More nails in the coffin of the electricity market?

August 5, 2017

In Australia, the National Electricity Market is rapidly becoming dysfunctional, with power shortages, blackouts and soaring prices making headlines.

Private companies are refusing to invest in new fossil fuel generators to replace those that have closed. This “investment strike” is due partly to uncertainty about carbon pricing and partly to increasingly volatile spot prices received by generators.

There has been investment in renewable energy, stimulated by the Renewable Energy Target, but not in the associated infrastructure required to support renewables.

Governments have been blamed. Some have announced interventions in the market to keep the lights on. This is going well beyond the usual role of government. Traditionally they just set the framework by which the market operates. But now governments have announced their intention to build generators and storage.

Private companies and neoliberal commentators have warned that such direct intervention will undermine the private sector and could make private companies even more reluctant to invest in new power stations. Governments do not want to take back control of the electricity sector, but they have to ensure that it works.

This all seems like a downward spiral for an electricity market that relies on private investment.

But what should we be arguing for?

Privatisation and competition

The electricity sector has many components, each with their own problems. There are increasing concerns with the grid (the poles and wires) and with the retail electricity market (where customers choose their supplier). Here we focus on electricity generation and the wholesale electricity market.

Both are driving up electricity prices.

Australia has privatised much of its electricity sector, particularly in Victoria, South Australia and New South Wales. Privatisation is deeply unpopular, with many blaming it for skyrocketing electricity prices.

But privatisation is only half of the equation. The other half is competition — the market. It is possible to have privately owned generators without competition. In some US states, private generators are paid a predefined price for what they generate.

Competition means that government-owned electricity companies do not operate in the public interest. When government-owned companies are required to make a profit it can lead to actions that are detrimental to the public.

For example, the government-owned Hydro Tasmania made windfall profits during the carbon price era by running down water storage levels. Last year the interconnector to Victoria failed, which took six months to repair. Tasmania faced an energy crisis because the water storage levels were too low.  Another example is Queensland government-owned generators driving up electricity prices through their bidding practices. This is now being investigated by the ACCC.

Some commentators claim that the problem is not competition as such, but that some generators have too much market power. They see the problem as not enough competition. In other words, they are arguing for more companies to be involved in generation. Even GetUp! has lumped together privatisation and lack of competition as issues of concern and wants more competition, if only for renewables.

Certainly there is evidence of market power driving up prices in South Australia. However, this raises the question of whether truly competitive electricity markets are even possible and ignores the drawbacks of the associated privatisations.  

Governments intervene

The original argument for electricity markets was that they would lead to a more efficient sector, driving down electricity prices. Markets would provide signals when new investment in generation was required, supposedly producing better investment decisions than if governments did the planning.

However, the market is not driving new investment. So governments are forced to step in.

South Australia is the most vulnerable state. Last September, the state’s electricity system completely collapsed — a rare and damaging event. It narrowly avoided a similar collapse in March. There have been power blackouts and large price rises.

In mid-March, the government announced state funding for a new gas power station and a large battery system. The battery is not only for electricity storage, but also for grid stabilisation to reduce the risk of system collapse.

The federal government followed quickly, announcing plans to substantially expand the Snowy Hydro scheme to provide a huge amount of pumped hydro storage. This scheme could greatly support the growth of solar and wind power. There has also been some talk of building a new coal-fired power station.

In Queensland, where many of the generators are still government-owned, though corporatised, the government is intervening in how its generators bid into the market. It has also announced reverse auctions for new renewable energy and storage.

Renewables

Electricity markets in Australia and elsewhere are in trouble because they were designed for conventional generators, mainly fossil fuel and hydro. Variable renewable energy, particularly wind power, does not fit the current market structure.

As the penetration of wind power increases it starts to “self-cannibalise” its market revenue. This is because it typically bids into the market at zero or even negative. When there is a lot of wind power, the wholesale electricity price is low; when the wind is not blowing, the wholesale electricity price is high. So wind power gets much less than the average wholesale price. Thus it is harder for wind power to recoup its investment cost from the market.

This does not matter now because wind power gets enough money from Renewable Energy Certificates. But governments want to replace Renewable Energy Certificates with a price on carbon. The carbon price would need to be very high to compensate for this self-cannibalisation effect — and we know how politically difficult it is for governments to introduce a carbon price. The International Energy Agency has concluded: “Under current circumstances, more than just a carbon price will be needed to incentivise low-carbon investments.”

Some overseas researchers have suggested ways markets could be fixed to incentivise the building of new renewable energy. Given that governments and business are intent on keeping electricity markets, it is likely that they will try some of these reforms, rather than dispensing with the market altogether.

Of course, we could retain the current Renewable Energy Target, which has been effective in driving private investment in renewable energy. Similar mechanisms are also emerging. The ACT uses reverse auctions with “contracts for difference” — a form of competitive tender in which companies bid to build renewable energy generators and then earn an agreed price.

Overall, while the electricity market in its current form is looking quite sickly, no one quite knows how this is going to end up. But it is important to push for more renewable energy generation using means other than market forces.

Small-scale private generation

Our electricity generation is inexorably moving from a centralised to a distributed model. In the future there will likely be many small-scale generators (typically renewables) scattered throughout the network. Most will be behind the meter, which increases their economic attractiveness for consumers.

These will be mainly private generators. This is not a bad thing.

Who would argue against households and communities setting up solar or wind power and connecting to the grid? If businesses generate their own power and feed the excess to the grid, this is beneficial. Indeed, solar panels on the rooves of our homes, factories, warehouses, shopping centres, municipal buildings etc. are expected to contribute at least 10% of our electricity by 2037 and potentially much more. The main issues with such private renewable generators are that they must receive a fair price for the power and the electricity system must have sufficient storage and other infrastructure to deal with their variable output.

Public large-scale generators

Large generators, which are unlikely to disappear as distributed generation grows, are another matter.

There are many reasons why it is better to have such generators in public hands. Governments can borrow at much cheaper rates than the private sector. Fuel costs of renewable energy generators are low or zero, so the main cost is building the plant. Government-owned renewables should therefore be cheaper.

Government ownership can ensure other objectives are met, such as providing employment and decent conditions for workers and the community, and can guarantee that the location and type of generators, plus how they operate, ensures that the sector acts in the public interest. And of course, governments should be best placed to plan a rapid transition to renewable energy in a manner that keeps our electricity system affordable and reliable.

Should we be pushing for existing private generators to be nationalised, or merely that new generators, which should be renewable, be in public hands?

Many existing generators use fossil fuels, and hence need to be shut down. Keeping these in private hands also raises concerns about how their closure can be brought about.  

Governments are not going to jettison electricity markets just yet: efforts to prop them up will continue. But our electricity system is likely to remain crisis-prone. It is time to put on the agenda not just renationalisation, but also replacing the market with a publicly owned, accountable electricity system that can drive the rapid transition to renewables.

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