Australia has rich energy resources, both fossil and renewable, and a well considered electricity market design, as evidenced by the National Electricity Market (NEM), so why is our electricity market policy overall in such a shambolic state? Successive national governments have failed to address the core policy issues that are fundamental if the ‘trilemma’ of current challenges are to be resolved.
The aims of ensuring that energy is affordable, reliable and secure and environmentally responsible (the trilemma) are now well established and in common parlance, used by the PM and his Environment Minister, Josh Frydenberg, and peppered throughout the Finkel Report ( Independent Review into the Future Security of the National Electricity Market: Blueprint for the Future, June 2017). Unfortunately, the reality falls far short of these noble aims, with Ross Garnaut recently awarding Australia the invidious ‘trifecta’ of having: the world’s highest retail energy prices; the highest electricity emissions per person on a production basis in the developed world; and again, in the developed world, the only country with significant stated government and public concerns about electricity security and reliability. This is an uncomfortable juxtaposition of noble aims and embarrassing realities.
Tony Wood at the Grattan Institute has accurately identified two vitally linked requirements for Australia if we are to have a coherent and credible electricity market policy, these being:
- A plan and strategy for transitioning the electricity system from its current concentration on non-renewable energy to one that that is increasingly drawing on renewable energy, and
- Putting in place credible targets and a mechanism for reducing electricity emissions.
Despite what Tony Abbott has said, both elements must be in place otherwise we will continue to see no private sector investment in the electricity system, other than for renewables; premature fossil fuel fired plant closures; and escalating retail electricity prices.
Finkel has written a very diplomatic set of recommendations for what needs to be done, reflecting the appalling state of energy and emissions policy and has refrained from making the obvious point that these reflect failures of the current policy framework and approach.
I have attempted to summarise what I see as the current policy deficiencies and then set out what needs to occur by way of redress.
Five key current areas of electricity market policy and its implementation are deficient:
1 There is no plan to transition from a 20th century electricity system to one suitable for a low emissions system. Our current 20th century system is based on large scale fossil fuel power plants that are concentrated in regions close to the source of fossil fuel and which use high voltage transmission and distribution lines to get the electricity distributed across eastern Australia. This needs to transition to a system suitable for the 21st century with a mix of more efficient and lower emission non-renewable power plants combined with an increasing proportion of renewable energy sources that are diverse in type, relatively small scale compared to the current coal fired plants , numerous and distributed widely across eastern Australia. Any transition needs to be backed by auxiliary services to maintain stability in the electricity system due to the increasing use of intermittent power such as from wind and solar. Despite the nonsense spoken by Turnbull and Frydenberg at the time of the South Australian blackout, system stability can be achieved with renewable energy using auxiliary services and other approaches addressed by Finkel and this is a responsibility of the NEM, not South Australia or any single state.
2 There is not a credible and effective emissions reduction target and mechanism for the electricity sector. Yes, there is the Paris agreement goal of a 26-28% decline from the 2005 level of emissions by 2030. However, this is a target for the whole economy not for the electricity sector. Currently, the only mechanism in the electricity sector to reduce emissions, the Renewable Energy Target (RET), sets targets for the level of renewable energy generated by 2020, not 2030 and not for emission reductions. At best this will only deliver about a 5% reduction in emissions by 2030. This is despite the electricity sector accounting for the largest share of emissions of any sector, at 35% of total economy wide emissions and having far greater capability to deliver cost effective emissions reductions than any other sector. Furthermore, emissions reductions in electricity generation can flow through and reinforce initiatives in other sectors to reduce emissions such as the use of electric vehicles in the transport sector.
No transition plan and no credible and effective emissions reduction target and mechanism have resulted in low investment and maintenance in non-renewable generation, noting that the RET does provide an incentive for investing in renewable electricity generation; the closure of a number of large power plants; and the recent electricity price hike.
3 The complete failure of gas market policy. Combined cycle gas plants were a key part of the transition to a renewable energy market as they have lower emissions than coal fired generators and have rapid start up capability to act as a balancing factor between base load plants and intermittent renewable energy. However, the large scale contracting for export of natural gas put paid to that strategy, created a spike in electricity prices and forced a non-market intervention by the PM to seek to reserve some natural gas for the domestic energy market. We have an almost surreal situation where domestic gas prices are higher than international gas prices before we take account of storage and transport involved in export and yet we still have complete uncertainty about gas supply for domestic power production.
4 The need for a new approach to network planning. The traditional approach has involved planning on connecting the occasional large sale generator to the network. Now there is a need to plan for a host of dispersed, relatively small-scale renewable generators being connected to the grid. In addition, we need to go beyond the traditional network solution of increasing grid capacity and consider alternative solutions such providing small-scale generation for remote and regional communities or those currently off the grid.
5 The poor state of retail electricity markets. This has manifested in significantly higher retail margins than in comparable overseas markets; poorly explained and designed retail products; lack of access by customers to electricity usage data; and the absence of assistance and advice on energy efficiency improvement opportunities. While the PM has engineered a photo opportunity with the CEOs of retailers to belatedly tell them to lift their game, this fails to form any part of an integrated policy.
I would have hoped that with the comprehensive Finkel report there would be recognition and acceptance of the way forward. However, the signs to date are not encouraging. There has been no move to adopt a credible emissions reduction target and a supporting mechanism to reduce electricity emissions. There has also been a bizarre attempt by the neo-conservatives in the Commonwealth government ranks to characterise the sharp increase in electricity prices as due to renewable energy, with no evidence to support such a wild claim. In fact it reflects the absence of a policy framework to encourage investment or maintenance of fossil fuel plants combined with the sharp increase in gas prices. Further, solar and wind can now generate electricity at a lower cost than even the most efficient new generation coal fired power plants.
Related to this is the lurch back to central planning in the National Electricity Market with, first, the Snowy Hydro 2 development and now the ludicrous proposal for the Commonwealth to contract a new supercritical coal generator, occasionally incorrectly referred to as a clean coal plant. These developments have the potential to completely undermine the NEM and, given the poor track record of Government planning, are likely to be the wrong solution to the wrong problem.
What needs to be done? We must have well-designed policies assigned to address each of the three elements of the trilemma.
For improved energy security and reliability, the comprehensive package of measures set out in the Finkel report need to be adopted, together with a clear plan to transition the NEM to accommodate an increasing load of renewable energy while providing the certainty to allow lower emitting non-renewable generators to continue to operate.
Environmental sustainability will only come about with an emissions reductions target for 2030 and beyond that reflects the capability of the sector to deliver substantial reductions, combined with a credible mechanism, be it an Emissions Intensity Scheme or a Clean Energy Target. Whatever the mechanism is, it needs political bipartisan support to provide confidence about the continuity of approach.
Affordability will flow from the greater policy certainty and the transition plan, together with increased use of renewables, which can deliver electricity at a lower cost than non-renewable energy. This can be reinforced by measures to increase competition in the retail market and provide information and advice to customers.
These are reasonably obvious, simple and sensible solutions but there are real doubts about the ability of the Commonwealth Government to deliver on them.
Michael Lambert is a former Secretary of NSW Treasury, involved in the development of the National Electricity Market, former non-executive director of Energy Australia and a director and senior adviser on health economics at the Sax Institute.