Josh Frydenberg must clean up Australia’s energy policy mess

by Tony Wood

Published by Australian Financial Review, Wednesday 7 October

The new Minister for Energy and Resources, Josh Frydenberg, has a tough task: to revive Australia’s languishing energy policy and create a 21st-century energy system.

The previous minister, Ian Macfarlane, had a deep understanding of Australia’s energy sector and its challenges. He was committed to energy market reform in all its guises. Yet the breadth of the Industry portfolio, big changes in gas market dynamics and the complexity of national energy markets in a federal system combined to frustrate Macfarlane’s best intentions.

Frydenberg will have to lead a national agenda that gives high priority to a relatively small number of significant challenges and actively manages them to deliver the necessary outcomes.

The first challenge will be to rekindle energy market reform, which has stalled in the last decade. Reform is hard, losers always value losses more than winners value gains, and local issues can overwhelm national priorities. Yet in the early 1990s we did create national energy markets that for a long time successfully provided reliable and affordable energy.

In the last five years or so, poor regulatory outcomes led to big price increases for electricity and gas; resistance to privatisation excluded consumers in some states from substantial savings and new technologies and customer choices got ahead of policy and regulation.

The signs of reform fatigue were never starker than when the COAG Energy Council, the central body comprising all energy ministers, recognised the urgent need for network tariff reform to produce fairer and lower prices, and the Australian Energy Market Commissions set about delivering it. Now state ministers seem to be retreating because the changes are complex and removing unfair cross-subsidies creates losers.

Tariff reform and energy plan choice on agenda

Frydenberg has already promised to use the December meeting of the council to introduce reforms “to make it easier for households to choose an energy plan that suits how and when they use electricity”. Network tariff reform is critical to achieving this goal and will be his first big test.

The second challenge is to address problems in the gas market. These include upward pressure on domestic prices, moratoriums on unconventional gas development in New South Wales and Victoria and lack of transparency and liquidity in the wholesale market. The recommendations of the Australian Competition and Consumer Commission’s review of competition in the wholesale gas market will provide either a clear way forward or a tricky challenge in an area where the federal minister does not pull all the levers.

The third challenge is to integrate energy and climate change policy. In the electricity market, a dog’s breakfast of policies has produced a dramatic over-supply in power generation, poor signals for long-term investment and even rising greenhouse gas emissions over the last year.

In its July communique, the COAG Energy Council promised to take “a central role in ensuring that policies to reduce emissions in the energy and resources sectors are efficient and effective”. It is right to do so, since energy – stationary and transport – produces almost three quarters of Australia’s emissions. Achieving the emissions reductions targets to which Australia is committed and maintaining a reliable and affordable energy supply are closely linked outcomes.

Yet making these policies work in tandem is hard to do, as the failure of the 2015 Energy White Paper to seriously address climate change suggests. Frydenberg has spoken positively of the need to balance the use of fossil-fuel technologies with wind and solar and supports a debate on the role of nuclear energy saying “Surely it is time to move on from the ideological battles of yesteryear”. He will need to work closely with the environment minister and with state governments that have their own ideas on state-based climate change policies.

Reform Agenda plan needs to be focused

The COAG Energy Council’s current Review of Market Governance may sound like an academic exercise, yet the market challenges described above are unlikely to be addressed without active management. The council has problems of its own, at least partly created by conflicts of interests and parochial concerns. The review has already diagnosed problems of prioritisation and delivery on policy objectives. The Council’s Reform Agenda Implementation Plan has a list of 52 key actions, which does not suggest a capacity to prioritise. The minister and the council, with support from appropriate officials, will have to focus on the highest priority issues and deliver the necessary results. This is Frydenberg’s fourth and perhaps biggest challenge.

“There has never been a better time for innovative technologies, practices and solutions,” Frydenberg said recently. He seemed to be echoing Prime Minister Malcolm Turnbull, who said: “There has never been a more exciting time to be alive than today and there has never been a more exciting time to be in Australia”. Frydenberg has the opportunity to realise the promise of his time.