NSW goes back to the future

NSW Energy Minister, Matt Kean, shouldn’t be so coy. His sudden reveal this week is politely called the “NSW Electricity Infrastructure Roadmap“. It is more aptly titled “The End of the Competitive Electricity Market and a Return to the Central Planning of the State Electricity Commissions of the 1980s”.

It is a sweeping reform agenda. It has been developed and agreed with political partners (The Nationals) and the Labor opposition without even a casual conversation with the industry it is disrupting.

The NSW reform agenda is a political ambush. In the end it was a state coalition government that delivered the looming vote of no confidence in the durability of the energy-only market in the 21st century and its ability to deliver the scale of investment needed to rebuild a decarbonised electricity system.

The talk of $32 billion of new investment, 26,000 jobs and lower power prices is all window dressing to sell the reform as a fait accompli to a public suffering from chronic energy market reform fatigue. As the biggest state in the National Electricity Market, the reality is that this approach is politically successful, then it could end up being as contagious as the Coronavirus.

The reforms are focussed on the next 15 years, when NSW’s existing coal fired generators are expected to close, taking three quarters of the state’s electricity generation capacity with them. The scale of this re-build is daunting, and this week’s announcement suggests the Berejiklian Government has lost patience with the talk of Energy Security Boards and post-2025 reviews, and has decided to create a government agency to plan out and underwrite whatever it needs to get the job done.

It will create a Consumer Trustee, an “independent and expert” government agency that will make sure that new generation, storage and whatever else is needed gets built. The Trustee will administer an Investment Safeguard, where the Trustee runs competitive tenders each year to build enough renewables, firming and storage to meet an Energy Security Target (reliability standard) prescribed by the state government.

Successful tenderer will be offered Long Term Energy Service Agreements where generators are offered swapation contracts – effectively paying back to the Trustee any revenues above a certain wholesale prices and being topped up by the Trustee for generation below a minimum price. In other words, the entire mechanics of the NEM signalling new investment and redundant closure through long term price signals has been wiped out. NEM price volatility, such that it remains, will be increasingly irrelevant. The market for caps and other derivatives will be redundant.

As the government (Trustee) is taking on the wholesale price risk, it will seek to hedge this with retailers and other counter parties.  The liquidity of this future market is unknown. So presumably if the Trustee cannot hedge its position, then the government passes and costs or surpluses back to consumers or taxpayers.

The Trustee will be busy: it is expected to contract existing generators to sell firmed contracts, offer to sign up companies to renewable power purchase agreements, and offer to sell a whole range of derivatives as required by “market” participants like retailers in NSW. Smaller retailers may be less exposed to wholesale price volatility, but then the whole nature of electricity retail is based on risk management. remove that and everyone’s costs and offering are the same. smaller retailers may find it harder to compete in retail markets on price.

The government (Trustee) will recover its costs through distribution charges, which will then flow back to consumers through the power bills.

The scheme is reliant on competition through rolling public tenders and through the guile of its central planning agency to not over-spend to keep prices sharp. This is counter-factual to the reasons for the creation of a competitive market, which was to do the same thing. It’s unlikely both can be true. in reality the benefit of central planning is ensuring capacity is built, and the cost is efficiency losses, which means electricity will be more expensive than if it were fully competitive.