Energy ministers must beware the power of conflicts of interest

by Tony Wood

Published by the Australian Financial Review, Thursday 19 April

A well-designed National Energy Guarantee (NEG) for Australia will include a world-first integration of energy and climate change policy. It will deliver reliable and affordable energy as we make the transition to a low-emissions energy future. Yet the challenges ahead will test the skills of even such an energetic politician as Energy Minister Josh Frydenberg.

At Friday’s meeting of the COAG Energy Council, the Energy Security Board (ESB) will seek endorsement from federal, state and territory energy ministers to take its high-level design of the NEG from federal, state and territory energy ministers to the next level of detail. In the lead-up, the signs are encouraging. Yet there are caveats in abundance. In his speech at the National Press Club last week, Frydenberg challenged the ideologues on both sides of politics while laying claim to a middle ground: practical policy to support a well-regulated market.

Currently, electricity retailers and generators engage through spot and contract markets to create and meet financial obligations to match supply and demand. The NEG will harness this same market structure to meet emissions reduction targets and reliability requirements.

On emissions reduction, the NEG is indifferent to what technologies contribute to meeting the target. Any weakness in the target arises from the political choice of the Commonwealth government. Yet, for a Coalition minister, Frydenberg is unusually clear – “Whether people like it or not, we are moving towards a carbon constrained future.” The immediate priority should be to agree on a process by which targets can be set and reviewed by future Commonwealth governments. The NEG is no barrier to state or territory governments that want to pursue renewable energy targets to stimulate local investment and jobs.

The NEG’s  proposed compliance register that enables retailers to optimise their individual positions and reduce overall costs through commercial transaction is particularly important.

On reliability, the ESB has struggled to be clear whether the problem is investment, deployment, or both. What is clear is a desire for the NEG to provide the market – retailers and their suppliers – with incentives to deliver the right investment in the right place at the right time. Tools such as strategic reserves and a day-ahead market should work alongside the NEG and its compliance regime to support efficient deployment of capacity during periods of peak demand.

Efficient investment

Concerns have been raised that the NEG could worsen the existing concentration of power in the electricity market. The ESB addresses these concerns through the use of a transparent, centralised trading platform and trade repository.

The NEG will test whether all governments align with Frydenberg’s call for well-regulated markets, rather than heavy-handed intervention, to drive efficient investment. Rather than fix problems in the market, governments have been choosing intervention. Examples include South Australia’s go-it-alone energy plan, Queensland’s intervention in the commercial operation of its state-owned generators to reduce prices and the Commonwealth’s decision to acquire 100 per cent of Snowy Hydro.

Frydenberg is right to say the NEG will support more renewable energy by balancing intermittent renewable generation with technologies such as pumped hydro storage. Indeed, the feasibility study for Snowy Hydro 2.0 shows the scheme is more profitable at higher levels of renewable energy.

While the legal structure of Snow Hydro should prevent inappropriate Commonwealth government direction of its investment decisions, the actions of other Australian governments have demonstrated that conflict of interest can be a powerful driver of behaviour. A Commonwealth government with a firm belief in the NEG and the role of the market would worry less about AGL’s position on the future of the Liddell power station, and would have privatisation of Snowy Hydro on its agenda.

The NEG is needed to draw a line under more than a decade of toxic debate on climate change that delivered a policy vacuum and investment uncertainty. Subsidies and industry policies to drive the adoption of renewable energy filled the vacuum. This has been a high cost and an emerging threat to reliability.

Most energy stakeholders want the NEG to succeed. But their pleas for clear policy action must not drown out the constructive criticism necessary to deliver a workable model. This concern was at the heart of federal Labor energy spokesman Mark Butler’s nuanced support – “We want this thing to work”.

The NEG will have major consequences for the way Australia tackles climate change and whether we will have boringly reliable and affordable electricity. No stakeholder will see the NEG as first-best policy, but the political economy demands compromise. A decade ago, posturing around ideological ideals got in the way of pragmatic progress. Let us not repeat that sorry saga.