Needed: change across broad front

If, like Bill Shorten (according to media reports), you can’t be asked to read the 398 page report on electricity costs by the Australian Competition & Consumer Commission or even the 23-page executive summary, then you can surely have recourse to a single page the watchdog has published – with three columns (headed “poor decisions” and “big problems” and “proposed solutions”) summing up why, in the organisation’s view, the NEM is “broken” and what can be done about it.

The “poor decisions” the commission highlights are (1) loosening the rules regulating monopoly networks and imposing excessive reliability standards leading to over-investment, (2) offering excessively generous solar feed-in tariffs, (3) collapsing Queensland generation from three to two players and selling New South Wales generation assets without sufficient eye to competition, (4) stopping or impeding gas exploration and development, (5) meeting sustainability objectives by subsidizing renewable energy without regard to market needs for energy, and (6) retailers deliberately using opaque discounts in their marketing, imposing excessive penalties for bill payments not on time and exploiting customer stickiness.

The ACCC identifies the “big problems” caused by all this as (1) customers paying more than they should due to excessive network asset bases, (2) those without solar panels subsidizing excessive benefits for those who have them, (3) considerable market power in generation contributing to higher prices, (4) power costs increasing as gas is more often the NEM marginal generator, (5) subsidies for generation assets that may not be capable of providing energy when the market needs it, and (6) customers using the highest retail discounts often not getting the lowest price, consumers disengaging from the market and undermining competition – and customers who don’t pursue switching paying too much.

The commission’s proposals to address these issues are (1) write downs or equivalent action to reduce excessive network bases in Queensland, NSW and Tasmania plus the removal of the Victorian network tax, (2) governments taking the cost of premium feed-in tariffs on to their budgets, (3) Queensland dividing its two generation business in to three, new rules to prevent future generation acquisitions from allowing any NEM entity to exceed 20 per cent market share, a new approach to over-the-counter trading, including much greater transparency,  governments providing back-end price support for new/small generation players and allowing large consumers to bid demand response in to the market, (4) making more gas available, (5) introducing a well-designed “national energy guarantee,” and (6) having the Australian Energy Regulator set default tariffs to replace the retailers’ current “standard offers,” limiting penalties on consumers for late bill payment and funding groups to facilitate greater household and small business switching between retailers.

There.  Even political blatherskites should be able to get their heads around this much of the plan – and they can read the ACCC’s executive summary for further and better particulars without straining their poor brains. All able to be done in less than 30 minutes.

(Not included in this shorthand version but a further proposal with decided bite for gentailers is a suggestion that the national electricity law be amended to give the Australian Energy Regulator powers to address behavior “manipulating the proper functioning of the wholesale market.” There be dragons……….)

The Prime Minister, who has a penchant for circumlocution that cruel critics lampoon as waffling, managed to sum up what should be the highest goal of the body politic in one sentence when he addressed the Queensland Media Club this week: “My single, clear-eyed focus is to reduce the cost of energy for Australians.” That’s a one-liner aimed squarely at those going to the by-election polls later this month.

Malcolm Turnbull added: “The measure of any (market) solution should be will it cut prices?”

He excoriated his opponents for continuing to focus on technology rather than lower prices and declared that “only a technology neutral approach will get prices down.” Here, I would have been inclined to rather say that “a technology neutral approach to generation is important among a set of steps needed to get prices down” – as one can see from the ACCC synopsis I have cited above.

As the Australian Industry Group, representing a large part of the commercial and industrial users who account for 60 per cent of the market by power demand, said in a largely supportive statement on the ACCC proposals, a lot of work will be needed to understand and flesh them out.

One of (few) worthwhile media commentaries on the commission’s report has come from a doyen of business journalism, Stephen Batholomeusz, in an op-ed in Fairfax Media’s The Age and Sydney Morning Herald. You can find it under the (rather smart-arse) heading – some editors just can’t help themselves – of “Light bulb moment: how many recommendations does it take to unplug our energy mess.”  Don’t be put off by that.  Bartholomeusz has done an insightful job in a relatively few words of conveying the context of the report for laymen.

As he says: “It is a measure of the complexity of the issues, the scale and number of the deficiencies and the difficulty of responding to them that the ACCC inquiry in to energy affordability has come up with 56 recommendations.” He adds: “It is also a pointer to the convoluted nature of our energy policies that, while most of the recommendations appear to be reasonably sensible, even the more obviously beneficial recommendations for consumers will have their critics and the potential to produce unintended consequences and uncomfortable trade-offs.” Quite.

The broad context was also concisely canvassed by Rod Sims, the commission chairman, in a media statement (which, again, certain people could at least have taken the time to read and digest) saying that “the NEM is largely broken and needs to be reset – previous approaches to policy, regulatory design and competition over at least the past decade have resulted in serious electricity affordability problem.”

(Shorten and his federal leadership team would rather be hanged, drawn and quartered than acknowledge that Labor, including present and past State governments, shares culpability for this situation. It is, they egregiously declare, “the Prime Minister’s energy crisis.”)

Sims claims that adoption of the ACCC’s recommendations will deliver savings to the average NEM household of 20 to 25 per cent and a saving for 2.2 million small to medium businesses of an average of 24 per cent. That prospect should require the political Punch & Judy show to take a sabbatical until the many moving parts of this attempt at a solution are shuffled and arranged by governments across the jurisdictions in to a workable form.

Again, Sims makes a point that needs to be well-appreciated by both politicians and the community at large: “First, our recommendations require some difficult decisions as sound economic reform usually does. Second, despite the poor past (record), it now falls to the Commonwealth and State government to make (these) decisions. Third, we must move away from narrowly-focused debates; addressing affordability requires change across a broad front.”

One aspect of the publication of the report that should not be overlooked is that it may have put to rest an outcry for a royal commission that seemed only days ago to be taking on populist momentum. There is no need to spend another year (or more) traversing the ground the ACCC has covered over the past 15 months; the need now is to press forward with solutions, including pursuit of the NEG, which gets a critical outing at the next CoAG Energy Council meeting on 10 August.

Josh Frydenberg, who has been in North America this week and who is plainly chuffed by the support for the NEG from the ACCC (“which has no partisan axe to grind”), has slapped down the royal commission push in an interview with ABC Radio: “There is no point in calling another inquiry before you have read the report of the last one.”

It is hard to pick one aspect of the ACCC recommendations as the most contentious – as evidenced by the instantaneous yodeling from the green corner about rooftop solar power and an early pushback again the default retail price on the grounds it will deliver re-regulation – but the trickiest is probably the new concept of the federal government underwriting off-take agreements for “appropriate” new power stations able to provide dispatchable energy. Already this is being interpreted as support for coal-fired or gas-fired generation and the usual suspects have been quick to vent their displeasure. (It could also encompass variable renewable energy combined with storage or peaking gas. Or, sotto voce, nuclear.)

The Australian Industry Group has reacted by commenting that such long-term agreements could “expose taxpayers to significant financial risks and cut across other elements of energy market design and policy.” It argues that “care and consultation are needed to ensure the proposal delivers value.”

It’s possible that the NEG may address the same issue of reliable, affordable supply without direct government intervention in the market and the distortions affecting investors that could create.

For the moment, as the aftermath of the ACCC delivery of its report has made clear, energy is still very much a football in the political game – immediately the imminent federal by-elections. Once they are out of the way and the upcoming CoAG debate has taken place, it is possible progress can begin to be made towards mending the NEM before Turnbull calls a federal election (which he repeatedly says will be next year). However, I can’t commit to holding my breath.

 

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