Privatising Electricity Infrastructure Makes Sense 2

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Monday, June 30th, 2014
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Australian consumers are poised to benefit tremendously from the comprehensive privatisation of the country’s electricity infrastructure assets.

Debate is currently raging around the benefits and merits of privatisation of electricity assets in New South Wales. Some of the assets have already been privatised; specifically the power stations operated by the NSW government owned corporations (GOCs) called Delta and Eraring.

Macquarie Generation accepted a bid from AGL Energy for the remainder of the generation assets that it still operates, with only authorisation from the Australian Competition and Consumer Commission (ACCC) now required for the sale to go ahead.

This would leave no power station assets in government hands. However, the most valuable (for now) and most controversial assets are still owned and operated by the government’s companies. These are the transmission and distribution assets operated by Transgrid (transmission) and Ausgrid, Endeavour Energy and Essential Energy.

The collective regulatory asset base was valued by the Australian Energy Regulator in 2013 at around $22 billion. That is a nice tidy sum but there is, of course, no guarantee that they will fetch anything like that price in a sale.

electricity grid

It is possible that they will fetch much less, given the risks that the incumbent technologies and business models are facing from new technologies such as solar distributed generation and cheap batteries. I think a privately owned business will be better suited to handling these issues.

The Queensland assets may, or may not be, on the auction block shortly. The Newman state government has been making noises about selling them, but not without a new electoral mandate. The NSW government is at least more definite about the sale (or a 99-year lease of 49 per cent) of the Transgrid, Ausgrid and Endeavour Energy assets.

The third distributor, Essential Energy, supplies the majority of NSW’s rural areas, and is seemingly too politically sensitive to sell. Fair enough, since if more cost reflective pricing was implemented for distribution tariffs in NSW, rural customers would face even higher charges.

With respect to the ownership of energy assets in other Australian states, Queensland assets are still fully government owned, with the exception of the privately owned power stations such as those belonging to NRG and ERM Power, while South Australia’s generation and network businesses have been leased (for a 99-year period) since 1999.

Victoria deregulated and privatised all assets under the Kennett government’s comprehensive reform and privatisation program in the mid 1990s. Western Australia, which is not connected to the rest of National Energy Market (NEM), elected not to join the original tranche of deregulation and pursued its own deregulation agenda from 2007 without privatisation and with quite different wholesale market design.

The only thing that was common to all states was the allowance, and in fact encouragement, of private investment in new generation. Governments decided they preferred lower taxes to investment in energy infrastructure. In addition, most natural gas transmission and distribution infrastructure is now also in private hands.

The question inevitably arises as to whether Australians would be better off with the current status quo – a mongrel mixture of private and public ownership separated along state borders (SA-Vic vs NSW-Qld-WA), or under a more consistent landscape of fully privatised generation, transmission and distribution networks.

To my knowledge, there hasn’t been a rigorous analysis of this question yet published. I will not attempt to do that here, but I will set out some general arguments suggesting that we would be better off privatising everything.

The argument is based on the objectives of maximising reliability, minimising cost, and minimising greenhouse gas emissions. The costs of electricity are a combination of generation costs (the market for which is the only truly competitive component of the wholesale markets), distribution networks, and transmission networks, whose revenues and prices are set by the Australian Energy Regulator (AER).

electicity price chart

The way these compare across state is shown in the chart above, which displays the data from the Australian Energy Market Commission’s (AEMC) review of retails pricing in Australia from November 2011.

The chart shows the immense variation between the states of the distribution and transmission components. Note in particular how much lower the distribution and transmission components are in Victoria versus NSW, Queensland and Western Australia.

South Australia is said to be a special case due to its sharp peak loads, which are supposed to justify high costs. Wholesale prices vary somewhat as well, mainly due the limitations on the capacity of transmission interconnection between the states leading to local pricing impacts. If the transmission system were expanded to remove these limits, the wholesale costs would be identical.

The key difference between Victoria is private versus public ownership of network assets. The evidence in the chart is overwhelming. The state with the longest history of private ownership also has the lowest underlying costs.

What about reliability then? The AER’s charts in the 2013 State of the Energy Market report on page 81 show that the key reliability of supply metrics SAIDI and SAIFI, which broadly measure how long power outages lasted and how often they occurred, respectively, were noticeably better in Victoria as well.

So again, at least in terms of reliability and costs, the evidence shows that private ownership is better.

Finally, there is the issue of investment in low emission technologies. While privately owned brown coal generators are much more CO2 intensive than their government-owned counterparts in NSW and Queensland, this is mostly an accident of geography and history.

The more important question is who has invested more in renewable generation, private or public owners? The evidence again strongly favours private operators.

Most wind and solar capacity under the large and small scale renewable targets has been built and financed by private companies such as AGL Energy, Infigen, who build and operate wind farms, as well as by residential consumers. There has been very little significant investment by government owned businesses in the past 17 to 19 years since the deregulation of the energy market.

electricity retail price chart

Finally, the distribution companies in particular are facing a very different technological and commercial reality to those they confronted when privatisation and deregulation commenced. As I wrote previously, electricity demand has been declining since 2009. This is due in large part to investment in residential solar panels and an energy efficiency based response to the puzzlingly uniform increase in the end user residential prices shown in figure 5.4 from the AER 2013 state of the energy market report (p132).

These trends, in combination with the impending commercially competitive prices for domestic batteries for the first time in history, create a viable alternative to the traditional grid which is available to consumers.

Distributors will need to be very agile as well as willing to innovate and take risks previously unheard of in the electricity industry. I find it impossible to imagine that state owned businesses will be able (or even allowed) to transform themselves efficiently to take advantage of the opportunities available. Only a fully privatised system can now realistically adapt to the new trends.

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  1. David Chandler

    Ariel it is hard to follow the point you are making. The ownership and operation of public infrastructure is an evolving phenomenon. On the face of it governments getting out of businesses they prefer not to be in may be attractive. And recycling the money tied up in these may appeal. But you mention the disruptive forces that will change energy business models. The same could apply to roads. Are we extracting too much for these assets, creating effective monopolies, encouraging high gearing and exposing public interest to uncharted waters? One would imagine that these defacto public utilities will be too big to let fail if they do not weather the storm and just like the GFC the public balance sheet left to pick up the pieces? Its a risk.

  2. David Maywald

    There has been excellent work done on public versus private ownership by both the Productivity Commission & The Grattan Institute, including section 4 of "Putting the customer back in front" that's specifically on why ownership matters:

    The vast bulk of evidence and informed opinion is that the network assets should be owned and operated by the private sector: more efficient; better reliability; lower costs for consumers…