10/09/2009 - 00:00

Competition the spark for energy sector

10/09/2009 - 00:00

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Synergy should be privatised, Verve’s market share should be less than 30 per cent and government should play a minimal role. That is what the energy market should look like in 10 years.

Competition the spark for energy sector

THE energy sector in Western Australia is currently in transition from a publicly owned, vertically integrated monopoly where decisions were made administratively to an energy market (albeit with various degrees of regulation) where commercial decisions, ideally based on cost reflective prices, drive outcomes.

While the market is still developing, we have seen increased competition in electricity generation, and for larger users increased competition in retailing of both gas and electricity.

It is important we continue to move towards a competitive energy market. In my view, the evidence is overwhelming that markets characterised by effective competition are more likely to result in an efficient use of resources and be responsive to the needs of consumers than a more centrally controlled, managed market where the interests of consumers will often rank second to political and/or producer interests.

Therefore, in 10 years' time, the energy market should have the following characteristics.

The wholesale and retail electricity markets will be competitive and innovative. No one generator will have more than 30 per cent of the market and no one retailer will have more than 40 per cent of the market. Ideally, the market share of the dominant generator or retailer would be less but I am conscious of the starting point and also the small and isolated nature of the WA market.

The wholesale market would continue to be run by the independent market operator to ensure transparency for participants. Retail tariffs for small use customers would no longer need to be regulated due to the competition and retailers would be competing not just on price but by offering energy solutions.

In 10 years' time we should have a competitive and innovative wholesale gas market, again run by an independent market operator to ensure transparency. (The operator may or may not be the IMO). Higher gas prices will have fulfilled their role in encouraging exploration for, and development of, new gas fields and there will be several gas producers competing for customers and gas prices (in real terms) will be below current levels. There will also be a number of gas retailers competing, not just on price but offering energy solutions.

In 10 years' time there should be a minimal role for government. It may still be the case that through the market rules the government will set the security requirement for generation capacity (based on advice provided by the IMO on the costs associated with various levels of security). The government may also still be the owner of the distribution and transmission network but with independent regulation (by the ERA) to ensure transparency - unless technology has changed, so that this sector of the energy market is no longer a natural monopoly, in which case there may no longer be a need for regulation. In order to avoid conflicts of interest (and to encourage greater efficiencies), Synergy and Verve have both been privatised

In 10 years' time there should be no role for the government to interfere in commercial decisions - long gone are decisions about the next power station being made on the basis of whether or not they will be located in marginal electorates. (As is already the case because of the transparency provided by the role of the IMO.)

Similarly, in my view, there should be no attempt to use energy as part of an industry development policy. Although, if the government does decide to do that, it is likely to be through the network and because of independent regulation the process will be transparent and will have to be funded by taxpayers rather than through cross subsidies from other energy users.

Are we on the right track?

Given the recent announcement by Energy Minister Peter Collier (that Verve and Synergy will not be merged), I can be more positive than I thought I might be. Keeping Synergy and Verve separate will help to keep competitive tensions in the marketplace, whereas a merger would have been a significant deterrent to new entrants.

Similarly, the steps the government has taken to ensure cost reflective tariffs are to be welcomed. Consistent with that objective, I would encourage the government to consider making independently regulated changes to network tariffs an automatic flow through to regulated retail tariffs.

The proposed carbon pollution reduction scheme and the recently passed renewable energy targets are less encouraging as they seem to be leading to an administered, rather than a market, outcome.

A CPRS puts a price on emissions of CO2 and other greenhouse gases. This aims to ensure that investment and operating decisions take account of the negative externality associated with such emissions. Properly designed, this should help promote efficient outcomes. However, anyone watching the process would have to be concerned at the political lobbying that is going on as part of that process. It seems to be a reasonable question to ask - who is looking after consumers' interests?

A mandatory renewable energy target is of greater concern. In contrast to a well-designed CPRS, an MRET deliberately favours certain generation plant technologies over others. In the absence of a CPRS, this may be a second best option for reducing greenhouse gasses. However, with the commencement of a CPRS, an MRET is more likely to promote investment in renewable plant (particularly wind in WA) that is not justified by the prevailing cost of carbon and hence is inefficient.

There are several dangers in any government seeking to artificially encourage industries. In some ways, this is analogous to the inward looking protected industry structure Australia had in the past when industries spent as much time lobbying government to further their commercial interests as they did in looking at ways to respond to consumer demand.

Simplistic arguments about the amount of investment that might be created are simply repeating the discredited arguments put forward by proponents of industry protection in the past.

There is a final issue that has the potential to be either a positive or a negative. At this same conference last year and again this year there has been a lot of talk about the need for the government to have an energy policy. Can I just say, be careful what you ask for, you might just get it.

The problem is that while everyone wants an energy policy, everyone has a different idea about what should be in it.

In my view if the government were to have an industry policy, which had as its objective the removal of impediments or obstacles that might be in the way of the market operating efficiently, then that would be a good policy.

On the other hand, if it is about interfering in the marketplace in response to particular vested interests, then that is unlikely to be of benefit to consumers and hence the WA community more generally.

Given the need of governments to be seen to be doing something in response to calls for action from the public, I would again sound a note of warning to be careful of what you ask for.

In 10 years' time I hope we will have a well-functioning competitive market. The electricity reforms in WA have been worthwhile and the market, while still developing, is delivering better outcomes for consumers. There are changes needed, which is not a surprise as the system was always to evolve over time, but in thinking about those changes the overriding objective should be one of economic efficiency - this will be in the long run interests of consumers.

n Lyndon Rowe is chairman of the state government's Economic Regulation Authority. This is an edited extract from a speech he delivered last week to the 9th Energy in Western Australia conference. The views expressed are not necessarily the views of the ERA.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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