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Electricity market « Previous | |Next »
August 1, 2003

I have just come across national electricity market by Sharon Beder. What she says is one in the eye for all those neo-liberals who claim that planning by a central authority is doomed to failure, and that we should trust the dynamism of the competitive market.

Sharon gives the historical background for intervention by the state:

"The need for long-term planning and co-ordination, and the unwillingness of private companies to take on the risks associated with constructing capital-intensive electricity infrastructure were major reasons why governments took control of electricity in countries like Australia in the first place."

She then highlights the different results from government and market planning. On the former mode of planning she says that:

"...when government authorities were in charge of planning there was a tendency to overestimate future demand because of the political consequences of failing to provide a reliable electricity supply. But the costs of temporary oversupply were spread over a large number of consumers over long periods of time."

Then the neo-liberals decided to redesign the Australian economy through using the state (ie., the CoAG process) to yield higher levels of efficiency and increase consumer satisfaction. You know the neo-liberals. They are the ones who think that the market order is the natural system of liberty. Sharon says:

"In the 1980s the need for planning and maintenance began to take second place to the desire to commercialise public services and reduce public service employment. And in the '90s, when electricity was liberalised, privatised and deregulated around the world, the planning function of government bureaucracies was abandoned and surrendered to market forces."

So how does the spontaneous market 'plan'? The theory is that market forces ensure there are enough supplies because the market has the ability to balance supply and demand through competition. As Sharon points out this means is that no one is responsible for planning or ensuring adequate generation or transmission facilities into the future. This can lead to problems in electricity supply because electricity is essential to human welfare and economic activity.

Well, we know the theory. What has happened in practice? Sharon says:

"The National Electricity Market in Australia provides no incentive for generators to invest in new capacity because undersupply keeps pool prices very high and the standby plant necessary to ensure system reliability erodes profits. Also, existing generators have developed a nasty habit of dropping prices when potential competitors are seeking finance to build additional generation facilities. System reliability is therefore compromised by the unwillingness of private companies to maintain reserve capacity in case of sudden rises in demand."

So what are the consequences of this market planning? Plainly put consumer rip off, as South Australians are only too well aware. Sharon says:

"The experience of the electricity market has been that private and state-owned electricity companies have made large profits by charging outrageously high prices when demand is high and reserve capacity low. Because of this, wholesale electricity prices have fluctuated wildly from less than $40 per megawatt hour to $10,000 per megawatt hour. Some companies have even artificially created the features of a shortage by withholding some generating capacity in times of high demand so as to be able to charge very high prices for their remaining electricity. In these circumstances they are hardly likely to invest in extra capacity."

Now I can accept with Hayek that the market is an imperfect instrument of governance due to uncertainity and ignorance and all that. And I accept Hayek's notion of the decentralised decision-making process of market capitalism. But what is not happening is that competition (ie., insecurity, change and economic rivalry) is leading to innovation as a way to increase profits to avoid being driven out of business.

We've been had. What has been created is deeply flawed. A spontaneous market order has not happened. The reality is that the National Electricity Market impedes the production of wealth and is causing impoverishment. The Australian points the finger at consumers for wasting electricity and reckons that a regulator can sort the mess out. The governments who use their electricity utilites as a cash cow (NSW & Queensland) are not very innovative in encouraging a shift to solar power by households.

Update

The Australian reports that moves are being made to establish a national regulator of the national electricty market. It says that is recognition and growing concern that the electricity reform process that began in the mid-1990s is stalling andd now failing to deliver real economic benefits.

That is an understatement. Electricity reform through the competitive market is clearly not the magic pudding that many in the 1990s said it would be. The continent faces rolling blackouts due to aging distribution infrastructure in desperate need of upgrading, distribution is failing to keep up with demand, little investment in power stations and sky rocketing prices in South Australia.

| Posted by Gary Sauer-Thompson at 11:07 AM | | Comments (0) | TrackBacks (1)
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