For years now I have puzzled at the whole mess of our energy policy. People keep telling us that soon (or now) solar-panelled electricity, or wind, or something, will be cheaper than coal, so we should be transferring, at once. Such oracles never tell us about the hidden subsidies that would make this really true, if it were apparently true. I’ve given up responding. It is plain to me that wind and solar cannot power an electricity grid without abundant base-level fossil-fuel energy. Well, along comes Gary Banks to tell it as it is.
For those who don’t know of him, Gary Banks is a thinker and economist who was the first Chairman of the Productivity Commission (1998-2013) and then the Dean of the Australian and New Zealand School of Government (until January this year). He is someone whom I know slightly, but I read whatever he writes with great interest. I may not agree with everything, but it always clear and accessible. The other day he gave the annual Infrastructure ‘Oration’, which I thought so good I sent the link to friends (most of whom had already seen it). You can read the whole Oration here. I have picked out those sections I really ‘resonated to’, as we now seem to say, which focus on what is being called our ‘energy crisis’, and the emphases in bold are mine, not his. Much of what follows was continuous, or almost.
‘There is no shortage of issues of relevance to infrastructure about which one could “orate” in these interesting times. My intention until a few weeks ago had been to focus mainly on the economic side – infrastructure’s important contribution through productivity growth to raising the living standards of all Australians. I was going to remind you of the gains from the structural reforms of the 1980s and 90s, and what it took to get them. And I’d intended to then revisit the ‘to do list’ I compiled in 2012, at the end of my tenure at the Productivity Commission, to see how it was faring five years on.
As some of you may recall, that ‘list’ was prompted by a remark by Glenn Stevens [Governor of the Reserve Bank], who, when asked at a ‘summit’ in Brisbane what could government do to raise Australia’s productivity, replied, “well the Productivity Commission has a long list of things to do. … Go get the list and do them!”…
The list turned out to be quite long. The infrastructure section included recommendations for better decision-making processes, governance arrangements, pricing and regulation; along with other specific reform proposals for transport, communications, water and energy – all evidence based and stress tested under the Commission’s public inquiry processes. Their common message to governments could be summarised most simply as a need for better spending, regulation and management of infrastructure services, with greater reliance on market incentives. It quickly became clear in revisiting my 2012 ‘to do list’ in recent weeks that its relevance had not diminished – on the contrary!
For example, in a 2014 report, the Productivity Commission identified a (still) ‘urgent need’ to overhaul processes for assessing and developing public infrastructure and to reform its governance, including further privatisation of assets where this had already proven beneficial and improving regulatory frameworks. In its 2016 Plan, Infrastructure Australia called for better planning and coordination, investments based on evidence-based priorities, along with better management of existing assets, including through private ownership and cost-reflective pricing of services to users…
As a number of reports have shown, policy issues of relevance to infrastructure extend well beyond ‘infrastructure policy’ per se. Other sections of the ‘to do list’ that if addressed would enhance the performance of economic and social infrastructure, include reforms to achieve more flexible labour market arrangements, a less distorting and punitive taxation system, and more efficient regulation in key areas such as planning/zoning and the environment. Within the last category, the Mandatory Renewable Energy Target received special mention…
While developing remarks along these lines, my train of thought was repeatedly diverted by the unfolding energy ‘crisis’. Even by today’s standards, the misleading, disingenuous and partisan nature of the energy policy ‘debate’ seemed to have plumbed new depths. So be it, I thought, it’s no longer my job to call out such things. But then a state premier went and made the following observation:
“We’ve got market failure. We know there is an investment strike. The private sector just isn’t building power generation.”
I must confess that this took the wind out of my sails – if you’ll pardon the analogy. The electorate was being told by a political leader that the problems they were experiencing – high prices, failing supply and costly emergency measures – had nothing to do with the government. It was the fault of the private sector and its perverse refusal to invest in power generation. Abraham Lincoln’s warning that governments can’t fool all of the people all of the time is once again being tested. The inconvenient truth is that the increasingly high prices for increasingly unreliable electricity are a direct consequence of the increasingly high utilization of renewable energy required by government regulation.
Energy markets are admittedly complicated things. However the logic is unassailable that if a cheap and reliable product is penalised, while expensive and less reliable substitutes are subsidized, the latter will inevitably displace the former. No amount of sophistry, wishful thinking or political denial can change that basic economic reality.
Changing the mix of energy use away from low-cost but emissions-heavy fossil fuels has of course been the whole point. While Australia’s own actions can have no discernible impact on global carbon emissions, let alone on Australia’s climate, there is broad support for the idea that playing our part is a precondition for a joint international endeavour that could. This requires a leap of faith, but it is a legitimate policy objective, even if a particularly costly one for this country given its resource endowments.
The resulting costs and difficulties have been greatly compounded, however, by governments choosing a policy path that is essentially anti-market, one violating basic principles of demand and supply. The energy crisis is self-evidently not the result of market failure but of government failure…
The actions of private investors are not hard to understand. They will generally not invest in a project unless the returns are likely to be sufficient to cover the costs and provide an adequate return on their capital — given the risks involved and the alternatives on offer. Following regulatory interventions, returns from fossil fuel generators have gone down, while the risks of investing in them have gone up. I suppose the consequent reluctance to invest could be called a ‘strike’, if one needed an emotive term, but it is really just a rational response to the forces at work.
Unlike government enterprises, private companies cannot be relied upon to provide cover for a government’s policy mistakes. In that light, the SA Treasurer’s lament that privatising ETSA was “the worst policy blunder in the history of South Australia” may have not only been a big call, but more revealing than intended. Not to be outdone, the new Secretary of the Australian Council of Trade Unions has triumphantly declared that “experiments in privatisation have failed!”.
In blaming the private sector for Australia’s energy problems (and I note the new ACCC inquiry into alleged misdemeanours by electricity retailers) there is a real risk that the policy mistakes that led to it will be compounded by further policy mistakes, rather than leading to corrective actions that acknowledge regulatory error. We seem destined to end up in a third or fourth best world, as economists express it, when the first or second best were well within reach.
Thus we observe at the Federal level the threat of regulatory intervention to withhold gas exports for domestic use – while at the same time state and territory governments ban or curtail exploration and production. We even see governments re-entering the energy business. South Australia is to spend a lazy half billion on a new gas generation plant. The Commonwealth is contemplating investing in clean coal generation using its $5 billion northern infrastructure fund, the Minister responsible declaring “the only people who can get rid of sovereign risks are the sovereigns!”. And while finance has never been scarce for viable energy projects in the past, the government is now planning to fill the gap caused by regulation through the previously derided Clean Energy Finance Corporation. Moreover it is proposing to establish a more general infrastructure financing vehicle within the Prime Minister’s own department (which a recent IPA submission depicts as “solving the infrastructure problem we don’t have and ignoring the one we do”).
Then there was the dramatic announcement of a “nation building”expansion of the tri-governmental Snowy Scheme that had been rejected as uneconomic in the 1980s. Whether or not this Utopia-like initiative can be justified on today’s numbers, it seems clear that any thought of privatising such a politically attractive asset has become a thing of the past. Following the WA election, Western Power must also take its place on the privatisation ‘no go’ list.
To add to the irony, we are seeing a new wave of interventions to help the very firms which emission reduction policies were intended to drive out of business. The Portland aluminium smelter, perhaps the most intensive user of electricity in the country – an operation requiring heavily subsidized power even when it was cheap – has received substantial additional taxpayer support to help forestall the inevitable. And, following belated recognition of the implications of the closure of the Hazelwood power station, there was considerable pressure on the Federal Government to deploy taxpayers’ funds to keep it open. While this did not eventuate, it would be surprising if the country’s other base-load generators did not have claims for assistance bolstered as a result, especially given the precedent in Europe.
The intervention spawned by the failure of energy/carbon policy accordingly looks to become a self-perpetuating process. It is disturbingly reminiscent of the conventional industry protection dynamic of times past, in which assistance to import-competing firms imposed costs on downstream users and exporters, who in turn demanded (and often received) assistance of their own. In the end it became apparent, even to supposed beneficiaries of the system, that “protection all round” was a chimera, responsible instead for a decline in industry performance and in the living standards of Australians.
More disturbing still is the fact that such interventions have not been confined to energy markets, with bad old policy habits re-emerging more widely. The headline act in this respect would have to be the NBN, which continues to affirm the wisdom of doing the numbers before announcing the policy. Then there is the saga of our home-made submarines, built with home made steel, which seem set to rival the Collins Class fiasco, but at even higher cost – especially given the grim energy outlook in the favoured state. Coastal shipping and its heavily unionised workforce continue to benefit from the renewal of anti-competitive regulation at the cost of farmers and miners. And we have just had the re-regulation of Queensland’s sugar industry. Meanwhile, on the trade front the anti-dumping regime has been made even more protectionist (in a rare instance of bipartisan agreement), and future reductions in our trade barriers have become contingent on reciprocal offerings by foreign governments, rather than for the domestic gains on offer.’
This is much less than half of it. The rest is just as good. Maybe someone important will pay attention to it.