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Monday, July 4, 2022

Should Australian governments nationalize the electricity sector? It’s not that simple

Last week’s suspension of Australia’s wholesale electricity market re-ignited a century-old debate over whether the energy sector should be nationalized – in other words, owned and controlled by the government.

The calls came after electricity prices soared and supplies tightened along the east side of Australia, triggering a series of events that eventually forced the Australian energy market operator (AEMO) to suspend the national electricity market.

So should the flow of energy in Australia be under public control? Even if feasible, would that prevent crises like the one we just saw?

I am an academician of energy economics with a special interest in the privatization of the electricity network. As my work has revealed, the nationalization of electricity is not a silver bullet. In order to function most efficiently, the sector needs to balance the roles of private competition and state regulation.

What caused the energy crisis?

The recent cooling meant more people turned on their heaters, so it was consuming more electricity. In addition, prices in the wholesale electricity market – where producers are paid for the power they produce – have risen for two reasons.

First, Russia’s invasion of Ukraine has raised global coal and gas prices.

Second, about a quarter of the coal-fired power plants that power the national grid were out of grid due to unplanned outages or maintenance. From time to time, renewable energy production has also declined.

All this caused an increase in wholesale electricity prices, which led AEMO to impose a price cap. The limited price was lower than that of some energy production plants, which led them to withdraw their capacities from the market. The situation became impossible for AEMO to cope with, so it was able to suspend the market indefinitely in order to prevent catastrophic power outages.

Generators now have to supply the market with electricity and will be compensated for losses.

The market operator has suspended the Australian national electricity market.
Lukas Coch / AAP

Public against private

The national electricity market was created in 1998 and includes generation, transmission, distribution and retailers. It covers all states and territories except Western Australia and the Northern Territory, and supplies about 80% of the country’s electricity.

Since the 1990s, state governments have tended to sell electrical assets to private operators. The system has now been privatized to varying degrees.

In Western Australia, Tasmania and the Northern Territory, electricity supply is wholly owned by state governments. In Queensland, the state government owns most of the electricity supply system and only the retail market has been privatized.

The power system has been largely privatized in Victoria and South Australia, and partly in New South Wales. However, governments continue to regulate electricity prices in Victoria, the Australian capital, Tasmania and regional Queensland.

The suspension of the energy market is not the only energy crisis that Australia has faced recently. In 2016, the electricity market in South Australia – a largely privatized system – was suspended for 13 days.

Crises in energy supply and accessibility in the national electricity market are increasingly coinciding with growing private ownership.

Western Australia, which is not part of the national market and has a system that includes significant state intervention in gas supply, has avoided the energy crisis that is currently gripping eastern countries.

My research has shown that privatization can lead to improved energy market efficiency, but only if combined with strong sector regulation. This suggests that countries with fully privatized energy markets should move to greater government participation. He also suggests that publicly owned states should privatize some property.

Nationalization is not a silver bullet. This is because market outcomes are the best outcomes for consumers if the market is functioning well. Competition is the best way to reduce retail and wholesale costs.

But if electricity prices are so high that some consumers cannot afford it, it is the government’s responsibility to provide them with electricity – for example through subsidies.

Read more: What is a network anyway? Understanding the complex beast that is the Australian electricity grid

Markets and government need to coexist

Experience from energy markets abroad shows that a complicated industry such as electricity should work, markets and government policies should coexist.

Chile’s electricity supply was state-owned until 1982. It then became the first country in the world to adopt a competitive energy sector by establishing a wholesale electricity market. Today, that market works well because energy prices tend to reflect the long-term costs of electricity production.

The success of this privately owned system is a consequence of strong reforms initiated by the government. These include effective regulation of transmission and distribution networks, strengthening sector institutions, and modifying auction rules in the wholesale market to encourage new bidders.

Chile also became a champion of renewable energy while having a privatized electricity system, as market reforms were supported by policies to promote clean energy.

Other Latin American countries with electricity market systems, such as Argentina, have also allowed varying degrees of government involvement to make the market work.

As climate change worsens and countries struggle to reduce greenhouse gas emissions, electricity market systems will become more difficult.

Everyone pays the cost of emissions in the form of global warming. But these costs are not included in the cost of electricity production. So, without the price of carbon, there is little incentive for producers in a fully privatized market to reduce their emissions.

The UK has recognized this. It has significantly intervened in the electricity market by introducing a mechanism to maintain stable prices for consumers and guaranteeing additional capacity in times of limited supply.

This helps achieve climate change goals by preventing supply shortfalls during the transition to renewable energy sources.

Coming soon?

Australia’s national electricity market lacks the right balance between state and market.

The strong pressure on the market that began in the early 1990s in Victoria, South Australia and New South Wales now needs to return somewhat. And in Queensland and Tasmania, where markets can be established, that should be done – with a policy of supporting energy security and environmental sustainability.

The experience of Great Britain and Latin America with state-owned electrical systems suggests that Australia should not be skeptical of such reforms.

The government’s active participation in the electricity sector is necessary for Australia to meet its ambitious climate goals, but that does not mean completely abandoning the power of market forces.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
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