Three ways to start fixing Australia's energy policy mess - Grattan Institute

Published  by the Australian Financial Review, Tuesday 3 September

Australia, with its abundance of coal, oil, gas and uranium, has been an energy superpower for much of the past century. We could be an energy superpower once again with our ample resources of sunshine and wind. But the transition from one to the other has proven fraught for Australia’s policymakers.Our fossil fuel advantage is in steep decline, because carbon emissions here and overseas should and will decline to near zero in coming decades. And this must be done at lowest cost while ensuring energy supplies remain reliable. We will ignore this challenge at our peril.

Clouding the future is the poor performance in recent times of governments, energy agencies and the industry. There has been growth in renewable power, but also carbon wars, piecemeal and stop-start policies, power station closures with little notice, needlessly high power and gas prices, compromised reliability, and only slow and partial decarbonisation. The result has been an intense focus on ad hoc actions to try to deal with these immediate symptoms.

Faced with clear and present problems such as high prices or threats to supply, governments must act in the short-term. It’s a political necessity. But while knee-jerk reactions might provide immediate relief, in the longer term they tend to exacerbate the problems. Examples include regulating prices, subsidising specific technologies, and reserving gas for domestic users. Least-bad actions will be those taken via existing institutions and that work with existing market and incentive structures.

Yet actions essential to the longer-term energy transition must not be ignored.

Drawing on a two-day gathering of a wide range of energy industry leaders and experts, Grattan Institute has published a policy paper, Australia’s energy transition: a blueprint for successwhich identifies three initiatives to ensure Australia has sound foundations to underpin the long-term reform agenda.

First, energy policy must be integrated with emissions-reduction policy, and go beyond electricity to encompass transport, industrial, and export energy. Today’s focus on separate sectors reflects a forced truce that emerged from the climate wars and abandonment of first-best policy. It should have a limited life if lowest-cost emissions reduction is the objective. The federal government remains opposed to any such action. If the states and territories could agree to a national emissions-reduction mechanism without the Commonwealth, that alternative, while not desirable, could be in the best interests of all parties.

Second, the Australian Energy Market Agreement must be revised. This agreement sets out the legislative and regulatory framework for Australia’s energy markets. It provides for national legislation that is implemented in each participating state and territory. Unilateral action by Commonwealth, state and territory governments indicates that the current agreement is being honoured more in the breach than the observance.

A revised agreement is needed that extends beyond the electricity market. It should clearly set out the responsibilities of each level of government as well as of the collective COAG Energy Council. And it must embody a national commitment in which jurisdictional proposals for unilateral intervention are subject to an independent impact assessment before proceeding. Recent examples include federal underwriting of new generation capacity, and state-based renewable energy targets.

Third, the model of separate and independent market agencies – the Australian Energy Market Commission as policy adviser and rule-maker, the Australian Energy Regulator as economic and market regulator, and the Australian Energy Market Operator as market and system operator – must be reformed. The core structure of the three roles is sound and worked while energy markets and technologies were changing relatively slowly, and issues were relatively narrow. That world has changed: the agencies have been reactive rather than proactive and usually too slow; they have been sometimes second-guessed by governments; and they have been unable to work collaboratively when broader strategic issues emerged.

The agencies should be strengthened so they can guide the nation through the rapid and disruptive transition ahead. Their remits should place more emphasis on emerging issues and challenges than has been the case in the recent past. Most importantly, they should be given a joint statutory obligation to collaborate on common objectives. If the Energy Security Board is part of the answer, its role should be formalised.

We need to get moving, preferably in the term of the current federal government. The full journey to near-zero emissions will take decades of adaptive and strategic action by governments and industry. Throughout, the interest of the public and regional communities in low energy prices, reliable supplies, and jobs, must be managed with skill and care.

This may seem like an ambitious reform program. Relative to the inaction of the past decade, it is. But each additional year of prevarication increases the need for significant, urgent reform so that the energy system can adapt to meet the requirements of all Australians.