Opinion/Comment, Politics

Dark view of business: Australia’s energy policy in a race to the bottom

The politics of power is entrenching a narrative that power costs too much and that the gentailers are to blame.
The politics of power is entrenching a narrative that power costs too much and that the gentailers are to blame.
Matthew Stevens AFR Woodcut
Matthew Stevens AFR Woodcut

These are dark and disruptive times for Australian energy companies.

Instead of finally getting the security of the national energy policy they have been seeking for the better part of a decade, they have instead become pawns in unpredictable and punitive energy politics.

Energy Minister Josh Frydenberg first coined the term “energy trilemma” in concluding a November 2016 speech that brilliantly defined why Australia needed to redesign its national energy market.

“It is a big job to ensure stability, security, and reliability in the energy system, while at the same time balancing the costs to industry and consumers and the need for a transition to a low carbon, low-emissions economy,” Frydenberg said in describing the three horns of his trilemma.

Retail margins have grown by $68 over the decade and they account for 16 per cent of the total increase.
Retail margins have grown by $68 over the decade and they account for 16 per cent of the total increase.

For 18 months and more Frydenberg has worked, sometimes reluctantly, with the energy industry to map out a pathway to security and affordability through the framework of our Paris commitments.

But that mission in balance has been replaced by matters far more urgent. Australia’s energy policy is now being recast on the run by the needs of party room and broader retail politics.

Malcolm Turnbull is throwing Paris babies out with free-market bathwater as he works at securing his job and, as a result, we are watching a race to a bottom that apparently has a Liberal Prime Minister contemplating some form of electricity market re-regulation.

While Turnbull muscles up his narrative of lower prices or else and his Resources Minister lashes out at the only offshore petroleum exploration and development companies that are doing anything about Victoria’s gas supply challenges, the federal opposition has proposed state-based pricing caps and wondered why the government might extend company tax cuts to price-gouging energy companies.

Gentailers are not to blame

The burden of our environmental commitments and renewables support added $84 to the final bill: 20 per cent of the total ...
The burden of our environmental commitments and renewables support added $84 to the final bill: 20 per cent of the total …

At each turn then, the politics of power is entrenching a narrative that power costs too much and that the gentailers are to blame.

On Saturday The Australian reported that Malcolm Turnbull had promised to target the big three energy companies (AGL, Origin and Energy Australia) for “market manipulation and deliberately inflating power prices through secret contracts”.

Now, I worked at The Australian for nearly 20 years and appreciate it has a very certain place as a conduit for a Coalition government.

So I receive this observation as an accurate reflection of the Prime Minister’s intent. And there’s the problem. Because it is far from clear who or what has informed Turnbull’s dark view of the power business.

The ACCC made no mention of secret contracts that resulted in market manipulation.
The ACCC made no mention of secret contracts that resulted in market manipulation.

It is not, for example, a conclusion shared by the ACCC, whose review of the retail power sector that was informed by coercive powers to gather evidence.

The ACCC made no mention of secret contracts that resulted in market manipulation. It has, on the other hand, accused the power retailers of deliberately confusing retail consumers to keep them on higher-priced supply deals.

That is why the ACCC recommended the introduction of an industry-wide default price that is set by the Australian Energy Regulator. That default price would be the base from which all of the electricity retailers make discount offers to lure new customers or re-secure existing ones.

It would seem most likely that this is the cap that Canberra is now talking about.

Australia's energy policy is now being recast on the run by the needs of party room and broader retail politics.
Australia’s energy policy is now being recast on the run by the needs of party room and broader retail politics.

In the end, the nearest the ACCC got to identifying material price manipulation was its criticism of the state government-owned generating duopoly in Queensland.

The competition regulator called on the state government to make three from two in the name of improved competition in state and national wholesale power markets.

Not quite what the ACCC found

As for the power price – well, we keep hearing that Australia has the highest power prices in the world. That, again, is not quite what the ACCC found.

Research conducted for this year’s landmark ACCC review of the retail market found that South Australian prices ranked third highest against a basket of international comparators that was made up of European nations.

The research found that the average Australian price was 37.4¢ per kiloWatt hour (kWh) versus the EU average of 34.1¢. The Australian average left if fourth against European comparators with Denmark, Germany and Spain hosting higher average unit costs.

The ACCC report identified that gross retail margins were comparatively high in Victoria but that the Australian average was lower than in Europe and that might suggest the “retail component of costs is less of an issue in Australia”.

That said, it noted that EBITDA margins represented more of an average Australian bill than in Europe with Victoria and NSW being particular outliers in margin recovery.

The ACCC report also broke down and valued the individual contributors to an average annual residential electricity bill that has increased from $1210 in 2007-08 to $1636 in 2017-18.

The biggest single contributor to that increase was a $148 increase in network charges. Network accounted for 35 per cent of the overall increase. Wholesale electricity charges added $96 a year to the average bill. That was 22 per cent of the total increase. The burden of our environmental commitments and renewables support added $84 to the final bill. That is 20 per cent of the total increase.

Then, finally, we get to the retail end of the business that is the target of prime ministerial tough talking. Retail margins have grown by $68 over the decade and they account for 16 per cent of the total increase.

The annual margin on the average 2017-18 bill was $135 and that represents about 8.3 per cent of the total bill. That compared to $66 in 2007-08, when the margin accounted for a spare 5.5 per cent of the average bill.

Business invited itself to crisis

The data supports a view that the generators were excessively opportunistic in pushing wholesale margins through the succession of supply-side disruptions that started with the severing of the Basslink interconnector in April 2016, that became a instant crisis in September of that year when South Australia’s network collapsed and that translated into a pricing opportunity in March 2017 with the unforgivably abrupt closure of Victoria’s Hazelwood power station.

Certainly, as ever in situations like this, business would do well to reflect very honestly indeed on how it invited itself to crisis.

But the wholesale price is set transparently through trading platform run by the Australian Energy Market Operator.

Allegations that the system was being gamed by some market participants – most particular the Queensland generators – were presented to the market operator through 2017. But nothing happened. If there is a point of reform needed, I would start there.

As it is, wholesale prices have started to fall as the market has recovered a level of security and supply-side balance. It would be fair to say that the level of regulatory and political scrutiny has helped to ensure that lower prices are being passed on to retail customers.

But politicians need to be seen to be doing stuff even if that stuff either doesn’t get to the heart of the matter or is a belated response to crises whose mitigation is already in train.

So it is that we have a new convergence of political and power wars that risks a new round of unintended consequences.

And in Victoria

On Sunday the Victoria government confirmed a $1.24 billion investment in electricity grid instability in a program that aims to underwrite a decade-long rollout of 2000 megawatts of residential solar panel capacity over a decade.

As has been demonstrated in South Australia, a random rollout of renewable generation will destabilise the economics of existing base load power generators.

And, as has been demonstrated in Victoria, the effect of the unscheduled closure of base load can be profound both on system security and affordability.

Residential solar panels will increase the complexity and cost of the power network and can increase the risk of its failure. Network operators work to a guaranteed rate of return. The allowable return stays the same no matter how much power actually travels along the wires.

So network charges per unit of power delivered rise when the network loses volume to domestic solar.

At the same the network has to upgrade itself to cope with residential solar so that it is capable of two-way power flows. Any increased investment will be reflected in the capital base that sets the regulated access price.

At a more systemic level, the shift in daytime peak demand patterns will see less need for baseload power through the day.

But, unless there is a similar large-scale rollout of battery storage or of larger scale storage projects like, say, pumped hydro, the demand for baseload will be the same as now through the evening and night-time peaks.

But the loss of market access will leave the baseloaders needing to recover costs when they are in the system and that will mean higher peak-demand prices.

Alternatively, the Victorian government will need to incentivise investment in firming gas-fired capacity.

The government needs a plan to mitigate the risk of perverse consequences. But, if there is a plan, it was not visible to the naked eye in Sunday’s self-congratulatory announcement.


 

First published at The Australian Financial Review – Monday 19 August 2018

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