Australian Electricity: A Plot Twist

Several months ago, when there was a mini-panic in the middle of winter with threats of electricity blackouts in eastern Australia, I wrote a couple of posts on the Australian electricity market (this and this). The blackout threats are something I have been expecting for some time as Australia has continued to add intermittent power sources (solar and wind) to the electricity grid. Not surprisingly, they came in winter when the days are short and the sun has a nasty habit of hiding itself behind clouds instead of shining on solar panels.

In the end, there were no widescale blackouts, but the Australian energy bureaucracy’s own guidance is that blackouts will become a problem perhaps as early as 2025. That will be a problem for the future. Right now, the political problem is price as the retail price of electricity continues to rise in Australia as in most other countries. This political pressure has triggered what might just be a paradigm shift in Australian politics, so I thought I would take a post to sketch out what that might look like.

The question about whether renewable energy is cheaper than other forms of energy generation is one of those topics that arouses heated debate. I don’t claim to know for sure what the answer is and the reason is because electricity generation is, in the language of the old school systems thinking that I like to use to analyse such problems, a medium number system. Medium number systems display organised complexity and can be distinguished from the organised simplicity of systems like Newtonian planetary physics and unorganised complexity eg. behaviour of gas in a container.

When trying to understand medium number systems, our culture loves to create models. Whenever you see a headline “experts say…” or “studies have shown….” that means somebody constructed a model. The problem with modelling medium number systems is that you can’t reduce the variables enough to get calculable, reliable results. Therefore, any model you create, even if it seems to correlate to empirical data over some time period, can be wrong (in fact, will be wrong, but might be useful).

Some argue that it’s still better to create the model. Maybe. But a model can give you a false sense of security and certainty. The approach I prefer is the heuristic-based approach where you apply many different heuristics to the problem knowing that they are fallible but trusting that the combination of perspectives can give insight into what is going on. This approach requires a level of humility that doesn’t gel well with our culture. We prefer to be certainly and heroically wrong than just a little bit more right than wrong.

When trying to understand the medium number system that is the Australian electricity market, one of the heuristics to use is the history heuristic. That’s the approach I took in the first of my posts some months ago.

The ultra-short version of that history is this: Australia built a large grid in the post war years that ran almost entirely on coal. Because Australia has huge, economically extractable coal reserves, we enjoyed almost the cheapest electricity in the western world up until the early 90s. Then we jumped on board the neoliberal agenda which required the privatisation of the electricity grid. We were told this would reduce prices through the wonders of the free market. Starting in the mid-2000s, we began adding solar and wind generation at scale. We were told this would reduce prices as renewables were now the cheapest form of electricity generation.

Either way, the price should have gone down. That’s what we were told. Here’s what actually happened.

What has gone wrong? There are two main suspects under investigation.

First hypothesis: Crooked capitalists are screwing over the public like they always do. The privatisation in the early 90s is the cause of the price rise.

Second hypothesis: Renewables are not really as cheap as we’re told. The increase in solar and wind generating sources has driven the price increases.

It’s possible to create models to justify either of these hypotheses. There has definitely been gold plating of the transmission system and weird behaviour from electricity retailers which lends support to hypothesis 1. On the other hand, the enormous spending on extra transmission lines in recent years was necessary in order to hook remote solar and wind generation into the grid. This would be evidence for evidence for hypothesis 2.

From a systems theory point of view, both the privatisation of the grid and the renewable energy push of the 2000s have one thing in common: they have made the system far more complex. When we’re talking about whole systems, complexity comes at a cost. Without knowing any of the underlying details, we can surmise that a system that is more complex is less efficient. To get the same output, you’ll need to increase the input (of energy and $$).

The privatisation of the system in the mid 90s added complexity to the organisational structure of the system. Up until 1990, the electricity system here in Victoria was a single entity known as the SEC. This entity handled everything about the system including generation and retail. The privatisation reforms got rid of the SEC and split the system into four separate sectors: generation, transmission (high voltage), distribution (low voltage), retail.

Complexity always comes at a cost. In relation to organisational complexity, one of those costs is regulation. Private enterprises that run for profit are going to maximise their profit and will be tempted to do so at the expense of the common good. All of history teaches us that. If you introduce more profit seeking players into a system, there is going to be more chance for corruption. To combat that, you’ll need to spend more money on regulation (bureaucratic departments, lawyer fees, court resources). That’s one extra cost.

Another extra cost is the communication overhead. More nodes in the system means more points where communication can break down. This can be mitigated by introducing information technologies. But software comes with its own complexities. More importantly, software is expensive. It is an extra cost that you now need to pay to run a more complex system.

The addition of renewables since the mid-2000s has also added significant complexity to the system. Rather than a few enormous coal fired power stations, you now have a solar farm here, a wind farm there, a hydro over there, an Elon Musk battery over there. You’ve got numerous small-scale sources providing highly variable amounts of energy. That variability needs to be balanced out to keep the grid up. What happens when that doesn’t happen? You get blackouts. And then you get court cases and fines. In other words, more cost. (On a positive note, it does keep a few hungry lawyers off the streets).

This has only worked so far because of the massive redundancy built into the original grid. But at some point it will no longer work and that’s why the energy bureaucracy is already predicting increased blackout risk. Think of it like a diesel car. You can add a certain amount of gasoline to the fuel mix and the car will still run. If you keep increasing the gasoline in the mix, however, eventually the car will breakdown. The car was not designed to run on gasoline and our electricity grid was not designed to run on renewables.

So, I would expect that both privatisation and renewables have caused the price of electricity to go up. The difference is that all the cost from privatisation should already be baked into the system while the cost of extra renewables (the complexity cost) is increasing as more renewables get added to the system.

Well, it looks like we may actually get a clearer picture which of the two hypotheses is correct because the price increases have now created enough political pressure that there has been a big development in energy policy in Australia in recent months. In both NSW and Victoria, Australia’s two most populous states, the left-wing Labor parties have begun using rhetoric that explicitly blames privatisation for the cost spikes in electricity. Here in Victoria, the government announced a plan to directly fund generation and even get a government-owned SEC back into the retail game.

This is pretty big news. The privatisation agenda was a core plank of neoliberalism. If this rhetoric turns into reality, this starts to look like the official end of neoliberalism in Australia.

Of course, for now the measures are small and the choice of rhetoric looks opportunistic. Greedy capitalists always make a useful scapegoat and politicians desperately need a scapegoat given that they have been caught with their pants down now that the electricity price refuses to do what they promise. It’s also true that the whole renewables push is a core component of the Save the Planet™ ideology which won Labor the last election. The choice between blaming capitalists or blaming renewables and undermining that ideology is a politically obvious one.

What is interesting from an Australian political point of view is that this new rhetoric gives the Labor Party a way to ideologically service its core demographic of inner city intelligentsia/bleeding hearts while also capturing the demographic which is currently up-for-grabs: the outer suburban working class. Labor can promise it has a plan to cut prices, which will appeal to the working class, while also Saving the Planet™ which is the main concern of the inner city types.

By contrast, the Liberal-National coalition looks set to try and jump on board the nuclear bandwagon. I don’t expect that will be a winning strategy. Thus, Labor might accidentally find a way to become a populist party in the years ahead and they’ll do so by returning to their roots of bashing capitalists.

This fits my broader prediction that Australia will revert to our social democracy roots as things get tough in the next decades. Neoliberalism was always a bad fit here. It was only really adopted to appease the bankers who run the US empire. As the US empire continues to decline in the years ahead, Australia should get more leeway to choose its own path and I expect we’ll revert back to what once worked.

Ultimately, none of this will solve the electricity price problem, however. The only thing that will bring prices down is to reduce complexity in the system. A full return to government control would do that. One way it might play out is that a crisis of some kind, almost certainly large scale blackouts, could see governments, who would already own a substantial part of the system by then, buy out the remaining private players and the whole thing will revert to government control.

If hypothesis 2 is right (as I suspect it is), the price will still not come down because of the fundamentally complex nature of renewables and the associated complexity tax they impose on the system. At some point, possibly a few decades from now but maybe as early as the end of this decade depending on how things play out, a decision will have to be made whether Australia wants to have a permanent 24/7 electricity supply or whether we want to continue the renewable dream.

If we choose the former, there are still enormous coal reserves at our disposal conveniently located right next to existing transmission lines. Will government fund the construction of new coal plants? It would not surprise me in the slightest. And Save the Planet™ will go up in a puff of coal-powered smoke.

19 thoughts on “Australian Electricity: A Plot Twist”

  1. It seems that we are already farther down the renewable road in Germany as our electricity prices are 50% higher than Australia. Unfortunately, we have already used nearly all our coal in the 20th century…

    Regarding blackouts, I have read somewhere (cannot find the source anymore) that the institution that is responsible for the stability of the electricity network had three incidents per year in 2000 where they had to interfere to keep up the correct frequency while in 2017 it was already three times per DAY!

  2. Secretface – I think Germany and the rest of Europe is just now finding out the real price of the energiewende. That’s the trouble with systems, you can run down the redundancy in the system quite a lot before things break. Think of a company polluting a local river. One company polluting might not cause any problems. Even two or three might not. But keep allowing companies to pollute and eventually there will be problems. By the time you notice, the damage has been done. As for keeping the grid up with lots of renewables, I think the same problem happens in Australia. It’s just a giant game of whack a mole – what a mole

  3. Simon – It seems like the drawbacks of the “Energiewende ” are now reaching the mainstream. In so called right-wing circles, represented by the AFD in the Bundestag, the “Energiewende” is discussed critically for quite some time. Unfortunately, they don’t have good alternatives on offer (e.g. more fossil fuels and more nuclear).

    Funnily, the prime minister of Saxony has said a few days ago, that we should get Russian gas again as soon as the war ends. He nows that we are and will be dependent on foreign fossil fuel sources.

  4. Secretface – I think for most of Europe there is no “solution” i.e. there is no way to maintain the status quo. For political reasons, nobody can say that openly, however. So, politics becomes one big lie after another. In Australia it’s a bit different because there is no practical reason why we could not switch back to fossil fuels and have cheap energy. The lies here are due to geopolitics and when the geopolitics changes, so will the discourse.

  5. The European situation was actually working pretty well, Russian fossil fuels were powering value added production in Europe, especially Germany, but it seems someone wasn’t liking this too much.

    Simon, thinking about Australian energy, do you think the states will survive the next few decades intact? I can see our home state of Victoria becoming an absolute basket case as it has the least natural resources per population by a mile, and is already struggling with debt and the worst response to the whole Corona debacle.

    I live near the border and NSW was a far better place to be the last few years, and a lot of their infrastructure was actually working better despite being a long way from Sydney. It is also orders of magnitude easier to get things done in a business sense on the northern side of the river.

    A don’t even get started on the Murray Darling and the water conflict between the states. I suppose they could just splinter further apart, but that will open up foreign influence to an even greater extent than already exists. If WA starts seriously sniffing around going its own way I could see the federal government having a heavy hand to keep a hold of the resources.

    Perhaps get rid of the states, but focus more on regional governance. The borders don’t make a lot of sense from a geographic sense anyway, although the legal difficulties mean it will only happen through a very radical break.

  6. Skip – very good question. Prior to corona, I would have defended the states on the grounds that it’s good to generate multiple different ideas and try them out to see what works. But the states completely failed to do that, so what is the point in having them? Whether they can be gotten rid of is another question but I guess there will at some point be a successful constitutional referendum. It could actually be the electricity question that drives a change because the current system is so obviously dysfunctional but it’s also more integrated than ever before. Getting rid of state involvement would be one way to clean it up and reduce state power at the same time.

  7. I always defended the states on the same grounds of providing difference (which they barely do) , but David Fleming’s book Lean Logic had an interesting entry about levels of government. He argued that powerful sub-national units are much more easily influenced by supranational entities and foreign powers and I think this actually plays out correctly in Aus.

    He had this scheme in terms of comparative power of level of government, with the capital letters representing the what happens when each one more influence/power:

    community < LOCAL < regional < STATE < country < INTERNATIONAL

    COMMUNITY < local < REGIONAL < state < COUNTRY < international

    So more powerful states leads to more influence by bigger organisations, while a more powerful federal government leads to a greater bulwark against foreign influence and more community agency.

    It was food for thought.

  8. Simon- At least, there is no solution where Europe achieves energy autarky. As long as we provide quality products, as Skip mentioned, other countries will sell us energy to produce them, but this only delays the problem of ressource depletion. I am personally not conviced that it would be possible, but to avoid a massive shrinkage in prosperity and population we have to extend our ressource base to Space (e.g. asteroid mining). I don’t see any other options as the proposed solutions on Earth (e.g. renewables, nuclear fusion, biomass, hydrogen) don’t seem to work well or at all.

  9. Skip – interesting. Well, Vic signed up for the belt and road and WA certainly seems quite cosy with the Chinese. Seems like there’s more corruption at the state level too. I don’t think there’s ever been a federal government anywhere near as corrupt as the Andrews government and even Andrews hasn’t managed to outdo Bjelke Petersen. Even though most people pay it no attention, if there were more powers at the local level, it would be possible for citizens to get involved directly as a check to corruption. And the stakes are high enough to keep federal corruption in check. State politics seems like a weird middle ground where there’s enough money and power to make corruption worthwhile but not enough to attract scrutiny.

    Secretface – there is another option which is to decentralise and allow people more autonomy and freedom of lifestyle. That would entail voluntary poverty, however, and I don’t think people or the powers-that-be would willingly choose that option.

  10. Secretface -Or a significant percentage of the European population immigrates to Russia. Russia actually needs more people, has vastly more resources and can defend itself. If the climate changes a certain way Siberia might be a much a nicer place to live. Sounds silly at the moment but I can see it happening.

    Simon – the corruption at state level is hilarious, to the point that I would be disappointed if a politician wasn’t compromised. It’s also a stated goal of imperial regime change types that it’s easier to break countries up into little bits to control them. The British Empire liked to do it when leaving a place often leaving a thorn in the side of the new country. India/Pakistan/Bangladesh is a prime example.

  11. Simon – I agree that deglobalization/decentralization is an option, maybe preferable instead of expansion into space. Jerry Mander and Kirkpatrick Sale come to my mind as proponents of this option. I would not be opposed to it but I am also not married to our current consumer lifestyle, but as you said decentralization would likely be accompanied by poverty. Except a few idealists, I don’t expect people to give up their current lifestyle without any resistance. Our global rulers also don’t appear to reduce their power on purpose. As long as they can send their enforcers to every spot on earth in a short time, I don’t expect that to change.

  12. Skip – true. Another lesson from corona was how easily most people will divide themselves into groups. Suddenly, everybody became a raging chauvinist for their own state. Sydney people were crowing about how NSW had the “best contact tracers in the world” and that’s how they’d avoided Victoria’s fate. They were saying that right up til the Sydney lockdown.

    Secretface – it will have to happen eventually and I think it will be a slow process. Some “early adopters” will try out new lifestyle forms. Most will fail but some will work. Over time, the main system will slowly lose supporters and eventually you get a state change to something new.

  13. Skip – I already had the idea of moving to Russia (or at least Eastern Europe) myself. The self-hate and self-flagellation in Germany is really hard to endure. We want to be the good guys so hard that we crawl in everybody’s ass (maybe except the approved enemies of the USA). Russia has the same demographic problem as the rest of Europe, but their ressource base and willingness to defend its territory make it attractive.

    Simon- I agree that this looks like the most likely path forward at the moment, but who knows what kind of miracles will happen in the future.

  14. Sectetface – I think this is why Russia will welcome Migrants, due to the demographic issues. It seems you guys in Germany just lost all confidence after WW2, but as Simon has noted the rest of the west needs to rediscover your mystical mojo as a balance against the hyper rationalist English current that has dominated for so long. Many of the best things the west has produced have come out of German speaking areas, whether that be the music, philosophy, technology, even agriculture.

  15. Hi Simon,

    A very thoughtful essay, and I’d have to suggest that ‘All of the Above’ is also the answer! The house here has been off-grid for about thirteen years now, and this stuff is super-expensive. When people tell me that solar panels are getting cheaper, that’s true. After all, I picked up eight solar panels for free off a guy I know, and got another eight solar panels for $400. Incidentally the first solar panel offer was made to me at a pub, a dodgy environment to be sure, but it was legit. It was. True. 🙂 Turns out, there’s only one place on the continent where these things get sort-of-recycled, and yeah, new installs can’t use old panels. Nothing yells at me the words: “Crazy AF civilisation”, than putting little value on such high technology items. Anyway, the thing is, none of the other necessary stuff is getting cheaper. No way at all.

    I agree with you, if it comes to down to the lights being out over vast swaths of teal coloured inner Melbourne, mate, they’re going to say: Stuff Save the Planet™, how quickly can we build a new coal fired power station because I can’t charge my fricken’ electric vehicle? That’s when they may discover that the generators might take upwards of six years to build – if we hurry. Probably how it will roll.

    There is an advantage for the older coal fired power stations to be nationalised. It tends to foist the costs of latter ownership onto the public purse when the vast machines require the highest level of maintenance expenditure just to continue operating. Plus, the operators might earn some extra cash for having been nationalised, but then I’m somewhat cynical.

    I like your suggestion as to the future of politics. Hmm, hadn’t considered that, but yeah. Interesting indeed.



  16. Chris – yeah, this might all play out much quicker than anybody thinks because, unless I’ve missed something, the serious grid instability is only a few years away and yet our politicians have decided that the way to approach that particular brick wall is by pushing down harder on the accelerator. As for selling back the plants when they’re ready to be decommissioned, that’s what’s called privatising profits and socialising losses. Decadent capitalism at its finest. Another reason why the socialist faction of the Labor Party will have plenty of ammunition in the years ahead.

  17. Daiva – thanks. That looks very similar to some other physics-based accounts I’ve read. The executive summary says it all. If somebody can explain why those points are factually wrong, I’ll be willing to hear about the bright energy future ahead 😉

  18. Skip — Real nutritious thought for food, that Lean Logic’s *model* ?

    Secretface2097 — ‘to extend our resource base to Space’ works on paper like a charm… until you start figuring in the *enormous* inputs this endeavour demands (of energy and $$). Same for green, same for fission and fusion alike. None achievable on scale that matters w/o ramping up the fossil fuels uptake. Energy costs of energy is the cipher key.

    Bar a true breakthrough in fundamental physics / technology (Dyson sphere, anyone?), the complexity—and prosperity in tow—has to go. Current levels of energy available are woefully inadequate to support the BAU (business as usual). As it stands, radical structural delayering / geographical decoupling of global economy is on menu du jour ?

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