Steering post-Finkel energy policy through a minefield of friends and foes

by Tony Wood

Published by the Australian Financial Review, Monday 26 June

Delivering secure and affordable electricity will make or break Malcolm Turnbull and his government. To pull this off, he will need a critical mass of support from federal Labor, the state and territory governments and, not least, from his own backbench.

The Prime Minister and Environment Minister Josh Frydenberg, have made a good start. Last week they announced real progress on the Finkel Review and other decisions aimed at improving the nation’s energy system.

They were responding to yet another round of electricity price hikes, and concerns about inadequate power supply, prompted by the closure of low-cost coal power plants and greater reliance on high-cost gas power.

The role of gas export restrictions in this drama will play out over the next six months as the PM works through a thoroughly messy sub-plot. And the decision to finally eliminate the so-called Limited Merits Review should be a clear winner for Frydenberg – but it will not result in lower prices until after the next election.

Navigating the minefield

In the meantime, the biggest challenge remains: how to steer energy policy through a minefield of friends and foes.

There are two keys to meeting this challenge: stabilising the electricity market so it delivers secure and reliable energy at affordable prices; and forging a credible national climate change policy. The tough political truth is that the former can’t happen without the latter.

Chief Scientist Alan Finkel’s blueprint, released on June 9, proposes a Clean Energy Target to deliver a low-emissions future at low cost. It’s the one Finkel recommendation that the federal government is yet to endorse. There are two barriers confronting Turnbull. The first is that a minority of his Coalition party-room reject Australia’s commitment to cut emissions. These MPs will never shift, but they can be contained. The second barrier is the reasonable concern of others that the Finkel blueprint, with the CET, will lead to a bad outcome for both prices and security of supply.

The trilemma

The truth is the three parts of the energy and climate “trilemma” – security, affordability and sustainability – do not have equal political weight. Up to a point, the community will tolerate blackouts less than higher prices, and higher prices less than meeting emissions reduction targets.

Finkel’s frontline mechanisms to provide reliable electricity are requiring power plants to give at least three years’ notice of closure and requiring new generators, notably of intermittent wind and solar power, to have firm back-up supplies when high levels of intermittent supply threaten reliability. Yet, Finkel acknowledges this may not be enough to provide certainty. Therefore, he proposes that the Australian Energy Market Operator (AEMO) can secure additional capacity, including gas generation, in emergencies.

Last week, Turnbull asked AEMO to review the outlook for generation and to make recommendations for additional continuous power if needed. This approach should address the major reasonable concerns within the Coalition party-room. In combination with a CET threshold that allows lower-emission coal plants to obtain credits, it could, and should, secure party-room support for the Finkel blueprint.

The PM did not rule out government ownership or intervention to secure additional power. This immediately raised concerns that he was walking away from Finkel and that the blueprint could be fatally wounded. It is unfortunate that, in today’s political climate, failing to rule out options is taken as preference for them.

Expanding AEMO

It is clear from her recent public statements that the head of AEMO, Audrey Zibelman, understands the imperatives that drive governments, and is more than capable of exercising an expanded role with sensitivity to these imperatives and to the needs of the market. She must be empowered to do so. This means taking the Finkel blueprint and building a transparent set of objectives and rules around it. The market should be able to see AEMO as the Reserve Bank of the energy sector.

If done badly, the outcome could be the worst of all worlds – a muddle of public and private sector investment that lurches between under-supply and over-supply and brings no relief from higher prices and lower security. But if this is done well, the market will provide the long-needed, credible policy environment for well-targeted private sector investment.

An effective, efficient electricity market needs enough secure, dispatchable supply to meet demand. Such a market will deliver coal power if it is an efficient part of the supply mix. Coal supporters be warned: it is entirely likely that new, cleaner coal plants will displace existing dirtier coal plants, rather than crowd out renewables as some might hope and others fear.

The energy and climate change policy minefield is littered with the carcasses of Australian political leaders, both Labor and Liberal. But there is a path through. The rewards for finding it will be big for this government and its leader – and ultimately for Australian businesses and households.