Punishing Price: Australia’s Wind & Solar Obsession Means Power Prices Keep Rocketing

Like night follows day, adding chaotically intermittent wind and solar to your grid sends power prices into orbit. South Australians know it: they suffer the world’s highest power prices as a result of their 50% RET.

Other Australian states are heading in the same direction. Victoria’s great wind rush has already sent prices rocketing: wholesale prices jumped 19% last financial year. Part of a trend (see above) which is all set to continue.

The effect of surging power prices is economically insidious. Electricity is a critical input to a range of businesses, such that rising power prices reduce margins, squeeze profits and limit the opportunities to employ staff and otherwise re-invest in those businesses. Ultimately, profits become losses and a date with insolvency and a liquidator soon looms.

On the consumption side, households being belted by ever-rising power costs naturally reduce their spending on everything else.

Not that the mainstream press will make the connection, but Australia’s self-inflicted power pricing and supply calamity has to be a significant component of this country’s current economic malaise.

For almost 28 years, Australia has enjoyed an unbroken run of economic growth: Paul Keating presided over Australia’s last recession in 1991-92.

Like it or not, power prices matter. As prices continue to rocket, household spending will contract further and business profitability will continue to decline and with it opportunities for employment and wage growth. A major recession is on the horizon, with energy costs a significant contributor to the reduction in growth rates.

And the Federal Coalition government seems all but powerless to respond, having thrown up the white flag on sensible energy policy years ago: the 33,000 GWh LRET remains firmly in place – with wind and solar to receive subsidies in the order of $5 billion a year until 2030 – talk about building coal-fired plant remains just that and nuclear remains a dirty word.

The latest (and apparently only) serious effort to rein in power prices involves tinkering with the market by threatening to break up the generator/retailers (gentailers); outfits that have made obscene profits by, among other things, gouging the wholesale market. AGL, Origin and Energy Australia routinely use their dispatchable assets (coal and gas) to extort over-the-market prices for power when their non-dispatchable assets (wind and solar) down tools after the sun sets and calm weather sets in.

The model was set by Enron in California back in the late 1990s: Enron Rides Again: Wind Power Chaos Enables Rampant Price Gouging by Conventional Generators

Here’s Judith Sloan with a rundown on an effort that appears to be far too little, and far too late the Australian economy.

Hint of a big stick could flick the right power switch
The Australian
Judith Sloan
24 September 2019

Rising electricity prices, combined with declining reliability, are an enduring and major challenge for the Australian economy. The danger is that businesses, particularly energy-intensive ones, will begin to shut their doors.

And is it really any wonder that businesses are finding it difficult to afford higher wages for their workers when rising electricity bills must be paid?

Of course, many households also are finding it tough. Those with a few resources and who own their own homes increasingly have resorted to the installation of solar panels to help with the power bills. But this leaves many families and individuals having to cope with higher bills essentially on their own.

“Why doesn’t the government just do something” is a likely common­ response among quiet Australians. After all, it wasn’t very long ago — less than two decades — that Australia had close to the world’s cheapest electricity.

The problem with this entirely understandable response is, first, that the federal government doesn’t have control over the National­ Electricity Market, which covers the east coast; the state governments are major players. And, second, any solutions are unlikely to be quick. The problems have taken a while to develop and will take a while to sort out.

So where does the so-called “big stick” legislation fit in? The Coalition government introduced the bill into parliament last week, having failed to get up an earlier version last year.

The reaction of Anthony Alban­ese was less than encouraging. “We haven’t seen it,” the ­Opposition Leader said.

“But I’ve got to say, the starting point is the title, which is Orwell­ian. This is a government that doesn’t have a policy on climate change or energy … and doesn’t have the maturity as a political organisat­ion to actually come togethe­r with a coherent policy.”

He may have a point that “big stick” is a clumsy description of the Treasury Laws Amendment (Prohibiting Energy Market ­Misconduct) Bill, but let’s not forget­ that Labor also was wont to use inelegant, Orwellian phrases when it suited. Anyone for building an education revolution or a working nation?

The real issues are whether the government’s legislation amounts to good policy and whether Labor should support it.

For those commentators who regard this legislation as some sort of anti-Liberal, anti-market forces drift towards socialism, they haven’t been paying attention to the features of the electricity market­ or the widely accepted mechanisms to deal with excessive market concentration.

One of the most common measures of market concentra­tion is the share of the market held by the top four competitors. Considering electricity generation, for instance, the top four competitors hold 80 per cent of the market in NSW; the top two hold 50 per cent. In Victoria, the top four hold 84 per cent of the market.

But some generators are also retailers — the so-called gentailers. In electricity retailing, the top four hold 40 per cent of the ­market. In some states, the gentailers hold very large shares — AGL Energy in South Australia, for instance. In several overseas countries, this vertical integration would not even be allowed.

And here’s another important feature of the electricity market — the diurnal variations in the degree­ of market concentration. On sunny, windy days, there is plenty of power at certain times of the day, thanks to the plethora of renewable energy in the market.

But when the sun sets and the wind dies down, the effective market­ concentration soars as only a few players with reliable generation are capable of producing electricity. At this point, the scope for the misuse of market power is at its peak. It’s not surprising that this is when very high wholesale prices are recorded.

The point is that electricity generation and retailing are concentrated industries in Australia and, as such, require particular policies to ensure that market power is not misused. This is a completely standard economic approach to deal with the situation of oligopoly.

Oligopoly is defined as an indus­try with a small number of large players selling an undifferentiated product — in this case electricity — and with significant barriers to entry. When it comes to dispatchable electricity, in particular, the definition is a perfect fit for the situation on the east coast.

One of the techniques used by oligopolists is to restrict supply to keep prices high. Bear this in mind when the big energy companies complain about the legislation being a dampener on investment.

While most attention has been paid to the “big stick” aspect — the forced divestment of assets — there are in fact some more import­ant parts. One deals with the manipulation of the wholesale market, which arguably occurred after the sudden closure of Victoria’s Hazelwood plant.

Another deals with the withholdi­ng of supply from contract­, as opposed to spot, markets­ to lessen competition substantially. Yet another deals with retail price gouging where retail margins are clearly excessive.

There is a range of remedies, including notices, orders and ­penalties. The ultimate option of divestment of assets is possible only after a recommendation from the Australian Competition & Consumer Commission and approva­l by the Federal Court.

There is also a clause in the legislation that prevents divestment becoming a form of privatisation. The legislation has a sunset clause of 2025.

Given that former opposition assistant Treasury spokesman Andrew Leigh was always banging on about the economic damage­ caused by a lack of compet­ition in many parts of Australian­ industry, it would be astonishing for Labor not to suppor­t this bill.

The party’s previous oppos­ition to it probably had more to do with the implicit electoral support the big gentailers were giving the ALP in respect of its proposed climat­e and energy policies, rather than any principled stance.

Ultimately, the key solution to the crisis in electricity, in terms of sky-high prices and declining reliabili­ty, is additional dispatch­able supply.

But the “big stick” legislation is a handy addition in much the same way as forcing retailers to offer a price-guided default price.
The Australian

About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

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