Finkel’s fake economics 3.0

One can usually expect on most days when the Senate is sitting in Canberra that the ALP, Greens or Nick Xenophon Team (NXT) will put forward for fake debate a so called Matter of Public Importance (MPI) such as the recent one for 9/11:

“Investment in renewable energy, which makes economic and environmental sense.” – ALP Senator Katy Gallagher from the ACT, Manager for Opposition Business (Senate).

As is often the case with those on the Left, this assertion is not just false but the opposite is in fact the truth. This has been shown many times by various LibertyWorks writers including myself earlier this year in both Finkel’s Fake Economics 1.0 and Finkel’s Fake Economics 2.0. I will now complete the trilogy with a this third and final instalment ie Finkel’s Fake Economics 3.0 (noting that, admittedly, I am quite fond of writing such trilogies such as on the Cost-of-Living).

The rest of this article will mainly quote from a 30 June 2017 report entitled The Finkel Report’s Recommendations on the Future Security of the National Electricity Market: Impacts on the Australian Economy and Australian Consumers. I helped Senator Malcolm Roberts engage Dr Alan Moran, formerly of the Institute of Public Affairs (IPA) but now of Regulation Economics, to produce this report. It assesses the Finkel Report released earlier in June 2017. This assessment has since been dubbed The Moran Review.

The Moran Review reproduces the following shocking graph below and the accompanying explanation after:

Over recent years Australia has witnessed a massive increase in its electricity prices.  In terms of the consumer this can be seen from the [graph above].

Around 2006 Australia’s electricity prices, having previously increased at about the same rate as inflation in general, started increasing at a much faster rate and electricity is now relatively twice as expensive as it was in 1980. Initially, this price upsurge was largely caused by increased regulated network charges, partly due to a need to renew investment and partly as a result of “gold plating” by businesses whose incentives are to boost costs knowing that these will be recouped by higher regulated prices.

More recently, we have seen a politically-driven increased share of intermittent renewable energy. This depends upon subsidies and squeezes out commercial electricity supplies both as a direct result of its subsidy and by imposing costs on coal generators which have to operate in a higher cost, accommodative manner due to renewable energy’s intermittent nature.

As a result, 6024 MW of generation capacity (2710 MW brown coal and 3314 MW black coal) has been forced to close since 2010. This comprised over 20 per cent of the 2010 capacity. The Finkel Report envisaged other closures falling due … leaving only 3000 MW by 2050.

Some argue that many of these power stations are old, and the Finkel Report contemplated a forced closure of power stations over 50 years old. The absurdity of such notions should be clear: US global military power is dependent on its 10 Nimitz class aircraft carriers which were first launched in 1972, and many rail lines and ports are over 100 years old. Even most of Australia’s commercial hydro power stations are over 50 years old. In all cases, older established plant has been renewed and revitalised over the years. While totally new facilities can be lower cost, it is wasteful to scrap facilities which continue to be competitive.

Other key points from The Moran Review can be found in the summary that follows next:

Governments are subsidising the building of intermittent renewable energy that are reducing reliability and security while increasing prices. The Finkel recommendations entail an amplification of these subsidies, the outcome of which has been a doubling of wholesale electricity prices and a degradation of supply reliability. Compared with wholesale electricity prices of around $40 per MWh prevailing during the first 15 years of the present century, prices now exceed $80 per MWh.

The Finkel review accepts that its policy proposals will not return wholesale electricity to their historical levels but mistakenly argues that this would be impossible. Moreover, its over-optimist assumptions on future costs of renewables mean that its proposals would make even its $80 per MWh price goal unattainable.

Implementation of the Finkel recommendations would bring a further deterioration of system reliability and lift wholesale prices to at least $100 per MWh. This is already evident in prices of electricity on futures markets. Returning to the previous market-based electricity supply system that has been have gradually undermined by regulations over the past 15 years would result in new coal plants, wholesale electricity costs at around $50 per MWh and the restoration of a more reliable system.

Household energy bills, even under an optimistic view of the Finkel proposals, would be between $588 and $768 per year more than would be the case under an outcome that removed market distortions by eliminating all subsidies.

More injurious to households than the lift in their direct electricity costs, the Finkel recommendations would vastly increase the costs of electricity to commercial users.  By more than doubling electricity costs, the Finkel proposals would force the virtual cessation of production in energy intensive, trade-exposed industries; these account for one fifth of manufacturing and include some of the nation’s most productive activities including metals and smelting, pulp and paper, sugar and confectionery. Competitiveness and future growth would also be adversely impacted across most agricultural and mining sectors.

A regulatory-induced elimination of the industries able to take advantage of Australia’s natural advantage in low cost energy supplies and the forced increase in all other industries’ electricity costs would severely reduce Australia’s living standards.

Thus, the recommendations from The Moran Review are that:

In general, the Finkel proposals should be rejected and regulatory distortions on energy supply should be removed. In particular, the Commonwealth should:

Abolish the Commonwealth’s Renewable Energy Target (RET) and the subsidies, presently about $75 per MWh, it creates for wind and large scale solar;

Eliminate the Small-Scale Renewable Energy Scheme (SRES) under which electricity users in general are forced to provide a subsidy of $40 per MWh to roof-top photovoltaic installations; and

Cease all government subsidies through the budget including guarantees to bodies like the Clean Energy Regulator and the Clean Energy Finance Corporation (CEFC)

The electricity market management should require, in line with the Finkel proposals, that all generators pay to ensure they operate reliably and require new generators to pay costs of transmission that their grid connection entails.

State government should remove subsidies like the Queensland Solar Bonus scheme and preferential Feed-in-Tariffs for PV generated electricity.

To find out more about The Moran Review and related matters, then please join us at the inaugural Cost-of-Living Summit on 13 October 2017. The Summit will be held, the day before LibertyFest, in the Legislative Council Chamber (also called the Red Chamber) at Queensland Parliament House in Brisbane Queensland. The topics are planned to be: the four key drivers of property rights, tax/budget, regulation and money; and the four key impacts of energy, housing, farming and banking. The speakers are expected to include (besides yours truly, Dr Moran and Senator Roberts): The Outsiders of Ross Cameron and Mark Latham; Dan Mitchell from the Cato Institute; Adam Creighton from The Australian; Tony Makin from Griffith University; Kesten Green from UniSA; Tim Andrews from the Australian Taxpayers’ Alliance; Graham Young from Australian Institute for Progress; and Andrew Cooper from LibertyWorks. Seats are strictly limited, so please express your interest to purchase a ticket well before October 13th at [email protected].

Darren Brady Nelson

Darren Brady Nelson

Darren Brady Nelson is on the LibertyWorks advisory board, an economic policy adviser to One Nation Senator Malcolm Roberts & a Liberty Evangelion.
Darren Brady Nelson

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