There be dragons

Hard as it may be to do so, let’s put aside the present political game and focus on the bare bones of electricity supply.

Issue one, can the southern mainland States get through the summer without significant security issues? The agency responsible for ensuring this happens, the Australian Energy Market Operator, is giving a qualified “Yes” – providing, it asserts, there are not significant thermal generation failures in extreme heat, providing interconnectors do not run in to trouble (eg from bushfire impacts) and providing it can work with industry to limit problems.

Blackouts in parts of New South Wales and Victoria last weekend were, of course, heralded by some in the media as a “dramatic reminder” of such potential problems – but they related to lightning strikes on the network system – and a subsequent blackout in South Australia was created by gale force winds dropping trees on power lines.

Issue two, the one on which new Prime Minister Scott Morrison is betting a fair bit of his political farm, is power prices and, even by recent standards of the energy debate, this is a messy area seemingly getting messier, with “big sticks” being waved by the federal government but without a clear picture at present of what can be delivered via more regulatory pressure and when.

Meanwhile green boosters are strongly pushing the argument that NEM wholesale prices have already “turned a corner” and that current investment in renewables will deliver lower costs over the next few years and more such investment will do so to an even greater extent.

Which brings me to issue three: the need for a better understanding of how gas costs have influenced the wholesale price in the past 18-or-so months and how they may do so in the next year and out to 2022 because of Asian gas prices, the cost of east coast imports through LNG terminals and any fall in the value of the Australian dollar as a result of international developments. (The latter would also see a non-trivial impact on vehicle fuel costs, another voter bugbear.) While the impact of relatively expensive gas is widely publicized with respect to commerce and industry direct users, its influence on the NEM wholesale market tends to flow somewhat below the radar of the public debate.

Issue four, I think, is the real maverick in this stable – the unintended consequences of politicians chasing quick fixes. The Grattan Institute has pursued this point. In a recent commentary, it said that, if intervention ends up damaging retail competition by forcing out retailers who can’t fully recover their costs, fewer retailers and increased market concentration could see lower retailer margins “more than offset by price increases resulting from a less competitive wholesale market.”

New federal Energy Minister Angus Taylor made no bones this week, in his first speech in the role, of the Morrison government mindset. “As a Liberal,” he said,” I’m not a strong believer in heavy-handed government intervention. It would be marvelous if we could fix these problems by leaving industry alone. But unfortunately we’re well past that point. This is a sector now characterized by heavy-handed historical government intervention. Poorly conceived interventions in the past leave us no choice but to make interventions if we’re going to get things back on track quickly. On the other hand, the sooner industry itself steps up and provides the solutions to the problems that I’m outlining, the sooner government can get out of the way.”

My hated high school maths teacher used to snarl at me, hesitating at the blackboard, “don’t just stand there, boy, DO something!” There’s a strong element of this impacting on the Morrison government at the moment.

The political pulling power of the government imposing what it describes as a “price safety net” is a strong attraction for Morrison & Co – as manifestly is choosing to interpret the recent ACCC electricity report as providing an imprimatur for “a program to underwrite new stable low-cost generation for commercial and industrial customers.”

And, looming over it all, is the growing conviction of the commentariat as well as the business community, that, while the exact timing of a general election may still be unclear, Australia is about to get another federal Labor government – with Shorten committed to pro-renewables intervention (and the expensive grid augmentation that must accompany it) as well as a much higher carbon abatement target for 2030. To steal a Labor line from an earlier era, the Coalition can be expected to “do whatever it takes” to ward this off or at the very least to “save the furniture” by limiting the size of its defeat.

Perhaps the biggest risk for electricity suppliers in this environment is that the “default price” morphs in to a price cap. A line from Malcolm Turnbull as he lunged towards his political eclipse worries some gentailers mightily, I believe. “We’ll set a price expectation which should be the most anyone pays.”

And the then Environment & Energy Minister, Josh Frydenberg, now Treasurer, added: “For too long the energy companies have made out like bandits. Some companies have tripled their profits as struggling families have tried hard to meet their power bills.”

Morrison has made much of the fact that, so far as he is concerned, Taylor’s real portfolio title is “Minister for Cutting Power Prices.”  Another version of this would be “Minister for Politically Acceptable Power Prices.”

As those maps centuries ago were wont to say about terra incognita, “there be dragons.”

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