9
Sep
2020

Sunset over a power line

There’s no spark of economic revival in this energy policy

by Tony Wood


Published in the Australian Financial Review, 9 September 2020

Last week, Prime Minister Scott Morrison said the national cabinet’s energy reform committee would progress critical reform of the energy system as a key component of Australia’s economic recovery.

There is little doubt that governments, working across the economy need to drive such a recovery. In the same week, The AFR View described Australia’s energy system as a costly mess. Yet the immediate actions identified for the committee provide scant comfort they will effectively or efficiently contribute to either an economic recovery, or a fix of the wider energy mess.

The plan’s first action is to develop “immediate measures to ensure reliability and security of the electricity grid ahead of the 2020-21 summer”.

Yet, the electricity energy market operator AEMO, in its latest outlook of supply adequacy, sees no impending reliability problem for the coming summer. This conclusion holds even with the more stringent interim reliability standard recently imposed by energy ministers.

Against that background, new reliability measures would be a puzzling initiative that would impose unjustified cost on consumers.

On Monday, the Energy Security Board published its Post 2025 Market Design Consultation Paper. This comprehensive paper addresses a question that has been vexing governments, their agencies, and market participants for years: What changes are necessary to ensure the current market, largely designed in the late 1990s, will remain fit for purpose for the next 20 years? The committee’s second action is to complete this redesign by mid-2021.

If a low gas price is the key to these industrial investments, they would have happened decades ago.

There should and will be vigorous debate over the various elements of this market redesign. The issues are critical if we are to make an affordable transition to a low-emissions system while maintaining reliable power supply. It is unfortunate that this work is made far harder by state governments subsidising more renewable energy and by the last of the three proposed actions.

The third committee action is to implement a package of reforms, by July 2021, “to unlock new gas supply, improve competition in the market, and better regulate pipelines”. The details of the package have yet to be officially announced, although leaked versions have been widely circulated.

There are at least three significant problems with the core rationale of the reported reform package: a gas-led manufacturing renaissance. First, high gas prices are an existential threat to some existing gas-intensive manufacturers.

Yet history tells us that any proposal for government to subsidise prices below costs or real market dynamics will lead to annual subsidies in the hundreds of millions of dollars for many years. Second, using bad economics to subsidise new investment in commodity manufacturing or gas pipelines is unlikely to create either the tens of thousands of jobs or the economic stimulus claimed by its proponents. And thirdly, if a low gas price is the key to these investments, they would have happened decades ago.

The COVID-19 recession is also being enlisted to justify increased spending by several state governments on subsidies for more renewable energy. It would be comforting to believe, as recently argued by Victorian Energy Minister Lily D’Ambrosio, that more subsidies for renewable energy are an efficient way to drive down emissions, lower prices, create jobs, and increase reliability. Emissions reduction is necessary. Yet, the broader claim stands up to scrutiny no better than the dream of a gas-led recovery.

From an energy perspective, the prescriptions currently being pursued risk making the costly mess worse. Instead of technologies competing in a well-designed and regulated energy market, we have proponents for a gas-led recovery lining up alongside those calling for a renewables-led recovery. Neither idea makes sense. A combination of parallel subsidy programs for gas and renewables seems like a new definition of madness.

Intriguingly, wholesale electricity and gas prices are lower than they have been for five years, electricity sector emissions have been consistently falling over that same period, and the latest projections show that reliability looks OK for at least the next few years. And electricity demand in Australia has fallen only by a couple of per cent through the lockdown.

In a rational world, this would be a window of opportunity for pause and comprehensive reset. If followed through, the latest work of the ESB is an example, albeit a partial one, of what could be done.

The way out of our costly energy mess is the way that federal and state governments have rejected and neither side of politics is ready or able to embrace: credible, stable, integrated energy and climate policy. There could not be a more important reform agenda for the national cabinet’s energy committee.