Hasten carefully

What east coast energy supply system we will have by the end of 2019 is not an idle question and this point has been accentuated in the past couple of months by a number of developments.

There is, for example, a notable interest in some quarters, mostly green-leaning, in playing off the Australian Energy Market Operator in its current guise against the rule-maker, the Australian Energy Market Commission, portraying the latter as being too conservative, too wedded to reliance on the competitive market and too slow to pursue changes (that it is believed will advance wind and solar power and batteries) in an environment where to quote one report this morning “the (grid) genie is out of the bottle.”

This perspective got a run last week in an Australian Financial Review story about the need asap for a “strategic reserve mechanism” as part of the effort to ward off generation-related supply failures.

The commission’s attitude can be summed up by a paragraph from a discussion paper on NEM reliability it published just before Christmas: “Some form of a safety net, such as a limited and targeted ability for a system operator to pay a premium for capacity that is not otherwise being traded in the market, is appropriate in the event that the market is expected to fail to meet the reliability standard. Given the costs that can be associated with such safety nets, it is important to understand what the existing limitations are with the current safety net in the NEM, the Reliability and Emergency Reserve Trader (RERT), before a balanced solution to these limitations can be developed and assessed to make sure it is in the long-term interests of consumers.”

Behind the agitation led by the warriors of the green revolution is a growing desire in some quarters (by no means all environmentalists) for a return to central planning in power supply, taken to its extremes in recent days by the Greens, hell-bent on winning the Batman by-election in Melbourne, calling for networks to be renationalized (in the States where they have been privatized), and Labor, desperate to cling to the federal seat, making noises that might, in the dark with the light behind them, be taken for an interest in considering the point (at least until the poll closes).

It is interesting to read the AEMC’s comments on central planning in its reliability paper (for which responses closed last week).

“Historically, it has been common for governments around the world to own and operate electricity infrastructure – including generation assets. Australia was no exception. Prior to the start of the NEM, central planners (that is, governments or their agencies) would decide when to invest in new generation, what types of plants to build (for example, base-load, mid-merit or peaking) and where they would be located. The chief advantage of this pure central planning approach is that it can generally be expected to deliver a reliable power system. Put simply, public funds can be allocated directly to try and make sure that the desired level of reliability is met; it is a simple way to make sure that there is enough generation to ‘keep the lights on’ for an acceptable amount of the time

“However, the problem with this approach is associated with high cost to consumers. It is generally accepted that central planners perform this capital investment function far less effectively than private firms and individuals.

“Private investors pursuing profits invariably have superior information about their own forward-looking costs and are subject also to important capital and take-over market disciplines. They will consequently be striving to produce their output at a lower cost than their competitors and to maximise their returns.

“In contrast, central planners generally:

  • have access to only highly imperfect information, that is, much like an economic regulator, they face an asymmetric information problem in that they cannot estimate accurately the respective costs and benefits of different investment options (and)
  • do not have very strong incentives to ensure that the industry is operating at least cost, that is they are not subject to the same market disciplines and may be motivated primarily by ‘keeping the lights on’ at whatever the cost, for reasons of political expediency.

“Centrally planned electricity generation consequently tends to be significantly more expensive to consumers than market-based investments since it passes the risk of ‘getting it wrong’ on to consumers.”

So far as I can see, none of the media types have felt the need to convey this admirably succinct case for the competitive market to their readers or viewers while headlining the nationalization demands.

To all the above the commission adds: “The basic idea of the existing reliability framework in the NEM is to deliver the desired outcomes through the market mechanism as much as possible, albeit within specified price limits. As the supply/demand balance tightens this should manifest in higher spot and contract prices that should provide a spur for efficient entry and expansion that addresses any potential problems before they transpire. Those market-based initiatives are assisted by further information provided by AEMO in various publications and it is only after all else has failed that direct interventions are used as a last resort to minimise the likelihood of involuntary load shedding.”

Well, that’s the theory; the practice, especially since 2016, is for government to knee-jerk in response to every latest piece of news that plays badly in the media, piling interventions or proposals for interventions on top of each other.

Perhaps the core issue is that the “we want it now” brigade, including some politicians and certainly including those who ache for fresh ways to trip up coal-fired power, are for fast moves in new directions, aided and abetted by the media for whom heat and movement is almost always their preference, while the “conservative” AEMC sees its duty in, as it puts it, helping to create “a coherent package for the future” that requires “a detailed design of reforms likely to provide balanced solutions that will address the needs of an evolving system.”

My South African high school had as its motto “festina lente” – which is a Latin take on a Greek adage that roughly translates as “make haste slowly.” Don’t indulge, in other words, in heedless hurrying – which is good advice in many areas of life and should certainly apply to pursuing change in our economically and socially critical power supply market.

The activists, on the other hand, are pushing for use of the new Energy Security Board to bypass the AEMC’s examination of this issue and get CoAG (that is politicians) to make a quick decision on new reliability moves in an election year…………

Comments are closed.