Milne's ascension is good for electricity consumers

The rise of Senator Christine Milne to the leadership of the Australian Greens is good news for electricity consumers. Senator Milne has bravely challenged the big electricity companies over allegations that they are operating an energy oligopoly, driving our electricity prices up artificially to maximise profits.

Beyond Zero Emissions, a renewable energy think tank, has claimed that the relentless rise in the cost of electricity is partly due to 'price gaming' by the big polluters.

This is a new chapter in the 'Greenhouse Mafia' controversy sparked in 2006. ABC's Four Corners ran evidence from Guy Pearse, a Liberal Government whistleblower, that showed how Prime Minister John Howard was improperly influenced by a cabal of polluters who literally called themselves the Greenhouse Mafia.

Australia's leading renewable energy company is Pacific Hydro. The company has recently told the Federal Government that the electricity market needs fixing in order to unleash the energy investments we require.

Senator Christine Milne, the new leader of the Australian Greens, has referred these issues to our consumer watchdog, the Australian Competition and Consumer Commission.

The ACCC has considerable power to investigate corporate conspiracies. An adverse finding against the big generator-retailers - Origin Energy, AGL and TRUenergy - could send shockwaves through the political economy and damage the standing of Energy Minister Martin Ferguson.

Australia's electricity industry agencies and regulators do a very good job. As governments around the world will admit, electricity markets are hard to regulate, partly because the physical nature of electricity makes it a commodity unlike most.

Electricity is delivered via a vast interstate network of poles and wires, which cannot be torn up and replaced every time you switch your energy company. Just like the Telstra phone cable or the gas pipe, you are stuck with one physical provider. 

How is it possible to have competition in that situation? It's not as if you can run another set of poles and wires from your house out to your chosen generator hundreds of kilometres away.

In order to simulate a natural market, the government has established a rules-based trading system for electricity. This gives consumers some of the benefits of competition.

While it works very well in some respects, there is evidence that consumers are being exploited by the big polluters.

The outcome of Milne's ACCC case could shift investment decisions over major coal, gas, grid and renewable energy projects.

The money at stake in the grid here and internationally makes Senator Christine Milne's $10 billion Clean Energy Finance Corporation look like small change - think a thousand billion dollars globally and you're in the right ballpark.

Australian electricity consumers buy our power from retailers who can buy and sell electricity in the wholesale National Electricity Market (NEM). The NEM runs 24/7 through a very clever computerised trading system. This emulates the competitive trading dynamics of a true market commodity.

The NEM effectively allows speculation on the abstract price of electricity, up to four years ahead.

In that sense, our electricity is not an essential service any more, but partly just another abstract money market to be played for profit. According to one broker, the market for futures and options is larger than the total value of all the actual electricity generated in Australia over a year. (Note that its not a fully 'national' market, but it does include almost everyone outside of WA.)

Giles Parkinson, Australia's leading climate and energy writer, says that the NEM rules allow big players to 'game' the price.

Generators are allowed to dramatically alter the supply side of the wholesale market, for example to create scarcity on a hot day when all the air conditioners are on, and price gouge the consumers.

(Generators can also change the grid services they provide, again potentially holding the market to ransom by threatening energy security.)

The technology and law in this area is very complex, so consider this rough analogy with the price of petrol; imagine Dave, a hapless millionaire, who is running late to a wedding in the country.

Dave drives up to the last petrol station before the tollway to the country. The petrol station owner can see how to make some serious coin and tells Dave the petrol will cost $100 a litre. Dave has no choice, so he pays $100 a litre.

Now imagine that a computer registers this energy transaction and imposes this price on every litre sold in the country. This means that since there is one sucker prepared to pay $100 a litre, everyone is charged $100 a litre! Crazy, right? Well, these "pool price" and "merit order" principles are not so crazy in the electricity market and in fact work well most of the time.

Some of you are probably already beginning to smell the rat. If an energy supplier is able to massively inflate the price when demand is desperate, their 'competitors' also benefit. The consumer will never know. The market transaction is effectively invisible to the punter.

It would come as no surprise that the price gaming referral to the ACCC was made not by the generator-retailers nor their lobby group, the Energy Supply Association of Australia, but by Senator Christine Milne.

It is a dangerous allegation to make, for the energy sector is one of the most politically ruthless industries in the world.

Our energy regulator has often been forced to issue many reports on 'price events', when the market jumps way too high or too low. These spikes can drive the cost of electricity from $50 to $10,000 (per MWh, which is the standard trading unit).

Giles Parkinson has reported that generators earn around one quarter of their revenue from windfall profits they make during 40 hours worth of 'price events' each year. Energy Minister Martin Ferguson was forced to concede this fact recently and has been outsmarted by Milne.

People are unaware how extreme the electricity market price rises can be because they are hidden in our bills. When you get a quarterly bill, all you know is the average price charged to you for the electricity you used. What you don't know is the extreme variation hidden by that average price.

The ACCC has reported on AGL's involvement in 'price events' in the past. In one case, AGL got a slap on the wrist; in another case, a $20,000 fine.

Senator Milne's ACCC inquiry will be watched closely not just by our industries, but by some very big companies in the USA, China and Europe. 

She gets the potential of clean energy better than anyone else in politics. She appreciates that international finance and technology companies are holding back from making significant clean energy investments in Australia and that a strong outcome from the ACCC could provoke an important policy debate.

The final point to be made clear is that the ACCC's findings may contradict the political narrative about 'green energy rip offs' that has become dogma in certain sections of the media.

As a result, we should expect to see these sections of the media either downplay the ACCC's inquiry or misreport it significantly in order to defend their narrative.

 

Dan Cass