Nov 9, 2012

Marn’s minimalist white paper goes the market way

The federal government's energy white paper sensibly steers clear of government intervention and aims at getting markets working effectively. But there's not much in it for players.

Bernard Keane — Politics editor

Bernard Keane

Politics editor

Like most white papers, Martin Ferguson's energy document is rather bland, for the most part unexceptionable and even anodyne -- unless you're a union potentially affected by privatisation, a rentseeking power utility or the state governments of New South Wales and Queensland. It's an example of how far -- nearly two decades after the Keating government initiated the national electricity market reforms -- public debate about electricity has devolved that some of the contents of the paper are a source of controversy. Like the national water market, self-interested state governments and special interests are a huge impediment to the implementation of reforms that would deliver ongoing and significant benefits to communities, business and the economy alike, primarily via greater reliance on pricing signals to empower consumers and business users to better shape demand. Then again, when you consider how dismally ignorant and malicious the media can be about electricity pricing (behold the drivel from The Daily Telegraph for example), it's no wonder provincial politicians are cowards on the issue. Unfortunately, the path to reform and lower rates of growth in electricity prices lies through the states, and particularly NSW and Queensland which even under Coalition governments continue to resist privatisation and cling to electricity pricing regulation, a quaintly Stalinist practice that will eventually seem as ridiculous as the regulation of bread prices, which NSW only abandoned in the 1980s. The white paper lays out, albeit with plenty of bureaucratic boilerplate like "enabling and incentivising markets", a path forward via COAG for, in effect, removing the worst state-based encumbrances from a fully-effective electricity market. This of course reflects the government's political strategy of targeting state governments -- most of which are now, handily, Coalition ones -- as the guilty parties of electricity pricing. The reliance on a market-based approach is also reflected in the paper's correct dismissal of (disturbingly wide) calls for domestic reservation of gas supplies to de-link international demand from domestic supply:
"Such measures should be a matter of last resort, undertaken only where there is clear evidence of market failure. Currently, there is no compelling evidence to support this."
Or, for that matter, evidence of any kind. The paper is also sanguine about the extinction of the Australian oil refining industry, despite agitation from unions such as the AWU on the issue:
"Coupled with rising demand for liquid fuels, this will make Australia more reliant on imports of crude oil and refined petroleum product. Australia is not the only country in this position: European nations and the United States are also undergoing similar structural adjustment in their refining industries. These changes are not considered to reduce our liquid fuel security, which is assessed as high trending to moderate over the longer term. This is due to Australia’s access to diverse and well-established supply chains and the planned replacement of lost refining capacity with import facilities to maintain market supply."
On renewables, the paper adds nothing to the government's current suite of initiatives arising from the Clean Energy Future package, but targets barriers to take-up of emerging technologies (which echoes the original Ross Garnaut recommendation that governments focus on addressing take-up and commercialisation barriers rather than picking winning technologies). If you're picking up the theme that this is a strongly pro-market paper, you're correct. That even extends to Ferguson's favourite issue: nuclear power. The paper concludes:
"[T]here is currently no social consensus on the technology or an economic case for its deployment, even taking into account the carbon price and the need to reduce our emissions."
It does, perversely, argue the Fukushima tragedy in Japan is "not expected to significantly affect the growth of nuclear generation in the medium to long term", a peculiar conclusion given Fukushima has led the phasing-out of the Japanese nuclear power industry, along with that of Germany's, and safety audits in Europe that have led to the closure of two reactors and significant cost increases for those currently in operation or under construction. Fewer reactors and lower demand for uranium has prompted one miner to cut production forecasts. And this week the Financial Times reported that two reactors had been shut down in South Korea and the rest of the country's reactors -- which together provide one-third of the country's electricity -- are to be audited after the discovery that safety certificates had been forged. The paper also includes a table on electricity generation costs for different technologies showing nuclear power as one of the cheapest, while acknowledging the costing does not include financing (or decommissioning) costs. The construction of nuclear power is so monumentally expensive and so prone to delays that it is one of the most expensive forms of power from a capital cost perspective. That's why, as the paper notes elsewhere, government financial support would be needed for such an industry. This is, however, the best sort of white paper -- one that sees the role of government as getting markets working as efficiently as possible and only intervening where markets fail.

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4 thoughts on “Marn’s minimalist white paper goes the market way

  1. Hunt Ian

    why Bernard thinks that Martin Ferguson’s disappointing and rather useless white paper on energy “sensibly” steers clear of government intervention is a mystery. Perhaps he is still contented with thumbing through first year economics texts, or perhaps he knows as little about economics as Martin Ferguson.

    Campbell Newman, the Queensland premier, is perfectly right when he says that the electricity distribution network is a natural monopoly and that he has no intention of privatising it. Although he says and does a lot to which I am more strongly opposed, this time not even the first year economics textbooks that inspire the Canberra bureaucracy can help out. There is even more of a problem here than the Labor Government found with the awful privatisation of Telstra. Splitting the network up would impose impossibly high transaction costs. Hiring it out would save labour maintenance costs because the government could hold a competitive tender for running the network for a limited period. This might save labour maintenance costs, at the expense of engineers and maintenance workers employed by the network, but it would also cost a lot to monitor and would pose security risks. It cannot be said that a monopoly is alright, as you might with the car industry, because competition from imported electricity would keep the distributor monopoly honest, as you might say with cars.

    Is government intervention “Stalinist”? Oh, please Bernard, silly associations (Oh, no! We don’t won’t to be like Stalin-government intervention in the network will lead tomorrow to mass murder and purges, we can’t have that) are not an argument for markets. Markets are not the be all and end all. They work pretty well with the price of bread but they have been hopeless with natural monopolies and oligopolies, of which there are many instances in distribution, real estate, education health care, agricultural infrastructure and other systems in Australia

    Does this mean the state governments are blameless when we look at prices? Not at asll. The same silly let’s have markets everywhere policy has produced profit fixing. If revenue for the “electricity providers” (salespeople and distributors) falls short, they can increase the price to give themselves their state government guarenteed return on their investments. How absurd this is!. Without clumsy, silly privatisation programs it would not happen and has no point.

    “Gold plating” the networks is a problem. Some of the extra cost is not the fault of State governments. The network has to be renewed. This used to come out of taxes but our governments think that their first year economics gospels tell them that higher taxes are “less efficient”. So now the cost of the replacing networks comes out of electricity bills. Those who consume more, pay more. This might be fairer than taking it out of progressive income taxes but there is probably not much in it, as those who consume more electricity usually pay more tax. It is, however, probably not fair to the ill or disabled who must use more electricity.

    Some of the “gold plating” comes from unused 99% of the time network capacity. There are many ways that could be handled, including by getting big users to cut back on high demand days or getting households equipped with gas fuel cells (as pushed by eg Blue-gen) that put in more power when demand is high (solar panels also work to some extent to reduce high demand in summer).

    Martin ferguson is not to be blamed for his silly energy white paper. A few fluffy gestures ate the market (oh, so sound, you know) are all his bureaucrats can supply, possibly because they they are desperately trying to distance themselves from Joseph Stalin.

  2. John Bennetts

    I have become used to Kean’s weary and repetitious rants against nuclear power. Give the bloke half a fact and it blows up into a tsunami of muddled opinion.

    For starters, Japan has not phased out its nuclear power industry and neither has Japan. Both countries have expressed political will to do so, concurrent with no affordable or technologically adequate alternative. So, Japan is slowly re-commissioning part of its fleet of NPP’s and Germany has pushed its deadline far beyond the political horizon of current players.

    I find it curious that one as experienced and as capable of acute awareness of nuance as is Bernard, that on this issue he doggedly hangs onto such a shallow, unsupportable one-eyed stance.

  3. Achmed

    In the late 1800’s a bloke named Telsa was experimenting with electricity from the atmosphere – it worked. Funding and the subsequent development of the technology to draw electricity from the atmosphere was withdrawn as the investors realised that there was no way they could profit from the sale of something that was freely available in the atmosphere. Gotta keep those coal mines making a profit

  4. John Bennetts

    Achmed, Tesla was far from the only person seeking to draw electricity from the clouds. US President Franklin experimented along these lines much earlier.

    There is very little prospect of commercialising an energy source which is extremely high voltage, operates extremely unpredictably and delivers energy only perhaps a hundred times per year, and then only for millisecond spurts.

    The impediment was not the coal industry.

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