Exposed: the great energy company price heist

The Yallorn coal-fired power plant. Two thirds of Australia's energy still comes from coal.
July 21, 2017

If South Australia were a country, its citizens since July 1 would have been paying the highest residential electricity prices of any nation in the world, edging out Denmark.

Throughout most of Australia, the new financial year brought spiralling energy charges. For an average Canberra household without rooftop solar, the combined cost of electricity and gas over 2017–18 will rise by $580.

In SA, retail price hikes of 16–20% for electricity and 6.6–9.3% for gas, will raise combined household energy bills by about $470 over the year. In New South Wales the corresponding figure will be as much as $379.

Queenslanders will be spared the worst increases. Residential power prices in their state are up by 7.3%, or about $130, with the state government ordering the publicly-owned electricity network to limit its rises. In Victoria and Tasmania the bad news is still to come, with new tariffs scheduled for January 1.

But for any Victorians who think they will dodge the bullet, wholesale electricity prices in their state rose during the two years to May by a staggering 213%.

Market failure

It is not as though Australia lacks the potential to provide its people with affordable energy. Resources of wind and solar energy are world-class and international prices for renewable energy with storage are dropping steeply.

The essential problem with energy prices does not lie with resources or technology. It has to do with profit-hungry corporations and politicians besotted by free-market ideology.

When Australian electricity infrastructure began to be privatised in the 1990s, promises abounded that prices would fall as market mechanisms allowed new efficiencies. Generation, transmission and distribution are now extensively privatised in most of the country — in Victoria and SA, completely so.

And the prices? The Australian Bureau of Statistics Electricity Price Index shows that from 2000 to 2014, household electricity prices around the country surged by 174%. The years since have been worse.

The market model of energy provision is plainly in crisis. While the situation is complex, its main features become clear if we think in terms of four underlying market failures. Each of these has opened the way for corporate larceny on a grand scale.

Corporate collusion

The most fundamental of these failures relates to the fact that energy networks are profoundly unsuited to private ownership and market mechanisms.

It used to be that even very conservative economic textbooks recognised energy systems as natural monopolies. It makes no sense to have competing poles and wires running down the street, any more than to have competing sewers. Such systems belong in public hands.

Even if multiple firms use the same poles and wires, the number of these firms is normally too small to permit real competition. Collusion to boost prices and rob the consumer is more or less inevitable. This certainly happens in Australia.

“Our wholesale electricity markets seem to be cornered regularly,” Melbourne-based energy economist Bruce Mountain noted in February.

Melbourne University energy specialists Dylan McConnell and Mike Sandiford observed of the electricity market in South Australia: “There is demonstrable evidence for the extraction of monopoly rents by some generators, arguably through physical and economic withholding of capacity.”

Making supply intermittently tight, the major energy firms combine to ensure that consumers can get what they need only by paying extortionate prices. This is the market strategy known as “price-gouging”.

Another failure of the market underlies the spectacularly profitable device known as “gold-plating”. This involves gaming the provisions allowed by National Electricity Market regulators for network renewal and expansion.

When new investment in “poles and wires” became necessary in the early 2000s, official regulators allowed the network owners to finance the work on astonishingly favourable terms. Steep, continuing price rises followed.

In a November 2015 ABC article, investigative journalist Jess Hill spelt out the details of what she termed “a perverse incentive in the system for overinvestment.” Through lobbying and legal appeals, the network corporations secured the right to charge their consumer base for the cost of new construction on the principle that the work was being financed at an interest rate of 10%.

This was considerably higher than what the networks actually paid on their loans, with the difference representing pure profit. The more the networks built, the more money they raked in.

When wild projections of future demand proved unfounded — electricity demand has actually fallen since 2010 — Australians were left with grossly underused poles, wires and especially substations.

Nevertheless, the Australian Energy Regulator late in 2015 authorised the networks to spend a further $50 billion over the following five years. “For the foreseeable future,” Hill observed, “consumers will continue to pay for investment they didn’t ask for, and will never need, every time they pay their electricity bills.”

Retiring coal

A third failure of the market involves the inability — or rather refusal — of corporations to properly manage the transition away from centralised, high-emissions, fossil-based generating technology.

This transition is an environmental necessity. But like the “poles and wires”, it can also be gamed for profit, as the energy corporations have discovered.  

In February this year, coal-fired plants still accounted for two-thirds of electricity generation. According to a report late last year by the peak body Engineers Australia, three-quarters of the country’s coal-fired generating plants are operating beyond their design life. Replacing them is becoming an urgent task. But if consumers’ interests are to be protected, proper grid-wide planning for the change is essential.

In May last year the Northern Power Station in SA shut down, and last March, the Hazelwood plant in Victoria. The closures were carried out with minimal consultation, on the basis of the owners’ profit calculations.

These and earlier shut-downs have placed heavy pressure on the country’s fleet of “peaking” gas plants. Resembling giant jet engines, “peaking” plants are expensive to run but can be started up quickly. They provide the usual means of covering demand “peaks”, as on hot summer afternoons and winter evenings.

Under the mechanisms of the National Electricity Market, generating firms “bid in” to supply current as anticipated demand changes. During extreme peaks, the prices paid by electricity retailers — and ultimately consumers — can be dozens of times the usual level. The premium prices extracted during demand peaks account for a large share of the energy companies’ revenues.

With ownership of the generating plants highly concentrated, the situation is made for monopoly price-gouging — restricting supply, forcing up prices and reaping super-profits.

Following the coal shutdowns, the lost generating capacity has been made up to a large extent by running peaking gas plants more often and for longer periods. While this situation has done no harm to the bottom lines of the energy firms, the price to consumers has been high.

The great gas rip-off

As coal-fired power output has shrunk, the eastern states electricity grid has become critically dependent on gas supplies. Here we find the fourth — and arguably most catastrophic — failure of the market.

In December 2014 exports of liquefied natural gas began from the eastern Australian gas grid, via Gladstone in Central Queensland. The shippers were seeking prices in Asia that in preceding years had been around four times those in their home market. By early this year about 70% of the gas on the eastern grid was being exported.

Following the opening of export markets, output of gas in the eastern states, mostly coal seam gas from Queensland, expanded dramatically as new fields were exploited. In practice, all the new gas went to export, and local prices rose swiftly to meet world levels.   

Ironically, it was not long before saturation of the global market caused international prices to dip well below those in eastern Australia. But in the tightly concentrated local gas market, dominated by just six large firms, prices continued to climb.

Importantly, the new coal seam gasfields were proving less bountiful than expected. Needing to meet foreign contracts, exporting firms seized on gas from traditional sources such as Gippsland and the Cooper Basin. Fears multiplied of catastrophic local gas shortages. Between December 2014 and March this year local gas prices tripled, while wholesale electricity prices rose by almost as much.

Taken together, these failures of the market make up the background to the electricity price hikes of July this year. It would be a mistake to accept the complaints of the electricity firms that they are the innocent victims of high gas prices. To put it mildly, there is no Great Wall between electricity and gas interests in this country. The major electricity generator and retailer Origin Energy, for example, is also a key player in the gas export trade, with a 37.5% stake in the huge APLNG terminal near Gladstone.

Jobs at risk

According to one estimate, some 65,000 jobs around Australia are at direct risk from elevated gas prices. Cases are already being cited of firms that have shut down because of soaring electricity costs.

Even where jobs are not under threat, the living standards of very large numbers of working people are taking a hit. In SA, a typical consumer now spends close to $60 a week on gas and electricity alone.

Homeowners may be able to dodge the energy bandits by putting solar panels on their roofs. But renters and those on low incomes rarely have this option. Significant numbers are being forced to choose between eating and keeping the lights on.

“For jobseekers, sole parents and age and disability pensioners, the July 1 power price increases will be devastating,” Pas Forgione, coordinator of the SA Anti-Poverty Network, told Green Left Weekly. “Newstart Allowance, at $267 per week, is already more than $160 below the poverty line.”

In July last year, after an earlier round of electricity price increases, Uniting Communities SA advocacy manager Mark Henley noted: “Already we’ve got thousands of SA households, maybe about 40%, who are struggling to pay their bills at some stage during the year.”

In NSW, according to the Sydney Morning Herald, the number of electricity customers on hardship programs between January and March this year was up by 36% on the figure for the June 2014 quarter.

These numbers will now swell — and the knives will be out for politicians who refuse to provide solutions.

Political duck-and-weave

The federal government has now announced controls on gas exports from the beginning of next year. Exporters who try to meet their foreign contracts by taking gas from the domestic market will be blocked from shipping the amounts needed to prevent any local shortfall.

But these measures will not make any impact soon, and will not cut gas prices in eastern Australia dramatically. Those prices will be set by the high costs of production of the newest coal seam gas projects.

The general bankruptcy of Coalition thinking on energy price issues is shown by this statement, in March, by Minister for the Environment and Energy Josh Frydenberg: “What we won’t do is pursue a reckless 50% renewable energy target like that of Bill Shorten and the Labor Party, which will drive up energy prices and put at risk our energy security.”

While blowing on the anti-renewables dog whistle, the federal government is also pressuring state Labor governments to wind back their renewable energy targets, and demanding that the ban on gas fracking in Victoria be dropped.

Wary of being blamed for power price rises, the federal Labor opposition has ducked for cover on the issue. In a July 4 opinion piece, Labor Climate and Energy spokesperson Mark Butler called for “bipartisan consensus” on energy matters, saying: “Coal will play an important part in our energy system for many years to come.”

SA Labor Treasurer and Energy Minister Tom Koutsantonis at least remembers which side of parliament he sits on. In June he railed against energy firm “profiteering”, complaining that “there is not a competitive market in South Australia.”

But SA Labor’s focus remains less on energy prices than on the fraught issue of grid security. The state government’s energy initiatives this year include projections for new generating plants, to be powered by … gas.

Unique, apparently, among Australian parliamentarians in talking sense on the energy price crisis has been NSW Greens energy spokesperson Jeremy Buckingham. Analysing the crisis in a June 23 press release, Buckingham argued that the energy sector “should be re-nationalised to stop the failure of deregulation”.

What is needed is to cut through the whole disreputable tangle of private profit-seeking and market dysfunction. The energy sector needs to be taken back into public ownership, and run in a planned way for collective benefit. This would open the way to providing clean, cheap, reliable energy in relatively short order.

Coal and gas-fired electricity generation needs to be phased out, in a planned but rapid manner. But the market won’t do it, and with big profits at stake, the private owners of today’s energy industry will campaign furiously to stop it happening.

Power-price justice will only come when the victims of the energy gangsters join together to stop the heist, through a new, more resolute politics.

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