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Ten reasons why energy policy is broken

Tuesday, 05 December 2017

Ten reasons why energy policy is broken

The combined policies of state and federal governments regarding energy infrastructure, generation and distribution have in the past two decades degenerated into one of the biggest policy failures in postwar Australia.

Our energy markets are broken — they are failing to deliver reliable, affordable electricity and gas — which is costing families and businesses for no apparent advantage.

Despite sharing an abundance of energy resources — from sun and wind to gas, coal and uranium — Australian households and businesses now suffer from high energy prices and diminished reliability. A decade ago, prices were the fifth-lowest in the OECD. Today they are the 12th highest.

Prices have risen as a result of subsidies designed to either discourage use of gas or coal, encourage the use of renewables (such as solar and wind), or both. Australian consumers and businesses were largely kept in the dark about the effect these subsidies have had on their power bills.

High prices are a failure of government at the Commonwealth, state and territory level, who have been driven by ideology, ignored basic physics and economics, failed to appreciate the different structure of our economy compared to other OECD countries and underestimated the unintended consequences of government intervention.

Australia’s mish-mash of policies have added pressure to consumers and businesses, damaged the confidence of investors and driven some businesses overseas.

While the phasing out of the Renewable Energy Target is to be applauded, it is merely the start. We call for the immediate removal or phasing out of all subsidies.

Energy policy aims to achieve three outcomes: lowest price, highest reliability and honouring our emissions commitment to the Paris Agreement. The third of these objectives must only be achieved without compromising the other two.

Consumers and business owners who attended the Shepherd Review’s workshops across the country have delivered a consistent message: “We’ve had enough. Just stop energy prices rising and make sure that when I push the light switch, the light comes on.” 

The Review panel believes that consumers deserve a frank assessment of both the problems in our energy sector and challenging policy task of correcting them. The community needs honest and simple facts if they are to be taken on this journey. 

OUR KEY FINDINGS

The current situation is failing the nation. The retirement of caseload generators and the scarcity of gas has created uncertainty in supply. The nation is now facing the prospect of shortages and widespread blackouts, a scenario that until recently was unimaginable to most Australians. Beside this, the cost of energy has increased (residential prices have increased by 63 per cent on top of inflation since 2007–08), and investor confidence has been severely diminished.

Renewable energy policies have increased costs without a corresponding increase in transparency. The estimated subsidies paid under the LRET and SRES components of the RET have increased from about $100 million in 2003-04 (in current value) to $2.74 billion last financial year. Had consumers been more aware of this being added to their power bills, they are unlikely to have agreed to them. 

EnergyExecSummary1

All subsidies distort the market. They steer capital to investments that would not otherwise have been made, and have other unintended consequences. The excess capacity created by subsidies drove down wholesale prices, pushing some of the lowest cost generation off the system. The result was a deficit of dispatchable energy and a significant increase in prices.

Energy prices are reducing Australia’s competitiveness. For instance, between 2007–08 and 2014–15, the cost of electricity to increase output by $100 increased from $5.77 to $9.28 for primary metal and metal product manufacturing, from $1.68 to $3.34 for food product manufacturing, and from $0.92 to $1.62 for agriculture. Only two sectors showed a decline over that timeframe – machinery and equipment manufacturing and basic chemical and chemical product manufacturing.

EnergyExecSummary2

Green jobs don’t work. Job creation is frequently used to justify subsidy programs. The Climate Council in 2016 said “moving to 50 per cent renewable by 2030 would create more than 28,000 jobs”. However, this figure includes construction jobs. In fact, only 16,240 jobs would be involved in the ongoing generation of energy. The rest of the jobs touted by the Climate Council would disappear.

This low reliance on workers does not mean renewable energy is cheaper. Unfortunately, their high investment costs and intermittency mean they still rely on subsidies to survive. The following graph shows that, despite billions spent in subsidies, employment in renewables has decreased since 2012.

Renewable energy employment

EnergyExecSummary3

Moratoria on gas extraction have the same effect as subsidies. The ban in some states on extracting or even prospecting for gas (as in Victoria) increase prices and reduce investment. However, the eastern states of Australia desperately need new supplies of gas. At least four Australian inquiries have found that it is possible to manage community concerns relating to environmental and social issues with respect to gas exploration and production, the most practical method of which is a cost-benefit analysis on a project-by-project basis. This would be better than a blanket ban.

Nuclear power is safer than other forms of base load electricity generation. The risk of accidents in nuclear power plants is low and declining. The consequences of an accident or terrorist attack are minimal compared with other commonly accepted risks. Australia is in a good position to benefit from the lessons learned worldwide. New developments consider lessons on reactor design and siting, and human and cultural factors.

Empower the customer. As Wilson (2017) has noted, one reform of there NEM could be for retailers to offer customers a choice of “on demand” (mostly baseload) and “as available” (mostly renewables, when the sun is shining or wind is blowing), priced accordingly. We recommend any measure that is constructed in such a way to account for community expectations yet does not unduly affect Australia as a place to live or do business.

The industry is too concentrated. The NEM has too few players competing for the generation and retailing of power. These players as a result are able to exercise excessive market power, to the detriment of consumers.

EnergyExecSummary4

A single generator in Tasmania accounts for 86 per cent of that state’s generating capacity. On the mainland, the three largest generators account for roughly three quarters of generating capacity in each NEM region outside Tasmania, other than New South Wales, where they account for 62 per cent.

In the retail space, 2016 estimates suggest there were 9.3 million residential customers in Victoria (VIC), New South Wales (NSW), South Australia (SA) and Queensland (QLD), with three retailers (AGL Energy, Origin Energy and EnergyAustralia) supplying electricity to around 70 per cent of customers in the NEM. In NSW, Victoria and South Australia, their market share in generation is much higher, while in Queensland a government monopoly is in place.

Policies to alleviate this include: disallowing vertical integration (preventing an entity from owning both generation and retail businesses) or limiting market share (allowing an entity to vertically integrate, but limiting its market share), or a hybrid of both.

Policy is too disjointed. In theory, states are responsible for energy policy while the Commonwealth is responsible for emissions policy, since it has the obligation to honour international agreements. The federal government has become gradually absorbed into energy policy since it passed the Snowy Mountains Hydro-Electric Power Act in 1949 and the subsequent agreement between the Commonwealth and the States. The establishment of the NEM, and the formation of the Council of Australian Governments Energy Council in 2001 gave the Commonwealth a prominent seat at the table.

As the peak governance body responsible for strategic planning and reform, the Energy Council must carry responsibility for the current poor state of the market. The council failed to guard the national interest. It was slow to address the disruptive challenge of renewables and its failure to take action to arrest the declining system strength in the grid.

Further, it has appeared to be blind to the dangers of individual jurisdictions pursuing their own arrangements on emission targets, despite the costs it would impose on users outside that state.

So long as states or territories remain connected to the NEM, the notion that they could become “100 per cent renewable” is a fiction. In reality they import coal-generated energy to cover the gaps caused by intermittency. The cost of intermittency is paid not by the errant state, but by customers in other jurisdictions.

The most immediate practical step for the Energy Council and its constituent governments should be the adoption of the NEG. The NEG, properly constructed, would also act as a deterrent against local decisions, such as state-based renewable energy targets, that are likely to reduce the stability of the grid or impose upward pressure on prices.

The NEG will force the states to bear the full cost of the mix of energy generation inside their jurisdiction, including the costs of maintaining sufficient dispatchable capacity to ensure that consumers’ demand can be met when the output of intermittent resources is low. 

Implementing the NEG will require the unanimous agreement of NEM states under the Australian Energy Market Agreement. It will require the passage of legislation through the South Australian Parliament and amendments to at least four Commonwealth Acts.

Agreement on the NEG will therefore be an early test of the NEM government’s resolve to put the consumer national interest before parochial politics. Should it fail, the consequences for energy reliability and prices will be severe.

 

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