ACCC blinded on electricity prices by its focus on market forces

Here’s a piece of advice: if you want to know the real causes of high electricity prices; don’t rely on the Australian Competition & Consumer Commission.

To be sure, its staff can put together attractive charts and the like, but the ACCC approaches this issue from a particular (biased) point of view: it must be market power.

Don’t get me wrong: market power is part of the explanation, but it is not just the three privately owned electricity companies — AGL, Origin and EnergyAustralia — that are to blame. Recall that energy generation remains government-owned in Queensland and retail electricity prices in Queensland are second only to South Australia.

And there’s another thing: lots of industries have only a small number of large players and a tail of smaller players but can still provide competitive prices and quality service.

But it is the tendency of antitrust bodies such as the ACCC to see everything in terms of market power.

To be sure, the high cost of the poles and wires is also mentioned by the ACCC. But everyone seems to forget the government mandate to improve the standard of the electricity transmission and distribution system — these days it’s referred to as gold plating — was made at the behest of Labor governments yielding to the pressure of the Electrical Trades Union. There were lots of jobs for ETU members, you see.

Add in the regulated rates of return and a weird change to accounting standards and the poles and wires companies were given a licence to print money. But again the gold-plating problem was worse in Queensland and NSW where the companies were government-owned. (The NSW assets have since been sold.)

The ACCC concedes that since 2015, the main source of higher electricity prices has been rising wholesale prices. In other words, the prices being bid by the generators have been driving up retail prices. And the biggest disruption to the market was the (slightly unexpected) closure of the Hazelwood plant (capacity 1600 megawatts) in the Latrobe Valley earlier this year.

Recall that I was writing almost weekly, imploring the Turnbull government to prevent Hazelwood’s closure, but the Prime Minister was simply not interested. Mind you, the out-of-touch Australian Energy Market Operator with its out-of- touch head (Ms Demand Management) initially thought the closure would make no difference. Six months later, AEMO is now calling for a strategic reserve of 1000MW to cover potential shortfalls this summer.

But the real problem with ACCC’s analysis of electricity prices is its failure to connect the dots. “Green schemes” do not sit alone in driving up electricity prices; they drive coal-fired plants, in particular, to the wall. It is simply a logical fallacy to say environmental interventions such as the Renewable Energy Target play only a small part in driving up prices when it is the RET that is causing low-cost plants to exit the market.

Consider the case of South Australia, which has the highest retail electricity prices in the world. With its very high rate of penetration of renewables, the consumers in that state disproportionately bear the cost of paying for the Renewable Energy Certificates that are part of the RET. The price of RECs is above $80 per megawatt hour.

At least ACCC chairman Rod Sims has the honesty to say that a further intervention such as the clean energy target would not lower prices. This is in sharp contrast with the dodgy analysis contained in the Finkel review.

While it is true that there is no silver bullet to make electricity more affordable and reliable, the last thing the government should be contemplating is to further subsidise renewable energy or meeting the self-serving calls of the renewable energy industry for investment certainty. That is just a highway to higher prices.