Government intervention in markets leads all kinds of unwelcome outcomes.
THE state government has rightly bitten the bullet and pulled the shutters on its expensive rooftop solar scheme, but it had best learn quickly from the consequences of this policy failure.
The decision last week to stop offering residential owners of rooftop solar electricity generators a significant and costly incentive was the only thing the state could have done, given the scheme was becoming too costly.
But the incentive scheme was wrong in the first place and is just one of a growing number of silly policy decisions by governments to have caused considerable angst to various industry sectors.
Most of these mistakes have been made by the federal government, notably under prime ministers Kevin Rudd and Julia Gillard, but the Western Australian government’s overstimulation of the rooftop solar market – followed by its decision to all-but shut it down – shows that state’s can be equally impervious to the commercial impacts of their policies.
In the federal sphere the examples are glaring, and continue to pile up, with the latest being the live cattle export trade.
Reacting to a current affairs program on the television, the Labor federal government stopped an industry almost overnight, risking hundreds of millions of dollars of capital investment, thousands of jobs, years of sensitive foreign policy and Australia’s reputation as a reliable supplier to export markets.
That crisis continues, even though it is off the front pages.
It followed a number of schemes that resulted from the federal government’s near-panicked reaction the GFC and its coordination with regard to mixing fiscal stimulus with other policy outcomes.
The obvious example was the so-called pink batts home insulation scandal, which was more than just a bad mixture of financial and environmental policy because it led to deaths as well.
I probably don’t need to remind readers about the details of what happened, suffice to say that, when the government (or anybody) suddenly throws money at a sector of the economy, the rise in demand causes a reaction on the supply side. In the case of the home insulation sector, existing suppliers struggled to keep up with the new demand and either did a poor job or found the gap in the market was filled by new entrants in the market, often referred to as ‘cowboys’.
When it became more than obvious that things were going wrong – including houses becoming electrified and the deaths of some installers – the government simply pulled the rug on the subsidy, a move that resulted in previous businesses going belly up because they had over-extended on the basis of this policy.
The Building the Education Revolution spending had similar impacts. The construction sector in many parts of Australia increased prices to take advantage of the billions on offer; never mind the fact that the government was supposed to saving them from going broke in the GFC.
At the end of that period many builders went broke when the funds dried up anyway, with some notable cases in WA where the federal government’s profligacy conflicted with the state government’s fiscal restraint.
Let’s not forget the impact on the mining sector of the announced (but discarded) Resource Super Profits Tax and, before any of the above examples, the mishandling of visas for foreign students, which caused immense damage to an industry that had become our fourth biggest export earner.
Perth-based global education group Navitas CEO Rod Jones last week made it clear it was policy that slammed the breaks on this growing industry, not the rising Australian dollar, as many others claimed.
I am not a believer that decisions have to be made by committee or with years of exhaustive consultation. Governments in Australia don’t have long enough between elections to do anything if we demand a kind of red-tape process for every decision. They ought to be able to consider the consequences of their actions, however.
That is especially the case where they are making policy decisions designed to stimulate a market. Surely some form of caution should prevail when it comes to both the potential cost to the government and what short-term impact it could have on existing industry.
Unfortunately, many companies or businesses affected by this capricious decision-making are small or family enterprises, whose calls for concern are lost in the noise of bureaucratic self-congratulation.
I am particularly surprised that the state government under Premier Colin Barnett, an economist by training, could have made this mistake in allowing policy to cause a market runaway in residential renewable power generation, mainly rooftop solar systems.
The net feed-in tariff scheme was introduced last year and set at 40 cents per kilowatt-hour on electricity exported into both the South West Interconnected System and regional grids. Arguably there was already a lot of information around that schemes like these were proving very costly in jurisdictions such as NSW or even Germany.
By May, with 2,000 systems being installed per month, the state cut the tariff back to 20 cents/kwh, citing unexpectedly high demand, which had prompted the number of systems on WA rooftops to more than double to 45,900. Last week it suspended the scheme, citing that more than 65,000 homes had taken advantage of it – suggesting nearly 20,000 units had been installed or applied for the tariff in less than three months.
Here is an industry that has responded to the market signals provided by the government, and paid the price for it.
The problems created by this short-term thinking are many. Firstly, as this newspaper has warned, there is a risk of a rerun of the home insulation scandal as cheap solar units fail and potentially cause electrocution and fire risks in homes.
Also, the shortage of electricians in WA was exacerbated by the demands of residential solar system buyers, so much so that I have heard director reports of these skilled tradespeople starting up their own renewable energy companies to take advantage of this lucrative business.
They will now be dealing with the end of that business, or fighting tooth and nail with other established solar companies as the market quickly retracts.
There is also the impact on the grid. Rooftop solar causes all sorts of problems for our electricity grid, which is designed to deal with steady supplies coming from big power plants.
Oddly enough, the renewable sector now claims that the state’s most recent offer means those who install solar power generators won’t meet their costs and will, in effect, subsidise coal-produced electricity. If true, and I am a little sceptical, then this is a further and continuing distortion of the market.
At a federal level, the proposed carbon tax is creating a significant amount of uncertainty in the market, and adding to factors that are hitting consumer confidence. This is not clever. Perhaps this issue is exacerbated by the fact that a year ago Ms Gillard said she wouldn’t introduce a carbon tax. In some ways the decision to backflip on that is even more distorting than the surprise out of the blue such as the RSPT. Strangely, federal government leaders are now appealing to business to calm their criticism.
Governments of all persuasions need to think long and hard about whom they affect with their decisions. Often the best decision is to leave well alone – in all the cases of implemented policy above, the outcome would have been better.