Home > Economic policy > NSW electricity privatisation – a quick look

NSW electricity privatisation – a quick look

December 12th, 2007

There’s nowhere near enough evidence in the public domain for a proper evaluation of the announced privatisation of NSW electricity, but there’s enough to do a quick retrospective evaluation of the last such proposal, under the Carr government in 1996 and 1997. At the time, estimates of the sale price for the whole industry (generation, distribution and retail) were “up to” $22 billion (an overoptimistic figure based on extrapolation from Victoria). If entirely used to repay debt (unlikely, this is NSW after all!) that would have saved the government around $1.5 billion per year. Instead the government got dividends of around $1 billion a year, and also extracted at least $5 billion in special capital repayments. So, the total stream of payments was about the same, and the present value was, if anything, a bit higher since the capital repayments came early.

Coming forward to 2007, the government looks set to get more than $15 billion for generation and retail alone, even with a range of restrictions that would reduce the sale price substantially. In general, distribution accounts for at least half the value in the industry, implying a value upwards of $30 billion.

Short analysis: By not selling in 1997, the public lost nothing in terms of cash flow, and accrued at least $8 billion in capital gains.

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  1. SJ
    December 14th, 2007 at 21:03 | #1

    BTW, Terje, I understand that you have a degree in electrical engineering. As with “baseload”, you should avoid using terms of art like “brown out”, when you don’t know what they mean.

    Brownout

    Where the voltage level is below the normal minimum level specified for the system.

    When you don’t have quite enough generation, you don’t get a total blackout or a brownout, you get a partial blackout caused by manual or automatic load shedding, or you get calls for voluntary load reductions (same result whichever way it’s done).

    So when you use terms like “state owned”, I haven’t got a clue whether you mean “owned by the state of NSW” or “publicly owned”, whether you understand the difference, or even whether you understand anything about what you’re commenting on. There’s a huge communication barrier here.

  2. Peter Wood
    December 14th, 2007 at 22:05 | #2

    The price of carbon has collapsed in the NSW GGAS baseline and credit emissions trading scheme which mainly covers the electricity generation sector. This is because the NSW government has stopped reducing the cap. Is it a coincidence that they have stopped reducing the cap just before privatisation? I doubt it.

  3. December 15th, 2007 at 10:19 | #3

    Terje wrote:

    Well actually the Post Master General acquired the monopoly on providing telephone services only after all the private operators were driven out of business by legislation.

    I am not able to comment on the detatils of this except to say that the arrangement clearly served Australia well up until the late 1980′s.

    Australia actually had a very robust, innovative and competitive private sector in telephone service provision prior to the PMG. All of it shut down to suit the socialist straight jacket of government ownership. The public sector were followers and monopolisers.

    If this was true of the PMG at the start of the process, it was not by the 1930′s. The PMG was amongst the world leaders in devlopment of radar and in the 1970′s Telecom laboratories were leading the world in optical fibre technology. They had plans to have all of Australia connected to fibre optical cable before 2000 – all thrown away for the idiocy of coporatisation, a contrived competitive market and privatisatation, so that a handful of selfish insatiably greedy people could profit at everyone else’s expense.

    And innovations like PCM (pulse code modulation) which paved the way for digital data communications were pinoneered in the private sector US market. The Europeans followed the US lead and we followed the Europeans.
    And much of the technical innovation in Australia was actual done by Telstras private sector suppliers such as french owned Alcatel and it’s precursor (STC from memory).

    A lot of world-leading innovation also came out of Telstra’s (or the PMG’s or Telecom’s) own laboratories which led the world.

    I am not denying that private companies can be innovative, but I do object to the pathological hostility that you and others on this forum display towards any involvement whatsoever by government in the economy. NSW’s power infrastructure was paid for by its customers and taxpayers. It has worked well in the past under government ownership and can be made to work well again, if the NSW government were to find the poliltical will to make it work.

    Also it should be pointed out the private investment banks to whom Iemma and Costa would hand across NSW power’s infrastructure are not interested in innovation as some private companies in the past may have been. Their primary goal, judging form past privatisations is simply to gouge every possible dollar it can by screwing its workforce and the paying public.

    BTW the private telecommunications manufacturing sector which once employed 10,000 Australians has been destroyed as a result of free market ‘reforms’.

  4. December 15th, 2007 at 19:22 | #4

    Hello your comment is funny.
    I like your diary..
    thank you again

  5. December 16th, 2007 at 23:43 | #5

    SJ,

    In terms of your question regarding brown outs I am probably being a bit too loose with my terminology so let me elaborate. If an electrical network (of fixed nominal voltage) is overloaded then it will suffer voltage sag. If the sag due to this problem of supply is excessive then the response by the network operator to correct this problem will in general be rolling blackouts as they shed demand by switching off sections of the network (there may be few other options). So frequently the result of brownouts is deliberate blackouts. This is different to typical non-deliberate blackouts that result from equipment failure or broken wires. As such I am using the term brownout as a descriptor for a particular sort of blackout.

    If the retailers and the regional network operators are completely separate entities then retailers who have previously put in place the relevant contracts to ensure supply to their customers may still find that their customers suffer an outage because the network operator dumps demand in a less than discrete fashion (ie they isolate entire sections of the network not particular consumers). In this way service availability is critically linked to having standby supply in excess of demand. Without reserve supply, network availability simply can not be assured. It is my view that many customers (probably most) care more about service availability than marginal savings on energy prices. Although this will not be true of all consumers.

    Of course if we had fast enough signalling and metering (currently true for some larger customers) that could shed power instantaneously by blacking out selected customers only (those whos retailer had not put in place the necessary supply contracts) then a separation of retailers and operators would become more viable. I personally think that such a day is still a way off because smart metering and signalling is not yet widespread.

    ~~~

    Terje, what you’re saying here is that you think electricity retailing is a natural monopoly, and that it should be in public ownership.

    YES to the first and a qualified NO to the second. In relation to the second issue I believe that local government ownership would be better than state (ie NSW government) ownership. I think a private mutual structure where customers were members (like the old NRMA) would probably be a better structure again. However I’d be happy to let local governments figure out that reform initiative independently. Also even if you privatised distribution/retail on a regionalise private for profit monopoly basis, that still does not mean that the price that they charged would be prohibitive. And the sale price should in any case reflect the monopoly status. So I’m not reflexively opposed to the private ownership of natural monopolies. For some applications there are in any case near substitutes (eg gas, oil or solar for heating water/rooms/food).

    With smart metering and signalling becoming more widespread over time I can also see the day where separation of retail and network operation becomes a much more viable option. That still leaves the question of ownership in relation to the network (wires and poles).

    However my real point was that at this stage in the game I see no significant argument in favour of government ownership of power generation plants. It is a function within the industry that is quite readily outsourced to the private sector.

    Regards,
    Terje.

  6. SJ
    December 17th, 2007 at 21:28 | #6

    Terje, I wasn’t asking you a question about brownouts, I was telling you that you were using the terminology incorrectly.

    Your paragraph about brownouts above is largely correct, but completely irrelevant. You had originally said:

    To prevent brown outs you need idle generating capacity or demand management tools.

    This simply isn’t correct. If the source impedance feeding the load is too high, you’ll get poor voltage regulation, i.e brownouts. This does not occur across an entire network, but only at particular locations on the network. Idle generating capacity will not help one bit. To fix a brownout situation, you need demand management at the particular location suffering the brownout, or increased transmission capacity to that location, or better power factor correction at the location.

    But as I said, this is irrelevant to the question of generation shortages.

    I’ll see if I can explain it to you. Let’s say we’ve got 10,000 MW of generating capacity, demand of 9,000 MW, and electrical losses of 500 MW. We’ll need to put 9,500 MW of mechanical energy in to supply the demand + losses. If the demand from one minute to the next goes up to 9,100 MW, what happens? We’re taking electrical energy out at a greater rate than we’re putting mechanical energy in. We’re putting in 9,500 MW and taking out 9,600 MW. Because of the principle of conservation of energy, the electrical energy and the mechanical energy have to match. Where does the extra mechanical energy come from? From the stored rotational kinetic energy of the turbines and alternators. That means that their rotational speed will fall, as will the overall system frequency. The turbine control systems (governors) will detect the fall in frequency, and open steam valves in a steam turbine, water valves in a water turbine, etc. to increase the mechanical power input.

    But what happens when the electrical demand rises to 9,600 MW? Total demand plus losses now equals 10,100 MW, but we’ve only got 10,000 MW of plant, so we’re only capable of putting 10,000 MW of mechanical energy in. There’s an excess demand of 100 MW, the governors have opened all the valves as far as they will go. We’re now sucking that 100 MW out of the rotational kinetic energy of the turbines and alternators and not replacing it. Without intervention, the generators will slow to a stop in a matter of seconds. That timescale is too rapid for manual intervention, so in practice automatic underfrequency load shedding relays are installed all over the network to progressively shed load. Normal system operating frequency is 50 Hz, corresponding to a rotational speed for most generators of 3000 rpm. The underfrequency relays are set so that control the reduction in system frequency. The first to activate might be set to say, 49.5 Hz, the next to 49.4 Hz and so on. If the load shed by the first is sufficient to arrest the decline in frequency, then the second one won’t activate, and so on.

    This is the situation we’re talking about, and it does not equal “brownout”, no matter what you might have half remembered from some subject you took years ago.

    However my real point was that at this stage in the game I see no significant argument in favour of government ownership of power generation plants. It is a function within the industry that is quite readily outsourced to the private sector.

    It looks like you aren’t capable of thinking through an argument. You recognise that there’s a natural monopoly somewhere. You think it’s in retailing, and that if the retail franchise was granted, then outsourcing of generation to the private sector is OK. Simultaneously, you recognise that no retail franchise has been granted, but you think that outsourcing of generation is still OK, and you give no thought to regulation in any of your desired scenarios.

    In turn, I’ll wish for free electricity and a pony.

  7. david booth
    January 6th, 2008 at 17:10 | #7

    To meet greenhouse gas reductions of at least 60% by 2050 the extra carbon output from a new coal fired power station (privately or publicly owned) would preclude achieving this target. No amount of fudging the figures can avoid this reality. Its a zero sum game where an increase anywhere means a larger reduction is required elsewhere if overall reduction is to be achieved.
    Translate this to 8 million tonnes per year of greenhouse gas emissions from a 1500 MW power station. This would stop NSW achieving targets of 20% reduction by 2020. At present the whole game is owned by the Government who are responsible for achieving energy delivery and greenhouse gas reduction.
    To privatise is an attempt to shift responsibility where the government should realise that with privatisation the risks never move to the private sector they remain with the government and the consumer. No market manipulation will avoid the necessity of reducing greenhouse gases.
    I am forced to the conclusion that Mr Iemma is putting up a straw man in the form of an ugly coal fired power station and hoping the federal government will buy him out.
    It is such an illogical decision he could not be that stupid, could he?

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