Economist Rudi Dornbusch once warned that “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could”. Now is a good time to invoke that rule as we watch the Australian government, faced with exploding energy prices (told you so, again) do what desperadoes generally do either before or after turning to inflation to mask their errors: shut down the price signals that just might lead the private sector to fix the problem, then force suppliers to produce at a loss anyway, and wonder why the shortage keeps getting worse. As a classic headline in the state press put it, “Australian Energy Market Operator suspends spot market for wholesale electricity to ensure reliability and avoid blackouts”. Yes, they suspended the mechanism that ensures reliability and avoids blackouts. We can guess what will happen next.
The government Australian Broadcasting Corporation piece predictably presented the government case as news, saying “The Australian Energy Market Operator (AEMO) has taken the extraordinary step of suspending the spot market for wholesale electricity across the country. The electricity sector has been dealing with soaring costs, forcing AEMO to cap prices and compel generators to offer their services.” But what “forced” AEMO wasn’t the situation, it was their understanding of the situation. As more economically literate authorities would have been “forced” to deregulate to meet the crisis.
Eric Worrall rightly, in flagging this story, calls the result “a regime of expropriation” because “Electricity providers claimed they refused to offer services under the government imposed price cap, because it would have meant running at a loss. Now they are being told they have no choice, they will be compelled to provide power at the price the government sets.” So they must run at a loss against their will, watching some of their wealth disappear every day and possibly all of it, and facing fines or jail time if they refuse to let the government bankrupt them.
It's not just bad for them. It’s bad for the society, because this approach is also known as eating the seed corn. Which is a plan that ends in famine for reasons you’d swear were obvious but evidently are not.
As we warned last week, the likelihood of new Australian Prime Minister Albanese recognizing the error and correcting it was minimal. As we added, “In which case the notorious instability of their electoral system might just turn out to be a good thing for once.” And indeed The Weekend Australian just warned that “Anthony Albanese faces a parliamentary defeat over his plan to legislate a 43 per cent emissions reduction target by 2030, as the Greens, the Coalition and teal independents line up to block the bill.” But even if he does, it won’t solve the big problem: bad policies driven by bad ideas.
The move to “fix” an energy policy blunder by driving the whole productive apparatus into the ground confirms Friedrich Hayek’s insight in The Road to Serfdom that would-be central planners lacking adequate information are like a person trying to stamp out brushfires the hem of whose pants has caught fire. (We claim to have invented that analogy after reading Hayek; if anyone knows of an alternative source we might have read then forgotten about, please let us know.) And it’s very hard to fix that situation until one faces up to the fact that one is actually spreading the blaze in a well-intentioned effort to extinguish it. At the moment there’s not much pressure that way, and a good deal the other.
You might expect pressure from businesses. But as usual the companies are trying to tiptoe around an angry state capable of destroying them on a whim, with lines like “The price cap unintentionally means that some plants can’t recover their fuel costs. Participants are legitimately seeking ways to resolve the problem,” a soothing evasion from “A spokesperson for the Australian Energy Council, which represents major power generators”. And the press isn’t helping; the Brisbane Times only threw in that mealy-mouthed plea for beatings to continue gently after kicking off its article with “Power generators are exploiting the chaotic energy market by withdrawing power supply from the electricity grid, forcing the Australian Energy Market Operator (AEMO) to direct them to fire their plants back up and triggering profitable compensation payments” and later quoting some professor who contributes to “The Conversation” but clearly skipped economics class (correlated phenomena) that withdrawing power rather than sell at a loss is “not in good faith and fairly unconscionable conduct. Yes, there is some sort of justification for it, but it’s the wrong thing to do”. Although the good professor does not personally sell his services for less than it costs him to provide them. And any business that does so goes broke. Even, eventually, a government.
Still, not everyone thinks about the world in terms of what actually works. As Bill Watson noted “Thus they tell us we need policy that is ‘strategic,’ ‘forward-looking,’ ‘inclusive,’ ‘people-focused,’ ‘grassroots-generated’ and so on. Well, sure. I’ll resist my curmudgeonly economist’s urge to argue that none of these is necessarily desirable, in part because several have no clear meaning, and instead simply ask: OK, but what do you actually propose and how exactly will it work?”
Well, see, we’ll make energy scarce and unaffordable, when prices rise in consequence we’ll bankrupt all our energy companies, and then we’ll see if it makes power more abundant and cheaper. Hey. Hasn’t it gone dark?
I listened to an Australian politician say that switching over to renewables completely would fix everything. My cat is fixed too.
Australia, California, UK, Germany, Trudeau's Canada and Biden's US, all resembling Lemming-like behavior. I call it peak energy ignorance.
This story has not aged well. The Bayswater units have been repaired and come back online and the wholesale market has been restored by AEMO. It's undoubtedly true that some generators would have made excess margin on their coal fired electricity and perhaps lost money on gas-fired electricity. I imagine that they will be paid on a cost-recovery plus commercial margin basis. AEMO has plenty of data for the generators to agree a commercial settlement.
About 18 months(?) ago in the Australian Capital Territory, the Local Government boasted that our electricity is now '100% renewable energy'. A month or two after that, we had a 9% increase in the price of power. We have just had a further 19% increase in the price of our electricity. (Even more renewables ... ?) Strangely enough, we have also just been told that a large solar 'farm' in the ACT has just gone into 'receivership'. They had a long term contract to supply the ACT Government power at 17.8c/kWhr, but went broke ... ? What are these people doing?
The UK 11,000 turbines generate electricity at their advertised, ie rated, ie maximum capacity about one third of the time. Gas generated electricity
Is required to fill the gap up to the rated level and then much more to fill the large gap up to the demanded level which changes virtually
Ten minutes. The wind performance is referred to as the capacity factor. It will not change if we build another 30,000 turbines!!
Building turbines does not change the wind variability!! SURPRISE!! SURPRISE!!!
ALSO….the IPCC does not recognise that global temp. Variation existed prior to when CO2 started to increase, ie 1850!!!
So natural causes of global variation like solar variation are not even considered by them. Totally illogical……and excludes their theory,ie
man made CO2 emissions will be the end…..as meaningless drivel!!
Per my last input we will need gas powered electricity or some instantly demanded equivalent forever!!,…..
Net zero is dead!,,