24
Sep
2014

Energy Green Paper leaves power investment up in the air

by Tony Wood


Published by The Australian Financial Review, Wednesday 24 September

The energy green paper released on Tuesday shows how hard it is for the federal government to deliver on its pre-election promise of “coherent, consistent energy policy to protect jobs and investment, and take cost pressures off energy users”.

The green paper does cover the issues facing Australia’s energy sector. It is convincing and comprehensive on the gas market and workmanlike on the electricity market. But it frankly goes missing in providing credible direction on climate change policy beyond 2020.

This issue, as much as any, will inform the critical investment decisions that will determine the future reliability and affordability of our energy supply.

The green paper makes the unequivocal statement that “there are sufficient gas resources for both domestic and export purposes”. This rightly means that policy interventions should focus on ensuring that the market is working.

Grattan Institute’s 2013 report Getting gas right, endorsed the Government’s rejection of domestic gas reservation policies while recognising there are actions that should be taken to improve price transparency and competition.

These proposals are strong features of the green paper.

There is a suggestion that the ACCC or the Productivity Commission could investigate possible constraints in the gas supply market that could limit market responses. It is not clear what these might be, but the looming impact of gas price rises suggests this is a good idea.

On electricity, a central focus is on reducing consumer costs. It therefore makes sense to prioritise the driving of tariff reform so that “customers pay a cost that more closely reflects their individual use of the system”.

PAPER PUSHES FOR SALE

As expected, the green paper urges completion of the sale of state- and territory-owned electricity assets. The end of this 20-year reform journey is in sight and consumers will be the winners.

The COAG Energy Council must actively drive these two initiatives.

While the Australian Energy Market Commission and the Australian Energy Regulator have roles in setting and policing the market rules, governments must not abrogate responsibility.

It would be good to see this outcome-based commitment more strongly reflected in the energy white paper.

It is disappointing that where the green paper raises some of the key challenges in the national electricity market, it provides no real clarity on what governments should do. For example, while identifying that the wholesale spot price in electricity may not be working efficiently, no actions or solutions to such a problem are put forward. We should be taking actions now to avoid getting into the same difficulties of stressed balance sheets and wary investors that some European electricity markets are already experiencing. The green paper takes a 20-year view on the challenges and risks for Australian electricity networks, but a six-year view on generation, where action on climate change has been, and remains, a central issue. This was a work in progress with the previous government, and the current government is focused on implementing a climate change plan to meet a 2020 target for emissions reduction.

This position represents a major threat to efficient investment and creates unmanageable risks for investors. Australia’s energy strategy will be incomplete until this gap is addressed.

The only hint that the government recognises this challenge is the suggestion that COAG could be used to develop a set of cost-effective interventions to achieve environmental outcomes. It is not clear what this beautifully obscure inaction might actually mean in practice.

Rationalising emissions reduction actions to reduce unnecessary costs and removing poorly designed subsidy schemes are steps worth taking. The Warburton panel’s review of the Renewable Energy Target is a clear example, although it remains to be seen how the government will respond to its recommendations. Of particular interest is the panel’s emphasis on seeking lower cost approaches to reducing emissions, and what policies could meet this yardstick.

There has been much political debate over recent months regarding the government’s decision to abolish the Australian Renewable Energy Agency and the Clean Energy Finance Corporation. These bodies support Australia’s development in renewable and low-emission technologies, and the green paper confusingly reiterates their abolition while arguing the case for supporting research and development, demonstration and pre-commercial deployment of renewable energy technology.

Developing clear energy policy is a big challenge. The green paper addresses some of the issues that will determine how well we continue to enjoy reliable, affordable and sustainable energy into the decades ahead. In the words of the classic parent-teacher interview, “trying hard – could do better”.