We are a few month down the track from the Turnbull government’s involvement into Australia’s national electricity market. If the results of the South Australian election was truly a referendum about the veracity of Mr. Turnbull’s NEG ( National Energy Guarantee ) strategy then one thing is clear. The Turnbull government’s NEG is very similar to the policy position of the Rann government in 2010, minus the ‘Finkel Review’ recommendations. What is interesting about the South Australian election is that Jay Weatherill’s renewable energy policy during the recent election campaign closely mirrored the advice I gave the Rann DPC ( Department of Premiere and Cabinet )in the same year. So perhaps we should ponder the ongoing electricity pricing debate with this retrospective in mind.
In 2018 the position of both the Turnbull federal government and the new Premier for South Australia, Steven Marshall, is very similar to the Rann government position of 2010. Jay Weatherill fought the election, without knowing it, on almost the identical advice I gave Mike Rann’s DPC. Does this mean that the NEG strategy is almost 10 years behind current best practice? No! My advice to the Rann government was tailored to the needs of the South Australian government at the time. It was advice tendered in good faith and following talks with Unions and Wind farm operators. Most of us knew that the compromise advice I tendered to the Rann government was 10 years behind best practice EU grid code standards. The key points of difference between stakeholders were that South Australia urgently needed to build an embedded storage network to achieve electricity supply independence from the National Energy Market (NEM). AGL immediately recognized that this would undermine its contractual agreement with the South Australian government. AGL saw that integrated DER ( Distributed Energy Resource) zones incorporating DES (Distributed Energy Storage) systems would pave the way for independent renewable distribution zones ( hubs ) supplemented by direct wind and solar farm PPA’s (Power Purchase Agreements). To stall this debate AGL placed immense pressure on individual communities, Unions and the South Australian Energy Regulator. The push for a ‘Green HVDC Power Transmission line’ and a second interconnector from the Great Australian Bight to NSW was not my preferred solution to the problem because I could not see how a federal Labor Industry Minister rusted onto a gas transition program could possibly approve this multi-billion dollar project. The Green Transmission line was rejected by the federal Labor government. Subsequently South Australia’s energy independence from the NEM with the help of a DES policy was shelved until 2016.
Does this mean that the Turnbull government will approve the second interconnector and the HVDC green transmission line from the Great Australian Bight to NSW? It might ensure that the Snowy 2.0 project may become commercially viable? Don’t get me wrong! I like pumped Hydro projects. I like them especially if they stack up commercially against other DES solutions. I like them even more if they enhance Australia’s water security whilst promoting the sustainable economic future of regional towns. This implies a considerable amount of detailed cooperative planning and higher order project management skill in both state and federal bureaucracies. Neither government has demonstrated this level of cooperation since 1901 except when the country was on war time footing. Neither has demonstrated the ability to operate at current international best practice standard when it comes to major national infrastructure projects in recent times.
What does this have to do with electricity prices?
No doubt many of the eastern states are just as confused today as they were ten years ago. Is the purpose of the NEG to build a resilient NEM with an emphasis on state energy supply independence, or is the purpose of the NEM to build a resilient national transmission network with a guaranteed 15-18% capacity supply reserve? The Snowy 2.0 project seems to favour the latter. Perhaps the purpose of the NEG is to build a series of large scale wind and solar farms connected to government and Utility owned DES solutions that are supplemented by gas and coal power stations? In all cases we have to ask whether Mr. Turnbull’s assertion that Australia’s Energy Crisis is a crisis of economics and engineering was a perverse Freudian slip for a government unable to accept its own managerial accountability over a dysfunctional energy bureaucracy sadly out of its depth.
In the absence of a clear definition of what a ‘Renewable Energy Zone’ actually is, the ‘Finkel Review’ has left the door open for continued delay in the formulation of a viable Utilities transition policy that will have a genuine impact on electricity prices. This was clearly articulated by US investors during Mr. Turnbull’s recent visit to Washington. What is even more perplexing is that the Turnbull government’s commitment to corporate tax cuts includes no targeted tax measures to underpin the creation of renewable energy zones that would positively impact on lower power prices. This threat to the current and future profitability and international competitiveness of high electricity user SME’s ( Small to Medium Enterprises ), continues to drag on Australia’s productivity, jobs creation and GDP growth projections. The Trump government’s recent tariff bombshell tends to indicate that much of the Turnbull government’s economic policy is based on prayers and assumptions of friendship rather than sound policy. National debt sustainability through a resilient and self-sufficient industry policy is clearly desirable. Reliance on growing a military manufacturing sector and the vagaries of the commodity markets are speculative strategies for a country in need of a competitive and clearly articulated industry policy. Perhaps we can pin our Westminster ideals to the Dutton Plan and flog goats to South Africa in a giant prepacked Biryani to pay for the Turnbull government’s corporate tax agenda?
The political party Hat trick
We have already been told that Mr. Turnbull and Mr. Frydenberg have worked hard to solve Australia’s electricity crisis. The question on everyone’s lips is a little predictable! What has changed? When I re-started the prosecution for the case of energy industry reform in 2016 the prospect for real change seemed more promising then in 2007. After all, at what point will a politician realize that the uncontrolled cost blowout of a core social service will start costing votes and drive industry and investment offshore? We are lucky that economics is an applied social science rather than a real science. Like ‘politics’, the practice of ‘economics’ is about shaping opinions and managing stakeholder influence by manipulating statistics and cherry picking data to serve an ideological construct. In a western liberal democracy this translates to powerful interest groups having disproportionally greater representation then the citizen paying the bills. Australian’s are pretty basic meat and three vegetables sort people in this respect. They like the idea of kicking the tyres and checking under the hood of their Australian made ‘Holden Ute’. It is great to put the foot to the pedal and listen to those dual exhaust notes. Those twin blowers sound exactly like the noise that comes out of Canberra.
There is no conversation with voters because politicians, public servants, institutional and industry leaders have mastered the ability to talk at you rather then holding a meaningful conversation with you. It’s a lot easier to presume what people want to hear instead of addressing the real issues at the heart of the matter. Everything is just fine ‘under heaven’ when the share of the economic spoils is relatively evenly spread throughout the economy! The problem with this interpretation of the Über economy is the dichotomy between the applications of Taoism and the neo-liberal corporate state in the grip of grey ghost serenity asserting objectives only non-accountable mandarins can call unquestionable truth. It was no surprise that the head of the ACCC recently announced that greater data sharing was inevitable without mentioning the need for consumers to own their electricity data. What was not talked about was data sharing between whom, for what and at whom’s expense and for whose benefit? It was even less of a surprise when the ‘Chief Scientist’ declared that Australia’s electricity mandarins are not accountable for Australia’s electricity crisis. No one doubts that serenity ‘Under Heaven’ must be preserved for all grey ghosts in the machine. The proposition that for over 20 years Australia’s smartest people in charge of the NEM had neither the power nor the tools to enforce grid standards and regulatory compliance to ensure electricity reliability and price affordability requires balls of steel. Not even Pinocchio could have carried those ‘cajones’ without some red faced embarrassment.
This is precisely where the Howard government policies are coming home to roost. The consequence of privatization in conjunction with generous tax and investment allowances are dragging the national economy into debt. Instead of comprehensive taxation reform the Turnbull government has no problem continuing the rapid shift towards a user pays economy. There is nothing wrong with the user pays principle if the accounting practices that underpin it are both fair and equitable. This is where another caution I raised ten years ago comes into play. In all service sectors of the economy the concept of independent data validation and verification must guide the compliance and enforcement mechanisms that inform fair consumer prices. We know that the ACCC, until recently, has been excluded from inquiring into the electricity sector by law. We also know that AEMO and the AEMC have been complaining for years about inadequate and timely access to accurate electricity data. In short, if we are to transition to a user pays economy for all socialised services then at the very least we have to ensure that regulatory and compliance frameworks reflect community standards and do not allow for the deliberate exploitation of users for the benefit of privatized cartel and government sanctioned operators. This includes the privatization / outsourcing of government services to preferred contractors without any quality assurance oversight and regulatory control for the accountability of these services. Once again we come back to three core policies I have been hammering for more than 10 years.
- Define a DER (Distributed Energy Resource) and DES ( Distributed Energy Storage ) for a renewable energy zone/ hub for consumer groups. Define a standard renewable zone / hub as a minimum 40 MVH independent capacity supply zone that can be grid disconnected during emergencies and supplemented with private PPA wind and solar farm agreements without Utility approval and function independently from the electricity distribution company.
- Ensure that consumer data ownership policy enables independent 40 MVH Blockchain networks supplemented by transmission and distribution grid embedded DES services that are free from electricity distribution company data interference and data privacy manipulations and data mining.
- Ensure that each state has sufficient electricity generation and reliable grid capacity to meet is own demand under peak conditions.
What politicians and free market economic theorists don’t want to comprehend is that in respect to socialized services the idea of spreading the cost of socialized services to all users simply doesn’t stack up in the 21st century Über economy. You either retain electricity, water, gas, health, aged care and education as a fully government owned service and spread the cost evenly, or you implement a just in time service that allows the consumer to pick and choose when and what part of the service they wish to use and pay for. You simply can’t privatize a socialized service and then mandate a minimum socialized payment obligation onto all users regardless of their use of the service. This is the very same argument the LNP uses when it wants to attack the legitimate right of Unions to participate in Australia’s industrial process. This hypocritical double standard is why the Australian electorate is so angry. Electricity users pay a daily grid connection charge without knowing exactly what components make up this charge. Now they pay a Carbon charge even though the Abbott government abolished the fixed Carbon price system introduced under the Gillard government. When Mr. Turnbull and Mr. Frydenberg recently announced that they had fixed the Australian energy crisis, by tackling price affordability and grid reliability, the electricity prices promptly increased as the grid struggled under repeated coal power plant failures.
Despite this obvious contradiction Mr. Turnbull and Mr. Frydenbergy stoically maintained that without their intervention in the gas market electricity prices would have been even higher. To the average voter this is about as informative as the dual exhaust on the V8 Holden Ute droning at full pelt. Mr. Turnbull and Mr. Frydenberg are counting on the fact that the average punter has no idea about the difference between Pool prices, Capacity Reserve Prices and L & R Frequency Ancillary Control Prices and how they interact with the Wholesale electricity price.
What is the Wholesale electricity price
Under Australia’s broken electricity market the wholesale electricity is a calculated average price for each state. The Pool price is the contracted supply price. For example:
A state government releases a competitive tender for the supply of ‘X’ MVH of electricity generation. Under the tender the state government will specify whether the tender is for renewable energy or some other generation fuel option. Even though the lowest bidder is not guaranteed to win the tender, recent history suggests that wind and solar farm prices of $60 – $80 per MVH are competitive choices against gas hovering at $110-$150 MVH. The state electricity Pool price is the average of all generators in the state. So if a state has two coal plants with high maintenance and low reliability cost, one gas plant and several wind and solar farms the average Pool price is calculated by adding up the total contracted price for each generator and dividing the total by the number of generators in the state. When Mr. Turnbull and Mr. Frydenberg crowed about fixing the electricity price affordability in 2017 they used the electricity Pool price to claim that power prices would reduce by approximately $100 per consumer per annum. This is serious ‘Pinocchio-nomics’! Something Mr. Scott Morrison is very familiar with. What we witnessed instead was that Utility companies immediately applied for their annual mandated price increase in daily connection charges to recover the shortfall. This provided Mr. Turnbull with the ‘Pinocchio-politico’ excuse that under Australia’s ‘free market system’ electricity companies are entitled to apply for reasonable and fair price increases under the Energy Market Rules. What Mr. Turnbull neglected to tell the voter and the Media was that the Market Rules don’t work. The Market Rules allow the energy cartels to manipulate the wholesale ‘Spot’ price. We can only presume what was agreed between Mr. Turnbull and the energy cartel bosses. The following is an approximation to what is likely to have happened. Because we ( The Government ) are legislating the ‘day ahead market bidding process’, the government requires that you don’t game the short term electricity wholesale ‘Spot’ price to drive up prices in 2017 and 2018 beyond what is agreed. In turn the government will ignore the gauging of the retail daily pass through charges. Wink, Wink! Nudge, Nudge! Oink, Oink!
We know that the wholesale ‘Pool’ price is notoriously unreliable as an indicator of wholesale electricity prices. Perhaps this is the reason why politicians like using them. Industry never uses the ‘Pool’ price other than as a base indicator for investment return. The industry prefers to use the long term projected ‘Spot’ price in conjunction with future usage analytics and marginal returns offered by ancillary supply services. The latter is based on private industry owned data about grid integrity and generator resilience under optimum demand conditions. The industry knows exactly what part of the NEM and which generators are likely to fall over under high demand conditions. AEMO has known this as well for many years. This is of course where the energy market cartel makes its money in collusion with the grey ghosts of the energy bureaucracy. We know that Frequency Ancillary Services are contracted at serval hundred thousand dollars per MV supplied into the NEM annually. For this reason any coal or gas fired power station contracted to provide Frequency or Voltage control services can show a profit even though the generator might run at a loss for most of the year. Even though the electricity ‘Spot’ price is capped at $14,200 per MV, this price simply does not apply to capacity reserve markets. The South Australian Tesla battery impact on the NEM in 2017 reduced the cost for FCAS from over $250,000 to about $50,000. This should have had an impact on consumer prices in South Australia if the government had passed these savings onto the consumer. Since the South Australian government also contracted a high cost gas power station the Tesla battery cost savings simply subsidized the gas power stations in this incidence. The reason is twofold! The Tesla battery is not contracted by AEMO to provide short term FCAS into the NEM. The regulation that mandates a 5 or even 2 minute settlement period for fast response storage and ramp up technology doesn’t even exist and its introduction will be resisted by the large energy cartels until at least 2021 or beyond. In other words, South Australia didn’t get paid for the intervention of its battery into the NEM because the battery is not contracted by AEMO to provide this service to AEMO. Since the CAPex for the new gas plant and the battery still needs to be paid for the South Australian government budget would have struggled to lower energy retail prices even if it wanted to.
Once again we witness Mr. Turnbull and Mr. Frydenberg engaging in nothing short of political thuggery by claiming that South Australia’s irresponsible renewable energy policy is entirely the fault of its own making. I don’t know whether this was a deliberate political strategy to influence the outcome of the recent South Australian election. Perhaps the motivation is the perverted aim of slowing Australia’s renewable energy transition in order to buy time until the Turnbull government finds a Clean Energy Policy prior to the next federal election. We do know that any federal Clean Energy Policy on similar lines to the Rann policy of 2010 is not enough to address our international obligations. What I can say with certainty is that the Rann government renewable policy in 2010 was already 10 years behind best international practice. Implementing a NEM strategy with a ‘Finkel’ bolt on would effectively consign Australia’s Clean Energy Transition program to being 20 years out of date. It is not surprising that US investors simply scoffed at the industry and super fund heads who accompanied Mr. Turnbull on his recent visit to Washington. Australia still has no renewable energy transition policy worth investing in. This is the energy reliability crisis the Turnbull government has engineered for Australia under a fake energy price affordability caveat.
How is the Retail Electricity Price Calculated?
We know that the state wholesale electricity is the spot price + the contracted frequency and voltage control prices + any unforeseen contingencies. Generator companies can make profits by exporting any excess capacity to other states + any carbon credits this might entail. It was the Clean Energy carbon credits the Rann policy was banking on through the Victorian and South Australian interconnector. Since Victorian customers are also paying for the HVDC underwater connection with Tasmania the net dividend to South Australia was never going to eventuate unless Victoria closed the majority of its coal generators. It was the Victorian coal generators supporting a South Australian grid built without a mandatory storage requirement that supplied the power when the wind wasn’t blowing. It did this at enormous cost to the South Australian consumer. In turn, Victorian customers benefited greatly when the ‘Roaring Fourties’ made the wind turbines go like the clappers because the wholesale electricity price dropped like a stone. Once again the lower costs where not passed onto the consumers in either Victoria or in South Australia because the minimum Pool price came into effect. Even then the extra cash disappeared into the Cartel coffers as South Australia tried to balance its energy revenue against an excessive interstate energy import bill during the lean times and a low Pool price in the good times. This sort of ‘Pinocchio- nomics’ only has one outcome as the Weatherill government discovered in 2016.
If there is any legitimate criticism to be levelled onto South Australia, then the failure to listen to my 2010 DPC advice is it. Recently I listened to a boffin from some right wing industry group who claimed that South Australia purchased 60 million dollars’ worth of Victorian coal power annually to keep the lights on. If we assume that this is the gross subsidy that the South Australian government was channelling into its own energy market in order to balance the books I can understand why the Weatherill government was sorely disappointed at the blatant rip off from the other states in the NEM and AGL. This however does not explain why Victorian, NSW, Tasmanian and Queensland customers are facing the same rip off.
We know that wholesale prices plus transmission charges, substation and interconnector charges as well as distribution costs, state taxes, GST, data metering charges, billing charges and carbon charges make up the retail electricity price. We also know that the vast majority of these fees and charges are undisclosed and agreed to behind closed doors between state government ministers and the Utilities. Transmission charges are levied on distance. No one knows what the interconnector and substation charges are. I do know that the Tasmanian interconnector costs Victorian electricity consumers about $1million every year in maintenance alone. We know that distribution charges are agreed behind closed doors and take into account grid integrity, terrain, maintenance, insurance, bush fires and climate impact, street lighting discounts for local councils and the elderly etc. We also know that electricity company employees never pay more than half the recommended retail price. Built into the retail energy price are a raft of hidden cross subsidies and concessions that everyone else pays for. Don’t get me wrong! I am fully in favour of concession prices for anyone on welfare. I am fully in favour of concession prices for anyone suffering serious hardship and illness through no fault of their own. That’s what an equitable socialized service should do. What I am against is this piecemeal attempt to wrangle concessions for those who can’t pay their power prices ordinarily when the legitimate retail price should be between 30% – 50% lower for all. I am against corporate welfare disguised as a legitimate service charge.
We are not just dealing with a broken electricity market in one state. We are dealing with a broken market and pathetic government in all Australian states. It is simply unacceptable that local councils negotiate a new rate for their street lighting without making a real effort to replace their ML 40’s with smart LEAD street lights. Last time I looked the replacement cost was $5000 per light with battery backup in the pole. $50 from 1000 rate payers can pay for 1 smart Lead street. $50 from 20,000 rate payers every year can replace the majority of all ML 40’s in a local council jurisdiction quick smart. So what is local government doing with all the rates we pay?
The future of Australia’s reliable and affordable energy market
The federal ‘Ministerium’ of population and liveable resilient communities is fully aware that Australian cities are facing a massive infrastructure crisis. No doubt age old concepts of increased urban densities and linear rapid transport corridors to regional towns will feature heavily in the deliberations of urban planners and designers in the future. We might even see the revival of the 19th century ‘Garden City’ and the German idea of designated green belts between cities and regional towns. What we haven’t seen from urban planners and politician is common sense. If we assume that high rise apartment living will become the norm in Australia’s major cities, then we should seriously think about the impact these energy guzzling shoe boxes have on Australia’s national electricity grid. Until we can include reasonably priced and efficient transparent solar glass in the design of the next high rise apartment block we should think about retrofitting all apartments and office blocks with energy storage batteries. I favour a planning and building code amendment that specifies a 1:4 consumption to storage ratio for all apartments and office blocks. This national mandated amendment to local council planning and building codes could not only turn each high rise apartment and city office block into a giant ‘Tesla Power Wall’, but it could form a significant storage hub for each 40 MVH renewable energy zone postulated under the ‘Finkel Review’. Funded through a Green Bond and a targeted Tax credit mechanism the energy storage of each city high rise can cement grid resilience, lower ‘Spot’ prices and reduce FACS costs in one elegant low cost solution. So why don’t we have such a national policy?
Australia’s politicians don’t think elegant solutions. They are enthralled with a user pays philosophy where consumers pay private companies a premium for a social service that could easily pay for itself in most circumstances. What is wrong with this simple idea in a user pays democracy like Australia? What is wrong with the user pays principle is that those on higher incomes spend disproportionately less of that income on basic social services such as electricity, water and sewage. They also pay a lower proportion of their income on food, rent, house repayments, council rates, health and education. Australian federal governments have spent years talking about tax reform without doing anything. The Turnbull government is prosecuting the case for lower corporate taxes in readiness for the next election without any reciprocal obligations on Australia’s corporate citizens. What is not discussed is the simple concept that lower tax revenue under continuous public service growth requires that revenue to pay for public servants and social services must come from somewhere. Only a few people are talking targeted tax reform that addresses the social inequalities the corporate welfare system has created in the last 30 years. No one is talking about smarter government policies that target the scourge of government and private business fees and charges that have replaced tax revenue over the years. Oh yes! Direct user pays principles are fairer and more equitable the liberal think tanks maintain. Bollocks! Look at the electricity market and tell that to the pensioner with rooftop solar paying 1000 Kwh of solar generation per billing cycle to cover daily pass through grid connection charges. The perverse thing about this is that same power is resold by the electricity distribution company at 3 times the retail price as the pensioner pays GST for the privilege of trying to live sustainably on a pension.
What we have seen over the last 30 years is a steady increase of cost recovery by all three tranches of government in Australia. Increases in fees and charges under the user pays principle have reached the point where base service charges predominate at all levels of government regardless of usage or equity. As a tax replacement this method of cost recovery simply does not stack up. At no point in this discussion do we see targeted tax and service fee charges that actually reflect real time usage. At no point do we discuss the undue influences of powerful stakeholder groups and perverse ideologies that benefit the top 10% at the expense of everyone else. This is particularly true when more intelligent solutions are starring Malcom, Scott and Josh in the face!
We don’t even discuss the concept of leveraging ever rising social service costs against intelligent service provisions that can generate their own income and lower the burden on all community members fairly. We don’t do that because we have privatized and outsourced essential public services to private business without any effective checks and balances. This is precisely what is wrong with neo-classical economic theory in the 21st century Über economy. Users demand to pay only for what they use. They expect that service providers are capable of providing a just in time affordable service tailored to the needs of the customer. Customers do not expect to pay a socialized service fee for an essential service to a private company. This is especially true when the private company can earn additional revenue from other sources and maintain profit margins through more intelligent management of their existing revenue streams whilst it minimizes its tax obligations through offshore accounts. Customers do not expect to subsidize the corporate bottom line because of governance, regulatory compliance, standards and enforcement failures that are the responsibility of the government. Customers demand integrated and customized services that demonstrate that both governments and corporates are fully engaged responsible citizens of the national economy.
At what point do politicians finally work out that the Australian Energy Crisis is not a crisis of reliability and affordability but a crisis created specifically by government to benefit the few. It is the sole responsibility of governments to work cooperatively on smart integrated solutions that benefit the community. It is not the government’s responsibility to work for the express benefit of the top 10% income earners and private corporations who minimize their social and tax obligations to the national economy. But of course you say! As long as we ignore the failures of western liberal democracy in Australia, all must be well ‘Under heaven’.
Powering our future Inquiry into modernizing Australia’s electricity grid, House of Representatives Standing Committee on the Environment and Energy. Canberra 2017
Fact Sheet The National Electricity Market
Regulated Electricty Prices 101115 PDF document – How are Electricity Prices Set in Australia
IBISWorld Industry Report D2630 Electricity Distribution in Australia, 2014
State of the Energy Market , AER publication May 2017
Essential Services Commission Report RPT-2014-15 Comparative Performance Report Customer Services 20160502 PDF
Electricity Prices and network costs 2, Energy Networks Association, 2014 Report
2017 Review of Climate Change Policies, Australian Government, Department of the Environment and Energy
Independent Review into the Future Security of the National Electricity Market – Blueprint for the Future, June 2017
New business models in the electricity sector, Jake Brooks, July 26, 2016
Roadmap 2030 Financing and implementing the Global Goals in Human Settlements and City-Regions, World Urban Campaign, the ecological sequestration trust
Competition Policy Review Final Report, March 2015
Mr. Angerer has more than 30 years’ experience as a government adviser and senior consultant covering all aspects of Climate policy and context specific solutions for urban and rural development. Mr. Angerer has a multi-disciplinary background in Architecture, Engineering, ICT, GIS & Mapping, Urban and Rural Development, International Development Law, Transport Systems, Environmental Management, Business and Project Management, Risk Analysis, Change Management as well as E-Learning, Education Management and Training. Mr. Angerer has developed the UN compliant E-WASH system with a focus on poverty reduction, food and income security, whilst enabling positive investor returns at the lowest risk for developing nations. Mr. Angerer’s expertise is in strategic government and business policy and business development for all aspects of renewable energy and Blockchain peer to peer VPN managed community owned smart grids for integrated E-WASH grid connected and off grid system. Mr Angerer also has an extensive background in employment and training policies and curriculum design standards at national and international level.