Sunday, March 12, 2006

Deregulating old sparky

It is important to look at the experience of deregulation and to recall the promises made. Electricity deregulation in the US has copped repeated blastings and is again criticised in the Washington Post here. Electricity prices have soared faster than fuel prices and by more in deregulated states than in regulated ones. Under the old system, electricity prices were based on costs. Now, prices are based on what suppliers believe markets will bear.

Recall that the move to deregulate was initiated by Enron which later succumbed to scandals, including one in which it manipulated the California wholesale electricity market in 2001, causing prices to soar. The Californian debacle has had an impact here in Australia, at least among academic economists.

US prices have risen strongly in the US partly because of lack of meaningful competition. Almost no-one chooses to change supplier. Isn't it much the same story in Australia?

Nor has deregulation brought on technology improvements in the US. Older, less-efficient plants have remained profitable, discouraging investment in new plants. Deregulation was supposed to encourage development of a national grid. But the national grid hasn't been improved because power producers don't want the competition a national grid allows. It nearly impossible to move large amounts of electricity over long distances.

Some regions remain short of capacity and must import energy from outside at high prices.

Low-cost coal-fired and nuclear plants are able to sell power at the same price as more expensive natural-gas-fired plants. The primary beneficiaries are their owners not consumers.

The record seems poor though I bet some of the claimed facts can be challenged. How much of the debate is relevant to Australia? I'd be interested in locating up-to-date reviews of Australian experience.

Update: Ian recommends this (on the Australian sector) and this by David Newbery on the UK experience.

1 comment:

ian said...


I too would would be interested to see a range of authoritative work.

David Newbery studies power markets, especially UK. This is his (with others) paper on NETA.

Bob Booth (trading as Bardak Ventures) is a prominent local critic of the NEM. His latest paper discusses market power issues.