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What lies behind the power price increases in Australia? What lies behind the power price increases in Australia?
(4 months later)
Queenslanders have just received the news of another round of big increases in the price of electricity averaging 20%. This was a particularly bitter pill for a government that came to power promising to cut the cost of living, and particularly for a treasurer keen to persuade an already hostile public that selling electricity assets is a good idea. Queenslanders have just received the news of another round of big increases in the price of electricity averaging 20%. This was a particularly bitter pill for a government that came to power promising to cut the cost of living, and particularly for a treasurer keen to persuade an already hostile public that selling electricity assets is a good idea. 
There’s nothing unusual about Queensland’s experience. Average Australian electricity prices for households have risen by around 80% over the past decade, even after adjusting for general inflation.There’s nothing unusual about Queensland’s experience. Average Australian electricity prices for households have risen by around 80% over the past decade, even after adjusting for general inflation.
Discussion of the price increases has lined up an impressive list of potential culprits, includingDiscussion of the price increases has lined up an impressive list of potential culprits, including
There is some validity to most of these claims. To take the most contentious example, the introduction of the carbon price implied an increase of around 2 cents per kilowatt-hour, or 10% of the retail price of electricity. But taken together, they do not amount to anything like an explanation of the huge price increases we have experienced.There is some validity to most of these claims. To take the most contentious example, the introduction of the carbon price implied an increase of around 2 cents per kilowatt-hour, or 10% of the retail price of electricity. But taken together, they do not amount to anything like an explanation of the huge price increases we have experienced.
The central problem with all these arguments is that they take for granted the structure of the electricity industry and the pricing system that goes with it. But these structures aren’t the result of inexorable market forces - they are the result of a set of reforms introduced only 20 years ago, with the expectation that they would lead to lower, not higher prices.The central problem with all these arguments is that they take for granted the structure of the electricity industry and the pricing system that goes with it. But these structures aren’t the result of inexorable market forces - they are the result of a set of reforms introduced only 20 years ago, with the expectation that they would lead to lower, not higher prices.
Before the reforms, the electricity supply industry consisted of a set of integrated public systems, one for each state. Most of the enterprises involved were statutory authorities, which were expected to charge enough their own investments and return modest profits to the government. They were also charged with a vaguely defined public service objective, which included requirements to ensure a reliable supply.Before the reforms, the electricity supply industry consisted of a set of integrated public systems, one for each state. Most of the enterprises involved were statutory authorities, which were expected to charge enough their own investments and return modest profits to the government. They were also charged with a vaguely defined public service objective, which included requirements to ensure a reliable supply.
With the exception of a period of blackouts in NSW in the early 1980s, this system worked well and reliably. Electricity, still an urban luxury in the first half of the 20th century, was extended to the entire population. Costs declined slowly but steadily in real terms. Mostly the states worked separately, and the Commonwealth was not involved. The major exception was one of the great successes of Australian nationbuilding - the Snowy River scheme.With the exception of a period of blackouts in NSW in the early 1980s, this system worked well and reliably. Electricity, still an urban luxury in the first half of the 20th century, was extended to the entire population. Costs declined slowly but steadily in real terms. Mostly the states worked separately, and the Commonwealth was not involved. The major exception was one of the great successes of Australian nationbuilding - the Snowy River scheme.
The changes began in the 1990s, when enthusiasm for microeconomic reform was at its peak. The trigger for reform was the creation of a national grid, linking the eastern states into a single network through the construction of new transmission links. At the same time, the Council of Australian Governments (COAG) was developing a National Competition Policy, aimed at replacing public monopolies like the electricity industry with competitive markets in which private firms would first compete with, and then replace, government enterprises. The central assumption was that competition and choice would produce better outcomes for consumers than public provision.The changes began in the 1990s, when enthusiasm for microeconomic reform was at its peak. The trigger for reform was the creation of a national grid, linking the eastern states into a single network through the construction of new transmission links. At the same time, the Council of Australian Governments (COAG) was developing a National Competition Policy, aimed at replacing public monopolies like the electricity industry with competitive markets in which private firms would first compete with, and then replace, government enterprises. The central assumption was that competition and choice would produce better outcomes for consumers than public provision.
Ironically, in the light of subsequent events, two of the key complaints about the public monopolies were overstaffing ("featherbedding") and excessive investment in system reliability ("goldplating"). Private entrants and corporatised public firms slashed the number of payrolls and capital investments in network infrastructure. But the blue-collar workers and technicians laid off in the 1990s were replaced by even larger numbers of managers and marketing staff, needed to operate in the new competitive environment. Skimping on infrastructure investments led to a wave of blackouts, and a costly crash program aimed at restoring reliability.Ironically, in the light of subsequent events, two of the key complaints about the public monopolies were overstaffing ("featherbedding") and excessive investment in system reliability ("goldplating"). Private entrants and corporatised public firms slashed the number of payrolls and capital investments in network infrastructure. But the blue-collar workers and technicians laid off in the 1990s were replaced by even larger numbers of managers and marketing staff, needed to operate in the new competitive environment. Skimping on infrastructure investments led to a wave of blackouts, and a costly crash program aimed at restoring reliability.
Some of these mistakes might have been avoided. The free market assumptions of the reformers were simply inapplicable to a network industry like electricity, where every participant interact with one another through a distribution and transmission system that has all the characteristics of a natural monopoly. The assumption that a combination of profit-driven investment and regulation in the public interest could resolve these contradictions has proved unfounded.Some of these mistakes might have been avoided. The free market assumptions of the reformers were simply inapplicable to a network industry like electricity, where every participant interact with one another through a distribution and transmission system that has all the characteristics of a natural monopoly. The assumption that a combination of profit-driven investment and regulation in the public interest could resolve these contradictions has proved unfounded.
Equally importantly, even though the COAG reforms coincided with the emergence of global concerns about climate change, the reform process took no account of the possibility of carbon pricing, and made no provision for renewable energy. In particular, the assumption that households could be regarded purely as consumers failed to consider the possibility of solar rooftops, or of any interactions between households and energy suppliers to promote energy conservation.Equally importantly, even though the COAG reforms coincided with the emergence of global concerns about climate change, the reform process took no account of the possibility of carbon pricing, and made no provision for renewable energy. In particular, the assumption that households could be regarded purely as consumers failed to consider the possibility of solar rooftops, or of any interactions between households and energy suppliers to promote energy conservation.
Fixing this mess will take many years. But the first step is to admit that electricity reform has been a failure, and to re-examine the whole system without any ideological preconceptions.Fixing this mess will take many years. But the first step is to admit that electricity reform has been a failure, and to re-examine the whole system without any ideological preconceptions.
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