CHAPTER 11
Jeffrey Hole
Electricity has been an important enabler of economic and social development around the world over the past 150 years. But as we are now acutely aware, its generation through burning fossil fuels has also had a major detrimental impact on the environment. A key challenge facing all nations, including Australia, is finding ways to ensure that electricity continues to support economic and social development, while reducing its adverse environmental effects.
Australia’s energy and climate policy is at a crossroads. In the lead-up to the November 2021 United Nations Climate Change Conference in Glasgow, the Australian government announced a commitment to reduce emissions of greenhouse gases to net zero by 2050. It also released a long-term strategy that attempted to explain how this target is to be achieved. This strategy is just the latest, however, in a series of proposals to deal with climate change. Over more than a decade, plans have been proposed, implemented, unwound or rejected. The Gillard government introduced a carbon tax in 2012, but it was abolished in 2014 after the Liberal-National Coalition, led by Tony Abbott, came to power. In 2018, the Commonwealth proposed, then withdrew, the National Energy Guarantee, a policy intended to reduce emissions and ensure energy reliability. The latest strategy provides funding to develop new energy technologies but it lacks interim targets or new policies for reducing emissions from the electricity sector. State governments have stepped into the national policy void and introduced a wide variety of targets and policies to achieve them.1 Political battles over climate and energy policy in the last decade have contributed to the downfall of prime ministers and opposition leaders on both sides of politics, leading to the lament that the last decade has been a period of policy ‘drift’.2
Commentary on reforming the national electricity market seldom considers that Australia has previously experienced periods of major change in the electricity industry. The present makeup of the industry looks very different from its composition prior to 1998, when the national electricity market was introduced. Understanding the role of government in previous transformations offers key lessons for politicians, policy advisers and the community about what needs to be done to break through the current impasse on national energy and climate policy. It highlights that previous transformations were characterised by bipartisan agreement on policy priorities, and the extensive use of royal commissions and public inquiries to help build a consensus for change.
Previous transformations in Australia’s electricity supply industry
Today, the electricity industry is a complex system of institutions and physical infrastructure networks connecting electricity markets along the east-coast states of Queensland, New South Wales (NSW), the Australian Capital Territory (ACT), Victoria, South Australia and Tasmania. Separate systems operate in Western Australia and the Northern Territory. The industry comprises many public and private enterprises involved in one or more of the many activities required to produce and sell electricity to end users. These activities (often called the ‘supply-chain’) include: electricity generation; transmission over high-voltage powerlines; distribution through lower-voltage local poles and wires; and retail services (comprising bulk power purchasing on behalf of customers, and billing and marketing). Today, each supply-chain activity is subject to complex rules and oversight by national and state regulators, all working to achieve the aim of promoting ‘efficient investment in, and operation and use of, electricity services for the long-term interests of consumers with respect to price, quality, safety, and reliability and security’.3
This complex industry structure is a product of several major transformations over the last century. While the pattern of development across Australia has varied, reflecting local conditions and events, several broad reform phases can be identified.
Electricity in Australia: The early years
The period from roughly 1880 to 1914 saw local experimentation in the use of electricity in Australia. It was also a time when electricity and gas competed to provide lighting. Some of the earliest uses of electricity in Australia were for street lighting but over time, electricity expanded to include industry and transport in the form of tramways.4
In the very early years of the industry, the role of state governments was limited to that of consumers of electricity for lighting government buildings. The early suppliers were local government authorities or private enterprises. Whereas private firms initially dominated in cities like Adelaide and Brisbane, a mix of the two supplied Melbourne and Sydney.5 Most of these early electricity networks were very small due to the expense of laying wires to transmit electricity, the limited number of customers, and uncertainty about rights to develop electricity supplies.
The state steps up: Electricity is seen as vital to economic development
State governments gradually came to appreciate the enormous potential of electricity, which is reflected in a long period of policy evolution. Drawing on British precedent, state governments initially introduced regulation that was intended to clarify the right to supply electricity, prevent wasteful duplication, and increase safety and reliability. Such legislation was first passed in South Australia (1891) and other states followed. Victoria’s Electric Light and Power Act 1896, for instance, required new private electricity undertakings to obtain, what was in effect a franchise. It also gave electricity operations run by local government authorities the right to acquire private undertakings ‘at valuation’ after 30 years.6 At a time when capital for private electricity undertakings was scarce, such legislation made investing in electricity supply riskier because of the limited duration of franchises and the prospect of council takeovers.
The First World War enhanced appreciation of the importance of electricity for economic and rural development, and defence. As a result, state governments sought to accelerate the coordinated development of electricity supplies. Tasmania and Victoria were the first states to establish state-owned electricity businesses to supply electricity. In 1919, for example, Victoria appointed several electricity commissioners to advise the government on the development of the industry. In 1921 this arrangement was formalised as the State Electricity Commission of Victoria, with one of Australia’s most successful wartime commanders, Sir John Monash, appointed as inaugural chairman. In the following decades, other state governments established state enterprises to produce electricity. Initially, these enterprises operated at the early stage in the supply chain, producing bulk supplies of cheap electricity for resale by private and municipal undertakings.
Between 1918 and the late 1930s, state governments took a more active role in encouraging the development of the electricity industry. Sometimes, as in the case of Queensland, the state provided grants to encourage towns to establish electricity supplies.7 In Victoria, convinced that municipal and private sector control was inefficient and wasteful, the government empowered the State Electricity Commission to take over municipal and private undertakings.8
During the 1920s and 1930s, industry and household demand (for those who could afford it) started to take off. Public and private electricity businesses expanded capacity rapidly in an attempt to keep pace with this growing demand. In this period, technological improvements allowed electricity suppliers to generate increasing quantities of electricity and transmit power economically over long distances. In 1924, the first electricity was transmitted to Melbourne from the Latrobe Valley, via a 145 kilometre long high voltage transmission line.9 Over time, state governments concluded that large-scale production and transmission of electricity supply was the most economical and reliable method of organising production. They began to undertake long-term planning and provision of such services.
The pace and pattern of these developments occurred at different times in each state, in response to local factors. The fact that Victoria’s State Electricity Commission was a pioneer in this process reflected the Victorian government’s desire to reduce its dependence on unreliable black coal imports from NSW. The State Electricity Commission was tasked with developing abundant brown coal resources that were discovered in the Latrobe Valley.10 However in South Australia, a private company led the development of the electricity sector in the period up to the Second World War, by virtue of having access to private sources of capital and technical capabilities that were in short supply in South Australia.11
Postwar growth: The extension of the state enterprise model
After the Second World War, Commonwealth and state government involvement in the electricity sector increased. Initially, the war had the effect of interrupting the rapid expansion of the electricity sector. Restrictions on the import of capital goods, together with labour shortages, had resulted in a tightening of supply and a significant backlog in the number of towns and properties that were unable to access ‘essential’ electricity supplies. The supply situation was so serious that some states implemented rationing well after the end of the war. The dire supply situation, compounded by national security concerns, led the Commonwealth and state governments to prioritise rapid expansion of the electricity sector. In 1949, for example, the Commonwealth commenced construction of the massive Snowy-Hydro Electric Scheme to supply electricity to NSW and Victoria. The demand for electricity continued to grow after the war, due to a combination of strong population growth, the expansion of manufacturing and unprecedented household adoption of electrical appliances for lighting, heating and cooking.
During the postwar period, all state governments established new state enterprises or expanded the role of existing ones. While the scope differed in each state, all encouraged their enterprises to invest in additional generation capacity and expand their networks. In some jurisdictions, state enterprises were encouraged to take over municipal and private undertakings involved in electricity distribution and retail. New state electricity commissions were established in Western Australia (1946), South Australia (1946) and NSW (1950) to go with those established earlier in Tasmania and Victoria.12
The state electricity enterprises that operated in Australia from the early 1950s were arguably well adapted to meeting government priorities of encouraging growth in business and household demand for electricity, and state-wide electrification. They possessed a high degree of autonomy, and, apart from NSW and Queensland, were involved right across the supply-chain: from long-term planning, construction and operation of increasingly large power stations, to the operation of coal mines (or contracting with coal suppliers), construction and operation of long-distance transmission infrastructure, construction and operation of distribution networks, and connecting/ disconnecting and billing customers (although some local authorities retained responsibility for supplying consumers using bulk electricity supplies purchased from state enterprises). In NSW and Queensland, regional bodies and local councils were responsible for distribution and retail functions. State enterprises were also responsible for regulating electrical safety, which included licensing appliances and electrical workers, and some were also involved in retailing electrical products.
While there were setbacks and mistakes, by the 1970s, state enterprises were seen by policymakers to have successfully delivered the priorities of meeting rapid growth in demand, and state-wide electrification. A history of the State Electricity Commission of Victoria, for example, proudly reported that in the 30 years to 1966–67, the supplier had succeeded in electrifying the entire state, while ensuring that prices rose by only 43 per cent, compared to a rise in the Consumer Price Index of around 270 per cent.13
Changing times: The decline of the state enterprise model
By the late 1980s the state enterprise model had reached its limits, in the view of some governments.With electricity supplies now available state-wide, and demand growth having slowed, government priorities shifted to the cost of supply. Governments became increasingly concerned about overcapacity and inefficiency, especially after a projected resources boom failed to materialise in the early 1980s. Adding to these concerns were large cost-over runs on major projects, overstaffing and high levels of industrial unrest. State government finances were also being squeezed by a combination of high levels of government debt and associated interest payments, inflationary pressures, and lower revenues as a result of cuts in Commonwealth government grants. Community criticism of state enterprise was also growing due to concerns about the environmental and amenity effects of unbridled expansion, as illustrated by the opposition to a proposed hydro-electric development on the Gordon River in south-west Tasmania. State enterprises were also criticised for focusing on increasing the consumption of electricity and neglecting energy conservation. Concerns about climate change were building, especially after the 1988 Toronto conference on the changing atmosphere.
In response, state governments attempted to rein in the autonomy of state enterprises. Some were required to invest in demand management and energy efficiency, and to pay greater attention to the environmental and social impacts of their decisions. However, the main priority for the states was improving the financial performance of electricity enterprises.
State governments introduced measures during the 1980s that were designed to make state enterprises more commercially focused. Given labels like commercialisation and corporatisation, they included legislative changes to set out government expectations of state enterprises, introduce new corporate reporting requirements (including performance targets), and clarify ministerial powers to intervene. Some states initiated major public inquiries into the performance of state enterprises, leading in certain cases to the deferral or cancellation of planned investments in new power stations. A 1986 inquiry into the Electricity Commission of NSW found that there was a major problem of oversupply, resulting in unnecessary costs for users.14 In several jurisdictions, plans to build large new power stations were scrapped or postponed.
State electricity enterprises responded with major efficiency measures. In 1989 the State Electricity Commission of Victoria, for example, announced that it would reduce its workforce by 20 per cent over three years; eventually it achieved a 50 per cent reduction over the following four years.15 Other state enterprises introduced similar reductions. These had huge ramifications for affected workers and local communities that had grown around energy production, such as the Latrobe Valley in Victoria.
During the 1990s, the Commonwealth government sought to accelerate the pace of reform in the electricity sector. This was prompted by the desire to improve the competitiveness of the manufacturing sector by reducing the cost of state government–provided inputs, such as electricity. In 1990 it commissioned the Industry Commission to undertake a review of the electricity and gas sectors.16 This review made a public case for major structural reforms designed to create an interconnected and competitive national wholesale market for electricity, with the remaining monopoly transmission and distribution functions to be separated out and subjected to ‘light-handed’ regulation. The inquiry report estimated that implementing electricity reform would produce very large gains to businesses and households.17
Following the Industry Commission report, the Commonwealth commissioned a review of competition policy, which supported the introduction of competition into areas dominated by government enterprises, including the electricity sector.18 Armed with these reviews, state governments came to the view (sometimes independently, as in the case of Victoria under the Kennett government, and sometimes with the encouragement of Commonwealth financial incentives) that further gains could be achieved by restructuring state enterprises and creating a national market for the supply of electricity. The reforms that created the present market structure were subsequently agreed through the Council of Australian Governments. They were incorporated in National Competition Policy agreements signed by the Commonwealth and state governments in 1995.
Establishment of the national electricity market
The reforms that resulted in the creation of the national electricity market have been extensively discussed elsewhere.19 Essentially, the Commonwealth and states agreed to establish a national electricity grid, along with a national wholesale electricity market to form what is now known as the National Electricity Market. To enable the development of competition in electricity generation and the retailing of electricity to consumers, state electricity enterprises were also broken up.
Those in Victoria and South Australia were also privatised. New regulatory institutions were established to determine the rules governing the operation of the national market, to regulate and enforce these rules and to operate the national wholesale market. These reforms produced the national electricity market that exists today, which involves all states and territories, except Western Australia and the Northern Territory.
In a radical departure from the past, the new national market would no longer use a model of centralised planning based on forecasts by state enterprises of future demand growth. This model had been introduced in Victoria after the First World War and gradually adopted elsewhere. The role of centralised planner was replaced by a wholesale market. The market would provide a price signal in the form of movements in spot and future prices for electricity, indicating the need to expand or reduce capacity. Effectively, it was considered that a market comprising many buyers and sellers could perform at least as well as a centralised planner, if not better. The new system would transfer the financial (and political) risks arising from forecasting errors from consumers onto market participants.20
The wholesale market was expected to resolve one of the central problems facing the electricity sector: managing demand and supply uncertainty. Undertaking long-term planning in the electricity sector had been eloquently described by Cecil Edwards in a history of the State Electricity Commission of Victoria as:
the art of steering between the rocks of ‘too little, too late’ and ‘too much, too soon’. The first brings down on an electric supply system the wrath of the consumer who cannot get or use the power when they want it; the second exposes the undertaking to charges of wasteful expenditure and the risk of having to raise tariffs to meet the fixed costs of plant not fully used.21
In the postwar period, state enterprises faced rapid demand growth and were encouraged to lean towards erring on the side of ‘too much, too soon’. Faced with a surplus, state enterprises could stimulate sales through marketing or the sale of appliances. Governments could also offer subsidies to large electricity users (like aluminium smelters). But as demand growth slowed and pressures to reduce energy consumption mounted, the costs of adopting a strategy of ‘too much, too soon’ became unacceptable.
Future challenges for the electricity industry
After more than 20 years of experience, a consensus among policymakers emerged that the national market had not performed as intended. Electricity price rises in Australia prompted numerous public inquiries by the Australian Competition and Consumer Commission and others.22 The rapid adoption of intermittent renewables has highlighted reliability risks, especially in unfavourable weather.23 Poor marketing practices in the retail sector undermined trust in electricity companies.24 Governments also found that they were unable to avoid political risks: they are still blamed by the public when electricity prices rise or supply is threatened. The factors explaining disappointment with the results of the electricity market are complex and relate to issues of market design, the behaviour of market participants, and government policy failures. Irrespective of the causes, disappointment has led to further Commonwealth and state government interventions in an effort to cut emissions, reduce prices and maintain reliability.
Recent government interventions include renewable energy targets, financial incentives for various forms of private investment in renewable energy generation, and regulatory changes (such as the reintroduction of retail price controls and increases in reliability standards). There has also been a reassessment of the role of government in planning for future investment in the electricity industry.
Governments are again undertaking centralised planning, in an effort to stimulate and guide new investment in additional generation and transmission system capacity, and to ensure that the electricity supply is reliable as aging, coal-fired generators close down. The main body responsible for operating the national market (the Australian Energy Markets Operator) now publishes long-term (20-year) plans, identifying prospective locations for renewable developments, future network constraints and opportunities to expand the transmission network.25 State governments are also undertaking long-term planning to support the investment in new renewable generation capacity and transmission network upgrades, including in collaboration with the market operator.26
In addition to policy changes, technological developments are also driving changes in the electricity industry. For example, new technologies are breaking down the traditional separation between consumers and producers of electricity. This includes the increasing uptake by households of rooftop solar power and batteries, which result in greater two-way flows of electricity on the network. New methods of automation are also allowing greater control of electricity use and supply to take advantage of fluctuations in electricity prices during the day. New uses for electricity are also emerging, such as electric vehicles and hydrogen production. These developments, along with the challenge of reducing emissions, are some of the factors driving demands for a new round of reform in the electricity industry.
Lessons from history: We need to build political and policy consensus for reform
The history of electricity reform in Australia offers many lessons for policymakers dealing with the present-day priorities of lowering emissions, reducing electricity prices and ensuring reliability. Two lessons relating to the role of government policy stand out as especially significant. Firstly, as former Prime Minister John Howard has observed, major economic reform in Australia is only possible with bipartisan agreement or through a strong prime minister able to expend political capital.27 Indeed, the history of electricity reform serves as an important reminder that bipartisan agreement about policy priorities is crucial. After the Second World War, for example, there was bipartisan agreement within the states on the need to quickly expand access to the ‘essential service’ of cheap and reliable electricity. State electricity enterprises were not the only possible vehicle for achieving this aim, but the model was progressively adopted by governments of varying political hues after Victoria and Tasmania took an early lead. A change in government priorities in the 1980s to emphasise economic efficiency and competitiveness then led to bipartisan agreement to fundamentally restructure state enterprises.
While there is now a bipartisan commitment to achieving a target of net zero emissions by 2050, differences exist on the need for interim targets and the policies needed to achieve them. Interim targets are important because achieving net zero by 2050 will be extremely challenging, given that coal and gas account for about 70 per cent of electricity generation and that transmission systems are currently configured around existing centres for power generation, such as the Latrobe Valley in Victoria and the Hunter Valley in NSW. The Australian government, has however, chosen to retain the interim target set under the Paris Agreement of a 26–28 per cent emissions reduction on 2005 levels by 2030.
Respected bodies such as the Organisation for Economic Cooperation and Development have called for Australia to develop more ambitious interim targets and policies to achieve them.28 There are several reasons why this is a priority. First, the present strategy effectively defers much of the effort needed to achieve net zero by 2050, thereby shifting more of the burden onto future governments and taxpayers. Second, resisting adoption of more ambitious interim emissions reduction targets and national policies such as carbon taxes or tighter limits on emissions also increases risks that international investors and governments will impose pressure on Australia to bring forward carbon emission reductions, through some combination of international financial markets imposing a ‘climate risk premium’ on lending to carbon-intensive industries, and international actions such as the imposition by other nations of carbon taxes on Australian exports. Third, an absence of interim emissions reduction targets and supporting policies also means the practice of each state developing its own, probably more costly, approaches will also continue. Despite this, the lack of a consensus on interim targets and policies to achieve emissions reductions in the electricity sector represents a major obstacle to further reform.
A second lesson from history is that royal commissions and public inquiries played an important role in building consensus about the need for, and direction of reform of Australia’s electricity sector. In Victoria, for example, between 1908 and 1918 the government sought and published formal advice on electricity supply on at least five separate occasions; commissioned experts in 1908, 1911 and 1912 were interspersed by a royal commission in 1911, and followed by an advisory committee in 1918. This advice was debated in parliament and influenced the decision to establish the State Electricity Commission of Victoria in 1921.29 In 1991 the Industry Commission finalised its report recommending development of a national electricity market, leading eventually to the commencement of the wholesale market in 1998.
More recently, national inquiries by the Australian Competition and Consumer Commission, among others, into the electricity sector have led to important changes in the regulatory and institutional framework, such as the reintroduction of retail price controls and changes to the rules governing the operation of the national market. These recent inquiries have largely taken the Australian government’s energy and climate policy objectives as a given. Perhaps it is time for a consensus-building inquiry which would examine interim targets and future policies to achieve decarbonisation of Australia’s electricity industry, as well as the roles of the Australian and state governments in orchestrating this transition.
In conclusion, the history of electricity reform in Australia provides valuable lessons for policymakers about the importance of consensus building on the need for, and direction of reform, and about the role of royal commissions and public inquiries in helping to achieve consensus. Understanding the history of reform in the electricity sector doesn’t provide the recipe to address the decade of drift that has afflicted climate and energy policy in Australia, but it does identify some of the key ingredients.