HIGH TENSION WIRES IN SYDNEY'S OUTER WEST.   GENERIC ELECTRICITY, POWER, ENERGY.

ELECTRICITY 970417 

Photo by MICHELE MOSSOP

A drop in electricity demand is exposing the industry's past mistakes. Photo: Michele Mossop

In the 1990s, the National Electricity Market was developed as part of the National Competition Policy. The original idea was to make operators of electricity infrastructure accountable and efficient by using competitive forces, while maintaining consistency with broader policy and maintaining equity.

Overall, after seeming to work for some time, it has not delivered too well in recent years.

The model has worked reasonably in power generation where for example recent decline in demand has led to closure of expensive-to-run power stations.

It has failed for transport of electricity, where poor regulatory design has encouraged a distorted outcome and power lines were mistakenly treated as regional monopolies. In practice, they compete with gas and other fuels, as well as energy efficiency, local generation and storage, and demand management to provide inputs to energy-related services.

In the states where retailing of electricity has been deregulated and privatised, it has failed. Complaints have increased, while the costs of excessive customer "churn" – people changing retailers, have added to electricity costs.

In Victoria, over a quarter of customers change retailer each year – often under pressure from aggressive sales tactics.

Recently a senior AGL executive admitted that, even in the limited competitive market of New South Wales, it costs his company (and its customers) $192 every time someone changes retailer.

Then there is the hidden cost of the time and angst of customers as they struggle to work out what to do in a confusing and disempowering marketplace.

Declining demand

In the past few years, ongoing decline in electricity consumption has occurred in eastern states. This drop, combined with changing consumption profiles and the emergence of on-site electricity generation using solar panels and cogeneration, has undermined the profitability of the capital-intensive, inflexible electricity supply system. Indeed, investment in new power lines is now very risky (or should be, if the existing framework sent the right signals).

Instead of welcoming the emergence of new, more environmentally sound and economically sustainable electricity solutions, policy makers, the electricity industry and many commentators (see Michael West's article this week) have simply assumed that we must look after the welfare of the existing electricity industry. The discipline of the market is under threat, because these businesses are considered too important to fail. Apart from banking, this applies to few other industries – and is hotly debated, so at least there is some accountability.

Propping up the existing industry undermines the emerging, more sustainable and popular options and disempowers businesses and households.

Industry welfare

Now the argument is that, if wealthy people and businesses reduce dependence on the electricity grid, costs for remaining consumers, especially those on low incomes, will increase, as the industry must recover its investment costs. Why? In other industries, if businesses over-invest they have to solve their own problems. At the extreme, this may include "fire sales" at depressed prices that allow the new owners to run the business profitably, often using improved business models.

Yet the original advocates and designers of the electricity market seem to support the ongoing industry welfare scheme. They now argue that it is necessary to protect the poor by blocking competitors and increasing unavoidable energy charges. But the poor could be protected by appropriate market rules and regulatory protection within a competitive model.

We now need to ask whether society, emerging businesses and the environment should pay to protect the existing electricity industry. Or whether the participants in that industry should pay for their poor decisions and acceptance of flawed regulatory models while they were profitable.

The recent Senate Inquiry into Electricity Pricing is the first serious independent review of the electricity market model for two decades. I hope the government does not allow it to be captured by the energy sector - again.

Alan Pears AM is an adjunct Professor at RMIT University