Sauve qui peut!

One of the ironies is that creation of the east coast electricity market (the “NEM”) two decades ago was strongly influenced by the desire to take politics out of power supply, leaving it to competition between suppliers to dictate what new infrastructure was built where – and, it was widely assumed at the time, ensuring through much greater efficiency in the private sector that inevitable price rises would be kept to a minimum.

For a relatively brief time – between 1998 and 2008 – this brave new world seemed to be delivering as planned and then politicians started intervening again.

An enduring public myth is that intervention will lower power bills when, all along, what is really anticipated (within governments) is that rises in consumer bills can be more constrained by political action. Paradoxically, the more evidence there is that such scheming makes things worse, the more politicians are driven to interfere.

In 2017 the interaction between politics and the east coast energy marketplace has blown up this conceit big time – thanks to interventions piled on interventions, the inevitable reactions of investors and, more recently, the macro world of engineering colliding with the machinations of political mice.

The east coast situation is made all the more complex by the fact that multiple governments are involved in energy policy and, when elections loom, the default position for each, to pinch the French phrase, is “sauve qui peut!” (“Save yourselves, whoever can,” the infamous cry of Napoleon’s Old Guard as they cut and ran at Waterloo.)

The other wrinkle in today’s NEM prices crisis is that “sauve qui peut!” is essentially the cry being directed by the federal government to residential consumers. Even as the body politic turns on energy retailers – via both the Victorian government’s push towards re-regulation and the federal government’s recourse to the big guns of the Australian Competition & Consumer Commission – the top-level message to households is still that their first, best hope for lower bills lies in their own hands.

Federal Environment & Energy Minister Josh Frydenberg has a detailed dissection of the current security and price situation in today’s The Australian in which his most salient point is that half of east coast household accountholders – that is more than four million bill payers in South Australia, Victoria, New South Wales and Queensland – have not moved retailers or contracts in the past five years (when the price spikes have really hit the political and media fan). “This,” writes Frydenberg, “is despite savings of more than $1,000 a year being available to those who secure a better deal.”

The minister claims “important progress” is being made in addressing this situation through the recent meeting between energy retailers and Malcolm Turnbull, Scott Morrison and himself.  This progress, he asserts, flows from the retailers being driven to providing better information to households. “The government’s campaign to shine a light on the behavior of retailers,” Frydenberg adds, “has caught the public’s attention, with a record 150,000-plus visits to the Australian Energy Regulator’s price comparison website.”

There’s an element in all this of that constantly-aired TV advert for the lotteries with cartoon characters driving a truck over-laden with money down a highway. In this case, using the ministerial arithmetic, the power truck notionally contains several billion dollars a year which householders collectively can win if they can just get their act together. The federal government’s ploy is to harass the retailers in to doing the herding of consumers towards the pots of money because, in a looming election environment, the mass market is where the voters are.

Timing is a huge political issue here. Householders/voters are still wincing from receiving the power bills for a long, hot summer. Soon they will get the energy charges for a cold winter – and next summer is not far away. The point is elections: Queenslanders and Tasmanians have to go to the polls by next May, South Australia votes on 17 March, Victoria on 24 November 2018 and New South Wales on 23 March 2019. Somewhere in this time frame Malcolm Turnbull has to pick an election date – although he may have one forced on him by circumstances. In every case, the “energy crisis” will be a major issue affecting votes.

(Just to throw fuel on the political energy fire, the next United Nations climate talks – “CoP23” in the jargon – will be held on 16 and 17 November in Bonn; you can guarantee that the ripples from this will spread in to our domestic wrangling, with the Turnbull government’s carbon abatement target sure to get a good kicking. The government’s review of climate change policies, in a number of respects no less important to the NEM than the Finkel review, is promised for “the end of 2017.” Will it appear before or after CoP23?)

The sleeper in all this is the impact of energy costs on business consumers, both very large ones (of which there are more than 3,700 across Australia) employing lots of people and hundreds of thousands of smaller ones employing a lot more. The companies are significantly impacted by what the Australian Industry Group describes as “eye-wateringly high” energy costs and the flow-on must reach workers/voters.

On Friday, GLOBAL-ROAM’s Paul McArdle, writing in his WattClarity blog in a commentary well worth reading, fretted about the “disproportionately low share of the (public) conversation” focusing on the impact of these costs on business, pointing out that last calendar year the non-residential sectors accounted for 130,000 gigawatt hours of NEM electricity consumption versus just under 60,000 GWh for households. “It’s businesses that provide our jobs, salaries and dividends from investments,” says McArdle, urging greater recognition that energy-intensive industries in particular are facing “a systemic crisis.”

Which brings us around again to the NEM and the I-word: intervention, the tool for which governments reach when the heat in the voter kitchen threatens to burn them. Market analysts, for example, describe the Andrews government in Victoria as “poised to make significant regulatory interventions in the energy market.”

The situation would be troublesome enough if it only related to price rises but the NEM waters are also muddied by political virtue-signaling through boosting green technologies and baulking fossil fuels (eg anti-fracking activity), by the very real developments in new technologies (eg storage and also solar power but also conventional supply) – which tend to get over-run by media and activist hype – and by individual corporate steps to bolster their market shares and profits.

To which can be added the issue of an ageing NEM power generation fleet (as Frydenberg points out in The Australian today, units supplying 70 per cent of NEM electricity are heading towards the end of their designed working lives). How, when and where these workhorses are replaced is a major challenge. Just how major can be illustrated by reminding ourselves of the NSW load in the critical late-afternoon heatwave hour of 10 February that so nearly saw the State, the largest sub-region of the NEM, in real supply trouble: at that point, the contributions to extreme peak capacity requirements were 64.5 per cent thermal generation, 18.3 per cent hydro power, 12.2 per cent imports from other States, mainly Queensland, 2.9 per cent all forms of solar and just under two per cent wind farms.

In passing, there are two very useful opportunities just ahead for stakeholders to assess the NEM state of play. One is a one-day symposium to be presented by the Australian Academy of Technology & Engineering in Sydney on 1 November under the title “The National Electricity Market after the Finkel review” – all the details can be found at www.atse.org.au. The other is the return of the Quest Events “NEM Future Forum,” the fourth in this series, to also be held in Sydney on 30 and 31 October (see www.questevents.com.au) to examine key trends and technologies driving change in the east coast market and the interplay between them.

In co-chairing the latter event, I must remember to quote from Frydenberg’s op-ed today: “For government, it is not a question of preventing change, but rather of managing it in a way that ensures energy reliability and affordability remain paramount. There is no silver bullet to lowering energy prices; anybody who says so is lying.”

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