Published by Australian Financial Review, Thursday 22 November
The right answer to Australia’s high electricity prices and rising greenhouse gas emissions is a credible climate change policy with enough bipartisan support to be around long enough to win broad acceptance. Federal Labor’s new energy policy is not the right answer.
The energy package Labor announced on Thursday shows what happens when you give up on good policy. And it’s not pretty.
There are broadly two planks to Labor’s platform. Labor has recommitted to the National Energy Guarantee (NEG) as a policy mechanism to achieve its 45 per cent emissions reduction target for the electricity sector. But Labor seems to have rejected the idea of addressing a key weakness in the Coalition government’s version of this mechanism by including some form of low-emissions trading.
In pursuing the NEG, Labor would have the high moral ground with a policy to address climate change at a level consistent with the global challenge. Industry leaders will likely support the structure, because they’ve already worked on it, but will be more interested in the likely impact of the higher target on prices. We should brace for a barrage of economic modelling to “prove” both sides of that argument.
Labor would also have a political advantage because the Coalition can hardly reject its own policy – one for which former energy minister and now deputy Liberal leader Josh Frydenberg secured broad political and industry support. Of course, all that means is that the battle will be over the cost of Labor’s 45 per cent target against the Coalition’s 26 per cent target, rather than over the policy to deliver it. Labor has recognised that achieving bipartisan support, or even securing support in what might be a hostile Senate, is by no means assured. The history of our climate wars suggests a high risk of Groundhog Day all over again.
Expecting that the NEG ultimately won’t win broad political support, Labor has announced that it would proceed to directly fund large-scale renewable energy projects via government-underwritten contracts. This approach may avoid the need for new legislation, but at face value it would represent a major step away from the current market. It should be greeted with alarm by the broad energy industry – even if they like taking the government’s money.
The second plank of Labor’s platform is major new government funding to support renewables and batteries and in transmission and distribution infrastructure. It promises an extra $10 billion for the Clean Energy Finance Corporation. This would extend the reach of the CEFC into renewable generation and storage, and would presumably be consistent with its current remit of funding projects that are near commercial but where the commercial banks are unable or unwilling to provide support.
Labor promises a separate $200 million battery rebate program with concessional loans. In an ideal world, an effective emissions reduction policy with cost-reflective network tariffs, as recommended by the Australian Competition and Consumer Commission, would efficiently drive investment in battery storage. Outside that world, Labor’s subsidy scheme could be justified if it captures system-wide benefits and is capped and well targeted.
Australia’s energy transition will require major investment in transmission and distribution infrastructure, as recognised by the Integrated System Plan recently published by the Australian Energy Market Operator. Labor has concluded that the current policies, systems and processes will not deliver the necessary infrastructure, and proposes a $5 billion Energy Security and Modernisation Fund to provide low-cost finance to accelerate investment in infrastructure.
But neither the industry nor the government’s energy agencies have identified the need for such intervention. It looks like another shift away from market structures and towards a centrally planned and nationalised approach. At the very least, Labor must put a much stronger case before government explicitly takes on the risks that existing investors may not.
Labor’s policy announcement displays only lukewarm interest in the NEG as its central emissions reduction policy for the electricity sector. Yet the NEG remains a credible policy structure. Labor should be encouraged to strongly prosecute the case for the NEG through to the next election. If the NEG requires federal legislation and that appears unachievable, then working with the states might provide a better alternative to direct government intervention and funding on the scale Labor proposes.
Economic modelling cannons are being loaded and much confusing and complex analysis will be fired at the Australian people. The spoils should go to the party that can finally craft a compelling narrative of a new energy future.