Australia is suffering the conjunction of a number of events in recent weeks which demonstrate the poverty of the neo-liberal approach that governments on both sides of the political fence have followed over the last three decades. Electricity prices are rising and the governments have bowed to pressure from the power companies to end the favourable feed-in tariffs that promoted the widespread adoption of solar power by households. Further, our climate change denying federal government has seized on recent power outages in South Australia to attack that state’s accelerated move to renewable energy. The federal government claims it validates its decision to back coal (and they are planning to provide $A1 billion to the Adani group to build transport infrastructure for a new coal development that will never be economic. The problem with the federal narrative is that in the extreme weather Australia is now enduring (very prolonged hot spells with major bush fires) the state with about the lowest renewable mix in its electricity also had to cut power late last week. Further investigation shows that the privatised electricity generating sector has been deliberately manipulating the supply of power (maintaining spare capacity) to exploit price spikes while the captive regulator turns off power to thousands of homes and businesses. Profits before public service – that is what privatisation has delivered. And then, we have to put up with a rising ‘star’ treasurer who thinks government infrastructure spending is unfair to future generations and more privatisation is required. It is best not to put all this together – it is not good for one’s equanimity.
The problems I mention in the Australian context – extreme weather events, lack of public capacity to cope because privatisation has hollowed it out, people in charge of key government positions who should not be in those positions (or anywhere near them), market manipulation by greedy and poorly regulated privatised (former) public enterprises (in key utilities like energy, transport) – all woven together by mindless neo-liberal economic narratives designed to justify more of the same – are not unique to Australia.
The discussion that follows is relevant to us all even though the examples are Australian.
I have written about the parlous state of Australia’s electricity sector before – see Welcome to the world of privatised electricity and canned music
Australia is now enduring ‘record-breaking’ weather – floods in the West and a heat wave like no other in the East. The heat and high wind has brought bush fires and they are now raging out of control out to the west of where I live.
We have had a few of these heat events since the start of this year. The first major blackouts occurred in South Australia in September 2016.
South Australia (with a Labour government) has led the way on introducing renewables to the power generation mix and the climate change denying, pro-coal federal conservative government immediately blamed the shift to renewables as a demonstration of how ‘greenies’ have created power cuts.
Then last week, another extreme heat event, caused further blackouts in South Australia, when the Australian Energy Market Operator (AEMO) cut the interconnector from the national grid to that state and tens of thousands of people lost power in that state.
AEMO was created by the federal and state governments to operate “Australia’s National Electricity Market (NEM), the interconnected power system in Australia’s eastern and south-eastern seaboard, and the Wholesale Electricity Market (WEM) and power system in Western Australia.”
It is a private company that operates on a “cost recovery basis” through the imposition of “fees paid by market participants”.
You can learn about the – Australia’s National Electricity Market – if you are interested.
Previously, each state ran its own system – owning the generators, distribution, transmission and retail – it was a reliable system that worked and prices were lower than we now have to pay under this new market system.
The facts are that:
1. The NEM was established in December 1998 and created an electricity grid connecting the states on the East coast plus South Australia and Tasmania.
2. The NEM “operates the world’s longest interconnected power systems”.
3. The producers were privatised public companies although some state governments still own some of the infrastructure (see below).
4. A physical ‘spot price market’ links the producers with the consumers – and the generated output is “aggregated” and dispatched by AEMO.
5. AEMO selects offers from the generators every 5 minutes to meet current demand.
6. Then there is the ‘financial market overlay’ which allows a “separate financial trading market for electricity” to smooth out the highly volatile spot prices.
7. The market prices are skewed in favour of coal (because no external costs – pollution – are factored in). New entrants also find it difficult to enter the market.
Power generation in Australia is dominated by black and brown coal (depending which state) with gas a distant third. In 2014-15, black coal accounted for 42.7 per cent; brown coal, 20.2 per cent; gas 20.8 per cent; oil, 2.7 per cent; Renewables 13.7 per cent (hydro 5.3, Wind 4.5, Solar 2.4).
The mix is not uniform across states.
8. While there are maximum prices legislated, the ‘market’ is still subject to supply-side manipulation by the generators, which leads to ‘load shedding’, where if demand in a region exceeds supply AEMO forces power outages.
9. There are four components to this incredibly complex system
– The generators which sell to wholesale market;
– The distributors which manage the ‘poles and wires’;
– The transmitters – use the high-voltage network to link the generators and the distributors;
– The retailers that buy wholesale and sell to customers.
Some of the privately-owned assets are owned by foreign governments, which makes the whole privatisation justification of getting government out of the market the farce it is.
There is significant concentration in the private ownership which makes the ‘competition’ narrative look weak.
Between 1995 (when the madness really began) and 2012, electricity prices in Australia have risen by 170 per cent – “four times the rise in the consumer price index” (Source).
The promise was the opposite.
Even the state-owned bodies (in NSW and QLD) have been “ramping up prices because of an over-investment in poles and wires – or ‘gold plating'” which allows the network providers to increase their revenue (due to the market rules).
We now know that under the rules set up by these neo-liberal governments “the more the power companies spend, the more they get paid – and this spending constitutes the single biggest component of the rise in our power bills)” (Source).
When South Australia experienced a second major blackout last week, the federal government once again went feral blaming the use of renewable energy and once again reaffirmed its commitment to coal power.
The problem is that within a few days the heat had moved from South Australia (in central longitudes of the nation) to the East Coast (Victoria, NSW and Queensland) and AEMO was forced to shut off power to industry (large users) to stop the entire system collapsing.
That is inconvenient for the federal government because NSW is among the lowest users of renewables in the mix.
In the first blackout in December, the problem was a poorly maintained interconnector between Victoria and South Australia which failed, blocking power into South Australia.
However, the more recent blackouts in both South Australia and New South Wales were due to market manipulation.
The facts have since emerged that generators were idle during the blackouts because of the ridiculous incentives within the ‘market’ system that allows companies (many of them foreign owned and by foreign governments) to withhold supply.
We know from last year that in South Australia there was a huge spike in prices in July. The fossil fuel generators deliberately restricted supply which pushed up prices and delivered them huge boosts in profits.
At the time it was clear that generation capacity was always much greater than demand. The generators refused to supply at anything other than a massive price.
A commentator at the time said the generators (Source):
… weren’t doing anything illegal, but they were taking advantage of a market that wasn’t functioning properly.
But that is the perversity of our neo-liberal world. Money comes before service in essential services such as electricity. The government has set up an artificial system to allow operators to earn massive profits at the expense of the well-being of citizens and other businesses.
In last week’s power cuts as temperatures soared above 40 degrees Celsius, similar manipulation was going on.
A gas power station in South Australia, for example, was idle and wasn’t activated by AEMO, who claimed they had called on generators to supply more power “six hours in advance of the cuts” (Source) but the suppliers chose to leave infrastructure idle, knowing the price would spike as would their profits.
An expert on these matters concluded that:
… the underlying cause of the blackouts on Wednesday were the same as those behind what happened in July last year, when low supply led to massive spikes in wholesale electricity prices …
When the renewables are not operating flat out or making enough electricity, the fossil fuel generators have the market to themselves. And as we know from studies that I’ve done from 2008 onward they can and do corner the market …
This is just classical market cornering … If you decrease your output by half but as a consequence increase your price by a factor of ten, you’re better off decreasing your output.
And the society is worse off. Welcome to modern, neo-liberal Australia.
And Fairfax press reported today (February 13, 2017) – Prime Minister Malcolm Turnbull and ministers were told wind not to blame for South Australia blackout – that FOI requests have reveals that:
Turnbull government statements blaming last year’s South Australian blackout on its high renewable energy target ignored confidential public service advice stating that it was not the cause …
Advice to the government dated September 29, 2016 – the day after the whole of SA went black following a devastating storm – suggested the problem had not been the state’s high reliance on wind generation, but rather because key parts of its electricity distribution network were wrecked during a severe weather event.
So the other part of the modern, neo-liberal Australia (and the World) is that our governments now routinely lie (not just put a spin on things but lie) when they know the facts are contrary to their desired political messages, which in this instance relates to their on-going climate change denial.
All of this should remind us of the Enron scandal – remember the ‘Burn, baby, burn’ transcript which captured the Enron traders gleefully receiving news of a bush fire that was damaging power infrastructure because they knew it would push prices up and render them increased profits.
The – Smartest Guys in the Room – documented the role that Enron played in the California electricity crisis – whereby they would create artificial power shortages to allow the traders to sell power at much higher prices than normal, which eventually, (due to the cap on retail charges) drove Pacific Gas and Electric bankrupt in 2001.
The crisis was the direct result of the 1996 deregulation in California which allowed financial companies to manipulate markets without oversight.
That is the sort of situation that has been unfolding in Australia over the last 30 or more years.
On the feed-in tariff scandal – this story is interesting (February 9, 2017) – The great solar power scam.
Essentially, the power companies, already screwing all citizens are about to ramp up their exploitation of the lowest income earners in Australia.
Solar feed-in tariffs. As part of the drive to encourage households to install solar systems, the governments legislated that excess solar generation that was fed back into the National Grid had to receive a reasonable payment from the energy companies.
This incentive system ended at the beginning of this year and now households with solar cells receive around 5 or 7 cents per kwh of power they export back into the grid in excess of their needs.
The problem is that solar cells generate a lot of power during the day when most people are at work and not using power at their homes. So it was fair that the exported power would be similarly priced to the draw on the grid that households made at nights when they returned home and the sun was gone.
The feed-in legislation didn’t even go far enough and power companies could still buy our excess cheaper than they sold it back to us at nights.
But now it is ridiculous. They are charging around 30 cents a kwh but paying only 5 cents per kWh.
As the writer notes:
It’s a greedy mark-up that only serves to line the pockets of power companies, and it’s being facilitated by the Victorian government. So why is the government doing this, when it should want to encourage renewable energy?
Partly it’s due to governments – both Labor and Liberals – cowing to the demands of profit-hungry electricity companies who are chasing the bottom line before the coal industry inevitably closes up shop. And partly it’s due to a lack of vision from governments who can’t seem to imagine our electricity system being any different to how it is now.
What happens next?
Well in anticipation many of us have worked out that battery storage is now economic despite its rather high entry price. So the higher income households are now busily buying storage so as to reduce any drain on the grid at night and keep all the excess power generated from the solar cells during the day.
That sounds like a great idea – and my own household has done that and we are looking at cooperative models of community power companies to share power as a result.
But while it might be a great idea for those who can afford the batteries (they are not cheap), what it means is that as more high income earners leave (or mostly leave) the national grid:
This leaves fewer people (mostly lower-income households) on the grid. The dwindling numbers of people left on the grid will be responsible for the costs of maintaining it, which will get more expensive as more people leave.
Once again a failure of government policy to take on the big multinational power companies. As one commentator noted:
… power companies have been given a misguided sense of entitlement when it comes to making a buck. They expect over-sized profits and governments are happy to oblige them. The sizeable donations they give to Labor and the Liberals doesn’t hurt their cause, either. Policymakers continue to protect the electricity industry from change and discriminate against emerging technologies, ensuring the status quo continues.
The solution is obvious – everybody should have solar cells and encouraged to share excess power across the grid. Under current ‘market’ rules that is not going to happen and the poor will be – once again – the biggest losers.
But the market manipulation and market failure that is now causing an electricity crisis (along the same lines as the Californian crisis) requires radical surgery.
The system should be renationalised entirely, the components unified, and the public service mission restated and enforced – to provide power at the lowest possible cost consistent with environmental sustainability to citizens with the concept of ‘profits’ disappearing from the equation altogether.
If as this all was not a wake up call for our politicians, we have to put up with the new Treasurer of the NSW state government who is part of the conservative, hard-right faction of Australian politics and has a background in legal matters to do with banking restructuring.
The new NSW Treasurer hit the headlines over the weekend (February 11, 2017) in the Fairfax article – NSW Treasurer Dominic Perrottet I don’t think its fair that my generation is going to foot the bill – which effectively demonstrates why he should resign immediately as the Treasurer.
He is a 30-something fast mover-type with a history of student politics. He is now a state treasurer.
He told the press last week that:
I sit there and think as somebody who is 34, I don’t think it’s fair that my generation is going to foot the bill for modern day governments that don’t live within their means …
If you look at governments around the world and the pressures on their economies you’re having discussions on a whole range of issues about where we put funding that I think just won’t be available …
With an ageing population those pressures and the costs of those decisions are going to be borne by our generation. We’ve got to make the tough decisions now to make sure we have a strong position for the budget going forward.
Which should immediately disqualify him from being treasurer (even if it is only a state government).
One should be careful though because he is representing a state government, which is a currency user and so has to tax or borrow in order to spend.
Its debt is largely underwritten by the currency-issuing federal government, which of course faces no financial constraints on its spending.
At the federal level, the idea that borrowing ‘takes money from the pockets of future taxpayers’ is nonsensical.
The funds to pay for the bonds originate in the government net spending in the first place. The deficits add to bank reserves and non-government entities decide that it is in their best interests to hold the net increment in wealth in the form of government bonds rather than reserves. So the government is really borrowing their own spending back!
Once you understand that then the idea that there is a future burden will make you laugh. Further, the interest payments are incomes to the bond holders who presumably enjoy the return on their saving. Most will have children who will benefit from those payments.
When it is time for the government to relinquish a particular debt instrument and pay interest it just credits the relevant bank account and deletes up the IOU record.
The future generation has no less real options available to them as a consequence.
Whether future taxation is higher or lower is not conditioned by the deficits that the government has run in the past. It may be that the deficits will drive the economy into a solid growth path (they should if they are large enough and persistent enough).
As incomes rise, tax revenue rises. The government may form the view that private spending is growing to quickly relative to the real capacity of the economy to meet that nominal spending growth with new goods and services. The government can then raise taxes to stifle demand and prevent inflation.
In doing so it is not providing itself with any extra revenue to help it pay its debt back. It is just adjusting aggregate spending to ensure the economy maintains price stability.
There has never been an empirical relationship shown between tax level changes and debt level changes lagged however many years you like. The notion is ridiculous.
Further, if we want to provide for the future generation then the things that will matter are education, employment and public infrastructure. All three are investments in the future. Running fiscal surpluses tend to undermine those essential responsibilities of government.
The government has as much ‘money’ now as it had yesterday and the same amount it will have tomorrow. That amount equals whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past.
Fiscal surpluses do not provide the government with more capacity to spend in the future in the same way that the act of saving by a currency-using household allows for greater future consumption at the expense of current consumption.
It is a nonsensical notion thinking that a sovereign government would ‘save’ in its own currency. There is no storage shed in Canberra or Washington or anywhere else where the surpluses are saved up and available for the government to drive a truck down and pick up some dollars to spend.
Surpluses destroy financial assets that were previously in the hands of the non-government sector and these assets are gone forever.
Surpluses take money from the pockets of the households because the government spends less than they tax us.
The situation is, of course, different for a state government in a federal system, which uses the currency the federal government issues.
Please read my blog – When governments are financially constrained – for more discussion on this point.
In Australia, these state (and territory) governments have specific spending and revenue-raising responsibilities and powers as specified in the Constitution.
State governments are free to run deficits if necessary and can raise debt if desired. They have no income taxing powers and raise most of their cash from land taxes (stamp duties) and receive significant redistribution of federal revenue via an revenue-sharing arrangement.
There is significant vertical fiscal imbalance in the Australian government system with the federal government having the lion’s share of the revenue sources, yet the states having significant spending responsibilities under the Constitution.
The state governments are revenue-constrained like a household. It is at this level of government that the analogy between the government and the household budget has resonance.
This means that the state governments have to finance their spending either via taxes and charges, borrowing, or asset sales.
Over the neo-liberal period, the states adopted the view that borrowing was evil and so privatised significant assets (at bargain basement prices after paying huge fees to investment banks to facilitate the sales).
It has been a total disaster. Many of the assets have had to be re-purchased by government because the private operator went broke and the essential services would have been lost.
In the 1990s the NSW government, in pursuit of surpluses, began a privatisation binge. It started flogging off valuable state assets at massive discounts (to ensure the sales succeeded and hence avoid the political embarrassment) where the consultants who brokered the deals made millions and the state of public service fell.
Over the growth period leading up to the GFC, the NSW government, for example, squandered a huge boost in stamp duty revenue that came there way as a result of the Sydney property boom and oversaw the largest degradation in public infrastructure in our history.
The state government pursued surpluses over the entire boom period instead of maintaining the essential state infrastructure. It hired a massive squad of private consultants to help it cut spending. It entered into various public-private-partnerships which devolved its responsibilities for public infrastructure provision and handed them over to private equity interests who evaluated their investment decisions based on private profit rather than public good.
The capacity of public hospitals was devastated; railway bridges became dangerous. By the time the credit boom that had driven the NSW property boom was over the quality of public infrastructure has seriously decayed.
The other strategy that these neo-liberal obsessed state governments adopted was to pretend they had no funds for infrastructure development and so needed to form so-called public-private partnerships.
With PPPs, public purpose disappears and governments become underwriters of private profit. In NSW trade union superannuation funds have become compromised by the participation in PPPs and the conflict of interest that it presents the union movement. In PPPs, the risk is never transferred to the private sector.
The only things transferred are public oversight in the infrastructure planning process and the delivery of public services; huge volumes of public funds; and, ultimately, the overriding public purpose of interest becomes usurped by the unquenchable pursuit of private profit. Not a good look at all.
Please read my blog – Landlocked … but still swamped by budget hysteria – for more discussion on this point.
The fact is that that the issuing of debt by the state government is an essential way it can raise funds to finance large and expensive public infrastructure developments which underpin economic growth in the state economies.
The benefits of this investment span the generations.
So far from leaving a debt burden to the future generations, the investment provides benefits to them that they help pay for when they have incomes. That is called intergenerational equity.
The reluctance to borrow over the last few decades by state treasurers to has been a myopic strategy. The governments’ reluctance to fund infrastructure growth has reduced the potential growth path of the states and the debt retirement and interest savings have destroyed the wealth holdings and incomes of private savers.
The run-down of existing infrastructure is now revealing itself to be a myopic strategy – one that will cost more in the long-run than if there had been steady capital spending growth over the life of the Government.
Education is a good example. Investment in public education underpins child and community development but as the state governments built their surpluses in recent years they allowed teachers’ pay and conditions to lag behind other occupations.
State governments must realise that a responsible fiscal position requires that they should borrow to build public infrastructure, which creates assets that spread benefits into the future and the borrowing allows future generations to pay a share of the costs in some proportion to the benefits they receive.
The alternative austerity (aka euphemistically as “living within its means”) kills intergenerational equity.
And, returning the electricity debacle, the new NSW treasurer claimed that he was keen for further privatisation:
Absolutely. If there is case that will provide better services for the people of NSW, yes.
That line surely wears thin.
While the NSW government has further sought to outsource its electricity distribution responsibility in December in the name of lower prices and better services, the exact opposite is now clear – higher prices and highly unreliable supply – as a result of market manipulation.
Even one of the biggest proponents of privatisation in Australia is now becoming circumspect.
On July 27, 2016, the chairperson of the Australian Competition and Consumer Commission (Rod Sims), the federal regulatory institution that is pro ‘competition’ (neo-liberal style), was reported as saying that the history of privatisation in Australia had been “severely damaging” for the economy.
It was a stark statement given how he has been a well-known “former advocate of privatisation”.
His story was told in the Guardian article – ACCC’s Rod Sims says privatisations ‘severely damaging’ economy – where the ACCC head said that:
… governments have repeatedly botched the sale of airports, electricity infrastructure and major ports – making things worse for consumers – because, when selling the assets, they have been motivated by maximising profits rather than making efficiency gains …
governments have created private monopolies without sufficient regulation to stop those monopolies overcharging users …
He was quoted as saying that “I’m now almost at the point of opposing privatisation because it’s been done to boost proceeds, it’s been done to boost asset sales, and I think it’s severely damaging our economy … let’s just stop the privatisations … It is increasing prices – let’s call it out”.
That is not what you would expect him to say and demonstrates the extent to which various privatisations have caused such havoc to citizens in Australia.
A real pot-pourri of neo-liberal chaos and failure.
The ‘market’ innovations in electricity have transferred millions to the top-end-of-town at the cost to low income earners (in particular).
But the rising profits have not been enough. The greed is now driving the privatised suppliers to manipulate the ‘market’ and drive blackouts because blackouts are good for them. And f*ck the rest of us.
Burn, baby, burn.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.