How governments have destroyed the world’s most efficient energy market

The nation’s energy policy is in the hands of ideological tyros.

At the federal level Malcolm Turnbull is running the show with the equally green evangelist, his Departmental Secretary Martin Parkinson.

At the state level, we have a Victorian Government desperately promoting wind, to match Greens policies in the hope of retaining threatened inner city seats, while also killing coal, conspiring with the Liberals to close down gas supplies and otherwise using the electricity supply system to provide favours to key support groups.  And in South Australia we have a Premier who has drunk deeply from the well of Commonwealth subsidies, declared his jurisdiction at the cutting edge of the global renewable movement and, in denial of the evidence, is desperately trying to demonstrate the wisdom of this.

Electricity supply.
In a statement plumbing the depths of credibility, the electricity market manager, AEMO, maintains that  the closure of Hazelwood will not compromise the security of the Victoria electricity system nor the broader National Electricity Market (NEM) next summer.  Looking around it says that there are adequate supply sources available to cover the loss of Hazelwood’s 1600 MW of reliable baseload power.

Hazelwood’s closure takes out 11 per cent of the Victorian-South Australian capacity of fossil and hydro availability, 19 per cent of the total if the now short supplies of gas are excluded.  Hazelwood’s closure, having already triggered a doubling of the average wholesale price, places supply on a knife edge, especially when the 2900 MW of wind is not available.

In its final analysis of the events leading to the September 2016 South Australian black-out, AEMO re-affirms that the failure of the wind generators was the cause.  It argues that there are measures that can be taken to mitigate this.  Among these are payments to consumers to lower demand at crucial times and re-engineering the grid to accommodate the policy-induced reduction in fossil fuel energy.

One such proposed grid re-engineering is the South Australian plan to spend $150 million on short term battery storage.  But this would provide a buffer of just 4 seconds; fully supplying itself with wind energy buttressed by battery storage would according to Miskelly and Quirk cost $180 billion – about twice South Australia’s Gross State Product!

South Australia deliberately chose to close off its options of retaining a back-up supply of coal when it prevented the Northern power station from remaining open.  It now says it will build a new gas plant at a cost of $350 million to be used as a reserve unit only.  Good luck with getting the gas for this and in getting a return for the state citizen owners!

South Australia also intends to over-ride the AEMO allocation of electricity between different jurisdictions to ensure that power is delivered from Victoria in time of need.  Victorian Energy Minister Lily D’Ambrosia may be clueless in the economics of electricity supply but she understands the political penalty of Victoria facing black-outs due to electricity being exported to another jurisdiction.  And so the national market would quickly unravel into state autarkies, at least until the Commonwealth invokes Freedom of Trade provisions of the Constitution (s 92) and takes over the market management.

Malcolm Turnbull’s “nation-building” proposals to create a pump storage scheme for the Snowy is an alternative to batteries smoothing the supply but, by losing 20 per cent of available energy in the pumping process, actually reduces the available resource.  Snowy Hydro already has pumped storage and has the option of increasing this but has never done so simply because it makes no commercial sense.  Turnbull’s costing of his proposal at $2 billion is ridiculous and the five year time frame would outlive his tenure of office.

Energy retailing: a smoke screen for policy incompetence
Perhaps under orders, Energy Minister Frydenberg has given the ACCC, under Rod Sims an institution marked by hostility to normal market operations, a task of finding out if the retailers are price gouging.  Frydenberg has cited an analysis from the government’s political adversaries at the Grattan Institute in support of this, saying there could be savings of $250 million a year for Victoria alone if the market was working properly.

With more retailers than in any other electricity market in the world, and with easy entry and smaller retailers going out of business, monopolistic price gouging possibilities defy rational analysis.

The Grattan analysis has this chart

The cause of retail margin increase are solidly down to government regulations which involve costs that must be passed on.  Among these for Victoria are:

  • “Customer protection” requirements and hardship provisions
  • Disallowance of exit fees
  • Requirement to pay above market rates for solar buy-back
  • Support for the compulsory roll-out of “smart” metering
  • Various regulatory requirements to offer long life lighting and other virtue-signalling favours to customers

The fact is that government policy forcing the replacement of reliable coal plant by unreliable wind at three times the cost is at the heart of the energy crisis we face and Commonwealth measures along these lines are exacerbated by those of the states.

(Unashamed self promotion: my latest book CLIMATE CHANGE: Treaties and Policies in theTrump Era, is now published and if not in your local book shop available on Amazon et al and direct from the publishers Connor Court)

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40 Responses to How governments have destroyed the world’s most efficient energy market

  1. stackja

    TA repealed the carbon tax. MT is a disgrace.

  2. a happy little debunker

    My only thought, is to make yourself energy independent (when the Grid fails), by getting a decent diesel generator.
    At least the stuff in your freezer won’t melt!

  3. JC

    You’re possibly right Alan. It was a fabulous energy market with few people ever experiencing a blackout. I can’t ever recall being in one in Australia. All that’s gone now.

  4. Dr Faustus

    AEMO has become political road-kill on the Australian energy super-highway.

    As a statutory authority it has pandered to conflicting and contradictory energy policies at State and Federal levels and now shares the blame for the failure of the market it was supposed to protect. Perhaps more culpability lies there than with the imbecile politicians; AEMO has industry technical knowledge and was well aware in advance of the strategic mess that formed over the past 10 years.

  5. DM of WA

    Describing the people who have taken control of energy policy as “tyros” is much too kind; they are actually much more sinister because they are radical ideological zealots who believe we should pay any price to achieve their ultimate goal: to replace Western capitalism with a socialist alternative.

  6. herodotus

    Good man Alan Moran. Please keep it up.

  7. john constantine

    They fully intend to deindustrialise yarragrad, the smelter at Portland will have Holden style cash tossed at it, then it will go.

    Once energy intensive industry is Gone With the Wind, rolling blackouts of Tory electorates will keep the people who matter lit up.

    Vicco minister filthlilly was on radio recently, describing the plan she saw that explained blacking out the far west of the state would enable business as usual for the rest. Sadly, to them, the far west is everything the wrong side of Bendigo and Ballarat.

    The province of south Stalin had their weatherfilth on sky today, bluntly stating that south australia could go it alone with energy if it shut down the pipeline going East from the Moomba gas plant and kept all the gas for south australia.

    No Moomba gas for Sydney [a move straight out of the Putin playbook.]

  8. john constantine

    Deindustrialisation and Dewesternisation will surpass Democracy, Grim Reaper electricity policy is just a weapon to enforce their dream.

  9. Rabz

    Seriously, how long is it going to take for people in this country to wake up to, much less put a stop to this staggering treasonous stupidity?

    Quite frankly I’m not going to settle for anything less than certain monstrous imbeciles experiencing HOP time.

  10. hzhousewife

    One of Dad’s Army mates became very big in the Victorian SEC, a country boy with hardly any education but self motivating after WW11. I remember Dad pointing out the SEC building in Flinders St every time we went to Melbourne, he was so proud of his mate and the way the whole Latrobe Valley developments had proceeded.

    I’m glad he’s not here to see the sensational mess it has all become.

  11. candy

    The closing of Hazelwood seems troublesome for Victoria.

    Tony Abbott was right about coal mines all along. We need them and that’s that. He’s pretty much right about most stuff.

    But this “dirty coal” business has sunk into Australia’s consciousness, sort of.

  12. egg_

    AEMO has become political road-kill on the Australian energy super-highway.

    Splinters from sitting on the fence?
    Appears deserved.

  13. Rafe Champion

    See how little rooftop solar happens in a sunny state with no access to the subsidy and buyback rort.

  14. zyconoclast

    Seriously, how long is it going to take for people in this country to wake up to, much less put a stop to this staggering treasonous stupidity?

    When it becomes a third world hell hole of rationed power, unexpected blackouts, when you are meant to have power and when you do have power it is of such low quality you cannot run air conditioning or refrigeration.
    This place does not have the history, finances or natural resources that we have.
    This is my experience from briefly living in such a place.

    People rely on paying a lot for a local business that runs a huge diesel generator hooked to your house to make up the shortfall.

    Eventually, part of this country had a private operator build a brand new plant to supply power. It is good, 24 hr reliable but very expensive.

    The rest of the country continues with rationing. It is the socialist way.*

    *Welcome to our future, which is happening now.

  15. Roger

    Victorian Energy Minister Lily D’Ambrosia may be clueless in the economics of electricity supply but she understands the political penalty of Victoria facing black-outs due to electricity being exported to another jurisdiction

    She tells us she’s been assured by AEMO Victoria will not face supply restrictions in the medium term after Hazelwood’s closure.

    AEMO, otoh, are predicting 72 days of restrictions of supply to VIC over the next 24/12.

    It’s all down to NSW & QLD as to whether VIC has security of supply.

    Not to mention SA.

    Political realities will see the NSW & QLD premiers seeking to ensure security of supply for their states in the event of pressure on the eastern grid.

    Meanwhile, where’s Josh?

  16. Pete of Perth

    We in the west watch on with interest. Hopefully the new state gov doesn’t f it up.

  17. Dr Faustus

    when you do have power it is of such low quality you cannot run air conditioning or refrigeration…

    Another ‘unexpected’ benefit of overlaying asynchronous supply from windmills.
    Electric motors stop working efficiently.

    The Board of AGL should be beaten with sticks, naked, in Martin Place every Wednesday lunchtime.

  18. Art Vandelay

    Alan, is another reason for the seemingly wide gap between wholesale and retail prices in the Grattan analysis chart (which they are no doubt using to claim that retailers are ‘price gouging’) is simply the fact that wholesale prices don’t include the cost of subsidies under the RET whereas retail prices do?

    I’ve noticed that the politicians and left-wing thinktanks like to quote wholesale power prices as much as possible. I assume this is because they do not include the cost to retailers of purchasing LRECs so they:
    1) make prices appear lower than they actually are, and
    2) they can then subtly shift the blame to retailers/deregulation for price rises.

  19. Art Vandelay

    TA repealed the carbon tax. MT is a disgrace.

    Abbott is equally culpable. He brought about the RET in its current form and he replaced the carbon tax with a secret ETS with the help of Greg Hunt. He’s a socialist and an economic vandal.

  20. Viva

    Just as they were dragged kicking and screaming to come to Jesus on border security by voters, Labor will need to be subjected to similar persuasion on energy security.

  21. Viva

    PS Even if the libs freeze or abolish theRET, the threat of a Labor govt and an increasedRET would still prevent investment in coal or gas plants.

  22. john constantine

    The effect on federal finances of south australia deindustrialising may be survivable [although if it demands gold plated submarines to prop it up, that is debateable.] what happens federally when victoria deindustrialises as well?.

    Once a critical mass of labor states fundementally transform themselves into debt funded services economies, betting everything on importing enough tenants to beat the housing cycle and dynamiting the infrastructure that enabled industry to Toryproof their Stalinist phantasies, how does Australia service the national debt?.

    Can south australian labor dynamite the Moomba to Sydney gas pipeline to force Stalinism upon the rest of Australia?.

  23. Alan Moran

    Art V,
    Interesting breakdown of costs in the latest ACT price review this shows LRET, SRES and other regulatory measures at 9.77 per cent of costs. But we wd need to factor in the effects of the green schemes in doubling the wholesale costs and, in effect, contributing a further 15-16 per cent.

  24. Tel

    The purpose of the energy market is to make the generation side competitive and it worked… take one look at the chart and wholesale prices have come down and are decently low. That chart only goes up to 2014, and wholesale rates have come up since then, but still overall they are pretty low.

    I’ve been banging away pointing out the massive divergence between wholesale and retail for years on this site and everyone keeps talking as if we had a power generation problem. Now OK, I see you included a bunch of items that partially explain the high retail prices (to the extent that those have been tacked on, they are just tax by stealth and should have been dragged out and put on parade right before every election) but I should point out there is no market whatsoever determining the retail prices… retail is 100% government price setting. In addition, there is no competition on the poles and wires, they have you over a barrel there so go back to most fundamental economic theory… the part of the supply chain with the monopoly will always be the guy who gets the biggest margin.

  25. yackman

    Alan, thankyou once again for an excellent article.
    Can you advise what proportion of power is sold on fixed contract cf that sold on the spot market?
    A retailer would have to allow in the gross margin for some worst case pricing in extreme peaks ($14,000 per Mwh)

  26. Alan Moran

    Yackman
    difficult to say what the proportion of contracted electricity is. Some is in-house through retail-generation common ownership. Lack of this puts smaller independents at a disadvantage in unpredictable markets and some are closing. In more stable markets these retailers often have an advantage from spot prices lower than.

    Contracts are of varying lengths but less than 5 per cent of supply is covered by spot prices.

  27. OldOzzie

    The nation’s energy policy is in the hands of ideological tyros.

    At the federal level Malcolm Turnbull is running the show with the equally green evangelist, his Departmental Secretary Martin Parkinson.

    Mark Latham has an interesting summation of Martin Parkinson in the Daily Telegraph

    Latham has also offended Malcolm Turnbull’s Department of Prime Minister and Cabinet chief, Martin Parkinson.

    Latham accused Parkinson, the former head of Treasury, of hiring employees based on “the shape of their genitalia” and whether he could “find out who they’re sleeping with.”

    “We’ve got more on Parkinson’s disease,” Latham said on his Sunday show.

    “The crazy habit in the Canberra bureaucracy of hiring people on the basis of how they look, the colour of their skin, the shape of their genitalia and if Martin Parkinson can find out who they’re sleeping with.”

  28. john constantine

    http://www.asx.com.au/asxpdf/20170329/pdf/43h3q4k01jz1dd.pdf

    Origin announces this morning that it will do a gas deal to look after south australia, and an electricity deal to look after south australia.

    Remember their south australian energy minister declaring that he had the power to destroy Origin’s south australian business without compensation?.

    Stalinism is victorious. [probably a bit of taxpayer wealth to flow in the deal, but the headlines look good for their south australian filth.]

  29. Dr Faustus

    john Constantine: The Origin announcement underscores exactly how fucked the energy market has become.

    Origin is to make available 8PJ of gas to ENGIE across two years, apparently in exchange for a power supply agreement to take off 240MW when the wind doesn’t blow and Pelican Point has to run. In the context of the East Coast 670PJ/annum domestic gas market, 4PJ/annum is a trivial new supply that could have been provided at any time if ENGIE had seen the commercial need to run PP1.

    The reason this did not happen (until the power went off in Adelaide) was entirely due to AEMO failing to react to the hi-viz, Wetherill-made system vulnerability in the Mendicant State.

    Origin is happily feasting on the carcass.

  30. mh

    Josh Frydenberg, I believe you are the “dropkick” sir.

  31. Political realities will see the NSW & QLD premiers seeking to ensure security of supply for their states in the event of pressure on the eastern grid.

    Sadly, I can’t be so confident about Queensland maintaining sufficient supply for itself, let alone propping up Southern states or that couch-surfing, humbugging cousin – SA or its mate Victoriastan. Our un-esteemed Premier has promised us 50% re-new-balls by 2030, so we’re stuffed as well.

    Poor fella my country indeed.

  32. truth

    Art Vandelay:
    That’s just silly!

    Tony Abbott was always a sceptic but Turnbull and the Left have made it compulsory for a politician in Australia to pretend to believe somewhat in CAGW ….if he aspires to high office in any way at all….or to stay there!

    MT spelt that out and when TA was being whiteanted by him and the LW MSM was grooming the country to hate him, TA of course had no option if he wanted to survive…but to just get the RET as low as he could….which he did…. no option at all to abandon it entirely …not at that time with the whole world bearing down on him…including Obama…and demanding compliance with the Paris Agreement.
    TA did what was POSSIBLE.

    What you demand was IMPOSSIBLE without inviting annihilation.

    Abbott did nothing more than he had to to survive …and to say he was equally culpable and a socialist is just sheer naivety or ignorance about what’s possible….IMO.

  33. None

    I simply cannot read this sort of stuff without despairing. Out of sheer bloody mindedness and spite idiot children like Turnbull and Weatherill are destroying our economy. The lights stayed on for quite a while in Queensland through Cyclone Debbie. Can you imagine handling a national emergency with windmills? Keeping a hospital open? These people should be locked up in a lunatic asylum, plain and simple.

  34. Vicki

    Reduced down to essentials:

    They are turning off our reliable source of energy before we have the technology to survive.

    Ask the SA businesses who have suffered irreversible losses.

    If you had a time machine 20 years ago & could foresee this debacle – you would not have believed that we could do this to ourselves.

  35. Vicki

    when you do have power it is of such low quality you cannot run air conditioning or refrigeration…

    Another ‘unexpected’ benefit of overlaying asynchronous supply from windmills.
    Electric motors stop working efficiently.

    I’ve often wondered why we have so many short blackouts ( minutes, not hours) at our farm in the central tablelands of NSW. Maybe this switching of power transmission is responsible. It has been very irritating, but pales into insignificance in view of the developments in SA and Vic.

    Now using 10 KW solar system & back up generator.

  36. Tezza

    Dr Faustus is right.

    There is a fabulous essay waiting (for you, Alan?!) to recount the AEMO’s patently false reassurances to successive RET reviews (first, conducted by Climate Change Authority, FFS!) and then by Warburton for Tony Abbott in 2014. That 2014 RET review was Australia’s last chance, pre-crisis, to walk back from the RET insanity.

    Warburton and Abbott clearly wanted to get the RET down as low as they could, but AEMO advised Warburton that they had everything under control. Anti- RET voices were left without a feather to fly with: the national technical expert was telling them their worries, grounded on UK and German experiences, among others, were inapplicable in Australia’s case.

    The ABC also contributed shamefully to the public misinformation about the RET in a disgraceful 4 Corners program, Power to the People . this program was specifically timed and constructed to prevent rational consideration of the RET, by yet another run of the recurrent ABC storyline, that there were imminent breakthroughs looming on renewable energy, and Australia risked being left behind.

    This widespread misinformation emboldened the Greens, Labor and the usual fruit loops to fight tooth and nail against the slight reduction in the RET that was achieved.

    So here we are, three years later and completely stuffed.

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