Will Australia’s Battle with Energy Prices Result in a Royal Commission?

With the US celebrating Labor Day, there was no trading in stock markets overnight. That doesn’t give Aussie stocks much of a lead.

While recent trading action around the world has been relatively benign, keep in mind that the Labor Day long weekend in the US marks the end of the summer holiday season.

Influential money managers come back to work and more money usually starts flowing through the markets. So expect volatility to start picking up in the coming weeks.

Will the rally continue?

On the one hand you have the US economy doing extremely well. On the other, stock prices appear to have factored in much of the good news.

Given the NASDAQ has been the leader of this bull market, it makes sense to focus on the big tech stocks to see whether there are any signs of weakness.

So far, there are none. As you can see in the chart below, the NASDAQ just made another new all-time high. It is well above the highs of earlier this year. In contrast, the S&P 500 only just made a new high, while the Dow Jones index is still below its January 2018 high.

MoneyMorning 04-09-18

Source: Optuma
[Click to open new window]

So the NASDAQ is the key.

In recent weeks, President Trump has ramped up his criticism of some of the tech giants. If this is a sign of coming regulation, it’s not showing up in the index. Investors do not appear concerned.

Let’s see how it plays out. We all know (or should know) that Trump is at war with the Deep State. Google has its origins with the Deep State, as this article explains.

Anyway, it’s something to keep an eye on.

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How will Morrison help bring down electricity prices?

Moving the conversation back to Australia, and the focus for our new government leaders is, quite simply, to keep electricity prices down. As I explained yesterday, failure to do this was a major reason why Turnbull got the boot.

New boss Scott Morrison clearly knows what his job is. As he said in an interview with radio host Alan Jones yesterday, when Jones asked him about whether he would stick with the Paris Accord:

Now that discussion isn’t going to change anybody’s electricity prices, and that’s what I’m focused on. I’m not a climate warrior one way or the other. What I’m about is getting people’s electricity prices down.

If he can’t get the job done, he’s setting up the energy sector to take the blame. As reported in The Australian yesterday, Morrison ‘is open’ to a Royal Commission into the power industry.

Perhaps he’s learnt from his mistake of opposing a Royal Commission into the Banks 26 times?

What has contributed to Australia’s energy prices?

Look, maybe a Royal Commission is necessary to find out what the problem is. But usually, when the market fails, or prices rise sharply, there is a very simple reason for it.

In this case, there are a number of factors that have contributed to Australia’s soaring power prices. Let’s take a look at them…

We have some of the largest and highest quality coal reserves in the world. This makes for cheap base load electricity. However, as the climate change lobby has increased in power, coal has been viewed as a dirty form of energy. As a result, investment in coal fired power stations has plunged.

On the other hand, more money has gone into renewable energy sources. While this is great, renewable energy isn’t a reliable source of base load power. This contributes to the instability of the power grid.

In short, investment in stable power sources has dried up, while investment in volatile sources has increased. Not a good combination.

Throw in the fact that a huge supply of domestic gas is now heading toward the export terminal at Gladstone in Queensland, along with reduced investment exploration (driven by state-based policy) and you have all the ingredients for a price shock.

Oh, and there’s more. While I’m not an expert on the economics of energy transmission infrastructure, the poor regulation of the power (energy transmission) industry has no doubt contributed to higher prices.

Owners of energy infrastructure are allowed a regulated return on assets. The more you invest, the better your return. The result? Overinvestment in transmission infrastructure. It’s known as ‘gold plating’ and adds to the cost of getting electricity into households.

With the horse well and truly out of the gate, the regular is now scrambling to fix it, as this July article from The Australian points out:

Electricity network companies will be stripped of $2 billion in revenue over the next five years as part of a crackdown by the national regulator to fix “gold-plating” and reduce household power bills. 

A new five-year draft determination by the Australian Energy Regulator could cut about 13 per cent in revenue from the gas and electricity network sector, in a blow for power grid owners who may suffer valuations cuts if the new rules are implemented.

It’s too late. Electricity has become a hot political issue. In a land with abundant energy resources, it’s a failure of political leadership on both sides that our bills are so high.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity

PS: The growing Chinese middle class could translate into a massive investment opportunity for Australians. Download this FREE report here. 


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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