The National Electricity Market: A View from 2001
While doing a bit of work on electricity policy, I dug out this piece from 2001, which was published as ‘Market-Oriented Reform in the Australian Electricity Industry’ in The Economic and Labour Relations Review, June 2001; vol. 12, 1: pp. 126-150. The conclusion, written at a time when supporters of electricity reform were trumpeting it as a huge success, stands up pretty well 15 years later, I think.
Some problems, however, are likely to become more rather than less acute. The Australian National Electricity Market commenced operation in a period of oversupply so that problems of market power and excessive prices have not emerged until recently. It remains unclear whether an electricity auction market can produce adequate incentives for investment while generating appropriate prices for consumers.
Similar problems are emerging in relation to the regulated monopoly component of the industry, the transmission and distribution sector. Regulators must set prices that do not reward inefficiency or allow monopoly profits, but nevertheless provide appropriate incentives for new investment. This is a delicate balance.
In the longer term, the problem of the environmental impact of an industry relying predominantly on carbon-based fuels remains to be addressed. A market solution would involve the creation of emissions credits that could be traded along with electricity in national markets. Although limited steps have been taken in this direction, much remains to be done.