Why are Ministers 'dropping' reports rewarded? An RD&I case study.

The 'drop' is a means of releasing government reports in such a way that journalists and community (or lobby) groups have the ability to consider the report to be able to comment on it at the time of release. You can tell there is a drop when the coverage refers to the report in the future tense (as in coverage on a Tuesday that reads 'The report to be released Tuesday.')

This week we saw the drop of the report of the Strategic Review of Research and Development, Ambitious Australia. InnovationAus, the Australian Academy of Science, Universities Australia and the Business Council of Australia (BCA) (to list only a few) dutifully reported the iminent release of the report. All referred to the report positively, mostly using the report's own language. 

The Academy of Science either missed something in editting their release, or they really do think the May Budget presents an opportunity to merely start halting the decline in RD spending.

The BCA used the opportunity to reference its own report submitted to the Strategic Review, which it asserts shows a $5 increase in economic activity for every $1 of government expenditure over thenext decade. Unfortunately, the actual report by Mandela includes no details on methodology. The online version states that this information is in a separate volume, but it does not appear in the BCA post. 

The Minister's media release meekly states 'The Government will carefully consider the report and its recommendations and how it might respond.' The nature of the drop means the commentary is based on only one information source - the report itself. 

One feature of the report didn't get mentioned in any of the commentary - its date. The cover of the report carries the date December 2025 under the title.

What has the Government been doing in the interim?

I can take a guess. The Government response is already drafted and has been considered by Cabinet. Easy reform tasks such as creating a new body to replace an old one will have budget implications. Reforms, if any, to tax incentives and university funding obviously have larger budget impacts.

Consequently, we can expect on budget night that one of the policy areas that will be supported by bespoke colour brochures and quotable quotes will be the suite of responses to the report. Whether they will be big enough to attract attention away from any budget nasties is another question. 

I am not getting my hopes up. The Government could notionally adopt every recommendation in this report, but judiciously sequence them. Move first on creating the National Innovation Council. Task it with identifying the goals for the National Innovation Pillars. Then task them to prioritise all the other recommendations which means that nothing would substantially change for two years or more.

While the new Council is working its way through this, some shiny new bauble (AI?) will suddenly dominate the innivation conversation, and the Government will feel that all too common challenge of being seen to do something. Whatever that something is will cut across the work the Council is doing. 

By about year three there will be frustration by Ministers that nothing has changed and some other review will be initiated - this time by PM&C. They will attempt to reprioritise the original program, and in doing so will quietly gut it of items that were going to cost a lot. This will be sold as a benefit based on an argument that the outcomes will be delivered at lower cost.

Why am I so certain? Because this has been the history of every review of innovation, R&D or the digital economy for the last two decades. 

Maybe what we need is innovation in the making and implementation of economic policy. Ultimately that might require giving the Federal Parliament a legislative power that can, in some way, constrain future Governments. Otherwise how do we ever implement a reform horizon longer than a parliamentary cycle? Note that four year rather than three year terms achieve nothing in this regard - has anyone evidence that the States having moved to fixed four year terms have been any better at dealing with long term strategy?

Depressing, isn't it? 

Maybe we should stop rewarding Ministers for drops. Adopt a cynical stance that the drop is in reality a smokescreen for inactivity. Of course, the risk is that your organisation gets cut-off from future drops. 

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Life is what happens while you are busy making other plans JWL

Have we seen this movie before?

Jaded observers of the IT and innovation spaces may be looking askance at the forecasts of Data Centre requirements to fuel AI growth. The implications go beyond just data centre investors and extend to energy policy. The most recent example of the latter is the suggestion that the data centre electricity demand is sufficient to warrant lifting the 'ban' on nuclear energy in Australia.

At least this time the forecasts for the transformative effects of AI don't seem overblown - so after (in my experience) forty years of AI being the next great thing, it at least seems real. But the question remains of how much the success of AI will really translate into data centre demand.

First a history lesson. At the start of this millenium, global stockmarkets were greeted by the dot.bomb crash. This crash has been well documented in Dot.bomb and Dot.bomb Australia. What's less well known is that a lot of it could have been avoided.

Everyone's favourite statistic from that era was that the capaciy of the internet (then still spelt with a capital 'I') was doubling every hundred days. As was well documented in at least 2002, this 'statistic' was entirely based on a 1998 claim by WorldCom. However, that it was both not true and, indeed, could not be true, was detailed by Andrew Odlyzko and a co-author in a 1998 article The Size and Growth Rate of the Internet. (Odlyzko wrote some other fascinating pieces, among them Content is Not King and  Metcalfe's Law Is Wrong, both are worth reading by anyone in the strategy or analysis business).

How could the myth have been believed? Firstly, any network operator who didn't see this growth reflected in their own network traffic reasoned that they were marketing their services wrongly or some other cause meant they were missing out on the growth. Cetainly, every stockmarket analyst was quoting it, and I have observed first hand CEOs whose choice of strategy has been the one that satisfied analysts to put a buy recommendation on the stock rather than the one suggested by all the detailed analysis inside the company.

Secondly the forecast fueled new entrants to the market who were simply riding the market sentiment, not making detailed analysis. It was a traditional bubble. Nobody could afford not to climb on board while the growth phase was on.

Just like the the dark fibre boom, the forecasts of growth in computing capacity cannot be sustainable. Other parallels between the dark fibre and compute booms have been detailed in a piece that is in part written by AI! It is a question that has even been considered by Fortune magazine, and the founder of Open AI even says the AI bubble is about to pop. 

By its nature, AI infrastructure (including both the computing requirements and the AI engine itself) has the same economies of scale and demand side economies of scale as other digital platforms. The latter scale economies work exactly like network effects - and even agreeing with Odlyzko that Metcalfe was wrong and the value of a network doesn't increase at the rate of n*(n-1) where n is number of the number of users but only n*log(n) - the effect is significant. That is why these markets tend to monoplies.

An AI platform is continuing to train while it is being used - high usage therefore leads to better capability. In brief, the computing requirements for AI will be nowhere near as large as they seem because there will be less, more efficient, AI platforms.

Students of the history of electricity markets in Australia* will recall that the impetus for market reform in the 1990s was over-investment in generation in the 1980s that was driven by the Fraser Government's desire/plans for an extended mining boom that did not eventuate. It would truly be a shame to replay two historical errors!

As to the 'ban' on nuclear energy, the title suggests that it was at some point a carefully worked out policy rather than just another case of Howard Government misjudgement**. It was never Howard's intention to embed a ban - he was merely outlawing something that no one had ever seriously suggested they wanted to invest in in Australia. And no private capital has wanted to invest in it since. 

To create a possibility of such investment requires a heck of a lot more policy work than simply removing the legislative ban. For the new Opposition Energy shadow to make a simple ban removal statement reflects one of the two the stunning consequences of the leadership change in the Liberal Party -  on almost every policy position they have moved towards all the policy elements that the suppressed party review said were errors. (The second is that the new leader is virtually invisible - a huge contrast to Sussan Ley who seemed to occupy more media space than the PM).

Maybe, just maybe, the prodigous power of AI might be useful to solve the other technology promise that has underdelivered for just as long as AI - nuclear fusion reactors.

* My chapter in On the Grid provides a useful short history.

** Anyone left with any delusions that Howard was a good Prime Minister or that the country benefited from his Government should read Amy Remikis' Where It All Went Wrong.

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Life is what happens while you are busy making other plans JWL

Was there ever a case for VPPs?

Interesting report arising from the Energy Consumers Australia Foresighting Forum - is it time to give up on VPPs?

The proposition that it is time was advanced by Lachlan Blackhall whose views are greatly respect. The question to be asked, however, was why we ever thought the VPP model made sense. Back in the days when Energy Networks Australia (ENA) was interested in broader policy issues their Electricity Network Transformation Roadmap was developed with extensive consultation. 

A question frequently posed at workshops was how 'value' was captured. That is, of course, management consultant speak. Economists define value very differently. But the essential concept comes down to a pricing question. If an action by person A creates a financial benefit for person B, how do we provide and incentive to A with a share of that benefit to itake the action.

I this language, the problem with VPPs is that they only capture the value created in the whlesale energy market. They are blind to the benefits (or costs) that they might impose on distribution networks.

The ENA Roadmap identified the way to capture the network value was distribution level markets:

Establish active distribution system operations and markets for technical stability and optimising investment by procuring distributed energy resource based grid support. Evaluate cost benefit analysis of procuring these services through a digital market platform.

The contemporaneous Australian Energy Market Commission (AEMC)  Distribution Market Model asked ENA to:

explore what minimum level of control DNSPs need to have over distributed energy resources in order to enable higher levels of distributed energy resources for future distribution level markets,

The combined result was Open Energy Networks, an ENA and Australian Energy Market Operator (AEMO) joint project. That this project never landed a single tangible outcome reflects, as far as I can see, the inappropriateness of AEMO as the partner in the project. 

AEMOs one job (in electricity) is to operate the energy only market. Other functions exist in support of that, e.g. ancillary services markets, short term demand forecasting. Because of AEMO's forecasting expertise they were assigned the function of long term network planning - the Integrated System Plan. They know nothing about distribution networks. (Note that the AEMO forecasting expertise gets in the road of long range planning because they confuse forecasts and scenarios - the long range expectations shouldn't look like any of the scenarios. Scenarios are boundary conditions, the outcome is somewhere in nbetween).).

That VPPs were a dead end was known to everybody. I'd suggest even the retailers who promoted VPPs knew they were a dead end, but they were the right strategy to ensure DER caused minimum disruption to their business model - primarily the generation side of their businesses. Their business model relies on the simple fact that in the wholesale energy market there is only one buyer - AEMO. Generator bid strategy is much easier with the specification of the required generation in five minute intervals than in the face of demand schedules bid by consumers. 

Yes, I am suggesting that the gentailers actively promoted the VPP model because they knew it would fail and that it would forestall the development of the Distribution Market.

In the interim between the 2017-18 work referred to above we have had the ESB's disastrous Post 2025 Market work, and we have more recently had the NEM review. AEMO is acting on the one piece that they can contribute - making access available to the standing data held in the DER register. 

There are simple remedies to avoiding a repeat of these policy and implementation failures, and they start with Governance.

1. The Commonwealth should use its corporations, foreign affairs and national security powers to take full legislative responsibility for energy. ideally the States will refer powers just to make it robust. The model of key decisions being made by a collective of energy ministers is anti-democratic (the legislation is never fully debated in any parliamen) and demonstrably fails.

2. Create an Australian Energy Agency that has all the powers of the AEMC plus the power to self-initiate rule changes plus the long term planning functions of AEMO, and all the AER functions except price setting (of distribution networks or default retailers).

3. Rewrite the Australian Energy Objective to simply state 'Manage the transition to a zero carbon energy system at least cost to consumers, while at least maintaining reliability and quality of service.'  All the qualifiers used in the current objective are unnecessary - they are all just dimensions of reliability (meaning energy is available when i want it) and quality (electricity is at the right voltage and frequency).

4. Redesign the wholesale electricity market model so that all 'demand side' connection points bid into the market with a price schedule. Appoint a Distribution Market Operator for each demand side connection point - depending on model choices this is either a separate agency, the DNO, or the default retailer for the distribution area.

5. Recreate default retailers for each distribution area that is regulated in some way (could be by auctioning the right to be the retailer) - move the competitive model to energy system service providers, people who manage whatever a household has to be managed, and trades in the distribution market.

6. Recover fixed network costs measured as the minimum cost of providing the distribution network for street lighting and other public goods (NBN nodes, traffic lights) from land taxes (i.e. charge LGA councils).

That is a model that has a chance to work. But reform has to start with the governance model.

 

 

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Life is what happens while you are busy making other plans JWL