8
Oct
2019

Short-term power fixes are breaking the energy market

by Tony Wood


Published by the Australian Financial Review, Tuesday 8 October

Ad-hoc direct intervention by governments in the electricity market has become a major risk for investment and to the price and reliability of Australia’s electricity supply. Governments feel compelled to act when things go wrong, but there are better ways.

The Grattan Institute’s new report, Power play: how governments can better direct Australia’s electricity marketdescribes how governments have felt compelled to respond to blackouts and sustained high prices. The intention of these interventions has been to fix things: improve reliability and security, drive down prices, or reduce emissions. Yet increasingly and repeatedly, rather than operate through existing market rules, processes and agencies, governments have chosen to intervene directly through subsidies, direct investment or threats.

State-wide blackout

This trend is recent. After the South Australian state-wide blackout in September 2016 and further outages in early 2017, the state government announced an energy plan that included securing diesel generators to be used only when things got tough. This expensive but constrained idea became problematic when the constraint was removed. The current government sold the generators in 2019 to private owners who will now convert them to gas and participate directly in the market.

More recently, the Commonwealth government launched a program to underwrite new generation, committed to the Snowy Hydro 2.0 pumped hydro project, and appointed a taskforce to consider options to override AGL’s plans to close its ageing Liddell power station.

The Victorian and Queensland governments have programs to directly contract large-scale renewable energy projects, while Victoria and the Commonwealth have imposed retail price caps. These are all government interventions that disrupt the operation of the market, often with unintended consequences.

More than 20 years ago, Australian governments created the National Electricity Market (NEM) and established market agencies to deliver reliable, affordable power. Many of the expected benefits of this market have been delivered. Like any other tool, markets need to be maintained to make sure they still work well. It is here that governments, their agencies and the industry have failed.

Misguided

Governments, particularly the federal government, appear to have formed a view that the market is not functioning, and that intervention is necessary. Far from simply setting the rules and appointing the referees, the federal government has become one of the key players in the electricity market game.

But many of these interventions will be ineffective at best, and counterproductive at worst. By picking winners and directly supporting specific generation investments, governments crowd out other investments. When governments wield a ‘big stick’ and pressure companies over coal closures, it makes it harder for the market to deliver the price and reliability outcomes politicians and consumers want.

Our report makes four recommendations based on a central principle: governments should be committed to an effective and efficient NEM and intervention, when needed, should be rules-based and through existing institutions.

First, governments have initiated the post-2025 NEM review to ensure the market remains fit for purpose and delivers enough dispatchable capacity. They should not second-guess that review through separate, conflicting interventions. However, they should similarly review the roles of the market agencies, particularly that of the Energy Security Board whose current mandate ends next year.

We have identified two key areas where well-structured government intervention is justified. The current process to deliver much-needed investment in transmission links takes far too long, as much as six or seven years. This should be accelerated by running some of the processes in parallel and giving networks confidence they can recover the cost of early planning works.

Managing closure

Managing the closure of ageing coal power generators is critical to a successful energy transition. Consumers cannot afford another sudden closure as occurred with the Hazelwood power station in 2017. But existing rules to prevent this are likely to be ineffective. We propose that coal generators be required to put funds into escrow to ensure they comply with closure dates that they nominate in advance, to protect consumers and drive timely replacement investment.

Fourth, governments must fix up the climate policy mess. The federal government has considered and rejected five climate policies over the past decade, and state governments have filled the vacuum with uncoordinated renewable energy targets. If the federal government is unwilling to provide clarity, the states should do so through a state-based, but nationally-consistent, emissions reduction policy.

A well-designed and well-regulated electricity market will deliver low emissions and reliable supply at lowest cost. Direct, ad-hoc government intervention will lead to higher prices and lower reliability. If government actions are rules-based and implemented through sound institutions, all Australians will share the benefits.