by Tony Wood

Published by the Australian Financial Review, Sunday 1 July

Australian households and businesses are waiting with intense frustration for governments to fix the problem of high energy prices. But they will not easily forgive the same governments for more blackouts, or for failing to confront the challenge of climate change. Herein lies the trilemma for governments and the reason for the intense policy debate on the National Energy Guarantee (NEG).

For more than 20 years, governments have espoused a commitment to the primacy of markets to deliver a better result for consumers than a nationalised, regulated system. For most of this time, the National Electricity Market (NEM) delivered reliable, low-cost electricity. What was not well understood was that part of this success arose from an over-supplied generation sector fuelled by low-cost coal and gas. As aging legacy assets such as Hazelwood power station closed, and as fuel prices, mainly gas, rose, the market responded as efficient markets will – prices rose, sharply.

The annual value of electricity traded in the wholesale spot market rose from about $8 billion in 2015 to $18 billion in 2017, 60 per cent of this rise due to supply reductions and 40 per cent to higher input costs. There has been some modest cost relief in recent months.

Markets are good servants but poor masters. Faced with rising prices, politicians from both sides of the fence forget that the market is there to work for us, not the reverse. Labor’s inherent suspicion of privatisation and markets drives calls for strong intervention; more surprising, the right of the Coalition also turns to intervention such as capping prices and various forms of renationalisation. Both responses are understandable but misguided.