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Energy reform key to productivity, paves way for carbon action

Prime Minister Kevin Rudd ducked the question of changes to carbon pricing in his National Press Club address yesterday. But he put energy market reform at the top of his “New National Competitiveness…

Australia’s energy regulations need a clean up. Flickr/Looking Glass

Prime Minister Kevin Rudd ducked the question of changes to carbon pricing in his National Press Club address yesterday. But he put energy market reform at the top of his “New National Competitiveness Agenda”.

Rudd’s plans rest on effective agreement with the business community, the unions, and state and territory governments. The gauntlet has been thrown down. Will it be picked up?

The Prime Minister identified electricity prices as a major concern for business and for voters. His view is that the way electricity networks are regulated is producing unacceptably high rates of return for distribution businesses. This aligns closely with a key conclusion of Grattan Institute’s 2012 report, “Putting the customer back in front: how to make electricity prices cheaper”.

Our analysis concluded that regulatory bias in favour of these businesses - including permission to make unnecessary investments and borrow at an unduly low cost - has helped them make higher profits than are justified by the actual risk. These profits could be used to reduce consumer prices.

Productivity is relatively worse in government-run electricity distribution, but both in these and in private businesses profits are too high. Fixing this problem and three others we identified in the report could save businesses and homes A$2.2 billion a year.

As a matter of urgency, governments must overhaul the current regulatory arrangements and the governance structures that give consumers such a bad deal. They must move from an overwhelming attention on process to a focus on results.

In December 2012, Prime Minister Julia Gillard said that energy market reform could save Australian households A$250 a year. Since then, we have seen an increase in the powers and budget of the Australian Energy Regulator.

What we have not seen is anyone taking responsibility for achieving lower prices for consumers and lower profits for the regulated businesses. This is the challenge for the Prime Minister, Resources Minister Gary Gray and the energy ministers of the states and territories.

The Prime Minister also identified gas market reform as a priority, but was not clear what that might mean. Grattan Institute’s June 2013 report, “Getting gas right: Australia’s energy challenge”, recommends that governments should create a more transparent gas market.

This includes trading hubs and a forward gas price index, and removing barriers to supply by freeing up the trading of pipeline capacity. The task is to ensure the gas market delivers the best result for all Australians, to capitalise on our extensive gas resources.

The global gas revolution - especially rising demand in Asia - is projected to place Australia at the top of the global gas export market, producing more than A$50 billion in annual export earnings by 2017.

But the domestic price of gas is rising to meet the price gas producers can obtain by exporting. The local market is struggling to ensure a transition not too painful for houses and businesses.

To keep prices low, and resolve the impasse over coal seam gas development in New South Wales, will require leaders to resist increasing calls for protectionism by some businesses. Reserving a proportion of gas production for local use, or other forms of protection, merely provides an unfair taxpayer subsidy to some businesses, keeps them inefficient, and in the long run does not keep prices low anyway.

Energy reform may not be the world’s most riveting subject, but it must be part of the Prime Minister’s National Competitiveness Agenda. It will make it easier for the Prime Minister to persuade the public of more reform if and when he returns to the increasingly urgent problem of climate change.

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14 Comments sorted by

  1. John Newlands

    tree changer

    There's a lot to be said for the model represented by Electricite de France who generate, transmit and sell low carbon power at affordable prices. The problem with this model is the temptation to featherbed at various levels in the system. In Australia for example a State owned power company is said to provide cushy retirement jobs for failed politicians. Another advantage of vertical integration is that full service providers can decide their own technology given a CO2 target. That is they decide how much gas, coal, nuclear, wind, hydro and commercial solar they want without having to do reluctant deals with interposed companies.

    I disagree that Australia particularly the eastern half should go for broke on LNG exports and CSG/shale gas drilling. It's a fallacy of the 'markets will provide' philosophy. Once that gas is gone we'll never get it back.

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  2. Gary Murphy

    Independent Thinker

    Is it just a coincidence that electricity prices have risen so drastically since privatisation? Where instead of one organisation running the system on a non-profit basis (and with government borrowing costs) we have three groups of companies extracting profits?

    And what do retail companies do that requires a 20-30% cut? Read a few meters, send out a few bills. They do seem to be spending a lot of money on advertising these days.

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    1. Henry Verberne

      Once in the fossil fuel industry but now free to speak up

      In reply to Gary Murphy

      This country is full of these parasitic industries that extract large profits but for very little benefit, certainly little for the consumer. The "benefits" of privatisation have certainly not flowed to the consumer in many instances.

      Some of the "wealth management" industry,encompassing financial advice can be similarly characterised.

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    2. Greg North

      Retired Engineer

      In reply to Gary Murphy

      It is no co-incidence Gary though it could be considered as such if you like seeing as it was always going to be the case with privatisation.
      Privatisation or Industry restructuring as it can also be seen had a number of goals, depending on the state and government policies in play at the time.
      The Victorian State Government for instance with the SECV wanted to introduce more accountability and so a number of internal structural changes came about in intially moving from a management by scope…

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    3. Michael Shand

      Software Tester

      In reply to Gary Murphy

      There is a great book which examines this question, its called "Powerplay: The fight to control the world's electricity"

      It is a really great read and covers the privatisation question in depth.

      If you can't be bothered reading it, the short version is, privatisation tends to create many average size competitors who quickly monopolise by buying out the competition so it becomes only a couple of large companies who own the whole market under various brand names and then they find it is not actually in their best interest to compete against each other, it is actually more profitable to match your competitors price and reduce your operational costs whilst pocketing the difference

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  3. Greg North

    Retired Engineer

    " Rudd’s plans rest on effective agreement with the business community, the unions, and state and territory governments. The gauntlet has been thrown down. Will it be picked up? "
    It is so easy to throw down a gauntlet when you likely have no real idea of what in detail the gauntlet is.
    Has Rudd ever been any different?

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  4. Garry Baker

    researcher

    Rudd would do well to read this article in full

    http://www.adelaidenow.com.au/news/opinion/bruce-dinham-former-etsa-boss-says-were-all-being-ripped-off-on-electricity-prices/story-fni6unxq-1226676683356

    Much the same in Melbourne, where two of the largest suppliers are in effect owned by foreign entities (in one of the cases, a government). Each are directly concerned with control of the retail supply market, yet both have other vital interests as well. One of them owns the generating capacity…

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    1. Greg North

      Retired Engineer

      In reply to Garry Baker

      That article by Bruce Dinham sure shows a lack of something Gary, be it research or understanding and just to take a few points of what is claimed:
      " When this arrangement was introduced, key features of electricity supply systems seem to have been ignored or not understood.
      Features of such systems are that they are: 1) inherently vertically integrated with a style of management control united by a common owner; 2) have several essential operating features; and 3) cannot be run in separately managed…

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    2. Garry Baker

      researcher

      In reply to Greg North

      Research more ? Greg I'm fully aware of the past history of the SECV and the subsequent dismal failures as a result of its breakup and privatisation.

      Sure, Project Victoria was underway during a Labor gov't - but they did nothing with it - Nothing !

      It took a ratbag like Kennett to flog it off - and yes, he did inherit about $40 billion in debt from the incompetent Labor gov't, but selling off state assets to retire it was highly irresponsible.

      Added to this, he and his crew retailed…

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  5. Peter Lang

    Retired geologist and engineer

    If we want to get electricity prices down - and we should for the benefit of the country - then there are some obvious early gains to be made:

    1. remove the mass of regulatory impediments that are preventing an appropriately free, lightly regulated, electricity market.

    2. Remove the so called climate policies like carbon pricing, mandatory renewable energy targets, feed in tariffs, renewable energy subsidies.

    Carbon pricing cannot succeed. The sooner it is repealed the better.

    Without…

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    1. David Arthur

      resistance gnome

      In reply to Peter Lang

      Thanks Mr Lang. My own comment on Mr Wood's article concerns his penultimate paragraph, in which he extolls the future of gas: "The global gas revolution – especially rising demand in Asia – is projected to place Australia at the top of the global gas export market, producing more than A$50 billion in annual export earnings by 2017."

      In response to that remark by Mr Wood, it should be pointed out that in order to avert runaway permafrost thawing and methane emissions, the world needs to stop…

      Read more
  6. Garry Baker

    researcher

    The article states:
    "To keep prices low, and resolve the impasse over coal seam gas development in New South Wales, will require leaders to resist increasing calls for protectionism by some businesses. Reserving a proportion of gas production for local use, or other forms of protection, merely provides an unfair taxpayer subsidy to some businesses, keeps them inefficient, and in the long run does not keep prices low anyway. "

    Good Lord, it's as if natural gas is a magic pudding resource, never…

    Read more
  7. Michael Shand

    Software Tester

    It was a good article up until the last line;

    The idea that if we conduct an energy reform then maybe possibly this will help us look at adressing cliimate change later down the line.....is ignorant to say the least or maybe Naive

    The idea that if electricity prices are low therefor people will magically stop whining about the cost of living shows you greatly under-estimate the self entitled and self justified victim-hood the average Australian feels

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  8. Doug Hutcheson

    Poet

    "The task is to ensure the gas market delivers the best result for all Australians, to capitalise on our extensive gas resources"

    vs

    "It will make it easier for the Prime Minister to persuade the public of more reform if and when he returns to the increasingly urgent problem of climate change".

    We can't have our gaseous cake and eat it too. If Rudd is serious about global warming, he will resist the temptation to support fossil carbon burning both here and overseas, by stopping exports and reducing domestic consumption. Of course, that is not going to happen and Australia will continue to provide fossil carbon for the international market to convert into CO₂. Sigh.

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