Thursday, October 29, 2009

Don't wreck the RECs by Reg'ing them.

Flicking through the AFR on Wednesday 28th October, I found an Article by John Breusch called “Call for REC pricing regulator”. The article outlines that – in response to the bottom falling out of the renewable energy certificate (REC) market – the clean energy industry is pressuring the government to create a REC pricing regulator. The issue was also picked up by The World Today on ABC radio.

The price of RECs has dropped significantly recently. Clean energy industry participants such as the
Clean Energy Council suggest that a primary driver of this price reduction has been the considerable uptake of solar hot water heaters in Australia. This uptake has been spurred on by the recent increase in government rebates offered under its $96bn stimulus package.

Matthew Warren, the chief executive of the Clean Energy Council, is quoted as saying that the low REC price:

“will not deliver against the government’s objectives of developing a world class, competitive, clean energy industry”...and ...“A government regulator or carbon bank could solve the short-run problem in the REC market by either setting a floor price of buying enough certificates to support the price to a level that would trigger broader investment”.

Mr Warren somewhat spuriously likened the actions of the carbon bank to those of the RBA acting in international money markets to stabilise the dollar.

The saga continued on
The World Today on ABC radio with Oliver Yates, the head of Utilities and Climate Change at Macquarie Group proclaiming a similar view:

“So if the REC price is low, it signals to the market that it should not be proceeding with a large renewable project. Currently the REC price is quite low, and therefore there is some question as to whether it will stay that way and therefore jeopardise some of those renewable projects. But what the Government probably needs to do is step into the market and buy some of the RECs which are in excess supply”.

Mr Yates went on to say:

“A little bit of market intervention (is needed) at the moment. But they (the government) can hold on to them, they can bank those RECs and hold them, and they can release them later into the market when the market price improves”.

In answer to Mr Warren’s concerns, the development of a world class clean energy industry is a tool, not an objective. It is a tool that can be used to reduce the environmental footprint of our energy market and to reduce our reliance on non-renewable fuels. If we can have these two objectives, without a world class clean energy industry then great. Who cares about being world class?

More to the point, what the hell is a ‘world class’ clean energy industry anyway? I would have thought that a clean energy industry would be the one that was able to meet the MRET requirements at the lowest possible market cost. Wouldn’t then the low price REC price suggest that we are well on the way to having a world class clean energy market.

And to Mr Yates, if buying up and holding RECs until the market improves is a suitable investment strategy for the government, why isn’t Macquarie following your advice? Also, how is the government buying up all the surplus RECs (or worse still, setting a price floor) ‘a little bit of market intervention’, that would be a very large bit of market intervention.

Personally, I think it is great to see the Australian people putting their (and the government’s) money where their mouths are and buying into the solar power market. The use of domestic solar panels could significantly reduce the need for expensive additions to the electricity network through providing generation in the areas of consumption.

I think we should go further faster. In spite of all the hoo-ha around the development of the MRET scheme – which electricity retailers suggested would send them (and every Aussie battler) broke – it appears as though we are meeting the current targets easily and now have a surplus. And, judging by the REC prices in the market, the MRET scheme should not have significantly impacted the price of electricity at all.

Finally, if the government is going to play any role in the market, surely it should be to bring forward the
2020 target of 20% renewable energy. Clearly its current targets are too soft.

Wednesday, October 21, 2009

The 'Spirit' of Australia has a story today about the Qantas shareholders throwing tanties about executive pays in light of huge drops in profit. And while the story about is about executive pays (an issue I have historically sat on the fence about) my gripe is with Qantas’ use of the slogan ‘the Spirit of Australia’. I think in many ways, Qantas does embody the real spirit of Australlia, but it is not a spirit I want to be associated with.

Remember back in the day when there was no competition in the air market in Australia when Qantas was one of only two airlines. How much did it cost to fly? It was bloody expensive. And why? Because Qantas was ripping us off blind.

In spite of lower fuel costs, lower wages and cheaper booze and food, flights were significantly more expensive back then than they are now. We were all robbed by Qantas. But now, they somehow command reverence as being ‘truly Australian’. They stand for everything Australia stands for – the spirit of Australia.

But is screwing others over really the Spirit of Australia?

I find this a hard question because we would all like to say ‘no, Australia’s spirit is one of a relaxed , easy going, generous nation’. But is that really the truth? It seems that all too often we Australians are happy to screw others over, or at least sit back and watch other do it. It is part of our culture. If, like Qantas did for decades, you can screw someone over without going outside the law, it is fine. It’s good business. Good leadership.

Take for instance the way the Government is currently treating the Tamil refugees that are now back in Indonesia. If the refugees had landed on Australian soil, the government would have to look after them. That’s what the law says. But, intercepting them before they reach land and sending them to a third party nation to sit and starve in a boat is totally fine. It’s not illegal, it’s good leadership.

Irrespective of the rebuke that the Government is currently getting in the media over the matter, a large number of Australians think that this is the right way to deal with refugees.

Is that what the ‘spirit’ of Australia has come to? Do we, want Australia to be known as a closed, greedy country - a country full of people who will screw people over whenever they can do it legally?

I would rather we be known as a ‘fair go’ country. A country that accepts people that have been persecuted in other countries – not a country that locks them up in detention. A country that cherishes its diversity – because, after all, we are almost all new to this country.

That’s the ‘Spirit of Australia’ to me.

Breaking Telstra - Is the Government looking for a better market structure, or just buying a monopoly?

Is Telstra being denied procedural fairness through the forced splitting of the copper network from the retailing and mobile networks? And, is the government forcing the split for the right reasons?

The front page (and pp 50-51) of the Fin Review today spouts off against the splitting of Telstra, suggesting that the telephony super-power has been denied ‘procedural fairness’ and suggesting that the government is forcing the split purely to ensure a monopoly over the broadband network? The Opposition is trying to stop the split or at least put discussion of the split off to next year.

And, for once, I think I’m probably sitting on the opposition’s side of the fence.

Whilst I’m all for the splitting of Telstra for the competitive benefits stemming from the split, I’m the whole situation smells a little to me. Is the government forcing the split to promote competition in the telecommunications industry, or is it forcing it to ensure it has a monopoly in the future broadband network? Moreover, how dare the government sell Telstra off and then institute this type of reform. If I were a Telstra shareholder, I would be livid.

As briefly touched on yesterday, there is considerable benefits from splitting up vertically integrated companies trading in non-competitive markets. However, the Government’s bill to force Telstra to sell its copper network is just shifting the monopoly from the telephone industry to a monopoly in the broadband industry. If Telstra does not sell its copper network to the NBN Co. it could become NBN Co’s largest (and only) competitor. This, to me, is anti competitive behaviour that the ACCC should look at very carefully before it allows any such changes.

Clearly shareholders are suffering too. The Telstra Share Price has dropped significantly since ‘Conroy’s convoy’ first entered the arena. As seen below, Telstra’s stock price has depreciated strongly, even in light of an upward moving market.

Whilst I think that the move to split Telstra is a good one, I this is another example of mediocre policy, crap timing and poor planning. The split should have been completed prior to selling Telstra. Telstra should be allowed to keep its copper network; if for no other reason, it should be able to keep it to promote competition in the new broadband network. If nothing else, Telstra should only sell its copper network at a price that is acceptable/beneficial to shareholders – just like any other acquisition.

Tuesday, October 20, 2009

The green light for vertical integration in the energy market

At what stage in the development of a competitive industry does vertical integration become a good thing?

This question arises as the NSW Government enters the process of selling off their electricity generators, and the energy retailers are expected to be the buyers.

Today the Australian had an article discussing the sale of about $6 billion worth of NSW state-owned electricity generation assets. Whilst the sale process will be open to all investors, the article suggests that interest will come from major electricity retailers including Origin Energy, Integral Energy, TRUenergy and ERM. Yet, governments and regulators across Australia have put in so much work to remove vertical integration from the energy market. So why would we be allowing this shift back to vertical integration? Because it can reduce electricity prices.

Vertical integration often leads to market inefficiencies (particularly in monopoly, monopsony, oligopoly or oligopsony markets). This has been highlighted in the recent discussion regarding the de-vertical integration of Telstra (vertical disintegration is a different thing altogether). Vertical integration in market structures where a few participants have price discrimination power enables the vertically integrated company to price gouge in the monopoly/oligopoly components of the business. The company can then cross-subsidise those components of the business that are open to competition - effectively opening up a cartel pricing scheme. So why then, if vertical integration these markets is a bad thing, would the government be happy to allow for re-vertical integration of the energy market?

To my mind, there are three reasons why this re-integration is a positive (or at least an acceptable) outcome:

1. The perfect hedge – currently, retailers and generators minimise their risk through over the counter transactions. This enables retailers to purchase the majority of their load at a pre-arranged price, rather than facing the volatile NEM price. It also enables generators to guarantee demand even in low-consumption periods. Whilst this is a good system, the contracts are agreed to ahead of time and any variance between the agreed contract consumption and the actual consumption has to be bought on the NEM at an unknown price.

When retailers and generators merge, they are able to better hedge their demand and price risks. So long as the price the generator offers the NEM is low enough so that the generator’s offer is accepted and dispatched, the retailer and the generator can have a perfect hedge.

2. The market structure of the NEM – the NEM is not a typical Oligopoly or Oligopsony, rather, it is both. There are a few large generators and there are a few large retailers. Having both the buyers and sellers in a market with considerable power in some ways removes any price discrimination power that could occur in a standard oligopoly/oligopsony.

3. The regulation of the NEM – even with vertical integration, the dispatch system used in the NEM ensures that the energy needs of the market are met by those generators willing provide the energy at the lowest possible price.

There is still considerable room for gaming on the margins of the market, but not considerably more than is currently going on.

Sunday, October 18, 2009

The Economics of Babies - 2

Babies cost money! But does anyone care?

It appears that the world (wide web) is devoid of real economics on the economic impact of a baby entering the world. I may have to do some if I ever go back to Uni. In the mean time, I’ve done some ‘back of the envelope’ calculations on the impacts of a baby in the first year, and have been quite surprised by the outcomes.

I’ve found various websites stating the costs of having a baby. These costs ranged from $125,000
to around $400,000 for the first 18 years. With the first year anywhere up to $20,000.

I was astounded when I used the Babycentre cost calculator
. I estimate that our baby will cost in the order of $8,000 over the first 12 months (inclusive of birthing and prenatal care). And that’s assuming zero food costs (breast feeding), no day care (saving thousands) and using re-useable nappies (saving around $1,000).

By applying the ABS methodology for Industry Value Added (IVA)
, I estimate the Baby Value Added impacts for our baby at some -60,000 to our family in the first year. The majority of these are due to loss of income.

The impacts on the economy as a whole are very different. Using the ABS IVA methodology again, I estimate the net impacts at $33,000. The difference is driven by the transfer of my the wife’s income to another employee and the boosts received in the retail, health and service sectors.

Not rigorous, but interesting all the same.

I was surprised by the outcomes of the calculations. I wonder at what financial cost I would stop having kids? What about you?

Friday, October 16, 2009

The Economics of Babies - 1

One little baby can have such a big impact on the economy. When I look around at the amount of things Anna and I have amassed so far, I am blown away by the impact one baby could have.

When I first started the baby making process I had a discussion with my Anna about how I think lots of people go over the top with babies, and that we should try to source as much second hand stuff as possible. The decision wasn't a fiscal one; as TINKs without a mortgage, cash was not an issue. Rather, it was about trying to rectify some of the wastage that comes from babies - taking some second hand stuff off people's hands. cheaper for us and saving them the trouble of storage or getting rid of the items.

I think it is fair to say I falied.

The whole baby miracle has been taken up by a consumerist nature. Having a baby, for many people, is no longer the deeply spritual and special gift that it once may have been. Rather, in the same way that weddings have gone before, it's now about showing off your prosperity. And I'm sad to say, it appears as though I have been caught up in it too.

The best pram, the timber cot, the whitest white bassinette, the rocking chair for mum, the rocker for baby, the baby backpack for dad, the baby bjorn, the baby bjorn rip-off, the sling, eco friendly nappies, eco unfriendly nappies, bottles, clothes, rugs, hooded towels, video cameras, swiss balls.... the list goes on.

Laying in bed this morning, I started to think, what is the economic impact of one baby? Is this an area of economic study that my insular mind has never entered?

In the absence of any real research on my behalf, here is some political hokeypokey on the impacts of the baby boom. I'll get to some baby economics over the next few posts.

Thursday, October 15, 2009

A long time coming

I’ve been planning on starting a blog for years but somehow never got around to it. Sometimes too busy, other times too lazy. But, for some reason, I’ve been thinking about it more and more over the last few weeks. Additional to my own fixation on the idea of blogging, I’ve met a number of people lately who have told me about their blogs, and when I’ve gone to them, I’ve really enjoyed the insight that you get from a chronological series of thoughts. I’ve found them both very useful.

Tim Kastelle is an academic at the UQ Business School who specialises in networks.

Cameron Murray is one of my Young Economist cronies.

As such, I’ve decided now is the time.

I guess I have a range of objectives for the blog. I would like to have somewhere to store and share my thoughts. I would like to have an outlet to practice my writing on a regular basis. I’m also hoping that forcing myself to blog on a regular basis will ensure I stay on top of topics that I should really be on top of. Finally, and probably most importantly, I like to think that others might find interest, enjoyment and/or use in the lamentations of my mind.

Whilst I find it intimidating that people may disagree with my points of view, I like the idea of being challenged. My thoughts and points of view are things that I hold dear, so I should make sure I can back them up, and I should not shy away from letting the world know.

I’ve named the site the Social Economist for a couple of reasons. Firstly because I’m a serial socialite. And secondly, because the thing that really turns me on about economics is the social/psychological side. I love to get together with other people and find out what makes them tick. And I have a penchant for late boozy nights with colleagues.

On a more personal level, my wife is rather pregnant with our first child right now. The baby (we do not know the sex) is due in 25 days. I’m very excited about becoming a father and just hope that I’m up to the job.

Anyway, I’ll try to put some meat into the next Blog rather than just writing guff.