23
Oct
2018

Only policy shockers on offer in rush to fill energy vacuum

by Tony Wood AM


Published by Australian Financial Review, Tuesday 23 October

Emerging from the political rubble after the Wentworth byelection, the federal government is desperately trying to get onto the front foot on energy policy.

Yesterday the Prime Minister announced contentious new measures he hopes will force down electricity prices. On Friday, his energy minister, Angus Taylor, will lean on the state and territory governments to embrace a challenging agenda of interventions in the energy market.

Yesterday’s announcement basically picks up some recommendations from the Australian Competition and Consumer Commission’s recent report on electricity affordability. Two of these are particularly contentious.

The first is to have the Australian Energy Regulator create a “price safety net”: a default price for households and small businesses who are unable, or choose not, to grapple with the complexity and confusion of the retail electricity market place. The idea is to provide a common basis for any offered price discounts, so customers can make fair comparisons of offers.

The principle is sound, but the energy retailers are rightly concerned that the safety net could morph into a regulated price cap, driving out the best current offers and maybe some small retailers. Yet the industry should also acknowledge that the wounds will be largely self-inflicted. It remains to be seen whether the states, currently responsible for retail competition, will support this Commonwealth incursion into their territory.

The second contentious proposal is for the government to underwrite investment in new electricity generation. The ACCC was seeking to encourage new generators where market concentration has been contributing to high prices. The industry has been remarkably quiet in the face of this proposal for a quite extraordinary level of market intervention. Perhaps industry players are happy to take the government’s money, believing that the market will invest in ways that preclude such intervention. It may be that the design of the government scheme turns out to be relatively benign. But this proposal is a further step down the road of government intervention and regulation, when what Australia needs is clear and stable policy for well-regulated markets.

Friday’s meeting of the COAG Energy Council will be the first chaired by Taylor. It will be a big surprise if his state and territory counterparts simply wave through this agenda.

Think of what’s happened since the last council meeting in August. The federal government dropped its flagship energy and climate policy (as well as its prime minister), offered no clear reason for either decision, and then promoted the dumped policy’s chief protagonist to treasurer and deputy Liberal leader. As energy minister, Josh Frydenberg had worked tirelessly to secure widespread support for the National Energy Guarantee (NEG) from the industry and its customers, and was close to securing the reluctant support of the states and territories. The subsequent policy vacuum has been filled by anger and frustration, much of it voiced at The Australian Financial Review’s Energy Summit this month.

There is little if any prospect of bipartisan support for climate policy, or even for an emissions reduction framework such as the emissions obligation of the NEG. Hence, the federal government will seek support from the COAG Energy Council for the other half of the NEG, i.e., the “reliability obligation”, which requires electricity retailers to cover their share of future electricity demand with supply contracts.

After months of detailed work, led by the Energy Security Board, the energy industry had a broadly acceptable detailed design. Yet Taylor is likely to find very little enthusiasm from council members to provide a lifeline for the federal government’s political fortunes.

He will use Friday’s meeting to seek council support for several ACCC recommendations related to market concentration and market behaviour, including greater powers for the Australian Energy Regulator to remedy market manipulation. In a recent Grattan Institute report, Mostly working: Australia’s wholesale electricity market, we also identified concerns around the use of market power and would strongly support these recommendations.

In a more intriguing move, the federal government is proposing to empower the Treasurer to order the “divestiture of assets on advice from the ACCC”. The ACCC did not recommend such a move in its report; nor did it identify market activities that would lead to such advice in the future. It may be that the plan emerged after the federal government’s vigorous debate with AGL over its proposal to shut the Liddell power station in NSW. Ordering divestiture of energy assets would certainly break new ground on the market intervention front.

COAG Energy Councils used to be somewhat sleepy events. Not any more. At Friday’s meeting, we will be best served if immediate political imperatives take a back seat to sensible policy proposals that make a real difference to the lives of Australians. But we shouldn’t hold our breath.