Industry had better argue its energy case with the federal government

by Tony Wood

Solar panels with wind turbines and electricity pylon at sunset. Clean energy concept.

Published by Australian Financial Review, Friday 9 December

How about that? Josh Frydenberg, the Minister for Environment and Energy, was forced to do a backflip from the high board of energy and climate change policy.

Those who forced this outcome may very well be pleased. Yet their success is likely to lead to higher prices and greater risks to electricity security and reliability, presumably just what they should have been trying to avoid.

It wasn’t supposed to happen like this. Greg Hunt, as Environment Minister, designed and implemented a policy that delivered some emissions reductions at low cost and with no impact on electricity prices in the short term.

And in the long term, the policy could be ramped up to meet more challenging targets. Prime Minister Tony Abbott committed Australia to a post-2020 emissions reduction target under the Paris Agreement against which Hunt’s policies would be reviewed in 2017.

Earlier this year, Frydenberg made substantial progress on unifying the state and territory ministers of the COAG Energy Council on critical issues facing the energy sector, including the integration of climate and energy policies.

He steadily and carefully developed the message that Australia would meet its targets at lowest cost, and used the electricity price and supply crises in South Australia to crystallise this message. He appointed Australia’s Chief Scientist, Alan Finkel, to undertake a review of energy policies and regulations in the context of electricity security.

Very recently, Frydenberg released the terms of reference for the 2017 review of climate change policies, and they were unremarkable.

And then, in a radio interview, he specifically acknowledged that a particular policy, a form of emissions trading or carbon pricing called an emissions intensity scheme, would be considered in the review.

The very use of this “carbon pricing” language was all that was needed to ignite the passion of those in the Coalition against any form of action on climate change and they roared.

Blood has been drawn

The minister was forced to cave in, and the Prime Minister provided no support to do otherwise.

The consequences are clear. First, it is difficult to see how the Coalition – or any government – will achieve their 2030 emissions reduction target at least cost, nor the larger targets yet to be determined, without some form of carbon pricing. Ruling out options prior to reviews is just bad management.

Second, there are now calls to abandon Australia’s emissions reduction commitment, despite the government’s recent ratification of the Paris Agreement.

Blood has been drawn and more is being sought, even if it means that the federal government leaves the playing field on energy and climate policy. But climate change will not cave in to the demands of the deniers.

Third, the states now feel fully justified in implementing their own climate and renewable energy policies as already flagged by the South Australian Premier, which we saw at the COAG meeting on Friday.

A coordinated approach is possible and might be welcomed, but a continuation of the dog’s breakfast that has already contributed to security concerns is a prospect.

Fourth, the energy sector will continue to stumble forward without credible policy in the area most affecting investment and divestment. Decisions will be made, but they will be less efficient and less predictable than would occur in a stable policy environment. Unpredictability means risk, and risk means higher costs. There is no good news here.

Cheap for consumers

Finkel, in his preliminary report presented to COAG, drew attention to extensive modelling by the Australian Energy Market Commission and the Australian Energy Market Operator which found an emissions intensity scheme would provide stability for the National Electricity Market and be cheap for consumers.

A response to energy stability and cost should come from industry.

The energy sector’s representatives have already highlighted how the sector is becoming uninvestable due to climate policy uncertainty. Innes Willox from the Australian Industry Group has raised concerns that the policy mess will lead to higher prices.

The BCA could mark out some territory under its new chair, Grant King, by strongly arguing the case for policy clarity. Even the Minerals Council, with its own experience in using balance sheets to influence policy, has a self-interest in that outcome. These voices will be important.

If the government had wanted to avoid higher prices and ensure greater security, they have just set Australia down a path that will lead to exactly the opposite.

This is the message that Frydenberg and Turnbull – as well as the electricity sector, business and environmental groups – need to hammer home if there is any hope that the current situation in energy and climate change policy is to be turned around.