NEG agreement will be our first step to energy sanity
Published in the Australian Financial Review, Thursday 9 August
When they meet on Friday, Australia’s energy ministers can trigger the beginning of the end of the climate wars by cautiously endorsing the National Energy Guarantee.
Those who say the guarantee is enormously complex are wrong. It’s alarmingly simple.
First, it requires energy retailers to deliver increasingly clean energy to their customers, in line with Australia’s national emissions reduction target.
Second, it requires the retailers to ensure they have enough contracted capacity to meet their customers’ demand.
Over the past six months, the proponent of the guarantee, the Energy Security Board (ESB), has worked with a wide cross-section of energy suppliers and customers to develop and test the detailed design of the policy.
Public support from those groups, including smaller energy retailers and the Clean Energy Council, suggests this has been successful. The remaining design limitations, such as its potential impact on competition in the market, can be addressed during the implementation phase.
The primary concern with the guarantee, also shared by a wide range of stakeholders, is that the electricity sector’s emissions reduction target is too weak – 26 per cent below 2005 levels by 2030.
If our major political parties are as committed to tackling climate change as they claim, then there is little doubt this target will have to be increased by future governments and cover emissions across the economy.
It is therefore appropriate that federal Labor and the state and territory governments apply maximum political pressure to ensure this can be achieved.
Yet, the guarantee should be supported.
Why states and territories should support it
Energy consumers and both sides of politics want lower prices.
There is debate about the precise impacts on electricity prices to 2030, but the ESB has demonstrated that the guarantee should deliver lower prices through greater investor confidence.
The states and territories should support the guarantee, despite their valid concerns about the emissions target.
First, under the guarantee it will be easier for a future federal government to increase the target in 2020 and beyond, than to design and get support for a new policy from scratch.
Second, the guarantee places no restriction on individual jurisdictions setting their own, more ambitious renewable energy targets.
The arguments by Victoria and Queensland – that their more aggressive targets enable others to freeload – become less appealing when it is pointed out that Victoria has long been the state with the highest per capita emissions, and Queensland is the only state that significantly increased its emissions in the past decade.
On that basis, Victoria and Queensland should do more on emissions anyway – and rejecting the guarantee will not remove their concerns about freeloaders.
Third, Federal Energy Minister Josh Frydenberg has agreed a process to ensure alignment between what is agreed by the COAG Energy Council and the federal Coalition party room. A commitment to reviewing the target in 2020, and then every three years, would also be a constructive compromise.
Why the states should support it
The Coalition should support the guarantee.
First, it ensures reliable supply of electricity – regardless of the mix of technologies.
Second, it provides greater investor confidence for all new generation – including coal-fired power plants, if commercially viable.
There are those from the extremes of both sides of this debate who have concluded that the guarantee would be worse than doing nothing. They are wrong.
First, the current subsidy-driven wave of renewable energy projects ends in 2020. If there is no guarantee, investors in any form of large-scale supply or storage will then face great uncertainty in an environment of flat or falling demand.
And the next closures of existing coal-fired power stations may just drive up prices.
Second, on the current trend, the 26 per cent target may be met by 2025, but then little further.
And third, the combination of renewables growth and coal plant closure will expose energy supply to significant reliability risks.
The Australian Energy Market Operator has already identified these risks and is calling for the guarantee or an equivalent mechanism by the end of 2018.
The danger is that our political warriors may beat each other to a standstill, with no clear victor and no clear policy. If that happens, the biggest losers will be Australian energy consumers and the environment.
We will face higher prices, lower reliability and stalled emissions reductions.
There is a better outcome.
Supporting the guarantee can ensure reliability is maintained as the legacy coal plants are retired.
And it can provide a framework, with bipartisan support, to deliver emissions reduction.
The stage would then be set for a debate during the next federal election campaign over more ambitious emissions reduction targets.