8
Jul
2015

Energy policy lacks clear direction

by Tony Wood


Published by The Australian Financial Review, Wednesday 8 July

Australia’s lack of direction on long-term energy policy is alarming many chief executives. Their fears were all too clear in The Australian Financial Review’s 2015 Chanticleer Outlook Survey and are behind many of the questions the newspaper’s Energy Future series is posing. The answers are proving hard to find.

The federal government’s energy white paper, released in April, has some virtues. It comprehensively describes the energy sector and the current policy agenda, makes a clear commitment to markets as the best answer to most problems and expresses frustration with the states and territories over failure to enact vital reforms. It also commits the government to develop a National Energy Productivity Plan with an improvement target of up to 40 per cent by 2040. But in terms of providing vital policy direction to drive future investment in energy, the white paper is woefully silent.

Australians have benefited from the energy reform process that began in the early 1990s with the 1993 Hilmer Review of national competition policy. Energy supply has been reliable and generally affordable for most Australians, but maintaining the rage for reform proved hard in the early 2000s. Policy and regulations have fallen behind technology developments and consumer choices. Yet a small number of key initiatives could rekindle the reforming fire and provide the basis for sorely needed direction in coming decades.

A good place to start is at the top: the COAG Energy Council (CEC) of federal, state and territory energy ministers. Politicisation, conflicts of interest and the complexity of supporting organisations make effective reform via the CEC difficult. For example, state governments are resisting network tariff reform, yet such reform is essential if we are to see fairer and cheaper electricity prices. The problem is that genuine reform would remove some cross-subsidies embedded in current tariffs and governments dislike policies that create losers, even when most people would benefit. Governments have also failed to adopt a national approach to the regulation of unconventional gas development, with the federal minister left to berate some states and no clear path forward.

The government’s current review of governance of the national energy markets should be judged on how its recommendations for the CEC and associated institutions address the above problems and create a structure that has a mandate for reform and is accountable for its results. Beyond network tariff reform, these should include completion of privatisation of government-owned assets and retail competition in the electricity supply chain.

GAS MARKET CONFUSION

In gas, both customers and suppliers see the market as a mess. The ACCC’s review of the effectiveness of competition in the upstream gas market may spark important reforms. These should include expansion of gas trading using the model of the Wallumbilla Hub and a more active market in pipeline capacity. Any form of domestic gas reservation policy should be firmly rejected.

An energy policy for Australia that fails to integrate energy and climate change policy falls at the first hurdle in providing direction for investment. By the end of this month we will know what post-2020 target for greenhouse gas emissions reduction Australia will take to December’s international negotiations in Paris. Stationary and transport energy contributes about two-thirds of Australia’s emissions. To meet the new target the energy sector will have to be transformed at a scale that will demand closer integration of energy and climate change policy than previously seen from any Australian government.

Two examples illustrate the importance of this integration. The renewable energy target (RET) was set to deliver a fixed amount of electricity supply regardless of demand. Falling demand then triggered the acrimonious debate over the RET that has only just been resolved. The second example lies in the propensity of state and territory governments to set climate change or renewable energy policies that have unintended and unpredictable impacts for markets that are supposed to be national.

The energy white paper recognises the “growing long term risk to our fossil fuel export industry in an emissions constrained future.” Yet it contains no plan to address this risk. It includes a commitment to maintaining “stable and predictable policy settings”, yet climate change policy in recent years has been mostly unstable and unpredictable.

POLICY AT VARIANCE

Both major parties support a 5 per cent to 25 per cent reduction in emissions below 2000 levels by 2020. They also agree that Australia should contribute its fair share to keeping average global temperature increases to less than two degree. Yet we have seen major differences in the choice of policy to meet these objectives: the repeal of the carbon “tax” after two years in operation and its replacement with the emissions reduction fund and the acrimonious approach to the RET. It would be hard to overestimate how much these policy gyrations create uncertainty for investment, green or otherwise.

Once Australia’s post-2020 target is announced, attention will turn to domestic policy. At present the Labor Party seems committed to an economy-wide market-based approach, best exemplified by a cap-and-trade emissions trading scheme. The Coalition government has the challenge of re-engineering its Direct Action approach, emissions reduction fund and safeguard mechanism to become credible, long-term policy. There are elements in this highly partisan situation that could form the basis for a bipartisan approach, but that topic is for another day. Whatever approach is adopted and whichever party wins the next federal election, it is vital to find a bipartisan approach.

Change and adjustment to change are permanent features of the energy landscape, and calls for governments to do something are often and loud. Effective governments will resist most of them and focus on areas where policy intervention can be effective. Reinvigorating the national reform agenda to ensure lower electricity and gas prices should be a high priority. So should protecting the primacy of markets and free trade. But developing a credible climate change policy that is integrated with energy policy must be top of the list.