The panicky piecemeal measures to avoid blackouts across eastern Australia this summer vividly illustrate the illogicality of most energy policies these days, and the exorbitant costs they impose on consumers.
The measures, announced by Australian Energy Market Operator CEO Audrey Zibelman this week, include refiring mothballed gas power stations in South Australia, Queensland and Tasmania, and stocking up on diesel generators.
You might like to read that again: Australia, which has some of the world’s richest reserves of gas, coal and uranium, is stocking up on diesel generators to avoid blackouts.
Until now, most Australians associated power blackouts and the haphazard methods to avoid them with less-developed nations or their grandparents’ quaint recollections of life under wartime restrictions.
Worse, this pain is self-inflicted. This is not market failure, but political failure. It is probably the most expensive policy blunder in our life times. Fixing this mess will not be easy. It requires a focused and concerted response from governments, Commonwealth, state and territory, who should stop their parochial political games to work in the national interest or more importantly the interests of the average Australian.
Traditionally, energy policy has focused on two objectives: minimum price and maximum reliability.
Since 2001, when prime minister John Howard introduced the Mandatory Renewable Energy Target, a new objective has crept in: reduce carbon-dioxide emissions. Howard’s relatively benign and novel policy was transformed by various successors into an exercise in industrial-scale virtue signalling, starting with ratification of the Kyoto Protocol in 2007. Since then, politicians on all sides have breathlessly espoused the wonders of trading emissions, installing solar panels, demolishing reliable coal-powered generators and blighting the countryside with windmills while neglecting to explicitly divulge that all these policies come at enormous costs that are paid, in the form of subsidies, by the consumer.
Our review (Power Off Power On, published today by the Menzies Research Centre) recommends that all subsidies be phased out, as the federal government is doing by abandoning the discredited Renewable Energy Target from 2020.
The gravy train of subsidies may not have stopped, but it is rapidly reaching the end of the line. Investors know it. Investment in renewable generation has slowed considerably, since the government announced its plans to make generators provide power every second of every day.
Most of all it requires that the market should be left to balance supply and demand and to pass on the benefits of Australia’s abundant sources of energy.
Finally we must recognise that reliable and affordable energy are non-negotiable. Without them, Australians and the businesses they run will struggle to get ahead.
The cost of inefficiency in the energy market flows through to every sector of the economy. It affects our prosperity, health and employment opportunities. An inefficient energy market puts a handbrake on the economy and limits the life chances of future generations. It is in every Australian’s interest, therefore, to ensure that the market operates smoothly.
This is not to say that government policy should not pursue the goal of reducing emissions, if that’s what people want. However, it should never be achieved at the expense of the traditional objectives of price and reliability.
Crucially, we say governments should stop picking winners. We should be technologically agnostic and let the market decide the best solution, be it wind, solar, hydro, gas, coal or storage. We should have a serious debate about uranium as a medium to long-term solution.
State government restrictions on coal seam gas extraction should be lifted to allow the market to make up the shortfall and bring gas prices down.
Consumers have been hoodwinked once again on gas. I can’t remember a single anti-coal seam gas advocate point out the economic consequences of their bans: a jump in the price of gas that is hurting households and driving businesses to the wall.
The national shortfall of gas for next year was estimated in September to be 55 to 108 peta joules. This is within the estimated annual output of just one coal-seam gas deposit at Narrabri, in New South Wales, where Santos is waiting to start work on extraction.
Santos has been held back by both Liberal and Labor.
In a letter to the relevant state premiers, Prime Minister Malcolm Turnbull bluntly said these “blanket moratoriums” on new gas developments were “putting our energy security, industries and Australian jobs at risk”. Federal Energy Minister Josh Frydenberg is equally forthright when referring to poor policy at state level, calling South Australia a “basket case” after the state suffered four blackouts (one of which was statewide) last summer.
Thanks to the National Energy Market, which since 1998 has helped to break down state borders for energy suppliers, South Australia can pursue an ambitious renewables program and Victoria and New South Wales can blithely slap bans on gas extraction knowing that if there is a crisis, a more reliable neighbour will come to the rescue. Further, the cost of intermittency is paid not by the errant state, but by customers in other jurisdictions.
The continuation of the pick-and-mix approach by states and failure to separate market governance from other ambitions will lead to higher prices and the weakening of the system to dangerous levels. This is no way to run a country.
Under these circumstances, it would be incumbent on the Federal Government to take control of the NEM using the constitutional levers at its disposable. The Commonwealth would appear to have ample scope under the corporations and external affairs provisions of the Constitution.
However, federal regulation of the NEM is not a desired outcome. But it would be a necessary outcome if the cooperative governance arrangement under COAG fails to appreciate the gravity of the position and act in the national interest.
Tony Shepherd is the chairman of the panel that wrote Power Off Power On: Rebooting the National Energy Market, published by the Menzies Research Centre today.
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