Despite yet another round of policy announcements from the Morrison government, energy policy in Australia is still stuck in the morass created by a combination of climate denialism and the failed reforms of the 1990s, of which privatisation was a critical element.
I’ve argued for some time that the grid should be renationalised, and the case is even more urgent now.
The case for renationalisation has been massively strengthened by the fact that real interest rates on government debt have fallen below zero, and seem likely to remain there indefinitely. That makes renationalisation of monopoly infrastructure assets a bargain at any plausible price. Let’s look at the numbers
It’s estimated that we will need $100 billion of new investment in the grid to make the transition to renewables by 2035. It’s far from obvious that this will happen under the existing system.
Suppose, however, that the grid had remained in public ownership (say, under a joint Commonwealth-State setup like that for the original Snowy Hydro). The current rate of interest on Australian government bonds is about 1.8 per cent: inflation-adjusted, it’s close to zero. So, if this were a public project, financed entirely by bonds, the debt service would be less than $2 billion a year, or about $200 per household.
But what about the existing grid, privately owned outside Queensland. Excluding Queensland, it’s valued for regulatory purposes $50-75 billion to the existing private owners, who are getting regulated returns close to 5 per cent per year as well as enjoying the benefits of asset price inflation. This friendly treatment would probably push the market value close to $100 billion. So, renationalisation would require another $2 billion a year in debt service, for a total of $4 billion.
With a regulated rate of return pitched between the bond rate and the private-sector “Weighted Average Cost of Capital” used in our current failed model, it would be possible to lower costs for consumers while returning a virtually risk-free profit to the public owners of the network and supporting comprehensive decarbonization of electricity supply (this would require a mix of public and private investment in carbon-free generation).
The only question about all this is how much demand there is for long-term $A bonds, and how much debt could be issued without pushing up rates. There is certainly quite a bit of demand A recent issue of $15 billion in 30-year bonds was massively oversubscribed, so there’s no reason to think we couldn’t raise hundreds of billions over the next ten years or so, without offering significantly positive real returns.