What do a Former Penal Colony and BoJo Have in Common?

            With Prime Minister Boris Johnson on the way out, it is an appropriate time to take a different tact and pose this question.  It is an odd question, to be sure, but one with a clear answer: both Australia and Boris Johnson have a current problem – namely, there is not enough current at reasonable cost on their respective electric grids.  Australia and the UK have both seen soaring electric costs for customers, meaning political trouble is not far behind.

            Australia deregulated its wholesale power supply market and established the Australian Energy Market Operator (AEMO), and the United Kingdom also embraced restructured “markets.”  And now the AEMO has taken the step of the ultimate market intervention by suspending the wholesale trading market and taking control of the market because “the power system was becoming unmanageable.”  The suspension has lifted, but even price caps could not solve the issue for a time, forcing AEMO to act. 

            Meanwhile, in the United Kingdom, Prime Minister Boris Johnson and the government are growing increasingly concerned about the price of electricity and how it is tied to the marginal cost of gas production as opposed to the actual cost of generation.  The Ukraine war has impacted natural gas prices globally. But both sets of troubles flow from flawed electricity market design.

            Lost in the discussion is that cost-of-service regulation and the regulated utility model, as a general matter, can provide protections for consumers that are not at play in Australia or the United Kingdom.  In cost-of service regulation, the price customers pay is based on—you guessed it—the cost of service and not the cost of a marginal gas unit.  This design flaw is not unique to Australia and the United Kingdom.  In fact, it is an electricity market design that we use right here in the United States in certain regions of the country.

            We have seen the ramifications of this broken model during Winter Strom Uri in the ERCOT market, and now Australia and the United Kingdom are seeing variations on the same thing.  There is a significant amount of noise in the system all the time about “monopolies” and the downsides of cost-of-service regulation, but rarely are those critiques looking at any kind of meaningful comparison between the pros and cons of that model and the problems inherent in deregulation.

            With the world watching, as illustrated by this piece looking at “lessons” for India “to avoid [an] Australia like fiasco,” the United States should be taking a global view as well.  We need to be honest about the flaws in our current electric market designs here in the United States.  There may be Twitter confirmation loops to revel in by panning “monopolies” and celebrating “markets” as talismans for all that is good and great, but the experience of restructured “markets” points to more sober conclusions: bad “market” designs are another form of mal-regulation, not a triumph of Adam Smith’s invisible hand.  Maybe it is time they go the way of BoJo and take a step aside.