12
Jul
2018

The ACCC has produced vital ammunition to reform energy

by Tony Wood


Published by Australian Financial Review, Wednesday 11 July

On Wednesday, the ACCC released its highly anticipated report on electricity affordability. This report complements the Finkel blueprint that focused on reliability and security and the National Energy Guarantee (NEG) that integrates energy and climate policy.

The ACCC concludes that the National Electricity Market (NEM) has not worked for consumers and must be reset. It is unsparing in its criticism of the market participants, governments and the regulatory bodies. Its recommendations will leave none of them untouched.

Federal Minister for Energy Josh Frydenberg has committed to add this report to the agenda for the August meeting of the COAG Energy Council when Australia’s energy ministers are scheduled to make their endorsement decision on the NEG.

In the coming weeks the report will be scrutinised in depth. There are some recommendations that are uncontroversial and should proceed; others that may be resisted by the industry and governments; and some that will require chewing before swallowing.

First, recommendations to fix confusing and often misleading advertising to households and small businesses have been needed for several years and should be welcomed by the responsible retailers themselves. The introduction of a default market offer is in a similar vein and could be adopted by the Victorian government to take a lead, given its initiative with the Thwaites Review of retail competition in that state.

Cost-reflective network pricing has been an important but deferred idea for some time. The ACCC’s recommendation for transitional assistance to address bill shock for households and small businesses may provide the circuit breaker for an initiative that would lower network costs for everyone. Similarly, the proposal for the Australian government to assist Queensland, NSW and Tasmania to remedy past over-investment in network businesses may overcome resistance to an action that we have strongly advocated in a Grattan report.

The recommendation for immediate work on a mechanism for third parties to offer demand response directly into the wholesale market is long overdue.

In the second category, the Queensland government may reject the recommendation to decrease market concentration by dividing up its generation businesses and then ensuring they are separately owned and operated. Our own work on market concentration suggests that would be unfortunate since a structural change is better than a government owner pressuring its businesses to reduce their profits.

There are several recommendations that go to the heart of concerns about market concentration and manipulation. These include more power to the Australian Energy Regulator, greater disclosure of trading deals through a central repository and heavier fines for breaches of rebidding rules. Companies may see unfair criticism in these recommendations. However, they would be wise to work them through constructively as alternatives could have been far harsher.

Recommendations to abolish the small-scale solar subsidy and for state governments to pay for solar feed-in tariffs on budget, rather than through subsidies from all consumers, are sensible responses to poorly designed policies rather than a rejection of emissions reduction objectives.

Finally, the recommendation for the Australian government to underwrite low, fixed-price energy offtake agreements to enable project developers to finance generation supply for commercial and industrial customers is a striking intervention in the market. It has already attracted considerable comment. This proposal will probably need much more justification and detailed debate before it is supported.

The ACCC looked closely at vertical integration of generation and retail operations in the same business. It concluded that on balance the potential for the risk mitigation benefits of this structure to be pro-competitive could outweigh adverse impacts on market liquidity, and least for now.

Importantly, the report supports the NEG and looks to reset, rather than replace, the NEM.

There are 56 recommendations in the ACCC report and 50 in the Finkel blueprint, together with the detailed design of the NEG. With the best intent, there is a risk that the detail drowns out the important, a criticism of the COAG Energy Council previously made by the Vertigan review of governance arrangements in the electricity market.

It is incumbent on the COAG Energy Council to agree and implement a comprehensive plan covering the ACCC report, the Finkel blueprint and the NEG. It should prioritise those actions that are either big, uncontroversial and/or can be implemented quickly. And it must include clear milestones that measure progress against real outcomes.

The ACCC has delivered a precious gift to the Commonwealth government and the energy ministers of the states and territories – real substance on which to drive a new wave of energy market reform. It must not be wasted.