Electricity prices up, up and away.

Your title is spot on. Two reason electricity prices are going up are:

1. RET,

2. Public ownership of electricity systems is far more expensive than private ownership over the long term. Ridiculous union claims and slow work practices add enormously to the cost of the network. And when government owns the electricity system, from time to time we get incompetent governments in power who use their control of the electricity system through their minister to impose their ideological beliefs through the electricity system, such as carbon restraint policies, renewable energy targets, and similar. This adds enormously to the cost of electricity. As a result, Australia's electricity prices have gone from near the lowest to near the highest in the OECD.

The RET is one example of how such policies increase the cost of electricity.

The Commonwealth government is considering locking in the Renewable Energy Target for 2020 at 45,000 GWh. That’s about 27% of Australia’s projected electricity generation. There was bipartisan support for 20%, not 27%. Labor-Greens legislated 45,000 GWh target. However, Labor-Greens carbon restrain policies cost nearly $20 billion per year and forced aluminium smelting and manufacturing industries and jobs out of Australia. As a result electricity demand decreased so the 20% has become 27%.

The recent RET Review shows the cost of the RET is huge. The CO2 abatement cost is about $100-$200 per tonne CO2. That’s four to eight times the carbon tax that voters rejected at the 2013 election. It’s ten to twenty times the European carbon price, and over 100 times the International carbon price futures.

It is irrational and irresponsible for Labor and Greens to insist on the 45,000 GWh target and irresponsible of the government to consider retreating from reducing the target to 20% (or less). The damage to Australia, in terms of jobs lost over the long term will be huge.

The author should make some efforts to condense his arguments, particularly if his assessment is mostly nonsense. Prices are regulated in private or publicly owned networks by the Australian Energy Regulator. Prices set by any privately-held monopoly have to be regulated in such a manner.

The regulator recently did benchmarking exercise in which it concluded that the private sector was considerably more efficient in its use of capital and management of costs. The ACCC, and Productivity Commission, the Grattan Institute and E&Y have all found similar things.

Because a private operator is more likely to be able to cut costs below the levels set by the AER as "fair", after permitting the operator to keep the difference for a time as an incentive, the regulator would reset prices to the generally lower costs.

I don't think the author appreciates these basic realities.

The argument about keeping the assets as a business to profit state taxpayers has been comprehensively rebutted elsewhere

Well argued and cogent.

No businessman worth the title would sell assets that were so profitable! But a moron or an ideologue (same diff) might!?

And if competition is required, why not corporatize the separate entities as separate corporate entities, and then require them/give them free rein to compete fiercely for market share and their individual survival.

And on the back of mandatory three year labor hire contracts for all the workforce/Government employees.

Those with a record of success finding getting their contracts renewed easy as; whereas those stumbling along, subject to the same market imperatives of any self sustaining private company, should live or die courtesy of those same market imperatives.

And every manager should have an understudy, and a performance based bonus. With the most successful manager offered lucrative terms to head up one of the failures.

And the unions would then be obliged to act as labor hire firms competing for labor hire contracts; or face losing all their members to those not so bloody minded, or more thrifty with other folks pay packets!

For mine, negotiating a profit sharing paradigm, (7-10% of the gross) along with a union member on the board, is the way to go, and would all but automatically eliminate the drones/unreasonable demands from/in the system!

We just don't need to privatize anything, just ensure they're intelligently managed! Ditto state finances! And would that make a nice change/famous firsts!?
Rhrosty.

Peter Lang, there are a lot of conflicting claims on the effects of the RET. Do you have any evidence that the claims of http://www.businessspectator.com.au/article/2014/9/19/renewable-energy/dirty-dozen-myths-ret-debate are wrong?

The RET does not depend on ownership. But it is much easier to hold public monopolies to account than private monopolies.

The real problem is that even in public hands they're trying to make big profits rather than passing the benefits on to consumers.

Nowhere could I find so much as a single verifiable example of privatization resulting in cheaper prices!

Moreover we need a divorce from the great white elephant of a national grid, given the huge transmission losses are forcing prices way up there for everyone; but particularly struggling business!

And we must start replacing coal with far cheaper cleaner thorium, ideally, connected to micro grids. Which would more than halve the cost of industrial power; and or, desalination!

And the roll-out of local biogas production coupled to individual ceramic fuel cells, will not only supply endless free hot water, but domestic power halved yet again.

With the money saved reappearing as improved discretionary spending, the very life blood of any domestic economy.

If the NSW government needs money for profitable money making infrastructure roll-outs, self terminating 30 year bonds beckon!

I mean, there's money to be made, profits to be earned and jobs/jobs/jobs to be created, just rolling out and installing the alternatives; rather than just trying to bleed a captive market white!

Current price gouging, is down to incredible political stupidity; and or, using the power authorities' operating capital as some sort of private political piggy bank!

Think, in smaller communities near a reliable water source; a thirty metre wide three metre high weir, will produce enough energy to power around thirty homes.

More if there are enough solar panels on every roof, and the micro hydro just providing cheap as chips (local water surety) back up; meaning, it's hardly necessary to run expensive transmission lines to small mountain hamlets, which simply forces prices up for those folks already on the grid!

And the roll-out of even smaller weirs further upstream, will quite massively improve the landscape, local soil fertility and production; as well as extending local water surety and environmental flows deep into the heart of the worst possible droughts.

Good insurance every which way you look at it!
Rhrosty.

The RET should be cut back to a real 20%, (or, better still, closed to future investment; this is one of the options recommended by the RET Review Expert Panel).

The cost of abatement with the RET is excessive and cannot be justified on a rational basis (see below). Therefore, the government should close the RET to future investments, and roll the existing investments into the Direct Action process.

Abatement costs of the RET compared with the Labor-Green CO2-e price, the EUA market price and the CER market price are listed below:

RET Review estimates of the RET in $/t CO2-e for the period 2014 to 2030 https://retreview.dpmc.gov.au/56-cost-abatement :
LRET: ACIL Allen: $32-$62
SRES: ACIL Allen: $95-$175
RET: ACIL Allen: $35-$68
RET: Frontier Economics: $55-$65
LGC: Deloitte: $72-$82

Australia’s legislated carbon price was $24.15 when the electorate rejected it at the 2013 election.

EUA market price (10/3/2015) = €6.83/tCO2 http://www.carbonplace.eu/info-commodities-EUA

CER futures price (9/3/2015) = €0.40/tCO2 https://www.eex.com/en/market-data/emission-allowances/derivatives-market/certified-emission-reductions-futures#!/2015/03/09

Therefore, the RET is 2 to 3 times the carbon tax which was rejected by the electorate in 2013; ~5 times the current price of the EUA; and >100 times the CER price (the international ‘carbon’ price).

The rational decision is to close the RET to future investments. Or, as a temporary measure, wind it back to a real 20%.

The article seems to have too many wotifs to be very credible.
David

For those who feel governments know best, some breaking news.

In November 2014 the regulator decided to begin lowering prices for the five years from 2014.

Baird’s Minister for Energy, Anthony Roberts on 27 Nov crooned (http://www.davidelliott.com.au/archives/1833) how prices are now coming down, will keep a lid on the cost of living and how “Mike Baird is the man you can trust”

Everyone it seems was celebrating the forthcoming fall by 10% in power bills.

But then on 5 February something strange happened. Business Spectator quoted a report from the Australian Financial Review announcing that the NSW government made a 180-degree turn. It now refuses to accept the umpire’s decision and is vigorously OPPOSING the proposed fall in prices.

Yep, OPPOSING the 10% fall in price consumers would pay. Instead, it is beating the drums, in support of an 8% INCREASE in prices.

You read that right.That what Business Spectator reported in the body of a pro-privatisation column.

8% hike in prices in addition to years of high electricity prices consumers in the First State have been fleeced to pay for the gold plating of infrastructure.

Looks to me like fattening a multi billion dollar lamb before slaughter.

To Jonathon Ariel.

You don't know what you are talking about.

As an electrician, I have worked with the State owned Electricity Commission and I have personally seen the drunkenness, over manning, feather bedding, and overpayment of ELCOM workers.

My firm wired up the 330Kv Kemps Creek HV switchyard. The ELCOM boss drove down to the local to the pub every day and drove back piissed at 4-30 PM so that he could claim 2 hours overtime. There were 12 men from our firm to wire up the yard, and 36 ELCOM workers to test what we had installed. They arrived around 7.AM and did not leave their crib room until 10.30AM. It took six men to test any circuit.

Out in the field there were three blokes. One bloke got up the ladder and shorted out the cable under test. One bloke held the ladder, and another used the walkie talkie. Inside the control room, one bloke held the meter and read it, one bloke held the test leads, and one bloke held the walkie talkie.

On remote jobs the private industry workers were getting (at that time) $98 dollars a day Living Away From Home allowance. The ELCOM blokes got $58 a day. We were expected to start on the job at Cooma, Oberon, or wherever at 7AM on Monday morning. The ELCOM "workers" started in Sydney at 7AM and drove in ELCOM cars, stopping for a leisurely lunch along the way. On Friday's our boss would allow us to knock off around 2-30 PM to drive back to Sydney. The ELCOM "workers were gone at 9AM.

When I worked on the Drayton Coal Mine in the Hunter valley, there was a scandal in the power station next door. The ELCOM worker doing the critical job in the control room was in his chair in front of his controls, surrounded by beer cans, drunk and asleep. He was sacked but reinstated, because the union said that while it was true that he was asleep surrounded by beer cans, it was not legally established that he was drunk.

Continued.

Continued.

Drive past any power station and note that there are two types of parking. The ELCOM workers get undercover parking, while the lowly workers who do the damned work around the place get to park out in the hot sun. The ELCOM workers who bother to drive to work anyway. ELCOM workers would arrive at work and leave again in taxis paid for by ELCOM.

Look Jonathon, I don't know what your personal philosophy is, but I presume that you are another Socialist fighting the good battle for the "workers". You are part of the push by my own union to prevent the selloff of Electricity Commission assets to public companies. But I can tell you, that I oppose my own union on this subject. I am a worker, and I will not support outright, overpaid bludgers. If any "emeritus professor" ever spent a day in the hot sun sweating with a bull gang pulling cables on an ELCOM job, and watched the government "workers" merrily driving around in the golf carts doing sweet FA, he would get himself a reality check.

I know all about ENRON and what went on with that privately owned energy company in the USA. But the reform of the state owned Electricity industry is way past it's due. The direction of history in all societies today, is to get rid of state owned enterprises because that are always a financial black hole. From what I have personally seen with state owned enterprises like ELCOM and Sydney water, I can only say that I understand why Socialism failed in Russia and China. Private industry can be bad, but state controlled enterprises are a lot worse.

I am absolutely convinced that the primary reason for the extortionate rates of electricity prices in NSW is because of the scandal within the state owned electricity industry. And because of that, aluminium smelters are closing and pensioners are
too poor to turn on their air conditioners.

Jonathon Ariel,

>"For those who feel governments know best, ..."

Government certainly don't know best about how to run industries or businesses. That's why they shouldn't be running the electricity industry - anymore than they should be running the grocery supply system, farms, banks, telecommunications, media, etc.

Despite your qualifications as "economist and financial analyst. He holds a MBA from the Australian Graduate School of Management.", you clearly haven't learnt the most fundamental concepts in economics. I'd urge you and other followers of this thread to read the classic: "Economics in one lesson" http://steshaw.org/economics-in-one-lesson/contents.html.

Ariel has mad the fundamental mistake of not looking at all the consequences (costs and benefits) of privatization. When you do this you will understand why it is best to privatise businesses like the electricity industry and release the capital for other purposes when government can do it better (in Australia), such as health, hospitals, education, roads and public transport infrastructure, law and order, etc.

Two principles which are usually true are: (1) commercial activity is more cost effectively and efficiently administered by the private sector (2) Private sector investment seeks the best available return on capital at lowest risk while the vendor seeks the best possible return on asset.

Private sector in long established public assets usually produces better management, more efficient use of labor, reduction in size of and increased productivity of the labor force. Result – redundancy and possibly rising unemployment.

Obtaining best possible yield from investment in a natural monopoly is obtained by paying the lowest price possible and thereafter being able to sustain an acceptable rate of return by increasing future charges levied by the monopoly. The latter does not necessarily involve increasing cost of electricity delivered but can be achieved by increasing “supplementary” charges and introducing new ones. Result – Cost to consumers increases at least at a rate which maintains or grows real return investment.

Sale of a natural monopoly is always questionable, particularly when its management, operating efficient and yield can always be improved by retaining public ownership but installing hard-nosed private sector management who’s remuneration is linked to achievement of commercial benchmarks. That is more likely to leave both consumers and government better-off.

Lego,

I think you are confusing two issues: capitalism vs socialism on the one hand; and monopolies vs competitive markets on the other.

I do not dispute your claims of feather bedding in the government owned monopoly. And that featherbedding leads to inefficiencies and in turn higher retail prices.

I am disputing your implication that (a) featherbedding does not occur in private monopolies and (b) that even if featherbedding does not exist in private monopolies, that the savings (or efficiencies) gained by the new owners would be passed on to consumers.

This does not happen.

It is not in the monopolist’s interest to do so.

The regulatory system in place rewards owners with a return on assets.

You say “I [meaning Lego] know all about ENRON and what went on with that privately owned energy company in the USA. But the reform of the state owned Electricity industry is way past it's due”.

I agree. Reform is needed. A good deal of reform. But nowhere have I ever read that the best interest of the taxpayer is when “reform”= private monopoly.

I would argue that creating competition in a market where there is none is the best reform under the sun.

As to you statement that I am a “socialist”, that’s a new one for me. But thank you. I have been called “Tory”, “libertarian”, “anti-Labor” and some names that are not fit for a family friendly publication like OLO. Now apparently I am “socialist”.

Seems I am offending everyone equally.

Agmnostic of Wollongong,

>" particularly when its management, operating efficient and yield can always be improved by retaining public ownership but installing hard-nosed private sector management who’s remuneration is linked to achievement of commercial benchmarks."

But that is an enormous IF and it snot what happens in the real world over the long term. For example, governments appoint people to head the organisation that lean their way. Socialist leaning governments get into power and use the government owned organisation as a means to embed their ideological beliefs in the community. It's always been this way. Examples are the mass of climate change and carbon restrain programs the organisations were required to implement. And political correctness, no matter whether it is best for the economy Ii.e e best for everyone in the long term) or not. These are just a few examples. But really, government owned businesses like electricity, are no in the best interests of the community over the long term - at least not any more A century ago, the public sector could manage these business better than the private sector, just as they could telecommunications, mail, etc, But that's no the case now.