Go With the Flow
Snowy Hydro 2.0 might end up being one of the best investments in infrastructure we could make. By Nick Cater
Geologist Pawel Edmund Strzelecki was the first European to climb Australia’s highest peak, which he blessed with the near-unpronounceable name of a Polish compatriot.
He is also credited with the discovery that Australia has more than its fair share of an energy-dense combustible sedimentary rock known as coal.
Were he to return today he would doubtless be struck by what we’ve achieved in the century and a half since his death by turning the stuff into electricity.
A plan to produce electricity by pumping water up the side of the Snowy Mountains and letting it run down again would probably strike our time traveller as a little barmy. But hey, that’s progress.
In the symmetrical world imagined by rational economists, the business case for the Snowy 2.0 Hydro power would fail.
In a country scarred by irrational policy decisions and a broken electricity grid, however, this audacious, gravity-defying and not-inexpensive feat of civil engineering may be one of the best investments in infrastructure we can make.
The world has changed dramatically since the 1980s when the term economic rationalism was coined. The reform tools employed 30 years ago to solve the problem of creeping post-war socialism have been blunted.
Back then the solution was to remove government-imposed constraints on the free market. Selling government-owned businesses into private hands made them more competitive in energy, transport, communications and other sectors, improving service and reducing costs.
Fixing the mess created by Socialism 2.0, however, is another thing altogether. It is not simply a matter of creating new markets where they had not previously existed as Margaret Thatcher did. Today we face the far more complex task of fixing markets broken by political meddling on an industrial scale which has emboldened private oligopolies every bit as uninterested in the wellbeing of the customer as the government monopolies they replaced.
Died-in-the wool economic rationalists, the kind that attend conferences paying homage to dead economists from the Chicago School, might wish today’s problems could be solved by deregulation. The sad reality is that in most cases they will not.
Non-market failure, that is failure that stems from poor policy to which corporate boards gleefully respond, will not be cured by privatising Snowy Hydro, perverse as that might seem to those who learnt their economics from Milton Friedman.
The Howard government’s decision to ditch the privatisation of the scheme in 2006 troubled purists at the time, but now seems an act of genius.
Non-market failure in the energy market will not be cured by less government intervention. The painful reality for conservatives is that it will probably require more.
The caveat is that it will also require administrations to learn from their mistakes, bureaucrats who don’t respond to failure by writing submissions for more money, and ministers with the courage to stand up to their departments and challenge the conventional wisdom.
The Morrison government’s approach to banking illustrates the new reality. The Liberal Party won its first election 70 years ago under Robert Menzies opposing Labor’s plan to assume control of the banks.
The party won its 19th federal election in May on a promise to assert a degree of control unprecedented in the modern era in its response to the Hayne royal commission.
Those who like policy arguments to flow in a steady current might be troubled by this paradox. Yet both policies are consistent with the Liberal principle that citizens should be protected from the abuse of arbitrary power.
In 1949 that threat was rightly seen as the rise of an overbearing, socialist state. Today we are acutely aware of that threat emanating from overbearing corporations, frequently empowered by clumsy government intervention.
The centre-right has barely come to terms with Socialism 2.0, which gained pace around the time of the 2008 financial crisis. It retains the irritating Marxist habit of dividing humanity into classes, this time based on identity rather than the ownership of the means of production.
Like the old socialism it waves a banner of social and economic equality when it suits its purpose, but not when it doesn’t.
It cements the power of an entrenched elite who walk around the farmhouse on their hind legs, barking orders and filling their cups to the brim.
The new intelligentsia, like the old, is chronically invested in central planning and profoundly compromised by self-interest. Their ambitions run beyond the mere ordering of an industrial-military complex. This time they want to fix the planet. Once again it is unrestrained by what is technically or economically possible.
It is by this route that we have become a country of abundant energy resources but volatile energy supply.
Don’t believe the propaganda that we are dragging our feet when it comes to reducing emissions. A fact, little mentioned by the panic merchants, is that Australia has invested twice as much per capita in renewable energy than any other country.
The unprecedented volatility in the price of electricity creates a market for the insurance policies which Snowy sells.
It’s a great business. The Tumut 3 generator, for example, which operates from a pump hydro system, is frequently able to buy the energy to power its pumping stations for nothing on days there is so much wind and solar power in the grid that it has to be dumped.
On days when energy is short, Snowy sells into the grid at an extraordinary price. Since it enters into forward contracts up to 15 years out, its revenue is immune from falls in wholesale prices.
The heavy investment in Snowy 2.0 demands the utmost scrutiny. It must be compared to the cost of other possible ways of firming the energy supply, including proposals for new or renovated coal-fired power stations.
It must be judged, however, as an answer to the challenges of this century, not the last. Like all good policy it should be driven by pragmatism, not by ideological fixation.