The Gains from the Microeconomic Reform of the Power Generation Industry in East-Coast Australia

Abstract

Power generators in the east-Australian states of Queensland, New South Wales and Victoria comprise the dominant part of a 40,000 MW power system and operate at world benchmark efficient levels. But it has not always seem this way. During the late 1980s, the states were grossly over-supplied and the cost structure of the generation sector was spiralling out of control. Microeconomic reform has since corrected pricing practices and capital allocation. But electricity reforms need to be carefully orchestrated. While gains in productive and allocative efficiency will invariably occur, dynamic efficiency gains are harder to achieve. Inadequate restructuring or a supply-demand imbalance at the start of reforms may result in high prices, which in turn can drive an excess entry result, following which emerge systemic faults in signalling for new plant. Poor starting blocks can set off a chain reaction of events which may take a power system more than a decade to recover from.