Californian electricity consumers are currently experiencing rolling blackouts and brownouts. The Californian problems stem from a lack of new generation in the face of a 12 per cent demand increase since 1996. NSW is adopting features of the Californian market arrangements that can disguise real prices thereby contribute to a shortage.
Now that electricity markets have replaced integrated utilities in providing energy, co- ordination of supply and demand is undertaken in the hurly-burly of commercial interactions. Electricity retailers -- like energyAustralia -- sell a low margin product at a fixed price and can incur huge losses for little gain when wholesale prices rise; hence they seek to reduce their risk exposures. Similarly, those generators with high fixed costs want deals to minimise downtime on their expensive capital equipment.
For the most part electricity is therefore traded under contracts. But because nobody can be sure about the precise demand and supply out-turns there also needs to be some means of meeting residual demand. The spot market performs that function as well as offering guidance on the underlying value of electricity.
In Australia, as elsewhere, the authorities have progressively been opening market segments to competition. This is most difficult for small users, especially households, that account for about half the electricity consumed. During the transition to free markets, prices to these customers were fixed as were prices and matching supplies from generators.
The NSW Government has introduced legislation that discourages electricity retailers from contracting for energy supplies to small customers, who account for half the market. These arrangements mean generators will hold fewer contracts than they would otherwise choose. They may also be required to reimburse retailers if pool prices rise above yet to be announced levels.
In California, the US federal regulator reported a key reason for inadequate supply was regulations that prevented retailers and generators contracting for electricity. This resulted in inadequate incentives to build new generation. Preventing generators and retailers from contracting with each other for half the market in NSW begins to resemble the disastrous Californian model. It also bears similarities with the approach Queensland adopted in 1997 but abandoned under a spate of massive price instability.
Aside from the effect on generators, severing the link between the retailer and the customer is pregnant with uncertainty. Preventing retail competition hinders traditional retailer services like assembling portfolios of supply to match output and risk requirements of generators with customer needs. The proposed NSW approach reduces the pressure competition places on producers. And it means consumers will be unable to benefit from retailers searching out and responding to demand for features like time of day or uniform pricing or for products like green power.
The Carr Government describes its new regulations as a phase-in to full retail competition. But if this bivouac for NSW State owned entities assumes a permanency the State will see reduced gains from the market and may face the Californian experience.
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