Time to renationalise electricity transmission
Written for an interview that didn't happen
I’ll be doing an interview today with ABC 7:30 report (update: ANC cancelled) about the loss of power in Broken Hill and nearby communities, triggered by a storm that destroyed transmission towers owned by Transgrid, the privatised firm that operates the NSW and ACT electricity transmission networks. The loss of power should have been temporary, but one of two backup generators was offline, and the other overheated and shutdown. As a result, power was lost for a week or more, leading the NSW government to offer partial compensation to those affected.
Storm damage to transmission networks is common. It’s what happens next that matters
A large battery operated by AGL, and commission only a few months ago, should have been able to help, but Transgrid had not connected it, for reasons that remain obscure but appear related to Transgrid’s own plans to provide a different storage technology in the future. It took nearly ten days of negotiations to switch the battery on.
There will doubtless be lots of arguments about the technological problems (the denialists at the Oz are already trying to blame the batteries), but the issues here reflect the failure of the electricity reform agenda.
Some lessons are already evident. First, even in a fully privatised system, governments cannot escape responsibility for essential services like electricity. This has been shown by previous system failures, such as the South Australian blackouts in 2016. After the blackouts, the SA government re-entered the electricity business, making a deal with Tesla for the construction of the world’s first big battery.
Second, the fragmentation inherent in the design of the National Electricity Market makes the entire system more prone to failures. Responsibility for keeping the lights on is shared between private transmission, distribution and generation companies, the Australian Energy Market Operator and the Australian Energy Regulator.
The NEM was originally designed for a system in which coal-fired plants supplied a constant supply of (misleadingly named) “baseload” energy, while peak demand was met by gas-fired power and some limited hydro. The market was supposed to match supply and demand in the short run, while providing the incentives necessary for new investment (expected to be in gas)/ The stability of the system was provided by the “spinning reserve” of coal-fired power synchronized by the grid.
This never worked perfectly (in particular, investment signals never really worked), bit problems have been made more severe by the energy transition. The maintenance of system stability now involves a variety of technologies with different properties, including batteries and other storage technologies. Prices for these have been bolted on to an already complex system.
It’s time to reconsider all aspects of the system beginning with the privatisation of monopoly assets such as transmission and distribution. The hope was that the efficiencies of private operation would offset the higher rate of return being paid to privatised firms, This has not happened.
Returning these assets to public ownership would allow for a return to a more integrated electricity supply industry. Ideally, the public market operator would own the poles and wires. The existing pool market would be partially replaced by long-term power purchase agreements with clear obligations to provide continuity of service, system stability and so on.
Renationalisation is perfectly within the financial capacity of Australian governments. Indeed, the low-risk nature of these assets has made them attractive to quasi-public investors, such as sovereign wealth funds and public pension funds (Transgrid is mostly owned by a Saudi wealth fund and Canadian provincial governments).
The big question is the price that should be paid. Acquisition “on just terms” would require that Transgrid’s owners receive at least the value of the “regulated asset base”, which is about $8 billion. But the high rates of return on regulated monopoly assets typically mean that they trade at a substantial premium, often around 40 per cent. It would be necessary to negotiate a price somewhere between the two, with compulsory acquisition as a possible backup.n
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Interview was cancelled so I'm glad I took the time to write this up
There are a whole range of purchasing options for renationalisation from compulsory acquisition, as mentioned, to an agreement giving asset control to the gov while permanent passive private propietors clip their coupons while we switch on our air-conditioning. Middle of the road options could include a kind of rent to buy scheme, annual reverse auctions of with the federal government offering diminishing amounts for parts of the national grid, slowly pushing up incentives to sell with increasing regulation, or any combination of the above.
There will be much talk of threats to our wide brown land's reputation with the global investor class, most of whom are amazed that we let them tap us for free money for so long. But generally attacks will center on increasing electricity prices and will be loud and frequent enough to drown. The government needs to pre-empt this with a campaign of billboards and mail outs pointing out how prices have increased more sharply under private ownership than public.
Any nationalisation process that offers private owners the best price to get out while the going is good shouldn't be too difficult to put together. But the more I think about it, the more I think that compulsory acquisition would be the way to go. A quick change will have fewer risks and messing about over the medium and long term compared to any prolonged series of payments or piecemeal acquisition. It would require a "take it or leave it" offer including the $40 billion in lost revenue mentioned in the article BUT with a hefty "we could have done this much sooner, be grateful you're getting this much" discount. The cost to tax payers would be atomised across the country (WA? Why should WE pay for the grid YOU were silly enough to privatise? And give us more GST revenue...; )..) and over time with loans THAT COSTS US LESS IN THE LONG TERM AND PROBABLY MEDIUM TERM THAN THE COST OF LEAVING VITAL INFRASTRUCTURE IN THE HANDS OF AVARICIOUS RENT SEEKERS YOU DRIBBLING, SYCOPHANTIC, DELUDED..............ahem. Sorry about that. Sometimes I hear voices in my head and they sound suspiciously like Peter Hartcher and Andrew Bolt.
The political risk of a the one fell swoop approach will be high from the time of announcement to several years after completion of handover. Given that this time period will almost certainly span more than one election cycle means it would take a government that believes in what it is doing and legislates to make the process all but irreversable. I know, I know but we have to hold out hope, otherwise what's the point?
A process stretched out to what could be decades leaves to much room for reversal, stuff-ups, cost blow outs, extra rent seeking and leaving the job half done, probably in the form of some horrible public private hybrid entity. Any reputational damage to us as an investor destination will be short lived and only scare away the types of investors we don't want. ie: VC, PE.