Why electricity reform failed

My latest piece in the Guardian is headlined The national energy market is an abject failure – it’s time for a publicly owned grid   I’ve said this before and I don’t mind repeating myself. But the new insight that provoked me to write this piece is a bit further down

Why has Australia done so badly? The reform process in Australia has treated markets and competition as goals in themselves, rather than as policy instruments designed to produce useful price signals and thereby guide investment and consumption decisions.

The article is also a plug for a recently published book, Wrong Way, How Privatisation and Economic Reform Backfire, in which I have two chapters, one on electricity and one on productivity.

25 thoughts on “Why electricity reform failed

  1. The privatisation reforms have succeeded for the very rich. That is all the very rich care about. It has succeeded for them and made them even richer. They do not care about the rest of the people, neither they do care about the total wealth of society, nor about equity, nor about environmental sustainability. The neoliberal program has been a stunning success in achieving its essential (though hidden) real goals. The super-wealthy control most of global policy, most global wealth and most governments. Often key representatives of the super-wealthy are in direct power or linked to those in power (note Trump, Putin, Xi Jinping and their families).

    The centralistion of power and wealth is a continuing and intensifying feature of our global system… for the time being at least. It’s difficult to see it breaking down until environmental collapse followed by civilizational collapse. But nothing is certain. Some sort of enlightened revolution might still be possible. How this might come about I have no idea and scarcely any hope (maybe about 1% hope).

    There will be at least a semi-collapse of environmental and civilizational systems across the globe. That much is close to inevitable now. Revolutionary theorists need to develop plans now for action at that juncture. These plans need not be for violent revolution. Indeed, a subtle, non-violent, and genuinely broad-based and democratic revolution winning minds to the new cause would be far more likely to succeed.

    How to proceed in detail? Well, I have admitted that I don’t really know. I have my theories like almost everyone else. What will happen in practice is that many plans and many actions will be tried in many localities, nations and regions. Eventually something will work… or it won’t. If it doesn’t (if the elites remain effectively in charge) then we will collapse to a medieval-like age or even a stone-age.

    Nothing is more certain than this. If the elites remain in charge they will drive the system to total collapse. They can insulate themselves from negative consequences for far too long. Thus they receive no feed-backs and incentives, from the environment or anything else, to induce them to change their ways.

  2. Pubic ownership of significant portions of the electricity production, distribution and retail sector is what is necessary to effect real cost control. It would not require full public ownership – but distribution is the most important key.

    Block chain electricity distribution and the ability to participate in publicly owned electricity generation plants (e.g. community solar farms) means that renters (business and residential) could buy kilowatt production blocks (solar panels in a solar farm) and the electricity produced for them transfers to where ever they locate to. This overcomes the disincentive for business in rented premises to use solar to lower their electricity bills. It also allows home owners with limited appropriate roof space to expand their solar production. Renters who are locked out of the home ownership market need not miss out on subsidies available to home owners.

    Block chain distribution would also allow renewable energy production to be located in the most geographically suitable locations and compensate for locations of with poor sun due to lots of cloud, position within mountain ranges – think of Walhalla which has limited sunrise or sunset at any time of the year due to its north south alignment in a steep valley.

    Solar batteries, even with government subsidies are still not viable, though once retail prices exceed 50 cents a kilowatt the balance switches in favour of batteries if the owner lives in a high sun location. Community solar farms located out of Mildura with block chain electricity distribution makes it viable for someone living in (e.g.) Blackwood in Victoria to invest in solar batteries as their solar gain is not reliant on their rooftop. Again this is reliant on block chain electricity generation

    Block chain electricity is currently on trial in West Australia and a google for Block Chain electricity distribution in Australia should take the reader to relevant material.

    So – we need to own those poles and wires.

  3. The Guardian article mentions ERCOT’s good record in Texas but fails to give credit to its inspiration, Margaret Thatcher ‘s 1990 privatisation of electricity in the UK. This has been the model for Texas, India and Germany. (It’s an EU standard on paper, but France gets away with a Potemkin version.) Generally, the closer countries have stuck to the UK model, the better it works. IIRC California and Australia tinkered heavily and are both a mess.

    Thatcher’s policies were in many ways odious but she was intelligent, especially on climate. She did not try to privatise the railways, which was John Major’s fiasco.

  4. James, I’m from a very strange universe indeed where Trump is President and UK electricity is regarded as a nightmare. A couple of years ago the UK had the highest pre-tax electricity prices in the world. They fixed that by trashing the pound which they did by voting to leave the European Union — Stop laughing! This really happened in my reality!

  5. +1 for identifying magical thinking. I see it in plague proportions, everywhere, and I think it is a real problem, perhaps The real problem. Possibly as we suffer from information overload and don’t have time to do the real analysis so fall back on mythologies for solutions. Mythologies share an adaptive advantage with fake news: they are designed to appeal directly with human proclivities rather than the difficult, long, messy and potentially humbling engagement with reality.

  6. Trouble is, if the wholesale price cap was eliminated or raised then the generators would put even more effort into gaming the system to cause wholesale prices to shoot up and there would be even more shutting down of power plants in middle of heatwaves for mystery maintenance.

    It’s almost an insolvable problem if your starting point is greed is good. It’s like how the Weyland-Yutani Corporation always thinks they can control the alien monsters but everyone ends up getting eaten every single time.

  7. In 2013 John Pierce and the AEMC were so enamoured of their work in bringing the NEM into being that they commissioned KPMG to prepare a case study of the NEM as an example of ‘successful microeconomic reform’. They interviewed 31 participants in the process to learn how they did it. Notably some are still central to Australia’s energy policy, or lack of it.

  8. Ronald: source for the high UK electricity prices? Higher than Germany and Australia?
    British consumers are forced by the government to buy expensive nuclear power and offshore wind, and generators are stopped by the government from building cheap onshore wind farms. This is recent and independent of the Thatcher/Littlewood reform.

  9. I do not think many people would argue with John.
    The problem of nationalising the assets via State governments would be one of the cost for State governments.
    although privatisation is responsible for 80 % of the price rises in the last ten years 9 David blowers has it a tad higher) nationalising the assets wil not bring down prices as much.

  10. Its my understanding that here in WA the grid is already government owned and controlled and it hasn’t seem to help prices at all?

  11. Duncan it is a backdoor tax rise. the QLD Government is particularly enamored with it I am told.

  12. James, here’s a link that clearly shows UK pre-tax electricity prices aren’t the highest in the world:

    I don’t have a link for when the British pound was higher but as the world contains small island nations with grids powered by diesel, clearly I was a fool for saying UK pre-tax electricity prices were the highest in the world. Or a deceptive liar in the pocket of big lie. But the mess in Britain was something we did console ourselves with here.

  13. OK, current UK commercial rates are fairly high – but if you aren’t into steel making or aluminium smelting, these differences are not a dealbreaker. Is it the gas prices?

    Niggle: the chart clearly shows that Spanish rates are higher than British. This is surely down to crony capitalism, not a flawed market model. The incumbents even manages to get a special tax imposed to prevent residential solar – eve disconnected from the grid! This has just been reversed by Sanchez’ impressive new energy minister Teresa Ribera. There is no solar subsidy, but households have regained the right to instal and will be paid the wholesale rate for fed-in surplus.

  14. @margaretblakers

    It would be interesting to see the annual amount of money paid by the Federal government to KPMG. I wouldn’t think it would be trivial.

  15. James, looking at the second graph I link to, which it seems you can still click to despite it not appearing as a proper link, the pre-tax cost of residential electricity in the UK appears to be about 14 Euro cents. Maybe less. At the current exchange rate of 0.61 Euro cents to the Australian cent that is 23 Australian cents. The pound was about 25% higher so if we adjust for that we get 28.7 cents. I’m not sure exactly what counts as a tax, but if we just take off Australia’s 10% Goods and Services Tax that’s more than what Australians were paying. But this is just approximate and to do an accurate comparison we’d have to look up the actual electricity prices and exchange rates at the time. Even allowing for the for higher pound in the past Spain, Ireland, and Belgium may have had the UK beat, looking at how high their pre-tax electricity charges are now.

  16. “Why has Australia done so badly? The reform process in Australia has treated markets and competition as goals in themselves, rather than as policy instruments designed to produce useful price signals and thereby guide investment and consumption decisions.”

    This is the crux of the matter, IMHO. Similarly, privatisation has been treated as a goal in itself.

    IMO, the advocates behind these policies are most likely totally uneducated in economic theory which is concerned with conditions under which desirable outcomes are conceivable in a competitive private ownership economy with alternative assumptions about the market structure (complete commodity markets, sequence of commodity and financial markets, partially segmented markets, incomplete markets – to name what I believe are the milestones since around 1950). It seems to me these policy advocates and decision makers are stuck on the words “private” and “competition”. But the theoretical insights from these models, expressed in the language of mathematics, would be the same if the words “private” and “competition” would be replaced by say George and Lisa just as the double entry book keeping system would result in the same numbers if the words “assets” and “liabilities” would be replaced by John and Mary. (Perhaps those who advocate learning a ‘foreign’ language to assist in conceptual thinking have a point.)

    Yes, I am repeating myself on this blogsite, too. But what else can one do when faced with the persistent problem of contradictions, in terms of observables vs theoretical conditions, internal contradictions in policy pronouncements, and observable failures of the said policies.

  17. “..IMO, the advocates behind these policies are most likely totally uneducated in economic theory .”
    Ha,ha! Please read the post by Ikonoklast above. They were not attempting to do anything concerned with “desirable out comes” for the population at large. They did not need any education in economic theory. They simply did what they were told, which their “donors” knew would have the desired effect of taking public goods and gifting them to the oligarchs at a song, so that the said recipients of these goods would continue to enjoy the fruits for ever, and at monopolistic rates. The “donors” knew enough “economic theory”, whether of the sort you like or not, to ensure that the benefits flowed as envisaged.

    How anyone can believe otherwise astounds me.

  18. totaram, I did read Ikonoclast’s post.

    My argument is based on the knowledge (ie empirically verifiable) that the policies, referred to as ‘neoliberal’, were promoted as being ‘market oriented’, with ‘freedom of choice’, ‘competition’ and ‘private ownership’ being ‘more efficient’ (the list is incomplete but I believe it is sufficient to make my point). Therefore it seems to me at least to be reasonable to examine these policies from the perspective of exactly that part of economic theory which deals with the type of economy ‘they say they want’.

    I don’t know whether ‘they’ deliberately followed a hidden agenda, as suggested by Ikonoclast or whether ‘they’ are ignorant. It is difficult to deduce motivation from empirical observations, while it is relatively easy to demonstrate the divergence between the economic theory I have mentioned and actual policies and outcomes and say, ‘they’ don’t seem to know what they are talking about.

    So, one does not always have to simply believe.

  19. Ernestine, I think it is reasonable to impute motivated design to neoliberalism. You agree that it is designed. Your further agree that it is badly designed. The motivations of its designers you find more disputable. I argue that its design intent was to increase total wealth of the 1% or even 0.1% with no regard to what happened to the total wealth of all the people.

    To me the issue hinges on bad faith and having reasonable ground to impute bad faith. When I strongly suspect bad faith and see a set of complicated swindles play out (plenty of empirical evidence from BOOT projects, to the Paradise papers, to bank behavior etc. etc.) then I am not willing to stay simply calm about the matter nor give the class of people in question the benefit of any remaining doubt. As we have a democracy, the ballot box is strong enough on its own for real action, at this stage. But if we don’t use the ballot box soon, I fear for the future of this society.

  20. Ikon, I don’t know whether neoliberalism was ‘designed’ in a motivational sense. I do know arguments presented by for example Joe Hockey and Mathias Corman are not based on insights from theoretical models of competitive private ownership economies.

    When I say I don’t know then I am not saying you are necessarily wrong. In any case, if perceptions matter at the ballot box then it doesn’t really matter whether neoliberalism is the result of ignorance on part of the decision makers or a deliberate strategy of deception (‘market oriented’ while being aimed at redistributing wealth from the bottom to the top) as long as the voters say NO.

  21. @ Ernestine Gross
    Do you really think that Mathias Corman is that disconnected from the Neoliberal process?

    “MATHIAS CORMANN: Well, we believe that Medibank Private policy holders will be the winners because Medibank Private in private hands will be able to perform even better than they have under government ownership. The truth is that in 2014 there’s no reason for the Federal Government to still run a private health insurance business.

    The health insurance market is a very well-functioning competitive market, well regulated. ”


  22. Ernestine, I understand your position. I would be happy to see people say NO at the ballot box no matter whether they impute ignorance, deception or opportunism to the various architects, purveyors and exploiters of the general neoliberal “movement”.

    More generally, the distorted incentives of our current system are a fundamental problem with the current system. I mean market-distorting incentives like negative gearing, first home owners grants, lower taxes on business and capital compared to labor, fossil fuel subsidies and others. For example, “Market Forces estimates that tax-based fossil fuel (direct) subsidies amount to almost $11 billion per year federally. This figure includes subsidies that support both the production and consumption of fossil fuels.”

    It is proving very difficult to remove such subsidies. They are one way that the major parties buy or keep blocks of votes. I am sure there is an analogy in game theory; where voting interest groups want to keep preferential treatments but where the whole group (the group of groups) would be in total better off if preferential deals to interest groups were removed. What is the best strategy then to change the situation?

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