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Discussion paper

The costs of market experiments

Electricity consumers pay the price for competition, privatisation, corporatisation and marketization

18 Jan 2019

Australia’s Energy Security Board recently acknowledged that ‘the National Electricity Market is not in the best of health’. For consumers who have faced escalating power prices, and never-ending uncertainty about the security and sustainability of electricity supply, that statement surely ranks as a gross understatement. Continued lurches in energy and climate policy by the Commonwealth government ensure that this atmosphere of crisis will continue.

For the past generation, the electricity industry has been a key testing ground for neoliberal economic philosophy: namely, the idea that industries function most efficiently, and can best meet the needs of consumers, when the role of government is minimised, and key decisions regarding investment, technology, and pricing are left up to private, for-profit companies. Given the radical extent of the market-driven policy experiments which been applied in Australia’s electricity industry, one would think the sector would today be a paragon of efficiency, stability and consumer well-being. But in fact, the reverse has been true. Prices for electricity have soared faster than almost any other major consumer item. The core economic efficiency of electricity production and distribution has performed worse than any other industry since these market experiments began. And Australia has proven incapable of addressing the fundamental challenges of climate change and pollution control in this crucial sector, so carbon emissions from electricity generation continue to grow in defiance of our international commitments. In short, the electricity industry seems to provide a textbook study in how not to manage the economy.

Why do we face a seemingly endless state of crisis two decades after the neoliberal reforms that were supposed to ‘fix’ electricity? Political leaders fixate on specific villains and scapegoats – driven more by short-term political optics than real economic understanding. This includes blaming renewable energy sources for higher prices and supply disruptions (despite mounting evidence that renewables are now both cheaper and more reliable than conventional fossil fuel generation). Curiously, the rhetoric of the Commonwealth government, supposedly committed to the same market-based philosophy that guided electricity privatisation in the first place, has now taken on a populist, anti-corporate tone – with the Prime Minister himself blaming individual corporate executives for the mess, and threatening to intervene with a ‘big stick’ to force still more fragmentation and incoherence in the industry’s structure and direction.

This paper takes a deeper look at the core structure and operation of the electricity sector, and finds that the crisis cannot be ascribed to the actions of one or two villains.

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