Power Players Search For The Best Selling Point
Sydney Morning Herald
Tuesday January 1, 2002
Deregulation of the electricity market and rising prices present a challenge of priorities for the State Government, writes Brian Robins.
JANUARY 1 marks the start of full deregulation in electricity markets, with households for the first time able toshop around for the best deal on electricity prices.
As when the telephone market was opened to new players a few years ago, expect to be assaulted by heavy advertising campaigns over the next few weeks as newcomers seek to offer a bundle of gas, electricity and, in some cases, telecom services.
And just as with telecom services, rival groups will be offering the deal of a lifetime. Will it be cheaper? At this stage it is hard to say, although the easy gains from cutting power prices via deregulation have already been made.
Full retail contestability, as opening up the household sector to price competition is known, is the last step in the freeing-up of the power market which began in the early 1990s when large-lot power users were first able to shop around for cheaper power.
Initially, deregulation led to steep falls in wholesale electricity prices. But that has now changed, with wholesale prices rising during the past 18 months. That means the consumer or household end of the market is being freed at a time when there is really only one way for power prices to go: up, opening the way for a political backlash.
Queensland was the first to act. Worried over the political fall-out of higher power prices, it opted out of further deregulation a few months back. In mid-December, Victoria put price caps in place, limiting the extent to which higher wholesale power prices could be passed on, thus sowing the seeds for a California-like disaster in the power industry.
Full deregulation of the market comes as connection constraints continue to hobble generators, with only limited flows of electricity across borders, especially from NSW into South Australia and Queensland, so that a true ``national market" (minus Western Australia) is still some way off. These constraints are serving to hold up power prices in states such as Victoria and South Australia, when compared with NSW.
Only NSW and Victoria have made it across the line to exposing the household sector to competition, even though constraints are in place to limit the impact of full market prices on households in both states.
Opening the power sector is designed to allow proper pricing so that capacity is introduced as demand and prices warrant. A more open market will, it is hoped, avoid the massive overinvestment which occurred in NSW in the 1980s (and which is now under way in Queensland). Some of that capacity is still idle because of a lack of demand.
Government control of the power industry, as in NSW, typically leads to excess capacity, with lower prices in its wake, with the cost of that on the state's finances hidden from view. Putting the industry into private hands, as in Victoria, leads to inevitable pressures to keep prices higher to maximise returns.
Since the power sector introduced competition, most of the easy gains have been won, with the initial steep fall in prices now largely recouped. Wholesale prices are now back to about 80 per cent of their pre-deregulation level.
So while it is politically understandable for state governments to try to limit the prospect of further price rises on households, this will result in limited investment in new capacity, with the prospect of a disaster emerging, similar to that in California in 2000, where years of underinvestment triggered surging prices in the wake of power shortages.
The difficulties for the state governments are compounded by the extreme volatility of power prices in the wholesale market. In NSW, heavy losses by Pacific Power and Integral Energy have been hushed up, with the Government now moving to block all of its power generators and retailers from trading in the electricity market.
When Victoria privatised its power sector, it virtually extinguished all of its debt. Unable to follow suit, the Carr Government has enjoyed surging profitability of its power companies since deregulation. It is not widely recognised, but it has massively raided the hollow logs in the power sector over the past 12 months, stripping out more than $3 billion of funds, with plans to take out another $1 billion again this financial year. This is on top of the dividends of more than $425 million received from these state-owned companies over the past financial year alone.
Privatisation of the NSW power industry may be politically unpopular, but the State Government has reaped the benefits, in full, of its improving efficiencies of the past decade. How to manage a period of rising power prices is the political challenge of the coming few decades.
© 2002 Sydney Morning Herald