Why Rudd must reform energy markets
by Tony Wood
Published at The Conversation, Friday 12 July 2013
Prime Minister Kevin Rudd ducked the question of changes to carbon pricing in his National Press Club address yesterday. But he put energy market reform at the top of his “New National Competitiveness Agenda”.
Rudd’s plans rest on effective agreement with the business community, the unions, and state and territory governments. The gauntlet has been thrown down. Will it be picked up?
The Prime Minister identified electricity prices as a major concern for business and for voters. His view is that the way electricity networks are regulated is producing unacceptably high rates of return for distribution businesses. This aligns closely with a key conclusion of Grattan Institute’s 2012 report, “Putting the customer back in front: how to make electricity prices cheaper”.
Our analysis concluded that regulatory bias in favour of these businesses – including permission to make unnecessary investments and borrow at an unduly low cost – has helped them make higher profits than are justified by the actual risk. These profits could be used to reduce consumer prices.
Productivity is relatively worse in government-run electricity distribution, but both in these and in private businesses profits are too high. Fixing this problem and three others we identified in the report could save businesses and homes A$2.2 billion a year.
As a matter of urgency, governments must overhaul the current regulatory arrangements and the governance structures that give consumers such a bad deal. They must move from an overwhelming attention on process to a focus on results.
In December 2012, Prime Minister Julia Gillard said that energy market reform could save Australian households A$250 a year. Since then, we have seen an increase in the powers and budget of the Australian Energy Regulator.
What we have not seen is anyone taking responsibility for achieving lower prices for consumers and lower profits for the regulated businesses. This is the challenge for the Prime Minister, Resources Minister Gary Gray and the energy ministers of the states and territories.
The Prime Minister also identified gas market reform as a priority, but was not clear what that might mean. Grattan Institute’s June 2013 report, “Getting gas right: Australia’s energy challenge”, recommends that governments should create a more transparent gas market.
This includes trading hubs and a forward gas price index, and removing barriers to supply by freeing up the trading of pipeline capacity. The task is to ensure the gas market delivers the best result for all Australians, to capitalise on our extensive gas resources.
The global gas revolution – especially rising demand in Asia – is projected to place Australia at the top of the global gas export market, producing more than A$50 billion in annual export earnings by 2017.
But the domestic price of gas is rising to meet the price gas producers can obtain by exporting. The local market is struggling to ensure a transition not too painful for houses and businesses.
To keep prices low, and resolve the impasse over coal seam gas development in New South Wales, will require leaders to resist increasing calls for protectionism by some businesses. Reserving a proportion of gas production for local use, or other forms of protection, merely provides an unfair taxpayer subsidy to some businesses, keeps them inefficient, and in the long run does not keep prices low anyway.
Energy reform may not be the world’s most riveting subject, but it must be part of the Prime Minister’s National Competitiveness Agenda. It will make it easier for the Prime Minister to persuade the public of more reform if and when he returns to the increasingly urgent problem of climate change.