Dr Nelson prescribes a prophylactic
The Nelson review has made a number of sensible and welcomed recommendations particularly as they go to disclosure and liquidity.
The centrepiece though represents a more fundamental change to the energy only market than is realised at first. Notwithstanding the maintenance of a spot price dispatch mechanism and its long term partner the forward hedge the truth is that the Nelson Committee has said that the for one reason or another the investment signals are being full ignored.
In fact this is not news to anyone that follows the market.
Where I think Tin Nelson and his consultant committee have badly missed the market is in not doing enough work to identify why investment signals are being ignored. And I reckon there is a failure of process that underlies the error.
Its a basic tenet of research that you need to test your theory. Conceptually it has to be falsifiable.
the committee can be criticised for being at once too theoretical and at the same time baldly assuming a conclusion as fact without ever producing any evidence.
Specifically the draft report almost entirely ignores market structure as an explanation. Market structure is just a euphemism for the oligopoly in electricity retailing. Its just a poor effort to ignore this in the discussion.
The report says that retailers won’t contract long because their demand is uncertain but thats basically garbage. Such a view:
- ignores history in that all the big gentailers own long term generation. AGL,ORG and EA own coal generators and Snowy owns very long term hydro and
- that beause of the large and broadly stable residential customer base the gentailer in fact do have predictable enoiugh demand to build longer term generation assets and
- Notwithstanding the Nelson Committtee’s spurious claim about uncertain demand being the reason for no new investment in fact all he Gentailers are falling over themselves to build 20 year batteries. EA and Snowy have also built gas generators. AGL invested in Barker Inlet, a gas generator.
So, not to put too fine a point on it the Nelson Committee diagnosis of the problem is dead wrong and therfore brings the entire report and its conclusions into a poor light. If you don’t understand the problem how can we trust the recommendations?