The staggering mess that is east coast energy

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From Richard Denniss yesterday at the AFR:

The folk who predicted the carbon price would give us $100 legs of lamb, that China’s demand for coal would keep rising and that NSW would run out gas are at it again. Wind energy, we are now told, is ruining the economy. Run for the hills!

…Most economists believe that increases in the supply of a product like electricity reduces its price, that introducing new competitors to a concentrated market reduces collusion and lowers prices further still, and that increasing trade between regions with different attributes leads to better outcomes for both regions (doesn’t anyone remember comparative advantage from Econ101?).

…Another reason for the recent volatility in South Australia’s electricity spot price is that the Heywood Interconnecter has been operating below capacity as it was being expanded. Of course, the reason it was being expanded was to increase the future capacity for South Australia to export more electricity on windy days and import more electricity on calm days.

…Another reason for the recent price spikes in South Australia is that the owners of the Pelican Point gas-fired power station reputedly decided it was more profitable to on-sell its gas supply contracts into the new export market than to burn it to make electricity. But the boosters of our new “gas policy” are strategically silent about this element of the South Australian “renewable energy crisis”.

…As more wind turbines are spread around the country the risks of calm weather are reduced.

The problem is not renewables, it is gas prices. Gas turbines are often used to supplement renewable networks around the world. When it happens you get temporary price spikes to justify firing up the stations. Hence today we have calls for a solution, also from the AFR:

AGL Energy chief executive Andy Vesey says the rules governing the National Electricity Market need to be overhauled to deal with the unreliable nature of renewable energy sources to ensure a stable supply of power to businesses and households.

“It’s absolutely wrong to blame the fact that this is about renewables,” Mr Vesey said “This is about transitions. In any transition there are always going to be rough spots.

…Mr Vesey said issues around intermittency, market design and the availability of gas were manageable provided there was leadership from governments and regulators.

He said it was “absolutely wrong” to blame wind and solar for South Australia’s power crisis.

The “capacity” market system, which operates in Western Australia, is often criticised for being inefficient as payments are made even if no electricity is being generated, which can mean higher bills for customers.

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That’s one solution. But why, I ask you, would we pay gas power to keep power stations idling when we’re already massively subsidising vertically integrated gas generators via cartel pricing for the gas? The particular problem for us is that we’ve sold off our gas to an east coast cartel that is shipping it off to North Asia. Thus the trend for gas prices (much more significant than spikes) is higher, much higher even than resources-poor Japan!

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This flows through to electricity prices because when retailers bid for power in the wholesale market it is gas that sets the price as the marginal cost producer:

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There are two intersecting problems here. The first is that we have no national energy policy to prevent natural resources from being given away offshore even as we pay monopoly prices at home. There must be an answer to that first or all of this is simply piling stupidity upon stupidity and burying consumers in layers of cross-purposed rent-seeker subsidies.

The second is that we have an unavoidable energy transformation underway governed by a pack of arseholes instead of by a single price. We should not even be having this debate, change should simply be happening via a single carbon price that determines winners and losers in very efficient time.

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In short, political and business rent-seekers have so distorted the east energy “market” that it now resembles our housing quango, with massive winners and losers determined solely by how much power each has over this parliament or that, or, this news paper or that. It is a scab grab not a debate.

For what it’s worth (and that ain’t much in the Banana Republic) there are four solutions to the underlying problem of gas and electricity prices:

  • we force east coast communities to allow more east coast gas development and force those reserves into more competitive hands;
  • the public buys Santos or Origin and does not export any gas until it has satisfied domestic demand at mandated rates of return that forces the gas cartel to price efficiently;
  • we build a bunch of publicly-owned LNG import terminals in our major cities and sell the gas at mandated rates of return that forces the gas cartel to price efficiently. This will embed higher prices in the cost of gas in liquifaction and regasification but at least it will prevent the uber-gouge, or
  • we do what every other country on earth does. Every single country other than us. We have a national (or at least east coast) energy policy that includes domestic reservation with mandated pricing and sales.
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Let me conclude by saying that I know of no greater market and policy failure anywhere in the world than this debacle. We took an huge natural advantage of low cost gas for manufacturing, leased it away for free with no tax take, watched as $200 billion was pissed away to increase revenue for a few gas firms by $10bn (not profits, revenue), allowed the same hapless gas-bubblers to consolidate and ream us (the owners of the gas) by refusing to give it to anyone locally, hollowed out our manufacturing and lumbered households with higher energy bills, while providing the cheapest energy bonanza in decades in North Asia (at huge losses cross-subsidised by you know who).

We could not have fucked ourselves more royally than if we let some resource-poor super power in North Asia invade and set us up as a vassal state paying huge royalties to the distant King to live in our own land.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.