Published in Chain Reaction and Green Left Weekly, June 2013.
Markets are neither free nor efficient, and they are bad for the
environment. Market choice is not cheap. While that may sound like a
timeless left-wing credo, it's also a simple assessment of Australia's
20 years of privatisation and market-oriented restructure of electricity
Outside small left-wing dissident circles (from Keynesians to
Marxists), operating the power industry according to market principles
has become an unquestioned and unspoken assumption.
Reducing this industry's greenhouse emissions has also been seen as
fundamentally a matter of market mechanisms, as Australia heads toward
an emissions trading scheme. But the history of the past two decades
indicates that electricity industry privatisation and imposed market
mechanisms have already been a key barrier to reducing emissions and
restructuring the industry in a progressive manner.
A recent study commissioned by Environment Victoria shows that under
the package of measures accompanying the carbon price, Australia's
dirtiest power stations will be gifted a windfall of between $2.3 and
This outcome appears perverse and corrupt. Yet the industry's representative body claims it is fair and just. As The Age
reported in February, "Chief executive of the Energy Supply Association
of Australia, Matthew Warren, said carbon compensation was chiefly put
in place to compensate for a reduction in the asset value of power
stations as a result of the Emissions Trading Scheme."
If this precedent is followed, what will happen when climate action
mandates the ending of coalmining? Coal companies, like mining companies
worldwide, are counting the value of as yet unmined resources on their
bottom line. Will the public purse be required to compensate coal barons
for every dragline-bucket of coal that they do not mine and export?
The private owners of the power stations knew a carbon price scheme
may be coming: it was in their contracts when they bought them. They
have been warned and they have profited nicely in the meantime. They
should not be compensated for a risk they were warned of. It is as
perverse as it would be to compensate James Hardie for the loss of its
National Electricity Market
Victoria and South Australia have the most privatised electricity
industries, but resisting complete privatisation in other states has not
saved them from the logic of a private market. Following Victoria's
lead, in the 1990s the eastern states and SA set up the National
Electricity Market, modeled on now-failed electricity market systems in
Britain and California.
The reasons given by governments for privatisation were to make power
cheaper, in particular to attract and retain energy-intensive
industries. But this is not what happened.
In the one-sided “power pool” system, energy generators make bids for
how much energy they can provide and at what price. The cheapest bids
have to be accepted first, but the price they receive is not what they
bid, but is set by the highest bid that is accepted.
This system can push up the price paid to all generators in a given
period to enormous sums. It caused excessive price rises and blackouts
in Britain and California, where it was abandoned. In Australia, where
it did not result in such immediate and obvious disasters, it has been
One of the main environmental outcomes of the National Electricity
Market power pool was that the cheapest power took a larger market share
— its low bids are accepted first. The cheapest is also the dirtiest
power — Victoria's enormous brown coal generators.
These generators tended to displace baseload capacity from the
slightly less polluting black coal generators in NSW and Queensland,
with brown coal's share of generation growing from 23% to 31% in the 10
years from 1992.
As the brown coal dinosaurs became more profitable, their expected
retirement date kept being pushed back. Victoria's notorious Hazelwood
power plant, the most polluting of all, was scheduled for
decommissioning in 2006, but was granted a 30-year extension by the
state Labor government.
Following on from this, the Julia Gillard government's Clean Energy
Future carbon price package promised to pay the dirtiest coal generators
to close down under their "contracts for closure" scheme — but the
government abandoned it at the last minute. Instead, we now see these
most polluting power stations being compensated while staying open.
Contracts to close Victoria's brown coal operators would have made
NSW's underused black coal generators more profitable, and they are only
marginally less polluting. It would not necessarily have caused
renewable energy replacements to be built. Either way, the coal industry
is the winner.
While the market has favoured the dirtiest coal generators, renewable
energy sources have required assistance from outside the electricity
market to make any headway.
The Renewable Energy Target has been organised by way of a market in
Certificates (RECs). It sets a clear target of
renewable energy, requiring that set amounts of RECs are bought by
energy retailers (from renewable generators) to ensure that the target
Yet the market was skewed by an influx of cheap, token RECs awarded
to rooftop solar hot water systems during the Kevin Rudd government. The
oversupply of these “phantom RECs” crashed the REC price, and energy
retailers bought up cheap RECs — largely stalling the wind farm
construction industry that had been doing well until then.
The stalling of the wind industry also means that many big energy
companies are now finding themselves without significant renewable
Origin and Energy Australia have argued for a reduction in the
Renewable Energy Target instead of building new wind farms. The
Coalition parties appear to be bowing to this pressure and it remains to
be seen whether Labor will follow suit.
The electricity market has seen declining demand since 2008. In a
market that was expected to keep growing for the foreseeable future,
this is bad news for the corporate players.
Industry going offshore may account for some of the drop in demand —
and accordingly, China's energy use and emissions have been rising
sharply since 2000. On the other hand, domestic energy efficiency
measures and the proliferation of photovoltaic (PV) solar panels on
homes is probably a large part of the picture.
As PV prices have dropped, Australians have installed more than two
gigawatts of solar PV generating capacity on their roofs — enough, at
peak output, to replace one large coal generator.
Such demand reduction lowers wholesale prices. In peak energy use
periods, reduced demand means the most expensive bids don't get used in
the power pool, keeping the overall price down. SA's regulator has even
called for lower retail prices as a result of this effect.
State governments have slashed support for PV by attacking feed-in
tariff schemes that rewarded PV owners, but the falling cost of PV
technology, and the rising cost of electricity, means PV will remain
popular. This is good news — as far as it goes.
To compensate for their declining market share, and partly to pay for
recent investment in "poles and wires", electricity companies are
raising prices. For this reason, energy company AGL has pressured the
SA government to cancel the drop in retail prices that the regulator
mandated. The investment by homeowners installing solar is not being
allowed to benefit all consumers as it ought to.
As these and other examples illustrate, privatisation has given us an
ongoing legacy of increased and extended use of our dirtiest power
stations — and ensured they remain immensely profitable to their owners.
It has kept prices high and deterred investment in new clean energy
Free marketeers could point to ways the current electricity market
may be improved to function more fairly. They may also point to the old
state electricity bodies as inefficient bureaucracies. However, we don't
have to defend the old bureaucracy to look beyond the existing
electricity market system. There is scope for much more community
ownership: in Germany, more than half of wind farms (for example) are
owned by citizens such as farmers and cooperatives, not by large
The power pool system is unsuited to renewable energy — wind and
solar in particular. Falling electricity demand combined with growth in
renewable electricity are causing the existing system to strain.
Instead of persisting with our inflexible, inequitable and
polluter-rewarding market, we should start thinking of newer, more
accountable mechanisms to replace the failing system.