Should we burn the Energy White Paper for cheap heat?

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From the AFR come details of the Energy White Paper which aims to address rising energy prices:

The paper says:

  • Productivity must improve and peak demand growth slowed to reduce prices
  • There must be more incentive to increase domestic gas through traditional, offshore, coal seam and shale sources
  • There will be a greater reliance on imported liquid fuels like crude oil
  • Costs must be lowered and investment environment must be more competitive to secure the one-third of energy resource investment that is yet to reach final approval; and
  • The government must accelerate the pace of commercialised cleaner energy

The paper provides a suite of proposals to help consumers – including a timeframe for deregulating price controls and increasing competition; having a benchmarked “fair and reasonable” feed-in tariff; and improving network efficiencies by making investment processes more transparent with increased information for consumers to choose cheaper energy.

This is a grotesquely brief summary but I don’t see anything here that will deal with electricity price rises. As we all know, the vast bulk of price rises have derived from investment in distribution networks. From the Garnaut Review:

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This is the result of many years of under-investment and, more recently, warped incentives in publicly owned infrastructure to “gold plate”. Also from the Garnaut Review:

There is a pressing need to revisit the state-owned distributors. There is an unfortunate confluence of incentives that may be leading to significant over-investment in network infrastructure. It is clear from market behaviour that the rate of return that is allowed on network investments exceeds the cost of supplying capital to this low-risk investment. The problems are larger where the networks continue to be owned by state governments. State government owners have an incentive to over-invest because of their low cost of borrowing and tax allowance arrangements. In addition, political concerns about reliability of the network, and about the ramifications of any failures, reinforce these incentives.

A comparison of costs between Victoria, where the network providers are in private hands, and New South Wales and Queensland, where the network providers are in state hands, provides compelling evidence to support this contention. While there are likely to be genuine differences between the states that explain some of these divergences, it is unlikely that these differences explain the majority of them.

Distribution networks are, of course, natural monopolies. So a strong regulatory regime is required to prevent price gouging.

The last point is instructive. Not much point deregulating pricing if the wholesale dimensions of production and distribution are natural monopolies (which they are). Competition is a furphy in electricity, except perhaps in the retailers, but that is not where the price rises are coming from. The advantages of privatisation are all about operational and capital efficiency, not competition, but will still prevent price rises if coupled with a strong regulator. So some sense there.

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As for freeing up greater gas supplies, so long we continue to expose ourselves to the North Asian oil-linked benchmark system via export markets, more supply isn’t going to do jack about local prices.

These are preliminary comments only, but on today’s evidence the paper looks like it should be put aside for the winter when it can be burned for cheap heating.

Happy to be persuaded otherwise!

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Find below Martin Ferguson’s speech. He makes the document sound a lot more like a “Mine More Gas White Paper” than anything addressing expensive energy. Sell ’em dirt!

85616482-2952-11e2-96e4-0e5569ad5389_Martin Ferguson’s Energy White Paper Speech

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.