How significant is the Victorian government’s plan to revive the State Electricity Commission?

Victorian Premier Daniel Andrews has announced a plan to revive the State Electricity Commission, which will, if Labor is re-elected, take majority stakes in renewable energy generation projects and potentially become a retailer as well.

The day after the government issued a series of media releases about the proposal, the front page of the Australian Financial Review declared: “Andrews nationalises electricity”. Former Liberal Premier Jeff Kennett, who oversaw the privatisation of Victoria’s electricity supply in the 1990s, described the plan as “bloody shocking” and “heart-breaking”, while Dylan McConnell, from Melbourne University’s Climate & Energy College, called it “a game changer” and “a real paradigm shift”.

The proposal has obvious political significance. Victoria was the first state in the country to privatise its power network. And the people and institutions overseeing Australian capitalism for several decades have pushed private capital and private markets further and further into areas previously held in public hands and run in the public interest.

So it cuts against recent history, and the associated ideological consensus about market efficiency, for a government to announce itself as a player in a field created solely for privately owned, profit-making firms. It cuts even more so when the ALP government in question is one of the most business friendly in Victorian Labor’s history and juiced the announcement with a level of anti-profiteering rhetoric that you rarely hear in official politics.

How radical a proposal is this?

The first thing to note is that it is not at all the “nationalisation” that the Financial Review declared. Labor’s plan is to set up a government entity that will compete in the electricity generation market in partnership with private capital and, most likely, according to the premier, with superannuation funds (some of which already have large investments in the Victorian electricity sector).

Under the proposal, the government will retain a controlling interest in new power plants it builds, all of which will produce electricity from renewable sources. There will be a $1 billion initial investment to generate 4.5 gigawatts of power. Beyond that, the revived State Electricity Commission will consider becoming “a state-run retailer, partnering with an ethical retailer or remaining in the wholesale market only”.

While the announcement has ruffled feathers, it needs to be put in perspective. To do that, it’s necessary to understand the architecture and economics of the Victorian power system, and how it compares to other states.

The original State Electricity Commission was established in 1921. For many years, other companies and entities operated power plants in the state as well, but the SEC by the 1970s provided electricity to nearly all of Victoria. Then, in 1993, the Kennett Liberal government split up the Commission’s operations, and between 1995 and 1997 sold them to private businesses.

From there being one integrated provider, the system now has four separated parts. First is power generation. Second is transmission, which is the movement of the energy from a power plant or other generator to a substation, usually via high-voltage power lines held aloft by big steel towers. Third is distribution, which takes energy from the substations to homes and premises using medium and low voltage lines. Distribution is actually the final stage of power delivery. But we have a fourth layer as well: retailing.

Each of these disaggregated levels is owned and controlled by a private company, or a set of competing private companies.

In terms of electricity generation, the old SEC produced more than 90 percent of Victoria’s power from the coal plants in the Latrobe Valley. These privatised plants still provide around two-thirds of the total energy, but a more decentralised patchwork of renewable power generation, with an associated patchwork of owners, is emerging across six zones throughout the state.

In terms of transmission, the 6,000-kilometre high-voltage system is owned and maintained by a regulated private monopoly, AusNet Services. Once the power gets to the distribution stage, there are another five businesses taking a cut. They own the local power poles, wires and meters and are responsible for connecting premises to the grid. Each of the five— Powercor, United Energy, Citipower, Jemena and (again) Ausnet Services—has a regulated monopoly in a different part of the state.

The Institute for Energy Economics and Financial Analysis recently found that the transmission and distribution businesses on Australia’s east coast receive super-profits 67 percent higher than “the normal level of profit”—an extra $10 billion over the last eight years alone. They have achieved this by overestimating the costs of building, operating and maintaining the network and then charging for those overestimated costs. The big winners were the companies’ shareholders, who “retained the differences between revenues and costs”.

Last are the retailers. There are at least 34 of them, some of which also have stakes in the power generation industry. About 13 percent of a household’s power bill is taken up by the retailer’s costs and profits, according to the Australian Competition and Consumer Commission. The kicker here is that the retailers don’t deliver electricity at all. They buy it wholesale and then compete for the right to provide us with a retail contract and to send us the bill—with their mark-up included, of course.

So, at every step—generation, transmission, distribution and retailing—a private company is making a profit that adds to the final price paid for electricity, which is well above the actual cost of simply providing the power and maintaining the network.

With this system architecture and its associated economy in view, it quickly becomes apparent just how limited the Labor government’s proposal really is. It is not taking any of the infrastructure back into public hands. The retailing arena will stay for-profit and privately operated. The transmission and distribution systems will stay for-profit and privately owned. The existing power generation infrastructure, and the projects already planned, will remain for-profit and privately owned.

What we have is a proposal for a government entity, the revived SEC, to compete in the power generation market while partnering with private or institutional capital, which will also receive a profit (presumably commensurate with the investment stake).

What about the scale of the proposed investment? It is not huge in the scheme of things. “An estimated 20 gigawatts of renewables generation is needed by 2035 [to meet the government’s renewable energy targets], about 4.4 times more than the 4.5GW the SEC would develop”, Patrick Durkin and Angela Macdonald-Smith note in the Financial Review. So power generation investment is still, at this stage, projected to come overwhelmingly from the for-profit private companies.

How does this compare to the situation in other states?

The electricity networks in Tasmania, Western Australia, the Northern Territory and Queensland are 100 percent government owned. In NSW, one electricity network is privately owned, two are majority private owned and one is government owned. The Australian Capital Territory’s network is a public-private partnership.

Only in Victoria and South Australia are the networks 100 percent private owned. On the face of it, Daniel Andrews’ proposal will transform the Victorian power network from the most privatised in Australia to ... the second-most privatised in Australia.

No wonder, then, that despite all the sound and fury from the likes of Jeff Kennett and some of the existing power generation company executives, a range of potential institutional and private investors have been positive about the potential to make money by partnering with the government—which will probably guarantee a set rate of return for its co-investors.

“We need to procure longer-term investment capital in our projects”, Nick Sankey, country manager for BlueFloat Energy, told the financial press this week. “As a leading offshore wind developer, we can be a facilitator in these projects that the government would like to invest in.”

“We are always interested in partnering with governments on projects that can help maximise long-term returns”, said David Whiteley, chief executive of IFM Investors.

“We see significant scope for other private investors to participate”, said a spokesperson for the Clean Energy Investor Group.

So while the government’s planned revival of the State Electricity Commission is a masterclass in how to create a political narrative, its proposal, as it stands, contains very little that would fundamentally challenge the massive profiteering in Victoria’s privatised energy market.