The ETAG was appointed in April this year to review the performance of the electricity markets (wholesale and retail) and make recommendations on improvements.
Their intial report looks very good to me, and their recommendations make for interesting reading. Highlights include:
1. A recommendation to phase out the reserve-energy mechanism. Reserve generation is the crazy measure put in place after the 2001 dry year, in which an expensive power station (Whirinaki) was commissioned whose only role would be to provide power in the event of a “1 in 60 year” dry year. That is, the initial idea was that it be operated for a few winter months once every 60 years and lie idle the rest of the time! In practice, it has been operated a lot more than that, but the concept is still the same.
Unfortunately, the report implicitly acknowledges that rationality might be a tough sell here, and so it has some second-best recommendations in the event that the reserve-energy mechanism is retained, but its favoured option is abandoning the concept of reserve energy altogether.
2. A recommendation to replace the Electricity Commission. The EC was another misguided innovation in response to the 2001 dry year. The ETAG recommend replacing it with a hands-off agency that would not be under the direct control of government, and so not a route for governments to intervene in the industry in response to short-term political objectives. Another victory for public choice reasoning.
3. Recommendations for moves to create more price sensitivity in consumer demand. This is long overdue. In a system where capacity is highly dependent on fluctuating weather patterns, it makes far more sense for the country to respond to low rainfall by having all electricity consumers reduce demand by a bit in response to price incentives, than by asking a small number of consumers to reduce demand by a lot, or, even worse, to have a large amount of capacity sitting idle except in very dry years.
4. A focus on the retail rather than the wholesale market for improving competition. The Wolak report looked at ostensible market power by generators. The ETAG put the focus where it belongs—on the retail market.
5. Some suggestions for improving competition in the wholesale market. This would seem to be an acknowledgement that there is market power in the wholesale market as the Wolak report claimed. I’m not so sure. More on that tomorrow.