The Conversation - Tony Wood
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| Australia’s power policies still aren’t heading in quite the right direction.
AAP Image/Mick Tsikas |
Over the next few decades Australia, like many countries, faces the
prospect of an energy transformation that will challenge every aspect of
stationary and transport energy: from production, transmission and
distribution to consumption and exports.
The ultimate imperative is to move our economy to a low-carbon
footing, while ensuring that consumers don’t pay unnecessarily high
costs. The
COAG Energy Council, the decision-making body of federal and state energy and resources ministers, formally recognised the
critical connection between energy and climate policy last July. Later that year the world’s governments brokered the
Paris climate agreement, with Australia promising to cut emissions to
26-28% below 2005 levels by 2030.
Yet this need for wholesale transformation has emerged at a time when
Australia’s policy structures are already struggling to maintain the
delivery of affordable and reliable electricity, after the reforms of
the 1990s lost momentum in the 2000s.
It also comes at the end of a three-year period in which the
Coalition government’s actions to address these challenges made modest
progress at best. Tony Abbott’s administration
repealed the carbon price,
wound back the Renewable Energy Target and established the
Emissions Reduction Fund
(ERF), which has contracted for more than 100 million tonnes of CO₂
emission reductions at less than A$14 per tonne. But it largely
sidestepped the reforms needed to address emerging energy trends such as
low demand growth, the rise of distributed wind power generation, the
boom in domestic solar power and the dramatic growth of coal seam gas.
The upshot was that 2013-16 has left the energy industry with huge
uncertainty about what is in store, at a time when it craves reassurance
more than ever.
This leaves the new government with three key priorities. As
elsewhere, its capacity to deliver will be constrained by the reality of
the new parliament.
The first priority will be to build on its current climate change
policy to create a stable, long-term approach that will lead the
transition to a low-emissions economy. The government will be able to do
this through a combination of administrative action and bipartisan
support.
The second priority is to revive energy market reform through the
COAG Energy Council. The third is to maximise the value of Australia’s
gas resources and ensure continuity of supply.
These are not politically partisan issues but they do require galvanising cooperation across state and territory governments.
In addition, the government should develop a renewed reform agenda
for the COAG Energy Council – one that addresses all these issues with a
focus on outcomes, rather than being mired in process as it has been so
far.
Climate policy
For most of this century Australia has lacked a
credible, long-term climate policy. Instead we have had toxic debate,
policy bonfires and a mishmash of unstable and unpredictable
federal and state policies that have threatened industry investment, not to mention the environment itself.
Existing government policy (the ERF and its new
safeguard mechanism,
plus the reduced Renewable Energy Target) is likely to be enough to
meet Australia’s 2020 emissions target – a 5% reduction on 2000 levels
by 2020 – but far from enough to meet the stronger 2030 target, or
indeed to get us to zero net emissions thereafter.
An economy-wide carbon market is the best way to cut emissions and
meet Australia’s targets without excessive cost to the economy. But in the absence of the political will to implement this, we must work with what we have.
The government should therefore
strengthen the safeguard mechanism, which puts pollution limits on 140 of Australia’s biggest-emitting businesses, so that it becomes an
effective market mechanism.
This approach has the potential to gain the bipartisan support that
energy companies seek as they consider investments in long-lived assets.
Technologies that might produce plentiful low-emission electricity
will still be expensive and risky in the short term. To overcome these
market barriers, the government will need to expand its existing clean
energy research funding to
reduce the costs of moving to a low-emissions economy.
Electricity reform
Energy market reform began in the early 1990s but stalled in the
2000s. Privatisation became politicised and governments baulked at
introducing electricity prices that more closely reflect the costs of
producing power. Meanwhile, prices climbed by
60% in real terms for all customers.
The government should work through the COAG Energy Council to
push for network privatisation and
tariff reform, with the goal of delivering fairer and cheaper electricity bills.
In reforming power networks, two issues come first.
The process for defining the costs that networks can recover from
customers takes too long and encourages networks to overspend. It must
be overhauled.
Second, governments must decide who will pay for surplus network
infrastructure that was built to meet overly cautious reliability
standards and exaggerated demand forecasts. This “gold-plating” is one
of the main causes of power price rises over the past decade.
Network infrastructure has been built to meet the peak demand that
occurs only once every summer in most states, yet customers are charged
on their year-round use. Pricing to reflect the cost of meeting this
peak would make electricity prices
fairer and cheaper for all consumers in the long term.
Federal and state governments have
agreed
to introduce new network tariffs from the start of 2017. But progress
is slow, as the losers from policy changes have loud voices that have
deterred risk-averse state ministers.
This lack of tariff reform is one of the factors (alongside the large
subsidies on offer) that have prompted so many Australian households to
install solar panels. By our analysis, the benefits have
fallen far short of the costs so far.
Yet as solar panels and battery storage continue to get cheaper,
cost-reflective network tariffs will encourage consumers to combine them
fairly and effectively.
Since its creation in 1998, the
National Electricity Market
has helped to provide affordable, reliable and secure electricity
supplies. But now it faces new challenges that were not envisaged when
it was established.
Thanks to the surge in household solar and other factors, more and
more electricity is now generated at zero or even negative marginal
cost. A similar situation in European markets has led to
serious financial losses for major energy companies in Germany.
This is forcing governments in Britain, Germany and elsewhere to
introduce supplementary markets for generation capacity even if it is
not used.
Although Australia is not yet in this situation, the government
should initiate a review of the National Electricity Market to avoid
such threats arising.
Gas markets
Opening the east coast domestic gas market to international buyers has
pushed up prices.
These pressures are exacerbated by the lack of progress toward a
transparent and liquid wholesale market and by patchwork regulation of
unconventional extraction such as fracking.
The government should lead the implementation of recommendations from
the recent Australian Competition and Consumer Commission’s
East Coast Gas Inquiry
to create a more effective and efficient market. Reverting to
protectionism by reserving a proportion of gas for domestic use is not
the answer; in the long run this would reduce the availability of
domestic gas and drive up prices, while also
reducing export revenue.
Fixing the COAG Energy Council
A
recent review
of how Australia’s energy markets are governed identified problems with
the COAG Energy Council and the operation of the government agencies
that implement its decisions.
In a way this serves as a neat illustration of the problems facing
the government if it is going to get energy policy right. Governance,
rules, regulations and policy settings are desperately dry issues. But
if Australia gets them right, the problems people really care about –
like expensive energy bills and climate change – will be much easier to
solve.
Links
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