It occurred to me after writing last week’s post that it’s worth exploring the deregulation of the Australian electricity market in a little more detail as it’s quite indicative of the larger transformation that happened in society in 1990s. It’s that transformation that is unravelling as we speak. These are themes I’ve touched on before but they bear repeating to make sense of what’s happening in the world these days.
To recap, in 1993, Australia had about the lowest electricity prices in the developed world, which made perfect sense when you consider we had enormous coal reserves and a tightly integrated electricity grid designed around baseload power.
The market was then deregulated. The official reason given by the government was that deregulation would drive down prices, a strange claim given that prices were already dirt cheap and electricity generation is a natural monopoly and not amenable to a free market. We could discuss the theory of why this was a bad idea, but the data can do the talking.
Things really started to go off the rails at around the time of the GFC but this was also the period during which solar and wind began to be added to the grid. These two facts are not unrelated because the push for renewables in the last couple of decades is all about the profits of financial interests and, despite what the propaganda will tell you, has nothing to do with “the environment”. We’ll come back to this point later.
To see how absurd the discourse around the Australian electricity market has been, check out this article which is about a report by the Australian Energy Market Operator (AEMO). It was written in 2014. We can see from the above graph that electricity prices had spiked by this time. Nevertheless, the article tells us that the market had an “oversupply” problem. We had too much electricity.
Economics 101 says that, when you have an oversupply, the price will go down. However, the exact opposite happened in the Australian electricity market. The expert from AEMO explained why in the article.
“The prices have been rising because of the other parts of the cost of electricity, which is the cost of getting it from the boundary of the power station through the meters of all the individual consumers,” Mr Sadler said.
And that’s considerably more than half of the total cost of the total electricity that’s supplied to households or small businesses.”
Why was the cost of transmission suddenly going up? Because of all the new renewables being hooked up to the grid that needed new connections. That’s the part that is conveniently left out of the article. This is the point I made last week. Because connection costs make up more than half the price, if you add solar and wind to the mix, even though they are cheaper to generate, the system level price goes up because of the extra cost of transmission. This is why the Australian government just announced a lazy $20bn to build new transmission lines. Where is the $20bn coming from? Debt. We’ll get to that shortly, too.
The system was over-generating in 2014 because companies are paid to generate electricity. Because solar and wind are cheaper to generate (but not to deliver) they “outcompete” fossil fuels leading to things like gas plants being shut down, the exact gas plants our “experts” now tell us need to get built to stabilise the system because apparently we don’t have an oversupply problem anymore. (Note that “oversupply” really means redundancy and redundancy is what you want in a system to keep it stable. Apparently, our “experts” don’t know that).
Let’s go back to 1993 and summarise the sequence of events. The government imposed a “free market” on the natural monopoly of electricity generation. It then proceeded to rig the market against fossil fuels and in favour of renewables encouraging extra generating capacity without the necessary transmission infrastructure. The fact that prices went up while supply increased tells you the market was already broken back in 2008, well before it was officially suspended a few weeks ago.
The only reason this shambles of a system is still running is because of the massive redundancy in the system at the start and the fact that renewables still make up a small fraction of the total energy mix.
Clearly the de-regulation started in 1993 has not achieved its stated objective of reducing prices but that should have been obvious. The truth was those measures were part of a larger historical movement sometimes referred to as “neoliberalism”. It would have been possible to introduce neoliberalism in other areas of the economy while leaving the energy system alone but the neoliberalism of the 1990s was rabidly ideological partly fuelled by the misplaced optimism that came with the collapse of the USSR. The West was the “winner” now and for ever. It was the end of history and all that crap. (The truth was the West was suffering from the same underlying problems as the USSR. We just had a little more fat built into the system.)
Neoliberalism, in part, was about going back to the laissez-faire free market days which held prior to the wars, a strange thing to do given that the free market gave us the economic crises of the 1890s and then The Great Depression. No surprise then that the same system took only about 20 years to give us another economic crisis this time around. We called it the GFC.
All that was forgotten in the 90s, however. In order to go back to the “golden days”, we first had to dismantle the existing paradigm which we can call social democracy. Social democracy was the system that was put in place after the wars and it involved doing things like having government own and run the state utilities. Thus, the de-regulation of the electricity sector can be seen as mostly an ideological move, a strong signal to everybody that the days of social democracy were done.
There are two other important factors to consider in relation to neoliberalism. The new neoliberal free market would include China who were accepted into the WTO in 2000. Then we had the Kyoto Protocol and its former and subsequent manifestations whose stated purpose was to reign in carbon emissions. Those agreements left out China and other “developing” countries meaning those countries were free to emit. And that’s exactly what they proceeded to do, fuelled in large part by Western corporations moving their manufacturing to Asia. This was another nail in the coffin of social democracy whose pesky unions demanded little luxuries like good working conditions and wages for workers (if you want to know why the unions these days are completely useless, it’s cos they sold their soul to the devil back in the 90s).
The combination of these facts meant that the system was perfectly set up to export all carbon emissions to China and the third world and that’s exactly what happened. Thus, we see that almost all growth in carbon emissions since 2000 have come from China and Asia while overall emissions have increased.
China accounted for 10% of world emissions in 2000. Today it accounts for 30%. Of course, emissions are directly related to energy production which is directly related to economic growth so all of this was perfectly predictable to anybody in the 1990s when all this was being worked out. If we had really wanted to reduce global carbon emissions back in the 1990s, we couldn’t have come up with a worse way to do it. Of course, it was clear to anybody that neoliberalism didn’t give a damn for the environment as could be seen by the complete lack of environmental standards in the various treaties of the time. Rather, neoliberalism was partly about getting around whatever environmental regulations still existed in the West by exporting the problem elsewhere.
Arguably, the social democracy paradigm was already falling apart in the 70s and so the bad decisions of the 90s were the continuation of a failure to address the underlying problem. Thus, another way to think of the 90s was that they were kicking the can down the road; a way to extract a little bit more life out of a moribund system.
It looks like the can can’t be kicked much longer. For starters, all western nations now have unpayable debts.
Meanwhile, the neoliberal reforms created huge inflation in the west. For the last two decades that inflation was mostly hidden but it’s now crawling out of the cupboard like the monster in some cheesy horror film.
It is no small irony that it’s China and Russia who are now forcing these issues to a head. With the fall of the USSR in the 90s, the West believed we could do no wrong. The attitude towards Russia was unbelievably arrogant. Russia could have easily been incorporated into Europe in the 90s. That would have been in everybody’s interests, especially western Europe’s. Instead, Russia was treated like dirt and the completely avoidable war in the Ukraine is the end game for that trend.
I can’t help but finish with a reference to The Devouring Mother archetype.
If the US empire is The Devouring Mother, the Global South are now the geopolitical rebellious children who aren’t gonna take it anymore. Putin looks set to become the Father Figure who will provide them with both a military and economic alternative to the status quo. The Global South can only improve their relative position from here while the West can really only go backwards. The sooner we admit the reasons why, the sooner we can start to think about how we are going to live in the new world that is taking shape. Until then, however, we can expect the West to be exactly what’s it’s been the last two years and more: a madhouse.
Addendum: in news this week, the company which owns Elon Musk’s big battery in South Australia got fined for not providing power to the grid when it was needed. And the circus rolls on – https://www.abc.net.au/news/2022-06-28/sa-agl-wind-farms-tesla-battery-fined-over-breaches/101190674