7
Jan
2020

Getting past a lost decade on energy policy

by Tony Wood


Published by Australian Financial Review, Tuesday 7 January

For Australia’s electricity sector, the 20-teens was largely a decade of lost opportunity. As we enter the 2020s, the opportunity to plot a clear pathway to a new energy future is there to be taken. Yet energy policy decisions must now be framed against the inescapable savagery of this summer’s fires.

In December 2009, wholesale prices in the national electricity market were around $44 per megawatt hour although network prices were rising, electricity sector emissions peaked at 212 million tonnes of CO2-e per annum and the reliability of the power system was unquestioned. Kevin Rudd’s prime ministership had yet to unravel although climate change policy was faltering domestically and internationally.

Ten years later much has changed. Network electricity prices have stabilised, some relief is in sight from two years of wholesale prices above $90 per megawatt hour and sector emissions have fallen by around 15 per cent. More intense Australian summers bring wildfires and widespread fear of blackouts. Our political battleground is littered with the bodies of leaders who have fallen over climate change policy and international climate change negotiations remain stalled.

The challenge of the next decade is to navigate through the great energy transition to a future of near-zero emissions at lowest cost while ensuring energy supplies remain reliable. It looks daunting from here but in the mess of today’s dog’s breakfast lie the elements of success.

The central success factor will be the delivery of much more renewable energy – 50 percent of supply by 2030 and more beyond. Immediate drivers are the last stages of the Commonwealth’s Renewable Energy Target, installation of solar on domestic and commercial rooftops and state-based targets for renewable energy. Integrating these policies across the states and with broader emissions reduction policies is the challenge.

All the states and territories have targets to achieve net-zero emissions by 2050 but have yet to determine polices to meet them. By the end of 2020, the Commonwealth should meet its commitments under the Paris Agreement to review our 2030 target and under the Finkel Review to develop a whole-of-economy emissions reduction strategy for 2050.

The best outcome would be for the Commonwealth to take the lead in bringing this all together. If they cannot, despite the heightened concerns triggered by this summer’s fires, then a coordinated approach between like-minded states and territories would be next best. Integration with Western Australia and the Northern Territory will be a very good idea.

Most of the next decade’s generation investment will be intermittent, zero-marginal-cost, solar and wind power and will be widely distributed. Delivering this investment at lowest cost while maintaining reliability will require that the Energy Security Board and the three market agencies, the commission (AEMC), the operator (AEMO) and the regulator (AER), work together to provide clear strategic advice to ministers on key policy issues. This structure may need to evolve. Yet there are three immediate tasks all of which will be crystallised in 2020.

Lower wholesale prices

The first is to coordinate transmission investment with generation to deliver the former in a timely manner while avoiding, or at least minimising, investment in assets that are subsequently stranded. AEMO’s Integrated System Plan and the AEMC’s recommendations for investment coordination have laid the groundwork to build on. The second task is to integrate a disparate set of existing and planned measures that are intended to address short-term, medium-term and long-term reliability issues. Providing balanced advice on reliability to risk-averse politicians will be vital. Tolerance of blackouts is currently very low, but tolerance of high prices is never abated. The third task will be to provide clear recommendations of how the national electricity market should evolve to be fit for purpose over the decade and beyond.

The overall outcome for consumer electricity prices looks favourable over the next few years. Stable, clear policy on emissions and reliability in line with the above measures will lead to lower wholesale prices. That trend should not be materially impacted by coal or gas prices. The outlook for the regulated network prices is benign. While the immediate benefit of regulated retail price caps is likely to reduce as retailers rebalance their margins, material price increases are unlikely.

There are many factors that could throw our transition off course and we could persist with the climate wars and the recent spate of uncoordinated government intervention in the market. Yet a period of stability on prices, reliability and sector emissions may allow just enough space for broader emissions reduction policies and a return to governments having confidence in markets and a rules-based approach to intervention.

There are no fundamental barriers to what needs to be done. History is not on our side, but the benefits make the battle worth fighting.