22
May
2017

This year will determine if Australia still believes in energy markets

by Tony Wood


Published by Australian Financial Review, Monday 22 May

Since the 1990s, Australian governments have supported energy markets as the best way to deliver reliable and affordable electricity. For most of this time that approach has succeeded. But now there is a new challenge: to integrate climate-change and energy policies to manage an inevitable transition to a low-emissions future. The biggest policy issue, and one that may determine whether reliability and affordability are sustained, will be where we choose to sit on the spectrum.

A new Grattan Institute report, Powering through: how to restore confidence in the National Electricity Market, identifies the risks to affordability, security and lower emissions of further policy uncertainty and uncoordinated government interventions. It charts a better path for Australia.

The transition from centralised electricity based on fossil fuels to decentralised electricity characterised by low-emission technologies such as wind and solar is well underway. In Australia this has been primarily driven, not by efficient climate change polices but by a grab-bag of subsidies to support renewable energy. The subsequent failure to integrate intermittent supply sources into the existing system hastened coal plant shutdowns and led to power outages and a greater dependence on gas plants just at a time when gas prices more than doubled. The result: higher and rising electricity prices along with serious and growing concerns about the security of supply.

Unmade decisions

The bodies responsible for the National Electricity Market have not served us well. The changing supply mix should have meant changes in how the market is regulated and operated. Yet, despite identified and serious concerns about potential problems, decisions were not made, or made too late, unnecessarily exacerbating the consequences of nasty weather events.

The COAG Energy Council did the right thing late last year by commissioning the Finkel Review to deliver a blueprint for a secure, affordable, low-emissions electricity system. But since then the commonwealth and several state governments have pre-empted Finkel, with well-intended but unco-ordinated and potentially counterproductive interventions.These include further renewable energy subsidies, capped prices, real and potential government investment in generation and storage, and the threat of direct intervention in the activities of the Australian Energy Market Operator.

Good policy choices and evolving market dynamics can contain rising electricity and gas prices and reduce the risks of investment in the right technologies. But electricity prices will be higher under the new system, at least for some time, and gas prices are unlikely to fall back to the levels seen when Australia had a market protected by export barriers. Governments need to be upfront about this, even as they seek to protect security of supply and maximise affordability.

Hard choices

The best way forward is clear but requires hard choices. First, urgent action is needed to stabilise a physical system that has increasing levels of wind and solar energy, and to ensure all supply and demand options are in place to avoid blackouts this summer. The rule-maker (the Australian Energy Market Commission) and the market operator (the AEMO) must introduce and apply a combination of existing and new rules and regulations that are suited to the system and technologies we have now. Effective action may challenge the very cultures of these agencies.

Second, Australian governments need to agree on a credible emissions reduction policy that is integrated with the NEM. The Finkel Review, due for release next month, should identify what real integration means for climate policy design. The federal government’s climate change policy review, due for release later this year, should recommend the best policy to meet our current and future emissions reduction targets.

Third, the COAG Energy Council needs to identify and address risks to a dependable supply of electricity. This will require changing governance arrangements and the operation of the NEM. The current arrangements between the council and the market agencies are no longer fit for purpose and there are risks that the NEM will be crippled as an efficient spot market and driver of investment and divestment decisions.

Change in Australia’s electricity system is here now, and there is more on the horizon. Even the survival of the NEM itself cannot be assumed; alternatives may be needed in the longer term. The policy choices Australia makes in 2017 will determine whether we depend on the ongoing primacy of markets, or shift towards central planning and regulation. These choices should be made consciously now, to avoid major regrets later.