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.

12 thoughts on “The National Electricity Market: A View from 2001

  1. We did have a market for emissions credits (or its equivalent) but Tony Abbott got rid of it. We still have a market for renewable energy certificates and a renewable energy target that inevitably will drive more investment in renewables. It’s a very expensive way to reduce carbon emissions (expensive compared to an economy wide carbon price) but at is the way the political cookie has crumbled.

  2. My take on the NEM is that it was designed without giving adequate forethought to:

    1. The rise of household renewables, which (a) complicate the grid and (b) are an atomistic method of generating power, with large diseconomies of scale.

    2. The limits to consumption of irreplaceable fossil fuels (peak coal on 2014 trends would be less than 10 years away).

    3. Carbon emissions/climate change.

    4. The lack of system coherence and weakening of democratic control, meaning no-one is in charge.

    All these were eminently predictable. Climate change is probably the subject of the greatest negligence, and there was no excuse for not predicting it, after Margaret Thatcher lectured governments at the UN to do something in 1989.

  3. Given that a limited number of electricity producers facing fairly high barriers to entry were operating in a market with inflexible demand, it was inevitable that some degree of market rigging would occur.

  4. Well, nothing learned by our political/business class. Hardly surprising is it?

    Big scary lessons for the dribblers in the very near future. My annual electricity bill is about $1500. That is enough money to service a loan of nearly $40,000. And that kind of money buys an awful lot of power generation capacity. Going off grid is tempting, but there are some very interesting technologies emerging in battery management that may offer positive returns.

    I will happily drive them to bankruptcy. The business types that is. Politicians should be exterminated.

  5. @Geoff Edwards

    You say;

    “1. The rise of household renewables, which (a) complicate the grid and (b) are an atomistic method of generating power, with large diseconomies of scale.”

    There is truth in this but it is not the whole story. They may complicate the grid in some respects. They also put the grid to a new use, namely, via micro-generation of power, the pushing of power (distribution) back into the grid. When we find a new use for an existing infrastructure, this is a win in economic terms. The grid is now doing more for us.

    As for “atomistic” method and “large diseconomies of scale” this again is only part of the story. Solar panels are easily scaleable. You can have a lot, or a few, at any one site. If you have a lot in the aggregate, and these are widely distributed, you do have a kind of economy of scale, albeit one vitiated by requirements for more, smaller inverters etc. On the plus side, if implemented correctly, distributed power generation, in some respects, is less vulnerable to one massive central failure. The system has a distributed robustness rather than an over-centralised vulnerability.

    These features I mention are worth something in the cost-benefit equation.

  6. Lachie A’Vard, I thought I might make a comment on energy, but because I don’t want to be associated with your views I will state I disapprove of murder, regardless of what the victim’s job is.

  7. My annual electricity bill is about $1500. That is enough money to service a loan of nearly $40,000. And that kind of money buys an awful lot of power generation capacity.

    Note the gap here! The current power bill is equated to the capital cost [“generation capacity“, not generated power] with recurrent costs like fuel or maintenance or attrition replacements ignored.

    This isn’t the sort of mistake you make deliberately: even a person arguing in absolute bad faith won’t try “my argument has gaping holes that I will ignore in the hope that noone notices them”, the chance of it backfiring is too high. The only time you get people making huge omissions is when they don’t know about them.

  8. @Collin Street

    The case is not as bad as you make out. A person paying $1,500 annually for power could easily make all power and hot water for his/her own property from an investment of $15,000 and maybe less (for solar power and evacuated tubes hot water system). Let us assume this is financed by home equity at home mortgage rates, let’s say 5% comparison rate.

    It would take 15 years to pay off at $118.62 a month. That is less than the $125 per month currently being payed for power. If the change is made when a new hot water system is needed anyway, this helps the economics of it. After paying it off, the person could expect on average of another 10 to 15 years of free power depending on the quality of the whole system. This looks financially viable to me.

  9. > The case is not as bad as you make out.

    Sure. It’s fairly straightforward to add in adjustments for running costs, &c, and you get basically the same result, albiet a bit less impressively… which means that we can tell that Lachie didn’t make the omission consciously to mislead us, because there’d be no benefit in doing so.

    Since Lachie did make the omission, and there was no reason for him to have done so deliberately… he must have done so accidentally, which means we can apply “but this was written by a person who is unaware of the existence and/or impact of recurring expenses” to anything he might care to write in future.

    And it’s that, and not anything about the cost/benefit of home-made electricity [just like mother used to make!] that was the observation I wanted to bring to everyone’s attention.

  10. @Collin Street

    Isn’t the substantive point the fact that his electricity bill can service a loan for home generated power over a period of 15 years and give him another 10 years (about) of free power? For the purpose of the exercise, we will assume all his equipment fails precisely at 25 years.

    This tells me the centralised power generators are over-charging for power or using using inefficient technology or both. It appears centralised generation can be out-competed by distributed generation. This shakes up a whole set of assumptions about our electricity system. It becomes viable to become a “prosumer” for example. Private giant monopolies can be busted long term. The technology itself begins socialising the ownership of production.

  11. The Tesla Powerwall 2 was announced about a week and a half ago. It is a 13.5 kilowatt-hour battery storage system that can be retrofitted to any existing rooftop solar system for under $10,500 in Australia according to Tesla. That’s fully installed.

    While it is too large for most Australian households to economically use for on-grid storage, under the right circumstances some households could save money by installing it.

    Provided what Tesla has said is correct, we are at about the break even point for on-grid home energy storage.

    I mentioned a few years ago this sort of thing might be available in a few years. It’s a bit bigger than I expected though.

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