This is a final version submitted for publication. Minor editorial changes may have subsequently been made.
The 15 percent rise in electricity prices foreshadowed by the Australian Energy Regulator for 2009 (SMH 29 November) comes on top of a 10 percent increase already approved by the Independent Pricing and Regulatory Tribunal (IPART) for 2009/10. These price increases will be just the beginning if the NSW government goes ahead with its plan to sell off retail electricity companies and lease the right to trade electricity generated by state-owned power plants.
The government plan has received the approval of the NSW ALP despite its past opposition to privatisation of electricity and indeed it may save jobs in the electricity generation sector. However it is bad news for household electricity consumers.
The Rees plan is for government-owned generators to sell electricity to private operators at a low set price that is supposed to cover the cost of producing the electricity. The private operators will then set out to get the highest price they can for the electricity on the National Electricity Market (the spot market) and there is plenty of evidence that companies selling electricity in this market manipulate the price so that it fluctuates from a reasonable $30/MWh all the way up to the current regulatory cap of $10,000/MWh.
When the spot market price is high, private operators will make big profits rather than the profits going to the government-owned generators as is now the case. Consistently high prices on the spot market will raise the price of electricity supply contracts and the private retail companies will pass these higher prices on to consumers with an extra margin to cover the risks that a volatile electricity market poses to those offering electricity via contracts.
If the spot market price is consistently low for a time, private retail companies will make big profits rather than consumers paying less for their electricity. Don’t imagine that the three electricity companies that already dominate the private retail sector outside of NSW go in for much competition on the basis of price.
What is more the spot market price will only fall substantially if there is an excess of generation capacity but the government is leaving it to the private sector to build any new capacity and it is not in the interests of private generating companies to build the excess capacity that will deny them high prices on the spot market.
The government wants to reduce its exposure to the risks associated with the electricity spot market. It was able to do this when it owned both generators and retailers but if it sells off the retailers and keeps ownership of the generators it wouldn’t be able to balance the risks. Private electricity companies can do this by being vertically integrated, that is, by owning generators and retailers. In this way when spot prices are high their generators make big profits and when spot prices are low their retailers make big profits.
Instead the NSW government is about to lose its ability to make profits either from high prices or from low prices and the risk, rather than being transferred to the private sector, will be paid for by consumers through higher prices.
The government claims that retail electricity prices will be regulated by the IPART for a few years to protect consumers. But bear in mind that IPART has already approved substantial annual electricity price rises in preparation for privatisation. One reason IPART gives for the price increases is that “retail prices need to be sufficient to recover the costs incurred in selling electricity in a competitive market, and to compensate retailers for the risks that they face” with extra profit margin.
Despite this inclusion of compensation for risks associated with the fluctuating spot price, IPART has included provision for reviews so that electricity prices can be raised even more if wholesale prices go up more than expected: “These reviews are intended to explicitly address the risk of significant changes in the wholesale price of electricity”. So much for consumer protection!
Once ratepayers just paid for the actual cost of electricity supply. Now, in the name of ‘competition’ and ‘efficiency’, electricity prices must also cover the profits of several layers of private companies on the route from generating plant to household, as well as the risks that are associated with volatile electricity markets.
By leasing the electricity trading rights but retaining ownership of the generators, the NSW government is protecting itself from political risk not financial risk. It wants to be able to disassociate itself from the inevitable electricity price rises that retail privatisation will bring and also make peace within the ALP by retaining electricity assets. But you can be sure that the consumer will pay dearly for the government’s cowardice in this matter.