Lessons from the California Energy Crisis

The energy crisis in California should ring alarm bells in Australia, though not for the reason commonly suggested.

California -- a state of 34 million people and the centre of the new high-tech world -- has been racked by black-outs, rising electricity prices, and bankruptcy amongst energy generators and wholesalers over the last year.  This has resulted in the State Government putting into place emergency rationing, bailing-out bankrupt distributors and contemplating entering the electricity business.

The critics, both in the US and Australia, have been quick to blame the crisis on privatisation and deregulation.  Privatisation, however, has played no part in the crisis as the Californian electricity industry has always been in private hands.  Deregulation is also not the cause.  The crisis would have arisen under the old regulatory system.  Moreover, the political micro-management of California's utility companies can hardly be called deregulation without twisting the meaning of the word beyond recognition.

The underlying problem in Californian is faulty regulation.

First and foremost, there has, effectively, been a ban on the construction of new generation capacity.  Over the past two decades California regulators have blocked new construction, arguing that renewable energy would pick up the slack, that "negawatts" -- activist jargon for subsidised energy conservation -- was preferable to "megawatts," that minimising new emissions was more important than generating new electricity and that the BANANA army ("Build-Absolutely-Nothing-Anywhere-Near-Anybody") must be heard.

During the 1990s, electricity demand in California grew by 12 percent, while supply grew by 1 percent.  It is a simple fact;  you cannot go on obstructing the building of new capacity for years on end in a growing economy without eventually experiencing black-outs.

The same ideology is beginning to prevail in Victoria, as witnessed by the impediments put in the way of the proposed electricity transmission line from Tasmania to Victoria.

Second, the wholesale cost of electricity in California has skyrocketed thanks to the regulatory bias in favour of so-called "clean" energy.  Virtually all additional capacity over the last two decades in California has been in renewable and gas-fired power stations.  As a result, the State is inordinately dependent on these two high-cost sources of fuel.  This dependence was made much worse by the explosion in the natural gas price -- up by 600 per cent -- since November last year.

Again, one can see the signs of a growing policy bias -- no mater the cost -- in favour of so-called "clean" energy.

Third, the Californian government prevents wholesalers from passing costs on to consumers.  The Californian regulators have mandated a maximum retail price of 6.5 cents per kilowatt hour, irrespective of the underlying cost.  As a result, generators have had no incentive to build new plant and, with the rise in natural gas prices, electricity wholesalers and generators have been haemorrhaging red ink.  Additionally, consumers have had no incentive, or even recognition of the need, to conserve electricity or build new plant.

Thankfully, Australian governments, as part of the national electricity market, are moving away from fixed retail prices to market-determined rates.

The California energy crisis has lessons for Australia, but it is important we learn the right ones, otherwise we may hasten down them same path as they.

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