A power struggle that has to end

by Tony Wood

Published by the Australian Financial Review, Friday 12 July

Since the May federal election, pressure has been building on Australia’s federal and state energy ministers to provide clear policy leadership. Electricity prices remain high, concerns about reliability of supply have been heightened by problems with large generators, and climate policy remains a vacuum. The failure to hold a COAG Energy Council meeting since last December suggests a stand-off between federal Minister Angus Taylor and his state counterparts. This cannot continue.

The COAG Energy Council is the national policy and governance body for the Australian energy market and includes the state and territory energy and resources ministers. Chaired by the federal minister, it has specific responsibility for the legislative framework within which the market operates, and it both directs and acts on the advice of the market agencies where reforms are required.

Most of the time, the roles of the two levels of government work well with that of the council. But recent developments reflect some tension.

The Commonwealth last year withdrew support for the emissions reduction obligation (ERO) element of the National Energy Guarantee. The industry and several states were unhappy with that decision, most notably the then NSW minister, Don Harwin, who spoke out at the last council meeting in December. Their unhappiness has some validity given that the council has a specific responsibility for developing climate change mitigation policies.

It is likely that the electricity sector will contribute its share of Australia’s emissions reduction target. This allows Taylor some space to question why anything further is required. It is also consistent with the Australian Energy Market Operator’s projection that more than 60 per cent of consumed electricity will come from wind and solar by 2042.

Meanwhile, the Commonwealth is proceeding with its own initiatives: underwriting investments in new generation and storage projects, doubling down on the so-called big stick legislation that extends to possible asset divestment when companies behave badly, and introducing a Default Market Offer to cap prices for electricity standing offers. The last of these is a concern for some state governments because they have traditionally had responsibility for the retail electricity sector.

On the other hand, the states are pursuing unilateral programs to achieve aggressive renewable energy targets. There are upsides: such programs can deliver large-scale renewable projects reasonably cost-effectively. But there are also downsides: they need to be matched with dispatchable capacity, or supply could become less reliable; they risk undermining the operation and liquidity of the wholesale spot market and transferring risks from investors to consumers.

In response, the states, particularly those with commitments to zero emissions by mid-century, will argue that the failure of the ERO means they have no choice but to do the heavy lifting on climate change.

In the short term, these actions and the work of the Energy Security Board can continue without a meeting of the COAG Energy Council, and some issues such as rule changes to facilitate needed market reforms and appointments to the Board of the Australian Energy Regulator could be handled out-of-session. In fact, a hostile or fractious council meeting could do more harm than good.

There are three plausible scenarios that could play out from here. First, current workplans and legislation could proceed, and things could drift on without an active council. But at some time, probably before the end of 2019, this will become untenable and important work would grind to a halt.

Second, the states could undertake their own unco-ordinated, unilateral renewable programs or they could feasibly set up a national emissions reduction mechanism without the Commonwealth. The latter would be preferable from a market perspective, but seems politically challenging since it would almost certainly have to be led by the NSW Coalition government and agreement on an emissions target could be a major sticking point.

Third, Taylor may be able to craft a path through a minefield. On one side are the federal Coalition parties, who show no sign of moving on emissions reduction from the position that destroyed Malcolm Turnbull’s prime ministership. On the other side are the state and territory ministers, who are looking for action and hold more of the legislative energy policy levers than does the federal minister. Crafting a policy to link energy and climate policy and satisfy both sides has been more than elusive to date. But if it could be done, it would not only be the best approach by a long way but would also provide a major boost for Taylor’s political credibility and aspirations. It would also be overwhelmingly applauded by the energy industry and its customers.

Something will have to give in the coming months. The energy sector is too important for its future to be decided by a high-stakes game of chicken.