How are Energy Prices Determined?

My Commentary last Sunday reported that, in a speech to the South Australian Liberal  Party, Turnbull said that Labor’s approach to energy was a combination of ideology and politics, compared to the Liberal focus on economics and engineering. No doubt with the South Australian Labor Premier in mind, he classified South Australian policy as “it’s actually ideology and idiocy in equal measure”.

But the problem is that both the Federal and South Australian governments have the same basic policies seeking to reduce emissions of CO2 and increase the usage of renewable, both of which policies add to power costs. True, South Australian Premier Wetherill says his government aims to have zero CO2 emissions by 2050 whereas the Turnbull government’s target is so far only a 26-28 percent reduction by 2030.  But US Energy Information (see graph below and the article Energy Prices) shows the adoption of policies designed to reach these targets is already resulting in much higher electricity prices in South Australia than in Europe (average) and Britain. In fact, South Australian prices are 35% higher than in Victoria but only a fraction higher than in Germany and Denmark, each of which would fall in Turnbull’s “idiot” grouping.

It is little wonder that my Commentary  drew attention to Weekend Australian articles by Judith Sloan, who described “energy policy as a farce”, and by Chris Kenny who spelled out the adverse effects in Ontario, particularly in manufacturing,  from the adoption of policies similar to South Australian.

Meantime, my letter published in the AFR yesterday argued that the main problem is that  “it is government failure (as economists describe it) that is occurring across the entire energy pricing sector” (see below). Such failure relates to both the emissions and renewable policies as well as to the extraordinary regulatory arrangements.

Government Failure Not Energy Markets (Letter published in AFR, 14/8/17)

You report that Treasurer Scott Morrison told the energy companies the government would act if they do not meet commitments to help consumers cut their costs (“Libs, energy chiefs agree certainty key to price fix”, August 11).

But it is government failure (as economists describe it) that is occurring across the entire energy pricing sector. If lower priorities were given to emission reduction imperatives, that would help reduce electricity prices. The case for lower priorities has been enhanced by analysis published by climate experts showing that temperature estimates by the Bureau Of Meteorology do not warrant emission reductions as they have been targeted by governments.

We also now learn that electricity retailer AGL has benefitted by using the government controlled pricing sector to achieve a 14 per cent increase in profit. How did the Australian Competition & Consumer Commission or the electricity regulators allow this to occur? How come that as a customer of AGL I was advised a day before it announced its profit surge that I had been “mistakenly” receiving additional discounts on my bill and that these would be “corrected” on 17 August?

The reality is that the government regulated market has allowed customers to be subjected to quasi-monopolistic pricing while, with the other hand, governments have been forcing prices up by imposing policies which are now shown as faulty. My bill should increase my discounts, not reduce them.

Des Moore
South Yarra Vic

The argument as to the causes of the large increase in electricity prices continued yesterday following the publication of a supposedly bipartisan Review Into Victoria’s Gas and Electricity Markets (see article from The Age on Victorian Power Prices). I failed to have published in The Australian a letter rebutting the Review’sclaims. The main claims are that, since privatisation in 2002, electricity prices have risen faster than in other states through profit gouging and opaque pricing and more regulation is needed (“Regulation needed to keep lid on energy bills: review”, 14/8). But the Australian Energy Council (AEC) says that power prices has shot up only in the past 12 months and that the real issues were government interference in energy markets.

The AEC has undoubtedly identified the major influence. As I said in the letter above published in the AFR, and again in my unpublished letter in The Australian,  it is government failure that is occurring across the entire energy pricing sector. The giving of higher priorities to emission reduction imperatives has been the most important influence and this forced the closure of Hazlewood power station and, hence, the switch to power sources which result in higher costs passed on to the consumer.

The Australian has to a degree caught up today by publishing another excellent article by Judith Sloan entitled “Energy a Joke, But No One Laughing”  which elaborates further on criticisms of the existing energy policy situation (see Sloan on Climate Policy). Unfortunately, the editor of The Australian could only find room to publish it on page 29. Meantime, the South Australian situation has deteriorated further, with Weatherill announcing that, in addition to expanding wind turbines, it will construct what is described as “the world’s largest solar thermal plant costing $650 million”. Given Turnbull’s classification on Sunday of the “idiocy” of South Australia’s policy, he ought now to be thinking of taking action to deter SA from proceeding. But his political problems suggest there will be no such action, let alone any modification of Federal policy.