How to recharge energy policy

by Tony Wood

Published by the Australian Financial Review, Friday 26 April

The coming federal election provides an opportunity for the next Commonwealth government to reset the agenda for the Australian energy market and its consumers.

Australia’s electricity is more polluting, less reliable and more expensive than many comparable countries and we are not on target to reach our emission reduction commitment. Grattan Institute’s Commonwealth Orange Book 2019 shows how the next government can turn this around.

The emissions intensity of our electricity is much higher than in comparable countries due to our high dependence on coal. The intensity has declined in recent years and is projected to further decline as old coal-fired power stations retire while solar and wind generation grow. Yet, these trends and today’s policies will not be enough to meet our current or likely future international commitments to reduce emissions across the economy.

During and since last summer, concerns about the security and reliability of the National Electricity Market were intense. Technical improvements to maintain grid security are now catching up with the rapid adoption of solar and wind. But commissioning of new capacity has been slowed by a combination of connection difficulties for distributed generation and climate policy uncertainty. Neither of these processes has been helped by the recent political and media blame game, which has been disproportionate to any actual change in the reliability of Australia’s electricity supply.

Electricity prices remain too high due to a nasty combination of coal plant closures, higher coal and gas costs, poor regulatory outcomes and, again, climate policy uncertainty. Some price relief is on the horizon from investments in new generation and lower regulated network prices. But this relief has been too slow to reduce the political pressure on governments.

Simultaneously challenged on these three fronts, the Commonwealth and state governments turned to directly intervening in the markets and threatening big energy companies rather than doing the hard work of leading and implementing a coherent market reform agenda to support investment. This is despite the recommendations of major reviews of the past three years to reduce prices and emissions and increase reliability.

The next Commonwealth government will have a large body of proposals, programs and new policies to address immediate energy priorities and create momentum for a longer-term transition. A good start would be to take a deep breath and create a focused reform agenda.

The Commonwealth has responsibility for climate change policy and targets. But the states hold most of the energy policy levers. So, the federal minister has no choice but to work with the ministers of the COAG Energy Council to develop national energy policy and implement it through the market agencies. The alternative is today’s incoherent and uncoordinated mess.

The next Commonwealth government should focus on four priorities to deliver the biggest results over their three-year term.

The first is to implement the emissions obligation of the National Energy Guarantee (NEG) for electricity, integrated with specific mechanisms in other sectors. A clear policy framework is necessary to meet our current target and those that will emerge in the coming years. Wishful thinking is a poor substitute.

The NEG is not first-best policy. But it is good enough to deliver the credible and predictable policy sought by investors and the cleaner energy sought by consumers. And it brings some prospect of bipartisan federal support and from the states.

The second is to lead the COAG Energy Council to complete implementation of the reliability obligation of the NEG to ensure dispatchable capacity is available when and where it is needed.

The third is to adopt existing recommendations to improve the efficiency of the wholesale market and, in concert with the states, privatise remaining publicly owned electricity businesses and pursue the effective write-down of overvalued network assets.

The fourth priority should be to negotiate a new Australian Energy Market Agreement that commits all Australian governments to national markets, the policy-making role of governments and the implementation role of the energy market agencies.

In the election campaign the debate on climate change and energy is already intense. The climate war is far from over and there are clear policy differences between the major parties.

Australian businesses and voters are looking to the Commonwealth government for action on climate change. Yet they are also looking for reassurance on energy reliability and prices. Ultimately, these three objectives are best achieved through investment under a clear market and policy framework, rather than ad hoc political intervention.

Investment takes time and results do not always conveniently appear at the right time in the electoral cycle. A long-term vision is required. Australians should and will support the party that, clearly and honestly, sets out that vision.