I’ve been flat out for the last couple of weeks, and haven’t had time to post. But I’ve finally found enough time to read the Finkel Review into the Future Security of the National Electricity Market (NEM). There are four inter-related points that come out of the report

1. The NEM has failed in its own terms, that is, with respect to the objective of providing reliable and affordable electricity. The Review recommends a variety of tweaks to the market rules, but the core measure is a shift to central planning by a new Energy Security Board, which effectively overrides the multiple existing market bodies. Not surprisingly, given the political environment the Review ignored my submission calling for renationalization of the Grid, but the logic is the same.

2. We need a carbon price, in one form or another, if we are to reduce emissions in line with our commitments. Given that all economy-wide options have been ruled out, we may as well start with an electricity specific policy. Within electricity, the existing Renewable Energy Target is a crude kind of price mechanism, with only two prices, one for renewables and the other for non-renewables. But, if we tweak that a bit, we can replace the largely irrelevant notion of “renewability” with emissions-intensity, and we have something like a carbon price. I pointed this out a couple of years ago. The Clean Energy Target Finkel Review doesn’t quite get there, but it goes most of the way.

3. The only way to get lower wholesale electricity prices is to expand renewables and let the owners of coal-fired power station take a corresponding hit to their profits.

4. Policy uncertainty has been at least as big a problem as bad policy. This was most obviously true of the Abbott government’s attacks on the RET, which stalled investment in renewables, while doing nothing for coal. Abbott is correctly blamed for many of our current problems. The implication is that a bipartisan compromise is better than holding out for the right policy, only to see it reversed after the next change of government. Whether that judgement stands up remains to be seen. If Turnbull does indeed face down Abbott, Abetz and the rest, and can reach an agreement with Labor, the arguments of the Review will be vindicated. And, with the denialists sidelined, it will become obvious that we need and can easily achieve more ambitious targets.

11 thoughts on “Finkel

  1. Re 1: The logic may be the same (central planning) but the costs may differ.

    a) Energy Security Board, which effectively overrides the multiple existing market bodies, entails multiple sets of competing management and therefore results in a complex coordination problem for the Board. Furthermore ‘overriding existing market bodies’ has a paper meaning and a in reality meaning; the two may not always be the same.
    b) A national grid is under one management.

    My null hypothesis is that option a) is ‘less efficient’, both in terms of monetary costs and in terms of technical efficiency (coordination).

    Option a) invites the next round of complaints about excessive regulation of ‘competitive enterprise’ (market makers).

  2. The first quibble I have with these points is the lack of mention of a ceiling along with price and the likely need for a rapidly decreasing ceiling at that if we are to play our fair part in reducing emissions.

    And this will need to apply to industrial and built emissions, without the option to fudge the issue using land clearing reduction claims based on modelling from agencies subject to political pressure if not in producing the numbers on reduction then producing a list of caveats a mile long. The latter is one of those scandals IRT Australia just under the surface whereby where many believed we were reducing emissions or stabilizing them since 1990 in line with Kyoto when we were in fact increasing them by 30-40%.

    A further complication is planned population increases. The use of the per capita fudge when we are already one of the planets biggest emitters and ones with least excuse (we dont have cold northern winters) is outrageous.

    A third complication is the subsidies like that for agriculture and diesel which promote carbon use.

    The setting of targets for all these as well will be just as difficult as putting a price on carbon.

    Maybe (likely ?) I am missing something. Perhaps they are included in the fine details under ‘price’. But in this case the current debate is not transparent in letting the public know how bad we have been and what else they need to consider.

  3. The Energy Security Board will be a co-ordinating body only, like the Council of Financial Regulators, which is made up of the bodies with the real power and authority (RBA, APRA, ASIC etc). Its job will be to report on how the market is going in giving us reliable and secure energy. It won’t have any statutory powers. It won’t have any authority to direct investment in generation or transmission or regulate prices or change the market rules. It won’t be overruling anybody because it won’t have the power to overrule anybody. This is all set out in Finkel. The Energy Security Board won’t be even a tiny bit like re-nationalization.

  4. @Smith

    Not my reading “The COAG Energy Council should agree on a strategic energy plan for the NEM, building on the recommendations of this blueprint, reflecting government priorities. A new Energy Security Board should drive implementation of this blueprint”

    “The ESB will operate by the delegated authority of the ministers (through the Energy Council) and its power will derive from being endorsed by ministers” As regards statutory powers “Establishing the ESB as a non-statutory body in the first instance will enable it to begin performing its functions as quickly as possible within the existing legal framework. The need for the ESB to have statutory powers should be considered as part of a subsequent review of its performance.”

    That sounds like a fair bit more than reporting, though that function is certainly included.

  5. @John Quiggin

    “its power will derive from being endorsed by ministers”

    In other words, it will have the power of the pulpit. It will be able to say “we think a new interconnector should be built between A and B” (or whatever). But it won’t have the legal power to force anything, until “The need for the ESB to have statutory powers should be considered as part of a subsequent review of its performance.”

    Don’t hold your breath.

    If you want a central planner with powers to do things, then get a central planner with powers to do things. Otherwise, it’s all hot air.

  6. From Europe, it all looks a very strange and local screwup. National Grid in the UK, ERCOT in Texas, and the German triumvirate of backbone grid operators all work fine. There is nothing wrong with the basic principle of a monopoly regulated grid operator plus competition in generation. As in California, you have to work hard to make it fail.

  7. @John Quiggin
    Fizzer is is high. What happens when the views of the ESB run counter to the commercial interests of the existing owners both government and private? Do you really think that a conservative Queensland government would allow its GOCs to be significantly devalued? Or that a Commonwealth Government would put in the dollars to pay off existing owners

  8. I suspect enduring policy certainty is going to be hard to come by and the need to keep remaking energy policy may be an intrinsic condition of an ongoing transition to low emissions.

    So, is the assistance to be given to low emissions proposals going to be scaled, stepped or, like the RET, a simple threshold? Since achieving less emissions than old coal is not the same as achieving the emissions reductions climate stability requires, the RE projects that achieve the latter should get greater assistance.

  9. “While the AER’s current regulatory decisions have reduced network charges, a number of appeals on decisions to the Australian Competition Tribunal and the Federal Court remain unresolved, creating uncertainty about the ultimate revenue that these networks may recover from their customers. During 2016, 10 electricity distributors in NSW, the ACT, South Australia and Victoria, and two gas distributors in NSW and the ACT were involved in reviews of AER decisions. The businesses sought reviews of fundamental elements of the decisions, including the allowed rate of return, the cost of corporate income tax and the AER’s approach to determining efficient operating expenditure (including the use of benchmarking in some matters).

    The Tribunal directed the AER to remake some of its decisions relating to the NSW electricity and ACT gas distributors. The AER subsequently applied to the Full Federal Court for judicial review, asking the Court to consider whether the grounds of review were properly established by the network businesses and correctly applied by the Tribunal. In May 2017, the Federal Court found in the AER’s favour on the approach to determining income tax costs, but upheld the Tribunal’s decision on network operating expenses and the cost of debt. The AER is considering the implications of the Federal Court decision for the current determinations, and for our approach to future regulatory decisions.

    [this case is Australian Energy Regulator v Australian Competition Tribunal (No 2) [2017] FCAFC 79 –234 pp of impenetrable economic jargon derived from a Rube Goldberg 1990s microeconomic fantasy, the National Electricity Law and the National Electricity Rules, by which a privatised monopoly is imagined to operate analogously to a competitive free market]

    Since 2008, reviews have been sought on 32 out of 51 regulatory decisions (figure 8). Of the matters that were varied or remitted back to the AER, none resulted in a decrease in revenues the regulated businesses could collect from their customers compared with the original decision. Service providers face little practical downside from seeking merits review. The legal costs of seeking review are minor compared with the potential upside from successfully reviewing elements of the decision. To date, consumers have not argued successfully for any decrease in network revenues.”

    Click to access AER%20State%20of%20the%20energy%20market%202017%20-%20A4.pdf

  10. @James Wimberley
    PS: A footnote on the German grid. The largest of the three backbone grid operators, Tennet, is owned by a government: the Dutch one. This makes no sense, though I don’t know enough of the details to judge whether the misaligned incentives have caused serious harm.

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