National partnership at last for an affordable, reliable, net-zero power system

Last Friday, Australia’s energy ministers agreed on substantial market reforms under their National Energy Transformation Partnership. The Partnership and the reforms are hugely significant and positive.

The ministers will now directly drive – and be held jointly accountable for – policies to deliver a net-zero energy system that is affordable and reliable for all Australians.

The success of the partnership’s agreed reforms will depend on what happens next in a few key areas.

First, the ministers agreed to put an emissions objective into the National Electricity Objective. This will make it clear that the long-term interests of consumers include emissions reduction alongside affordability, reliability and security in the operation of Australia’s energy markets.

Governments and industry have been looking for integration of energy and climate change policies for a long time. The practical question is how the objective is embodied in policies and regulations and interpreted by the agencies responsible for the operation of the energy markets. The best answer is to have separate mechanisms for reliability and emissions reduction.

The ministers were clearly dissatisfied with the slow progress by the Energy Security Board (ESB) in developing a mechanism to deliver adequate firm capacity in the transition to a low-emissions future. Senior officials, that is, government bureaucrats, will now have this task.

The first test of the new partnership will be for the ministers to agree on a national emissions target for electricity that meets the various targets of the jurisdictions.

Carbon market

The target could be realised by recasting the existing Renewable Energy Target (RET) as a “clean energy target” to operate alongside whatever capacity mechanism emerges from the work of the senior officials. A less direct, but less politically difficult, approach would be to impose the emissions target as a constraint on the capacity mechanism.

Effective capacity markets in other countries tend to work alongside some form of carbon market, and a decision on the latter makes it easier to design the former. Even so, there is no reason why the senior officials will find it any easier than did the ESB to design a capacity mechanism unless ministers make it clear what they want that mechanism to deliver.

With clear guidance, options can be developed that determine what sort of market or other mechanism will be most effective for delivering new investment and ensuring the orderly exit of coal generation.

Another important decision taken at the minister’s meeting was to declare a suite of transmission projects as being of national significance. This is probably necessary, given how long it is taking to identify, approve and build critical new transmission. But it’s not an ideal outcome, as it inevitably excludes the checks and balances of a more orderly process.

Ministers will still need to decide on how the costs of these projects will be allocated between jurisdictions and how to improve the ongoing planning and investment process for transmission. As recognised by the new federal Labor government, the scale and pace of infrastructure investment that must be delivered over the next couple of decades in an already resource-constrained economy creates major risks of cost and further time overruns.

The third key challenge for the partnership is the gas market, which remains an acute problem. Improvements to the Australian Domestic Gas Security Mechanism (ADGSM) and the associated heads of agreement between the Commonwealth and the LNG exporters can and should ensure gas shortfalls are avoided, at least for the next couple of years. In the medium to longer term, the answer will lie in a transition away from natural gas.

The high and increasing price of gas in the East Coast market must be addressed urgently to avoid extensive business closures and further consumer hardship. That means either the threat of a windfall profit tax on the producers’ domestic sales or a price trigger in the ADGSM.

The former is short, sharp, and targeted; it should be politically acceptable and defensible against claims of sovereign risk. The latter is structural and broad and has the advantage of building on an existing framework. Both alternatives require setting a domestic price constraint since export parity in the current international circumstances is part of the problem.

Friday’s decisions have maintained and reinforced the momentum created in the ministers’ previous meeting. Most valuable are the reinforcement of the Transformation Partnership and the integration of energy and climate change policies. The challenges of delivery have not diminished, and the likelihood of further price increases remains. However, the longer-term transition is now more likely to be delivered in the best interests of consumers.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

While you’re here…

Grattan Institute is an independent not-for-profit think tank. We don’t take money from political parties or vested interests. Yet we believe in free access to information. All our research is available online, so that more people can benefit from our work.

Which is why we rely on donations from readers like you, so that we can continue our nation-changing research without fear or favour. Your support enables Grattan to improve the lives of all Australians.

Donate now.

Danielle Wood – CEO