Over the past eight weeks, as the carbon tax debate has raged in Canberra, the ALP’s appointed climate change policy guru Ross Garnaut has been diligently updating his 2008 climate change report.
Previous installments dealt with global action on climate change (progressing much better than many believe), the ever-more frightening science of climate change (the world is getting hotter faster than we realised) and the policy fundamentals underlying the need for a carbon price.
This week Garnaut released his latest update, on perhaps the most contentious part of climate policy: electricity generation. Showing his ability to cut through the political spin that obscures all aspects of the climate change debate, Garnaut has taken a long hard look at Australia’s electricity markets. He’s turned up all sorts of important information.
What Garnaut has discovered will be a revelation for those of us who’ve recently received a nasty power bill. Australian electricity prices certainly are going up — but they’re still substantially below those of many of our trading partners. And the reason they’re going up is not because of any uncertainty related to the introduction — or not — of a carbon price. Rather, Garnaut thinks they’re going up because of a range of related reasons concerning Australia’s National Electricity Market. You might be surprised to know that some of the biggest beneficiaries are the state treasuries of NSW and Queensland.
The reason prices are going up is not because electricity generators need to build big new power plants. It’s actually because they’re replacing a lot of high-voltage wires and pylons, and passing the costs on — and then some — to you, the consumer. As Garnaut makes clear, "rising network costs are the greatest factor in rising electricity prices, accounting for approximately 68 per cent of recent price rises". Some of this capital investment is clearly necessary, in order to replace power lines built and installed in the 1960s and 1970s. But Garnaut thinks some of it is unjustified, and is instead driven by overly conservative state government regulations. "Gold-plating" is the pointed term he uses.
Interestingly, because the largest electricity generators in Queensland and NSW are state-owned, the coffers of those state treasuries are benefitting handsomely from the recent price rises. State government-owned electricity companies can raise money at the long-term government bond rate, which is cheaper than corporate debt, and they also generate windfalls from the federal government in the form of extra GST revenue — because the profits of state-owned businesses are exempt from the calculations Canberra uses to hand out GST. Garnaut concludes that "the shareholders of state-owned businesses … do well out of over-investment" and that this may be "why government-owned network providers invest more heavily than privately owned providers and have consistently overspent their regulated allowance."
Garnaut raises another key issue: Australia’s National Electricity Market is not really national. Not only are Western Australia and the Northern Territory not connected, but in many cases the high-voltage interconnection lines are not powerful enough to truly link each state’s electricity grids. For instance, Garnaut points out that if the Victorian and South Australian grids had better connections, Victorian wholesale electricity prices would drop rapidly whenever the wind blows in South Australia, because of that state’s extensive wind power assets. Better interconnection would also be a huge boon to renewable energy generation, which is often intermittent and therefore benefits most from feeding into what Garnaut calls a "truly national market".
Garnaut is at his best when debunking the myths of the electricity debate. For instance, he patiently explains why a carbon price will not lead to the shutdown of brown coal power plants like Hazelwood in Victoria — one of the most consistent scare campaigns mounted by Big Carbon. He takes us back to the global financial crisis in 2008-2009, when the highly leveraged conglomerate Babcock and Brown collapsed spectacularly.
Babcock and Brown owned a significant part of Australia’s generation assets through its then subsidiary Babcock and Brown Power, but the lights stayed on because those generators were still making money (Babcock and Brown Power eventually changed its name and turned itself into Alinta). Garnaut points out that a carbon price will be much less disruptive than this, and that in any case, the very dirtiest brown coal plants could still make money just by operating on very hot days when the electricity demand — and therefore the wholesale price — is highest.
Garnaut also has a whip-smart recommendation for top-level electricity regulation. Arguing that electricity is a critical asset, he recommends the government set up an Energy Security Council "to implement measures to counter energy market instability regardless of the source". This is one of Garnaut’s best ideas. As I’ve canvassed before in terms of defence policy, Australia is particularly vulnerable to energy security issues such as petroleum depletion — we’re one of the few countries in the rich world not to keep a strategic petroleum reserve, for instance. An Energy Security Council could address such shortcomings, and should eventually become a key Australian policy-making agency, akin to the Reserve Bank.
Of course, don’t expect the electricity generators to agree with Garnaut’s analysis. In fact, you can tell how accurate Garnaut has been by the shrill reaction of the fossil fuel lobby. According to Sid Maher and Annabel Hepworth in The Australian today, International Power — the company that owns Hazlewood and Loy Yang — thinks Garnaut’s report is "commercially unsophisticated". Translation: we’d like some more taxpayer money, please. If International Power thinks Garnaut is wrong, then it’s a pretty fair bet Garnaut is right.
Electricity price rises matter because they are one of the key issues scaring consumers about a carbon price. Those fears have been irresponsibly stoked by the Opposition; then again, the irresponsible stoking of fear is pretty much Tony Abbott’s stock in trade. In fact, Garnaut establishes that the recent rises in electricity prices will be larger than those that can be expected after the introduction of a carbon price in the $20-30 a ton range. Electricity prises are going up for reasons that have nothing to do with carbon pricing.
If the Gillard Government is smart and clever enough, it will use the analysis provided by Garnaut to debunk the misinformation around carbon pricing and push through this critical reform. Sadly, for this government, that’s a pretty big "if".
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