What just happened in the Victorian energy market?!

The Victorian Government’s announcement of the revival of the State Electricity Commission, alongside bold targets for climate change and renewables, is the most dramatic in the last 25 years of Australia’s energy system.

Tony Wood, Energy and Climate Change Program Director, and Alison Reeve, Deputy Program Director, break down this announcement and what it means for Australian policymakers, industry, and consumers.

Transcript

Alison Reeve: Welcome to the Grattan Institute podcast. I’m Alison Reeve. I’m the Deputy Program Director of Energy and Climate Change. And today on the podcast, Tony Wood, our Program Director and I are talking about what’s been a really big week in energy in Australia. We’ve had announcements around Marinus Link, around VNI West, the new transmission links in Victoria.

We also have a new Victorian target for net zero emissions for 2035 emissions for renewable energy and the revival of the Old State Electricity Commission of Victoria. So today we’re going to hash over what we think about all of this and hopefully delve into a few things where we think there may be a few traps for government coming up and also a few advantages of what it means for this new approach.

Tony. What was your reaction to, to all of this? I don’t, you can either start on, on Tuesday, Wednesday or Thursday, your choice.

Tony Wood: The way you’ve described it, Alison, is right. This is very big week in a series of announcements, but it’s not the first and it probably won’t be the last. We’ve gradually been inching away from a very strong commitment that was made more than 20 years ago in the 1990s towards privatization and competition to produce a better energy outcome for Australians to a situation in which for all sorts of reasons, we’ve run in, we industry and governments and organizations like, you know, independent think tanks as Grattan have decided that this isn’t working for us. And as a result of that, something has to change.

The things we’ve tried so far haven’t been effective in reforming that market structure. And so we’ve seen the sort of announcements that you made, Alison, which are reflecting that frustration, but suggesting that something has to change, someone has to take control, and the governments have decided that they should be the ones to make those decisions and take control at least for a while.

and that’s the sort of combination we’ve seen, this week. And it’s probably worth focusing at the specifics. But also then thinking about where might all this be leading.

Alison Reeve: I mean, I think one of my starting points was, in some ways, this is like a screeching U turn around the approach that’s been there through my entire career in this space, right?

Which was that we were moving on this very long privatization journey, but it’s actually not so much a U turn as in, and things have been like very, very slowly decelerating and the car’s been kind of making weird rattling noises and falling apart. And someone’s actually gone, actually, let’s stop and hop out of the car and do this journey in a different way.

And I mean, it sort of felt like. It was kind of the only thing that was left to do. We tried everything else. We tried national policy. We tried state-based policy. We tried a market reform process. We tried however many different approaches to putting carbon signals into the energy market and reliability signals and everything else.

And it felt like it was just like, no, this is the last thing in the box. And it’s probably the only thing that will work at this stage.

Tony Wood: There’s going to be some things which are pretty clear. And there are a lot of things that are unclear. So that just results in speculation and idle chatter, and we can talk a lot about those things.

But, in the short term, we’ve now got some very, we’ve already had some very specific legislated targets nationally for reducing emissions, and also to build out the system. And the Victorian government, as we know, taking its own view of the best way to do that in this state. But it’s not, you know, we couldn’t say that Victoria is the only state to take in this, you know, ultra left wing, you know, renationalization approach because even Queensland has always owned most of the energy assets in that state.

And often has taken great pride in that. So, I don’t think the issue is about so much a fundamental debate about the philosophy of private sector versus public sector, although that will play out as an election issue. The really important question is now, how do we build out a system? As you said, it’s not just that the old car is broken down, the old car is not fit for the purpose we want, and we’ve been mucking around trying to work out what sort of car do we want to buy.

Now I think we know more or less what it’s going to look like, but we’ve left it so long, we’ve now got to fundamentally just go and buy it, and that will inevitably create some risks. So, I think, you know, if you start with the specifics, the broad targets are interesting. They can be exciting, but most of them will depend upon what we actually do to achieve those targets.

So, I think the interesting thing then is, okay, what is this government going to do to achieve the targets that it’s set? I suppose you can start with, as you said, Alison, the rejuvenation, the reincarnation, the revival of a system that everyone thought was dead. That is the old, I think when I first came to Victoria, had been called the SECV reviving that as a structure.

So, what do you think of, of the core issue there as to what it’s supposed to do and what it might mean for dumping that in the middle of the energy market?

Alison Reeve: Yeah, I mean, if you look at the legislation that underpins the State Electricity Commission of Victoria at the moment, that legislation gives that organization the power to do just about.

everything that happens in the energy market. It’s allowed to build and operate transmission distribution networks, build and operate generators, run a retail business, go after customers who don’t pay their bills to it. And so on, you know, pretty much anything that at the moment, a retailer or a gentile or a transmission or distribution company can do.

It’s also, when you look at it, it’s a very, very old school way of setting up an organization. Like the, the original underpinning legislation is from 1921. The way that the organization is structured at the moment is that it has a single head called the administrator of the commission and they can be directed.

By the energy minister and the treasurer to do anything that the energy minister and the treasurer think is necessary. Now, if you look at the announcement yesterday, what it implies is that we are not going back to the State Electricity Commission as we knew it in the 70s and 80s, where it owns everything, runs everything, builds everything.

It was very much. couched around, I think, or at least this is my interpretation, something that’s more of a partnership approach between the government and the private sector. So, there was this stuff in the press release about the State Electricity Commission having a controlling interest, but not fully running or owning new replacement generation.

So, it’s a different approach. And that means the, the, State Electricity Commission is going to need a different structure to what it has in legislation at the moment because no private sector investment is going to want to jump into a partnership with an organization, which is basically run or by one person who can be directed by a politician to do anything that that politician wants.

Any sensible private investor is going to run a mile from that. What I would hope to see is that the Victorian government restructures it so that it’s got something that is a board structure that allows the day to day operation of the organization to happen at arm’s length from government, and that the minister and the treasurer then give the organization some broad direction around what they want it to do and what its KPIs are.

But then they leave it to get on with it, because I think otherwise it is not going to have the desired effect of getting stuff built, the sort of stuff built that you want in the time that you want it done within the budget that you want to spend.

Tony Wood: I think that’s the right way to think about it. The, you could expand this concept philosophically, but fundamentally.

When you look at those couple of decisions you referred to that’s happened to the Victorian government in conjunction with others have taken this week, you say, look, if we’re going to do what we’ve, we’ve set out, we’ve now committed to do and remembering we knew we do have legislative targets and the government, Victorian government’s announced some more, then we need to do two really big things.

We need to build a lot of renewable energy fast. We’ve got to build stuff to back that up when the wind isn’t blowing and the sun isn’t shining, and that will happen. And we have to build a lot of transmission and all three of those that look hard. Now, the combination of this SEC, which will hopefully in partnership with private sector investors, drive the investment in renewables.

We’ll sit alongside the organizations that include the Commonwealth now, which through the Clean Energy Finance Corporation is going to put money into transmission. Tasmania and Victorian and federal governments will take, an equity position in this Mariners Link, which connects Tasmania with Victoria to connect, renewable energy from Tasmania into the mainland.

And so, you can see that the two big things that are needed, more transmission. More renewables and the backup for those three, I suppose, three things, really, they’re all going to be driven by these two big decisions. Now, if that’s what we do, that’s going to be hard enough. Let’s get on and do that. And I don’t, for now, let’s not worry too much about all these other things, how it’s going to compete.

There will be lots of concerns. From private sector investors about their investments today, like Luoyang B and Luoyang A and what happens to them. There’ll be people concerned about, is this gorilla in the, in the playroom going to actually compete with, or is it going to be a separate competitor? Is it going to just, is it going to be really the old SEC very reinvented?

I wouldn’t, I think the main thing now is to say, look, we need to get some decision making going. This is a way to do it. Is it perfect? Probably not. Is it probably the least bad thing we could do? Yeah. Almost certainly. So, let’s get on and do this and let’s see how it goes because the effort required to get that done is going to be so great.

We shouldn’t be worrying about, I don’t think all the other peripheral stuff, which is fascinating philosophically, but probably doesn’t matter all that much. So, you know, I think that I guess I’d be interested to think about a little as well. How might this, if it has the remit you’ve described, Alison, how might it now go about its work to do that in a way that would be different from the frustration you mentioned before?

Alison Reeve: Yeah, I mean, if it’s sort of structured something like, like some of the federal funding bodies are that maybe that’s one way that it does it is kind of like an equity and financing partner rather than someone who, you know, actually gets into the nitty gritty of, of operating. Things, you know, it’s possible to take a financial controlling interest in something and not be the person who runs it from day to day.

So that might be one way to do it. What this really comes down to, if it’s going to be successful, I think, is Thinking about what the risks are in this transition and making sure that those are allocated to the people who are best placed to manage them. We used to try to do, do that through market structures.

That’s what we’re giving up on because it hasn’t been working out very well, but that doesn’t mean returning to something where. All of the downside risk sits with the government, which means it actually ends up sitting with us, the taxpayer. And all of the upside risk sits with the private sector. We don’t really want to go that way either.

It’s got to be, I think, a shared risk here, you know, between public and private and really with the end consumers as well. Like in the end, we all pay for this one way or the other, whether it’s through the tax system or through our energy bills. And what we want, I think, is for a fair allocation of that risk.

And then sort of within end consumers as well, a fair allocation for that as well.

Tony Wood: There’ll be issues to do with investment and financiers and, you know, what sort of investment would partner with the government to do this? I think it’ll be very different sort of investors. So, you know, yesterday, the Premier was talking about a lot of interest from superannuation funds.

If the structure of the new SEC is one where that entity itself Is very strongly backed by the government has got a very low risk profile for its investments. And it’s not taking the sort of market risks that are an AGL, or an Origin would take in the market. Then it will be attractive, I think, to those sorts of investors.

And I don’t think getting access to funds will be the big issue. It’d be worth, I think, thinking about the dimensions that pretty much the premier was talking about yesterday, but have been round for a while. And we’ve, and as you said, we’ve not done a very good job of balancing and that is how do we achieve what are going to be pretty challenging emissions reduction targets over the next.

10, 15, 20 years. How do we do that in a way that maintains the reliability of the system and also keeps energy affordable for what is an essential service and for many Victorians is that it has become a very expensive essential service. So, it might be worth, you know, taking each of those in turn and then coming and maybe the, the, the emission side is important because it isn’t just electricity.

But when you think about what’s going to be done now, firstly, reliability and affordability. Are we going to be able to build a system that is no coal by 2035, which isn’t that many years away, and maintain reliability? Is cost at risk? Because the government says, well, this is the way to deliver cheaper electricity for Victorians in a way that the private sector would never do.

Alison Reeve: There’s actually a lot of things that are going to affect affordability. It isn’t just going to be about the replacement generation. It is also going to be about where and when you get the transmission in place and who pays for that. And I mean, one of the reasons the federal government has stepped in to.

The world of transmission is because the system for allocating the costs of who pays for transmission is pretty broken. This is for our energy nerd audience. Obviously, we’re talking about the RIT-T here, and I mean, the other thing that sort of is impacting on this that we’re seeing at the moment is, you know, how linked the Australian energy market is to international markets.

It’s also going to be, a factor of. Not just what type of generation we have, how quickly we can build it. We have to remember the whole rest of the world is trying to do this at the same time that we are. particularly in Europe. I was looking at a chart yesterday of the amount of solar that Europe is importing from China at the moment.

It’s absolutely phenomenal. The SEV announcement and the Victorian target are not silver bullet that are going to Keep prices down. The trick is to keep prices as low as you can under the circumstances in which you find yourself. Now, that doesn’t mean that they will be empirically low. It doesn’t mean that we’re going to go back to, you know, some magical dream world of, you know, when I don’t, I don’t, I actually can’t remember when electricity prices were super, super, super low, but we’re not going to go back to that.

The challenge is to get it as low as you possibly can under the circumstances.

Tony Wood: The situation seems to be, well, look, we’ve done an awful lot. a lot of homes in Victoria have solar on their roof. In Australia, a lot of homes have solar on their roof. we built a lot of wind farms and solar farms, and the cost of that energy has been coming down dramatically because we’ve learned how to do it very cheaply.

The trick is that we’ve probably done the easy third. That is, we’ve connected all the, a lot of roofs there probably, you know, 20, 30, in some cases, almost 40 percent of roofs in some places have solar, and some new developments more than that. We’ve also connected the bigger facilities where the transmission grid had the capacity, and that was a grid that wasn’t designed for this, so it’s not surprising.

That we’ve now run out of that capacity and building more transmission in Australia and any community is really hard. I mean, the Germans having the same problem, so it’s not surprising. It’s hard, but we’re now into the more difficult. What’s become the next difficult third and maybe more as we have to build out all that transmission and that means it means cost and it means disruption.

And it means thinking about communities. And I think, you know, government’s working with the transmission companies who are going to do the building. It’s going to be difficult. And as you say, it’s going to be also competing with access for physical resources across the world and people. And at the same time, a lot of other infrastructures being built across the country, road infrastructure, tunnel infrastructure, and so forth.

And in many cases, they’re competing for the same resources. So that’s why I think, you know, it’s pretty, it seems to me pretty clear that the cost of doing this in the time that’s now available is going to be really hard. And so, you know, where might that work? Because, presumably, that one of the reasons governments have decided to step in is that they are really worried that if we get this wrong, then we will have the risk of blackouts.

We did have lots of concern when Hazelwood shut that we’re going to have blackouts and high prices. We did get high prices, and we did get a few supply problems. Luckily, we got through all that. So, do you think that, you know, there’s this balance between reliability and affordability? Are they both achievable?

Or is one more likely to give way to the other?

Alison Reeve: Yeah. I mean, I think the thing that we’re starting to learn about affordability as well, is that the more that you can integrate all of the different bits that make up the stack of whether or not energy is affordable or not, it’s not just keeping prices down, it’s keeping the overall cost down as well.

Well, that’s one of the many, many things that was not working is that we weren’t getting sort of good integration between all of the different bits that made up the cost stack of what you were actually paying for your energy. And I mean, that also goes to things like, you know, we didn’t, I think, until June this year, have a very good understanding of how international coal markets might, impact on our domestic energy prices or, and we didn’t really think that much about international gas markets on electricity prices either.

But, I mean, we’ve also seen the federal government announce that they want to have a, national energy performance strategy, which will be focused on how you can use, a more productive way of using energy as a way of keeping down the overall cost of energy, and then meaning you do need to maybe build less transmission or not need to upgrade your distribution network as much or build less generation and so on.

So, getting all of that right is important as well. You were talking about sort of the fact that we’ve done the easy stuff before as well. And maybe that’s a good segue into the broader announcement around the Victorian emissions target. So, they’ve brought forward their net zero date to 2045. They’ve set a 2035 target of, I’m gonna get this wrong.

Was it 75%?

Tony Wood: I think it’s a range of 65 to 70. It’s a range.

Alison Reeve: Okay. 75 to 80 something. Was that, is that right?

Tony Wood: 95% renewables by 2035.

Alison Reeve: The thing is that electricity is only about half of Victoria’s emissions. And when you look at the other stuff, you know, the, the transport, the industrial processes, burning gas, well, I was about to say the curves on those are flat.

They’re not curves. They’re flat lines, right? They, they, they aren’t changing, or they are going in the wrong direction. They’re going up. And so, this is really, I think the next massive challenge for the Victorian government is not just. How do they build out all of the electricity to get that 95 percent renewables target?

But then how do they get all of the households who are using gas to switch over to electricity? Because you are not going to hit that 2035 target unless you start to move people off gas. I just can’t see how you do that. How do they really start to supercharge? the move away from petrol and diesel cars and other forms of transport to electric vehicles.

What do they do in the agriculture sector? What do they do in the land sector? And then with, you know, Victoria, I think does have a pretty significant industrial base of people who use gas where there’s not a huge number of alternatives at the moment to that. And so that’s going to be the really, really challenging part that is coming.

We feel like the past 15 years has been this massive struggle, but actually that was the easy bit guys. I’m sorry.

Tony Wood: Well, I think that politically, as with the other New South Wales and Queensland, these big announcements have played quite well for the governments who announced them. So that may very well be the case again.

And the story is, can be, can look pretty compelling. You know, I think we’ve got some, some challenges ahead. And as you say, one of the big things, the government, the current government started to look at last year and this year was how do we start to plan for going away from gas. De gasification is the term that’s used.

Because Victoria manufacturing power generation and, households. have used gas for a long time, starting in the late 1960s, I think, something like that, natural gas coming from Bass Strait, and that gas is running out at the same time as gas is a fossil fuel. So, getting off gas is going to be a big deal.

Maybe working, the only way to start moving our transport system is to work with the other states and the Commonwealth to introduce emission standards on vehicles because that’s also a large source of emissions. So, I think there’s a lot of big challenges there. So when we think about where does this leave us, in my thinking and some of my, discussions with media and other, and market players, I feel sort of relieved, but also apprehensive, and I’m not sure which is the bigger, you know, I see relieved that, okay, we’re now going to make some decisions.

This is important. This is the reason we’re doing this. Let’s go and make those decisions. And maybe, you know, that’s the sort of image that the Premier likes to portray somewhat successfully. The other side of it says, well, are we really convinced this is, is it, can it, can it be done? Can it be done in the timeframe that we’ve got?

and is it, what’s the consequences likely to be for. consumers. And if you’re, I know, well, you live in Canberra, so you’ve got a different situation, I think, Alison, but if you’re thinking about this from the point of view of a Victorian consumer, how do you think they might think about the combination of all these things we’ve been discussing and some of the certainties and uncertainties?

Alison Reeve: I think the important thing from a consumer perspective to remember here is that it’s not all going to happen at once tomorrow. If over time the Victorian government can make this work so that it keeps electricity prices down, well then that’s going to be good. for everybody. when we talk about from the consumer perspective, moving away from gas, what’s important is that that happens in a planned and staged kind of way.

Then when we get into things like vehicles and so on, it’s, it’s sort of the same story, right? You don’t have to buy a new car tomorrow. Like, I mean, I know from, from my perspective, we’re in the market for new car at the moment. It’s probably going to be a patrol car, but we’re pretty sure this is the last petrol car we’re going to have.

And then one we will have after that will be electric when we can get them second-hand at a reasonable price. It’s kind of just thinking that, yep, the future, it is going to be a little bit different, but it’ll happen in stages and it’ll feel, it should feel, I think, pretty, Natural and not as challenging as it looks when you try and consider it, consider it all at once.

Governments at all levels and in all states are pretty laser focused on keeping energy affordable. because it, it is a reasonable big chunk of what people spend their household bills on. And it is also, it’s a. It’s a political hot button issue, right? You know, if we’re moving to a kind of a largely electrified economy, it becomes even more important that, it is affordable, that the reliability is very high, and also that it is zero emissions as well.

Tony Wood: The idea would be energy and electricity go back to be boring again, but at the same time, consumers Well, it might put us out of a job, Alison, but I think the, The, the point really is going to be that, we need to know as consumers and as parents, grandparents, whatever, that we have now, we’re now grappling with a new future, a low emissions future.

there’s a way forward here. It’s not completely clear how this is going to play out. Don’t believe politicians when they tell you that your power bills are going to go down by so many dollars a year. But also, I do believe politicians, when they’re really trying to do the right thing here. And I think this was in some ways, maybe for a lot of people to say, oh, bugger it, that we’re giving up on markets.

But maybe this was the best thing to be done. Now we’ll see how this plays out. There will be some big policy issues to unfold by state and federal, I think, over the next year or two in whoever’s in government in Victoria after November. you know, the current federal government’s got another couple of years to run yet.

There’s a lot of change going on in this space. And I think for those who are interested in good policy, this looks to be, you know, reasonable, probably necessary. We won’t know for some time because it will play out slowly. Has it been successful or not? We might look back and say, well, aren’t we glad we made those decisions back in 2022 or we might say, my God, what were they thinking of?

We’ll see. but I think broadly, the fact that we’re now getting some certainty on balance. Is that being a positive decision?

Alison Reeve: Yeah. And I mean, I think it’s also certainly better than policy by muddling through, right? You know, that’s the, that’s the counterfactual here is that we just keep spinning around and around the way that we have been, and that was always going to be expensive.

It was always going to impact on reliability, and it was not going to get the emissions targets. The only other thing I was going to chuck into is just, just to say too, this doesn’t mean markets are gone forever, right? We still have a national energy market that. The vast majority of generators are bidding into this doesn’t mean that we’re not or that we have to stop doing reform of that market, because when we get through this period, we are going to be in a new world of, you know, say, a 90 percent renewable grid, and we do need to think about what is the delivery structure that gets that energy to consumers in the most efficient way.

So, thinking about how the market morphs and how the. That whole system morphs towards that is actually a really big task that needs to be done At the same time as we’re building all of this new stuff I think the thing is with this decision to sort of take a lot of it and have governments do it actually allows for a bit of separation of those processes, which hopefully makes both of them easier

Tony Wood: I guess the other side of that is it sounds like we’ll have a lot more to talk about in future podcasts.

Alison Reeve: Well, I think we could probably leave it there. As you say, there’s a lot more that we’ll be talking about on future podcasts. No shortage of material. Thank you very much for listening. If you want to react to anything that you’ve heard today or get in touch with us, you can do this on social media. We’re at Grattan Inst on Twitter and at Grattan Institute on all of the other social media networks.

Next week’s podcast will be focused on the federal budget. So do tune in for that one. But until then, thank you very much for listening. And as Cat Clay always says, do take care.