Published by Australian Financial Review, Monday 28 August
Australia desperately needs a nationally consistent energy and climate change policy, with bipartisan support. Sadly, politics and ideology are delivering precisely the opposite, and the result is high prices, unreliable supply and rising greenhouse gas emissions.
Last week, the Victorian government announced it will legislate its renewable energy targets for generation of 25 per cent by 2020 and 40 per cent by 2025. The government will hold a series of auctions, beginning in October, for renewable energy contracts to deliver electricity that will build to meet those targets. Superficially at least, this approach has several advantages: successful bidders get bankable projects because they have a secure revenue stream underpinned by a government contract; the government takes the market risk but can manage that risk through the way its sets volume and price parameters of future auctions; and auctions can deliver progressively lower costs while avoiding the risk of windfall profits to proponents.
Yet, this is bad policy on three levels.
The three failures
First, it directly contradicts the Finkel Review recommendation for nationally consistent energy policy – a recommendation endorsed by all federal, state and territory energy ministers. State and territory governments are justified in claiming that the federal government’s failure to endorse Finkel’s proposed Clean Energy Target (CET) means they have been forced to act. But that does not justify unilateral, unco-ordinated action. If there are more such actions, Australia’s energy and climate change policy really will be a dog’s breakfast. A far better response would be for Victoria to work harder with Queensland, South Australia and the Australian Capital Territory on designing a national CET.
Second, it fails to learn from the negative experience of the Commonwealth’s renewable energy target in South Australia. In that state, the failure to effectively integrate more than 40 per cent renewable energy with the wholesale electricity market contributed to security and affordability problems that led to the creation of the Finkel Review. That experience informed the decisions by federal Labor and the Western Australian Labor government to put aside legislated schemes to meet specific renewable energy targets. These schemes are a form of industry policy that poorly integrate with the electricity market. Yet the fact sheets published with last week’s Victorian government announcement fail to even mention the potential for risks to power security.
Third, the Victorian government claims its scheme will cut costs for customers, yet the calculations do not include the payments the government will make to generators, or the additional costs of transmission to connect the proposed projects to the grid, or the costs associated with balancing the intermittency of wind and solar generation, as proposed by the Finkel Review.
The unreliable modelling
Wind and solar power plants that are remunerated outside the wholesale market and have near zero marginal cost will displace coal and gas generation and lead to lower wholesale prices, in the short term. However, over time, the fossil-fuel generators will become unsustainable and will close, resulting in wholesale price increases. Economic modelling has a very poor record of forecasting such closures or the price consequences, as was seen in South Australia prior to the closure of the Northern power plant and in Victoria prior to the closure of Hazelwood. It’s hard to believe forecasts of a better outcome as Victoria drives towards a 40 per cent renewable share by 2025.
Federal Energy Minister Josh Frydenberg is correct to criticise the Victorian government’s go-it-alone announcement. Yet he is standing on shaky ground.
Australia’s energy ministers, federal, state and territory, have committed to an Australian Energy Market Agreement (AEMA) in which they take “a nationally consistent approach to energy policy that recognises Australia’s commitment in Paris to reduce emissions and governments’ commitment to align efforts to meet this target with energy market frameworks”.
The new AEMA has not yet been developed, but it could already be in trouble. The Turnbull government has so far failed to adopt a credible policy to meet Australia’s emissions reduction commitments under the Paris Agreement. Until Frydenberg can craft a CET or similar scheme that is endorsed by the Coalition parties and meets the test of credible climate policy, his criticisms of state and territory governments will lack authority. State or territory governments that propose unilateral action inconsistent with the AEMA will similarly lack credibility on their commitment to a national approach.
The ball is now in Frydenberg’s court. If he can deliver the CET or a similar scheme to round out Commonwealth support for the Finkel review, the households and businesses of Australia can all emerge as winners. The alternative should be simply unacceptable.