Electricity market reform in Australia’s south and eastern states


    Bruce Mountain, Director, VEPC


    The electricity market in Australia’s south and eastern states is the outcome of a major project of “reform” from the late 1990s. The Industry Commission (now the Productivity Commission) promised that the reform would lower prices (then amongst the lowest in the developed world) and improve industry productivity (assessed then to be unimpressive).


    While history is written by the victor, there is limited evidence to suggest that this reform was unpopular. Certainly it was not a vote loser. Perhaps there was a widely held perception that the state electricity commissions had put themselves before their customers. In Victoria, the Government’s decision to require tax payers rather than electricity customers to wear a large part of the over-spend on the giant Loy Yang A power station made a big impression on technocrats and politicians. It is not surprising that decision-makers cast about for a better way.


    But with the benefit of hindsight the “reform” has set us back. Our prices have moved from amongst the lowest in the world to amongst the highest, the bulk of our production stock is now old, dirty and increasingly unreliable. Our network is over-engineered and our retail markets do not serve customers well, as our retailers accept. With this legacy, combined with burgeoning decarbonisation pressures, it is no surprise that governments, both state and federal, are getting back into the business of electricity. Indeed any new large-scale electricity production program – whether of renewable or fossil production – will require either government investment or substantial policy support.


    One of the foremost projects on the table at this time is the giant “Snowy 2.0” pumped hydro project. Initially promised at $2bn, it was quickly revised to $4bn and a contract for part of its construction has been agreed at $5.1bn. Major transmission upgrades probably costing around $2bn plus other project costs have yet to be included. All of this will buy a facility with 2,000 MW of production able to produce for, possibly, several days if fully charged.


    Snowy 2.0 can certainly not be justified for the power system we have now. The large amount of pumped storage capacity in New South Wales and Queensland that we already have is barely ever used. Peaking gas generation capacity scattered through the south and eastern states is likewise seldom used. Rather the case for Snowy rests on a system with very large amounts of renewable electricity production, and very little other dispatchable production.


    But Snowy 2.0 does not have a monopoly on the service it can provide: gas turbines or reciprocating engines, demand response, greater interconnection, other pumped hydro, batteries can all provide comparable services. There is a great deal of uncertainty about the costs and market potential of these competitors, just as there is for the costs and functionality of Snowy 2.0. Indeed there is also a great deal of uncertainty about when, if indeed ever, large amounts of storage will be needed.


    In this context, it would be wise to seek out alternatives that buy time until the future can be seen more clearly. In particular if the Government is really worried about the lights going out in a rapidly changing power system it can easily procure 2,000 MW of relocatable reciprocating gas engines at less than one tenth of what it is now prepared to spend on Snowy 2.0. Not only would this be much cheaper, but because it can be deployed quickly, procurement can be just-in-time. Such capacity will also have negligible environmental impact assuming it is rarely used.


    If, in time, it turns out that Snowy 2.0 is the most promising approach then the decision to proceed with it can be made with confidence. And if it turns out that there is no need for Snowy 2.0 or that it is not the best approach, the Government will have deftly dodged a bullet. When cheap options exist it is wise to exercise them.


    We are doomed to repeat mistakes of the past if we do not learn from them. While a bank of gas engines has none of the glamour associated with a nation building project, they provide an alternative that voters would surely not think ill of.

    VEPC is part of the Victoria Institute of Strategic Economic Studies within Victoria University, Melbourne