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31
Bolt on electricity
January 31, 2009 | 21 Comments | Stephen King
Andrew Bolt has a bit of a rant in the Herald-Sun about lack of investment by the Victorian State Government in water, public transport and the failure to build new generators.
Hmmm. Let’s just back up on that. Last time I looked our electricity generators were privately owned, as is our transmission and distribution infrastructure. We leave it to the market to determine generation investment. Yes, the market rules are set by the Government (but not the State one) and enforced by the Australian Energy Regulator. But investment decisions in generation capacity are private decisions made according to market signals.
Is Andrew suggesting perhaps nationalisation?
The real point of Andrew’s article is that we should have infrastructure to deal with extreme events. But this doesn’t make economic sense. For example, we could keep expanding our roads so that there was no annoying congestion – but the expense would far outweigh the benefits. Similarly we could expand the electricity system so that it could deal with any level of feasible demand. But it would cost a lot, it would involve a lot of expensive idle assets, and it would not be achieved without extensive government intervention in the privately-owned Victorian electricity market.
One of the facts of private markets is that it is both privately and socially optimal for capacity to be constrained at times. For example, Movie World could quadruple its size and avoid everyone having to queue for rides. A good outcome? No! It would cost Movie World a lot and this would be reflected in the price consumers pay. The extra investment would simply not be valued enough by consumers to make it worth while (if it was, Movie World would make the investment, raise the price and make more profit).
Similarly our supermarkets could employ twice as many people and build more checkouts so that we never have to queue. A good idea? Of course not! The extra cost would have to be reflected in prices. It is neither profitable nor desirable for consumers.
So sometimes the electricty system will have the equivalent of queues. It will be in a situation where demand exceeds physical capacity and there will be rolling blackouts. Is this an argument to build more generation? Well let’s put it another way. How many of you would be willing to pay double the price of electricity all the time to avoid one-in-one-thousand chance of a blackout lasting more than a few minutes once during the year? Can’t see too many hands up. But this is what Andrew appears to want. Investment in generation capacity that is idle 99% of the time just to avoid the chance of an ‘electricity queue’.
That is not how the market system works.
But it is actually how government ownership traditionally did work. BK (before Kennett) the State Electricity Commission had a strong incentive to overbuild and avoid all but the slightest risk of a blackout. The assets were government owned and paid for by tax payers. The SEC and Government could avoid nasty publicity by overbuilding the system. Privatisation put a stop to the overbuild and stopped the waste of taxpayers money.
Why on earth Andrew do you want us to go back to those bad old days?
Comments
21 Responses to “Bolt on electricity”
Stephen,
1) electricity is a far more pervasive necessity than queuing at Movie World or the supermarket, in some cases, it is mission-critical and/or life-threatening. As well if you add in freezers of food thawing out and the like and you have a level of inconvenience way beyond a slow queue at the supermarket
2) Is there any evidence that the privatisation of the electricity supply in Victoria has led to reduced prices at all, let alone it costing half the price when the SECV ran the grid in Victoria? It’s quite clear we have a lower quality electricity grid than we used to, but I can’t see any significant reduction pain in my pocket from the 80s, if anything it seems more painful.
3) I’m hardly a supporter of Andrew Bolt in general, and given his support for all things non-Government, this seems pretty hypocritical on his part, but I personally and many others would be happy to pay a premium for a higher quality electricity grid in order to avoid the once or twice a year I have a significant blackout (something that never happened when the grid was run by the SECV)
cheers
Martin
Dear Martin Would you be prepared to pay nearly 100% increase as we in WA have be told is in the pipeline 52%next year 23% the year after and 13% the year after that.
And that’s from a govt owned utility,that was corporatised then split in 4 so we could go along with the competition guidelines.
You may be prepared to pay a premium, but what about fixed income pensioners ect who have enough problems paying now.
What’s needed is a way for those who need higher-reliability power to be able to pay more for it, and those who don’t, less.
That’s the only way that the market can find an answer to the question of how much excess capacity we’re collectively prepared to pay for.
Technologies that will enable this are coming, like “Smart Metering”.
John, I don’t really know the situation in WA, but I seriously doubt that it would require a 100% increase in electricity rates to ensure a more reliable supply in Victoria, if it does, then it just goes to show the complete lack of investment by the private providers in Victoria since they took over. The SECV provided a reliable service for decades, the drop in quality was quite noticeable in the years after the privatisation, exactly as Stephen’s post indicates would happen. The quid pro quo was supposed to be significantly cheaper electricity, now as fara as I’m aware that hasn’t happened. As well, corporatised government services are probably the worst of both worlds, you don’t get the serious competition that drives private enterprise and you don’t get the commitment to service of a government enterprise, so hardly a comparable situation. In terms of low-income people, then I’m happy for a progressive taxation system to subsidise those people who need it.
KME,
possibly, but as I understand it, smart metering is unlikely to allow them to blackout my neighbour on the low rate, while enabling me to retain power because I’m on the premium rate. The grid has a significantly larger grain size than the individual consumer.
To my mind, electricity is a natural monopoly with current technologies and not particularly amenable to competition, as the Australian experience has shown.
Where is the data that shows that the current level of reliability of the Victorian electricity supply represents an optimum level of investment, or that the money being spent on electricity supply is being used
efficiently ?
I don’t have any data on Victoria but I managed to find this US article which claims: Losses in the U.S. economy resulting from power outages and power-quality disturbances are estimated to be between $119 billion and $188 billion annually, according to the National Renewable Energy Laboratory.
$188B for 300M Americans is US$600/person/year.
Were the pre-Kennet SEC causing the Victorian governnent to levy US$600 per person per year more in tax than the current government?
The above article goes on to suggest, like other commentors on this post, that most improvements in reliability can be achieved by moving focus from the supply side to the demand side and using Smart Meters
Whilst I support, to some extent, the economic logic behind criticisms of Bolt’s Herald Sun article-(although Bolt is not entirely wrong either)would you apply the same “economic logic” to nursing homes and hospitals as well?Rather than have excess capacity and expensive”idle facilities” in hospitals let people die after waiting in a cue or for an available doctor?
Getting back to electricity outages……whist infrequent,the effects could still be dire-loss of life and,dare I say,income!
Regards,
Ian
Ah, yes, another instance of the kind of conservative bashing we have all come to know and love from mainstream academia: belittle the other guy’s position (a “rant”), mischaracterize the argument (“The real point of Andrew’s article is …”), then proceed to demolish the straw man. Yawn.
My take on Bolt’s article is that he is arguing that it has become pervasive for politicians on the left to: 1) accept the constraints on economic growth imposed by extreme environmental policies; and, 2) insist to the electorate that we all simply need to adjust our economic expectations downward.
My interpretation of Bolt’s argument is not that he idiotically fails to understand that private firms now make capital investment decisions wrt power plants. Rather, based upon the premise above, it is that harsh environmental regulations based upon false assumptions about the tradeoffs between environmental health vs economic development bound such capital decisions far from the social optimum. If the premise is true, then there is no economic illogic to his conclusions.
Ian
Not only would I apply the same economic logic to nursing homes and hospitals – we do, every day. The government could spend more on these services and others like ambulance, fire service and so on. But there is a trade off. Higher taxes (and lots of idle people and equipment lots of the time) or lower taxes (and a higher chance of people dying in times of crisis). As voters, we signal the government that we prefer less expenditure and a higher chance of a problem in a crisis.
Stephen
Except that when we do have a crisis we signal the government that we prefer not to have the crisis, and then punish the government for not dealing with the crisis.
As the Bolt article demonstrates, even though electricity generators are privatised it is the Government that is copping the flak.
Of course this is a sort of re-run of why the Victorian Government privatised the Electricity Supply Company of Victoria and created the SEC in the thirties, and the SA Government privatised the Adelaide Electric Supply Company.
In the end, the voters will punish the Government for failures in what they regard as essential services. The fact that the Government has no control (because the companies involved are private) cuts no ice with the voters. And that is historically the impetus for taking over those essential services. (Same also if you look at the history of the various private tramway companies and council trusts to form the MMTB).
The reason for this is that voters can punish governments – they have limited power to punish Texas Utilities.
Two words… essential services !!!
Stephen
The government could spend more on these services and others like ambulance, fire service and so on.
Using your economic argument, an idle resource is uneconomic, so we should only have one or two fire trucks (so they don’t have any idle time).
Similarly our supermarkets could employ twice as many people and build more checkouts so that we never have to queue. A good idea? Of course not! The extra cost would have to be reflected in prices. It is neither profitable nor desirable for consumers.
Your use of this example fails, in so far as the reality is that the number of checkouts is fine – Supermarkets simply fail to staff them
“One of the facts of private markets is that it is both privately and socially optimal for capacity to be constrained at times. For example, Movie World could quadruple its size and avoid everyone having to queue for rides. A good outcome? No! It would cost Movie World a lot and this would be reflected in the price consumers pay.”
When the discussion in hand refers to essential services I find it hard to believe that anyone with the qualifications and experience of the author could come up with a more fatuous argument. Comparing essential services to operating a movie house?
I can only believe the heat may have addled his brain.
It is useful for governments to hand over utilities to private enterprise as a cover for years of neglect.
We’ll leave the seismic shift due to “climate change” till another day.
Go back to your study and think again about the tripe you have just dished out.
All who are describing electricity as a blanket “essential service” are missing the subtle point: that electricity is only sometimes an essential service. There are many different uses of electricity, with wildly varying degrees of essentiality.
If I’m buying electricity to run my life-support system, I’m certainly willing to pay a much higher price to ensure a reliable supply than I am for, say, electricity to run my TV.
The problem at the moment is that we are technologically unable to distinguish between most of these different uses, so the market isn’t getting a clear signal as to what level of capacity is really optimum. (Certain very large electricity consumers, like aluminium smelters, are able to buy their electricity at spot market prices and make the decision to shut down operations for the short periods when the electricity price peaks, but most customers don’t have this flexibility.)
mr king- your arguments would make rabble rousers like rush limbaugh and ann coulter proud. for an academic your lack of understanding of basic economics is astounding. You may want to ask your alma mater if they have a money back guarantee. sue Harvard
I really dont know whether to laugh or cry at your new appointment. it is criminal to foist your half baked ideologies on hapless students.
Some fair points Stephen. However, both yourself and Bolt could do yourselves a favour by providing some data to back up your points. For example how much do these blackouts cost Vic business? How much would it cost to increase capacity to cover the shortfall?
Suppose there is the need for an increase in supply and coal is the cheapest and quickest way of doing so, who would make the investment at the moment with significant unknown variable costs (primarily ETS)? Who, in this time of credit rationing, is going to supply funding for this sort of project?
Doesn’t Stephen have anything better to do than to backchat commentators to his articles? No wonder the infrastructure in Victoria is in crisis.
In response to Martin’s question regarding victorian electricity prices, in real terms, there is a very slightly negative trend betwee 1980 and 2008 - as residential prices went up and down (in real terms) over the period - but lets call the trend zero for argument sake.
So despite around 10 per cent increases in Victorian real residential prices (on average) over the past 18 months, you are paying no more than you were in 1980 (see ABS 6401.0 and 6401.9).
At the same time, there’s been increases in generation capacity and transmission capacity in Victoria – and still the real price is roughly unchanged.
So, notionally, the same “pain in the pocket” – but your real income has also increased (for Victoria – real average weekly earnings increased between 10 and 30% depending on whether your male, female, full time etc… – see ABS 6302)
Pretty sure that pain is not the same as it was in the 1980s.
cheers,
Christopher
Re: arguing with Bolt
Never wrestle with a pig. You just get muddy and the pig enjoys it.
In the case of electricity, the economic theory being discussed here is actually a hindrance because it restricts creativity in thinking. Of course it’s impractical to build infrastructure to deal with any level of demand – in conventional terms. But electricity demand in Victoria peaks on hot, sunny days. We should get out of the business-as-usual paradigm and, in this case, invest in solar electricity generation. I could cheekily suggest that this is a benefit of thinking as a marketer, not an economist – satisfying customer needs efficiently!