All posts by Megan French

Get used to high electricity prices

High electricity prices are here to stay, according to a new Grattan Institute report that calls on politicians to tell Australians the truth about the future of energy costs.

Mostly working: Australia’s wholesale electricity market finds that wholesale electricity prices rose across the National Electricity Market (NEM) by 130 per cent between 2015 and 2017.

The price paid for electricity traded in the NEM also more than doubled, from about $8 billion to $18 billion, and household bills increased by up to 20 per cent in 2017 alone.

But it is impossible for governments to fix the problem, because most of the price rises have been caused by issues beyond their control.

The report identifies three underlying causes. First, big, old, low-cost, coal-fired power stations closed (Northern in South Australia in 2016 and Hazelwood in Victoria in 2017). Although they were low-cost to operate, they faced big maintenance bills that weren’t worth paying given low market prices as a result of historic oversupply. Their closure reduced supply and so pushing prices up. This accounts for about 60 per cent, or $6 billion, of the increase in the value of electricity traded annually in the NEM between 2015 and 2017.

Second, the price of key inputs, especially gas and black coal, rose just when the plants they fuel were needed more often, pushing prices up still further. This accounts for nearly 40 per cent of the increase. In both cases, the market responded efficiently and appropriately to the changing circumstances.

The third cause is that major electricity generators ‘game’ the system: they use their power in concentrated markets to create artificial scarcity of supply and so force prices up. Gaming has mainly occurred in Queensland and South Australia, but there are signs of it in Victoria since the closure of Hazelwood, and it could emerge in NSW as supply tightens with the scheduled closure of the Liddell coal-fired power station in 2022.

Gaming has been part of the market for years and appears to be permitted by the current market rules. But it may add as much as $800 million to the price paid for electricity traded in the NEM in some years, and the report calls for changes to the rules to eliminate or at least limit gaming.

Grattan Institute Energy Program Director Tony Wood said the report was not good news for households or businesses banking on lower electricity prices.

“Wholesale prices are very unlikely to return to previous levels of around $50 per megawatt hour,” he said.

“Historic over-supply is disappearing, gas prices will stay higher than they were in the past, and new generators using any technology – including coal – cost more.

“Politicians should tell Australians the harsh truth: high wholesale electricity prices are the new normal.”

Read the report

For further enquiries: Tony Wood, Energy Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

How to reduce university drop-out rates

More than 50,000 students who started university in Australia this year will drop out, according to a new Grattan Institute report.

Dropping out: the benefits and costs of trying university shows that not every incomplete degree amounts to a waste of time and money. A Grattan Institute online survey of students who dropped out reveals many found their course interesting, learned useful skills and made new friends. More than 40 per cent said they would enrol again if they had their time over.

But the report also identifies the costs of dropping out. On average, students pay $12,000 for their incomplete course. They miss out on the additional lifetime earnings that university graduates typically receive. The time they spent at university could have been used working or studying at TAFE. And the online survey shows that most people who drop out feel they have let themselves or others down.

The report pinpoints factors that increase the risk of dropping out. It shows that people who study part-time are much more likely to drop out than full-time students. People who enrol in three or four subjects a year – half as many as a full-time student – have only about a 50 per cent chance of completing their course in eight years. Students who enrol full-time have about an 80 per cent chance.

School results are important. Students with ATARs below 60 are twice as likely to drop out of university as otherwise similar students with ATARs above 90.

Students in health courses are more likely to complete their course than students in IT or engineering courses. And people who study off-campus have a slightly higher risk of dropping out.

The report calls on governments and universities to do more to alert prospective students to their risk factors. People planning to study part-time should be particularly warned. Universities should check that prospective part-timers have a credible plan to complete their course.

Once they accept students, universities have a responsibility to help them succeed – or, if things are not working out, universities should help students exit at least possible cost.

In the lead-up to the university ‘census date’ – the deadline for students to dis-enrol before they pay for their subjects – universities could send students a text message alert. And universities should do more to follow up on students who are not engaged with their studies, to get them back on track or encourage them to leave before they accrue a HELP debt.

“Too many students drop out of Australia’s universities. Fewer would if we helped them to make better decisions,” says Grattan Institute Higher Education Program Director Andrew Norton.

“The aim is not to reduce the number of drop-outs to zero: Australia makes it easy to try university, and some students will always decide it is not for them.”

“But we can and should aim to reduce the number of young Australians who leave university with nothing but debt and regret.”

Read the report 

For further enquiries:
Andrew Norton, Higher Education Program Director
T. 03 8344 3637 E. media@grattan.edu.au

How to cut power bills and build a more sustainable electricity network

State governments have spent up to $20 billion more than was needed on the electricity grid, and households and businesses are paying for it through their power bills, according to a new Grattan Institute report.

Down to the wire: A sustainable electricity network for Australia shows that customers in NSW, Queensland and Tasmania are paying $100-to-$400 more each year than they should.

The report calls on those state governments to write down the value of the assets to reduce electricity bills, or give direct rebates to customers.

The cost of the National Electricity Market’s power grid rose from $50 billion in 2005 to $90 billion today. But up to $20 billion of that was not needed to cover growth in population, consumption, or even demand at peak times.

There have been some improvements in reliability of supply, but not enough to justify the spending.

The over-investment was overwhelmingly in NSW and Queensland. In 2005, the NSW and Queensland governments required their network businesses to build excessive back-up infrastructure to protect against even the most unlikely events. At the same time, growth in demand for electricity slowed, as appliances became more energy efficient and more households installed solar panels.

Unless state governments fix the mistakes of the past, consumers will continue to pay for assets that are neither used nor useful. And prices that are higher than they should be will lead to poor investment decisions in future.

In Queensland and Tasmania, where the businesses are still state-owned, the Government should write down the value of the assets. This would mean governments foregoing future revenue in favour of lower electricity bills.

In NSW, intervening to revalue the privatised businesses would create too many problems, so the Government should instead use the proceeds of the privatisations to fund a rebate to consumers.

To prevent the mistakes happening again, state governments should move to full privatisation, because the evidence shows that privatised electricity businesses deliver lower prices for consumers, without compromising reliability or safety.

And governments should change the way electricity is priced, so all consumers can see when demand is high. Network costs would fall if customers reduced their consumption at critical peak periods.

“Consumers are copping the bill for the past excessive spending on the electricity grid,” says Grattan Institute Energy Program Director Tony Wood.

“Governments should act now to give some of that money back to consumers, and to ensure we have a more sustainable and affordable electricity network.”

Read the report

For further enquiries: Tony Wood, Energy Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

How to rebuild trust in politics

Protest politics is on the rise in Australia, and the main cause is collapsing trust in politicians and the major parties, according to a new Grattan Institute report.

A crisis of trust says that if the major parties and politicians want to rebuild trust with voters, they will need to change the way they do politics: stop misusing their entitlements, strengthen political donations laws, tighten regulation of lobbyists, and slow the revolving door between political offices and lobbying positions.

They will need to stop over-promising and under-delivering, on everything from reducing power bills to making houses more affordable and developing regional Australia. And the major parties will need to increase the size of their ‘gene pool’, by preselecting candidates who have broader work experience than being political staffers or union officials.

The vote share for minor parties and independents has been rising for a decade. At the 2016 federal election it hit its highest level since the Second World War. More than one-in-four Australians voted for someone other than the ALP, the LNP or the Greens in the Senate. First-preference Senate votes for minor parties and ‘outsider’ candidates leapt from 12 per cent in 2004 to 26 per cent in 2016.

Voters in regional and remote areas are particularly disillusioned. The further from a capital city GPO, the higher the minor party vote and the faster it has risen.

The report identifies voter disillusionment with the political establishment as the major cause of the rise in protest politics; it’s an ‘anyone but them’ vote.

Voters for ‘outsider’ politicians such as Pauline Hanson, Jacqui Lambie, Derryn Hinch and Nick Xenophon have much lower trust in government than those who vote for the majors. Australians increasingly believe politicians look after themselves and government is run by a few big interests rather than in the public interest. More than 70 per cent of Australians think our system of government needs reform. Voters are choosing parties and candidates that promise to ‘drain the swamp’.

Economic factors are less important. The rise in the minor party vote doesn’t seem to be about stagnant wages or rising inequality: the vote grew most strongly when real wages were rising and inequality wasn’t. And the biggest increase in the minor party vote was between 2010 and 2013 – a period when Australians were particularly optimistic about their immediate financial future.

But the loss of economic and cultural power in the regions looms large in regional voters’ dissatisfaction. Regions hold a falling share of Australia’s population, and consequently of the nation’s economy. Australia’s cultural symbols are becoming more city-centric – from mateship to multiculturalism, The Man from Snowy River to MasterChef. Regional voters increasing fear they are being ‘left behind’ and that ‘the Australian way of life is under threat’. The rhetoric and policies of some minor parties tap into these concerns and values.

Grattan Institute CEO John Daley says: “Our leaders need to heed the warning signs and focus on what matters to voters: restoring trust and social cohesion.”

Report co-author and Grattan Institute Program Director Danielle Wood says: “Politicians need to take a leadership role, by stressing the common ground between city and country and between communities with different backgrounds.”

Read the report

For further enquiries: Danielle Wood, Budget Policy and Institutional Reform Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

If Australians want cheaper housing, we have to build more of it

Building an extra 50,000 homes a year for a decade could leave Australian house prices
5 to 20 per cent lower than they would be otherwise, and stem rising public anxiety about housing affordability, according to a new Grattan Institute report, Housing affordability: re-imagining the Australian dream.

Within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home with good access to jobs. But home ownership rates are falling among all Australians younger than 65, especially those with lower incomes.

Owning a home increasingly depends on who your parents are, a big change from 35 years ago when home ownership rates were high for all levels of income. Those on low incomes – increasingly renters – are spending more of their income on housing.

Affordability will only get a lot better if governments ensure more homes are built. State governments should fix planning rules to allow more homes to be built in inner and middle-ring suburbs of our largest cities. More small-scale urban infill projects should be allowed without council planning approval. State governments should also allow denser development ‘as of right’ along key transport corridors.

Development in middle suburbs has increased in recent years, especially in Sydney. But today’s record level of housing construction is the bare minimum needed to meet record levels of population growth driven by rapid migration. Meanwhile a decade of accumulated shortages are forcing younger people to set up their own homes later in life.

The Commonwealth government can improve housing affordability somewhat – and immediately – by reducing demand. It should reduce the capital gains tax discount to 25 per cent; abolish negative gearing; and include owner-occupied housing in the Age Pension assets test. And unless the states are prepared to reform their planning systems, the Commonwealth should consider tapping the brakes on Australia’s migrant intake.

“It took neglectful governments two decades to create the current housing affordability mess. They preferred the easy choices that merely appear to address the problem,” says Grattan CEO John Daley.

“The politics of reform are fraught because most voters own a home or an investment property, and mistrust any change that might dent the price of their assets. But if governments keep pretending there are easy answers, housing affordability will just get worse. Older people will not be able to downsize in the suburb where they live, and our children won’t be able to buy their own home.”

Read the report

For further enquiries: John Daley, CEO
T. +61 (0)3 8344 3637 E. media@grattan.edu.au

Smarter money: a better way for Australia to select big transport projects

Australia should revamp the way it selects major transport projects, so that governments can better know which new roads and railways are worth building and avoid squandering billions of dollars of public money on the wrong projects, according to a new Grattan Institute report.

Unfreezing discount rates: transport infrastructure for tomorrow shows that the ‘discount rate’ Australian governments have applied to assess the value of proposed projects has been stuck at 7 per cent since at least 1989, despite the price of money having fallen from about 8 to 1 per cent since then.

The discount rate is a tool that puts present and future costs and benefits onto a comparable footing: it expresses how much we value the costs and benefits of a major project for young people and future generations relative to the costs and benefits for citizens today.

The report calls for the 7 per cent standard rate to be abandoned in favour of two lower rates: 3.5 per cent for low-risk transport projects (typically trains, buses and urban roads), and 5 per cent for slightly higher-risk investments (such as ferries and freight rail).

This new discount rate regime would cast fresh light on the value of some of Australia’s biggest transport projects. Under the present 7 per cent rate, the benefits of the $10 billion Melbourne Metro rail project and the Commonwealth Government’s $10 billion Inland Rail Freight project are both assessed to be only marginally higher than the costs, with Metro Rail ranked slightly better.

But under a lower discount rate, both projects would be assessed to deliver benefits about two-and-a-half times higher than the costs, and Inland Rail Freight could be ranked even higher.

“Interest rates have fallen dramatically since the 1980s, and it makes no sense that discount rates in Australia have been stuck since then,” says Grattan Institute Transport Program Director Marion Terrill.

This report builds on two 2016 Grattan Institute reports that exposed the need for changes to the evaluation and selection of major projects in Australia. Cost overruns in transport projects found that governments spent $28 billion more on transport infrastructure between 2001 and 2015 than they told taxpayers they would. Roads to riches found that a big portion of the large sums governments allocated to transport projects between 2005 and 2015 was spent unwisely.

“With our cities growing rapidly, smart investment in infrastructure is vital,” says Marion Terrill. “We need to improve our project evaluation, so we build the right transport projects in the right order. Better discounting would be a big step in that direction.”

Read the report

For further enquiries:
Marion Terrill, Transport Program Director
T. 03 8344 3637 E. media@grattan.edu.au

 

A new research organisation for Australian school education

Australia should establish a national school education research organisation to investigate the most effective ways of teaching and spread the word across schools, states and sectors, according to a new Grattan Institute report.

The Commonwealth’s role in improving schools calls for a national debate on how to boost the performance of Australian students.

It says the new research body should be charged with lifting the standard of education research in Australia, creating a long-term research agenda for school education, and promoting key findings across the country.

It could link-up all research on education for people from birth through to age 18, so policy makers and the community better understand the continuum of learning, from early childhood to school and vocational education.

The Australian peak body could be modelled on successful overseas organisations such as the US Institute of Education Sciences. It should be independent of government but backed by the Commonwealth and the states.

The report says that the Commonwealth-commissioned review on ways to achieve excellence in Australian schools (known as the ‘Gonski 2.0 Review’) should focus on reforms like this where the Commonwealth can make a genuine contribution.

The danger is that the Gonski 2.0 Review is used as a platform for Commonwealth interventions into school education that sound good, but don’t actually help on the ground. Experience shows that well-meaning Commonwealth interventions into systems primarily run by the states and territories can end up just increasing red tape and destroying policy coherence.

The ‘Gonski 2.0’ funding deal struck last year will deliver an extra $23 billion in Commonwealth funds to schools over the next ten years. But it needs to be kept in perspective: the extra money will be only 3 per cent of all government spending on schools over the decade. The states and territories still overwhelmingly fund and run schools.

Key priorities for states and territories include supporting schools more so that teachers know what works in the classroom, and know how they can adapt their methods to better target their teaching to the needs of their students.

“Because it doesn’t manage schools or school systems, Commonwealth intervention in school management is likely to be counter-productive,” says Julie Sonnemann, the report’s co-author and Grattan’s School Education Fellow.

But the Commonwealth could help with a research body. “If Australia wants to achieve excellence in schools, we need more and better education research,” says Peter Goss, co-author and Grattan Institute School Education Program Director.

Read the report

Increase competition to give consumers a better deal

The widely held belief that powerful firms control the Australian economy is a myth, according to a new Grattan Institute report.

Competition in Australia: Too little of a good thing? shows that the market shares of large firms in concentrated sectors in Australia are not much higher than in other countries and that they have they not grown much lately.

But the report shows that where a few firms dominate markets, they earn higher profits.

Up to half the total profits in the supermarket sector (dominated by Coles and Woolworths) are ‘super-normal’ – that is, profits that exceed the cost of compensating shareholders.

In the banking sector (dominated by the Big Four), super-normal profits account for 17 percent of total profits.

Other companies and sectors with substantial super profits include Telstra, some major city airports, liquor retailers, internet service providers, sports betting agencies, and private health insurers.

“There’s nothing wrong with profits – they play an important and legitimate role in the economy and society,” says Grattan Institute Productivity Growth Program Director Jim Minifie.

“But where profits become super-profits because firms face little competition, they can come at the expense of customers or suppliers.

“There are no policy silver bullets here, but governments can do more to improve competition in the private economy.”

The report urges governments and regulators to do more to ensure customers get a good deal, especially in highly concentrated sectors where big firms have market power and potential competitors face high barriers to entry.

To intensify competition in banking, governments should free-up customers from the control of their current bank by making it easier for people to switch banks.

In the supermarket sector, where the big incumbents have expanded into liquor and petrol retailing, governments should consider relaxing zoning restrictions that limit the entry of new competitors.

Constraints on competition in retail pharmacy should finally be removed, as many reviews have suggested.

Regulators can put more pressure on electricity distributors, ports and airports, and on health insurers.

And governments need to make it less complex and confusing for people to compare and switch providers of retail energy, and superannuation.

Read the report

Further enquiries: Jim Minifie, Productivity Growth Program Director
T. 03 8344 3637 E. media@grattan.edu.au

How to improve school education in Australia

Australia’s school education system is not fit for purpose, and we need to rethink the way we teach students, support teachers and run schools, according to a new Grattan Institute discussion paper.

Towards an adaptive education system in Australia says that, despite individual bright spots, overall student performance is declining in international tests, and an unacceptably high number of our students are not ready for life after school.

Australian school education faces three major challenges: improving student learning in core academic areas; better preparing young people for adult life; and closing the gap between the nation’s educational have and have-nots.

The only way to tackle all these challenges at once is to make our education system more adaptive.

“At present, the system is spinning its wheels,” says Grattan Institute School Education Program Director Peter Goss.

“The status quo is not working. We have failed to create an education system that adapts and improves over time – a learning system that systematically learns.”

Student outcomes improve when teachers track how much their students are learning, identify the specific teaching practices that boost learning and those that don’t, and then adapt the way they teach.

However, this process should not be done independently in every classroom, and schools need more help from education systems to make good local decisions.

As a start, Australia should follow the lead of high-performing education systems such as Singapore and Hong Kong by making better use of our best teachers.

‘Master teachers’ should teach fewer classes and instead should spend more time teaching other teachers how to identify and practise the best ways to improve student performance.

And the system leaders – including education ministers and departments and the heads of the Catholic and independent sectors – need to ensure schools and teachers have good access to the evidence about what works best, and the time, tools, training and support to implement these best practices in the classroom.

“If we want to halt the decline and create a system of excellence that supports all students, we need a new approach to reform,” Dr Goss says.

Read the report

For further enquiries:
Pete Goss, School Education Program Director, Grattan Institute
T. 03 8344 3637 E. media@grattan.edu.au

How to make our hospitals safer

Australia needs to reform the way we collect and use information about patient safety, to reduce the risk of more scandals and tragedies in our hospitals, according to a new Grattan Institute report.

Strengthening safety statistics: How to make hospital safety data more useful shows that the health system is awash with data, but the information is poorly collated, not shared with patients, and often not given to the doctors and hospital managers responsible for keeping patients safe.

Hospitals boards are often blissfully ignorant of the level of safe care being provided in their own hospitals.

Co-author Stephen Duckett, who led an investigation for the Victorian Government after seven babies died potentially avoidable deaths at Bacchus Marsh Hospital in 2013 and 2014, says safety scandals in Australian hospitals are “depressingly frequent”.

“They stimulate special reports and an immediate flurry of action. But the tragedy is that these safety incidents occur despite reporting, governance and oversight measures that – if they were working properly – might have detected the aberrant clinical care.”

Strengthening safety statistics shows there is no public reporting of safety data about private hospitals in Australia, and that private hospitals are left outside state government monitoring of hospital safety.

Australia has dozens of collections of detailed data about particular diseases or treatments – for example the Australian Genetic Heart Disease Registry, the Australian Bleeding Disorders Registry, and the National Joint Replacement Registry – but they operate independently. This means important information about an individual patient with multiple conditions – for example someone with a knee problem and heart disease – is kept in separate data sources.

To ensure hospital safety data is more useful, it must be more trustworthy, relevant and accessible. The many different data sets should be linked, and the information should be presented more clearly so doctors can act on it and patients can understand it.

The report calls for more and better safety data to be collected. And it says it is “unethical” not to better use all the data already available to improve patient care.

Some registries act like “secret squirrels” – they know about safety problems but won’t share the information with any body other that the person or clinical unit that contributed the data. Hospitals managers – and patients – remain in the dark.

“Clinicians and managers need to set high standards for what is acceptable in hospitals, and they need to have access to all relevant safety data so they can meet those standards,” Professor Duckett says.

Read the report

Further enquiries: Stephen Duckett, Health Program Director
T. 03 8344 3637 E. media@grattan.edu.au