Pearls and Irritations

When I saw the government’s latest energy policy proposal, I was disappointed but not surprised.

Just a few weeks ago I was speaking with a few utilities analysts and players, wargaming the absolute worst thing a party with just a few months to live could do to Australia’s energy policy and how far they could roll back some commendable progress to date.

What we came up with revolved around the Australian Competition and Consumer Commission recommendations. They were very sensible but we figured they had substantial scope for selective and perverse implementation. At one point, we joked about the possibility that this good advice could be turned into a policy to subsidise companies that own coal plants and coal.

Turns out that is exactly what has happened.   

It’s worth starting with the original ACCC recommendations and how and why the regulator was trying to achieve greater competition in wholesale electricity markets. The ACCC had opposed the sale of New South Wales’s generation assets to AGL in 2014 over concerns about what it would do to competition. With the benefit of hindsight most would now agree they were absolutely correct in doing so. Their suggestions about limiting further concentration in the market were sound and had precedents elsewhere. The proposed changes to the market operation rules were positive and so was the suggestion that some kind of settled policy to reduce greenhouse emissions would be helpful.

And then there was recommendation four, which in essence said the government should offer to underwrite new generation projects by promising to guarantee contracts in their later years at a fixed rate – an idea designed to make it easier for new players to enter a heavily concentrated market.

The problem with power markets in general, much like any portfolio, is that diversification reduces risk and to be diversified you have to be very large. As with other capital-intensive businesses it is a hard sector to enter without the capacity to borrow. After a decade or more of climate chaos, a carbon tax and a renewable energy target that has had a few near death experiences in the Senate, Australian banks quite rightly look at lending to this sector with some trepidation compared to other markets. Not losing money does not just depend on the laws of supply and demand but the utterly chaotic behaviour of our politicians. It has gotten so awful that it has earned rebuke from that hotbed of socialism, the Australian Industry Group. On that basis having the government break the deadlock to get more capacity built and ensure some peaking assets are held by someone other than the usual gentailer suspects makes a great deal of sense.

So what has the Morrison government’s energy minister, Angus Taylor, done with those largely sensible suggestions to come up with this perverse policy?

First, he set a comically low emissions hurdle, apparently suggesting that a project is fine so long as, on its own, it won’t lead to an increase over the emissions target by 2030. This is disingenuous. No single project is likely to do this unless someone is building a very large brown coal power plant. Essentially, it means there is no emissions component to this plan, in direct conflict with ACCC suggestions.

Second, it allows redevelopment of existing projects, to extend their life. Which could these be? It is unlikely to be AGL, Origin, Alinta or Energy Australia, who all have commitments to decarbonisation and plans to gradually replace coal with renewables, gas and hydro. It could, however, be Sunset Power owned by Brian Flannery and former National party candidate and LNP donor Trevor St Baker.

Third, the divestment proposal would appear to be designed to compel AGL to sell Liddell. St Baker has previously expressed a strong interest in this asset, and he could now also be eligible for a generous loan and off-take agreement from the government.

This is a far cry from the ACCC suggestion that getting simple gas turbines in a box and more wind and solar to more players would be a better approach to increasing competition.

And the most disturbing thing about current policy is that it is market intervention to the direct benefit of only some apparently favoured players.

The sooner this ends – or the government ends – the sooner Australians can look forward to a cessation of this wholesale assault on free markets with integrity, which I vaguely recall were once what the Liberal party stood for.

Alex Turnbull is a fund manager based in Singapore