Interference Driving up Electricity Prices
When markets replaced integrated electricity supply systems, Victoria parcelled the State Electricity Commission into a dozen components and sold them off. New South Wales also reformed its system into separate generating and distribution businesses but retained them under state ownership.
NSW government firms learned some very hard lessons. One was delivered by Victorian retailer Powercor, which signed contracts for electricity from NSW's Pacific Power at knock down prices. The NSW Government tried to wriggle out of the contracts but the courts would have no bar of this. As a result, NSW taxpayers have incurred a loss of some $600 million.
A further imprudent commercial decision was taken by energyAustralia, the biggest retailer in the NSW (and in Australia). This involved a 35 year deal with an American firm for two new power stations, Redbank 1 and 2.
Soon after the deal was struck, the price in the market halved and remains 30 per cent below the Redbank contract price. Some estimates put the contract loss on at $750 million. Again the NSW Government sought to renege on the deal. And again the courts refused to overturn it. After all, if one of the largest businesses in the country could simply tear up a contract that no longer suited them what would any contract be worth?
Redbank 1 has been operating for the past two years. But Redbank 2 is still not built and the NSW Government set up an inquiry into it. Citing greenhouse gas emissions, the Government has refused it development approval, thus avoiding an onerous contract. Various Carr Government funded green groups chipped in with a chorus of opposition to the project.
Using approval processes to cancel debts smacks of banana republic government practice. That aside, opposition to the development on environmental grounds is ironical. A few years ago there would have been green accolades for the Redbank project because it uses waste coal which could otherwise pollute the Hunter River.
Victoria has its own wrangle over environmental approvals with power stations. Hazelwood Power, which had been scheduled for decommissioning in 2004, was sold. Its private sector owners have revitalised it and extended its life by decades. But that extension requires changes to the mining license boundary. While this would normally be a formality, Minister Theophanous is making it conditional on costly greenhouse gas savings.
Playing the Green Card to energize radical environmentalists is a risky political game. Giving green lobbyists a voice in deciding which sort of power stations might be built can rebound savagely on power system security.
To see this we only have to look at California. In California, new power station approvals ground to a halt as a result of green and local NIMBY objections. The electricity market, which had design deficiencies anyway, became vulnerable to shortages. Those shortages caused widespread black-outs. The government panicked and bought additional electricity supplies in a sellers market at exorbitant costs. These costs almost bankrupted the Californian State Treasury. Along came Arnie and the rest, as they say, is history.