The Cost of Power - Part 1

Power prices continue to rise, and the public are demanding a better deal.  An act of political appeasement with the Greens has led to an inquiry to review the operations of Tasmania’s three power utilities.  It has now taken over 12 months, it is forecast to cost taxpayers over $3 million dollars, it has distracted the utilities from their main game, and its report is now well overdue.  Has it been worth it?

It all began with the National Competition Policy, established in the late 90’s.

By 1998, all state–owned electricity utilities were broken up (disaggregated) into separate generation, transmission and distribution/retail companies. In each of the mainland states a number of generation and retail companies were created.  The purpose of this national policy was to create competition and therefore lower prices.  States complied, because they would be penalized (by reduced payments from the Commonwealth) if they did not conform to this new policy.  A separate management company (NEMMCo) was then created to oversight the behavior of these companies in a newly-created National Energy Market, or NEM.  Has this policy worked?

Victoria embraced this policy with gusto.  It broke up the old SECV into a number of different entities, promptly sold them and made a killing.  The buyers thought they would also make a killing but soon found out it was not to be, and after many changes of hands, the present owners of these assets are managing them as best they can.

The same could not be said for New South Wales and Queensland, where the entities created from the breakup of the old utilities remained in public ownership.  Unfortunately for them, the long-awaited efficiency improvements and price reductions did not occur.

The NEM plan involved generators bidding blocks of power at particular prices into a ‘market’, and for retailers to buy the lowest-priced bids in the market.  The theory being that the generators would bid in as low as possible, in order to sell their power in the market, and thus provide retailers with low-priced power, which they could then provide to their customers, again in a competitive environment.

Practice does not always follow theory, and for some years, both generators and retailers struggled to come to terms with this new market-based reality.  Lack of proper risk management structures in the trading environment have caused grief to a number of players, especially when the market has been volatile, such as hot days, generators (gen-sets) going down etc.  Practice eventually began to conform to the theory, but hiccups have continued to occur.

Private companies that were operating at that time found they could generate power in one State and sell it in another, and so they began to buy up strategic assets.   This was not foreseen by the planners at that time. In fact no sooner had disaggregation occurred than a de facto re-aggregation (vertical integration) began to take place with generators buying retailers to become ‘gen-tailers’ and sell directly to customers.  This mitigated risk.  A single generator was at risk from a collapsing or rapidly varying bid price, and the retailer from a varying market price for purchase, yet having to provide a fixed price to the customer. Having a foot in both camps mitigates these risks.

The breakup of the public assets began to look like a transfer of those assets to private hands, using the mechanism of a national electricity market to do so.  By default, public policy appeared to suggest a transfer of public involvement from power operations to power regulation through NEMMCo. 

 Most mainland generators are coal-fired power stations, and their interest is to run their gen-sets at a constant rate and thus to provide a constant amount of power into the grid - in other words to provide base-load power.  Hydro stations, whilst also being good base-loaders, are better equipped to turn their gen-sets on and off with fluctuating demand, and thus better equipped to provide peak-load power.

Wind and solar, small beer in the grand scheme of things, can provide neither, due to the vagaries of the weather, and whatever benefits are provided by being “renewable” is both prohibitively costly and inefficient as there is always back-up required.  So thermal gen-sets have to be operating anyway.  However, in conjunction with hydro, these renewable energy sources can provide power into the grid as and when, with hydro acting as a backup battery, a sensible synergy.  Well sensible if we ignore the massive cost burden new renewable forms of generation create; a little discussed fact being that wind power is 3-4 times as expensive as power from a coal-fired power station and this alone will dramatically increase power bills if Australia reaches its target of 20% of its power from renewable means by 2020.

The new federal government initiative of putting a “price on carbon” - in reality carbon dioxide the gas -  emissions, will now impose an additional tax regime on coal-fired generators.  Many coal-fired generators are now considering getting out of the generation business altogether, and a number have responded to the Federal Government calls for Expressions of Interest to do so.

The Federal Government hopes that “cleaner” energy sources, such as gas, will replace coal-fired generation, but the policy remains unclear, and a sudden departure of existing generators from the scene could cause problems in reliability and capacity to supply. For example, Hazelwood, a brown coal generator targeted for closure, produces some 20% of Victoria’s power.

So, public money will now be spent to assist those leaving, more public money will be spent encouraging new entrants (note that gas is at least 50% more expensive than coal), and yet further funds will be spent to subsidise inefficient forms of energy production.  At the same time the power supply system has become less reliable and less secure.  One is left to wonder whether the public has benefited at all from the policy of disaggregation trumpeted as the new era of competition only 15 years ago.


Tomorrow Part 2 The Tasmanian Experience