Energy: key challenges for the re-elected Coalition Government

by Tony Wood

Published at the Australian Financial Review, Wednesday 22 May

The re-elected Morrison government will implement the energy and climate change policies it took to the 2019 election. No more, no less. This is despite the urging of its moderate members, the energy industry, its customers, environmentalists and state governments to do more.

The Morrison government’s key claims are that electricity prices will fall because of its interventions in the retail and wholesale markets, supply will remain reliable because of the Retailer Reliability Obligation of the National Energy Guarantee (NEG), and emissions will fall to meet the target of 26 per cent below 2005 levels by 2030.

The government’s priority will be lower electricity prices, and three factors could play out in its favour in the short term.

First, regulated default prices for disengaged and inactive consumers will reduce retail prices. Second, the benefit of the Australian Energy Regulator’s reducing rates of return for network businesses will flow to consumers over the next few years. And third, a wave of large renewable energy projects, supported by the Renewable Energy Target and state government subsidies, should put downward pressure on wholesale prices.

Before the election, the generation underwriting program shortlisted 12 projects to deliver 3800 megawatts of firm generation with low emissions. The program’s objective is a 25-to-30 per cent reduction in average wholesale prices by 2021, even though the Australian Competition and Consumer Commission assumed only a 5 per cent saving from its proposal on which the government’s is based. Regardless, if governments add more supply through subsidies, then prices should fall.

The government is likely to proceed with the Market Misconduct Bill, otherwise known as the “big stick legislation”. Poorly justified by the government and strongly criticised by the industry, this legislation is unlikely to have any impact since the three misconducts would require calling out by the ACCC, and that body didn’t identify these misconducts as major concerns.

The Retailer Reliability Obligation of the NEG is progressing towards implementation and the government is justified in identifying this as a critical step to ensuring reliable supply in the medium term. In the meantime, over the next couple of summers the Australian Energy Market Operator will play a crucial role in ensuring there is enough capacity available to cover high demand and generator plant stress during extreme weather.

The renewable projects already mentioned, and the closure of the Liddell coal plant in NSW in 2022, may well justify the government’s confidence that its modest emissions reduction target will be achieved. And the additional $2 billion funding under the newly branded Climate Solutions Fund will add to the almost 200 million tonnes of reductions already contracted at modest cost.

Challenges on several fronts

Overall, this is a relatively benign outlook. But there will be challenges on several fronts.

Retailers may increase prices to recover revenue lost from the default prices, and the high wholesale prices of the past 12 months may be passed through to consumers over the next year.

Industry will try to work with a newly endorsed government but should also continue to prosecute the arguments in favour of credible climate change policy to support investment and against the government’s direct market interventions.

State and territory governments may challenge the Commonwealth to implement the Emissions Reduction Obligation (ERO) of the NEG. If the federal Energy Minister is unwilling or unable to mend the disarray of the past nine months of the COAG Energy Council, the other jurisdictions could go it alone with their own aggressive renewable energy auction programs or unite to implement the ERO themselves. The former would be ugly and the Commonwealth may wash its hands of either outcome.

The market may not smoothly adjust to new, subsidised supply. For example, low and volatile wholesale prices could accelerate coal plant closures, causing price increases and threatening summer blackouts. And confirmation that Snowy Hydro 2.0 will proceed will deter unsubsidised, smaller storage projects.

On a slightly longer timeframe, the government will come under pressure from other signatories to the Paris Agreement. Australia’s modest target, policies for its achievement and use of the carryover of credits from earlier targets will be questioned. Achieving even the 26 per cent target still looks tough outside electricity. And all the while, the accumulation of the physical symptoms of climate change will continue.

Scott Morrison will use the authority of his election victory to establish a cohesive party room and stare down these challenges. The short-term energy outlook may be kind. But that cohesion may be critical when the winds change – as they will.