In the not-so distant past, our country’s electricity needs were delivered by state-owned, vertically integrated utilities. Typically, these organisations were responsible for everything in the electricity supply chain, from sourcing and mining the input fuel through to billing the customers.

With this broad responsibility, a key part of the former utilities’ role was to develop and update the long-term generation portfolio plan. Organisations such as the State Electricity Commission of Victoria (SECV) – with its direct knowledge of the infrastructure, customers and growth needs – planned for the future electricity requirements. 

These plans were 10, 20, 30-plus years out for generation capacity and related infrastructure (such as transmission and distribution), to meet expected demand, economically, with the right mix of assets available and appropriate at the time.

Indeed, one of the major selling points of a jurisdiction such as Victoria was its low cost, reliable supply of electricity to support a diverse range of industries – enabling the state to be competitive for economic development on a global basis.

But, with the privatisation and disaggregation of the industry over the past 15 years, long-term planning for major electricity infrastructure has all but stopped. In short, there is no forward plan for our supply-side electricity portfolio – instead it is left to “the market”.

Never has there been a more critical time to have a power generation plan. For example, we have targets and a desire to increase the proportion of renewable energy capacity output to be 20 per cent of the total by 2020. Yet there is no cohesive plan on what the mix of renewable plants will be, where such plants will be located and what supporting infrastructure will be required.

To meet such capacity targets by 2020 will require a range of project and investment decisions to happen in the next one to three years, as most projects take at least five years to develop and complete.

Further, we are seeing substantial growth in the demand for electricity through population, appliances and general growth of the economy. If left unchecked through effective energy efficiency programs, this demand growth will place further pressures on the current supply-side infrastructure if there is no integrated plan to meet forward demand.

Finally, there is a real possibility of a carbon price being applied to the wholesale generation of electricity that produces carbon emissions – intended to provide economic motivation to migrate the portfolio over time to lower-emitting power plants. But government is unable to articulate what the desired physical portfolio should be – creating a chicken-and-egg scenario.

It is impossible to calculate the right carbon price to set without a firm view of the desired future portfolio mix – equally, meaningful change in the generation portfolio will not occur unless the carbon price crosses a certain threshold.

While one can argue that "the market will sort it out", the market is already distorted by the forced exclusion of nuclear energy from consideration. Further, the market will seek to maximise short-term gains through manipulation of revenue maximising at the margin – the market design does not motivate or reward building very large-scale baseload capacity, which now competes with wind farms for dispatch off-peak, sub-optimising assets that are designed to run 24-7.

So, right now, despite all of these major forces descending upon us that could fundamentally change the requirements and our sources of power generation, the plan is not to have a plan.

This “no-plan” approach might be OK if we are talking about the cinema industry – it would be a pity but not catastrophic if our cinemas were overcrowded by 2020 through lack of long-term planning – and customers would find other things to do. But to have no long-term plans for electricity supply, which is essential for our economy and way of life, is nonsensical.

If there is one thing we should expect from our governments, it is the long-term planning and implementation of core infrastructure. Whether the implementation is carried out by private industry or by the government directly is a commercial decision. But the fact that private enterprise is now involved in the deployment of core infrastructure (eg. the construction and operation of certain roadways), does not make redundant the need and responsibility for governments to plan.

So, what is the solution?

Firstly, governments need to step back into the role of coordinating and approving the plans for the electricity supply infrastructure in each state, overlaid with any federal parameters and constraints. These plans should specify, based on what we know today, the infrastructure requirements for 2020, 2030 and beyond, detailing what needs to be built and where, and what needs to be turned off by when.

In developing these plans, the plan must accommodate the requirements for changes in the generation mix to meet renewable energy and emission reduction targets, along with expected growth and changes in demand.

Then, the owners of the plan must determine whether or not the mechanisms are in place for "the market" (that is, the privatised industry that services the broader electricity industry in this country) to properly respond and make the necessary investments to realise the projects required by the plan.

If there is a disconnect between the mechanisms and the outcomes, then either the mechanisms and market need to be modified or redesigned, or the government will need to directly intervene and build or contract the assets required to be built (or removed) for the long-term plan.

Finally, any new electricity infrastructure project proposed by industry needs to have the appropriate approvals from the owners of the plan and ensure the project is consistent with the long-term plan. (We have brought private industry into the road building and operations business, but they just can't run out and build a road because it suits them.)

As we continue to sell Australia to the world as a well-managed, stable economy with reliable and cost-competitive infrastructure to motivate further, ongoing inward investment, let's make sure we have a secure and robust plan for electricity.

Some say governments should not be picking winners, but continued inaction on developing and executing this plan will result in the only winners being losers.

Andrew Dyer is a Company Director and a former McKinsey & Co consultant.  He has extensive management and consulting experience in the energy and utilities industry in Australia as well as the US, Asia and Europe.