Each year the Jeremiahs warn us of impending electricity shortages and blackouts in the peak month of February. This year is no different. One year the Jeremiahs will be right, because no power system can ever be perfect.
Yet the national electricity market has proved to be resilient over the past decade. It has provided us with unprecedented reliability and lower real prices.
This has occurred despite the many flaws in the market's political oversight. It's worth rehearsing some of these.
One is that gas and electricity operate under different market arrangements although they compete and gas is an important electricity fuel. The regulatory authority for gas, the Australian Competition and Consumer Commission, has placed obstacles in the way of new developments by imposing controls and obligations on pipelines even though competition provides adequate disciplines. This means additional uncertainties about returns from new proposals.
Other aspects of political intervention include the price caps in place for household consumers. These prevent the setting of cost-reflective prices, impeding the market signals that indicate to suppliers where demand is growing.
More market distortions arise from green electricity requirements, which represent confusing, inconsistent and increasingly costly imposts on the market. Green electricity under the federal scheme will comprise 5 per cent of electricity supply by the end of this decade and costs twice as much as conventional power. Separate schemes in Queensland and NSW add considerably to this requirement.
Where green energy is supplied through wind power it is highly unpredictable and requires conventional back-up.
The uncertainties and costs of greenhouse measures mean that no major new coal-based investment can take place in Australia without specific government assurances.
Governments building new capacity themselves is one way of internalising the risk. Nonetheless, government ownership remains an enormous issue.
Although the government electricity businesses have been corporatised and by-and-large operate almost as efficiently as their private counterparts, their labour relations and strategic management is heavily controlled by their political shareholder.
Moreover, in NSW, the government's antipathy to coal has brought delays in commissioning new plants and higher reliance on imports from Queensland.
In Queensland itself we have the opposite problem: government-supported investments in new generation are undermining market confidence. Energy Minister John Mickel declared that to sleep easy he needed a buffer of surplus electricity capacity of 25 per cent of demand. He set about encouraging his state-owned generators to build more capacity, even though the return was less than commercial.
But having built the capacity, markets responded and the price collapsed. Compared with a pre-reform wholesale spot price of around $38 per megawatt hour, the price fell to an unprofitable $18/MWh.
Not only did this affect the government's investments but it also undercut the viability of private-generation investments.
Seeking a way of cutting its own losses, the Queensland government gazed over the Tweed at the attractive prices of $26 in NSW and saw a stronger transmission link between the two states as a solution.
This is expensive but in any case is a poor second-best to not undertaking excessive investment in the first place. The increased interconnection capacity means Queensland is exporting its own regional price distortions to other states.
Despite uncertainties created by government meddling, market signals remain sufficient to motivate investment in generation where it is most needed and the industry has continued to improve its productivity.
For coal, this is only incremental expansion at existing plants. Gas investments are proceeding in Victoria, Queensland and South Australia. These developments are less vulnerable to greenhouse tax impositions and are responding to price signals.
Although the Jeremiahs are likely to be proved wrong again this summer and blackouts will not occur, problems for the future are being stored up. And all of these stem from uncertainties that government interventions and ownership create for private investors.
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