Why a 'big stick' is the only way to tame power prices
Published in Financial Review
Calls for business and investors to focus on stakeholders beyond shareholders aren't new. Most business people understand the need to deliver for customers, suppliers, employees and communities, even if shareholders come first. But shrill demands from aggressive activists on social media and elsewhere are relatively new, and many business leaders are understandably rattled.
The energy sector, in particular, now has a choice. Should CEOs capitulate to the demands from the green left to prematurely close down coal and gas generators, without regard for customers? Or should they focus more on those quiet Australians in the suburbs and regions, the small businesses they run and the industries they work for?
The government believes the energy sector needs to focus on middle Australia, with clear implications. We can't afford premature closure of baseload generators to satisfy the activists. Abuse of market power isn't on, despite the temptation in thin, uncompetitive markets. And sharp practices won't be accepted, despite the disengagement of many energy customers.
I see increasing evidence that the energy sector is taking responsibility and focusing on customers. But there is some way to go and the lack of trust is still real. As trust rebuilds, the government and regulators must be willing and able to act against poor conduct.
This week, the government is reintroducing its electricity competition reform legislation to the parliament, widely known as the 'big stick' legislation. We took this policy to the recent election, after introducing an earlier version of the legislation to the last parliament.
Wholesale and retail electricity prices have been too high. One important reason is that markets have become less competitive. According to the Australian Competition and Consumer Commission, the resulting behaviour has been "unacceptable and unsustainable".
In particular, three players hold at least 60 per cent market share (and often much more) of nearly every generation and retail market. Generators have increasingly integrated with retailers to form 'gentailers', deterring market entry from new competitors. The loss of big baseload coal and gas generators is not helping, as aggressive renewable targets and subsidies crowd out dispatchable capacity.
Retailer Reliability Obligation
In this context, it is important for the market to signal the need for retention and investment in dispatchable generation (mostly coal, gas and hydro). That's why we have established the Retailer Reliability Obligation, requiring retailers to commit to the capacity necessary to meet customers' needs at least three years ahead of time.
We recognise the need to phase out the subsidies that have been forcing renewables into the market at by far the fastest pace in the developed world. The federal government won't replace the federal renewable energy target as it ramps down in the near term (this was always the intention behind the Renewable Energy Target), and we're calling on states to do the same. After all, renewable project proponents claim they can beat the economics of alternatives so there is no need for new subsidies.
But we also need to strengthen our competition laws, which have not always been fit for purpose in dealing with the most egregious cases of poor market behaviour in the electricity market.
The legislation focuses on three areas.
The first is deliberate manipulation of the wholesale market, which would most likely result from withdrawal of supply or hiking bids into the market. We saw very sharp increases on the announcement of the Hazelwood closure even before any change in supply, 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, in a market where retail margins have more than doubled over a decade.
The legislation will provide for graduated remedies including notices, penalties, contract orders and divestment, the last of these only in the worst cases of wholesale market manipulation and only after a court order based on a recommendation from the ACCC. The ACCC, Treasurer Josh Frydenberg and the court must all be satisfied divestment delivers a net benefit, and is proportionate.
The legislation is restricted to the electricity market, prevents forced privatisation and sunsets in 2025. The aim here is to provide short-term remedies as the market moves back to a more competitive footing in the coming years.
We understand business's suspicion of government intervention. In my 20-year career in business, I shared that suspicion. But trust must be rebuilt with middle Australia and this legislation has an important targeted and temporary role.
Some have argued that this will hurt investment. In recent years, we have seen record levels of investment in generation despite claims to the contrary. Moreover, court-ordered divestment has existed in the United Kingdom and the US for many years, and we don't hear of companies withholding investment as a result. Our challenge now is to make sure future investment is balanced, and translates to reliable, affordable electricity.
We expect new competition and supply to emerge in the coming years, as past market distortions are addressed and eliminated. That way, it won't be necessary to use this legislation, and it can disappear in five years' time. In the meantime, we all need to focus on the needs of customers of this essential service, the quiet Australians and the businesses in which they work.