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'Big stick' shifts power balance in favour of consumers

September 2019

Published in The Australian

This week the government is reintroducing electricity competition reforms to the parliament, widely known as the "big stick" legislation. We took this policy to the election and, in combination with other reforms, it is squarely focused on driving down the costs of electricity for all consumers — households, small business and industry.

Wholesale and retail electricity prices have been too high. One important reason is that markets have become less competitive.

The resulting behaviour, according to the Australian Competition & Consumer Commission, has been “unacceptable and unsustainable”, at the expense of middle Australia. All of this as some industry participants were boasting about the “virtue” of their environmental strategies.

Three players hold at least 60 per cent of generation and retail in almost every market. Generators increasingly are integrated with retailers to form “gentailers”, deterring new entries.

The loss of big baseload generators has made this worse. These generators are exiting the market in response to record investment in intermittent wind and solar, driving prices low or even negative when the wind blows and the sun shines. But as inflexible baseload generators exit the market, lack of competition is causing price spikes when the sun goes down.

Worse, this withdrawal of baseload generators has driven bidding behaviour that is increasing prices. The exit of the Hazelwood coal-fired generator from the Victorian market and the Northern gas-fired generator from South Australia had profound market impacts, far worse than the experts told us. The mere announcement of the Hazelwood exit in Victoria led to a doubling of wholesale ­prices and worse.

Part of the answer is to keep ageing gas and coal-fired generators in the market unless there is genuine like-for-like replacement. That’s why we have established the Retailer Reliability Obligation, which requires retailers to commit to the capacity needed to meet customers’ needs at least three years ahead of time. It’s also why we’ve established the Liddell taskforce to consider options to deal with AGL’s planned closure of that power station and ensure that we don’t see a repeat of the Hazelwood disaster in NSW.

We need to encourage more reliable supply into the market. That’s why we are underwriting new reliable supply into the market, with 12 shortlisted projects under the microscope (including gas, coal and hydro). Meanwhile we are investing in Snowy 2.0 and the development of the Marinus Link, the second Bass Strait interconnector needed to turn Tasmania’s “battery of the nation” vision into reality.

The government also is phasing out the subsidies that have been forcing renewables into the market at breakneck pace. The subsidies have caused substantial market distortion and a throng of noisy rent-seekers, who demand more subsidies while telling us their technologies can beat the economics of fossil fuels. For this reason, the renewable energy target (which is about to be reached years ahead of schedule) will not be replaced as its impact falls away in the next two years or so. We’re calling on states to do the same.

In a market where competition is weak, we need to prevent abuse of market power. The default market offer and reference price are designed to empower customers. Customers are always the best regulators, if they have the ability and information to act. Already, we are seeing good outcomes.

Preventing abuse of market power also means strengthening our competition laws, which have not always been fit for purpose in dealing with the most egregious cases of poor market behaviour in electricity. The legislation focuses on three areas.

The first is deliberate manipulation of the wholesale market, which most likely would result from withdrawal of supply or raising prices in the market. We saw sharp increases after the withdrawal of Hazelwood, and this can’t be repeated.

The second is withholding supply from contract markets to substantially lessen competition. In South Australia, for instance, the lack of competition has meant there is little contracting to independent players, creating strong barriers for new competitors to enter an otherwise attractive high-priced market.

And the third is retail price gouging, preventing retailers from pocketing falling costs. After all, this is a market where retail margins have more than doubled across a decade.

The legislation will provide for graduated remedies, extending from notices to penalties and, in the worst cases of wholesale market manipulation, to divestment. Divestment is available only for wholesale market manipulation and only with a court order after a recommendation from the ACCC. The ACCC, the Treasurer and the court must all be satisfied divestment delivers a net benefit.

The legislation is restricted to the electricity market and prevents forced privatisation of state-owned assets. The legislation sunsets at the end of 2025. The aim is to ensure the remedies are in place for six years as the market finds a more competitive footing.

It’s no secret that some in the business community oppose the legislation. With much of my career spent working in business, I understand the suspicion of government intervention.

But this is an essential service, purchased by almost all households and businesses. Increasingly, business leaders are capit­ulating to shrill cries from political fringe-dwellers, such as those who want to rapidly shut all coal-fired power stations. Meanwhile, the interests of the quiet Australians are lost in the noise.

The government’s hope is that we are already moving beyond the sharp practices of the past. New competition and supply should emerge as we remove the shocking market distortions of the past. That way the big stick can stay in the bag, then disappear in 2025.

In the meantime, we will work closely with like-minded industry participants to deliver the outcomes the hardworking quiet Australians deserve.