Regime uncertainty, climate change, and electricity prices

This morning Graham Richardson was talking about electricity prices and this comment caught my attention:

From the conservative side, blaming the carbon tax, which has been in place for one month, for price increases occurring over three or four years is pathetic. A portion of this year’s increase may be attributed to the carbon tax but it is not retrospective.

That would seem sensible, but it isn’t quite right. It overlooks something called regime uncertainty (a more precise term for people who like to use the term ‘sovereign risk’ – a term that is usually reserved for bond markets).

Regime uncertainty is a concept developed by Robert Higgs, that describes uncertainty of investors in their private property rights in their capital and the income it yields because of government action.

Vague government policy can have a real impact on the economy before it comes into effect.

So has this happened in the case of electricity prices? I went to the ABS and captured the CPI data for All Groups and Electricity and graphed over the period 1980 – 2012 (the longest period available).

So for a long time the All Groups CPI and Electricity CPI tracked each other quite closely before a massive deviation in 2007. So let’s have a look at that.

About the middle of the year a deviation between the two series occurred that has persisted and shows no sign of reversing. We can hardly blame events in 2007 on the Rudd-Gillard government. Well maybe we can. The middle of 2007 saw the release of the Shergold Report, the introduction of regime uncertainty around the value of power stations, and the price of electricity.

Peter Shergold, chair of the Prime Minister’s task group on emissions trading, said it would take three years to establish such a system in Australia.

Dr Shergold released the group’s eagerly awaited report today, recommending work should start “at once” on developing a cap and trade emissions trading system to achieve a target within five years.
“Australia should commit to an emissions target for post 2012 ahead of any comprehensive global response, and it should do that with an emissions trading scheme based upon cap and trade,” he said.

But he said Australians should know a carbon emissions target would come at a cost to economic growth, business and households.

“What we are doing by seeking to prudently manage risk is bringing forward costs from the next generation, costs that we impose on ourselves,” he told reporters in Sydney.

“While there are these costs, which need to be understood in acting now, the consequences of inaction are potentially larger.”

At that point climate change policy became bipartisan with the Howard government adopting ALP policy – always a mistake in the post Hawke-Keating era. So it looks like a combination of climate change policy and gold-plating (the desire to extract as much value from existing assets before the government expropriates their entire value) is responsible for the massive increases in electricity prices.

We can argue about why the Howard government lost its nerve on climate change in 2007 – it was a mistake and Howard did go on to lose government and his seat – but there can be little doubt that regime uncertainty associated with climate change policy is the cause of the price hikes we have experienced in the last 5 years.

To the extent that Gillard owns climate change, she owns those price increases.

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17 Responses to Regime uncertainty, climate change, and electricity prices

  1. Jarrah

    I have to say, that is a compelling argument.

  2. John Comnenus

    Welcome to reality Jarrah. Have you seen your latest electricity bill?
    The CCC may never be able to afford to meet again after its electricity bills went up by 17.7% of which 14.2% was attributed to the carbon tax.

    Can I now ask the Treasury’s forecasting arm to be sacked. After all they said there would be a 10% increase in electricity prices over 3 years. If I made financial forecasting errors of that magnitude I would expect to be sacked. Why isn’t the increasingly erratic Treasury forecasting arm sacked?

  3. manalive

    The expanded MRET must figure in there also.

  4. Pickles

    They haven’t been sacked because CanDo isn’t PM. Yet.

  5. Splatacrobat

    Does this graph also take into account the regime uncertainty of governments deregulating the retail market and selling off of government owned electricity generators?
    I recall Bligh saying when they deregulated the retail market in Qld that this would open up competion and prices “WILL come down”. It’s no wonder we kicked her arse out with vacuous statements like that.

    The LNP raised this over 12 months ago

  6. Bruce

    The Renewable Energy Target legislation was passed in August 2009. There’s a pronounced jump in both graphs at that time. Before that you probably had the effect of the GFC, with cessation of financing for energy companies.

    In other words ALP caused just about all of the price jump. Its just convenient for them to say it can’t have been the carbon tax. But they brought the RET legislation in, they are responsible. All pointless too since renewable energy is nearly as much a scam on us voters as the carbon tax is.

    Incidentally the Chinese are now saying their solar PV industry is bankrupt. So sorry (/sarc).

  7. John Comnenus

    Bruce,
    oh no, don’t tell me that the Chinese have wasted the money they have shoveled into solar technologies. My God, tell me its not true. We were told by Combet, Gillard and co that we had to keep up with China’s levels of investment waste on renewable technologies. Say it isn’t so!

  8. brc

    Just think – every bit of cash that is going into that blue line is no longer going into the things in the red line.

    Myriads of businesses will be wondering why their turnover is down 10-20% – and a simple answer is that the cash has been diverted from their business into the yawning chasm of ‘green’ energy, wasted, never to be seen again.

    The irony is that the ‘green’ indexes of share markets show a curve almost inverse to this one. Despite all the taxpayer money shovelled into them, despite all the rough-riding over planning laws to allow it, despite all the regulatory fixes, they’re still going bust by the fist-full.

    Howard rightly deserves criticism for reversing his previous pushback – I distinctly remember him quietly explaining about the needs of baseload power. But he eventually caved and allowed green idiocy like the light bulbs, greenhouse measurement (which was a necessary precursor to the carbon tax) and RET.

    Again, they build up a surplus, pay down debt, introduce a few ‘soft’ left policies, then get booted out when people are comfortable. The ALP then comes in, doubles down on the regulations and wastes all the surplus on stupid schemes.

    Then try and blame everyone and everything else on their failures.

  9. Entropy

    I recall Bligh saying when they deregulated the retail market in Qld that this would open up competion and prices “WILL come down”.

    Hmm, that wasn’t what the briefing material said…..you just can’t trust a pollie.

    Anyway, the flaw in this proposal, well researched as it is, is that it doesn’t look at what else went on at the time.

    2007 was when Brisbane was suffering brown outs due to years of under investment in poles and wires. This happened because of a string of drought exacerbated hot weather making everyone turn on the AC at once., There were also days of lost power in some SEQ locations because of windstorms, as well as power being out in FNQ for 3-4weeks in 2006 post STC Larry.

    The underinvestment occurred because Beattie demanded diversion of revenue from GOCs such as Energex to help fund spending. In typical Beattie style, the 2007 problems caused him to move into full cheeked ‘sorry’ mode mixed with overkill in trying to catch up. So it isn’t all RETs and carbon tax expectations, there are also other causes.

    But we shouldn’t fall into the trap of playing Gillard’s game here, with Richo’s support. There is no getting away from the fact that the alternative energy subsidies and taxes are a key factor driving up power costs, even if they aren’t the only factors, and their removal would be a big part of making things less expensive for everyone.

  10. thefrollickingmole

    On a side note when the lekky company was in state government hands it was effectively impossible to sue them for negligence.

    My uncles farm and a large chunk of his district was severly burnt out by wires seen actually arcing and sparking on a termporary pole on his property.

    There was a court action and the states defence came down to “we put it up according to our standards therefore we werent negligent”…
    The state won.

    Fast forward a couple of decades and power companies being sued is a regular risk for them.
    Thats got to be worth a few cents on your bills as well.

  11. Splatacrobat

    Entropy I also covered this on the gold plated thread

    “the reason given was inadequate investment in the network.”

    Yes this did happen under Beattie’s watch. The main reason for the inadequate investment was that Ergon and Energex were GOC’s and sent profits back to Treasury. Qld Labor were requiring from Government Owned Corporations huge dividends to fund their black hole budgets.

    There was at the same time an investigation into Energex and the CEO who was facing accusations of funnelling money out of the company for private purposes. Sadley he committed suicide. It also didn’t help having a Labor party compliant board.
    This is also a good link if you want to delve into the history of why energy providers in Qld have been investing in infrastucture.
    It’s not rolling it in gold, just catching up with years of neglect.

  12. entropy

    Oh, my bad. Didn’t go to that one.

  13. SteveC

    “but there can be little doubt that regime uncertainty associated with climate change policy is the cause of the price hikes we have experienced in the last 5 years.” So everyone else is wrong about the overinvestment in infrastructure?

  14. Mundi

    This is what really killed labor in qld. Everything has gone up way more the CPI and way less than GDP growth, so the average person is getting poorer. Living standards seem to have peak just become the dotcom bubble crash in 2003.

    Qld water? Up 200% in just 2 years. Electricity up 25% before carbon tax. Car rego was fixed at 7% pa.

    Labor still insist that such things had absolutely nothi to do with them getting slaughtered in qld.

  15. stackja

    Wind power downed gold plate coal power in some suburbs of Sydney 10 August.

  16. Elizabeth (Lizzie) B.

    KISS. Keep the blame on the most obvious thing, the CO2 Tax.

    Clearly ram home that Gillard has deliberately introduced uncertainty for the electricity generators via her useless tax, she’s wasted a motza on ‘green’ dreams, and she’s had no interest in poles and lines until yesterday.

  17. kae

    Power rose 70% in about three years in Queensland, a friend of mine did a calculation. This was before Beattie buggered off and Bliar got the reins.

    Another parting gift from Beattie was the forced amalgamation of local government councils. My council rates, except water, and including all fees and charges (garbage, etc.) rose from a $700 rate with early payment discount on the land rates component payable in January, to two payments per annum, January and August, of about $700 each with discount for early payment.

    Yeah, we were told it would keep rates down, we were told it would bring economies of scale and so on. It didn’t. Many broke and councils with huge debt were amalgamated with councils which had been managed properly and not put into huge debt.

    Our rates have risen over seven percent this year*. I know in Bankstown, NSW, rate rises are capped to 2.5%.

    *This may or may not be due to the January 2011 flooding which has cost a bomb, and the state government tried to worm its way out of assisting, there was millions of dollars damage to roads and bridges and other infrastructure and the ALP promised the sun, moon and stars, but I think that being an LNP stronghold we were ignored.

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