By Tony Wood, Grattan Institute
The Energy Green Paper 2014 released this week by federal Industry Minister Ian Macfarlane provides more clear direction and coverage of critical policy issues than did its 2012 predecessor.
However, while it sets out a confident path in key areas such as gas supply, it is tentative in others regarding the electricity market and frustratingly silent on the critical issue of climate change. So how might we score the Green Paper?
Overall, the commitment to market-based outcomes as the central pillar is worth making. Vested interests will always find ways to argue the case for other approaches. But what sort of markets we should have and what sort of market failures should be addressed are more difficult questions.
On electricity, the Green Paper’s attention to cost is hardly surprising given the recent history of price rises.
Commitments to drive tariff reform and support the sale of government-owned assets are absolutely right. The challenge for the government and the COAG Energy Council will be to deliver on these outcomes. This challenge is additional to ensuring that investments in network businesses (“poles and wires”) more closely track demand and make profits commensurate with the low risks faced.
There is well-documented evidence that the European energy system is not coping well with the combination of low growth and the mandated increase in supply from intermittent renewable energy sources.
In Australia, falling demand and the Renewable Energy Target have led to significant over-supply in generation capacity. Low wholesale prices may be a short-term benefit, and a shift to lower-emission energy supply is both desirable and needs to be accelerated in coming decades.
The Green Paper recognises these issues with the wholesale national electricity market, but it strangely fails to identify actions to ensure the current market structure has the capacity to continue to deliver reliable and affordable electricity.
On balance: “C” for electricity.
Good news for gas
The domestic gas market is going through a period of major upheaval and uncertainty as high regional prices for our gas exports get reflected in the domestic market.
The government’s statement that “there are sufficient gas resources for both domestic and export purposes” is a fundamentally important starting point. This is because it means that the focus can turn to issues of market failures or barriers that might justify government intervention. As demonstrated in the United States, higher prices do lead to more supply, although bringing that supply to market can take longer than users might like.
The Green Paper is right in making it an immediate priority to ensure that impediments to additional supply are removed and that the gas market is more transparent and competitive. This includes upstream gas supply and pipeline access arrangements, as documented in the Grattan Institute’s 2013 report Getting gas right. Rejection of protection-style actions such as domestic reservation policies or their ilk remains the right decision.
Gas users are understandably concerned about steep price increases. Therefore, the suggestion of a review of competition in the gas market by the ACCC or the Productivity Commission may be worth supporting.
While gas users may disagree: “A-“ for gas.
Climate policies missing
The Green Paper argues for technology neutrality for future energy options, and identifies coal, gas, nuclear and renewable sources as being available to Australia.
But energy markets are distorted through the current failure to price the environmental impact of greenhouse gas emissions. When this changes, the number of decades for which coal combustion without emissions containment continues to be a major source of global energy may be smaller than is envisaged by the energy analysts to whom the Green Paper refers.
In Australia, the community is subsidising higher-emissions electricity supply. Analysis by the Climate Institute suggests this subsidy could be A$7-20 billion per year. The first and most important policy measure must be to establish a credible, long-term price on emissions.
The Green Paper is silent on this issue beyond referring to the short-term target of a 5% reduction in emissions below 2000 levels by 2020. This is simply not good enough for an industry where predictability is critical to investment decisions.
The Australian policy landscape is littered with the poor outcomes of badly designed and poorly implemented policies and programs that confused climate change, technology development and technology deployment in their objectives. These include various capital grant programs and rebates and the Renewable Energy Target, and range across federal, state and territory governments. Clearing up this dog’s breakfast is to be praised; not replacing it with a credible alternative is to be condemned.
Only one score is possible on climate change: Failed to answer the question.
In responding to the Green Paper, energy users should find some good news on electricity prices, but will remain greatly concerned on gas supply and prices.
Energy suppliers and investors will be nervous about the gas market and cautiously positive on network tariff reform.
However, users, suppliers and investors should be loudly calling for credible, preferably bipartisan, policy on climate change if the underlying objective of energy policy to deliver reliable, affordable and sustainable energy is to be achieved.
Tony Wood owns shares in Origin Energy and has shares in other energy and resources companies via his superannuation