Here’s two odd examples being used in attempt to justify a claim of why privatisation will lead to higher spot prices

With the increased angst about all sorts of perverse outcomes (both real, and perceived in error) arising from this badly-managed energy transition increasingly bouncing back-and-forth in traditional/new media, we are trying to read as widely as possible.  On Saturday 30th September I read an opinion piece titled “Opinion – Privatisation of public assets can come at a cost – like higher power prices” by Paul Syvret in the Courier Mail – which surprised me in a number of ways, including:

1)  That it was published in a News Corp publication (whereas it would have been more expected had it been published by the ETU, as I’ve already written about here); and

2)  That it was written by Paul Syvret, who has seemed to have been one of the more considered journalists I’ve read in the Courier Mail.

Paul’s main claim is that on many occasions privatisation is, on balance, the better option – but that …  “when it comes to state-owned assets that provide essential public services or are a natural monopoly or near-monopoly, the magic achieved by Adam Smith’s “invisible hand” is less compelling.”

(A)  Paul’s odd choice of examples

I can understand someone making an argument (on either “side”) about whether we would have been better off without privatisation in the generation sector of the NEM – ultimately this devolves to a discussion about different subjective points of view, because of the insurmountable problem of knowing (as distinct from having a view on) “what would otherwise have been”.

There’s been an increasing amount of discussion going on (online and offline) over the past 12 months and more as it has become increasingly clear that we’re in the midst of a pretty big train wreck in the energy sector.  Ordinarily I would just let it pass by.

However what made me take a second look at the author’s arguments were two particularly odd examples to illustrate his point:

Odd Example #1 = had NSW Government (via MacGen) still owned Liddell, the outcome might be less fraught

To provide this example, the author does implore his readers to “Park the often ideologically tainted bickering about renewables, climate change and emissions targets to one side for a moment (although these factors are important, even in the absence of any cogent national energy policy).” – though I know that this will be an impossible task for many of his readers (and also those of WattClarity at both ends of the Emotion-o-Meter, who seem to see everything through this single frame of reference) .

Paul’s point is that “When you retain strategic assets in public hands, you can take a different approach and, if Macquarie Generation was still state owned, the Liddell debate might (arguably) be less fraught.”

Note that I’m not sure whether Paul is actually suggesting that a Government-owned MacGen might have decided to extend the life of Liddell, but I’m pretty sure that a number of readers of his article will conclude:
1.  That this would have been the outcome; and
2.  That this is what the author was implying; and
3.  That this would have been a more desirable outcome – again, leaving aside concerns about renewables, climate change and emissions targets.

In this hypothetical exercise, let’s also leave aside the fact that MacGen was not owned by the Federal Government (which is the one that wants to keep Liddell open) but by the NSW State Government (which, though LNP, is not exactly seeing eye-to-eye with their Federal cousins in terms of the way to manage this energy transition).

Let’s say that the Feds (as hypothetical owner) did make the call to extend the life of the station.  Even if we leave aside (which we can’t) considerations of climate change and the risks of investing capital into coal-fired generation, there must be an open question about whether it would have been a wise decision?

We just have to look across to the other side of Australia to the claims of government waste by a short-lived refurbishment and life extension of similarly aged Muja A and Muja B power stations to see a counterposing example of where the Government (it’s now claimed) made an unwise investment in arguably similar circumstances.  See one of today’s other articles (here) for more discussion on this comparison.

The similarities (at least in some respects) between the two cases does call into question whether it would actually be a good decision for any owner (private sector, or Government) to extend the life of the Liddell asset.

I do wonder why the particular example of Liddell was chosen to illustrate why Government ownership might be a good thing?  Surely there would be less fraught examples to use?

Perhaps one of our readers who understands more than I do can help me with this one?

Odd Example #2 = QLD Government direction to GOC (Stanwell) to change bidding practices has reduced wholesale price outcomes in QLD

Paul also notes “Queensland Treasurer Curtis Pitt responded to soaring power prices in June by directing state-owned generators to change their bidding practices in the national electricity market”

I posted this initial view on 6th June (a day after the announcement was made) to show that futures prices had reduced immediately following, and probably due to, the announcement.  Hence the government has some basis in claiming some credit that its direction to Stanwell has lowered wholesale price outcomes.

I’ve updated that view in the following chart from NEMreview v7 that puts the effect of the announcement into some perspective:

2017-10-01-NEMreview7-trendedQLDfuturesprices

Some might read, in this chart, that the effect of the Government announcement was a short-lived blip, with the futures prices returning to prior trends pretty quickly – however understand that these will always be subjective calls, based on the impossibility of knowing “what would have otherwise been”.

However, a bigger issue seems to be that the Government can hardly claim credit for the effect it’s been able to have on reducing wholesale prices in the Queensland Region of the NEM through its direction towards Stanwell Corp without  also accepting responsibility for:
1)  the higher market concentration that resulted from the Government’s directed 3-into-2 merger of Queensland GOCs back in July 2011; and
2)  the effect this had on generator market power, and hence to achieve control of prices (that same control that the Government has recently used to effect a small reduction) for the 6 year period since that time.

In my view, it’s a bit rich for the same Government to be claiming credit for reducing prices, when only 2 years earlier there had been announced plans to merge 2-into-1, which would have had a ballistic effect on wholesale prices.  I’ve linked here a fuller context to the history of Government involvement in Queensland’s generation sector that should be taken into consideration when determining the upsides and the downsides of Government ownership of generation assets.

Again, I don’t understand why such an obviously flawed example was used?

(B)  Conflating two coincident, but separate, changes

More generally, I’d also like to flag that two separate questions seem to be conflated together quite commonly:
Q1 = should there be a market, or not?
Q2 = should assets be owned by the Government, or by the private sector?

They are not the same question – though they are partially related.  Since the NEM began operations at the end of 1998, various Governments have continued to own generation assets (through Government Owned Corporations) and have been able to compete on that basis, fairly successfully.

When “the NEM is broken” argument [LINK TO COME] surfaces, as we’re seeing a number of times (and have seen for almost 20 years), I do try to understand more of the detail behind that particular stakeholder’s perspective.  It might be a perspective that stems from either of the questions above, or from something else.

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6 responses to “Here’s two odd examples being used in attempt to justify a claim of why privatisation will lead to higher spot prices”

  1. […] My sense is that this is something I’ll be referring to a number of times (in addition to this article today ) – hence I have separated it out into its own […]

  2. David Headberry says:

    Thanks Paul for a good summary and attempt to explain to often inexplicable. But you do raise two important points.

    Firstly there is little doubt that private ownership can improve things. The operation of Hazelwood before and after its sale shows that private ownership improved its availability and extended its life after the SECV had condemned it to the scrap heap in the early 1990s.

    Secondly, it is the loss of competition between generators that has the biggest impact on prices. What we are seeing now is the loss of dispatchable generation which is the prime provider of forward contracts. There have been attempts (eg by ACCC over the sale of MacGen) to limit the loss of competition in the NEM but state governments have sold the assets to get the maximum sale price rather than deliver a market where competition is strong.

    We still have nearly 90% of mainland generation provided by wind and coal at costs of production in the $40/MWh yet the cost in the NEM reflects much higher levels. This is a function of the loss of competition but I suspect that it is also a function of the market structure which is not designed to address the generation mix we now have

    That might be a topic for another Wattclarity article

  3. George Michaelson says:

    I think this is a very even handed approach to a knotty question. I know I bring my bias to the table, I explicitly and frequently repudiate the market in energy, and I believe it was and can be seen to be a demonstrable failure. Alternate realities cannot be proven, so I have to fall back on belief, conviction that a public utility function approach with strong regulation would have delivered a better outcome. But then bring liddell to the table.. would the state have been able to decide to stop sweating the asset and re-capitalize? At what price of capital? at what risk to the lending rate which *is* subject to market process and has follow on consequences.

    I know I’m biassed, but I’m holding onto my view right now: we needed innovation and we needed state intervention. What we’ve got is innovation but mostly undercapitalized and the state intervention has been a sorry saga of debt reduction and fantasy roles in the pricing war (Queensland government officials should hang their head in shame, having had substantive control over bidding all the time and simply defaulting to not using it)

    So for me? its even odder. I want to agree with the News Ltd Journalist, but to different ends: the price rises were unneccessary but retention of Liddell was not, and will never be a good idea, in either state or private hands.

    • observa says:

      Seems to me you got your favoured State intervention aka directed innovation and capitalisation of a plethora of wind and solar generators via massive subsidy mining and the dearest power prices in the world. If the State was going to intervene like that and put an end to coal it made sense to flog off aging coal stations to private enterprise to squeeze the last drop of revenue out of them before closure.

      The fly in the ointment with the cunning plan was always despatchability plus rising demand and concomitant high prices for alternative gas to replace coal’s traditional role. The Weatherill Govt has the simple solution to such oops! Roll out the diesel gennys and a show battery whatever the taxpayer cost and blame private enterprise for the price rises.

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