Finance Finance News Command-and-control energy plans cost us more

Command-and-control energy plans cost us more

snowy hydro
The reforms are expected to reduce power prices. Photo: Getty Photo: Getty
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Amid calls for re-nationalisation of the energy grid, pleas for a protectionist ‘gas reservation’ policy and the rise of populist economic nationalism, you’d be forgiven for thinking that ‘free markets’ just don’t work.

You’d be wrong. The extraordinary public stoush between South Australian premier Jay Weatherill and federal energy minister Josh Frydenberg is not about the operation of free markets, but the failure of a highly contrived regulated market.

That market is complex, and under some conditions actually incentivises companies not to cater for peak demand – most notably, the Pelican Point gas plant which lay idle during the South Australian rolling blackouts.

The Turnbull government has tried to argue that South Australia’s extensive renewable generation capacity is what makes it unviable for Pelican Point’s owner, Engie, and others to start up spare capacity.

In fact, as has been well documented, the market’s structure can mean that turning on generation capacity in one state could cost a company money by lowering the prices paid to its generators in other states.

That’s the problem with regulated markets – get the regulations wrong and perverse price signals can cause chaos.

That’s why economists tend to favour economy-wide price signals that, once in place, ‘let the market decide’ what gets built and how it operates.

It’s the same principle that ‘puts a price on alcohol’ in the form of excise, ‘a price on petrol’ as petrol tax, and a ‘price on taxis’ by issuing a limited number of tradable licences.

Once that is done, the market decides which alco-pop to sell where, how many service stations to build on a strip of highway, and whether to run taxi cars 16 or 24 hours a day.

Politicians used to agree with economists that price signals were the better option, which is why a string of leaders in Canberra thought a price on carbon would promote the right kinds of energy investment.

It started with Prime Minister John Howard, who in 2006 set one of his best policy minds, Peter Shergold, the task of setting up an emission trading scheme (ETS).

Following the 2007 ‘Rudd-slide’ election, the new opposition leader Brendan Nelson and his successor Malcolm Turnbull both supported an ETS rather than a command-and-control approach.

Tony Abbott is to blame for our current predicament.

But when Tony Abbott ousted Mr Turnbull with the help of anti-carbon-pricing MPs rallied by then-senator Nick Minchin, Coalition support for a market-based approach to emissions reductions ended.

Had a carbon price been legislated in 2009, even a fairly low one such as was built into Kevin Rudd’s carbon pollution reduction scheme (CPRS), electricity generators would have had policy certainty against which to assess the risks and rewards of building new generation capacity – be it gas, wind, solar or possibly even coal.

Instead, Mr Abbott convinced the voting public that the emissions trading scheme passed by the Gillard government was a ‘tax’.

It was not, though many economists consider a ‘carbon tax’ to be an equal or better price signal to encourage energy investment than an ETS – and certainly better than regulation.

Mr Turnbull discussed these issues in a feisty 2009 article entitled, ‘Abbott’s climate change policy is bullshit‘.

He wrote: “The whole argument for an emissions trading scheme as opposed to cutting emissions via a carbon tax or simply by regulation is that it is cheaper — in other words electricity prices will rise by less to achieve the same level of emission reductions.”

And yet the political farce of the past eight years saw the CPRS binned, a more sophisticated ETS legislated and operated for a year, and then the repeal of that ETS and the switch to Direct Action.

Now, both a state and a federal government are pledging command-and-control interventions – publicly funded grid-connected batteries, state-owned gas plant and the Snowy River Hydro extension – to patch up this mess.

There is still no coherent national energy policy, and no carbon pricing mechanism to give certainty to investors and consumers alike.

And that means, whether through tax bills or electricity bills, Australians will end up paying more.

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