Why energy reform has to be delivered by the Coalition

by Tony Wood

Published by Australian Financial Review, Monday 17 July

A 21st-century energy system is essential to Australia’s economic prosperity and can only be delivered if there is comprehensive agreement between the Commonwealth and the state and territory governments. Last Friday’s meeting of the COAG Energy Council ministers was a watershed. The pre-meeting verbal sparring suggested it could degenerate into chaos. But in the event, it was a valuable meeting, with the focus not on differences but on what can be done.

Led by Federal Energy Minister Josh Frydenberg, the council agreed on a timeline to implement 49 of the 50 recommendations of the Finkel Review into the future security of the national electricity market.

There was also progress on other major issues such as gas market reform. These reforms include strengthening pipeline regulations and ways to deliver new gas to the east coast gas market.

On the Clean Energy Target (CET) – the one Finkel recommendation not yet accepted – Energy Ministers Mark Bailey from Queensland and Tom Koutstantonis from South Australia vigorously criticised the Commonwealth for not going fast enough. But they kept space open for compromise.

Real action

Many of the agreed recommendations reinforce existing activities, such as the ACCC’s review of retail energy competition and the Australian Energy Market Operator’s (AEMO’s) planning for next summer. Several, such as creating an Energy Security Board and requiring renewable-energy generators to ensure they have back-up supplies, are new. Individual jurisdictions will find some recommendations create challenges, but for now real action is being taken and it will result in real progress.

Chief Scientist Alan Finkel’s great contribution has been to bring these reforms and actions together in a single blueprint, with a governance structure to drive its implementation.

The immediate test for governments is to ensure secure supply and limit price rises. The current mess was a decade in the making. It will not be cleaned up overnight.

On security, AEMO’s intensive work over recent months should ensure the system is ready for the 2017/18 summer. Planning changes and new security and reliability obligations on transmission companies and generators should progressively do the same for future years.

On prices, the best hope for short-term relief rests with improved gas availability and lower gas prices. There are already some signs of improvement, although the ACCC’s reviews into retail competition and pipeline regulations, and the strengthening of the Australian Energy Regulator’s powers on network pricing, will take several years to deliver results.

But what of the big sticking point, the Clean Energy Target?

It’s important to point out, amid all the political heat and noise, that the CET was never the central point of the Finkel Review. Even without Finkel, a political battle on policies to meet Australia’s 2030 emissions reduction target would have arisen through the Commonwealth’s 2017 climate change policy review.

Alan Finkel has made it clear that his panel has not proposed a climate change policy. Rather, the CET is a mechanism to reduce emissions in the electricity sector in support of the federal government’s existing policy commitments.

Yet the absence of stable, credible climate change policy, with a mechanism to reduce emissions in the electricity sector, has been the primary contributor to the very security and affordability challenges that led to the Finkel Review. The CET is such a mechanism.

Policy design

Debate on the CET design and associated economic modelling has been furious. The Minerals Council claims that high-efficiency coal plants could deliver electricity for $40-$78 per megawatt hour, well below their estimated cost of wind and solar with storage. Renewable energy advocates claim that wind and solar with storage are already cheaper than new gas generation. Such claims are based on operating assumptions and cost estimates yet to be tested. Good policy design will provide that test.

The states and territories have expressed frustration at the Commonwealth’s failure so far to embrace the CET, with the COAG Energy Council’s final communique noting the significance of the recommendation. Several Labor jurisdictions intend to ask the Australian Energy Market Commission to develop preliminary design options for a CET. In other words, they are threatening not to wait for the Commonwealth but to go it alone.

Yet climate change policy is a reform that needs bipartisan support. Financial deregulation and microeconomic reform “stuck” so well in Australia because they were delivered, perhaps surprisingly, by a Labor federal government. So too, climate change policy will have its best chance for lasting success if it is implemented not by Labor and the Greens, but by a Coalition government.

That task now confronts Frydenberg and Prime Minister Malcolm Turnbull. They have positive momentum from the COAG Energy Council and overwhelming support from the majority of stakeholders. Their historic challenge is to develop and deliver a workable energy and climate-change policy compromise in the interests of all Australians.