The Politics Of Energy And Why Free Markets Aren’t Always Best
Tags: Electricity Affordability,
Director, Richard Harris
The eastern states is in the middle of an affordability crisis. The Federal Government is in a world of political pain trying to grapple with policy solutions while copping a beating from the media and political opponents.
No, I am not talking about housing affordability for first home buyers.
We are talking about the skyrocketing price of energy – the cost of electricity and gas, primarily for businesses and especially for manufacturing industries which are reliant on competitively priced energy in order to survive. Those high costs are also starting to filter down to the charges that householders pay for their power and gas. And then the real political pain will begin.
The origin of the current problem goes back to the lack of policy action by successive Federal governments. An uncritical view that markets should always be left to operate on their own, with no intervention to address local needs – from both Labor and Coalition governments – has led to the current malaise.
The problem is essentially about a gas shortage. Well, actually, there is plenty of gas – mainly from coal seam methane derived from the vast layers of coal laid down millions of years ago. The problem is that a small number of large gas companies saw the opportunity to aggregate those diverse fields of coal seam methane and pool together large enough reserves to underpin the construction of LNG plants on the coast. These plants now export the liquefied product under long-term, lucrative contracts to the energy-hungry economies of China and Japan.
Those gas companies, copying a model already well established in WA, essentially soaked up all the available supply, even buying the gas that was previously held in stock by electricity companies for their power stations.
To make the LNG plants viable, they need a long term supply, and that has meant that almost all the available gas is now committed to those plants. If you want some gas to run a power station in the eastern states it is either not available or only available at an exorbitant price. That also translates into higher electricity prices.
WA faced this problem over 10 years ago and the policy response of the then Carpenter Labor Government was to put in place a “gas reservation policy”. This required any new LNG project to reserve 15 per cent of its gas field for domestic supply. At the time, the gas majors and the Federal Government cried foul – “market interference”, “there is no gas problem”, “let the market work freely". All familiar messages that are being heard again now from the gas majors with LNG plants on the east coast.
But 10 years later and in WA, we now have a thriving LNG industry, AND a secure domestic supply providing gas at reasonable prices to power generators, industry and to domestic customers.
The policy has worked. It was bipartisan – originated by the Carpenter Labor Government and continued by the Barnett Liberal-National Government.
It is an interesting example of sensible policy overcoming the self-interest of large companies. But it's also an example of where the best long term policies are those with bipartisan support – agreed by all major parties in the long-term interest of the community, and of business. And it is also an example of government setting the clear rules of the game so that business can go on to invest knowing those rules won’t change.