Energy White Paper: does public service outrank public good?

An article of mine in today’s The Australian which summarises the IPA submission to the Energy White Paper.

The energy white paper under preparation proclaims that government has a role in the energy industry. Perhaps so. But it is one that is best limited to controlling natural monopoly elements within the industry. It is certainly not to provide some blueprint for the future.

Energy has an ongoing history of public ownership, at least in part stemming from misplaced notions that it is a natural monopoly and a necessity requiring government interventions. The outcome has been deleterious and has been compounded by a determination of governments to use the industry to accommodate its social, environmental and industry policies. This has transformed an inherently low-cost industry into one that now has among the world’s highest prices.

A worrying feature of the review is a prominent role given to the supposed need to maintain analytical capability within the government. This appears to be a priority to protect departmental personnel jobs that sits badly with the market-driven industry the white paper claims to be championing. The priority may be partly due to an excessive number of goals that the white paper’s “issues paper” specifies. These encompass supplying and using energy:

• To put downward costs of business and households.

• To grow exports.

• To promote low emissions energy technologies.

• To encourage the more efficient use of energy.

Whatever may be said of the first two of these stated goals, the third and fourth are in conflict and have spawned the egregious interventions in energy policy that have created a need for a white paper. The fourth also adopts the discredited hubris: “I’m from the government and I’m here to help you.”

Markets develop from the interactions of consumers with businesses, which seek to sell their goods, access inputs and reduce risks. Government’s role is to allow these processes to be pursued and to uphold the law.

Rather than a plethora of goals, the white paper should have a single focus: to allow the market to bring about efficient production of energy with interventions limited to addressing natural monopoly situations. Anything beyond that will perpetuate the weaknesses presently evident.

Energy is a vital factor in the direct wellbeing of consumers.

More important still for Australia, it is a key component of economic development. Our minerals and agricultural processing industries are natural fits to the resource endowment that ­Aust­ralia has and cheap energy is both part of that endowment and crucial to its development.

Irresponsible government actions have impaired the value of our energy resources. This can be seen in four key areas:

• Retaining ownership of energy businesses in networks where such ownership is verifiably inefficient and always likely to remain so.

• Placing taxes and regulatory imposts on energy suppliers to force them into costly measures in pursuit of government-determined efficiency, consumer consultation and greenhouse-re­­­d­­uc­­­­ing measures.

• Impeding access to land for gas exploration and development.

• Suppressing prices to certain customer groups, thereby weakening incentives to supply and maintain industry resilience.

Policies to rectify these impairments have occasionally entail government action.  This is somewhat oxymoronic since it involves using government to combat poor policies governments have introduced.  The process did however work after a fashion with the post-­Hilmer competition policy ­pay­ments, where governments were re­warded (and occasionally punished) with regard to an agreed set of principles.

But the process would have backfired under the previous commonwealth government.  Labor, had it attempted more forcefully to exert pressure on states to promote a goal it favoured, energy-saving measures, the outcome would have been even more perverse than that which has eventuated.

The same might be said  to possibly result from the current white paper process.  Its ”issues paper” continues to promote market interventions in many places associated with green energy and energy efficiency.

The best starting point for policy, in line with the government’s deregulation initiative, is to announce the early sunsetting of all regulatory measures and discriminatory charges and taxes on energy supplies at the commonwealth level. This might be accompanied by an invitation to state governments to adopt similar programs.

Such a deregulation initiative would be an all too rare event in Australian policy.  Perhaps the best we can hope for is to have some costs (government ownership, bans on tight gas development) revealed followed by obvious rather than radical reforms.

 

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22 Responses to Energy White Paper: does public service outrank public good?

  1. Joe

    The ONLY monopoly in the energy sector is the transmission cables to the consumer.
    That should be owned by government and paid for by taxes.
    All the rest should be open to free and unencumbered competition.

  2. Andrew of Randwick

    As a NSW customer I am paying around US$0.30 per kilowatt-hour for my domestic electricity. Thus I was very surprised to read that the World Bank thinks this price is too high for development….

    “Many countries in Sub-Saharan Africa face electricity costs as high as US$0.20–0.50 per kilowatt-hour, against a global average closer to US$0.10. Such high electricity costs become a barrier to further electrification.” (page 12)

    The inmates have taken over the asylum and destroyed our once plentiful and cheap electricity!

  3. egg_

    The inmates have taken over the asylum and destroyed our once plentiful and cheap electricity!

    You mean the barge@rse Senator from SA who flies her high-air-miles Nanny to Canberra?

  4. wreckage

    All Aussie politicians want is to transition from a purely ag-mining economy to one with a healthy mix of industry with the highest pay, highest energy prices, and worst liability risk in the world!

    IS THAT SO MUCH TO ASK???

  5. Vasily

    “Energy has an ongoing history of public ownership, at least in part stemming from misplaced notions that it is a natural monopoly and a necessity requiring government interventions.”
    But surely energy is a necessity for any kind of civilised life, Alan?
    That is not a “misplaced notion”, surely?
    Even your Aborigines possessed fire.
    But even that does not mean that government should impose its social, environmental or industrial priorities on the energy sector, beyond what is clearly for the public good (basic pollution controls and planning limitations on the sighting of power plants). That is a non sequitur, I think. I struggle with your point there.

  6. Vasily

    Pardon a “second bite at the cherry”.
    Was not lack of private capital also a major reason for government investment in electricity infrastructure in Australia? Just a with your railways? The historical reason then was pragmatics, not ideology. If sufficient private capital is now available, government should divest, since the market will always be more efficient than the government in providing services. Government should only oversee a minimal regulatory structure within which private companies can operate at maximum efficiency. In such a scenario, government meddling will probably only artificially increase prices for the consumer. Why would consumer tolerate this?

  7. Wozzup

    To understand the perverse effect of government policy in this area one only has to look at the state of South Australia where the previous labor premier – Rann – dictated that a far higher proportion of electricity be sourced from “renewable” sources. Far higher than any national agreements required – why because he wanted to look good to his green base. The result is that in SA electricity costs are the highest in the country and amongst the highest in the world. So much in fact that domestic electricity use is falling as many people in this state (which has more than its share of poverty and welfare recipients – also thanks to labor policies in many cases) cannot now afford to use electricity for heating or cooling.

    Having people freeze in the dark is one way to save the planet I suppsoe and greens would look on with pleasure at their handiwork. Incidentally what this means for people who continue to use electricity is that they pay even more for it as the “regulated” formula for pricing allows some market participants to recoup their costs even when people are not buying their product (transmission businesses are like this). So effectively the less you buy the more it costs per unit – because they are allowed to get they money back come what may!

    I have a healthy disrespect for politicians playing in this market. I have an even healthier disresepct for public servants who advise them. Most of whom I am sure do not really understand this hugely complex market – itself a hotch potch pulled together as marriages of convenience to create a “national market”. this is another policy area screwed up by labor and the greens. We need to go back to square 1 and start again.

  8. Michel Lasouris

    To put downward costs of business and households.

    • To grow exports.

    • To promote low emissions energy technologies.

    • To encourage the more efficient use of energy.
    Actually these are not bad aspirations, provided that they are done for the public/taxpayers benefit, and not some stupid Green/labor environment result. Although, by coincidence only, these proposals cut the ground from under the Loony Left
    Again ( yes I know I’m boring, but bear with me) I recommend a serious look at
    1) PRT ,as personal safe cheap efficient means of transport available to ALL , that does not conflict with existing infrastructure, and is a real export potential, and will absorb much of the labor from the Holden/Toyota closures.
    2) Coal to liquid. For a mere $10 billion Australia could produce diesel and Jet fuel in abundance at the equivalent of $30 per barrel. Have we got coal, or have we got coal?
    3) develop MSR/Thorium safe,local, electricity generation. Gets rid of expensive grids, and the waste is relatively harmless. A technology that was perfected in US but only abandoned due to a Cold War need for weapons grade material. Do we have Thorium? Only about 400 years worth.

  9. johanna

    The last two of the dot points you cited are garbage (not yours, I hasten to add). WTF does “emissions” mean? I presume that it is shorthand for CO2 emissions, but who knows? I mean, who is supposed to be reducing “emissions” – power suppliers, private consumers, businesses – who, and why and by how much? It’s just gobbeldeygook.

    Then we get to the “encourage the more efficient use of energy” meme, which is one of the most pernicious in the greenie artillery.

    First, there is the premise that there is a demonstrably small and precious pot of “energy” that we must conserve at all costs. Balderdash. A large single nuclear power plant could power the whole of Sydney, without digging up a single lump of coal. And we have coal enough for hundreds of years. Plus we are now finding that we have heaps of gas as well.

    Second, there is the arrogant and wrong presumption that individuals and businesses are wasting money on energy costs when there are simple alternatives. Nuff said on that one. People who pay the bills are acutely alert to these issues.

    They also seem to have forgotten Jevon’s paradox, whereby people who save costs on energy in one area tend to maintain spending by increasing their use in another.

    Discussing energy policy with greenies is like being in a parallel universe. The UK is heading towards the cliff thanks to this surreal dialogue, where they are required to close down power plants with nothing to replace them

  10. Biota

    greens would look on with pleasure at their handiwork

    While sitting air-conditioned comfort or building up FF points as they tour the country and globe proselytising. It’s for them masses they say not us.

  11. Bruce of Newcastle

    There are some tough aspects which inhibit full private ownership of the electricity system. For example the solar PV installations. If they are not regulated you end up with a lot of instability imposed on the primary generation network for which the individual solar PV installations do not pay, despite causing it. A lot of the ‘poles and wires’ costs were because the street level grid wasn’t designed to run backwards. Yet the solar PV installations a facts on the ground (well…roof) and confiscation or dismantlement is not an option. Its also a pretty strong lobby as O’Farrell found when he tried to tackle the ALP’s crazy FIT’s.

    The second problem is that power is hard to reliably track. Individual electrons aren’t like cars with number plates. So if you have multiple private generators you have problems verifying who generated which kWh. Trust may decline, leading to instability problems and ructions. Furthermore if you have a power station in Victoria competing with a local station to power my fridge the Victorian station in theory should be factoring the physical distance away from my house, since power losses are related to distance. I doubt that can be easily done.

    So some degree of regulation is needed to prevent blackouts in the real world. What is acceptable and where is it excessive is a Solomonic equation. Otherwise I’m on Alan’s side.

  12. johanna

    Bruce, I get what you are saying, but how is this different from people going to Coles or Woolies for food?

    The US has had privately owned power generators from day 1, and they seem to have muddled along pretty well – except when regulators and politicians have decided to get involved.

  13. Alan Moran

    Vasily

    Energy, is a necessity like food, water,shelter and so on. But so many things are and those labeling them as such do so to give them a magical quality that only governemt can provide. Energy is a necessity but not Macquarie Generation or particular gas fields.

    Energy resolves any special needs if it is treated as a coomodity like others and except for the transmission in and distribution lines left alone to be provided competitively like houses, foods and television

  14. Bruce of Newcastle

    but how is this different from people going to Coles or Woolies for food?

    Woolies and Coles supermarkets don’t each have to buy ten tonnes of mince on Fridays from random members of the public, tying up their loading docks and bankrupting the abbatoirs supplying them, then having to sell it for half the price they pay for it.

    It’d be great for that situation to be changed but here in NSW its hundreds of thousands of registered and very irate voters. O’Farrell did a Sir Robin.

    All of the load management duty falls on the generators, and they lose (part of) the peak load cream they need to cope with the inefficiencies that imposes on them.

    As for coordination and billing, yes the US does that OK and we have AEMO. I withdraw that bit except for the distance losses which are a cheat on local power stations who don’t have access to lignite, yet have to cop part of the network VI losses.

  15. johanna

    Bruce, if you are talking about windmills and solar power, I absolutely agree.

    But as Alan points out, there is nothing special or sacred about supplying power, any more than there is anything sacred about supplying food.

  16. Vasily

    If I understand correctly, Alan, you were making your point rhetorically?
    Not being a native English speaker I am inclined to miss this.
    Thank you for clarification.

  17. Michel Lasouris

    Hellooo? helloooo? Will nobody even argue with me?

  18. johanna

    It would help if you told us what “PRT” means.

  19. Alan, back in the day, regulation used to about either prices are too high or there were hidden defects in product quality that were starting to be a bit too dangerous or rather expensive if not spotted early.

    These days, in the energy sector, neither rapidly rising prices or security of supply seem to be near the top of the regulatory policy list or even on the list?

    on the so called monopoly in power transmission lines, any group of power plants and their single power transmission network to user are very similar to a fleet of tuna boats that must use a cannery to get to the retail market.

    Tuna boat owners get around this cannery bottleneck by forming a cannery co-op at the dawn of industry to contract around future market power and opportunistic behaviour over prices.

    Buyers and sellers co-ops and strategic and R&D alliances are hybrid organisations that form to get around a future market structure where there is a specialised asset whose sole owner such as of a transmission network could otherwise act opportunistically towards them.

    there is a large literature in the USA on long-term contracts over natural gas pipelines and coal coking: take-or-pay, meet-or-release and price protection clauses with 15+ year terms to keep everyone honest. Far more exotic petroleum exchange arrangements apply in oil refining in the oz capital cities so that each of the oil companies uses each other refinery when required in that city without any chance of opportunism.

    These take-or-pay, meet-or-release and price protection contracts emerged in a Hayekian style of trial and error and experimentation.

    These vital market structures and hybrid organisations did not emerge in energy industries because of prior state ownership. Hybrid organisations are buyers and sellers co-ops, strategic alliances, franchising and all those entities in between a arms-length market and a standard firm.

    After privatisations and deregulations, these hybrid organisations and long-term contracts cannot simply appear overnight with the sale or the deregulation. Hybrid organisations and long-term contracts are successful simply because they emerged slowly through competitive discovery.

  20. Rob MW

    “But as Alan points out, there is nothing special or sacred about supplying power, any more than there is anything sacred about supplying food.”

    Sorry johanna but that statement of yours did make me laugh. Probably you should have added a caveat of something like: – “……..but it’s a real bastard when there is none to be had because the suppliers fucked off to the beach.”

  21. johanna

    Yeah, Rob, I still remember all those days when the family starved because “the suppliers fucked off to the beach.”

    Not.

  22. Rob MW

    “Not.”
    Joanna – Yep….. and your parents and grandparents have bad memories as well I suppose ?

    Last time I looked there was no such thing as a compulsory supplier, other than electricity, but then you obviously know more than me. Now let me see……what supply interruption was caused lately by….well….um….the supplier fucking off because they were going broke or the beach as it makes little difference????? Shit…. did that hurt the single brain cell ? The economics of supply interruption, you obviously have a cure for that that doesn’t require any aptitude to fix, just simply a full stomach on a wing and prayer.

    There you go, ask your insurance broker for an in perpetuity policy that guarantee’s your full stomach even if the suppliers fuck off. I understand that in the Latin American democracy of Venezuela the premiums are quite high…….now who would have thunk that. Funny what happens when the suppliers fuck off.

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