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Putting the blame where it belongs

September 20th, 2017

Queensland Premier Anna Palaszczuk has followed Bill Shorten in blaming privatisation for the woes of the electricity network. She’s basically right, although there’s much more wrong with the National Electricity Market than that.

Equally importantly, in terms of getting a good outcome, she’s on a political winner in the fight with the Turnbull government and particularly the Abbott faction pulling Turnbull’s strings.

No one fully understands what’s going wrong with energy policy, but Australians love renewable energy and hate privatisation. Both of these judgements are validated by experience. Renewable energy has overdelivered on its promises while privatisation has (at best) undelivered and more commonly made matters worse. So, the idea that the LNP can win the debate on energy policy by bashing renewables and attacking public ownership as socialism seems pretty implausible.

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  1. Peter Smith
    September 20th, 2017 at 20:15 | #1

    So, we who are unenthusiastic about the LNP should cheer them on, I guess.

  2. Smith
    September 20th, 2017 at 21:20 | #2

    It is difficult to attack public ownership of electricity assets when you are advocating public ownership, as Abbott did on the weekend.

  3. Kel Young
    September 21st, 2017 at 01:38 | #3

    You could substitute PPPs, private ownership of public transport, toll roads you name it all have failed to deliver jobs, taxes or service.

  4. rog
    September 21st, 2017 at 04:57 | #4

    In NSW privatisation of the power industry had been a hot issue for years with ALP Carr and co being thwarted by the unions.

    It was suggested but not supported by then premier Barry O’Farrell. His position was lost over a bottle of undeclared wine and Mike Baird took over. Being ex banker, where every problem is solved by privatising, he enthusiastically offloaded the lot incl the out of date Liddell power station (which was valued at $0).

    Neither side of politics, at least in NSW, seem to ‘get it’.

  5. Geoff Edwards
    September 21st, 2017 at 08:25 | #5

    I’m not sure why you would claim, Prof John, that “No one fully understands what’s going wrong with energy policy”. There would be systems engineers and electrical engineers who would have a fairly reasonable grasp, without mentioning the occasional heterodox economist such as yourself and public admin wonk, from a public policy perspective.

    The mess can also be explained in terms of faulty policy analysis: hollowing out of the public service in the 1980s and 1990s, the politicisation of policy by the right-wing press making it difficult to debate policy in logical manner, and the fragmentation of the systems as a result of microeconomic reform, of which privatisation was a major limb.

    The failure of the NEM to incorporate emissions policy or to foresee the advance of renewable technology also have strong explanatory power. These failures are difficult to excuse given that the NEM was launched more than seven years after the publication of IPCC 1990.

    Of course, no one understands any field of policy fully.

  6. may
    September 21st, 2017 at 13:57 | #6

    so at the next election

    it’s basically vote for anyone but the theocrats and the “coalition of the stuff it up”?

  7. Taojas
    September 21st, 2017 at 14:10 | #7

    I totally agree with you. I just can’t rationalize how this mess makes any sense whatsoever. Can someone explain all this to me as I’m not an economist. Is it politics or money that have got us here? Why does the Qld government control 65% of the energy market in Qld and simultaneously price gouge?(1) Whose interests does the government really serve?

    Excuse my naivete but Isn’t this a conflict of Interest? Shouldn’t they either totally put the entire energy system under state control and then dictate the price for the benefit of everybody etc.. OR totally privatize it and let the market sort it out?

    I miss John Clarke, maybe he could give us some clarity.

    1. http://www.theaustralian.com.au/business/powering-australia/queenslands-power-play-is-gaming-the-energy-market/news-story/63d9264c69b51b102490bb4e926bedc2
    http://www.afr.com/news/politics/accc-to-investigate-qld-power-prices-20170719-gxe899
    Why

  8. John Quiggin
    September 21st, 2017 at 15:23 | #8

    @Geoff Edwards

    Your first and last sentences seem to contradict each other, and the last is the correct one. I agree with paras 2 and 3, and have written a lot on both, but I wouldn’t claim a full understanding of the problems.

  9. derrida derider
    September 21st, 2017 at 15:59 | #9

    Geoff Edwards nails it in that third para. No one, not even advocates of carbon pricing of whom there were already a fair few in the relevant policy making circles (it is, after all, the economic rationalist’s preferred solution to AGW), thought through the implications of declining demand for grid electricity and changed patterns of that demand on both market and grid design.

    Despite propaganda it is those demand changes more than the rise of renewable supply that has caused instability. POLICY instability meanwhile has prevented an effective response to those network troubles. Ill-timed and poorly executed privatisations are certainly one more ingredient in the toxic stew, but I don’t think they’re the dominant ingredient – we’d still be in a mess if all the bits were owned by individual states.

  10. chrisl
    September 21st, 2017 at 18:32 | #10

    Regarding the claim that “Australians love renewables” My neighbor is absolutely cock a hoop! He is getting over 60 cents Feed in Tariff for as long as he lives in the house! My pensioner neighbor
    (income < $20,000 per annum) not so much. Firstly he can't afford the upfront cost and secondly he has no idea how long he will live there. The renters up the street don't seem to have solar either.
    My sister took the plunge on solar because she could pay it off on the bill! What could go wrong? Well it took a summer and an autumn (6 months!) and $4000 in upgrade costs to finally connect to the grid and make that meter go backwards. Truth be known ,the electricity companies don't want her electricity. By mid-morning when the panels crank up to full production there is so much electricity they don't know what to do with it.

  11. Ernestine Gross
    September 21st, 2017 at 22:27 | #11

    @derrida derider

    1. “No one, not even advocates of carbon pricing of whom there were already a fair few in the relevant policy making circles (it is, after all, the economic rationalist’s preferred solution to AGW), thought through the implications of declining demand for grid electricity and changed patterns of that demand on both market and grid design.”

    I don’t agree with your assertion that ‘carbon pricing’ has anything to do with ‘economic rationalists’. How would you prove your assertion?

    2. “Despite propaganda it is those demand changes more than the rise of renewable supply that has caused instability”

    In contrast to coal, nuclear, gas, and hydro, some renewable energy technology (solar, wind, wood, biomass) is suitable for economic units (households, farms, business enterprises, schools, …) to supply what they demand.

    Not sure whether this is what you had in mind or not.

    Re 1 and 2. While some renewable energy technology lends itself to a form of autarky in electricity for economic units (and therefore demand for grid electricity ‘instability’), this is not a necessary outcome. Depending on available land resources, large scale solar and wind farms, directly linked to the grid, are technologically possible. The timing of the introduction of a carbon price becomes a crucial factor for demand for grid electricity and ‘grid stability’. (Watch what happens in the US when cities and individual states opt for renewable targets but not the Federal Government.)

    Yes, there is ‘policy instability’.

  12. Smith
    September 22nd, 2017 at 10:16 | #12

    @derrida derider

    The design of the NEM was (formally) decided by the collective of state and federal energy ministers. Emissions reduction policy wasn’t their problem. It was the problem of environment ministers. Until very recently, emissions reduction was supposed to take place across all activities that created carbon emissions, from sheep farts to brown coal power stations, and policy, from the first Rudd emissions reduction scheme to Abbott’s direct action, was meant to be sector neutral. The philosophy was greenhouse gases are greenhouse gases, and we don’t care where the reductions come from, let the carbon price or direct action payment sort it out.

    It’s only now that carbon reductions have become synonymous with energy policy, so it’s really being smart after the event to blame the design of NEM, even though it now seems obvious.

  13. Obbie
    September 22nd, 2017 at 13:00 | #13

    Smith is right. Other emissions need urgent attention.
    For example, the lack of strong emission standards for ICE vehicles, said to have come about because our now-dead car-manufacturers couldn’t meet them, is something that should be tackled right away by the Federal government. Such standards would bring about significant reductions over time and encourage manufacturers to offer BEVs and PHEVs here that are already available elsewhere. The Australian offerings are pathetic.

  14. September 22nd, 2017 at 15:35 | #14

    I realize that economists see price manipulation as the preferred method for driving change. However, this doesn’t work very well as a tool for driving investments with long payback periods when the price keeps on being changed when ever there is a change of political fortunes. Investors like schemes like the ACT renewable auction scheme that gives them the security of contracts. A growing number of companies are also becoming more interested in investing in small renewable energy generators that guarantee them with a supply of low cost power.

  15. derrida derider
    September 22nd, 2017 at 21:01 | #15

    Neither Smith nor Ernestine seemed to have grasped my point.

    Ernestine, put yourself in your opponent’s mindspace (always a useful exercise). If you were a market type keen on minimising “inefficient” government regulation, and also, as a good rationalist with a respect for science, understood that we need to oxidise less carbon, then how would you propose we do that? By a Pigovian tax, of course. As John D notes, economists do believe prices drive behaviour – and to be fair, they have history on their side in this.

    Indeed, Smith, emissions reduction was to be sector neutral – because that is exactly one of several advantages a carbon price has over more direct interventions. But my point is that at NEM design time no-one believed grid electricity demand, due both to conservation and to household solar panels, would fall in the near future. They probably assumed that by the time it did rational governments would see it coming in plenty of time and reorganise the market design and investment accordingly. A silly overestimation of our politicians, of course. But it is that overestimation of demand which caused on the one hand a gold plated but inappropriate grid design, and on the other incentivised perverse behaviour by generators,

    This problem is quite distinct from that of managing dispatchable but locally intermittent supply to the grid – a manageable (and so far largely managed) problem that the coalistas are blowing up out of all proportion.

  16. Geoff Edwards
    September 23rd, 2017 at 06:25 | #16

    Our colleagues above are correct that plateauing demand was also unforeseen by the designers of the National Electricity Market, along with emissions policy and the expansion of technology. But like those other two, it also was predictable, and predicted. The conservation movement was advocating demand management with quite detailed guidelines in the 1970s. Nobody took any notice. “The Limits to Growth” predicting an end to indefinite expansion of throughput of materials and energy was published in 1972. This work was vehemently attacked by politicians, business and the economics profession and governments continued with business as usual. More than 40 years later, all these forecasts are coming to pass. The laws of thermodynamics and mathematics are not simply social constructs and will have the final say.

    Although economics describes itself as the study of supply and demand in scarce resources, the scarcity is conceptually confined to the market being studied; there is a cornucopian ethic in orthodox economics which doesn’t recognise global or absolute scarcity.

    The tangle that the governance of electricity has become might be given other names or other proximate causes, but would seem to have its roots in two trajectories. From an emissions perspective, it reflects the inability of economic systems based upon endless, geometric growth to adjust downward without instability. I’d be happy for the economist readers to demonstrate where I’m wrong with this. From a governance perspective, it reflects the capture of the institutions that craft policy by a pro-corporate elite pursuing its self-interest, just as Jared Diamond predicted in “Collapse”.

  17. I am and will always be Not Trampis
    September 23rd, 2017 at 09:40 | #17

    I guess an indirect criticism of the market would be the lack of investment since Abbott declared he was against a carbon tax ( which I note has been fessed as a lie). We know no-one wants to invest in coal fired stations. There would be a lot of investment in renewables if market participants had some surety in policy!

  18. Paul Norton
    September 23rd, 2017 at 11:32 | #18

    DD @15 is right about the intellectual provenance of the advocacy of economic instruments as preferred policy instruments for addressing AGW and other forms of pollution. My copy of Pearce & Turner’s (1990) Economics of Natural Resources and the Environment contains the proof, accompanied by nice little graphs, that a Pigovian tax is a more economically efficient means to achieve a given level of pollution reduction than conventional regulation. Of course the proof depends on certain assumptions about markets and about the design of the Pigovian tax that often don’t pertain in reality.

  19. may
    September 23rd, 2017 at 12:44 | #19

    completely-ish off topic

    (Americans look away. you won’t get it.)

    nomination for

    “Australian Pacifist of the Year”

    Astro Labe.

  20. September 24th, 2017 at 05:48 | #20

    Over and over we come across cases where privatisation is mostly about privatising profits and socialising losses … We all know, however, that ordinary voter should never get between a Premier and the Bag of cash or bottles of fine wine. Would we be any different creatures if we got elected to parliament … As it is a nature of power to corrupt

    A thoughtful study came out recently that might be of wider interest even though there is nothing new under the political sun:
    Want Proof that Corporate Money Influences Politicians? This New Study Has It.
    It really is no coincidence that the members of Congress who receive the most money from Wall Street are also the most hands-off on regulating it.
    http://inthesetimes.com/article/20543/corporate-money-citizens-united-corruption

    Moses came down from the mount with tablets inscribed with 10 commandments. Most of us know (most of) them, and most of us fail to live by (most of) them. But if Moses had turned them over and looked in the fine print on the back, he’d have found the 11th Commandment:
    Don’t get caught.

    That in essence summarizes the rise and fall of the Public Sector to advice Premiers on all sides of politics without fear and favour …

    Some trends are impossible to stop just like run away private equity trains:
    http://www.news.com.au/lifestyle/home/interiors/sharing-economy-why-we-will-barely-own-anything-in-the-future/news-story/6ef06cfb5efaca9e1ece0ed3324fcfa7

  21. September 25th, 2017 at 05:25 | #21

    Sir Bobby Charlton made his Manchester Common launch 60 years ago today (Thursday), when he scored twice in a 4-2 supremacy during Charlton Athletic at Prior Trafford.
    Charlton joined Concerted in 1953 as an England Schoolboys wunderkind with a giant reputation and was yearning to make his assess in Matt Busby’s free-flowing team. With Tommy Taylor away with England on international excise for a quarry against Northern Ireland, his hulking inadvertent arrived, five days stunted of his 19th birthday.
    The famous footballing Knight spoke to MUTV some time ago about his give in in great feature as he offered his recollections of the start of an mythical odyssey.
    “It was the longest point I’d in any case been mistaken the send injured,” recalled Sir Bobby. “There was a fellow called Keith Marsden who played centre-back in behalf of Manchester New zealand urban area Reserves and we both hit the ball at the yet unceasingly a once and my ankle swelled up. Three weeks later, Sir Matt Busby asked me how I was.
    Manchester

  22. may
    September 26th, 2017 at 13:40 | #22

    strewth.

  23. October 1st, 2017 at 19:28 | #23

    UK privatisation – Full Text FIn Times as site User Unfriendly –
    The pendulum swings against privatisation

    Evidence suggests that ending state ownership works in some markets but not others
    Undercover Economist

    Danny Kruger
    Capitalism must be revolutionary to defeat Corbyn  
    SATURDAY, 30 SEPTEMBER, 2017

    Selling off the railways seems like a failure every time your nose is crushed up against Sir Bobby or some other knighthoodish armpit …
    SEPTEMBER 29, 2017 by Tim Harford not by Thomas Uter 😉
    Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation.

    In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics.

    They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit.

    Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market.

    Privatisation’s proponents mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver

    That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds.

    Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years.

    There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.

    Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.

    Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible.

    But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that.

    Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise.

    All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly.

    A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent.

    My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria.

    The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents.

    The pendulum swings — but shows no sign of pausing in the centre.

    [email protected]

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