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The government has asked the Australian Competition and Consumer Commission to review the factors influencing rising retail electricity prices. However the ACCC has historically been more concerned with protecting markets than ensuring lower prices for consumers. And the problem is that the electricity market itself has contributed to rising electricity prices and shortages of electricity.
In theory shortages of electricity are supposed to lead to high prices which in turn provide an incentive to build new generating facilities. But in reality there is more financial reward in creating electricity shortages so that prices can be manipulated. Electricity generators have made large profits by charging outrageously high prices when demand is high.
Electricity markets bring a disjuncture between price and the cost of production as well as extreme volatility in prices that are reflected in higher retail prices.
To deal with price manipulation the ACCC authorised a price cap on electricity prices in 2002, of $5000/MWh compared to a normal electricity-generating price of $35/MWh. In 2002 the ACCC again expressed its concern with "the ability of generators to affect spot prices seemingly at will." Yet the price cap was increased to $10,000/MWh that same year.
Prices can be manipulated by the physical withholding of capacity or economic withholding — that is, bidding large chunks of their capacity at very high prices. Rebidding enables generators to offer capacity at very high prices at the last minute, so there was no opportunity for competing generators to put in a cheaper bid.
However, the ACCC accepted generating-company arguments against the proposed rule changes to rebidding, and said it did "not accept that the benefits of the rejected changes would outweigh the anti-competitive detriment." It rejected a compromise put forward by the Business Council of Australia, that rebidding should only be allowed within three hours of electricity dispatch if the price was lower. The ACCC did require generators to give reasons for their rebids that would be published. This did not stop them from giving "financial optimisation" (in other words profits) as a reason.
If companies resort to artificially creating shortages, they are hardly likely to invest in extra capacity. System reliability and security is therefore compromised by the unwillingness of private companies to maintain reserve capacity for situations of high demand. This increases the likelihood of blackouts.
It was the unwillingness of private companies to take on the risks associated with constructing capital-intensive electricity infrastructure that led to government provision of electricity last century. A government can build reserve capacity without much risk, because the costs can be spread over a large number of consumers over long periods of time. In a public system, the risk of lower returns to taxpayers who pay for the infrastructure is balanced by the lower prices to electricity ratepayers, usually the same people.
The role of the ACCC is to protect the electricity market and give the impression that there is some government control. However it is the market that is the source of Australia's electricity price rises and no amount of tinkering with the rules will change that.
Professor Sharon Beder, University of Wollongong, is the author of Power Play: The Fight to Control the World's Electricity.