Lights out: Why the free market fails

The market doesn’t work. At least, not for you and me. For years we have been told that the privatisation of the energy grid and the introduction of competition would create greater efficiency, greater choice and lower prices.

It was a total scam.

Privatisation has resulted in rising prices, degraded infrastructure and blackouts. The only beneficiaries have been the corporations selling us the so-called choice. The higher prices are delivering windfall profits to big energy companies, but little of this has found its way into system upgrades. As South Australians found out over summer, the supply of these most essential of resources is far from being assured.

The energy industry, as the saying goes, “only had one job”. It failed.

‘Efficiency’

The problem with Australia’s energy system is that, rather than being centred on the provision of an essential service to the public, it’s centred on the pursuit of profit. The much-vaunted “market” for electricity, far from providing consumers with a better deal, allows energy companies to hold society to ransom.

A recent report by the Grattan Institute, Price shock: Is the retail electricity market failing consumers?, shows just how much of a problem this is. The report focuses on Victoria, where the electricity system was privatised by Jeff Kennett in the early 1990s.

Privatisation was supposed to encourage competition and lead to lower prices for consumers. Instead of the entire electricity system – the power plants, the transmission and distribution networks, and retailing – being owned and run by the state, it was split up into its various components and sold off to the highest bidder.

Electricity is now marketed and sold by a myriad of retailers who pay power plants to generate it, and transmission and network companies to transport it to households. Most retailers are little more than a billing agency. Even meter readings are contracted out.

By the time electricity enters our homes, it has gone through the hands of up to five separate corporate entities, each of which takes its cut of the pie. Is it any wonder that we’re paying so much? Is it any wonder that crucial system infrastructure is left to rot, when each industry player is interested only in maximising its own profits?

Those who profit most from this set-up are the ones with the least involvement in actually providing us with electricity: the retailers. As detailed in the Grattan Institute’s report, over the past decade retail electricity prices in Victoria have risen sharply at the same time as wholesale prices have declined.

According to the report “the profit margin for electricity retailers appears to be about 13 per cent – more than double the margin regulators traditionally considered fair … Victorians would save about $250 million a year – about $100 per household – if the profit margin of their electricity retailers was the same as for other retail businesses”.

The gas market is even more of a rort. Australia has among the biggest reserves of gas in the world. But because it is controlled by private companies, whose only interest is making as much money as possible, we face the absurd situation of a potential gas shortage this winter.

Keen to make good on their more than $60 billion dollars in investments, Australia’s gas giants have entered into lucrative long term contracts to supply gas to countries in Asia, particularly Japan. Problem is, they don’t seem to have given much thought to whether the quantities of gas required could actually be supplied.

The “shortages” of gas in the domestic market, and the accompanying sharp price rises, are a direct result of this.

As a final sting in the tail, the current glut of gas on global markets means the price paid in Japan for Australian gas is much lower than the cost of gas in the domestic market. As journalist Michael West commented at the Conversation: “Some of this gas is drilled in the Bass Strait, piped to Queensland, turned into liquid and shipped 6,700 kilometres to Japan … but the Japanese still pay less than the Victorians”.

This is market “efficiency”: companies making as much money as possible by exploiting natural resources and ripping off consumers.

Government lies

Yet, according to Malcolm Turnbull and his backers in the fossil fuel industry, the main problem in the energy market is state governments setting unrealistic renewable energy targets. Again and again, Turnbull and his ministers have returned to this theme, pointing to the South Australian blackouts as evidence of the perils of relying on energy from these sources.

The idea that the South Australian blackouts were caused by an overreliance on renewables is rubbish. The first major blackout, in September last year, was triggered by the collapse of a number of transmission towers in a storm. Another blackout, during a heatwave in February, could have been avoided if the second turbine at a privately-owned gas fired power plant at Pelican Point had been switched on.

The latter example is particularly instructive. Plant owner Engie chose to leave the second turbine idle because from its perspective, the economics didn’t stack up.

As Tony Wood, energy program director at the Grattan Institute, told news.com.au: “If the price for power stays high – at say $10,000 per megawatt hour – and stays there for several hours, [they] can make a lot of money … But if they start their second plant (sending more power into the system) and the price crashes to $300 per megawatt hour, they don’t make as much money”.

A real solution

When it comes to actual or potential sources of energy – coal, gas, tidal, solar, wind and so on – Australia is among the most well stocked countries in the world. How difficult could it be to translate this natural abundance into a reliable, cheap and sustainable supply of energy for the benefit of all?

If it weren’t for the chaos imposed on us by the market fundamentalism of Turnbull and his predecessors in both the Liberal and Labor parties, we would already have an energy system befitting Australia’s natural abundance.

In fact, the current situation shows the need for state intervention to correct the failures of the market. The government is already leaning on the big gas companies in an attempt to have them act as “good corporate citizens” and guarantee supply over winter. It is doing so under veiled threats that, if they don’t comply, they could face government regulation to permanently restrict their exports.

Then there is Turnbull’s new policy of a $2 billion government expansion of the Snowy Hydro scheme. Dubbed the “Snowy Mountains Scheme 2.0”, it will involve the construction of new tunnels and power stations that will increase the output of the scheme by 50 percent, providing power for up to 500,000 homes.

But all this is window dressing. We need decisive action to take control of the national energy grid and the country’s natural resources and to push the private profiteers out. Not only could prices then be brought down, but the infrastructure could be renewed and transformed.

New technology is rapidly opening up the prospect of unlimited cheap energy from renewable sources. All that’s required is an upgrade in generation and distribution infrastructure – new wind farms and solar plants, large-scale battery storage, “smart” grids that allow for more effective real-time responses to fluctuating energy demands – and we could be living in a new, post-carbon age of genuine sustainability.

This applies not only to Australia, but to the entire world. It would be expensive. According to the International Energy Agency, it would require, as a start, global investment of around US$1 trillion a year between now and 2035. But keep things in perspective: according to a 2011 report by the Tax Justice Network, for instance, the world loses more than US$3.1 trillion annually to tax evasion.

A rapid shift away from the market-driven system of energy production is possible. The technology is there. The resources are there. But instead of the economy and society operating on the basis of what’s good for humanity, they operate in accordance with the logic of the market. And, as it turns out, the “logic” of the market isn’t very logical at all from a social perspective.