The shock suspension last week from Australia’s wholesale electricity market has rekindled a centuries-old debate over whether to nationalize the energy sector – in other words, owned and controlled by the government.
The calls came after electricity prices rose and supply tightened along Australia’s eastern layer, causing a chain of events that eventually forced the Australian Energy Market Operator (AEMO) to suspend the national electricity market.
So should the flow of energy in Australia come under public control? And even if it is feasible, will it prevent crises like the one we just saw?
I am an academic in energy economics with a special interest in the privatization of electricity networks. As my work has revealed, the nationalization of electricity is not a silver bullet. To function most effectively, the sector must balance the roles of private competition and government regulation.
What caused the energy crisis?
A recent cold fever has meant that more people are switching on their heaters and therefore using more electricity. At the same time, prices in the wholesale electricity market – where generators are paid for the power they produce – have risen for two reasons.
First, Russia’s invasion of Ukraine has caused global coal and gas prices to rise.
Second, about a quarter of coal-fired power stations feeding the national grid were offline due to unplanned outages or maintenance. At times, renewable energy outputs have also declined.
All of this has led to wholesale electricity prices rising, prompting AEMO to impose a price restriction. The limited price was less than what it cost some plants to generate power, which prompted them to withdraw their capacity from the market. The situation became impossible for AEMO to manage, and therefore he stepped in to suspend the market indefinitely to prevent catastrophic power outages.
Generators must now supply the market with electricity and will be compensated for losses.
Public vs private
The national electricity market was created in 1998 and consists of electricity generation, transmission, distribution and retailers. It covers all states and territories except Western Australia and the Northern Territory, and supplies about 80% of the country’s electricity.
Since the 1990s, state governments have tended to sell power assets to private operators. The system has now been privatized to varying degrees.
In Western Australia, Tasmania and the Northern Territory, electricity supply is wholly owned by state governments. In Queensland, the state government owns most of the electricity supply system and only the retail market is privatized.
The electricity system is mostly privatized in Victoria and South Australia, and partly in New South Wales. However, governments continue to regulate electricity prices in Victoria, the Australian capital, Tasmania and the Queensland region.
The suspension of the energy market is not the only energy crisis that Australia has faced in recent times. In 2016, the South Australian power market – a mostly privatized system – was suspended for 13 days.
Energy supply and affordability crises in the national electricity market have increasingly coincided with growing private ownership.
Western Australia, which is not part of the national market and has a system that provides significant state intervention in gas supply, has avoided the energy crisis currently gripping the eastern states.
My research has found that privatization can lead to improved energy market efficiency, but only if it is accompanied by strong regulation of the sector. This suggests that states with fully privatized energy markets should switch to more government involvement. It also suggests that state-owned states should privatize some assets.
Nationalization is not a silver bullet. This is because market outcomes are the best outcomes for consumers if the market is functioning well. Having competition is the best way to reduce retail and wholesale costs.
But if electricity prices are so high that some consumers cannot afford them, it is the government’s responsibility to provide them with electricity – through subsidies, for example.
Read more: What is a timetable anyway? To make sense of the complex animal that is Australia’s electricity network
Markets and government should coexist
Experience of energy markets overseas shows that for a complex industry such as electricity to work, markets and government policies must coexist.
Chile’s power sources were state-owned until 1982. Then it became the first country in the world to adopt a competitive power sector by establishing a wholesale electricity market. Today, that market functions well because energy prices tend to reflect the long-term cost of producing electricity.
The success of this privately owned system is due to strong government-initiated reforms. These include effective regulation of transmission and distribution networks, strengthening sectoral institutions and amending auction rules in the wholesale market to encourage new bidders.
Chile also became a renewable energy champion while having a privatized electricity system, as market reforms were supported by policies to promote clean energy.
Other Latin American countries with market-based electricity systems, such as Argentina, have also provided for different degrees of government involvement to make the market work.
As climate change worsens and countries struggle to reduce their greenhouse gas emissions, market-based electricity systems will become more difficult.
Everyone pays the cost of emissions in the form of global warming. But these costs are not included in the cost of generating electricity. Without a carbon price, there is little incentive for generators in a completely privatized market to reduce their emissions.
The United Kingdom has acknowledged this. It has significantly intervened in the electricity market by introducing a mechanism to keep prices stable for consumers, and to guarantee extra capacity in times of scarce supply.
It helps achieve its climate change goals by preventing supply shortages during the transition to renewable energy.
Australia’s national electricity market does not have the right balance between state and market.
The strong push to the market that started in Victoria, South Australia and New South Wales in the early 1990s now needs to be somewhat retracted. And in Queensland and Tasmania, where markets can be established, this must be done – with policies to support energy security and environmental sustainability.
The experience of the UK and Latin America with partly state-owned electricity systems suggests that Australia should not be skeptical about such reforms.
Active government involvement in the electricity sector is needed for Australia to achieve its ambitious climate goals, but this does not mean that the power of market forces is completely abandoned.