NSW Power Play Defies Logic

The Australian Financial Review

Graham Bradley
President, Business Council of Australia

More than 12 years after electricity privatisation was first proposed in NSW, the troubled process is lurching to a conclusion. It promises to be a poor one for electricity users and for NSW taxpayers.

In a state that contributes almost a third of Australia’s economic output, a poorly conceived privatisation of critical infrastructure has high stakes. The model doesn’t extract maximum value for the assets or the potential structural benefits of reform.

From the creation of a national market and the disaggregation of generation, transmission and distribution and sale of state assets – notably in Victoria – Australia’s proud history of energy reform has been recognised by the Organisation for Economic Co-operation and Development.

Privatisation's success depends on a number of factors.

When effectively designed and executed at the right time it can have a positive impact on public finances, drive productivity, increase competitive tension and encourage private sector investment. The result is lower energy prices for households and businesses.

This is no more evident than in Victoria, where the government moved decisively at the right time in privatising its electricity assets in the early 1990s.

Regardless of one’s views of privatisation, NSW’s latest attempt at privatisation will not maximise benefits and could leave a poor industry structure with adverse long-term consequences for the state.

As the NSW Treasury Secretary admitted, the value of electricity assets has eroded significantly since the government embarked on  the process in 1997. The partial sale now proposed is expected to raise about $8 billion, a similar model was estimated to deliver $10 billion in 2007. The full privatisation of all assets in 1997 was expected to raise between $22 and $25 billion.

The NSW government has settled on a partial privatisation model  the Gentrader model. This involves giving companies the trading rights to bid generation plants into the wholesale energy market, while the government continues to own and operate the generator.

It is not surprising that the NSW Auditor-General has identified this model as complex and challenging. There is no precedent or experience in the energy sector to draw on in implementing it,

By privatising only one part of generation, the government is introducing a new layer of complexity. The strength of incentives for private traders to invest to upgrade generation assets, and drive productivity –  a key government objective – is highly questionable.   

The government says that its model will transfer the risks of trading electricity in a volatile wholesale market and liability for a future tax or price on carbon. These risks will be reflected in the bids. In addition, the government will retain significant risk until the viability of these new traders can be proved.

The risks to government are already clear from its drastic move to guarantee the availability and cost of fuel for generators. The government has suggested it will develop a new coalmine to secure low-priced coal at a subsidised rate significantly less than present contract prices.

This may be, as some suspect, a bargaining threat as government generators seek to sign long-term contracts with coalmines. It may boost the potential value of trading contracts, but it is short-sighted and will have long-term consequences.

It could make coal generation cheaper than gas under a carbon price, making it more difficult to reduce emissions and requiring a higher carbon price. This would also make it harder for private generators that don’t have access to cut-price government coal to compete on an equal basis. Inefficiency in the generation sector will be borne by end-users.

The South Australian government, which privatised its assets in the late 1990s, engaged in equally short-sighted policy in an attempt to prop up the potential value of its assets. During the sale process, the government removed its support for plans to build an interconnector with NSW , shielding prospective private sector operators of generation assets from competition. This interconnector could have enhanced competitive outcomes in the market and provided critical capacity during blackouts in the hot summer of 2000– 01.

Reform of energy markets is important and business is ready to embrace sensible reform. NSW missed opportunity chance to reap the benefits of full privatisation in the 1990s. It appears that NSW will now also miss the chance for successful reform of its energy market structure.