6
Mar
2019

Clear policy plans needed for cheaper power

by Tony Wood


Published by the Australian Financial Review, Wednesday 6 March

Australian governments have failed to deliver affordable, reliable energy in a way that is consistent with meeting our emissions reduction targets. Rather than stable, credible energy and climate-change policies, we have disconnected market interventions by governments and various forms of re-nationalisation, most dramatically the Commonwealth’s $6 billion buy-out of and $1.4 billion equity injection for the Snowy Hydro pumped-hydro project.

Only four years ago, the Abbott government released an Energy White Paper. The objective was to give industry and consumers certainty in energy policy. The guiding principle was that “markets should be left to operate freely, without unnecessary government intervention”. As a result, the Australian Energy Market Commission was quoted as expecting that “electricity prices would show modest declines or be stable across most states and territories”. Hindsight is a harsh judge.

The inherent assumption was that reforms would ensure well-regulated markets capable of delivering competitively priced and reliable energy through competition and efficient investment. The faults with this proposition are now clear.

Poor economic regulation and actions by state government-owners of distribution networks had already led to over-investment. Excessively generous rates of return compounded the impact on consumer prices.

In the generation sector, the absence of clear emissions reduction policy meant that direct subsidies and government contracting for renewable energy distorted the capacity of the market to deliver efficient pricing signals for new investment that met the dual objectives of reliability and lower emissions at affordable prices. Investment in efficient gas generation to provide backup and balance is a casuality.

Promise of lower prices

Finally, failure to stop retailers’ poor practices in their marketing and their consumer relationships meant that the retail market did not deliver on its promise of lower prices.

Major reports such as the 2017 Finkel Blueprint on electricity security and from the Australian Competition and Consumer Commission in 2018 on electricity affordability provided more than enough material for governments to meet these challenges. Some of their recommendations have been adopted, such as the creation of an Energy Security Board and the introduction of a default market offer for electricity consumers. And, the ESB recommended the integrated energy, climate change and reliability policy (the so-called National Energy Guarantee) which was subsequently abandoned by the Turnbull government that promptly abandoned its leader.

Just as dramatic, and more concerning, has been an accumulation of announcements that involve direct government intervention in the market combined with outright criticism of companies for its own sake.

The Coalition government’s actions or announcements include threats of asset divestiture, direct underwriting of new generation investment, a $2 billion expansion of the emissions reduction fund, and the Snowy Hydro pumped-hydro project. The two motivations seem to be to demonstrate toughness towards the energy companies and a new-found enthusiasm for lowering emissions.

Federal Labor has cleverly adopted the Coalition’s National Energy Guarantee to reduce emissions in the electricity sector, but worryingly has proposed a Plan B that could involve the government directly contracting for renewable energy. Labor has yet to be clear on how it will achieve its emissions target beyond the electricity sector. And, it shares the Coalition’s enthusiasm for beating up companies.

Forced to intervene

Several state governments have pursued their own direct contracting approaches, there are two proposals for new government-owned renewable energy companies, and Victoria is planning to introduce its own version of a retail price cap.

In some cases, the energy industry has not helped by the way it has acted in the market. And we should not be surprised that governments feel forced to intervene when blackouts occur, or prices just keep rising. Yet, the nature of the interventions and the implicit, if not explicit, rejection of markets as a fundamental principle leads to an industry almost in despair of good policy.

Historically, the energy sector was owned and operated by governments. The case for competitive markets never rested on a vague notion of “free markets”, but on the proposition that well-regulated markets operating in a clear policy framework would deliver reliable and affordable energy at lower cost. And it recognised exactly what we are seeing today – that major investment decisions based on political rhetoric and sketchy cost-benefit analyses are no match for the hard-headed calculations of private investors responding to market signals. Given these benefits, and the strong track record of market-based reforms, drifting back to nationalisation should not be done lightly.

The immediate political environment is hardly conducive to a good outcome. Developing a comprehensive, integrated approach to energy and climate policy, including the best recommendations from the above reports, doesn’t fit the immediate political need. The best we might hope for is minimum harm in the short term, followed by a very deep breath and some clear-headed leadership from whoever forms government after the 2019 federal election.