancement.</p>
<h2>The innovation still needed</h2>
<p>Past developments in solar energy, wind energy and batteries are encouraging. But other technologies are needed for a clean energy transition, including those that can help <a href="https://doi.org/10.1126/science.aas9793">fully decarbonize</a> heating, electricity, industry and transportation. Progress must be faster and be more comprehensive (covering all energy services) than what has come before.</p>
<p>In one decarbonized future scenario, nearly all cars are electric, charged using carbon-free electricity. Across U.S. cities, residents use clean energy-fueled public transit for travel on most days, simply because it is convenient. People walk and bike along safe and enjoyable routes. Goods are delivered in electric vans, and people and products are transported longer distances by planes, rail, ships and trucks, all running on carbon-free fuels. It is easier for households and office buildings to opt into energy efficiency improvements and electrified heating than to opt out. Heavy industry runs on low-carbon fuels and captures any carbon dioxide before it is emitted. </p>
<p>To get there quickly, innovation is needed in physical technologies and infrastructures, like <a href="https://doi.org/10.1016/j.joule.2019.06.012">ultra-low-cost batteries</a>, carbon-free jet fuel and resilient power grids, but also in software and business models. Better software could help predict and manage <a href="https://www.climate2020.org.uk/storing-renewables/">shortfalls and excesses in variable renewable energy</a>. New business models are needed to enable a more integrated energy system, where excess renewable electricity is used to produce carbon-free fuels, such as hydrogen, and electrified industrial processes can turn on and off, acting as storage for the power grid. </p>
<h2>Tailoring policies for rapid progress</h2>
<p>There’s no single playbook for government policy-driven technology innovation, since the process works best when policies are matched to the <a href="https://doi.org/10.1016/j.joule.2020.10.001">innovation challenge</a> in question.</p>
<p>For some innovation challenges, greater emphasis should be placed on research to advance a range of technology options – for example, for low-carbon jet fuels. Other policies can incentivize private-sector demonstration of a new approach at scale, such as schemes to manage <a href="https://doi.org/10.1038/s41560-020-00752-y">electric vehicle charging</a> and use their batteries (perhaps even as they are “retired” from cars) as energy storage for the power grid. As technologies advance, stimulating market adoption becomes critical, as we saw in the last two decades for solar and wind energy. At the same time, regulating emitters can encourage innovation in mature industries and is absolutely essential for ensuring sufficient emissions reductions across the economy.</p>
<p>Beyond driving better technology performance, well-designed innovation policies will create <a href="https://www.santafe.edu/news-center/news/report-path-decarbonization">local economic growth opportunities and high-quality jobs</a>. Moreover, policy can be intentional about drawing on expertise in the oil, coal and natural gas industries and create new employment opportunities as fossil fuel use declines. In this way, the U.S. can find its equivalents of the Danish company Orsted, which parlayed its fossil fuel expertise in offshore drilling to become a global leader in offshore wind. </p>
<p>It is easy to get stuck thinking in linear terms, but technology has a tendency to change <a href="https://doi.org/10.1371/journal.pone.0052669">exponentially</a>. Left to its own devices, technological change will not necessarily solve climate change, especially not in the limited time we have left to act. But my <a href="http://trancik.mit.edu/publications/">research on technology evolution</a> suggests that government policy can help propel this powerful process toward rapid progress and beneficial outcomes.</p>
<p>[<em><a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=experts">Expertise in your inbox. Sign up for The Conversation’s newsletter and get expert takes on today’s news, every day.</a></em>]</p><img src="https://counter.theconversation.com/content/150015/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jessika E. Trancik has received funding from the Alfred P. Sloan Foundation, the Environmental Defense Fund, the National Science Foundation, and the U.S. Department of Energy. </span></em></p>Technology innovation is one of the Biden administration’s most powerful tools for accelerating progress on climate change. Recent successes in renewable energy and batteries show how this can work.Jessika E. Trancik, Associate Professor, Institute for Data, Systems, and Society, Massachusetts Institute of Technology (MIT)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1555272021-02-18T21:41:39Z2021-02-18T21:41:39ZHow the Texas electricity system produced low-cost power but left residents out in the cold<figure><img src="https://images.theconversation.com/files/385101/original/file-20210218-24-wcvh37.jpg?ixlib=rb-1.1.0&rect=30%2C0%2C5057%2C3394&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Waiting in line in freezing rain to fill propane tanks in Houston, Texas, Feb. 17, 2021.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/APTOPIXWinterWeatherTexas/74d88ea5f3bd4d77ad7ce77342b33357/photo">AP Photo/David J. Phillip</a></span></figcaption></figure><p>Americans often take electricity for granted – until the lights go out. The recent <a href="https://www.reuters.com/article/us-usa-weather/texas-deep-freeze-leaves-millions-without-power-21-dead-idUSKBN2AG257">cold wave and storm in Texas</a> have placed considerable focus on the <a href="http://www.ercot.com/">Electric Reliability Council of Texas</a>, or ERCOT, the nonprofit corporation that manages the flow of electricity to more than 26 million Texans. Together, ERCOT and similar organizations <a href="https://www.eia.gov/todayinenergy/detail.php?id=790">manage about 60% of the U.S. power supply</a>.</p>
<p>From my research on the <a href="https://scholar.google.com/citations?user=yxN_35oAAAAJ&hl=en">structure of the U.S. electricity industry</a>, I know that rules set by entities like ERCOT have major effects on Americans’ energy choices. The current power crunch in Texas and other affected states highlights the delicate balancing act that’s involved in providing safe, reliable electricity service at fair, reasonable rates. It also shows how arcane features of energy markets can have big effects at critical moments.</p>
<h2>Let there be light</h2>
<p>The <a href="https://www.penguinrandomhouse.com/books/88630/empires-of-light-by-jill-jonnes/">electric age</a> began in 1882 when the Edison Illuminating Company sent power over wires to 59 customers in lower Manhattan from its Pearl Street Generating Station. Edison was America’s first investor-owned electric utility – a company that generated electricity, moved it over transmission lines and delivered it to individual customers. </p>
<p>The scope and scale of electric utilities grew rapidly from those humble beginnings, but this underlying, vertically integrated structure remained intact for more than 100 years. Each utility had a monopoly on serving customers in its area and reported to a <a href="https://www.naruc.org/">public utility commission</a>, which told the company what rates it could charge.</p>
<p>Since the utilities knew more about their costs and abilities than anyone else, the burden was on regulators to decide whether the utility was operating efficiently. <a href="https://www.raponline.org/wp-content/uploads/2016/05/rap-lazar-electricityregulationintheus-guide-2011-03.pdf">Regulators also determined</a> whether the costs that utilities proposed to pass on to customers – such as building new generating plants – were just and reasonable.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/BpqQcHDgEZY?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Thomas Edison created the model for the traditional electric utility at his Pearl Street Station in New York City.</span></figcaption>
</figure>
<h2>The lines get tangled</h2>
<p>Things grew complicated in 1996 when the Federal Energy Regulatory Commission issued <a href="https://www.ferc.gov/industries-data/electric/industry-activities/open-access-transmission-tariff-oatt-reform/history-oatt-reform/order-no-888">Order 888</a>, allowing states to restructure their electric power industries to promote more competition. Through the actions, or inaction, of individual state legislatures, the U.S. electricity market fractured. </p>
<p>Some states, primarily in the Southeast and the West, maintained the vertically integrated structure. The rest of the nation moved to a market structure in which generators compete to sell their electricity. </p>
<p>Regions created new independent organizations – known as independent system operators or regional transmission organizations – to regulate the flow of power on the grid. In these regions, generators compete to sell their electricity, and organizations called <a href="https://www.potomaceconomics.com/markets-monitored/ercot/">market monitors</a> make sure that generators follow the rules. This approach created power markets that prioritize generating electricity at the lowest possible price.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Map of U.S. regional power markets." src="https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/384836/original/file-20210217-17-s7w4b3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">In the Southeast, Southwest and Northwest U.S., traditional utilities generate electricity and deliver it to customers. Other regions, including Texas, have moved to competitive power markets run by Independent System Operators, or ISOs.</span>
<span class="attribution"><a class="source" href="https://www.ferc.gov/industries-data/market-assessments/electric-power-markets">FERC</a></span>
</figcaption>
</figure>
<h2>An imperative to keep prices low</h2>
<p>What do these changes mean for electricity customers in regions with competitive power markets? The companies that deliver power over wires to homes and businesses still have to get their prices approved by regulators, but the system works differently for the businesses that generate that power. </p>
<p>Generators offer their electricity, typically at a particular price each hour, on exchanges run by market operators like ERCOT. Those operators figure out how much electricity is needed across the regions they serve and choose the lowest-cost bidders to supply it. </p>
<p>If a generating company is not selected, it loses the opportunity to sell its electricity during that hour. And selling power is how generators create revenue to pay for things like workers, power plants and fuel. This means that generators have an incentive to bid as low as possible and sell as much electricity as possible. </p>
<p>Generators in Texas are facing criticism now that they <a href="https://www.washingtonpost.com/business/2021/02/16/ercot-texas-electric-grid-failure/">weren’t prepared to operate in extremely cold temperatures</a>. But consider the challenges facing two Texas generators that are identical in every way, except that one decides to invest in winterization. That company will have higher costs than its competitor and may be forced to submit higher-priced offers in the market, potentially losing out on opportunities to sell its electricity. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1361346284230234112"}"></div></p>
<p>In the long run, the company that winterizes may have a more difficult time staying in business. It would be better prepared for the conditions affecting Texas now, but it would operate at a competitive disadvantage under more normal conditions.</p>
<p>An international nonprofit regulator called the <a href="https://www.nerc.com/Pages/default.aspx">North American Reliability Corporation</a> conducts semi-annual reliability assessments for each North American region, but those assessments are only as good as the assumptions they’re based on. If the assessment doesn’t consider extreme events, then the regulator can’t determine whether a power system is ready for them. </p>
<p>After an earlier cold wave in 2011 that led to power shortages, federal regulators identified options for winterizing the Texas power system – but ERCOT <a href="https://www.kxan.com/investigations/winter-preparedness-not-mandatory-at-texas-power-plants-and-generators-despite-2011-report/">did not require energy companies to carry them out</a>. Other regions might value resilience differently. For example, ISO-New England launched a program in 2018 that compensates generators for <a href="https://vimeo.com/257500308">providing extra capacity when the system is strained</a>.</p>
<p>The power of a competitive generation market is that each generator gets to decide for itself what makes it sustainable in the long run. That’s also a weakness of the market.</p>
<h2>What’s next for Texas?</h2>
<p>Once power is restored across Texas, state and federal policymakers will have to address several tough questions in order to make failures like this less likely.</p>
<p>First, does preparing the power system for severe storms represent value for electricity customers? What types of events should people be protected from? Who determines the scenarios that go into reliability assessments? Since consumers will pay the costs, they should also benefit. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1362407989131415554"}"></div></p>
<p>Second, how should people pay for this resiliency? Costs could be assessed based on the number of kilowatt hours each household uses or charged as a flat fee per customer – an approach that could benefit heavy electricity users. Or they could be covered through new taxes. How will decision-makers respond a year from now, when the crisis has passed and people ask, “The weather is great and the system is doing fine, so why am I paying more for my electricity?”</p>
<p>Third, how does that money that consumers pay to improve the system translate into projects? Should it go directly to generators or into a fund that generating companies can draw on? Who would administer the fund? Who is ultimately responsible for implementing changes to the system and accountable if things don’t improve?</p>
<p>Finally, how will these changes affect the market’s central goal: inducing energy companies to provide power at the lowest cost?</p>
<p>Ultimately, <a href="https://theconversation.com/delinquent-electric-bills-from-the-pandemic-are-coming-due-who-will-pay-them-147970">the public pays the costs of electricity service</a>, either through higher rates or service interruptions during events like this week’s Texas freeze. In my view, utilities, regulators, government officials and people like me who study them have a responsibility to ensure that people get the best value for their money.</p><img src="https://counter.theconversation.com/content/155527/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Theodore Kury is the Director of Energy Studies at the University of Florida’s Public Utility Research Center, which is sponsored in part by the Florida electric and gas utilities and the Florida Public Service Commission, none of which has editorial control of any of the content the Center produces.</span></em></p>The Texas electric power market is designed to give energy companies incentive to sell electricity at the lowest possible cost. That focus helps explain why it collapsed during a historic cold wave.Theodore J. Kury, Director of Energy Studies, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1018502018-08-30T12:18:16Z2018-08-30T12:18:16ZThe energy industry is being disrupted – and traditional firms can’t keep up<figure><img src="https://images.theconversation.com/files/234252/original/file-20180830-195304-1arjkeg.jpg?ixlib=rb-1.1.0&rect=0%2C341%2C3794%2C1985&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><span class="source">Sergey Nivens / shutterstock</span></span></figcaption></figure><p>The electricity sector is experiencing a profound disruptive shock. This is due to technological innovation including the falling costs of renewables and energy storage, along with tougher environmental policies and regulatory reform. </p>
<p>These changes are most apparent in Australia, the EU and parts of North America, where once-powerful utility companies are struggling or restructuring to survive. But, as I’ve looked at in a <a href="https://www.chathamhouse.org/publication/power-flexibility-survival-utilities-during-transformations-power-sector">recent report</a>, decision-makers elsewhere are asking whether these power markets are outliers or if they herald a global shift.</p>
<p>Global investment in renewable energy – excluding large hydropower – was <a href="http://fs-unep-centre.org/publications/global-trends-renewable-energy-investment-report-2018">just under US$279 billion</a> in 2017, a rise of 2% on the previous year. Wind and solar account for most of this. In fact, as technology and installation becomes cheaper, non-hydro renewables accounted for 61% of all the new installed power capacity (that’s including all fossil fuel, nuclear and hydro) across the world in 2017.</p>
<p>If we are to address climate change, such changes must continue. While the construction of wind and solar was initially stimulated by decarbonisation policy, now it is driven by economics. As renewables continue to be deployed, they become ever cheaper to build and install. Solar is already at least as cheap as coal in Germany, Australia, the US, Spain and Italy. By 2021, it is also expected to be <a href="https://about.bnef.com/new-energy-outlook/">cheaper than coal</a> in China.</p>
<p>Integrating all this new power may become costly. National power systems have been designed for centralised coal or gas power stations, after all, which can more easily be switched on and off to ensure supply meets demand. Things are much more challenging when renewables are involved, as the sun doesn’t always shine, and the wind doesn’t always blow.</p>
<h2>A new energy system is emerging</h2>
<p>Innovations in energy storage and digital technology promise to keep these costs down, but the big traditional utilities are failing to keep pace. This has left new actors free to provide new technologies and business models.</p>
<p>Storage is a key technological element of the new system. Fortunately, the development of electric vehicles (EV), to address climate change and localised pollution, is being seen as a key driver of change for transport and power sectors. EV sales are set to increase dramatically, stimulated by recent government targets and policy support, while the prices of lithium-ion batteries <a href="https://www.ft.com/content/a6e01984-3567-11e7-99bd-13beb0903fa3?mhq5j=e">decline sharply</a>. </p>
<p>A plethora of large and powerful car manufacturers are getting into electric vehicles, prompted by government sales targets and the speed at which the total cost of owning an EV is approaching that of a traditional petrol car. Honda wants <a href="https://de.reuters.com/article/honda-strategy/honda-to-focus-on-self-driving-cars-robotics-evs-through-2030-idUKL8N1J42GB">two-thirds of its sales</a> to be electric or hybrid by 2030, BMW is aiming for <a href="https://www.autoexpress.co.uk/bmw/101951/bmw-s-electric-car-future-mapped-out-25-pure-evs-and-hybrids-by-2025">15–25% by 2025</a>, while both Volvo and Jaguar Land Rover are targeting <a href="https://www.jaguarlandrover.com/news/2017/09/every-jaguar-and-land-rover-launched-2020-will-be-electrified">100% by 2020</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/234258/original/file-20180830-195328-1dqkv5f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Nissan has moved into the home battery market.</span>
<span class="attribution"><a class="source" href="https://www.theguardian.com/business/2017/may/04/nissan-launches-british-made-home-battery-to-rival-teslas-powerwall">Eaton/Nissan</a></span>
</figcaption>
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<p>Many of these companies are now making use of their manufacturing capabilities and moving into <a href="https://www.wired.com/story/nissan-solar-panels-home-batteries/">selling home storage units for electricity</a>, which aren’t too different from an electric car’s battery. These storage units mean that people with solar panels will be able to consume more of their own electricity. This is further reducing the market for traditional firms and creating new competitors as some of the world’s largest manufacturing companies enter the power sector for the first time.</p>
<h2>Going digital</h2>
<p>As in many other sectors, digitalisation is another disruptive change. Smart meters in particular mean energy firms can better monitor and understand their customers, which enables even more flexibility – imagine energy supplies tailored to individual households and times of day. </p>
<p>These increasingly complex electricity systems will rely on machine learning algorithms to know when and where energy will be needed. Internet giants like <a href="http://energypost.eu/coming-soon-the-amazon-of-energy/">Google and Amazon</a> are already piloting and exploring the opportunities. Who would bet against Amazon becoming a major power supplier in the next decade? Blockchain technology could also enable a <a href="https://www.fastcompany.com/40479952/this-blockchain-based-energy-platform-is-building-a-peer-to-peer-grid">peer to peer energy market</a>, allowing neighbours to sell excess power to one another and potentially further reducing the role of traditional firms.</p>
<p>Over the past few years, there have been significant changes in the power sector, resulting in declining profits and the restructuring of traditional utilities. However, looking forward, the electrification of the transport and eventually heat sectors, and increasing digitalisation is likely to lead to far more significant disruption than we have seen to date. This will bring in a whole new set of companies and potentially engage consumers like never before.</p><img src="https://counter.theconversation.com/content/101850/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Froggatt receives funding from CLP Group and the MAVA Foundation and is a Senior Research Fellow at Chatham House. </span></em></p>Digitalisation and better energy storage are reshaping the electricity market.Antony Froggatt, Associate Member, Energy Policy Group, University of ExeterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1007542018-07-30T19:58:30Z2018-07-30T19:58:30ZThe National Energy Guarantee is a flagship policy. So why hasn’t the modelling been made public?<p>Central to the public debate about the <a href="https://theconversation.com/au/topics/national-energy-guarantee-44929">National Energy Guarantee (NEG)</a> has been the numerical forecasts of its effects – in particular how much it will reduce power prices. In a democracy whose households pay some of the <a href="https://s3.ap-southeast-2.amazonaws.com/hdp.au.prod.app.vic-engage.files/4315/0252/0560/CME_-_electricity_-_analysis_of_offers_and_bills.pdf">world’s highest electricity bills</a>, it is obvious why this measure should shape the narrative on energy policy.</p>
<p>But Plato <a href="https://www.brainyquote.com/quotes/plato_400440">tells us</a> that good decisions are based on knowledge, not numbers. What’s more, electricity markets are incredibly complex, and therefore not amenable to straightforward predictions. </p>
<p>The <a href="http://www.coagenergycouncil.gov.au/council-priority/energy-security-board">Energy Security Board</a> has put numbers at the centre of its NEG proposal, but the basis of these numbers is not clear. With 22 colleagues at 10 other Australian universities, we are <a href="https://reneweconomy.com.au/open-letter-energy-ministers-release-neg-modelling-full-73162/">calling</a> for state and territory ministers to ensure that the ESB’s modelling is available for proper scrutiny. I explain here why I support this request. </p>
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Read more:
<a href="https://theconversation.com/infographic-the-national-energy-guarantee-at-a-glance-85832">Infographic: the National Energy Guarantee at a glance</a>
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<p>On October 17, 2017, the newly created ESB claimed in a <a href="http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Security%20Board%20advice%20on%20the%20National%20Energy%20Guarantee.pdf">letter</a> to federal energy minister Josh Frydenberg that annual household bills would ultimately be A$100-115 lower under the NEG as a result of the NEG being introduced. </p>
<p>The ESB said this calculation was based on its estimate that wholesale electricity prices under the NEG would be 20-25% lower than under business as usual, and 8-10% lower than under the Clean Energy Target proposed by the <a href="https://theconversation.com/the-finkel-review-at-a-glance-79177">Finkel Review</a>.</p>
<p>No analysis or modelling was provided to justify these claims. But five weeks later the ESB had altered its forecast, releasing a <a href="http://www.coagenergycouncil.gov.au/publications/report-national-energy-guarantee">report</a> claiming that wholesale electricity prices would typically be 35% lower with the NEG than they would be without it. Underlying this claim was the assumption that only 597 megawatts of renewable generation would be developed between 2020 and 2030 if the NEG was not implemented.</p>
<p>Since more renewable generation than this was <a href="https://onestepoffthegrid.com.au/commercial-solar-boom-delivers-second-best-rooftop-pv-month-record/">installed just on the roofs of Australia’s households and businesses in the first five months of 2018</a>, the ESB was effectively suggesting that without the NEG investment in renewable generation would all but dry up.</p>
<p>This stands in stark contrast to the verdicts of other analysts. Bloomberg New Energy Finance <a href="https://data.bloomberglp.com/bnef/sites/14/2017/11/BNEF-2017-11-22-Modelling-of-Australias-National-Energy-Guarantee.pdf">predicted</a> that 24,000MW of renewable generation (40 times more than the ESB’s figure) would be built between 2020 and 2030 without the NEG. Bloomberg also predicted less new renewable capacity with the NEG than without it.</p>
<h2>Final design on the table</h2>
<p>The ESB last week <a href="https://www.smh.com.au/environment/climate-change/electricity-plan-would-all-but-hit-emissions-goal-before-it-starts-20180724-p4zt8o.html">released its final design</a> for the NEG to policymakers, but not the public. It now claims that the policy will reduce household electricity bills by A$150 a year relative to business as usual. It also now says that without the NEG around 8,000MW of new renewable generation will be installed (13 times more investment than it predicted eight months ago).</p>
<p>But the ESB says all of this will be installed behind the meter on the roofs of Australia’s homes and businesses and it persists with the assumption that no new large-scale renewable capacity will be built without the NEG.</p>
<p>But once again this seems to contrast vividly with what others are saying and doing. Several major companies have signed contracts for large-scale renewables, including Telstra, Carlton & United Breweries, Orora, and <a href="https://reneweconomy.com.au/steel-giant-bluescope-turns-to-solar-with-major-ppa-deal-37396/">BlueScope Steel</a>. The ESB’s assumption that all large-scale renewables development will grind to a halt without the NEG is even less plausible now than it was in November 2017.</p>
<p>Others have <a href="https://www.theage.com.au/environment/climate-change/federal-labor-%20experts-call-for-full-release-of-energy-plan-modelling-20180727-p4zu1q.html">previously</a> <a href="https://reneweconomy.com.au/esb-must-release-agenda-driven-modelling-75643/">noted</a> that the ESB’s estimate of renewable investment from 2020 to 2030 bears no relation to the estimates from the Australian Energy Market Operator (AEMO) of around 18,000 MW of additional renewable generation between 2020 and 2030, despite the ESB’s claims to the contrary.</p>
<p>However, the ESB’s final design has now helpfully clarified what several other analysts have <a href="https://www.reputex.com/research-insights/update-the-impact-of-a-26-45-neg-on-electricity-prices-to-2030/">already</a> <a href="http://www.tai.org.au/content/july-electricity-update-supporting-technical-paper-0">pointed out</a>: that meeting the government’s target of reducing the electricity sector’s greenhouse emissions by 26% will require emissions reductions of just 2% between 2020 and 2030 beyond what is already set to be achieved. That is a meagre 0.2% cut per year that the NEG policy will be required to deliver.</p>
<p>I estimate that this will in fact be achieved several times over just with the 8,000MW of new rooftop solar capacity that the ESB predicts will happen even if the NEG is not implemented. To be clear, on the ESB’s numbers, Australia’s electricity sector greenhouse gas emissions will be lower than the government requires them to be, even if the NEG is not implemented. So how then can it be plausible to predict that the NEG will stimulate additional investment in renewable capacity beyond what would happen anyway?</p>
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Read more:
<a href="https://theconversation.com/explainer-why-we-shouldnt-be-so-quick-to-trust-energy-modelling-88228">Explainer: why we shouldn't be so quick to trust energy modelling</a>
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<p>You can’t have your cake and eat it. If a policy is intended to make no difference to what would happen anyway, how can it be expected to drive down household bills by A$150?</p>
<p>And without putting its modelling into the public domain where it can be subjected to wider expert scrutiny, how will we know whether the ESB’s assumptions actually hold water?</p>
<p>The NEG will be a massive administrative change to Australia’s energy market, and a potentially substantive change if future governments set much higher emissions reduction targets. State and territory energy ministers are being asked to accept the ESB’s promise that household electricity bills will decline by 30-40% in the next few years, and that the NEG will account for a fair part of this. Those ministers should scrutinise this rosy projection carefully before accepting it. After all, the public will be looking to them, and not the federal government, to make good on these price pledges.</p><img src="https://counter.theconversation.com/content/100754/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Mountain does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A policy that aims to reshape the electricity sector needs to be judged on its numbers. But the lack of public modelling from the Energy Security Board makes it impossible for analysts to do this.Bruce Mountain, Director, Victoria Energy Policy Centre, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/835652017-09-06T07:02:50Z2017-09-06T07:02:50ZCoal and the Coalition: the policy knot that still won’t untie<p>As the Turnbull government <a href="https://theconversation.com/agl-rejects-turnbull-call-to-keep-operating-liddell-coal-fired-power-station-83523">ties itself in yet more knots over the future of coal-fired power</a>, it’s worth reflecting that climate and energy policy have been a bloody business for almost a decade now.</p>
<p>There was a brief period of consensus ushered in by John Howard’s belated realisation in 2006 that a price had to be put on carbon dioxide emissions. But by December 2009 the Nationals, and enough Liberals, had decided that this was a mistake, and have opposed explicit carbon pricing ever since. </p>
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Read more:
<a href="https://theconversation.com/ten-years-of-backflips-over-emissions-trading-leave-climate-policy-in-the-lurch-69641">Ten years of backflips over emissions trading leave climate policy in the lurch</a>
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<p>The resulting policy uncertainty has caused an investment drought which has contributed to higher energy prices. Now, with prices a hot potato, there are <a href="https://theconversation.com/agl-rejects-turnbull-call-to-keep-operating-liddell-coal-fired-power-station-83523">thought bubbles about extending the life of coal-fired power stations</a> and a new effort to <a href="http://www.smh.com.au/nsw/conservatives-conservation-corporates-lobbyist-couple-energises-debate-20170901-gy8oku.html">set up a Conservatives for Conservation group</a>.</p>
<p>But the Liberal Party’s tussles over climate and energy policy (as distinct from <a href="https://theconversation.com/how-climate-denial-gained-a-foothold-%20in-the-liberal-party-and-why-it-still-wont-go-away-56013">denying the science itself</a>) go back even further – some 30 years.</p>
<h2>Early days and ‘early’ action</h2>
<p>It’s hard to believe it now, but the Liberal Party took a stronger emissions target than Labor to the <a href="https://en.wikipedia.org/wiki/Australian_federal_election,_1990">1990 Federal election</a>. Yet green-minded voters were not persuaded, and Labor squeaked home with their support. After that episode the Liberals largely gave on courting green voters, and under new leader John Hewson the party tacked right. Ironically, considering Hewson’s <a href="https://theconversation.com/actions-not-words-should-earn-divestment-advocates-praise-38605">climate advocacy today</a>, back then his <a href="https://en.wikipedia.org/wiki/Fightback!_%28policy%29">Fightback! policy</a> was as silent on climate change as it was on the <a href="https://en.wikipedia.org/wiki/Birthday_cake_interview">price of birthday cakes</a>.</p>
<p>In his excellent 2007 book <a href="https://www.penguin.com.au/books/high-and-dry-9781742284057">High and Dry</a>, former Liberal speech writer Guy Pearse recounts how in the mid-1990s he contacted the Australian Conservation Foundation, offering to to canvass Coalition MPs to “find the most promising areas of common ground” on which to work when the party returned to government. The ACF was “enthusiastic, if a little bemused at the novelty of a Liberal wanting to work with them”. Most Liberal MPs – including future environment minister Robert Hill and future prime minister Tony Abbott – were “strongly supportive” of the idea. But others (Pearse names Eric Abetz and Peter McGauran) were “paranoid that some kind of trap was being laid”. Nothing came of it.</p>
<p>Elected in 1996, Howard continued the staunch hostility to the United Nations climate negotiations that his Labor predecessor Paul Keating had begun. Not all businessmen were happy. Leading up to the crucial Kyoto summit in 1997, the Sydney Morning Herald reported how a “delegation of scientists and financiers” led by Howard’s local party branch manager Robert Vincin and Liberal Party grandee Sir John Carrick lobbied the prime minister to take a more progressive approach. Howard did not bend.</p>
<p>Howard stayed unmoved until 2006 when, facing a perfect storm of rising public climate awareness and spiralling poll numbers, he finally relented. Earlier that year a group of businesses convened by the Australian Conservation Foundation produced a report titled The Early Case for Business Action. “Early” is debatable, given that climate change had already been a political issue since 1988, but more saliently the report tentatively suggested introducing a carbon price. And Howard finally relented.</p>
<h2>The carbon wars</h2>
<p>The ensuing ten years after Kevin Rudd’s defeat of Howard don’t need much recapping here (go <a href="https://theconversation.com/ten-years-of-backflips-over-emissions-trading-leave-climate-policy-in-the-lurch-69641">here</a> for all the details). But one interesting phenomenon that has emerged from the policy wreckage is the emergence of some very unusual coalitions to beg for certainty. </p>
<p>In 2015, in the leadup to the crucial <a href="https://theconversation.com/au/paris-2015">Paris climate talks</a>, an “<a href="http://www.abc.net.au/news/2015-06-%2029/australian-climate-roundtable-business-unions-policy-alliance/6579106">unprecedented alliance</a>” of business, union, environmental, investor and welfare groups called the <a href="http://www.australianclimateroundtable.org.au/">Australian Climate Roundtable</a> sprang briefly into life to make the case for action.</p>
<p>Then, after the seminal <a href="https://theconversation.com/what-caused-south-australias-state-wide-blackout-66268">South Australia blackout last September</a>, a <a href="http://reneweconomy.com.au/heavy-weather-and-the-transition-to-a-21st-century-energy-system-37345/">surprisingly diverse group</a> of industry and consumer bodies – the Australian Energy Council, Australian Industry Group, Business Council of Australia, Clean Energy Council, Energy Users Association, Energy Consumers Australia, Energy Networks Association and Energy Efficiency Council – called on federal and state energy ministers to “work together to craft a cooperative and strategic response to the transformation underway in Australia’s energy system”.</p>
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Read more:
<a href="https://theconversation.com/who-tilts-at-windmills-explaining-hostility-to-renewables-77762">Who tilts at windmills? Explaining hostility to renewables</a>
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<p>It’s in this light that the new <a href="http://www.smh.com.au/nsw/conservatives-conservation-corporates-lobbyist-couple-energises-debate-20170901-gy8oku.html">Conseratives for Conservation</a> lobbying effort should be seen. Its spearhead Kristina Photios surely knows she has no chance of converting the committed denialists, but she can chip away at the waverers currently giving them comfort and power.</p>
<h2>Questions on notice</h2>
<p>Of course, there are always cultural (<a href="https://theconversation.com/who-tilts-at-windmills-explaining-hostility-to-renewables-77762">or even psychological</a>) issues, but you’d think that conservation would be a no-brainer for conservatives (the clue should be in the name).</p>
<p>There are a few questions, of course (with my answers in brackets).</p>
<ul>
<li><p>Where were all the people who are now calling for policy certainty back in 2011 when Tony Abbott was declaring his oath to kill off the <a href="http://www.sbs.com.au/news/article/2017/02/12/carbon-tax-just-brutal-politics-credlin">carbon tax</a>? (They were AWOL.)</p></li>
<li><p>Will any business show any interest in building a new coal-fired power station? (No.)</p></li>
<li><p>Is renewable energy technology now advanced enough for them to make serious money? (We shall see.)</p></li>
<li><p>Can we make up for lost time in our emissions reductions? (No, and we have already ensured more climate misery than there would have been with genuinely early climate action.)</p></li>
<li><p>Will the Liberals further water down the Clean Energy Target proposal? (<a href="http://reneweconomy.com.au/turnbulls-new-%20energy-target-%20drop-clean-%20ignore-climate-27667">Probably</a>.)</p></li>
<li><p>What will Tony Abbott say to UK climate sceptic think tank the Global Warming Policy Foundation when he gives a speech on October 6? (Who knows –
grab your popcorn!).</p></li>
<li><p>What will happen to the Liberals in the medium term? (Who knows, but Michelle Grattan of this parish has <a href="https://theconversation.com/grattan-on-friday-if-defeat-comes-what-then-for-the-%20liberals-succession-83311">some intriguing ideas</a>.)</p></li>
<li><p>Are there reasons to be cheerful? (Renewable energy journalist Ketan Joshi <a href="http://reneweconomy.com.au/bunch-reasons-optimistic-clean-energy-australia-66679/">thinks so</a>.)</p></li>
</ul>
<p>Perhaps the last word on this issue should go to John Hewson, who <a href="http://www.smh.com.au/comment/why-certain-liberals-cant-believe-in-climate-change-20161208-gt6t6n.html">noted last year</a>:</p>
<blockquote>
<p>The “right” love to speak of the debt and deficit problem as a form of “intergenerational theft”, yet they fail to see the climate challenge in the same terms, even though the consequences of failing to address it substantively, and as a matter of urgency, would dwarf that of the debt problem. The “right” is simply “wrong”. It’s political opportunism of the worst sort, and their children and grandchildren will pay the price.</p>
</blockquote><img src="https://counter.theconversation.com/content/83565/count.gif" alt="The Conversation" width="1" height="1" />
The Turnbull government is still tying itself in knots over the future of coal, as literally decades of policy turmoil on climate and energy continue to roll on.Marc Hudson, PhD Candidate, Sustainable Consumption Institute, University of ManchesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/822642017-08-10T04:40:11Z2017-08-10T04:40:11ZNew rules for retailers, but don’t sit there waiting for your electricity bill to go down<p>It sounds like good news. After summoning the heads of Australia’s major electricity retailers to Canberra, Prime Minister Malcolm Turnbull yesterday announced that the government will take “<a href="https://www.pm.gov.au/media/2017-08-09/better-deal-australian-families">decisive action to reduce energy prices for Australian families and businesses</a>”.</p>
<p>But look a little closer. Yes, the retailers have agreed to some small but important measures that will make it easier for customers to find the best electricity deal. But there is no guarantee energy prices will fall. And your electricity bill will only be lower if you, the customer, take action.</p>
<h2>Retailers’ current advantage</h2>
<p>At the moment, retailers typically encourage consumers to sign up by offering a discount on the bill for a fixed period – normally one or two years. After this period expires, customers usually face higher prices for their electricity. </p>
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Read more:
<a href="https://theconversation.com/poor-households-are-locked-out-of-green-energy-unless-governments-help-81987">Poor households are locked out of green energy, unless governments help</a>
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<p>Some lucky customers will be put on an equivalent tariff and their electricity costs will not change much. Others will lose the discount – which can be as much as 30% of the bill. And some unlucky customers will be placed on the retailer’s “standing offer” – usually the most expensive plans in the market. </p>
<p>All the retailers have to do is to send you a letter informing you of the change. Lots of customers find those letters <a href="http://www.afr.com/opinion/columnists/power-prices-complexity-of-supplier-discount-benefit-offers-is-energy-draining-20170809-gxsmoe">too confusing or time-consuming to read</a>, and throw them in the bin. Those who do read and understand it don’t necessarily take action: almost half of Australian households <a href="http://www.adelaidenow.com.au/news/south-australia/switching-power-providers-can-be-an-easy-way-to-save-on-your-electricity-bill/news-story/6aa5db6782e62f766cbaf28e2866ae24">have not changed their electricity retailer in more than five years</a>.</p>
<h2>How the new deal could help you</h2>
<p>Under the deal that Turnbull has brokered with the retailers, every consumer on a lapsing deal will be sent more comprehensive and helpful information that will encourage them to switch. This will include details of cheaper available offers, and information from websites that compare prices across the various plans and retailers. </p>
<p>Second, as the Grattan Institute recommended in our March report, <a href="https://grattan.edu.au/wp-content/uploads/2017/03/Price-shock-is-the-retail-market-failing-consumers.pdf">Price Shock</a>, retailers will now have to be more explicit about what happens if you don’t sign up to a new offer. Specifically, that means detailing exactly how much it is going to cost you. </p>
<p>Third, retailers will have to report to the Australian Energy Regulator how many customers are on lapsed deals. This may seem like a lot of red tape for not a lot of impact. But a lack of information on how many customers are on what type of deal has been a major barrier to understanding what is happening in the electricity market. This increased transparency will encourage retailers to reduce the number of customers they have on lapsed contracts. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-simple-rule-change-can-save-billions-for-power-networks-and-their-customers-38657">A simple rule change can save billions for power networks and their customers</a>
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<p>The new deal includes other welcome measures, mainly designed to help poor households reduce their bills and make sure they do not face increased costs as a result of late payments. (To be fair to the retailers, they already do a lot for customers whom they consider to be “in hardship”.) </p>
<h2>It’s still down to you</h2>
<p>The deal will doubtless improve the retail electricity market. Retailers will take on more responsibility for helping their customers onto a better deal. And those customers who are most at risk from very high prices will get more protection. </p>
<p>But these are only incremental steps and do not ensure that customers will pay less for their electricity. While more simple information will be available, it will still be up to the consumer to act on it. The bottom line remains the same: if you want to pay less for electricity, you need to search for and sign up to a cheaper deal. </p>
<p>Customers should be under no illusions. Energy prices are still going to be high for as far as the eye can see. </p>
<p>Gas prices remain <a href="http://www.abc.net.au/news/2017-03-09/gas-prices-will-rise-and-there-is-not-much-we-can-do-to-stop-it/8340536">way above historic levels</a>. Wholesale electricity prices are <a href="http://www.abc.net.au/news/2017-07-07/power-prices-off-the-chart/8687480">also high</a>. Network costs – the price we pay for the poles and wires – have grown enormously over the past 20 years, and ultimately those costs find their way onto our bills. And the much-needed policy stability on greenhouse emission reductions that can put downward pressure on electricity costs <a href="https://theconversation.com/critical-backbenchers-push-back-on-finkel-clean-energy-target-plan-79372">remains elusive</a>.</p>
<p>Under the new rules, consumers might be able to get a <em>cheaper</em> deal, but this doesn’t mean they will get a <em>cheap</em> deal. </p>
<p>It may be months before we know whether the new measures are enough to encourage consumers to go out and find a cheaper plan or retailer. The danger is that, in a year’s time, too many consumers will still be stuck on expensive electricity deals. </p>
<p>Even if huge numbers of consumers switch, <a href="http://www.afr.com/opinion/columnists/coalfired-nostalgia-wont-bring-back-cheap-power-20170808-gxrme9">there are still fundamental issues in Australia’s electricity market</a>. Prices won’t come down across the board until these are resolved. </p>
<p>This is a welcome move by the government. But it only addresses a fraction of the problems in the electricity market. The big question for the prime minister is, what next?</p><img src="https://counter.theconversation.com/content/82264/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Blowers does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government’s deal with electricity retailers to provide simple information to customers about their discounts and bills is a welcome step, but doesn’t cut to the heart of the power price issue.David Blowers, Energy Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/775022017-08-03T14:43:46Z2017-08-03T14:43:46ZElectricity is a rip-off – we need a truly radical intervention in the energy market<figure><img src="https://images.theconversation.com/files/180748/original/file-20170802-22216-qrixoz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Mark Sayer / shutterstock</span></span></figcaption></figure><p>British Gas has <a href="https://www.theguardian.com/business/2017/aug/01/british-gas-hikes-electricity-prices-centrica-energy-bills">raised electricity prices by 12.5%</a> and its rivals are likely to follow suit. Another round of inflation-busting increases has put calls for an energy price cap <a href="http://www.bbc.co.uk/news/av/business-40787866/alan-whitehead-calls-on-government-to-cap-energy-prices">back on the agenda</a>. </p>
<p>When then Labour leader Ed Miliband first proposed a cap in 2013 it was dismissed by the Tories as coming from a “<a href="https://www.theguardian.com/money/2013/oct/09/ed-miliband-heat-david-cameron-energy-bills">Marxist universe</a>”. Four years later, Theresa May <a href="https://www.theguardian.com/money/2017/may/08/theresa-may-to-promise-price-cap-on-energy-bills-in-tory-manifesto">flirted with the idea</a> ahead of the 2017 election, while Labour included the policy <a href="http://www.huffingtonpost.co.uk/tom-bailey/labour-energy-cap_b_16667000.html">in its manifesto</a>. But whatever it is, it’s not a Marxist idea.</p>
<p>For a start, the price cap won’t work because the market is not only broken, it never worked in the first place. Incredibly high start-up costs mean energy is a <a href="http://www.investopedia.com/terms/n/natural_monopoly.asp">natural monopoly</a>, in which a small number of companies have been protecting significant investments in fossil fuels and nuclear power since the sector was first privatised. </p>
<p>Yes, you can regulate markets, but that requires a regulator with both sufficient teeth and the nerve to use them, and one which does not believe that switching suppliers is the answer to all its problems.</p>
<p>British Gas’s move will add £76 to an average family’s bills each year. In theory, people could simply choose a different supplier, most likely from another of the “Big Six” energy firms who dominate the UK market. But there are lots of reasons why people won’t switch. </p>
<p>First of all, humans are generally poor at <a href="https://www.washingtonpost.com/posteverything/wp/2017/02/13/the-discount-rate-problem-we-somehow-need-to-learn-to-worry-more-about-the-future/?utm_term=.b62a84e18d19">envisioning their future circumstances</a>. Offer someone an amount of money in six months’ time, and then see how quickly they’ll take a fraction of that now instead. </p>
<p>Second, energy supply is something householders fundamentally rely on, and the difference between one supplier and another really isn’t that much extra if you’re happy with the service you have. So for those who can afford it, paying less than a tenner extra a month to avoid the hassle and for a bit of reassurance they won’t be left hanging in the case of a power cut is going to be worth it. And there are <a href="http://www.thisismoney.co.uk/money/bills/article-2487167/Energy-bills-demystified-Make-sure-switching-myths-not-holding-back.html">many more reasons</a> people won’t switch, simply because humans are highly complex and rarely completely rational creatures.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180756/original/file-20170802-21522-11q5caj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Should’ve switched after all.</span>
<span class="attribution"><span class="source">TeodorLazarev / shutterstock</span></span>
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</figure>
<p>The belief behind the cap is that up to <a href="https://assets.publishing.service.gov.uk/media/576c23e4ed915d622c000087/Energy-final-report-summary.pdf">10m “disengaged” Big Six customers</a> could’ve been protected from price hikes if they’d switched. </p>
<p>This may be true, especially in the short term or if they’d switched away from the Big Six, but it conveniently ignores the fact that a common cause of price hikes is governments signalling their intent to intervene in the market. And unlike governments, energy suppliers think in decades, so any threat of a cap will merely be seen as a signal to <a href="http://www.independent.co.uk/news/business/comment/british-gas-lays-down-gauntlet-to-government-with-huge-price-rise-a7870556.html">drive up prices while they can</a>, and then start lobbying like hell to get the cap raised by justifying the need for more of their costs to be passed to the consumer. An effective regulator might withstand this onslaught, but if we had an effective regulator there wouldn’t be a need for the cap in the first place.</p>
<h2>Price collusion can’t be avoided</h2>
<p>The problem with competition in the energy market is it encourages the sort of collusion and price fixing that even classical liberal economist Adam Smith <a href="https://www.adamsmith.org/adam-smith-quotes/">warned about</a> centuries ago. You can’t completely design out the potential for collusion because suppliers and network operators have to work together, otherwise the lights go off. And those who control the greatest assets in the market will exert the greatest influence on it – it doesn’t have to be active collusion, it’s a natural feature of imperfect markets. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180754/original/file-20170802-6912-ljhe0p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Ours for just £150.</span>
<span class="attribution"><span class="source">SamJonah / shutterstock</span></span>
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</figure>
<p>Competition also means companies waste vast amounts of money paying staff to develop competing applications for different locations and technologies, when what is really required is a national strategy that sets out what is needed, and where, over the sorts of multi-decade periods energy suppliers need to justify investment. And then why bother wasting money putting those contracts out to tender? It clearly <a href="https://theconversation.com/the-case-for-re-nationalising-britains-railways-45963">hasn’t worked for the railways</a>.</p>
<h2>Eco-socialism</h2>
<p>A price cap is hardly a “Marxist” solution to all this. A traditional Marxist energy policy would of course start with renationalising the industry, as energy supply is an issue that requires strategic planning at a national level. A Marxist solution would also push highly-skilled workers towards the socially-productive renewables sector, which even government estimates say could <a href="https://www.gov.uk/government/news/renewable-energy-delivering-green-jobs-growth-and-clean-energy">support more than 35,000 jobs across the UK</a>. </p>
<p>Where eco-socialists, including myself, sometimes differ from traditional Marxism is on quite how much state ownership we see is necessary. I see a lot of value in <a href="https://theconversation.com/no-more-big-power-plants-civic-energy-could-provide-half-our-electricity-by-2050-38183">community ownership</a> because it doesn’t just help solve the energy problem, it also helps make people and communities more resilient. Towns and villages can’t become energy cooperatives overnight, however. They need investment, technical expertise, and an awful lot of support to get up and running. Does that sound Marxist? We already do it <a href="http://time.com/4089171/mariana-mazzucato/">with private companies</a>.</p>
<p>The Labour manifesto included support for a <a href="https://theconversation.com/labours-energy-manifesto-isnt-about-nationalisation-so-what-does-it-really-say-77970">publicly owned energy company in each region</a>, and the <a href="http://www.gov.scot/Publications/2017/01/3414">SNP</a> has proposed something similar. It’s not a complete solution, but it’s a big step in the right direction. Maybe it’s another idea Theresa May could consider borrowing?</p><img src="https://counter.theconversation.com/content/77502/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Baker is co-author of ‘A Critical Review of Scottish Renewable and Low Carbon Energy Policy' which will be published by Palgrave Macmillan in September 2017. He has no other interests to disclose.</span></em></p>Price caps don’t cut it – but community ownership can help solve the energy problem and make people more resilient.Keith Baker, Research Associate in Sustainable Urban Environments, Glasgow Caledonian UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/753102017-03-31T02:03:30Z2017-03-31T02:03:30ZComparing Australia’s electricity charges to other countries shows why competition isn’t working<p>Australia’s residential electricity prices are amongst <a href="http://cmeaustralia.com.au/wp-content/uploads/2013/09/160708-FINAL-REPORT-OBS-INTERNATIONAL-PRICE-COMPARISON.pdf">the highest in the world</a> so it’s not hard to see why customers have been up in arms about high prices. </p>
<p>Comparing the charges for electricity retail services in Australia and in other countries, we find Australia’s charges are much higher. The difference is particularly stark when comparing retailer charges in New South Wales with those in Denmark, Germany, Italy and Britain which have the highest electricity prices in Europe. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/163225/original/image-20170330-8553-1lghqsj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Retailer charges in New South Wales compared to average retailer charges in various European countries.</span>
<span class="attribution"><a class="source" href="https://www.ipart.nsw.gov.au/Home/Industries/Energy/Reviews/Electricity/Retail-electricity-market-monitoring-2016?qDh=3">Mountain, B.R., 2017, Submission to IPART Draft Report on the performance and competitiveness of the retail electricity market in New South Wales (NSW)</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Residential electricity prices in Canada and the United States are typically less than half those in Australia and so the situation in Australia is even more damning in that comparison.</p>
<p>The prime minister’s <a href="https://www.pm.gov.au/media/2017-03-27/accc-review-electricity-prices">recent request to the ACCC</a> to review the retail end of the electricity market will put this part of the industry under the spotlight. This request follows the Victorian government’s appointment of a panel to review the Victorian retail energy market.</p>
<p>But rising concern about retail markets is not unique to Australia. In Britain, retail energy markets have received prime ministerial attention for many years. In what the British government described as the most significant review of its industry in the 30 years since privatisation, <a href="https://www.gov.uk/cma-cases/energy-market-investigation">their Competition and Markets Authority concluded</a> that significant changes needed to be made, although some ex-regulators <a href="http://www.telegraph.co.uk/business/2017/03/22/resist-temptation-intervene-energy-prices/">disputed their estimates of the problem</a>.</p>
<p>These reviews indicate changing attitudes in government. The Australian Energy Markets Commission reviews Australia’s retail energy markets every year and <a href="http://www.aemc.gov.au/Markets-Reviews-Advice/2016-Retail-Competition-Review">has consistently concluded</a> that they are working well. Similarly, the Independent Pricing and Administrative Tribunal <a href="https://www.ipart.nsw.gov.au/files/sharedassets/website/shared-files/pricing-reviews-electricity-publications-retail-electricity-market-monitoring-2016/review-of-the-performance-and-competitiveness-of-the-retail-electricity-market-in-nsw-november-2016.pdf">advised the New South Wales government last year</a> that their retail energy market is working well. Evidently the Commonwealth and Victorian government are now seeking a second opinion. </p>
<h2>How Australia’s electricity retail market is set up</h2>
<p>The business of retailing electricity is really finding out what customers want and then offering deals that meet those requirements. More specifically, it’s the business of procuring electricity and network services, acquiring retail customers, selling to those customers and then metering, billing and collecting revenue. </p>
<p>Analysis of regulatory filings shows that around 6.5 million of Australia’s 10 million households and small business customers (those in New South Wales, South Australia, South East Queensland and Victoria) can choose their retailer. These four deregulated markets are dominated by three retailers that also own sufficient generation to supply those customers. </p>
<p>After more than a decade of retail competition, the three big retailers typically still supply at least <a href="http://www.aer.gov.au/publications/state-of-the-energy-market-reports/state-of-the-energy-market-2015">80% of all customers in each regional market</a>. While in some of the regional markets, customers can choose amongst 24 retailers, the new entrant retailers have invariably grown their customer base slowly, if at all, despite powerful incentives to the contrary.</p>
<p>Social services organisations, customer advocates and some independent energy economists have long voiced concerns about retail energy markets. Their concerns centre on the amount that the retailers’ charge, that customers are not happy and that electricity is becoming increasingly unaffordable. </p>
<p>The <a href="https://theconversation.com/why-the-free-market-hasnt-slashed-power-prices-and-what-to-do-about-it-74441">Grattan Institute recently published</a> a blunt critique that went one step further. It suggested that not only are retailers charging a great deal, but that this is explained not by high costs but by excessive profits. </p>
<h2>Competition and consumer choice</h2>
<p>The official reviews in Australia hitherto have taken the line that if customers don’t engage in the market they can’t complain. But electricity is complex and customers need skill and a great deal of effort to reliably evaluate the market. </p>
<p>Since it’s a repeat purchase, active engagement means ongoing effort. Even customers with the necessary skills seem to often conclude they have better things to do with their time, <a href="http://www.aer.gov.au/publications/state-of-the-energy-market-reports/state-of-the-energy-market-2015">as evidenced in switching rates</a>. Pervasive advertising and the <a href="http://www.afr.com/technology/iselect-boosts-profit-34pc-20160828-gr3bqr">profitability of the commercial switching websites</a> provides additional evidence of the challenge new entrant retailers face in acquiring customers.</p>
<p>Why would it be so hard and expensive for new entrant retailers to attract customers if they were not loyal? Therein lies an explanation for Australia’s incumbent retailers’ apparently extraordinary profits. </p>
<p>Andy Vesey, the chief executive of <a href="http://www.afr.com/news/big-power-neglects-best-customers-agl-boss-says-20160823-gqzbgu">Australia’s largest electricity retailer AGL described</a> the retail market as one that penalises customer loyalty. While such candour is admirable, even hardcore market economists question the effectiveness of a market in which retailers profit most from their most loyal customers. </p>
<p>The issue is non-trivial: in its cost of living surveys, <a href="https://www.choice.com.au/money/budget/consumer-pulse/articles/electricity-costs-biggest-concern-july-2016">customer advocate Choice has found</a> that electricity prices are consistently the top cost of living concern for households. Electricity poverty payments to deal with affordability problems, are understood to now be costing state governments several hundreds of millions of dollars each year. </p>
<h2>Next steps</h2>
<p>While it has been a long time coming, the ACCC’s review in addition to the Victorian government’s review, is to be welcomed. </p>
<p>A great deal of effort will need to be made to get to the heart of the matter. Retail energy markets are complex and the amount that a retailer charges a customer for its services is not known for certain – it has to be estimated by subtracting the charges for network services, wholesale production, metering and environmental charges from the customer’s actual bill. </p>
<p>Not only do customers’ bills differ greatly but the components of the bill differ greatly for different customers and so obtaining reasonable estimates of retailers’ charges across the industry requires effort and care. </p>
<p>Fairly evaluating retailers’ offers and how much of their offers are explained by the retailers’ charge, is the place to start. Then finding out what customers are actually paying, and what retailers’ costs and profit margins are, is essential in assessing the nature and extent of market failure. </p>
<p>The reviews will need to cover tricky ground in assessing the economies of scale in retailing, and the value to electricity retailers of also owning electricity generation businesses that supply them. The extent to which high customer acquisition costs provide an advantage to the dominant incumbent retailers who don’t incur those costs unless they are seeking to expand their market share must also feature in the analysis.</p>
<p>There is reason to be hopeful about the ACCC and Victorian government reviews. Done well, they can allow sunlight into this part of the industry. As they say in regulatory circles, sunlight is the best disinfectant.</p><img src="https://counter.theconversation.com/content/75310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Mountain is the Director of Carbon and Energy Markets (CME) and co-founder of MarkIntell. MarkIntell provides energy retail market data and intelligence to regulators, government departments, network service providers, customer groups and social welfare providers. CME is also assisting the Victorian Government in its review of the Victorian retail energy market.
</span></em></p>The charge for retailing electricity in Australia compares poorly other deregulated markets in EuropeBruce Mountain, Director, Carbon and Energy Markets., Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/739512017-03-06T04:42:54Z2017-03-06T04:42:54ZThe case for renationalising Australia’s electricity grid<figure><img src="https://images.theconversation.com/files/159488/original/image-20170306-898-14vf113.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's electricity grid is no longer fit for purpose. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/tgerus/20809345953/">Tatters ❀/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The public debate over the problems of electricity supply displays a curious disconnect. On the one hand, there is virtually universal agreement that the system is in crisis. After 25 years, the promised outcomes of reform – cheaper and more reliable electricity, competitive markets and rational investment decisions – are further away than ever. </p>
<p>On the other hand, proposals to change the situation range from marginal tweaks to politically motivated mischief-making. The preliminary report of the <a href="http://www.environment.gov.au/energy/national-electricity-market-review">Independent Review</a> into the Future Security of the National Electricity Market, released last year, canvasses such options as the introduction of <a href="http://energypost.eu/understanding-uks-capacity-market/">capacity markets</a> for reserve power, which have done little to resolve problems overseas. </p>
<p>Meanwhile, the Turnbull government has used recent failures to score points against renewable energy (hated, for obscure historical-cultural reasons, by its right-wing base) and to promote the absurd idea of <a href="https://theconversation.com/new-coal-plants-wouldnt-be-clean-and-would-cost-billions-in-taxpayer-subsidies-72362">new coal-fired power stations</a>.</p>
<h2>A sorry state</h2>
<p>This debate might make sense if the system had worked well in the past. In reality, however, the National Electricity Market (NEM) never produced lower prices or more reliable power for households. </p>
<p>In the early years of the NEM, reductions in maintenance spending concealed this failure. When new investment became necessary in the early 2000s, the result was a dramatic upsurge in prices. This was primarily because the NEM regulatory system allowed rates of return on capital far higher than those needed to finance the system under public ownership.</p>
<p>Until the 1990s state governments owned and controlled Australia’s electricity grids from power stations to poles and wires. The expansion of interconnections between state networks created the possibility of a truly national network. The Commonwealth and the states could have jointly owned such a network, following the highly successful model of <a href="https://en.wikipedia.org/wiki/Snowy_Hydro">Snowy Hydro</a>. </p>
<p>The creation of the NEM broke this system into pieces. Ownership of generation was separated from transmission, distribution and retail, while maintaining effectively separate state systems. The only national component was at the regulatory level, where two separate national regulators (the Australian Energy Market Operator and the Australian Energy Regulator) overlap with the continuing regulatory operations of state governments.</p>
<p>Most state governments have sold their electricity enterprises wholly or partly. Victoria and South Australia fully privatised their systems by the early 2000s. NSW partially privatised its network business after 2015. Queensland privatised the retail sector but maintained public ownership of the network and some electricity generation.</p>
<p>Contrary to the hopes of the market designers, breaking up these integrated systems has delivered no benefits, while incurring huge costs. <a href="https://theconversation.com/myths-not-facts-muddy-the-electricity-privatisation-debate-38524">Power prices have continued to rise</a>. </p>
<p>These costs have been on display, in dramatic form, in recent system failures in <a href="https://theconversation.com/what-caused-south-australias-state-wide-blackout-66268">South Australia</a>, <a href="http://www.abc.net.au/news/2016-12-02/alcoa-curtails-production-at-portland-smelter/8085840">Victoria</a> and <a href="http://www.abc.net.au/news/2016-10-18/hydro-tasmania-withholds-fee-from-basslink-over-cable-woes/7943734">Tasmania</a>. Everyone has blamed everyone else, and no real change has emerged.</p>
<p>The tragedy is that all this could have been avoided if we had seized the opportunity in the 1990s to build a unified national grid, with a single authority running transmission networks and the interconnectors between them. This would still allow competition in generation, but would abandon the idea of market incentives in the provision of network services.</p>
<p>Electricity networks are considered to be natural monopolies. Unlike other industries, where it makes sense for lots of businesses to compete and drive costs lower, the cost and importance of supplying electricity means it make sense for one business to control the market.</p>
<p>Given this status, this authority should not be a privatised firm or even a corporatised government enterprise. Instead, it should be a statutory authority with a primary mission of delivering energy security at low cost. </p>
<p>This failure was not confined to electricity. Our telecommunications network was also privatised in the 1990s, with the promise that competition would deliver better services. In reality, investment and innovation stagnated. It got to the point where the government was forced to re-enter the market with the <a href="https://theconversation.com/au/topics/nbn-127">National Broadband Network</a> (NBN).</p>
<p>As the NBN example suggests, unscrambling the egg of failed reform will be a complex and messy business. It will have to be done gradually, perhaps beginning with South Australia and Tasmania, the states worst affected by recent disasters. But there is no satisfactory alternative.</p>
<h2>Public appetite, lack of political will</h2>
<p>An obvious question is whether renationalising the electricity network is politically feasible. While the political class on both sides views privatised infrastructure as an unchallengeable necessity, the general public has a very different view. With only a handful of exceptions, <a href="https://www.dropbox.com/s/jrlqywfz4eh9iey/QuigginNEMFailure2014.pdf?dl=0">voters have rejected privatisation</a> whenever they have had a chance to do so. </p>
<p>The question of reversing past privatisations is more difficult, and there is less evidence. However, none of the privatisations of the reform era, even those that took place decades ago, commands majority support in Australia.</p>
<p>The question has been addressed by pollsters in Britain, which provided the model for Australia’s energy reforms. The results show overwhelming public support for <a href="https://yougov.co.uk/news/2013/11/04/nationalise-energy-and-rail-companies-say-public/">renationalisation</a>, even though the electricity industry has been in private ownership for decades. Even a majority of Conservative voters support public ownership.</p>
<p>The issue will have its <a href="http://www.watoday.com.au/wa-news/barnett-government-to-announce-sale-of-western-power-20161130-gt0izl.html">next electoral test in Western Australia</a>, where the Barnett government is proposing to sell its majority interest in its electricity distribution enterprise Western Power. While nothing is ever certain in politics, <a href="http://www.skynews.com.au/news/top-stories/2017/03/05/new-poll-has-labor-leading-in-wa-election.html">current polls</a> suggest the government is headed for defeat.</p><img src="https://counter.theconversation.com/content/73951/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin has worked on the issues of privatisation and electricity reform for many years, and has acted as a consultant to unions, state governments and community groups. He received no funding for the work on which this article was based.</span></em></p>Privatisation has failed to keep Australia’s electricity cheap and reliable. Time to renationalise the grid.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/699802016-12-16T01:37:40Z2016-12-16T01:37:40ZFactCheck: Are Australians paying twice as much for electricity as Americans?<blockquote>
<p>Business here and households here, already we’re paying twice the cost of the US for electricity. <strong>– Craig Kelly MP, chair of the backbench environment and energy committee, <a href="http://www.abc.net.au/radionational/programs/breakfast/kelly/8095266">ABC Radio National Breakfast interview</a>, December 6, 2016.</strong> (Listen from 7.38)</p>
</blockquote>
<p>Environment and energy minister Josh Frydenberg recently <a href="http://www.abc.net.au/news/2016-12-05/government-to-consider-carbon-price-for-power-generators/8091912">left open</a> <a href="https://www.theguardian.com/australia-news/2016/dec/05/direct-action-review-coalition-leaves-carbon-trading-option-open">the possibility</a> of some form of carbon trading in the <a href="http://www.environment.gov.au/climate-change/review-climate-change-policies">electricity sector</a>. He later <a href="https://theconversation.com/turnbull-government-rules-out-an-emissions-intensity-scheme-70039">ruled out that option</a>, saying he wanted to keep electricity prices down.</p>
<p>Following Frydenberg’s initial comments, Liberal MP Craig Kelly said businesses and households in Australia are already paying twice as much as Americans for their electricity.</p>
<p>Is that true?</p>
<h2>Checking the source</h2>
<p>When asked for sources to support his statement, Craig Kelly referred The Conversation to a <a href="http://theconversation.com/full-response-from-craig-kelly-70215">range of sources</a>, saying that:</p>
<blockquote>
<p>… a report titled <a href="http://www.aemc.gov.au/getattachment/02490709-1a3d-445d-89cd-4d405b246860/2015-Residential-Electricity-Price-Trends-report.aspx">2015 Residential Electricity Price Trends</a> lists [on page 212] the average Australian price at 28.72 cents per kilowatt hour for 2014/2015. </p>
<p>In comparison, the <a href="http://www.eia.gov/electricity/state/">US Energy Information Administration</a> lists the average price for residential electricity [in the US] at 10.44 cents for 2014.</p>
<p>Converting 10.44 US cents at A$1/US$0.74 – is the equivalent of 14.11 cents Australia.</p>
<p>So using these sources (in Australian cents) we have 14.11 cents in the USA and 28.72 cents in Australia. Therefore I think to say that “we’re paying twice the cost of the US for electricity” (on average) is pretty much right on the money.</p>
</blockquote>
<p>You can read Craig Kelly’s full response <a href="http://theconversation.com/full-response-from-craig-kelly-70215">here</a>. </p>
<h2>Do Australians pay more?</h2>
<p>It’s definitely true that Australians pay much more for their electricity than US citizens do (and Australian prices are <a href="http://www.aemc.gov.au/Markets-Reviews-Advice/2016-Residential-Electricity-Price-Trends/Final/AEMC-Documents/2016-Electricity-Price-Trends-Report">set to rise even further</a>, according to the Australian Energy Market Commission. </p>
<p>Using OECD data, there’s one measure that says it is twice as much – or at least it was twice as much as recently as 2014. Another measure – a better measure, in my view – shows Australians pay about 50% more than US citizens do for their electricity. </p>
<p>As Craig Kelly notes in his <a href="http://theconversation.com/full-response-from-craig-kelly-70215">full response</a>, there is significant variation in electricity prices across states and territories in Australia and in the United States, so comparing the two is not a simple matter. The Australian Energy Market Commission’s annual <a href="http://www.aemc.gov.au/Markets-Reviews-Advice/2016-Residential-Electricity-Price-Trends/Final/AEMC-Documents/2016-Electricity-Price-Trends-Report">Electricity Price Trends</a> report shows that retail prices in Australia vary from 18.44 c/kWh in the Australian Capital Territory to 29.75 c/KWh in South Australia.</p>
<p>But we can use Organisation for Economic Co-operation and Development (<a href="http://www.oecd.org/">OECD</a>) data on <a href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/wholesale-and-retail-indices-of-energy-prices_data-00445-en">wholesale and retail indices energy prices</a> to check Craig Kelly’s statement. </p>
<p>The wholesale price is the cost of generating the energy that is sent to the grid. Retail prices are what householders are more used to talking about. Retail prices factor in extra costs like transmission and distribution (“poles and wires”), retailer margins and other levies (such as Feed-in Tariff and Renewable Energy Target costs). In other words, it’s what we’re paying on our power bill. </p>
<p>Let’s examine the data. </p>
<h2>A tale of two measures</h2>
<p>The two measures I have used to compare prices in the US and Australia are called “market exchange rates” and “purchasing power parities”. Craig Kelly’s calculations rely on market exchange rates, so we will start with that one. </p>
<p>Market exchange rates simply means converting the price in one country’s currency to that of another country’s currency, as Kelly <a href="http://theconversation.com/full-response-from-craig-kelly-70215">did</a>. This measure of comparison is <a href="http://www.imf.org/external/pubs/ft/fandd/2007/03/basics.htm">more volatile</a> than purchasing power parity exchange rates.</p>
<p>Using market exchange rates, OECD <a href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/energy-prices-in-us-dollars_data-00442-en">data</a> show that Australian electricity prices have, in recent years, been approximately twice as high as electricity prices in the US. Recently, the gap has narrowed. In 2015, using market exchange rates, electricity prices in Australia were about 70.3% higher than in the US. </p>
<p>The Australian Energy Market Commission projects that Australian prices will <a href="http://www.aemc.gov.au/Mark%E2%80%8Bhttp://www.aemc.gov.au/Markets-Reviews-Advice/2016-Residential-Electricity-Price-Trends/Final/AEMC-Documents/2016-Electricity-Price-Trends-Reportets-Reviews-Advice/2016-Residential-Electricity-Price-Trends/Final/AEMC-Documents/2016-Electricity-Price-Trends-Report">rise even further</a> in coming years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149380/original/image-20161209-31391-1fhqr9n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">By converting Australian electricity prices into US dollars (market exchange rates), we can see Australian electricity prices have been an average of twice as high as in the US over the past four years – though the gap narrowed in 2015, down to a 70% difference.</span>
<span class="attribution"><a class="source" href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/wholesale-and-retail-indices-of-energy-prices_data-00445-en">Chart provided by author, using data from the OECD.</a></span>
</figcaption>
</figure>
<p>That broadly supports what Kelly said. But if we use purchasing power parity exchange rates, the data show that Australia’s prices are approximately 50% higher than the US. </p>
<p><a href="https://www.oecd.org/std/prices-ppp/purchasingpowerparitiespppsdata.htm">Purchasing power parity exchange rates</a>, or PPP, factor in inflation and the cost of living in a particular country, and eliminate differences in price levels between countries. This measure allows a cleaner, less volatile comparison between the US and Australia.</p>
<p>The chart below compares the retail prices of electricity in Australia and the United States when adjusted for cost of living differences using purchasing power parity.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149379/original/image-20161209-31352-16tb5w7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Using purchasing power parity exchange rates, OECD data shows household prices of electricity are approximately 50% higher in Australia than in the US.</span>
<span class="attribution"><a class="source" href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/wholesale-and-retail-indices-of-energy-prices_data-00445-en">Chart by author, using data from the OECD.</a></span>
</figcaption>
</figure>
<p>As the above chart of the OECD <a href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/energy-prices-in-us-dollars_data-00442-en">data</a> shows, household prices of electricity are about 50% higher in Australia than in the US when you use purchasing power parity data. </p>
<h2>Why are the prices so different?</h2>
<p>As this chart shows, data from OECD indicate there has been a substantial divergence between Australian and American electricity prices since about 2008.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149381/original/image-20161209-31396-11kpet0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Retail price index: average power prices for householders in the US and Australia. The year 2000 is indexed to 100 (that is, 2000 = 100)</span>
<span class="attribution"><a class="source" href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/wholesale-and-retail-indices-of-energy-prices_data-00445-en">Author provided, using data from the OECD</a></span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149382/original/image-20161209-31352-1jhlhwt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Wholesale price index: the average price the generators charge to the retailers (or distributors) for the power they put into the grid. The year 2000 is indexed to 100 (that is, 2000 = 100)</span>
<span class="attribution"><a class="source" href="http://www.oecd-ilibrary.org/energy/data/end-use-prices/wholesale-and-retail-indices-of-energy-prices_data-00445-en">Author provided, using data from the OECD.</a></span>
</figcaption>
</figure>
<p>As noted in the <a href="http://www.environment.gov.au/energy/publications/energy-market-preliminary-report">preliminary report</a> of the Australian chief scientist Alan Finkel’s <a href="http://www.environment.gov.au/energy/national-electricity-market-review">review</a> of the National Electricity Market, household energy bills in Australia increased 61% on average between 2008 and 2014. </p>
<p>The main reason for this is the cost of maintaining the electricity network – essentially, the poles and wires that deliver the power. Network costs represent between 45% and 55% of a typical electricity bill. This has been the largest contributor to Australia’s increasing prices over the past six years. </p>
<p>Some observers have said that the “<a href="https://theconversation.com/bringing-an-end-to-electricity-network-gold-plating-40830">gold-plating</a>” of the network came about because of a regulatory regime that encouraged <a href="http://www.brisbanetimes.com.au/federal-politics/editorial/power-to-the-people--at-the-lowest-price-20120808-23ugb.html">over-investment</a> in poles and wires. This was been partly driven by an effort to shore up electricity supply and an overestimation of demand.</p>
<p>The <a href="https://theconversation.com/low-oil-prices-are-here-to-stay-as-the-us-shale-oil-revolution-goes-global-48100">US shale gas revolution</a> has also helped keep energy more affordable there than in Australia. </p>
<p>The <a href="http://www.pc.gov.au/projects/inquiry/electricity/report">Productivity Commission</a> reported that, in New South Wales, network costs accounted for 80% of price rises in 2010-11 and 50% of price rises in 2011-12.</p>
<h2>Is it really that simple?</h2>
<p>Not really. Energy economics is far more complicated than can come across in Kelly’s quick quote or this short FactCheck.</p>
<p>While the Australian <em>price</em> is higher, this doesn’t necessarily mean the <em>cost</em> is higher: Australians use much less energy than Americans. This is because as prices increase, energy productivity and energy efficiency also tend to increase. In total, most countries actually spend a similar proportion of GDP on energy costs. </p>
<p>This holds surprisingly consistent across a range of countries. For example, Japan has high energy prices, but also has high energy efficiency and productivity. Consequently, it spends practically the same amount of GDP on energy cost as the US. </p>
<p>So <em>prices</em> may be higher for individuals, but that doesn’t mean the economy-wide costs are higher. All that said, Kelly was talking about the prices for individuals and business, so that’s what this FactCheck is focused on.</p>
<h2>Verdict</h2>
<p>If we compare Australian and American electricity prices using market exchange rates, Craig Kelly’s comment is correct: Australia’s electricity prices were essentially double those of the United States as recently as 2014. In 2015, using market exchange rates, Australian prices were about 70.3% higher. </p>
<p>If we compare the prices using purchasing parity power exchange rates – which I’d argue is the more accurate reflection of the costs of living in each of the countries – Australia’s prices are about 50% higher than the US. </p>
<p>Overall, Craig Kelly’s broader point is correct: Australians pay a much higher price for their electricity than Americans do. <strong>– Dylan McConnell.</strong></p>
<hr>
<h2>Review</h2>
<p>I agree with the author’s position that purchasing power parity comparisons are less volatile and more representative of the relativity based on actual living costs. It is true Australian households pay a much higher electricity price than Americans.</p>
<p>There’s one important point I’d add. There is a baseline cost of having a house or business connected to electrical supply, regardless of how much electricity is used. This is called the fixed supply cost. The more electricity a household or business uses, the more the fixed supply cost is diluted in the overall electricity bill. This brings down the cost per kilowatt-hours (kWh).</p>
<p>American households use about twice as much electricity as Australian households. <a href="http://www.eia.gov/tools/faqs/faq.cfm?id=97&t=3">According to the US EIA</a>, average US household electricity consumption in 2015 was 10,812 kWh. <a href="http://www.energyrating.gov.au/document/report-residential-baseline-study-technical-appendix">2014 data for Australia</a> shows average Australian household electricity consumption was 5,772 kWh (down from 6,819 kWh in 2008. At 25 cents/kWh that is a saving of $307 for Australians for using less electricity over time). </p>
<p>So we would expect Australian household electricity prices to be higher, because an average Australian household uses less electricity and the large fixed supply costs must be spread across a smaller amount of consumption. This raises the cost per kWh. But because Australians use less, their annual bill may be lower. </p>
<p>Further, in recent years, Australian energy retailers have been raising their fixed supply (or baseline) charges. So small users pay much more overall per unit of electricity they use.</p>
<p>Lastly, it’s worth noting that larger businesses often negotiate much better deals on their electricity prices than householders can. <strong>– Alan Pears.</strong></p>
<hr>
<blockquote>
<p>This article was corrected on February 9 to replace the line “In 2015, using market exchange rates, the US prices were about 70.3% higher” with “In 2015, using market exchange rates, Australian prices were about 70.3% higher”. The Conversation apologises for the error, which was introduced in the editing process.</p>
</blockquote>
<hr>
<p><div class="callout"> Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/69980/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dylan McConnell has received funding from the AEMC's Consumer Advocacy Panel and Energy Consumers Australia.
</span></em></p><p class="fine-print"><em><span>Alan Pears has worked for government, business, industry associations public interest groups and at universities on energy efficiency, climate response and sustainability issues since the late 1970s. He is now an honorary Senior Industry Fellow at RMIT University and a consultant, as well as an adviser to a range of industry associations and public interest groups. His investments in managed funds include firms that benefit from growth in clean energy.</span></em></p>Liberal MP Craig Kelly said businesses and households in Australia are paying twice as much as Americans for their electricity. Is that true?Dylan McConnell, Researcher at the Australian German Climate and Energy College, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/672442016-10-21T00:56:04Z2016-10-21T00:56:04ZAre wind farms messing up the electricity market?<figure><img src="https://images.theconversation.com/files/142316/original/image-20161019-20298-kqc61q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wind farms are pushing down the price of electricity in the electricity market. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/chrisjstewart/5064120134/in/photolist-8HuWu7-5KsLer-r9RrSa-wuaJD-bazRPD-brNXG8-sbEo4-9bWJqt-8HuVdb-oTPHy3-4UwFcp-6HCMjF-4HjbTQ-a5B4Yr-aCTADX-pDCSrU-7HZLbC-bRPoZ8-bCUUCo-9vExKW-mnFdwo-bCUUBm-pDxzVX-4vwTMU-zRWdv7-7u8jUu-gZMhjs-DwLq4Z-dgtTPU-C3AvtV-DCHeLE-7SySc1-a5B7SX-dZeDXh-AJhmfv-fS7ZSH-mVsZxi-av4vtw-2s56Xw-9Gxe6U-6fRSYX-92YimZ-5hj2K6-grxKQX-5Tbz6k-9gBbLj-5GLys3-4UwFy2-6TZnGs-5s9LCX/">Chris J Stewart, Starfish Wind Farm, Cape Jervis, South Australia.</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>While Australia’s energy market operator continues its investigation into <a href="http://www.aemo.com.au/Media-Centre/Update-to-report-into-SA-state-wide-power-outage">South Australia’s recent state-wide blackout</a>, there are important questions being asked. </p>
<p>For instance, was extreme weather the only cause? Has South Australia <a href="https://theconversation.com/what-caused-south-australias-state-wide-blackout-66268">replaced fossil fuels with renewables too quickly</a>?</p>
<p>And is the Australia’s Renewable Energy Target (RET) <a href="http://www.abc.net.au/news/2016-10-06/claims-wind-farms-were-to-blame-for-sa-blackout/7907360">too ambitious</a> all together?</p>
<p>It is impossible to find answers without understanding how the energy market works, and how replacing one source of energy with another actually happens. </p>
<h2>How does the market work?</h2>
<p>Most Australians (barring the Northern Territory and Western Australia) get their electricity through the <a href="http://www.aemc.gov.au/Australias-Energy-Market/Markets-Overview/National-electricity-market">National Electricity Market</a>. </p>
<p>Suppose all the energy users, at a particular day and time, switch on lights, computers, industrial machinery, washing machines, vacuum cleaners, traffic control equipment and more. Added together, they determine how much energy is needed or demanded at that very point in time. </p>
<p>On the other side of the poles and wires, different independent electricity generators – thermal, hydro, wind, solar – are offering energy to the market, each at a price enabling them to recover costs and make a reasonable profit. This is called bidding. </p>
<p>Contemporary electronic technology allows for the wholesale market to take electricity and bids every five minutes, and allocate amounts accepted from the successful bidders. And who are those successful bidders?</p>
<p>All current bids are ranked by unit price. Allocation starts from the lowest-price bidder, then the second lowest one, and continues on until the current demand is met. The last accepted bidder’s price becomes the spot market price, and allows other successful bidders to make more or less profit.</p>
<h2>How do renewables affect the market?</h2>
<p>The main incentive policy for wind farms in Australia is the <a href="http://www.cleanenergyregulator.gov.au/RET">Renewable Energy Target (RET)</a>, which legislates that 33 gigawatt hours of electricity must come from renewable sources by 2020. As part of the RET, large-scale renewable energy generators (solar and wind farms) receive credits (certificates) for electricity they generate, which are then purchased by retailers to meet the target. </p>
<p>This market is separate to the National Electricity Market (NEM) and acts as a second income source for renewable energy generators.</p>
<p>With this in mind, we have modelled what happens when wind energy is phased into the market based on five minute electricity market data for several years.</p>
<p>The running (marginal) cost of wind generators is zero (because wind is free), unlike traditional thermal technology (which has to pay for coal and gas). Subsequently, wind generators recover their fixed costs and obtain profit in the difference between marginal cost and market price based on “more expensive” bids. </p>
<p>In the long run, wind generation decreases the market price through the bidding process. So with an increase in the energy volume generated by wind, the traditional sources are pushed out from the market. The chart below illustrates this process for South Australia. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/142317/original/image-20161019-20308-xt2ui.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As more wind enters the market, other players are pushed out.</span>
<span class="attribution"><span class="source">Gennadi Kazakevitch</span></span>
</figcaption>
</figure>
<p>Because their fixed costs can be recovered through the RET, wind generators can bid at near zero prices and completely eliminate traditional competitors. Therefore, wind generation can only naturally exist in the market if there are other, more expensive forms of generation to set the price. Otherwise wind farms could not recover their costs without the RET. </p>
<p>This means that there is an optimal proportion of wind energy in the market, where more expensive thermal generators set the market price. </p>
<p>If there is an optimum amount of wind energy in the market, this has important consequences for the RET. The target artificially increases the proportion of wind energy that can be sustained in the grid. While this may be the goal of the RET, without the incentive, wind capacity would eventually fall back to the market optimum. </p>
<p>In practice, this would occur as wind farms reach their <a href="http://www.cleanenergycouncil.org.au">natural life of about 20 years</a> and aren’t replaced. So the RET won’t maintain or increase wind energy in the market in the long term, unless the incentives continue indefinitely.</p>
<p>The current RET is legislated to 2030, with a target set for 2020. To encourage wind energy in the long term, it would be required, then, to support the RET by an ongoing financial inducement without a closing date. </p>
<p>Without any financial inducement, wind farm developers would not increase capacity beyond the optimal point, and some thermal generation will continue to exist. Thermal generation can be completely excluded only if all the fixed costs of wind energy can be recovered through the RET. This is impractical and beyond the intentions of the policy. </p>
<p>So as it stands, our modelling suggests the RET is not a good way to increase the amount of wind generation in the electricity network. However our conclusions are different for other renewable energy sources such as hydro, which also have near zero marginal costs but have much longer lifetimes.</p>
<p>Therefore, where and if possible, we need to use a mix of technology, rather than overemphasising wind generation technology. </p>
<p><em>This article was co-authored by Henry McMillan, masters candidate at Monash University focusing on regulatory and energy economics.</em></p><img src="https://counter.theconversation.com/content/67244/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gennadi Kazakevitch does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Australia’s recent blackout raised questions about the role of wind energy in Australia’s electricity network.Gennadi Kazakevitch, Deputy Head, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/666842016-10-08T06:53:55Z2016-10-08T06:53:55ZClimate change must be part of Australia’s electricity system review<figure><img src="https://images.theconversation.com/files/140959/original/image-20161007-21439-1pcsc8o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australa's electricity network is going through a period of major transformation. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/indigoskies/9618748827/">Indigo Skies Photography/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>On Friday, Australia’s federal and state energy ministers met for an extraordinary meeting following the complete loss of power in South Australia on September 28. The <a href="http://www.scer.gov.au/">COAG Energy Council</a> announced a <a href="http://www.scer.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Council%20Communique%20-%207%20October%202016.pdf">wide-ranging independent review</a> to provide advice to governments on a coordinated, national reform blueprint. The review will be chaired by Australia’s <a href="http://www.chiefscientist.gov.au/">Chief Scientist</a>, Dr Alan Finkel.</p>
<p>Dr Finkel has been challenged with steering Australia’s energy system around some big potholes while keeping his eye on the horizon. And all in about six months.</p>
<p>The review will consider work already being done around maintaining the security, reliability and affordability of electricity as delivered by the <a href="http://www.aemc.gov.au/Australias-Energy-Market/Markets-Overview/National-electricity-market">National Electricity market (NEM)</a> (which covers all states except Western Australia and the Northern Territory). </p>
<p>The state-wide blackout became a <a href="https://www.theguardian.com/australia-news/2016/oct/07/once-the-storm-settles-the-real-picture-emerges-of-governments-energy-goals">political opportunity</a> for Australia’s politicians. Yet it is certainly too early and hopefully wrong to say if this is just a reactive response. </p>
<h2>What’s in the review?</h2>
<p>The review has three timeframes. The immediate priority will be to systematically assemble existing processes and work programs initiated over the last year by the energy council and identify any major gaps in the context of energy security and reliability in the NEM. Some of these processes, such as a review of <a href="http://www.scer.gov.au/current-projects/governance">market governance arrangements</a>, have been completed but not fully actioned.</p>
<p>Others have only recently been announced. These include analysis of the impact of federal, state and territory carbon policies on energy markets and the reviews of the South Australian blackout. They will not all be complete by the December council meeting.</p>
<p>The review is expected to deliver a blueprint via a final report early in the new year. It is likely to include specific actions, both physical and financial, that respond to recent events such as <a href="http://grattan.edu.au/wp-content/uploads/2016/09/877-Keeping-the-lights-on.pdf">South Australia’s price shock in July</a> and <a href="https://theconversation.com/what-caused-south-australias-state-wide-blackout-66268">blackout in September</a>. These two issues should not be conflated. To do so, would risk solving neither.</p>
<p>The council has highlighted <a href="https://prod-energycouncil.industry.slicedtech.com.au/sites/prod.energycouncil/files/publications/documents/Independent%20Review%20ToR-%207%20October%202016.pdf">the significant transition underway in the Australian electricity market</a>. The drivers include “rapid technological change, the increasing penetration of renewable energy, a more decentralised generation system, withdrawal of traditional baseload generation and changing consumer demand”. The blueprint will address all of these issues in a comprehensive and coordinated way not previously a feature of the council’s output.</p>
<p>There is much uncertainty to how some of these drivers will evolve over the next two decades. To be really effective, the blueprint will need to consider a range of plausible long-term scenarios but focus on near-term options that can be adapted to evolving developments on all fronts. </p>
<p>The Chief Scientist will, amongst other things, bring to the review his knowledge of current and likely future developments in energy technologies. This will be important in considering policy, legislative and rule changes that favour the adoption of technologies that could address both low-emissions and reliability but are otherwise technology-neutral.</p>
<p>The federal energy minister, Josh Frydenberg, and his state and territory counterparts are to be applauded for the speed and cohesiveness they have shown in instigating the review. This follows a similar approach that permeated their <a href="https://theconversation.com/australias-new-focus-on-gas-could-be-playing-with-fire-64240">August meeting</a> where considerable progress was made on key energy market reforms across several fronts.</p>
<h2>Get climate policy right</h2>
<p>There are two critical areas of concern. The fundamental driver behind the issues listed in the review’s terms of reference is climate change and the policy response to it. </p>
<p>The federal government is committed to a <a href="https://www.environment.gov.au/climate-change/publications/factsheet-australias-2030-climate-change-target">2017 review of its domestic climate change policies</a> against its 2030 emissions reduction target.</p>
<p>State and territory governments have announced or implemented their own climate change and <a href="https://theconversation.com/victorias-renewables-target-joins-an-impressive-shift-towards-clean-energy-61084">renewable energy</a> policies. It is not surprising that states such as Victoria remain committed to these policies even though they are open to criticism for being uncoordinated at a national level, or failing to consider implications for system reliability and security.</p>
<p>Primary responsibility must rest with the federal government to deliver a credible scalable climate policy. Much can then flow from there, including agreement from states and territories to truly act in the spirit of national coordination to which they committed.</p>
<p>Greenhouse gas reduction is best achieved by <a href="http://grattan.edu.au/wp-content/uploads/2016/04/870-Climate-Phoenix.pdf">putting a price on emissions through one of several options</a> that have been canvassed in 2016 and in a form that acts with the electricity market and not outside it. The review’s terms of reference are silent on this issue, and yet recognise that the nature and structure of climate change policy have critical implications for the NEM.</p>
<p>Wind and solar power are intermittent. Their integration into the generation mix while maintaining reliability is best achieved by valuing flexibility either through the NEM or via complementary policies or regulations. The review is oddly silent on this issue. It is to be hoped that this is unintended and will be picked up in the course of the review.</p>
<p>There were high expectations for Friday’s council meeting. A state-wide blackout does that. These expectations have been delegated to the review which the council must support and drive to outcomes. </p>
<p>Minister Frydenberg has strongly and repeatedly emphasised that <a href="http://www.news.com.au/national/energy-minister-josh-frydenberg-says-states-must-learn-the-lessons-from-the-chaotic-sa-power-outage/news-story/c7cef3cf6358f8fce579f899d96c623d">the government will not compromise energy reliability</a> and security in the transition to a low emissions future. Failure on this front will not be forgiven.</p><img src="https://counter.theconversation.com/content/66684/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tony Wood has shares in a number of energy and resources companies via his superannuation fund</span></em></p>Australia’s electricity market will be reviewed over the next six months, following South Australia’s state-wide blackout.Tony Wood, Program Director, Energy, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/666312016-10-06T19:10:21Z2016-10-06T19:10:21ZWe don’t know why South Australia’s wind farms stopped working, so hold off on the blame game<p>Australia’s energy ministers are meeting today in an emergency gathering following South Australia’s recent state-wide blackout. </p>
<p>The blackout, following wild weather across the state, has seen an extraordinary response from <a href="http://www.theaustralian.com.au/business/malcolm-turnbull-to-put-the-wind-up-states-over-power-blackouts/news-story/b3616bf0d68a5d4f60cbc6661e44fc26">politicians</a> and <a href="http://www.theaustralian.com.au/opinion/editorials/green-zealots-renewable-targets-risk-energy-security/news-story/2b9cf7b96c01f7a5fa43792ad20deee2">media</a>, implicating the state’s wind energy in the fault. </p>
<p>On Wednesday the Australian Energy Market Operator (AEMO) published a <a href="https://www.aemo.com.au/Media-Centre/Media-Statement-South-Australia-Interim-Report">preliminary overview</a> of the blackout (known in the jargon as a “black system” event). This document reported first observations based on data available to up to Monday this week. </p>
<p>Importantly, the report concluded that the “root cause is subject to further analysis being conducted”, as further information becomes available. As the chief operating operator Mike Cleary <a href="http://www.theaustralian.com.au/business/energy-operator-loss-of-wind-power-triggered-sa-outage/news-story/cdd1d336bc1de47a7271137828c06660">made clear</a>, “at this stage we cannot apportion blame”.</p>
<h2>What does the report say?</h2>
<p>The report provides a detailed chronology of the events that occurred in South Australia and led up to the state-wide blackout, and the restart process. This includes details on the three transmission lines lost and changes in generation output. </p>
<p>Here’s a shortened summary of the timeline:</p>
<ol>
<li><p>Fault on first transmission line: one high-voltage line out of service </p></li>
<li><p>Fault on second transmission line: two high-voltage lines out of service</p></li>
<li><p>Loss of 123 megawatts of wind power</p></li>
<li><p>Fault on third transmission line: three high-voltage lines out of service</p></li>
<li><p>Loss of a further 192 megawatts of wind power</p></li>
<li><p>Flow on the Heywood interconnector (which links South Australia with Victoria) increases above limit</p></li>
<li><p>Heywood interconnector trips off</p></li>
<li><p>Torrens Island and other power stations trip off</p></li>
<li><p>Supply lost to South Australia.</p></li>
</ol>
<p>The time between the second transmission being out of service and the loss of supply to South Australia was approximately eight seconds. A total of 315 megawatts of wind generation disconnected during the this period.</p>
<h2>Frequency and Voltage</h2>
<p>A unique characteristic of electricity systems is that supply and demand must match instantaneously in real time. If they do not match, the frequency and voltage of the system can deviate from an ideal value. In Australia, AEMO maintains the frequency at 50 hertz (Hz). </p>
<p>Deviations from this value (from sudden changes in supply or demand) can substantially damage equipment. Automatic protection equipment activates to “trip” generators offline. </p>
<p>As the report noted:</p>
<blockquote>
<p>generating units are unable to operate (and are not required to do so) where frequency is below 47 Hz. With the frequency below 47 Hz, generating units subsequently tripped off line. </p>
</blockquote>
<p>This is likely to be how Torrens Island gas plants and other plants were disconnected from the system, after South Australia was disconnected from Victoria.</p>
<h2>Is this why the wind stopped generation?</h2>
<p>The report also suggests that:</p>
<blockquote>
<p>The magnitude of transmission faults due to weather in a short period of time, resulting in significant voltage dips and loss of load, resulted in system instability. This caused some generators to reduce output, increasing flow on remaining power system equipment, causing power system protection to operate to remove risk of damage. </p>
</blockquote>
<p>However, the report makes it very clear that “insufficient analysis has presently been undertaken to determine if everything operated as designed during the event.” Crucially, additional analysis is required to determine the reasons for the reduction in generation and observed voltage levels before any conclusions can be drawn.</p>
<p>At this stage, it is unclear if the wind farms tripped off because of voltage dips or other reasons. Other reasons could be related to the extreme storm events, such as a lightning strike. The answer at this stage is we don’t know.</p>
<p>What we do know is that the loss of supply from the transmission line faults and the decrease in wind output caused the flow on the Heywood interconnector to increase to approximately 850–900 megawatt – above the interconnector’s design limits. The system protection kicked in (in less than a second) to trip the Heywood interconnector, and the rest followed.</p>
<h2>Is this scenario unique to wind?</h2>
<p>A very similar situation in South Australia in 2005 saw a massive blackout when a similar fault caused a dramatic decrease in brown coal-fired in Port Augusta, with the Northern power station reducing output to 0 megawatt. </p>
<p>This created a similar surge in interconnector flows from Victoria, which ultimately resulted in disconnection from Victoria. Several other generators in South Australia also tripped off as result of this incident, and wide-spread blackout occurred. </p>
<p>The recent storm was was particularly extreme, with <a href="http://www.smh.com.au/national/south-australia-blackout-once-in-50year-storm-lashes-state-20160928-grqpks.html">reports</a> of 130,000 lightning strikes hitting the state in a matter of hours. The reality is that all parts of the power system are vulnerable to such extreme weather and lightning storms. </p>
<p>Indeed as noted in the AEMO report, one of gas turbines contracted to provide system restart service in South Australia was also affected by the recent storm. </p>
<h2>What can the energy ministers do?</h2>
<p>The federal energy minister Josh Frydenberg called an urgent meeting of <a href="http://www.scer.gov.au/">Australia’s energy ministers</a> in light of the recent blackout. </p>
<p>The role of interconnectors to provide better links across the National Electricity Market as well as battery storage have been <a href="http://www.afr.com/news/politics/states-under-pressure-to-boost-energy-infrastructure-20161005-grvavd#ixzz4MH0OkTaC">reported</a> to be on the agenda of Friday’s meeting. </p>
<p>Increasing transmission was also the focus of a recent energy council meeting, where energy ministers agreed to review of the <a href="http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Council%20Communique%20-%2019%20August%202016%20-%20FINAL.pdf">regulatory test for investment for new transmission assets</a>. </p>
<p>A formal review into the National Electricity Market will also be up for discussion. This may include a review of the National Electricity Objective, which forms the basis of energy policy decisions, and does not include environmental considerations, <a href="https://theconversation.com/the-electricity-markets-not-doing-a-great-job-heres-how-to-improve-it-63260">such as the need to reduce emissions</a>. </p>
<p>Given the increase in <a href="https://theconversation.com/what-caused-south-australias-state-wide-blackout-66268">moisture and heat</a> expected from climate change, one way that the state and federal governments can help ensure there is not a repeat of blackout is by agreeing to significant emission reductions.</p>
<p><em>Update: this article was updated October 7 to clarify that it is not known that lightning caused the fault leading to South Australia’s 2005 blackout.</em></p><img src="https://counter.theconversation.com/content/66631/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dylan McConnell has received funding from the AEMC's Consumer Advocacy Panel and Energy Consumers Australia.</span></em></p>South Australia’s wind energy has been caught in a storm since last week’s blackout, but what do we really know?Dylan McConnell, Research Fellow, Melbourne Energy Institute, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/516612016-07-12T05:51:55Z2016-07-12T05:51:55ZA snapshot of the challenges facing the new Turnbull government<p><em>With a federal election outcome, it’s time to take stock of how Australia is doing, where it’s going, and what governments can do about it. In partnership with the Grattan Institute, we explore the pressing policy challenges facing Australia in terms of economic growth, budgets, cities, transport, energy, health, school education, and higher education.</em></p>
<p><em>The infographic below sets out these challenges at a glance.</em></p>
<hr>
<p><iframe id="tc-infographic-209" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/209/bd9332da5bfa19f626eb93bc5d8b5a8b05f7e514/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/51661/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>In the late 1990s, Andrew Norton was a policy adviser to a Liberal education minister. He was also appointed by a Liberal minister in 2013 as co-reviewer of the demand driven funding system for higher education.</span></em></p><p class="fine-print"><em><span>Through his superannuation fund, Tony Wood owns shares in several energy and resources companies that would have an interest in the topic covered by this article.</span></em></p><p class="fine-print"><em><span>Jim Minifie, John Daley, Marion Terrill, Peter Goss, and Stephen Duckett do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What are the key policy challenges facing the new Turnbull government in terms of economic growth and budgets, cities, transport, energy, school education, higher education and health?John Daley, Chief Executive Officer, Grattan InstituteAndrew Norton, Program Director, Higher Education, Grattan InstituteJim Minifie, Productivity Growth Program Director, Grattan InstituteMarion Terrill, Transport Program Director, Grattan InstitutePeter Goss, School Education Program Director, Grattan InstituteStephen Duckett, Director, Health Program, Grattan InstituteTony Wood, Program Director, Energy, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/479472015-09-22T11:39:42Z2015-09-22T11:39:42ZIf the Hinkley C nuclear deal looks astonishing, that’s because it is<figure><img src="https://images.theconversation.com/files/95673/original/image-20150922-16682-s7t8ss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=nuclear%20power&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=136242767">Gui Jun Peng</a></span></figcaption></figure><p>I was rather perplexed to wake up to hear the <a href="http://www.telegraph.co.uk/news/earth/energy/11878566/Hinkley-Point-new-nuclear-plant-edges-closer-with-2-billion-Government-guarantee.html">news that</a> George Osborne was pledging £2bn in loan guarantees for the ill-fated Hinkley C nuclear power project in England. Hadn’t he <a href="http://www.theguardian.com/environment/2013/jun/27/nuclear-power-10billion-financial-guarantee">already</a> pledged £10bn in loan guarantees more than two years ago? </p>
<p>Hinkley C, all 3.2 gigawatts of it, was <a href="http://www.carbonbrief.org/blog/2014/11/how-the-uks-nuclear-new-build-plans-keep-getting-delayed/">according to</a> earlier proud boasts supposed to be up and running in 2018, but will now <a href="http://www.bbc.co.uk/news/business-34149392">be lucky to be started by 2025</a>. As recently as 2008, the total cost of such a plant <a href="http://www.carbonbrief.org/blog/2014/11/how-the-uks-nuclear-new-build-plans-keep-getting-delayed/">was estimated</a> by the UK department of energy at £5.6bn. Now it could easily be five times higher. </p>
<p>Has Osborne decided to cut the support he is offering French group EDF and the Chinese state nuclear companies to build the plant from £10bn to £2bn? No, it seems he is offering an “initial” £2bn. Has George made his <a href="http://www.bbc.co.uk/news/business-34311675">current trip</a> to Beijing with £2bn in £50 notes in a secure luggage arrangement? No, of course not. So what does this mean? Well, absolutely nothing apart from, no doubt, some PR consultant coming up with a bright idea to distract attention from the sheer awfulness that is the British nuclear programme.</p>
<p>Although some may feel that how this (awfulness) is all an aberration and that somewhere else nuclear power is being done much better, in my studies I can’t find much evidence of this, certainly not in the US and Europe. Both of the two “generation III” reactors being developed, <a href="https://www.euronuclear.org/info/encyclopedia/e/epr.htm">EPR</a> (Finland, France, China) and <a href="http://www.westinghousenuclear.com/New-Plants/AP1000-PWR">AP1000</a> (China, US, Bulgaria), are taking ages to build and costing mountains more money than originally anticipated. Hitachi’s ABWR, another reactor tipped to be built in the UK, has a <a href="http://world-nuclear.org/NuclearDatabase/reactordetails.aspx?id=27570&rid=F98DE7C7-0F7F-467C-B98C-8E633BBD50D5">very chequered reliability record</a> that would make it a no-go zone for investors.</p>
<p>Even in China the <a href="http://thediplomat.com/2015/04/chinas-coming-nuclear-power-boom/">much-vaunted</a> nuclear construction programme is, as much as you hear about these things from Chinese authorities, <a href="http://www.globaltimes.cn/content/927146.shtml">a lot less vaunted</a> than one would think. And we need to understand that this is before we even know whether any of these upcoming generation III reactors work well or not. </p>
<h2>Nuclear numbers</h2>
<p>Really this is not much of a change compared with what went on in previous decades. The marvellous hype from the nuclear people suckered an eager-to-be-suckered UK body politic that there really is a magical nuclear answer to our problems. So why do we find this out now? </p>
<p>The answer is actually surprisingly simple. Up until now, nuclear power has not been treated like other energy sources. In the UK and many other countries it has always been given a blank cheque to cover its construction costs and its electricity has never been costed according to commercial risk criteria. Now, in a bowdlerised way, it has been costed according to some commercial criteria under the UK’s <a href="https://www.ofgem.gov.uk/electricity/wholesale-market/market-efficiency-review-and-reform/electricity-market-reform-emr">Electricity Market Reform</a> system for incentivising low-carbon power generation. </p>
<p>This produced what many found to be a surprising answer. Two years ago Hinkley C ended up <a href="https://www.gov.uk/government/news/initial-agreement-reached-on-new-nuclear-power-station-at-hinkley">being offered</a> (still not signed) £92.50 per MWh (now £94 per MWh, rising with inflation) over 35 years with a £10bn loan guarantee – <a href="http://ec.europa.eu/competition/state_aid/cases/251157/251157_1615983_2292_4.pdf">said to</a> rise to £16bn with interest payments. This means the contract price is more than double the wholesale power price and the consumer will have to pay the difference for 35 years after generation starts. </p>
<p>It is a higher subsidy than that offered to onshore wind farms (which also get no loan guarantees and get 15-year contracts). Earlier in the year, the government awarded <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407059/Contracts_for_Difference_-_Auction_Results_-_Official_Statistics.pdf">premium price contracts</a> to onshore wind farms for around £80 per MWh. And if nuclear had the same contract lengths as other power plants: 15 years – and certainly no more than 20 years – its contract price would rise to well over £100 per MWh. That would make it look more expensive than offshore wind. Well, we couldn’t have that, could we? And if the £16bn was not guaranteed, it would never be built. The risk of cost overruns would be considered far too great. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/95677/original/image-20150922-16666-1npo57t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Off the agenda: onshore wind subsidies.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=g_f2fDHQkzwXwKKIWG4Unw&searchterm=wind%20farm%20uk&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=214633147">Alastair Wallace</a></span>
</figcaption>
</figure>
<p>Meanwhile the <a href="http://www.world-nuclear.org/info/Country-Profiles/Countries-T-Z/United-Kingdom/">other nuclear power plant proposals</a> for the UK currently held by EDF, Hitachi and Toshiba seemed to have melted into the background. Even with the government’s very generous offer to get new nuclear power projects off the ground, will these players take the risk of investing in these new projects? Only the Chinese seem to be at the table, having <a href="http://www.theguardian.com/environment/2015/sep/21/george-osborne-chinese-nuclear-power-station-bradwell-essex">apparently been</a> promised they can build their own reactor at Bradwell in Essex as part of the Hinkley C deal. </p>
<p>Of course many would point out that we could have lots of other things, including wind farms and solar farms generating loads of clean energy by the time (if ever) that our nuclear power programme gets going. But the government has made sure this is not going to happen, by <a href="http://www.bbc.co.uk/news/science-environment-34319458">cutting the incentives</a>. Even the CBI, the voice of business, <a href="http://www.bbc.co.uk/news/science-environment-34319458">is raising concerns</a> about this. Instead the government seems to be pinning its hopes on a nuclear programme happening at the end of a Chinese rainbow. Stand by for the crock of gold at Bradwell to be just as eye-watering.</p><img src="https://counter.theconversation.com/content/47947/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David received funding from the ESRC for the project 'Delivering Renewable Energy Under Devolution' (2011-13).</span></em></p>The UK’s first new nuclear power station since the 1990s is coming at the expense of renewable energy and leaving us unnervingly in hock to the Chinese.David Toke, Reader in Energy Policy, University of AberdeenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/408302015-04-29T02:30:33Z2015-04-29T02:30:33ZBringing an end to electricity network gold-plating<figure><img src="https://images.theconversation.com/files/79568/original/image-20150428-30851-1ebvpc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bringing down over-investment in electricity networks is a complicated area for regulators. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/indigoskies/6901753722">Flickr/Indigo Skies Photography</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/Electricity_and_AER">interim Senate report</a> into the performance and management of electricity network companies has rightly identified over-investment as a key reason for the increase in electricity prices. </p>
<p>But in choosing to focus on the most difficult and complicated area for regulators and governments to grapple with - what the efficient level of investment for these businesses is - the inquiry has struggled to come up with solutions. </p>
<p>One of the key recommendations is for yet another independent review to look at ways to exclude future imprudent capital expenditure and surplus network assets from a network service provider’s asset base. It also encourages state governments looking to privatise their networks to examine those networks to see if they are overvalued and to write them down if they are.</p>
<p>Good luck with that last recommendation.</p>
<h2>Demands falls - yet prices go up</h2>
<p>The proposal to look at ways to write down future imprudent assets is not a surprise. The risk in pushing a regulatory system too far is that it usually tends to get a political reaction. That is what is happening in the electricity sector.</p>
<p>Investment has grown well beyond what is required, especially in the government-owned companies in NSW and Queensland. Part of that may be due to older networks requiring upgrades and to the growth in peak demand from air conditioner use. </p>
<p>However, the inquiry found even after accounting for these factors there has been significant over-investment in these networks, leading to higher costs for consumers. This has occurred as electricity demand has fallen in recent years, due to a combination of the higher prices and the increased usage of solar panels. Neither the industry nor the market operator (<a href="http://www.aemo.com.au/">AEMO</a>) appear to have anticipated this.</p>
<h2>What’s behind it?</h2>
<p>A combination of the regulatory framework and government ownership has led to this over-investment. The evidence given to the inquiry shows that the problem is greater in NSW and Queensland. This is not news to regulators and analysts who have long recognised the problem.</p>
<p>Privatisation is part of the solution, but in itself that won’t be enough. Regulatory failings must also be addressed.</p>
<p>Proposals to retrospectively write down the assets are always extremely contentious. Such action gives rise to issues of sovereign risk which in the end results in higher cost for consumers. This is why when private investment is involved the rules need to be clear and give certainty to investors. If there is uncertainty this gets priced and consumers pay.</p>
<p>The question here is not due to uncertainty in the rules. There is no provision for stranding assets. The consumer bears the risk if the assets are no longer necessary or no longer fully necessary.</p>
<p>This is not consistent with what happens in a competitive market where the value of assets change constantly depending on the performance of the business. Policy makers have deliberately gone down the path of constraining regulator discretion and avoiding regulatory uncertainty. Changing the rules for existing investment would be problematic. That is why the inquiry’s recommendation focuses on future imprudent capital expenditure.</p>
<h2>The risk-compensation equation</h2>
<p>But if the companies don’t bear this risk, they should not be compensated as if they do. It’s on this side of the equation that the regulator can partly deal with the existing problem over time.</p>
<p>The recommendation to look at options to exclude imprudent capital expenditure from future capital programs, is back to the future. A higher threshold regulatory test for new transmission investment was applied by the past regulator, the Australian Competition Consumer Commission. This was effectively a cost benefit analysis. </p>
<p>The test was watered down by policy makers concerned that the regulatory system could chill investment - even though capital expenditure programs were growing strongly. In fairness, the test was extremely difficult to understand and to implement.</p>
<p>Currently the Australian Energy Regulator (AER) does have guidelines for assessing new investment, but clearly these are not considered adequate by the inquiry.</p>
<h2>Regulators will always know less</h2>
<p>While setting out many of the complexities and limitations of the current regulatory framework, the interim Senate report does not quite come to grips with the fundamental cause of the problem. Indeed a couple of its recommendations risk making the situation worse.</p>
<p>There is an asymmetry of information between the regulator and the regulated business which can never be resolved. In a regulatory system where the regulator is attempting to estimate the efficient cost, including capital costs, of the business he/she is always likely to be gamed.</p>
<p>The game becomes more complex as each responds to the other and more and more resources are thrown at the issues. It is not uncommon to hear the concern that the regulator needs more industry expertise and resources. Indeed the report makes just that recommendation. But that is not the solution. It is part of the problem.</p>
<p>This will simply throw good money after bad and risk even greater complexity. A potentially more productive approach is to take a more fundamental look at how we regulate.</p>
<h2>What are the solutions?</h2>
<p>We ask the regulator try to determine up front the appropriate level of investment, the appropriate level of operational expenses and the appropriate level of return on investment. It’s not surprising that we end up with the results that we have. The issue of gold plating of networks under “cost of service” regulation has been long recognised in the United States which has a much longer tradition of independent utility regulation than we have.</p>
<p>We should look to see whether there are better approaches in other jurisdictions. Rather than have the regulator do all the work up front we may be able to improve outcomes by giving network users greater prominence in the regulatory scheme. </p>
<p>This may involve consumer and business user groups but importantly also electricity retailers and generators. They too have an interest in keeping network costs as low as possible. Higher network costs and hence higher electricity prices are leading to lower quantities demanded and to off-the-grid generation. </p>
<p>Importantly these customers are much more likely to have the expertise to know whether an upgrade in the network or some other capital expenditure proposal is necessary or not.</p>
<p>The regulator needs to be there with the powers to arbitrate but not necessarily as the first port of call.</p>
<p>As is evident from the report, there are no simple solutions to the regulation of monopoly networks. We should, however, resist the urge to throw more resources and more rule changes at the current system. There are simpler, potentially more effective ways to tackle the problem.</p><img src="https://counter.theconversation.com/content/40830/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joe Dimasi is a former Commissioner of the ACCC and is the former head of the ACCC,s Regulatory Division which included energy.</span></em></p>A senate interim report suggests the retrospective write-down of state-owned gold-plated electricity assets. Good luck with that.Joe Dimasi, Professorial Fellow, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/386592015-03-19T02:42:58Z2015-03-19T02:42:58ZPower privatisation is bad for the NSW budget bottom line<p>Private firms experiencing financial distress are sometimes compelled to sell-off profitable business units just to survive. But the state of New South Wales is not in that position, which is just one of the reasons why the latest push to privatise its electricity assets does not make economic sense.</p>
<p>The Baird government’s campaign for re-election essentially involves privatising profitable businesses – <a href="http://www.smh.com.au/nsw/mike-bairds-electricity-dilemma-popular-premier-selling-a-toxic-electricity-privatisation-policy-20150306-13x13f.html">Transgrid, Ausgrid and Endeavour Energy</a> – and spending most of the proceeds on non-revenue generating infrastructure. </p>
<p>Premier Mike Baird is a former investment banker, and he has claimed that <a href="http://nsw.liberal.org.au/back-baird/">his government</a> “has been working tirelessly to Rebuild NSW … [and] fix the budget”, among its top priorities.</p>
<p>However, from <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">our examination</a> of NSW finances, several telling facts emerge. </p>
<p>Among <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">our findings</a> was that without state-owned electricity revenues, all other things being equal, the NSW Coalition government would have struggled to avoid deficits in every budget since its election in 2011. We also found that curious accounting methods have masked the underlying profitability of the agencies to be privatised.</p>
<h2>Keeping NSW in the black</h2>
<p>The table below is from our recent <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">briefing paper on Electricity Privatisation</a>, which we prepared out of concern at how poorly-informed the public debate has been about the true costs of privatisation.</p>
<p>As this table shows, the state’s electricity agencies have been a key contributor to keeping the NSW budget in surplus over the past four years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=163&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=163&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=163&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=205&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=205&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=205&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Electricity Privatisation: Bad Financial Management briefing paper</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The electricity revenues in the table are predominantly from network agencies, with some small amounts from generation, and represent both dividends and notional taxes that government businesses pay to the budget.</p>
<p>Obviously with the proposed partial privatisation, not all of these revenues will be lost – but the real loss will not be known until after the election.</p>
<p>Even an investment bank involved with the government’s electricity privatisation plan <a href="http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-election-2015-premier-mike-bairds-office-sought-to-influence-report-critical-of-electricity-privatisation-20150318-1m1ni9.html">has concluded</a> it is “likely have a negative impact on state finances in the long run” because of the loss of billions of dollars in dividends and other payments. The <a href="http://www.afr.com/business/energy/electricity/ubs-revises-damaging-nsw-power-sale-critique-20150318-1m1gyc">original 14-page UBS report</a> released this week was entitled “Bad for the budget, good for the state”. After being <a href="http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-election-2015-premier-mike-bairds-office-sought-to-influence-report-critical-of-electricity-privatisation-20150318-1m1ni9.html">contacted by Premier Baird’s office</a>, the UBS report was reissued with a new title, “Good for the state” and <a href="http://www.nsw.gov.au/sites/default/files/miscellaneous/economic-impact-of-state-infrastructure-strategy.pdf">new information</a> about supposed other benefits from increased infrastructure spending. </p>
<p>We agree with the original UBS conclusion that privatisation would be “bad for the budget” – yet as we have shown above, that negative impact would not just be “in the long run”, but felt immediately.</p>
<h2>Future loss to NSW taxpayers</h2>
<p>The Baird government has tried to downplay the scale of any future loss of budget revenues by referring to the Australian Energy Regulator’s <a href="https://www.aer.gov.au/node/29613">draft determination</a>. This would reduce the reported profits of the retained electricity interests – but their effective return on shareholders’ funds would still be the envy of most listed companies.</p>
<p>Moreover, the NSW government has avoided any mention of the potential loss of revenues since partly-owned network agencies will be exposed to “real” Commonwealth taxes – a fact conceded by a Treasury official during a recent hearing of a <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/commsen/152890ee-3326-4157-8c8a-698b766845c2/toc_pdf/Economics%20References%20Committee_2015_02_18_3209.pdf;fileType=application%2Fpdf#search=%22committees/commsen/152890ee-3326-4157-8c8a-698b766845c2/0000%22">Senate committee inquiry</a> into privatisation of state and territory assets and new infrastructure.</p>
<p>Mention should be made of three crucial matters.</p>
<p>First, a state budget only reflects the financial results of the “general government” sector. State-owned corporations are required by national competition policy to pay commercial rates of interest on debt, and in NSW this is handled by the payment of a loan guarantee fee to the NSW Treasury Corporation, or <a href="https://www.tcorp.nsw.gov.au/html/">TCorp</a>, which is not part of the general government sector.</p>
<p><a href="http://stoptheselloff.org.au/">Anti-privatisation campaigns</a> have referred to the <a href="http://www.audit.nsw.gov.au/ArticleDocuments/340/01_Volume_Five_2014_Full_Report.pdf.aspx?Embed=Y">A$1.7 billion</a> in dividends and tax equivalents that the electricity agencies paid to the NSW government last year. That amount is actually an understatement, as it doesn’t take into account loan guarantee fees.</p>
<p>An internal government document distributed to Coalition MPs and selected journalists identified loan guarantee fees from the electricity businesses as amounting to <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">A$338 million</a> in 2012-13. The agencies’ financial statements did not separately disclose loan guarantee fees but aggregated them with “interest” expense.</p>
<p>Second, governments can influence how earnings are calculated. Depreciation expense is a percentage of reported asset values, and in NSW government businesses have based those values on current replacement costs (not historical costs), and that has led to higher depreciation expenses and lower reported profits.</p>
<p>Third, and more significant, is the fact that the state government can choose how much of the electricity networks’ (reported) profits are paid into government coffers as dividends. That’s an important point, because of a recent report that the electricity dividends and other payments to the state are set to fall from A$1.7 billion last financial year to <a href="http://www.theaustralian.com.au/business/ubs-revises-negative-power-play-in-nsw-privatisation-debate/story-e6frg8zx-1227267070056">around A$1.1 billion</a> this year. </p>
<p>If dividends fall, is that necessarily a sign of falling profits? No – it could simply mean the NSW government is choosing to pay less into the budget. State governments can often “manage” budget results simply by requiring state-owned corporations to pay higher or lower levels of dividends to their consolidated fund.</p>
<p>In addition, at 30 June 2014, the three agencies slated for privatisation by the Baird government (Transgrid, Ausgrid and Endeavour Energy) disclosed <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">nearly A$2.6 billion</a> in retained earnings. That was an increase of A$666 million on 2012-13, or A$1.35 billion over the past two financial years.</p>
<p>NSW Treasurer Constance has claimed that the budget <a href="http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-election-2015-andrew-constance-says-dividend-losses-from-electricity-privatisation-far-less-than-luke-foley-claims-20150303-13tmyg.html">will not lose as much</a> from privatisation as his opponents claim, arguing that Treasury forecasts diminishing returns to government to 2017-18.</p>
<p>But you can safely bet that if privatisation goes ahead, the network agencies will be stripped of cash in a last-chance effort to bolster budget results.</p>
<h2>Curious accounting masks super profits</h2>
<p>Our analysis also found that NSW electricity network agencies were far more profitable than shown in their 2013-14 accounts.</p>
<p>As noted above, the network agencies had based their asset valuations on current replacement prices rather than historical cost. Then in 2012, the NSW Treasury reversed its stance on the appropriate method valuing specialised assets for which there was no market evidence of “fair value”. </p>
<p>On the last day of the 2012-13 financial year, Ausgrid revalued system assets upwards by A$2.9 billion. That was done without explaining how those book entries had affected reported indicators of profitability. But the effect was to almost halve the reported rate of return the following year.</p>
<p>As explained in greater detail in <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">our briefing paper</a>, we calculated what the financial results of the network agencies would have been with normal private sector accounting techniques, as used by listed industrial companies.</p>
<p>Those recalculations revealed that Ausgrid and Endeavour Energy were earning returns on shareholders’ equity of between 80-82% per year – which are extraordinary super-profits.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=165&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=165&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=165&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=207&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=207&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=207&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Electricity Privatisation: Bad Financial Management briefing paper</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>That suggests either Ausgrid and Endeavour Energy are highly efficient, and/or they have been allowed to gouge consumers with excessive charges. Either way, they have been far more profitable than their accounting reports have suggested.</p>
<h2>Reviving an old proposal, despite better economic conditions</h2>
<p>New South Wales has low levels of debt. In June 2014, NSW had general government net debt of A$6.869 billion, or just 1.4% of Gross State Product. </p>
<p>This level of debt is highly manageable on annual budget revenues of around A$70 billion – especially at a time when Australian government <a href="http://www.abc.net.au/news/2015-03-16/australian-governments-have-never-had-cheaper-debt/6322322">borrowing costs are at record lows</a>. NSW can keep its electricity businesses and use their revenues to fund new projects in other areas.</p>
<p>The current privatisation proposal is hardly new. Privatisation was first mooted by then Labor Treasurer Michael Egan in 1997, with a price tag of A$22 billion. Yet had he succeeded, the state would have
missed out on dividends and tax equivalent payments to the budget in the period up to 2014-15 of <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">A$20.2 billion</a> – plus loan guarantee fees, and many billions of dollars in retained earnings. In that time, the electricity agencies were also able to fund tens of billions of dollars of infrastructure renewal.</p>
<p>Currently NSW is experiencing a boom in real estate prices, which will flow through to increased revenues from land tax and stamp duties on property transfers. This tends to be cyclical. The loss of a relatively stable source of revenues from the electricity network agencies would only make NSW more dependent on volatile property taxes.</p>
<p>Whether it was under Labor in the past or under the Coalition government now, the push to privatise NSW’s electricity assets is indicative of poor financial management. If it goes ahead, it would be bad news for NSW’s budget bottom line.</p>
<p><em>* This article was co-authored with <a href="http://www.ncoss.org.au/content/view/8559">Dr Betty Con Walker</a>, an economist with experience in the private and public sectors, including with the NSW Premier’s Department and NSW Treasury. She has worked with various governments on policy and legislative development, and state budgets. She runs her own government and corporate consultancy. Her books include <a href="http://purl.library.usyd.edu.au/sup/9781920899400">Casino Clubs NSW: Profits, tax, sport and politics</a>, and <a href="https://sup-estore.sydney.edu.au/jspcart/cart/Product.jsp?nID=290&nCategoryID=1">Privatisation: Sell off or sell out</a> (co-written with Dr Bob Walker), which are both available from Sydney University Press.</em></p><img src="https://counter.theconversation.com/content/38659/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This article was co-authored with Dr Betty Con Walker, an economist with experience in the private and public sectors, including with the NSW Premier’s Department and NSW Treasury. She has worked with various governments on policy and legislative development, and state budgets. She runs her own government and corporate consultancy. Her books include Casino Clubs NSW: Profits, tax, sport and politics, and Privatisation: Sell off or sell out (co-written with Dr Bob Walker), which are both available from Sydney University Press. This article and their briefing paper, Electricity Privatisation: Bad Financial Management, were prepared independently, with no external funding.</span></em></p>We found that without state-owned electricity revenues, the NSW Coalition government would have struggled to avoid recording deficits in every budget since its election in 2011.Bob Walker, Emeritus Professor, Discipline of Accounting, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/386572015-03-12T21:52:01Z2015-03-12T21:52:01ZA simple rule change can save billions for power networks and their customers<figure><img src="https://images.theconversation.com/files/74611/original/image-20150312-13502-1iu2675.jpg?ixlib=rb-1.1.0&rect=8%2C4%2C1486%2C988&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Money spent on helping consumers reduce demand means less money spent on substations and other infrastructure.</span> <span class="attribution"><a class="source" href="http://commons.wikimedia.org/wiki/File%3AForest_Hill_Substation.jpg">Bidgee/Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>As the interminable <a href="https://theconversation.com/nsw-power-privatisation-stop-the-sell-off-claims-put-to-the-test-38099">electricity privatisation debate</a> rolls on, more important issues about the future of Australia’s electricity industry are being overlooked. </p>
<p>Electricity consumption is <a href="http://www.aemo.com.au/Electricity/Planning/Forecasting/National-Electricity-Forecasting-Report">trending down</a>, while solar power is <a href="http://pv-map.apvi.org.au/analyses">steadily increasing</a>. Lights, appliances and buildings are becoming more efficient, and battery energy storage and electric vehicles are expected to proliferate. </p>
<p>In short, dirty centralised power is in decline and cleaner, smarter, decentralised energy is in the ascendant. </p>
<p>It sounds encouraging, but we are at a turning point. The development of a cleaner, more affordable and sustainable energy future depends crucially on what happens next. Will our energy companies seek to embrace or delay decentralised energy? </p>
<p>This hinges on whether they choose to adopt a new scheme which you might not have heard of, but which could potentially reduce households’ annual power bills by hundreds of dollars while also helping energy firms manage the move to decentralised energy.</p>
<h2>Changing tack</h2>
<p>Since 2008, the <a href="http://www.aer.gov.au">Australian Energy Regulator</a> (AER) has given our electricity network businesses strong regulatory incentives to build infrastructure. The more poles, wires and substations they built, the bigger their “asset base”, and the bigger their profits. It is no surprise, then, that in the past five years Australian networks have spent more than ever on infrastructure – hence why electricity prices have <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Dec%202014?OpenDocument#Time">doubled between 2007 and 2014</a>.</p>
<p>The new scheme could change all that – assuming that our energy regulators are ready to face the future. The <a href="http://www.aemc.gov.au/">Australian Energy Market Commission</a> (AEMC), which <a href="http://www.aemc.gov.au/Energy-Rules/National-electricity-rules">sets the rules</a> for the industry, is considering a change to support decentralised energy. </p>
<p>The <a href="http://aemc.gov.au/Rule-Changes/Demand-Management-Embedded-Generation-Connection-I">Demand Management Incentive Scheme Rule Change</a> would require the AER to give the network business incentives to help customers cut their electricity demand. Submissions on the rule change proposal close on <a href="http://aemc.gov.au/getattachment/5f4c7ae0-939e-43b5-9866-3a89fc255242/Notice-%E2%80%93-19-February-2015.aspx">19th March 2015</a>.</p>
<h2>What will the new rules mean?</h2>
<p>“Demand management” is where a power company invests in helping consumers to save energy or reduce demand, rather than building more capacity in the form of power stations, power lines and substations. <a href="http://www.aemc.gov.au/Media/docs/Final-report-1b158644-c634-48bf-bb3a-e3f204beda30-0.pdf">Research commissioned by the AEMC</a> estimates the potential consumer savings at between A$4 billion and A$12 billion, which translates to annual household bill reductions of A$120 to A$500.</p>
<p>Demand management is not new. Off-peak hot water tariffs have been offered in Australia since the 1930s. More recent examples include:</p>
<p>• the <a href="https://www.energex.com.au/__data/assets/pdf_file/0011/199262/Form-8804-Demand-Management-at-Energex.pdf">Positive Payback</a> scheme offered by Energex in southeast Queensland, which rewards customers for buying and using energy-efficient air conditioners, pool pumps and other appliances. More than 40,000 households have signed up, helping to reduce the network’s peak summer demand by more than 100 megawatts.</p>
<p>• a scheme that will see New York electricity supplier Consolidated Edison <a href="http://www.greentechmedia.com/articles/read/con-eds-200m-distributed-energy-plan-gets-the-green-light">spend US$200 million (A$260 million) on batteries, energy efficiency and load reduction</a> in order to defer US$1 billion of network upgrades.</p>
<p>There are many <a href="http://www.efa.com.au/Library/David/Published%20Reports/2010/InternationalBestPracticeinEEandDSMforNetworkSupport.pdf">other examples around the world</a>, but still relatively few in Australia.</p>
<h2>The case for changing the rules</h2>
<p>The rule change was <a href="http://www.aemc.gov.au/Media/docs/Final-report-1b158644-c634-48bf-bb3a-e3f204beda30-0.pdf">recommended by the AEMC</a> in 2012 to help rein in the massive spending on network infrastructure. </p>
<p>If the rule change is not adopted, the AER will probably not provide meaningful incentives for demand management. Networks will be discouraged from undertaking demand management and instead be encouraged to continue their past practice of building infrastructure and maximising profits. </p>
<p>Fixed charges for network services are likely to rise and variable charges for energy will fall. There will be fewer incentives to support energy efficiency, peak load management and local generation. This will give consumers less control over their energy bills and make energy efficiency, solar panels and batteries less attractive. </p>
<p>It will lock Australia into an outmoded, centralised model of electricity generation, at a time when technology and market trends all point towards more decentralised energy. </p>
<h2>Friend or foe?</h2>
<p>Our energy utilities have seldom been so subject to criticism. <a href="http://www.ewon.com.au/ewon/assets/File/Publications/Annual_Reports/EWON-AR-FINAL-WEB.pdf">Complaints </a> and <a href="http://www.abc.net.au/news/2014-12-19/electricity-and-gas-disconnections-reach-a-five-year-high/5978200">disconnection rates</a> have spiked, power companies have found themselves in court over issues ranging from <a href="http://www.abc.net.au/news/2014-04-08/energy-australia-fined-1m-over-door-to-door-sales-practices/5375972">misleading marketing practices</a> to <a href="http://www.abc.net.au/news/2014-07-15/black-saturday-bushfire-survivors-secure-record-payout/5597062">bushfires</a>, and green groups have run <a href="http://www.greenpeace.org/australia/en/photosandvideos/videos/Whats-your-energy-company-really-up-to-/">television ads attacking the “dirty three”</a> power companies. </p>
<p>In this context, it is not surprising that the Queensland and New South Wales governments have struggled to convince voters to let them privatise poles and wires. But the fundamental issue is not who owns the electricity industry, but how we ensure that it operates in the public interest.</p>
<p>With the recent hike in electricity prices, the rise of decentralised energy and the need to rapidly decarbonise our energy, it is crucial that our networks are trusted consumer and the community partners. We rely on the network companies to keep the lights on and restore power after blackouts. We should be able to rely on them to keep power affordable and sustainable.</p>
<p>As a <a href="http://aemc.gov.au/getattachment/d028d147-6731-467c-8194-2f5075c13b53/TEC-commissioned-supplementary-report-%E2%80%93-Restoring.aspx">2013 ISF report</a> has noted, effective demand management incentive schemes have been established in dozens of places overseas. The report found that savings from demand management in Australia are less than half the average rate of the United States, (and much less than in leading US states like California and New York). Moreover, the bulk of savings in Australia have been delivered in just one state: Queensland, where the state government has actively supported the idea. </p>
<p>Back in the 1970s, before privatisation, the State Electricity Commission of Victoria ran a memorable <a href="https://www.youtube.com/watch?v=d8PlKAFFCRE">television advertisement</a>, featuring a square-jawed electricity linesman venturing out into a wild, stormy night to restore power to cold, darkened homes. Its message was summed up by the soundtrack of James Taylor singing “You’ve got a friend”. </p>
<p>The outcome of the DMIS Rule change proposal will determine whether this is still true in the coming years.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/d8PlKAFFCRE?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Are electricity networks still our friend?</span></figcaption>
</figure><img src="https://counter.theconversation.com/content/38657/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Institute for Sustainable Futures at the University of Technology Sydney undertakes paid sustainability research for a wide range of government, NGO and corporate clients, including energy businesses. Chris Dunstan also serves as the part time Chief Executive of the Australian Alliance to Save Energy, a not for profit alliance of business, government and research organisations dedicated to promoting the economic and environmental benefits of saving energy and decentralised energy technologies. </span></em></p>Incentives for cutting peak power demand are cheaper than building ever more infrastructure and sending power bills ever higher. The industry has a chance to embrace this new approach - but will it?Chris Dunstan, Research Director, Institute for Sustainable Futures, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/377642015-02-19T08:15:41Z2015-02-19T08:15:41ZEnergy companies’ loyalty problem lights the way forward<figure><img src="https://images.theconversation.com/files/72401/original/image-20150218-20789-19f03y8.jpg?ixlib=rb-1.1.0&rect=38%2C59%2C951%2C631&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dialing up. Energy companies and the numbers game. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/e_notagain/5705798803/in/photolist-9GcHcr-m3xHUG-a1QG4M-bsHL3-9GcHge-DyTd9-5WNoAq-4VStV5-d2MBS-4d3KYx-4vmCUj-4Uhcdv-4m7Svw-6hZbyU-qjSLQ-4Mb6R7-5MjRM-7TfGCa-2TNMJ7-4JUaVf-FcobE-brVHG-BtXsM-69QCKE-b6rFMX-9tLMVu-pVn6n3-ebJx7L-4Eeq5n-8W4kk-5w8AS5-pW1HTN-pY7h5t-pFK2n2-pFHJJf-pFFvPT-pFLVpE-p2jF1y-pFLNp7-pXWstk-p2jFXU-p2nGGc-pFHKAA-8W3gf-9Xj3HL-r89iT-a5UHqg-9Ed8ww-6DDd8e-5ZNCz6">Ety</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The Competition and Markets Authority’s (CMA) <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/404867/Updated_Issues_Statement.pdf">latest paper</a> highlights one of the key issues at the centre of its <a href="https://www.gov.uk/cma-cases/energy-market-investigation">investigation</a> into the UK’s gas and electricity markets: are customers who have not switched energy supplier being fleeced?</p>
<p>The simple answer is yes. Particularly those customers who rarely or never switch their energy suppliers, who are on standard tariffs which tend to be more expensive than “non-standard” ones offered to new or proactive customers.</p>
<p>The gas and electricity retail markets were opened to competition for domestic customers in the late 1990s. Despite the fact that consumers can now pick who supplies their energy, few if any switch regularly to find cheaper – or greener – deals.</p>
<h2>Sticking point</h2>
<p>The CMA estimates that if consumers switched between 2012 and 2014 they could have saved on average between £158 and £234 a year, depending on the suppliers. This is particularly serious given that the most inactive customers (known as “sticky”) seem to be made up of vulnerable groups: those who are over 65, people in social accommodation, people with no qualifications and/or those on lower incomes. The people who can least afford it are those who are suffering the greatest impact.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=309&fit=crop&dpr=1 600w, https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=309&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=309&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=388&fit=crop&dpr=1 754w, https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=388&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/72402/original/image-20150218-20799-95b52j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=388&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Customers getting burned?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/taylor90/6729222353/in/photolist-bfD2n4-a1xor6-cMm6c-9k7Ao8--c62QvJ-dLsYRZ-kN98oC-aqJTfB-5AD4jf-pK7FGy-9URDKp-4BzpdJ-uy6X-6BJsVB-5c11Qy-o7aFGo-cWkXqJ-35wDQz-9tiWfs-drmADW-fn1NMq-B2QNq-bPujGR-ff4Kxp-9nSxn-5UCC8B-Am15-393Ys-9nSAb-TjN4-TjLN-TjPe-8tVhR2-5NDt1C-avFQXQ-Meq9C-uy6M-uy6H-73oSdz-joRNiU-494Gwr-joNuzH-7MX9L6-pHTyJ-4m5Eoj-bEYojb-95dLaR-diCYg4-2babP">Taylor Bennett</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>So in the face of substantial savings, and a political and media storm over energy prices, how might the CMA investigation reduce the degree to which people pay over the odds for their energy?</p>
<p>The standard economist’s response would be to say that people should be given more information, that the information should be clear, and that the hassle from switching should be minimised. The consumer’s desire to source ever cheaper energy would then deliver a more competitive market where prices were driven down. That’s certainly what Ofgem, the energy regulator, has said in the past. But despite introducing a <a href="https://www.ofgem.gov.uk/simpler-clearer-fairer">set of measures</a> designed to make switching easier, the number of active consumers is still relatively low. For example, in most electricity regions, between 40-50% of customers have been with the incumbent supplier for 10 years or more (CMA <a href="https://assets.digital.cabinet-office.gov.uk/media/54e378a3ed915d0cf7000001/Updated_Issues_Statement.pdf">issues statement</a> para 115) . </p>
<p>This suggests that you need a more complex and wide-ranging approach than the standard neoclassical economics approach of providing information as a way of driving rational, price-based choices.</p>
<h2>Power games</h2>
<p>This is because the issue of energy prices is in fact just one part of a much bigger picture. The problem of overcharging customers is obviously an important one, but just focusing on this end point ignores the other contributing factors in the system as a whole, and the longer-term imperatives of delivering low-carbon energy in a way which is both secure and affordable.</p>
<p>In <a href="https://assets.digital.cabinet-office.gov.uk/media/54bf9bcc40f0b6158d000017/Summary_of_hearing_with_University_of_Exeter.pdf">our evidence</a> to the CMA in December last year, we argued that these contributing factors in large part relate to the structure of energy markets and the nature of the governance of gas and electricity systems. Energy markets are designed to reflect and maintain the current configuration of the systems by rewarding large-scale, flexible (and therefore fossil fuel) energy, while industry codes support the established technologies and practices. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/72408/original/image-20150218-20810-hm9td0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Getting the wind up.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/deapeajay/3789399078/in/photolist-6LREjS-3FnBp8-jvr9U-2mryr-ejwa3v-fUoFsz-j5CcQX-iBTdgE-ozuRN-6Mv6mg-itSbAX-9JFKi2-pc3Exz-57uJfT-7Ct8XX-71qLUb-hvRF8-4xkQiC-884Tsr-iyvsDF-g47ReA-kuBzz9-m4ikM-pfJHtv-5NwfZK-9QfcGt-aeeUUh-pULMU5-fwHhEs-bCYHRZ-2AUyEV-ej76pe-ftcXwE-i8KjAu-pMBzuc-7wwKfg-foaFTV-nmUJj8-6LYfp5-deWLZH-mmEgNk-7oqBN9-5wkP5G-j8bRzS-6PFXbE-9rXw2g-bL6qEH-66KEPB-brkvTr-fhTg4M">David Joyce</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Both tend to exclude new technologies, particularly renewables, which have different operating characteristics, and new entrants with different ways of doing things. In addition, the design of the electricity market (<a href="https://www.ofgem.gov.uk/ofgem-publications/64116/1105-factsheet070215april.pdf">known as BETTA</a>) in particular has led to the vertical integration and market domination of energy companies that we see today. So the governance of the systems has contributed to the dominance of the Big Six energy companies and given rise to the current concern about energy prices.</p>
<p>Just concentrating on prices and the performance of the retail market was treating the symptoms rather than the cause of the problems in the UK’s energy markets. Instead, we argued that the CMA needed to broaden the scope of its investigation to take the bigger picture of overall system governance into account and to consider issues such as market design when investigating new entry and the impact that could have on end user prices.</p>
<p>The CMA’s paper today has recognised the need for a broader perspective on governance and regulatory issues, and the degree to which they may or may not shape competition and development in energy systems. As a result, the CMA investigation holds out the potential of being more than just an economist’s examination of short-term pricing issues, and instead being a more sophisticated examination of the broader social, political and technical issues shaping energy systems. If it delivers on that potential, we might at last see some longer-term, more innovative approaches to the future of our energy systems.</p><img src="https://counter.theconversation.com/content/37764/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bridget Woodman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The revelations about the penalties for staying with your power company are a good marker for the kind of regulation we need.Bridget Woodman, Course Director, MSc Energy Policy, University of ExeterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/362152015-01-20T19:25:48Z2015-01-20T19:25:48ZFeral o'clock: why families struggle to shift their energy use<figure><img src="https://images.theconversation.com/files/69490/original/image-20150120-24445-5k1u4q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Peak power use is also a busy time for young families. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/nicocavallotto/63207736">Nico Cavallotto/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>A key plank of the Australian Government’s <a href="http://ewp.industry.gov.au/">draft energy policy</a> is to reform electricity pricing so that it more accurately reflects rises and falls in <a href="http://theconversation.com/explainer-what-is-peak-power-and-how-does-it-affect-prices-10222">peak demand</a>. New tariffs, such as <a href="http://theconversation.com/choosing-the-power-price-you-pay-voluntary-time-of-use-tariffs-18243">time-of-use</a> (TOU) pricing, aim to give consumers greater control and choice over electricity, while giving them incentives to shift demand outside peak times.</p>
<p>But <a href="http://www.familyenergystudy.net">research we have published today</a> suggests that this policy focus is missing other opportunities to shift electricity demand. Research with parents reveals that many household routines are unlikely to shift in response to cost-reflective tariffs such as TOU, which charge a higher fixed peak rate on weekday afternoons and early evenings, offset by lower costs at other times.</p>
<h2>The family peak</h2>
<p>The TOU peak tariff period usually falls between 2 pm and 9 pm on weekdays (the precise timing differs between states). Unsurprisingly, most parents in our study identified this as covering the busiest time in their homes. </p>
<p>This “family peak period” is hectic for parents with young children, particularly around dinner time. Parents described it as “crazy time”, “feral o’clock”, “dinner chaos” and the “witching hour”. Many activities are bundled together during the family peak (homework, cleaning, washing, food preparation, eating and bathing) as family members return home from work, school and childcare, and prepare for bedtime. </p>
<p>Some household activities, like clothes washing, are performed during “time gaps” when children are napping, playing or bathing. This means it is often not practical to switch these activities to different times.</p>
<p>Parents also said they were reluctant to increase housework activities later in the evening, reserving this as “down time” where possible.</p>
<h2>Can families change their routines?</h2>
<p>Half the surveyed parents who were already on a TOU or off-peak tariff did not change their activities to save money. Of the 44% that had made changes, most were running the dishwasher and/or washing clothes outside the peak tariff period. </p>
<p>Widespread (mis)understandings of “off-peak” electricity (such as cheaper electricity late in the evening) meant that some parents were <em>already</em> doing some activities outside peak tariff times. For example, about 40% of households that didn’t have off-peak rates already ran their dishwasher outside the peak period. </p>
<p>These findings suggest that there may be fewer “easy” options for households with children to respond to TOU tariffs. </p>
<h2>Alerts, not prices</h2>
<p>We also asked parents if they would be willing to disrupt their routines on an occasional basis if asked to reduce electricity use for a “peak alert”. We said these alerts might occur a few times each year on a hot day when there may be a shortage of electricity. Eighty-five per cent of survey respondents said they would respond to a peak alert, with no financial penalty or reward.</p>
<p>Parents who said they would respond gave many reasons. The most popular were “to help prevent electricity outage (blackout)” (64%), “to be part of a community effort” (59%) and “to reduce stress on the electricity grid” (52%). Thirty-five per cent said they would respond just because they were asked.</p>
<p>Parents said they would disrupt a much wider range of activities for the peak alert scenario than they would for a TOU tariff scenario. These included changing their home cooling (air conditioning), television viewing, computer use, and cooking the evening meal. In addition, 40% of survey respondents considered leaving the home to reduce their electricity use for a peak alert scenario.</p>
<p>Part of the peak alert’s appeal was that it only occurred occasionally, whereas TOU tariffs apply every weekday and require regular changes to routines. Such occasional responses align better with network peaks in demand (which normally occur on very hot days). They also better align with the types of disruptions considered “normal” and manageable as part of everyday life with children.</p>
<h2>It’s not all about price</h2>
<p>Responses to the peak alert scenario reflect community interest in and responsibility for the electricity system. This is distinct from the dominant
“price signals” policy approach, which assumes people will only shift activities to save money. Instead of engaging people via their hip pocket, peak alerts make the problem, and solution, one of community participation. And it’s only an occasional change.</p>
<p>Variations on the peak alert concept have been successfully trialled in Australia and internationally, both with and without price incentives. This strategy also resonates with community responses to water restrictions and voluntary targets.</p>
<p>Other proposed energy reforms, such as moves to privatise more of the sector, may undermine these shared responsibilities for energy systems.</p>
<p>Energy reforms need to consider these other ways in which people relate to energy in their everyday lives, how they negotiate disruption and change, and how the problem of peak demand can be managed more equitably.</p>
<p><em>The authors’ report is available for download from: <a href="http://familyenergystudy.net/">http://familyenergystudy.net/</a>.
The authors’ submission to the Energy White Paper - Green Paper is available for download <a href="http://ewp.industry.gov.au/sites/prod.ewp.industry.gov.au/files/submissions/Energy%20White%20Paper//ANON-VDK4-6B1Q-K-653.pdf">here</a>.</em></p>
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<p><em>Editor’s note: Yolande will be answering questions between 9–11am AEDT on Thursday January 22. You can ask your questions about electricity demand in the comments below.</em></p><img src="https://counter.theconversation.com/content/36215/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Yolande Strengers receives funding from the Australian Research Council, electricity utilities and consumer advocacy organisations. This project was funded by the Consumer Advocacy Panel (<a href="http://www.advocacypanel.com.au">www.advocacypanel.com.au</a>) as part of its grants process for consumer advocacy projects and research projects for the benefit of consumers of electricity and natural gas. The views expressed in this document do not necessarily reflect the views of the Consumer Advocacy Panel or the Australian Energy Market Commission.</span></em></p><p class="fine-print"><em><span>Larissa Nicholls has worked on projects funded by electricity utilities and also received funding from the Consumer Advocacy Panel for this project (as above).</span></em></p>A key plank of the Australian Government’s draft energy policy is to reform electricity pricing so that it more accurately reflects rises and falls in peak demand. New tariffs, such as time-of-use (TOU…Yolande Strengers, Senior Lecturer, School of Global Urban and Social Science, RMIT UniversityLarissa Nicholls, Research Fellow, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/341662015-01-06T17:43:23Z2015-01-06T17:43:23ZSun and wind could finally make electricity ‘too cheap to meter’<figure><img src="https://images.theconversation.com/files/64481/original/8nbfsv3t-1415885079.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Free 'fuel' means renewable energy has almost no marginal cost.</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/stevepj2009/7015542873">Stephen Jones</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><blockquote>
<p>Our children will enjoy in their homes electrical energy too cheap to meter. </p>
</blockquote>
<p><span>– Lewis L Strauss, chair of the US Atomic Energy <span>Commission, 1954.</span></span></p>
<p>When Strauss first coined the phrase above he was thinking of hydrogen fusion, a technology that always seems to be a tantalising 30 years away. However even without futuristic new technology the British electricity system may actually approach this mythical situation of energy that is “too cheap to meter”.</p>
<p>In the future, the industry’s costs will be determined by the number and size of power plants and turbines that will be needed, rather than the fuel burned in them. This won’t mean an end to electricity bills – but it will mean some major changes in how they are calculated.</p>
<p>When the UK’s electricity industry was privatised in the 1990s its power plants had the capacity to generate more than was needed. This was despite the fact many of these plants had already been in service for decades. The national transmission network was also well established. This meant the cost of electricity was largely determined by fuel prices – mainly coal and gas.</p>
<p>The hardware used by the industry today has changed little since privatisation – in fact much of it has been in service since the 1960s. On a typical day in November 2014, <a href="http://www.bmreports.com/bsp/bsp_home.htm">37% of the UK’s electricity</a> was produced by 40-year old coal-fired power stations, 31% came from gas power stations, many built during Margaret Thatcher’s “dash for gas”, and 14% from nuclear power stations, all but one of which are scheduled to close in the next ten years. The rest came from renewables and imports from the continent.</p>
<p>Over the coming 15 years this will change. To meet national and European targets for CO<sub>2</sub> and industrial pollution, existing coal plants will be <a href="http://www.theguardian.com/environment/2014/sep/24/uk-coal-power-plants-david-cameron-un-climate-pledge">phased out</a> and gas will be reserved for periods of peak demand. Most electricity will be provided by nuclear and renewables, supplemented during the winter by coal and gas. </p>
<p>This means a big shift from fuel to infrastructure costs – constructing the power stations, turbines, solar panels and associated infrastructure will cost many billions of pounds. Nuclear power’s refuelling and operating costs are relatively low. For wind and solar, the operating costs are effectively zero. </p>
<h2>Peaks and troughs</h2>
<p>To get anywhere near its emissions targets the UK will have to see a drastic reduction in the amount of gas used for home heating. While scrapping gas boilers in favour of electric heat pumps may reduce emissions, it will also mean the load on the electricity grid will be much greater in winter than in summer. </p>
<p>The problem here is that renewable energy doesn’t operate on the same cycle as us humans – solar panels are much less productive on a gloomy day in December, when electricity demand is high, than on a sunny day in June, when it is low. </p>
<p>The financial incentives for electricity generators are changing. The US fracking boom has reduced natural gas prices in America (but not in Europe as the networks are not connected) and many US electricity generators have therefore switched from coal to gas, leaving a surplus of coal. This has in turn reduced world coal prices at a time when the situation in Ukraine has left gas supplies uncertain. Therefore, if they have the choice, UK generators are burning coal rather than gas. </p>
<p>At periods of low electricity demand, the availability of almost free wind energy is depressing the demand for fossil-fuel generation so it is not difficult to see why the UK’s gas plants are increasingly under-used. </p>
<h2>The market for electricity</h2>
<p>In the UK, generators (the firms who own the power plants) sell their electricity to retailers (the firm named at the top of your bill) through an auction every half hour. The market works on energy prices (£/kWh). This was logical when the investment in power stations had been paid-off years earlier and fuel inputs such as coal or gas were the biggest cost.</p>
<p>However, in the approaching situation where marginal energy costs could be almost zero and capacity charges – based on peak usage – are very high, it is difficult to see how an electricity market auction is possible. Bid prices would no longer be related to operating costs and there must be a risk that it would be closer to a game of poker, where the bid is based on an assessment of the competition, rather than on cost.</p>
<p>A free market for electricity would be likely to produce extremely high prices in winter, particularly at periods of peak demand, but very low prices at times when the demand can be met entirely by renewable energy. If these energy costs are passed on to the customer, we could see the cost of using an electric kettle to make a cup of tea at 18:30 in January being many pounds, but electricity costing almost nothing during long periods in the summer. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=899&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=899&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=899&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1130&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1130&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68303/original/image-20150106-18600-1jht3pb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1130&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Want one this eve? It may cost you.</span>
<span class="attribution"><a class="source" href="http://www.flickr.com/photos/fredjala/2809720821">Fred Jala</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Headlines about a pensioner paying £20 to boil a kettle would be a big challenge for whichever government is in power. However, if peak-time prices are not allowed to reflect shortages there would be no incentive for continued investment in backup fossil fuel generation to be used during these periods. Such generation would be used only rarely, but without it the UK would risk blackouts – even more politically challenging.</p>
<p><a href="https://www.gov.uk/government/policies/maintaining-uk-energy-security--2/supporting-pages/electricity-market-reform">Reforms to the electricity market</a> are supposed to resolve this problem through introducing regular capacity auctions, where generators can bid to hold otherwise unused plants in readiness over a particular time period. Taken with an agreed “strike price” for renewable and nuclear generators which guarantees a minimum payment per kWh this has the effect of almost eliminating a competitive market for low-carbon electricity generators.</p>
<p>As leading energy economist Dieter Helm <a href="http://www.sciencedirect.com/science/journal/03014215/30/3">wrote at the time</a> of electricity privatisation, “the idea that governments could simply retreat from the scene and leave it to competitive markets is an illusion – energy is just too important to the economy and society”. </p>
<p>Perhaps consumers should be charged on their contribution to national peak load, rather than on their energy consumption. Then energy really would become too cheap to meter.</p><img src="https://counter.theconversation.com/content/34166/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger Kemp has received funding from the Technology Strategy Board to research the electricity industry. He is a Fellow of the Institution of Engineering and Technology and Royal Academy of Engineering which have published papers on similar topics.</span></em></p>Our children will enjoy in their homes electrical energy too cheap to meter. – Lewis L Strauss, chair of the US Atomic Energy Commission, 1954. When Strauss first coined the phrase above he was thinking…Roger Kemp, Professorial Fellow, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334642014-11-05T19:23:09Z2014-11-05T19:23:09ZWhy Australia’s entire power sector should support the RET<figure><img src="https://images.theconversation.com/files/63712/original/mmccvyk4-1415164637.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Falling demand and prices are leaving no incentive to invest in Australia's electricity sector.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/indigoskies/9618748827"> Indigo Skies Photography /Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>There’s been much talk about how uncertainty over the future of the Renewable Energy Target (RET) is affecting the renewable energy industry. </p>
<p>Investment in renewable energy is at its <a href="http://reneweconomy.com.au/2014/is-this-the-death-of-australias-renewable-energy-industry-83477">lowest level</a> since 2002, while a Baker and McKenzie and Clean Energy Council report released in October argued uncertainty over the RET was undermining the industry. </p>
<p>Renewable company Pacific Hydro also recently saw a <a href="http://www.afr.com/p/business/companies/ifm_investors_accept_write_down_dBvTiJ97KwLrvXDDVGppcL">A$685 million write-down</a> in its value, while Australia’s largest wind tower producer <a href="http://www.abc.net.au/news/2014-10-23/wind-turbine-producer-axes-100-jobs-after-ret-changes/5835516">cut 100 jobs</a>. Both were linked to uncertainty over the RET. </p>
<p>The Coalition government has announced its position: to reduce the Renewable Energy Target to a “real 20%” — or 20% of the expected electricity demand in 2020. This will result in a cut to around 27,000 gigawatt hours from the current target of 41,000 gigawatt hours. </p>
<p>But with demand falling and a significant oversupply of electricity, the RET is vital for stimulating investment in the electricity sector, not just renewables. </p>
<h2>No room in the electricity sector</h2>
<p>At the moment, there is a massive split between the proponents of renewables development and those who see increased penetration of renewables as a threat to their business. </p>
<p>Opponents appear to have the upper hand, with the government pushing to have the 20% target reduced to a “real” target that would be much lower.</p>
<p>The arguments to reduce the Renewable Energy Target are many-fold. They run something like this: </p>
<p>The target was set when electricity demand was expected to continue rising indefinitely. Therefore there was room for both renewable and fossil fuel sources. </p>
<p>This is no longer true as demand has actually been declining since 2008-09. It took another three to four years for the industry and government to accept that the end of demand growth had occurred and may continue indefinitely. </p>
<p>It is difficult to overstate how unusual and important this is for companies operating in a competitive environment. How many companies can thrive in a market where customer demand is falling?</p>
<h2>Tough times for fossil fuels</h2>
<p>Those supporting reduction of the target, or its complete elimination, argue that with no growth in electricity demand the current target 20% or even a “real 20%” is unnecessary and damaging. </p>
<p>Damaging to whom? To those companies that own and operate coal and gas-fired power stations. The argument is that the decline in electricity demand in combination with the roll-out of RET-driven generation, mostly wind, has resulted in lower wholesale electricity prices than expected. </p>
<p>At just over <a href="http://www.aemo.com.au/Electricity/Data/Price-and-Demand/Average-Price-Tables/Monthly-Price-Tables?year=2014">A$30 per megawatt hour</a> over the months since the repeal of the Carbon Price, wholesale spot prices are now at <a href="http://www.aer.gov.au/node/23196">near historical lows</a>. This is indeed making it tough for most fossil fuel plants.</p>
<p>The underlying problem for the wholesale price is twofold: firstly, with the more generation capacity you have in general, the more downward pressure there is on the price. </p>
<p>This is exacerbated by wind generators. Like most current large-scale renewable technologies, wind is not easily controllable and has no fuel requirements. This means operating costs are zero, and economic incentives allow them to run in preference to other power plants.</p>
<p>Hence those that operate fossil plant prefer to see less renewable generation in the market, while those specialising in building, owning and operating renewable plant will be squeezed severely if the target is revised downwards.</p>
<h2>Review paralysis</h2>
<p>The problem for investment in the renewable sector is more complex. As all investment in this sector is policy-driven, ongoing reviews with suggestion of changes to the parameters of the policy are painful. They paralyse decision making and planning. </p>
<p>This is because renewable projects rely on revenues from selling renewable certificates (so-called LGCs), as well as from collecting electricity spot market revenue.</p>
<p>The electricity market, and particularly the Australian electricity market, is the most volatile commodity market in the world. </p>
<p>On top of this, renewable projects rely on selling certificates into a traded market, hence the value of the subsidy they receive is subject to supply, demand and market sentiment. The renewable certificate market price is thus also a very volatile one, as volatile as the global crude oil price, for example. </p>
<p>Derivative market hedging does not help much as contracts have a maximum tenure of three years, while the lifetime of the project can be up to 30 years.</p>
<p>Note that the declining electricity demand is also hurting renewable projects’ viability as well as fossil fuel incumbents. This may not have been such a problem had we still had the carbon price but now without RET policy certainty there is a major problem. </p>
<p>Moreover, benefits for consumers are not at all certain in the long term as incumbent operators have the option of mothballing/decommissioning plants, partially offsetting downward pressure on prices due to falling demand.</p>
<h2>The RET is dead, long live the RET</h2>
<p>In the environment of declining demand and the prospect of new technologies such as PV panels, increased consumer engagement, electric vehicles and smart grids, this tension between the renewable industry and the incumbent generation sector is unnecessary. It is clear that both would benefit from a strong renewable target. </p>
<p>Why? As demand is shrinking, all players need a policy that stimulates investment. Without the RET, there will be no incentive to build any power plants at all! The market is oversupplied and will continue to be for perhaps another seven to ten years.</p>
<p>Taking advantage of the RET and the other new technologies is the only way modern electricity utilities can innovate, grow and successfully compete in a rapidly changing environment. Freezing the RET would be a false win for its opponents.</p><img src="https://counter.theconversation.com/content/33464/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ariel Liebman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s been much talk about how uncertainty over the future of the Renewable Energy Target (RET) is affecting the renewable energy industry. Investment in renewable energy is at its lowest level since…Ariel Liebman, Director of Energy and Carbon Programs, Senior Research Fellow, Faculty of Information Technology, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/264742014-05-09T05:33:12Z2014-05-09T05:33:12ZBack to the CEGB? Greater central control of UK energy may be inevitable<figure><img src="https://images.theconversation.com/files/48088/original/kgqhb58r-1399568563.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A rose-tinted view of central energy planning, or the best fit for the job?</span> <span class="attribution"><a class="source" href="http://en.wikipedia.org/wiki/File:Thorpe_Marsh_at_night.jpg">Ackers72</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>While a privatised energy market has delivered stable and cost-effective electricity to Britain’s national grid for 25 years, the world and the pressures it faces are changing. A group of Newcastle University academics led by Professor Phil Taylor, director of the university’s <a href="http://www.ncl.ac.uk/sustainability/">Institute for Research on Sustainability</a>, this week <a href="http://www.ncl.ac.uk/sustainability/documents/NewcastleUniversityEnergyPolicyBriefingNote1.pdf">raised some important questions</a> that go right to the heart of current energy policy dilemmas.</p>
<p>One of the most controversial points is the contradiction between the liberalised energy market philosophy dominant since 1990, and governments’ apparent inability to ensure the market invests in the low-carbon technologies necessary to meet their ambitious emissions reductions targets. More central planning and a strategic view beyond market forces, the academics argue, is needed. So is a return to something like the CEGB, the <a href="http://www.aboutblyth.co.uk/html/cegbstory.html">Central Electric Generating Board</a> responsible for Britain’s power supply until privatisation, the way forward?</p>
<p>In reality, governments in the UK and abroad have for some time been drifting away from relying on market forces alone. The obvious explanation is that markets respond only to the signals they are given. If producing carbon and other greenhouse gases comes with no significant cost attached, then it is quite rational for power companies, responsible for delivering profits to their shareholders, to continue to burn fossil fuels.</p>
<p>The main mechanism for introducing emissions limits through market forces, the <a href="http://ec.europa.eu/clima/policies/ets/index_en.htm">EU emissions trading scheme</a>, was largely undermined by an <a href="http://www.carbonbrief.org/blog/2013/03/saving-the-eu-emissions-trading-scheme-may-mean-abandoning-key-principles">excessively generous</a> initial issue of permits, doubts about the scheme’s long-term future and a lack of flexibility in responding to the recession or to the impact of other EU or national policies aimed at supporting renewables or energy efficiency.</p>
<p>So Professor Taylor’s broadside is on strong ground when he argues that fossil fuel-generated energy is too cheap – little or no costs have been assigned to the very substantial future burden brought about by the consequences of a changing climate driven by CO<sub>2</sub> emissions.</p>
<h2>A little consistency, please</h2>
<p>Chief among the other market-limiting factors is the sheer uncertainty brought about by <a href="https://theconversation.com/the-energy-policy-pendulum-must-cease-its-endless-swinging-25566">inconsistent energy and climate policy</a> that deters new investment. This has already seen companies <a href="http://www.theguardian.com/business/2014/jan/22/eon-close-power-stations-blackout">close power stations</a> and <a href="http://www.theguardian.com/business/2013/dec/13/scottish-power-cancels-argyll-array-offshore-wind-farm">abandon plans</a> for new capacity.</p>
<p>There is no global shortage of infrastructure investment money that seeks only modest returns in an era of low interest rates. But those investors quite reasonably demand at least a reasonable degree of certainty before investing huge sums. In practice that requires very strong government and regulatory commitments.</p>
<p>British governments commitments to low-carbon investments include <a href="https://theconversation.com/osborne-wont-usher-in-a-renewable-renaissance-15789">feed-in tariffs</a> or other subsidies for both renewables and nuclear energy. Carbon capture and storage (CCS), probably a vital component of a long-term strategy, has not received much funding so far, with <a href="https://theconversation.com/a-step-forward-for-ccs-but-much-greater-strides-are-needed-23745">only two projects</a> (in Yorkshire and Scotland) underway. Like it or not, a green agenda has drawn government into making decisions for the power sector. It’s hard to see a return to reliance on markets alone to deliver climate policy objectives.</p>
<h2>…and competence</h2>
<p>The challenge is to make sure that this is done competently, resulting in a well-balanced mix of power generating plant for the future and equally important investments to improve transmission networks and energy efficiency. In the form of the <a href="https://www.gov.uk/government/organisations/department-of-energy-climate-change">Department for Energy and Climate Change</a>, the government seems ill-equipped for the task. </p>
<p>Professor Taylor argues for “an independent, expert body who can act as an overall system architect”, but we need to be much more specific about what such a strategic authority would be and what we would want from it. Independent expert advice already comes through the <a href="http://www.theccc.org.uk/">Committee on Climate Change</a>. We can assume a great deal of technical advice comes from the <a href="http://www.nationalgrid.com/">National Grid</a>. But keeping the ultimate decision-making within government has serious weaknesses – not least an increased vulnerability to lobbying from special interest groups, and to a politicisation of the decision-making process.</p>
<p>Almost certainly we require an independent agency formally responsible for delivering a low-carbon power sector, making procurement choices, and with the power to enter into long term contracts with energy companies. One option, but not the only one, would be to give these powers to the National Grid, which is already a vendor-neutral provider of core system services. Such an agency could be public or private sector, and unlike the CEGB would not be encouraged to own or build its own power stations.</p>
<h2>Competition still key</h2>
<p>Whatever the answer this would be a major institutional change, with huge commercial implications for the sector. Professor Taylor’s brief implicitly assumes that more central control and planning of supply will be compatible with the aim to generate more competition among supply companies. At the very least this is not obviously the case; in the context of current markets, central direction tends to undermine competition. We need a new take on the retail market that will allow more companies to take their own approaches to what products and packages to offer consumers. This should promote innovation in the ways consumers use energy, not least in ways that reflect its true cost, as Professor Taylor advocates.</p>
<p>The most impressive example of a large and successful power sector decarbonisation has been the huge <a href="http://www.world-nuclear.org/info/Country-Profiles/Countries-A-F/France/">French nuclear programme</a> of the 1980s. This was driven by political consensus on the strategic need to reduce oil dependency. Its essential features were a powerful but independent agency, combined with a wholehearted commitment from the government to the objective. In the UK, these have been often promised but not yet delivered. Britain need not copy France’s reliance on a nuclear programme, but these two features – often promised in the UK but not yet delivered – are not optional to copy its success.</p><img src="https://counter.theconversation.com/content/26474/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rhys does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While a privatised energy market has delivered stable and cost-effective electricity to Britain’s national grid for 25 years, the world and the pressures it faces are changing. A group of Newcastle University…John Rhys, Senior Research Fellow, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/232722014-02-24T13:30:06Z2014-02-24T13:30:06ZUK energy policy gets more complex, but goes nowhere<figure><img src="https://images.theconversation.com/files/42096/original/pvjnybrm-1392920467.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Too complex by half.</span> <span class="attribution"><a class="source" href="http://www.geograph.ie/photo/1458671">Albert Bridge</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>With floods sweeping the country, energy policy has slipped down the agenda since Labour’s attention-grabbing <a href="http://www.bbc.co.uk/news/uk-politics-24213366">price freeze policy</a> announcement. And this of course is unfortunate, as energy policy is central to any response to climate change.</p>
<p>A refreshingly sensible view was put forward in a recent lecture given by senior Conservative politician (and former energy minister) Charles Hendry MP at Imperial College. In recent years it often has been painful to watch Conservative politicians speak about energy, facing as they do the difficult task of maintaining that the coalition is committed to being the “greenest ever”, despite considerable evidence to the contrary. But perhaps Hendry is sufficiently senior enough not to worry too much about toeing the line – and thank goodness for that.</p>
<p>Political discussion of energy tends to revolve around what is often called the “trilemma” of energy policy: how to balance the issues of energy security, climate change and affordability. And while Hendry stayed within these topics, he was unafraid to stretch their interpretation beyond the conventional.</p>
<p>He said: “Some people say we have moved too far away from the market, but it was the CEGB (<a href="http://www.rwe.com/web/cms/en/286400/rwe-npower/about-us/our-history/history-of-electricity-industry/">Central Electricity Generating Board</a>) of old that delivered much of the large scale investment which we now rely on, and there are real questions about whether the market can deliver energy security.”</p>
<p>“Energy security” is too often narrowly interpreted as self-sufficiency, but Britain is no longer an island (Hendry joking that “many of my colleagues will be nervous to be told this”). And it has long been true: there are now four electricity interconnects to mainland Europe and Ireland, with <a href="https://www.ofgem.gov.uk/electricity/transmission-networks/electricity-interconnectors">more under construction</a>.</p>
<p>Connecting the UK with other countries and sharing energy supplies through <a href="http://www.independent.co.uk/environment/climate-change/how-the-supergrid-could-help-keep-the-lights-on-7640771.html">supergrids</a> should play a major role in Britain’s future, and the economic view supports this. For example, the proposed link to Iceland would allow the import of its huge geothermal energy potential and others that draw upon the solar energy resources of southern Europe and North Africa would be positive steps for UK energy security and for Europe’s efforts to reduce carbon dioxide emissions.</p>
<p>From the menu of low carbon energy supply options, Hendry said most about renewable energy, pointing out how quickly prices have fallen in recent years, even if this is more a result of Chinese and German leadership than from the UK. Supergrids are part of the solution to renewable energy’s intermittency problem. Another is demand response, in which the retail electricity prices respond in real time to demand and supply, and which has the potential to dramatically increase energy efficiency. A further element is energy storage, a field of technology in which Britain could contribute.</p>
<p>But the devil is in the detail, and Hendry was also frank about some of the difficulties in making policy through a strange mix of targets, legislation and regulation. When the government set out the recent <a href="https://www.gov.uk/government/policies/maintaining-uk-energy-security--2/supporting-pages/electricity-market-reform">Energy Market Reform</a> policy, he said, “we had no idea how complex it would end up being.”</p>
<p>The sad fact is that current energy policy resembles an elaborate Heath-Robinson machine strapped to a huge, ageing and stubborn elephant. Ever more complex mechanisms and devices are added in an effort to prod and entice the beast in the desired direction, but despite various sticks and carrots the response is unpredictable and often unwanted.</p>
<p>Hendry acknowledged this more clearly than I have ever heard a politician do, describing a situation where “for every mechanism put in place there is a side effect which needs a correction somewhere else.” He bemoaned some of the complexities of making policy, such as the importance given to economic impact assessments based on figures of spurious accuracy. When the Chief Scientist for the Department of Energy and Climate Change took up the post, Hendry said he was amazed to find there were more than 100 economists in DECC, but not one engineer.</p>
<p>Hendry’s talk provides encouraging evidence that the elephant in the room is gradually being acknowledged. We are inching towards recognition of the need for a radical reshaping of how we conceive and structure our energy markets and how they are regulated. But there remains a long road to travel.</p><img src="https://counter.theconversation.com/content/23272/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Webb's PhD is funded as part of an EPSRC project on energy storage.
</span></em></p>With floods sweeping the country, energy policy has slipped down the agenda since Labour’s attention-grabbing price freeze policy announcement. And this of course is unfortunate, as energy policy is central…Robert Webb, PhD student, Imperial College LondonLicensed as Creative Commons – attribution, no derivatives.