I’ve come up with a solution to the current energy prices crisis.
It’s free. There’s no shortage of it. And it’s totally environmentally friendly. Except maybe a bit of noise pollution…
I call it the Canberra Reliable Hot-Air Power system (or CRHAP for short).
This is how it works…
We hook our politicians up to the electricity grid via a face mask. The mask harnesses all the hot air while they talk. Then we sit back, turn the TV on mute, and let them do what they do best.
Think of the turbines all the CRHAP could turn.
24-hour, non-stop CRHAP powering the Australian economy.
Seriously, if we could harness the amount of rubbish expelled by our politicians, then we’d be hitting base load power with ease.
Barnaby Joyce alone could power his rural electorate of New England. At last the pollies would be contributing to society in a meaningful way…
Alas, the CRHAP’s not real. At least, not the fictional product.
You see, I’ve been following this energy price debate for the past year. And I’ve come to the conclusion that none of our pollies in Canberra actually get it…
Or if they do, they’re doing a good job of hiding it.
In fact, most of them are just using the situation as an excuse to push whatever ideological barrow they support.
But in this case, the spin is now costing you real money. And whatever happens next will have big consequences down the line.
Today I thought I’d try and lay it all out for you, so you can avoid the political spin.
Then next time you get that increasingly steep power bill, you’ll know who to really blame.
How the Australian Energy market works
Australia’s energy market is complicated.
Intentionally so, I suspect. It makes it easier to gouge people.
Although it’s said to be a deregulated system, what that means can vary widely state by state.
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In 2002, New South Wales and Victoria became the first states to introduce Full Retail Competition, which allowed private energy retailers to enter the market.
In 2009, Victoria became the first state to completely deregulate its electricity market, meaning the retailers were free to set their own prices.
Since then, most other states have followed suit, though not all.
These days, you as a consumer are free to choose the electricity provider of your choice.
But this part of the process only accounts for about 10–15% of your total bill. So, shopping around can only help you so much. These retail providers have to first buy the electricity from the wholesale market first.
Indeed, this last mile is the smallest part of your total electricity bill.
Let me explain…
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The first cost — the one most hotly debated right now — is the cost of generating the energy. These are the big power stations that buy fuel (coal, gas, biomass or renewables).
This typically represents around 21–27% of the total bill.
And it’s increasing in cost due to a lack of new supply coming on board to replace old sites that are closing like Hazelwood. Let’s be clear, these closures were entirely foreseeable.
But the wholesale industry has not had the confidence to invest in new supply. It’s very expensive to build a power plant. And if you don’t know what the rules will be 5 or 10 years down the line, it becomes very risky. And what happens when supply falls but demand stays the same (or goes up). Prices go up.
Rising international gas prices are also contributing to the increasing wholesale costs. Despite our abundance of domestic gas.
The energy produced is sold through the National Electricity Market (NEM), and the price can vary day-to-day depending on supply and demand. Retail providers use complicated financial instruments like hedging and options to smooth out price variability over the short term.
From there, the vast network of poles, wires and substations distributes it to the end users.
This middle function typically represents around 36–57% of the total bill. The largest cost.
And lastly — as I said — the retail energy companies handle all the bills, questions and administration associated with dealing with customers. For a 10–15% cut.
A hijacked debate
For such a privatised system to work well, it must be incentivised to meet three outcomes.
First it must be reliable. In other words, power when it’s needed. With, certainly, no blackouts like we saw in South Australia last year.
Then it must be as low cost as possible. Energy price is a cost to not only consumers but also industry. A high cost energy market makes many of our export industries uncompetitive.
And lastly it should account for any cost to the environment. In economics, this is called an externality. A cost to the community — or future generations — that needs to be accounted for by today’s users.
It’s that simple a proposition. In theory, anyway.
The problem appears to be that the current framework doesn’t provide enough certainty for investors in the power generation part of the supply chain.
Climate change, and how to deal with it, is the source of the uncertainty.
With the politics going back to Kevin Rudd’s failed carbon tax, Julia Gillard’s emissions trading scheme and Tony Abbot’s ‘axe the tax’ policy.
What is the best way to account for environmental costs? And what is the best way to achieve our environmental targets?
It’s a decade long failure on both sides of politics, resulting in a huge policy vacuum.
The private sector cannot make long term, multi-decade investment decisions in such uncertainty. Some, like AGL, have decided against coal for public relations reasons as much as anything else. Others have just sat back and done nothing.
But the essence of a deregulated market is in letting a competitive market find the solutions. And at a cheaper and more efficient level. That’s clearly not happening.
And both sides are to blame. Let’s be clear about that.
The use of energy as a political football to pursue ideological ends — whether that’s left wing or right wing — is beginning to hurt us.
And now the consequences of a lack of investment and a complete lack of innovation are starting to come home to roost.
The Liddell coal-fired power station problem is a symptom of the underlying problem. Not the problem itself.
We need a true leader to step up and set a solid energy price framework that can get the balance right for Australia over the next decade.
The ‘ignore climate change’ and the ‘go green at all costs’ extremes have to be politically sidelined. These two interest groups are more to blame than anyone else for the lack of policy direction.
And ultimately, you and I will pay the cost.
Editor, Money Morning
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