Want to know about high energy prices?

4 September 2022

It is about market failure.  When public power utilities were privatised a market was set up and power producers could bid into a market to supply at a certain price for each period of time.  But obviously if someone bid in at a low price for part of the market, they would then watch as others bid in higher and made more money.  So the price to all producers was set at the last bid, so the cheap producers made a lot of money.

There were a few problems. The amount of electricity needed varies widely. Coal fired power is not very flexible-it needs a constant load, cannot be stopped and can vary its output only slowly and within a limited range. When renewables came, solar is only in the daytime, and wind varies, so the system had a problem with ‘stability’- the ability to dispatch power when it was needed.

Another problem was rorting, though no one wanted to talk about this.  There were big players who could withhold power so that there was a shortage; the price went up, and then they all cashed in. ‘Imperfect competition’ as economists would call it.  No one wanted to build coal plants and there was not enough storage to let renewable energy last overnight or for dull or windless days. So the Morrison government said that gas was a ‘transition fuel’ and more gas plants would be built.

Meanwhile the Australian gas industry agreed to massive export contracts on the assumption that they could frack Australia as the US had been fracked. But the environmentalists realised the harm this did and resisted.  So our price of gas went up.  So the companies pressured the Albanese government, which is now breaking its election promises and approving fracking. Sorry environment- what is a bit of permanently polluted groundwater and desertification between friends?

Of course years ago, publicly owned utilities run by professional engineers were charged with providing electricity and gas to the public on a non-profit basis. They charged enough to cover their costs with some money for maintenance and future planning.  The price was the average price of generation, not the most expensive component.  The model worked quite well and could again.  The change to a ‘market’ was ideological.

At an international level, the problem is similar, but it all being blamed on Russia, which is only partly true.  Naturally in a globalised world, we are also affected by the European gas market, but less directly, especially if we frack to get out of it; which is a very bad solution, substituting a long-term problem for a short-term one.

Here is an international article: