After a year of ongoing energy crises—both global and local—nothing should surprise the industry anymore.
Nevertheless, when Premier Daniel Andrews announced a re-nationalisation policy for Victoria on Oct. 20 it caught many people off-guard.
If they win the next election, the Victorian Labor party—currently governing Australia’s second most-populous state—will be reviving the State Electricity Commission; a reversal of three decades of energy privatisation.
The company will be 51 percent owned by the state government with the best candidates to own the other 49 percent supposed to be superannuation (pension fund) companies.
The argument between nationalisation against privitisation is a very traditional left-wing/right-wing argument. There’s no leader in Australia more left-wing than Premier Dan, so in one sense, the announcement is not surprising.
The idea itself is not my biggest concern—I am more concerned about the reasons for it.
Though left and right-wing thinkers will tend to shoot from the hip on this issue, the fact is that both national and private models can work in this industry.
For electricity in particular, I have always considered that it is reasonable to nationalise the network itself—the “poles and wires”—but that it is important to have private ownership of generators.
The poles and wires are like roads; even when privatised they are not quite “competitive”—you don’t get to choose which wire you buy electricity through (in fact, many of our poles and wires in Australia are already state-owned—by the Chinese communist regime).
If wires are like roads, then generators are like car manufacturers. There is a market-place for purchasing electricity, and it is very worthwhile that generators are made to compete with one another.
Shooting for the Net-Zero Stars
Andrews believes that electricity should never have been privatised in the first place. It is also clear that the Victorian Labor party considers national ownership to be the best working environment to affect the “energy transition” to net zero.Rather than cajole the private sector, or create the right cost incentives, they will simply build the things that they want built themselves.
They will spend $1 billion (US$642 million) on renewable infrastructure to displace carbon fuels, believing that building government-owned generators (wind, solar, and batteries) will simply solve the energy trilemma of providing reliability, lower costs, and lower carbon emissions.
At the same time, they will create thousands of new jobs ... Really, what’s not to like?
Yet the reality is that from both an engineering and an economics perspective, nationalising electricity cannot change the fundamental issues that our grid faces.
To supply all electricity from renewables will require a 10-fold increase in generation, backed by a gargantuan energy storage industry built from the ground up. One billion dollars will barely get the ball rolling.
What is scarcely mentioned is that, even if this remote objective is achieved, Victoria would still be far away from being a “net-zero” paradise.
Electricity is only one part of the energy sector, and the energy sector is only one of the sectors that emits greenhouse gas. If they really want net-zero, they will need to radically transform every industry sector, concurrently.
All available modelling shows that even just for electricity to become net-zero, the required change is radical and known technologies cannot do it economically.
Additionally, it remains uncertain what technologies will work best between hydrogen, batteries, pumped hydro, and biofuels. Each has significant draw-backs that gnaw away at their feasibility.
‘Magic Money’ the Key Ingredient for Net-Zero
The fact is, if the transition was cost-effective then it would have been done by the private sector already.And that is the point. The advantage that the government has over the private sector is that they don’t have to balance their books. They don’t have to run a self-sustaining operation. Instead, they can pay costs using “magic money”: taxes, or unlimited borrowing from the central bank.
This is why superannuation companies are their partner of choice.
Contributing to your superannuation fund is compulsory in Australia and inaccessible before the age of 65; though super companies ought to care only about return on investment, most prioritise environmental, social, and governance (ESG) ratings rather than profits.
Consequently, they have become a vehicle for activists to control a vast pool of money they never earned—more “magic money.”
All things come at a cost, and that cost is not changed just because the money comes from a different purse. One way or another the greater economic equation always adds up.
For instance, if the government employs more people, those people don’t come out of thin air, they come out of other industries that were producing wealth.
The Path to Centralisation
Though national ownership of some energy assets can work, this move does not bode well. It shows that decision makers continue to deny that the industry is hogtied by unavoidable physical constraints and will need to move slow.There is also significant political risk.
The Labor government has a soft-spot for Chinese Communist Party-style governance, as evidenced by their previous participation in the Belt and Road Initiative, which Australia’s federal government vetoed.
This announcement is another move by Victoria towards central planning.
The government should not own the means of production. It is simply not efficient enough to control a sector that underpins all economic growth. Central planning does not work and has driven many other countries into poverty.
For the Victorian government to casually propose that they should have the controlling stake in a company funded by our superannuation is very concerning.
Bad, Bad Timing
This move also comes at a bad time as energy security is already fragile.A perfect storm of ageing infrastructure, international fuel scarcity, and cold weather combined only a few months ago to drive electricity prices so high that the market was suspended.
Australia’s supplies were so low that the loss of just one more generator on the east coast could have led to a net shortfall and widespread blackouts.
We survived by drawing heavily on multitudes of small gas generators, so the crisis overflowed into the gas market. Gas retailers that were exposed to the gas spot-markets went bankrupt, and others sent letters to their customers asking them to please choose a different provider.
This was a perfect storm, but sadly all the ingredients for that storm are still prevalent. A repeat this summer or next winter is very possible.
Andrews believes its good timing for this move—if the private sector has already been failing then surely it’s time for the government to do better, especially while fuel prices are high, renewables may become more competitive. But for these same reasons, I say it is bad timing.
Unfortunately, it’s also shallow thinking. It fails to recognise that the Victorian Labor government played a significant role jeopardising its own energy security in the first place by over-regulating the industry.
Now, they will only do better than the private sector if their solution actually works. And it won’t work, if the new state electricity company spends all its efforts building more weather-dependent generation, which doesn’t produce when the sun isn’t shining or the wind isn’t blowing.
Rather than solve the problem, the perfect storm now has a new wind brewing. If Labor wins the next state election, we will see what really comes of it.
