The Politics    Wednesday, July 11, 2018

Electricity prices reality check

By Paddy Manning

Electricity prices reality check


The market is broken, the ACCC warns

The “coal huggers” in the National Party are clutching at straws today, claiming that the ACCC’s report on electricity prices supports their call for the government to underwrite the construction of “firm” low-cost power generation, which – they think! – means coal-fired power. The Australian reports [$] rather breathlessly that the ACCC’s recommendation “could end the energy wars”, and if that’s all it takes, then good. But the prime minister and the head of the ACCC are being more guarded, stressing that the report is “technology agnostic”, while Energy Minister Josh Frydenberg says “read the report”. They should also read today’s Financial Review, which makes plain [$] Australia does not need a new coal-fired power station and “it’s as simple as that”.

The Nationals have leapt on a recommendation by the ACCC that the government should enter into low fixed-price energy offtake agreements for the later years (say 6–15) of “appropriate new generation projects which meet certain criteria”. The ACCC will not say whether those are coal- or gas-fired power stations, or renewables plus storage, or anything else. Pressed on this in a press conference today, Rod Sims insisted the ACCC was technology agnostic. A hint, however, comes from the suggested price – $45–50 per megawatt hour of installed capacity. In today’s AFR, columnist Matthew Stevens writes [$] that new wind farms cost $50/MWh, batteries cost another $20/MWh, while new coal-fired power costs $90/MWh. If we let the market takes its course, it’s game over for coal.

The truth is that the ACCC’s report on electricity prices does not help the coal huggers one little bit. Going by the 80/20 rule, there are some neat figures in the report: exactly 80 per cent of the cause of higher electricity prices over the last decade has nothing to do with green schemes, renewable subsidies, emissions reduction targets or any other culture-wars bugbear; exactly 20 per cent does. The largest single factor, as we all knew already, is over-investment in electricity networks (poles and wires), and that’s where the single biggest price reductions can be made by virtue of some neat proposals from the regulator.

Some plain facts, straight from the report: annual electricity bills have risen in real terms by 35 per cent in the decade to 2017–18, from $1210 to $1636 – an annual increase of $426. The biggest single component, higher network charges, is responsible for $148 or 35 per cent of the increase. The cause? The regulator’s “limited ability to constrain excess spending by network owners” (the gold-plating problem), and reliability standards being “set too high”. (Which is why experts like RenewEconomy say the NEG’s reliability standard will never be used. The ACCC report itself hints that “reliability shortfalls … may be infrequent”). Here’s where the ACCC calls for “decisive action”, as we’ll see.

The next biggest component is higher wholesale electricity prices, worth $96 or 22 per cent, which the ACCC attributes to a tightening of a market previously oversupplied with electricity generation, and higher gas prices as east coast LNG exports began. The third biggest component, costing $84 or 20 per cent, is made up of environmental schemes, particularly subsidies due to the renewable energy target, and excessively generous state feed-in-tariffs for rooftop solar, which have generally been wound back but which are still costing money. Higher retail margins ($68 or 16 per cent) and retail costs ($30 or 7 per cent) make up the rest.

ACCC chair Rod Sims has today described the electricity market as “broken” and flagged a range of measures to “reset” it, covering all five components, which would lead to price reductions over the next three years. Those measures have been well canvassed today, and will no doubt be thrashed out over the course of the year. They include a 20 per cent cap on market share – especially relevant for the big three gentailers Origin Energy, AGL and Energy Australia (who are relieved they won’t be forced to sell assets) – and the break-up of Queensland’s state-owned generators.

The biggest reduction in electricity bills – $100 a year – would come from tackling the high network charges. The report proposes two “decisive” steps. The first of these is to get state-owned networks to voluntarily slash the value of their assets, thereby lowering the cost base used to calculate exorbitant charges we are all paying now. The second is to pay rebates to fully or partially privatised networks to achieve the same thing. In effect, the ACCC is proposing that the high network costs be shifted from users to the state governments that created the problem: New South Wales, Queensland and Tasmania. Hear, Hear.

The ACCC does propose fixes for the higher environmental costs – such as making the state pay the feed-in tariffs, and abolishing the small-scale renewable energy scheme – that will also be debated at length. The important point here is that the environmental costs aren’t the main game. If you are genuinely concerned about fixing electricity prices, don’t talk about our Paris commitments, don’t talk about renewable subsidies, talk about fixing the market.

Interestingly, the ACCC is pretty muted in its support for the NEG: “To the extent that [the NEG] can encourage investment in capacity from a diverse range of sources, diluting market concentration and promoting competition to supply retailers, the policy should assist in delivering electricity affordability”, it states. Faint praise, much?

since this morning

A whistleblower who alleged serious misconduct at Crown Casino had their allegations dismissed by Victoria’s gambling regulator because the person wanted to remain anonymous, independent MP Andrew Wilkie has said.

The Guardian reports that Fair Work ombudsman audits of the hospitality industry in Melbourne, Sydney and Brisbane found 72% of businesses had breached workplace laws, and businesses have been forced to pay back almost half a million dollars to 616 workers.

in case you missed it

The AFR’s Aaron Patrick writes [$] that warnings from former Goldman Sachs banker Alex Turnbull, the prime minister’s son, against the investment bank’s involvement in Malaysian state investment fund 1MDB “seem prescient”.

In response to a recent investigation of the underpayment of staff by the Rockpool Dining Group, the largest high-end restaurant business in the country, Fairfax’s Matt Holden writes that “in Melbourne and Sydney, our fine dining bills are being subsidised by wage theft from the people who cook the food and serve it.”

Anthony Albanese has conceded that the Coalition’s policies “have stopped the boats”, and rejected calls to put a time limit on offshore detention, in an appearance on Sky News on Tuesday evening.

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Paddy Manning

Paddy Manning is contributing editor at The Monthly and the author of Inside the Greens and Body Count.

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