Energy Still the Most Scrutinized Sector in Australia 2

Wednesday, March 5th, 2014
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The past few years have seen the rise of a peculiar phenomenon in the Australian energy industry: a surprising number of reviews and policy forming consultations at both the Federal and State levels.

For example, following the 1993 Hilmer competition review that resulted in the formation of the National Electricity Market in 1998 there was the 2002 Parer review, which focused on wholesale market reform and the need for a truly national energy market.

In 2004, the Howard government released an Energy White Paper. Following this there was the report by the Energy Reform Implementation Group (ERIG) in 2007 that was needed to conclude the unfinished business from 2002.

In 2008 or so, the Rudd government started its own white paper process with the white paper only released in 2012 and there were of course the Garnaut climate change review in 2008 and its 2011 update. The Abbott government now started its own energy white paper process (though many, if not most, of the 2012 Energy White Paper policies are yet to be implemented).

There have also been many state based review or policy strategy papers. For example, the current Queensland government’s 30-year electricity strategy process started in December 2012.

This plethora of reviews shows how difficult and politically contentious the energy sector has become, largely due to the triple storm of forces that has been battering the industry for the past 20 years or so.

The oldest influence has been the deregulation, disaggregation and partial privatization of the electricity and natural gas sectors in Australia which has resulted in many unexpected challenges.

Then there is need for de-carbonisation of energy production in response the threat to the modern way of life posed by climate change.

Finally, there are the disruptive influences of new technologies such as cheap solar panels and commercial scale windfarms.

Currently there are three significant reviews going on. The new Energy White Paper process mentioned previously, a new review of the Renewable Energy Target (RET) commissioned by Tony Abbott, and the consultation on the form of the Emission Reduction Fund (ERF), which would be the primary mechanism that Greg Hunt, the federal Minister for the Environment, intends to use as part of his “Direct Action” Climate Change policy.

So, what is going to be different in these reviews and consultations, and is there likely to be any tangible impact on the energy system, consumers, and prices?

In the case of the white paper, the majority of issues are similar to what they were with the previous white paper except for three key issues: possible shortages of natural gas in NSW, the recent unprecedented increase in electricity prices (80 per cent over the five years to 2012), and the even more unprecedented decline in demand for centralised electricity (the total electricity delivered to consumers from large scale generators including wind farms).

This decline of 4.3 per cent from 2009 to 2013 has understandably caused a great deal of anxiety amongst generators, retailers and network system operators. There has been talk of a “Death Spiral” where regulated prices will increase to recover fixed asset costs resulting in further energy efficiency activities leading to further demand reduction and price increases, and so on.

The truth is policymakers seem to have little idea as to how to tackle these three major problems. Luckily there are plenty of other matters to focus on in the White Paper such as how to best make use of, and capitalise on export opportunities in our energy resources sector.

There is also the new RET review chaired by former Reserve Bank board member and self-confessed anthropogenic climate change sceptic Dick Warburton, coming only 18 months after the previous RET conducted by the Climate Change Authority concluded that no changes are needed. Clearly, the new review is expected to deliver a different outcome.

One of the key issues raised by many stakeholders, particularly those whose investment in renewable generation is low, is that the original target of 45,000GWh of renewable electricity by the year 2020 was based on a targeted 20 per cent of a forecast energy demand. As we now know, demand is declining and the Australian Energy Market Operator has revised its forecast for 2020 significantly downwards. So much so that the 45,000GWh would equate upwards of 25 per cent of forecast demand.

Opponents of the target argue that it should be revised downwards to 20 per cent of the new demand forecast. It now seems that all the major retailers are in agreement on this and given the government’s stance on climate change policies it is likely that the target will be reduced.

Finally there is the Emission Reduction Fund (ERF) consultation. This puts meat on what was previously a very vague concept as put forward at the last election by the Coalition.

The principle of Direct Action takes the costs off energy generators and consumers and passes the cost on to taxpayers. While it is debateable whether the five per cent below 2000 emission levels can be achieved at the budgeted $3.2 billion, it is worth analysing the proposed mechanisms.

The ERF allows for two types of participation. Emitting entities can choose to participate in the ERF whereby they are required to keep their total facility emissions at or below their historical benchmark while being paid if the can reduce them.

If they elect not to participate, and their production of GHG is above 25,000 tonnes/year, then they will be required to report on their emissions and ensure that their emission intensity (tonnes/unit revenue, or similar measures) does not exceed their historical average.

This sounds good in theory, but is fraught with measurement and benchmarking difficulties. It will be interesting to watch how this plays out and how it is implemented. Furthermore, given the history of reviews and policy consultations, expect to see more discussion of this and other issues.

Given the current tenor, it is impossible to predict when these reviews might end.

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  1. Ray Del Colle

    "Global clean energy investment hit a record $260 billion in 2011. That's five times as much as 2004. The shift to clean energy is already happening

    • Ariel Liebman

      Absolutely Ray, I think it's unstoppable now. The question about the frameworks we have in the market is are they an enabler of efficient transition or a drag on it!