The key question is whether it is appropriate for government-owned firms to embark on high-risk generating ventures either with the taxpayers money or at the expense of energy customers, writes Richard Wood.
Deregulation and competition in electricity supply in Victoria and NSW is providing colossal savings to those customers permitted to break free of the government stipulated price. It is also resulting in enormous productivity gains, especially in Victoria, where the industry had massive overstaffing and poor plant reliability.
As from February 1997, the two State markets are to be linked. Electricity cab then be bought from interstate generators and the electricity will flow from the lower priced market to the higher priced market.
In both Victoria and NSW, before recent reforms, the cost of generated power was more than 5c per kWh. It is being phased down from that level for the customers who are not yet free to negotiate their own prices. (These account for 60 per cent of usage in Victoria and 85 per cent in NSW, falling to 60 per cent in July of next year). The "contestable" customers have negotiated prices believed to be about 3c per kWh in both States.
But the competitive electricity supply forces unleashed in bothe States are driving prices much lower than this. This is compounded by lower demand caused by major users continuing to engineer greater economies into their power demands -- many firms have signed on to the Commonwealth's Greenhouse Challenge and found they can operate with less power even where, as with supermarkets, there is a greater demand for power for refrigeration.
At the heart of the new electricity market is a spot price determined half hourly from the bids of generators wanting to supply power to the system. Since July of this year, this price has averaged only 2.4c in Victoria (1.6c in September and October) and 2.2c in NSW. Long-term contracts are on offer at less than 3c in NSW.
There are considerable implications arising from these low prices.
In Victoria, the marginal costs of production for the brown coal-fired generators (supplying 85 per cent of the load) are thought to be less than 1c and profitable operation requires at least 3c. In NSW, because the coal is available for uses other than power generation, the marginal costs are thought to approach 2c and profitable operations require up to 5c. Although almost all power is sold under contracts above the spot prices, they will continue to place downward pressure on future contract prices.
This presents major difficulties for the generators' profitability, especially since there is considerable surplus capacity which can readily be brought on stream whenever prices improve. In Victoria, the largely privatised generation industry will bear the burden of lower prices but there is some respite in the offing once the link with NSW allows Victorian generators to offer their intrinsically cheaper power into that market. While ratcheting Victorian prices upwards, this will maintain downward pressure on NSW prices.
For the NSW supply industry, the prospect of full competition with Victorian generators is alarming. Forty per cent of customers will soon be able to negotiate their own prices. If the prices they negotiate are at the 3c per kWh now on offer for annual contracts, NSW generators' revenues will be nearly halved, bringing a loss of some $400 million. If Victorian generators were to capture a 4 per cent share of the market, a further loss of $100 million would be incurred.
One concern of privately owned firms is that the NSW Government-owned firms will not act commercially. This will guarantee huge losses to the NSW taxpayer and grievously distort the entire market. A more insidious concern would be if NSW tried to keep out Victoria power on spurious greenhouse grounds.
A true market can only be assured if the NSW Government abandons its ideological opposition to privatisation. The current low electricity prices will doubtless have reduced the market value of the generators, but they remain highly prized assets. Their sale would allow private capital to operate with commercial disciplines and equilibrate the risks and returns concerned. Such a position is also the only way the NSW Government can avoid the risk of taking a major hit on its finances.
Yet in NSW, a new gas-fired cogeneration facility is shortly to commence at Smithfield on the back of a contract of 5c per kWh entered into by the Government-owned Integral Energy. A further plant at Botany is to be partly owned by another Government-owned firm, Energy Australia. To operate profitably, such a plant requires a power contract of 4c per kWh. Energy Australia is being asked to guarantee that price.
These are complementary to other industry developments and might turn out to be far sighted if the price of electricity were suddenly to double. But there seems little prospect of this happening over the next few years. And, as the lead time for constructing these sorts of plants is only two years, it would seem folly to embark on them now. Moreover, the new plants can only exert additional pressure for the closure of the more marginal existing NSW coal-based plants.
The key question is whether it is appropriate for government-owned firms to embark on high-risk ventures either with the taxpayers money or at the expense of energy customers. Voters will not tolerate tax increases, while electricity customers are aggressively seeking better deals. Capital resources available to State governments for roads, schools and public housing are increasingly limited.
There is no end of such calls on government investment capital for projects that could not attract private capital. Should State government funding be allocated to the casino that characterises the present electricity market rather than on public goods that cannot attract private funding?
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