Report adds pressure to Synergy split

It may have gone largely unnoticed in Western Australia, but a recent report into the east coast's electricity market could have major implications for the state, including for government-owned monopoly power business Synergy.

The Australian Competition and Consumer Commission’s July report into the National Electricity Market suggested a suite of changes to reduce power prices, and, although WA’s system operates separately, some recommendations could demonstrate big lessons for the state.

Principal among the report’s proposals with relevance to WA were those suggestive of the need to split government-owned generator and retailer Synergy.

The report was critical of Queensland’s state government, which owns a big portion of that state’s generation capacity through Stanwell Corporation and CS Energy, for its 2011 decision to merge three generation businesses into two.

Between them, Stanwell and CS control 72 per cent of generation in the state.

Similarly, in WA’s South West Interconnected System, Synergy owns around half the capacity.

The ACCC recommended Queensland’s government again break the two generators up into three, and sell two, while it suggested a further rule should be put in place to stop any one entity exceeding 20 per cent share of the generation market.

That would add to pressure for the state government to revisit decade-old plans by former treasurer Eric Ripper to split Synergy.

When asked by Business News if the state government should adopt the ACCC’s Queensland recommendations and apply them to Synergy, a spokesperson for Energy Minister Ben Wyatt said the WA wholesale market was less mature, having started operation in 2006.

“These market arrangements coincided with the move from a fully integrated state-owned entity responsible for all network, retailing and generation services, allowing scope for greater private sector participation in the wholesale electricity market arrangements in WA,” the spokesperson said.

“Synergy still plays an important role as a default provider of some important services required to maintain power security and reliability in our isolated electricity grid, supported by its position in the generation market.”

The spokesperson said the government was working on reforms to modernise the market and network access arrangements to promote a wider variety of generation.

“These reforms are expected to encourage additional private sector generation investment and deliver lowest cost supply outcomes, reducing the pressure that would otherwise be placed on state finances to support such investments in the future,” he said.

There are additional layers of complexity.

For example, Synergy itself was the result of a 2014 merger of generator Verve Energy and Synergy’s retail business, vertically integrating two government-owned enterprises.

Business News reported in 2008 that WA’s Economic Regulation Authority, which oversees the market, had said a merger of Synergy and Verve would destroy competition.

“Such a structure is likely to reinforce the barriers to new entry resulting from non-cost reflective tariffs and the absence of (full retail competition),” the authority said.

More than 10 years later, full retail competition still does not exist in the market, which effectively means that only businesses with more than 50 megawatt hours of power use per year can choose which retailer they use.

A further lesson from the ACCC was the importance of ensuring competition in the market even after privatisations.

The report criticised the NSW government for selling much of its generation portfolio to existing market participants.

“Of particular concern was the sale of the Macquarie Generation portfolio as a single business to AGL, which gave AGL control of 30 per cent of the state’s generation capacity,” the report said.

“Competitive outcomes would have been better served by the sale of the two largest generators in the portfolio (Bayswater and Liddell) to different parties.”