The price of uncertainty Economic modelling and the National Energy Guarantee
The Turnbull Government has argued that the passage of its National Energy Guarantee (NEG) will deliver significant price reductions to consumers, with much of the claimed price benefit coming from the ‘greater certainty’ it claims investors will have were the NEG to be agreed upon by state governments and the federal parliament.
However, at the same time that the Turnbull Government is suggesting that the ‘certainty’ associated with the NEG will deliver price benefits to households, the government is creating uncertainty by talking about new subsidies for coal fired power stations.
New coal fired power stations would have a significant impact on incumbent electricity generators. Even the discussion of such a possibility will increase the perceived risk for other electricity generators and, in turn, increase the cost of financing new generation. Ironically, one of the major potential benefits of the NEG, according to the modelling of the NEG commissioned by the Energy Security Board, is that by reducing policy uncertainty the NEG would lower the risk, and cost, of financing investment in electricity generation.
This paper provides an overview of the limitations of attempting to model the potential price impacts of policies like the NEG. In particular, it outlines the limitations of attempting to model the benefits of reducing ‘policy uncertainty’ in an industry like electricity, the market conduct of which is dominated by interacting state and federal legislation, a high degree of strategic interaction between oligopolists with significant market power, and a high degree of exposure to changes in tax, subsidy and consumer laws.