Governments picking winners is a bad way to manage an energy market
by Tony Wood
Published by Australian Financial Review, Monday 3 February
Government-to-government dealmaking in conjunction with governments picking technology winners is a bad way to manage an energy market and will not deliver lower emissions at lowest cost. So the Commonwealth and NSW governments must be banking on a clutch of political wins eventually justifying the $2 billion energy deal they struck last week.
For Prime Minister Scott Morrison, breaking the impasse on state barriers to onshore gas development is a breakthrough – although this win will look a little hollow if the outcome is an import terminal rather than development of the Narrabri coal seam gas project.
As for NSW Premier Gladys Berejiklian, while she must maintain the integrity of the project’s approval process, the chances of a positive outcome must surely have improved. The funding that the deal delivers to support NSW’s emissions-reduction targets and maintain the reliability of its power supply may justify her side of the deal.
The rest of the deal provides funding for three activities: new firm generation (gas or pumped hydro); projects to reduce emissions outside the electricity sector; and new or expanded transmission lines. Each of these may have individual technical merit.
For the first, presumably the Commonwealth will accelerate approval for NSW projects under its previously announced Underwriting New Generation Investments program. But this program represents unjustified and unnecessary disruption to the energy market.
For the second, the Commonwealth has a positive track record of delivering cost-effective emissions reduction though its Climate Solutions Fund, so there is every reason to believe that some version of this could successfully target projects in NSW. It would be more sustainable if it were free of budgetary allocations and part of a broader climate policy.
Finally, these governments have previously committed funding for an upgrade to the NSW-Queensland transmission interconnection. The funding will accelerate a sensible project and will be returned to the governments when the project proceeds. It is equally sensible to extend the principle to reinforce the NSW electricity grid by increasing transmission capacity to Sydney, Newcastle and Wollongong.
There may be a technical case for these projects, but little justification for the governments to fund them.
While there may be a technical case for these projects, there is very little justification for the governments to directly fund them. The absence of a cohesive strategy linked to clear objectives is of greater concern. Yet it may be some time before the adverse consequences emerge, because individual projects may contribute to lower prices, greater reliability or lower emissions.
The PM has made much of his government’s intent to take practical steps to reduce emissions at low cost. The history of climate policy within the Coalition government leaves him little choice.
Yet, throughout Australia’s climate change war economists and industry participants have argued for an economy-wide carbon price as the lowest-cost pathway to lower emissions. The history of botched attempts and climate politics since 2007 means this first-best policy remains a frustratingly remote possibility.
Second-best attempts, including the Clean Energy Target recommended by the Finkel review and the National Energy Guarantee championed by Malcolm Turnbull, focused only on the electricity sector. They could not clear the barriers within the Coalition party room.
The essence of the above and similar ideas is for governments to establish a stable climate change policy framework in which market participants are best placed to deliver lower emissions at lowest cost. The essence of the latest, third-best approach is that governments are justified in bypassing the energy market and are best placed to pick the technologies and projects to reduce emissions. No compelling case has been made to support these dubious contentions.
Acting on these contentions is likely to raise the barriers to private sector participation through the market. No doubt some companies will be more than happy to take the governments’ money – hardly an efficient market. The very problem governments are trying to fix with their actions is exacerbated, driving more of the same actions – a nasty and slippery slope away from the high ground of effective markets. Electricity prices will be higher than they should be.
This deal, and others to follow, may deliver lower emissions and maintain reliability. They may be the only practical path for a PM seeking to repair his government’s reputation on climate policy after the summer’s bushfires but with his own internal political constraints.
If so, our best hope is that such deals are one-offs – messy, but necessary to break the current policy impasse. It is just possible that they create some breathing space for pragmatic political leaders to find a new path to real climate policy delivered through real markets.