Power price politicking trivialises the net-zero challenge - Grattan Institute

News of impending electricity price increases is reaching Australian businesses and households in the middle of an election campaign. Yet political leaders are arguing over price forecasts years into the future. There is precious little clarity on what the next government, whether Coalition or Labor, can do to improve things immediately.

Six months ago, the Australian Energy Market Commission forecast a decrease in average household bills of about 6 per cent over the next three years. Network costs, about 45 per cent of the bill, would increase slightly but that would be more than offset by a decrease in wholesale costs (30 per cent of the bill) as new renewable generation replaced retiring coal plants.

Today’s reality is that annualised wholesale electricity spot prices in the National Electricity Market (NEM) are double what they were a year ago and some of this increase will be passed through to customers. This price shock is a hot topic for the election.

There are multiple causes of the price surge, including high global coal prices from a post-COVID recovery, disruption created by the Ukraine war, coal and gas power plant outages, local coal supply problems due to heavy rains and high late-summer temperatures. Some of these factors should fall away during 2022, while others are more unpredictable and are factored into the market’s price expectations for the next year or two.

The level of detail released to support Labor’s claim makes it difficult to assess.

Any electricity retailer or customer caught with this price volatility will be in pain and looking for relief. Yet, the drivers are not within the control of governments – a stark lesson for politicians who want to claim favourable price outcomes from their policies.

In the longer term, managing the transition to net zero while maintaining reliability and affordability will be a major balancing act.

Demand for electricity is likely to at least double by 2050 if Australia achieves the bipartisan target of net zero carbon emissions. At least 100 gigawatts of new renewable capacity will be needed to meet this new demand, plus more to replace existing coal and gas-fired power stations as they are retired. The government’s projections suggest renewables’ share of generation will be 70 per cent by 2030, while Labor’s Powering Australia Plan is looking to more than 80 per cent.

For this to happen, and regardless of the election result, future governments must ensure vastly more electricity infrastructure, i.e. transmission and storage, is built. Labor has proposed a $20 billion government-owned corporation to upgrade the electricity grid, unlock $58 billion of private sector investment in renewable generation and associated infrastructure, and deliver annual power bill savings between $275 and $378 in the second half of this decade.

The political dispute has been around the credibility of the forecast savings. The level of detail released to support Labor’s claim makes it difficult to assess. Other things being equal, using the government’s low cost of borrowing could reduce the costs of transmission that would be built anyway, although such a use of the government’s balance sheet might be questioned.

The cost of new renewable electricity is less than the cost of coal and gas generation. Grattan Institute analysis suggests that about 90 per cent decarbonisation of the electricity supply is possible at very little net cost even without Labor’s funding proposal.

There is a bigger issue: how to plan, approve, build, and pay for the new transmission infrastructure at the scale and within the timeframe required. So far, not so good.

Federal Energy Minister Angus Taylor has been working, so far unsuccessfully, with his fellow state and territory ministers and with the Energy Security Board to resolve the problems. Federal shadow minister Chris Bowen has committed to making it a priority if Labor wins the election. It must be so for whoever is the next minister.

Distilled to the basics, Labor and the Coalition have the same economy-wide 2050 emissions reduction target. Labor is proposing to deliver bigger emission reductions sooner. Labor’s electricity challenge will be to ensure that the balance of investment in generation, storage, and transmission is managed to maintain reliability of supply at the lowest cost. The Coalition has the same challenge but leaves a bigger task for later.

A debate focused on forecasts of power prices in 10 years’ time trivialises a policy issue crucial to addressing climate change. We are embarking on an industrial revolution on a tight timetable. The political choice should be about which side’s plan is likely to create genuine and affordable momentum towards that common objective of net zero emissions by 2050.

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.

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