COAG clears the air on electricity

by Tony Wood

Published by the Australian Financial Review, Monday 25 November

Federal Energy Minister Angus Taylor emerged from Friday’s long-delayed meeting of the COAG Energy Council with an unexpectedly upbeat perspective. It was at least partly justified: the apparent absence of vitriol and a positive, if underwhelming, Communique held some good news.

The last meeting of the Council in December 2018 featured verbal warfare between key states and the Commonwealth, particularly on climate policy, given it came so soon after the demise of the National Energy Guarantee. It took almost 12 months, accompanied by an ongoing war of words, for another meeting to be called.

There were three substantial outcomes. The first, and most substantial, covered reliability.

The Australian Energy Market Operator (AEMO) advised the ministers that there are enough arrangements in place to minimise supply risks over the coming summer. Yet some ministers, notably those from Victoria, NSW and the Commonwealth, have become increasingly concerned that the existing reliability standard needs to be enhanced to reflect the broad expectations of consumers. This standard is the trigger that determines how much capacity, either as more supply or less demand, should be in place ahead of time.

Taylor and Victoria’s minister, Lily D’Ambrosio, were united in their support for a higher reliability standard. Yet organisations representing both large and small consumers are united in opposition to a higher standard because of higher costs. The Council agreed that the concerns justified a review of the standard by the Energy Security Board (ESB) to be completed by next March.

The ministers agreed that more work remains to be done to co-ordinate investment in large-scale solar and wind generation with the new transmission required to connect these distributed resources to the existing national grid. In this case, the task of balancing the benefits of low-emission generation with the costs of connection falls to the Australian Energy Market Commission. It too will report to the Council by next March.

The second substantial outcome was for the ministers to push the ESB for progress, again by March, on implementing the Integrated System Plan for optimised, market-wide investment in generation, storage and transmission. There has been some progress during 2019 such as the joint commitment by the Commonwealth and NSW governments to expedite the transmission upgrade between Queensland and NSW, but other, equally critical, transmission is lagging.

A common feature of these outcomes is the tension between reliability and costs. AEMO is charged with maintaining a reliable system, and governments, as argued by NSW in its electricity strategy released on Friday, will have a very low tolerance for outages.

Yet research indicates that more consumers are concerned about price than reliability, and that large consumers do not support a higher standard. No one should forget that households in NSW and Queensland are still paying for a decade-long, $16 billion over-investment on ‘gold-plated’ distribution networks that achieved only very small improvements in reliability.

The third outcome was agreement for the National Hydrogen Strategy as presented to the Council by the chairman of the Hydrogen Working Group, Dr Alan Finkel. The Strategy provides a comprehensive overview of the potential role for hydrogen in Australia’s energy future. The potential will be realised as the cost of producing hydrogen from Australia’s renewable energy resources falls below the value it can deliver to reduce emissions in both domestic and overseas markets. The Strategy’s 57 actions for governments sensibly focus on non-controversial, low-cost initiatives.

Major disagreement among Council members was avoided by recognising that there was no current prospect to close the gap between, on one hand, the states and territories with unanimous commitments to net zero emissions by 2050 and, on the other, the Commonwealth, which is focused on its more modest 2030 target.

The Council’s agreed actions on reliability must now deliver clear and practical decisions. This will not be easy, and the noise from all sides will be loud. Yet it must be done. The risk of failure is always looming, and the actions contained in the NSW Electricity Strategy illustrate the propensity for unilateral action by jurisdictions.

Progress on reliability could be matched by current projections suggesting average wholesale spot prices are moving towards Taylor’s target of $70 per megawatt hour. Such joint success could even create some clear air where the harder issues, including emissions reduction policies, can be considered.

In the often messy and turbulent world of energy and climate policy, we end 2019 in a far better place than we began. There are grounds beyond naive optimism that the momentum can be sustained into the new year.