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dirty electricity markets « Previous | |Next »
August 15, 2003

The current mess in the national electricity market has to do with competition policy that opens up formerly regulated markets to a myriad of competiting industries are regulated to prevent one form from unfairly achieving and exploting market dominance.

The success of competition policy in terms of the criteria of economic efficiency and community welfare/public interest is usually judged by utilitarian economists in terms of price. If the price of airline or telcommunication services fall overall, then the policy is judged to be successful. The word 'overall' is important in the electricity case as the game played is to say that prices have fallen overall, even though they have dramatically risen in South Australia. It's the old utilitarian greatest happiness for the greatest number criteria that is being deployed here.

Economists, including the critics of competition policy, such as John Quiggin, (eg. in his Dilemmas of Competition Policy paper, no link) rarely move beyond price as the critieria of success. The assumption is that economic efficiency gives rise to lower prices and this gives rise to increased community welfare. This indicates that much of the debate is conducted in the economic domain, with little analysis and debate on the political, social (job losses) and environmental dimensions of competition policy The public interest is defined very narrowly. How can it be broadened out?

The broader environmental dimension would explore the increasing carbon dioxide emissions from the electricity sector since the establishment of a national electricity market, due to the increased use of brown coal. Why? Because of the cost minimising pressures of the competitive market. Carbon dioxide emitting brown coal is used for electricity production because it is cheap and so it is used to minimize short-run marginal costs.

Yet it is in the public interest to reduce carbon dioxide emissions in a country that has put on notice by the international community that it needs to lift its environmental performance. Promoting renewable energy technologies and reducing greenhouse gas emissions is a solution and federal policy. But this green turn is ususally dismissed by the free market economists because it involves state intervention and is more expensive way of producing electricity.

We are back inside the economic realm where price is the key criteria. And this where the politics come in. Consider this scenario. Private investors developing the brown coal fields in the La Trobe Valley in Victoria will eventually incur a greenhouse gas tax for carbon dioxide gas emissions (around 2012). This will make their enterprise unprofitable, unless the industry is subsidised. How to do this? Why the Victorian taxpayer can pick up the tab for the carbon dioxide emission costs in order to protect jobs. It would be best to leave coal in the ground and shift to renewable energy.

What we have here is politics. A reluctance to reduce carbon dioxide emissions because this will impact on economic growth and the viability of the fossil fuel industry. The politics is pretty straight forward.

| Posted by Gary Sauer-Thompson at 2:45 PM | | Comments (4) | TrackBacks (2)

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Gary, if you read my paper on this topic:

Quiggin, J. (2001), ‘Market-oriented reform in the Australian electricity industry’, Economic and Labour Relations Review, 12 (1), 126–50.

you'll find that I address all the issues you say I ignore.

On the specific issue of CO2, I observe:

"Since the market price of fuel does not incorporate any implicit or explicit externality charge, it is reasonable to conclude that the price of fuel (and therefore the price of electricity) is below the socially optimal level, and therefore that the operation of the National Electricity Market has contributed to excessive consumption of electricity and fossil fuels.

The adverse environmental effects of the National Electricity Market are likely to be reduced in the long run, as excess capacity is reduced by the retirement of older coal-fired plants, and as carbon taxes or similar market-based policies to reduce emissions are introduced. However, as Keynes appositely observed, in the long run we are all dead."

point taken. Thanks for the info.

I did try and search your papers for the something extra on the national electricity market (NEM) and sutainability.

But the links did not work and your articles did not come up online.

I'll mull over what you've written above. My gut reaction is that the NEM is flawed in the design. I had a go at trying to state this on Sundays's post in relation to last weeks blackouts across the North America.

Gary, you should be able to get the article here. I am also sceptical about the design of the NEM.


Thanks. I will read it closely.

I'm not sure about that excess capacity bit. It's not the case here in SA, hence the pressing need to connect an aging regional grid to those of NSW and Victoria.

I presume that your reference to excess capacity applies to NSW?

On an another note I am just not convinced that the policy shift to a sustainable NEM has taken place; or is even on the horizon.

I just cannot see the sense in SA importing electricity from NSW over an aging infrastructure when SA has the option to introduce exta capacity in through solar energy (wind and solar power).

All they talk about here is introducing competition in the retail sector. That will make hardly any difference to consumer prices.