Federal Energy White Paper: Tempest in a Teacup? 1

Wednesday, April 29th, 2015
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Two weeks ago, the federal government’s Department of Industry released its long awaited White Paper.

The wait for this document, mind you, was not as long as the wait for the previous government’s Energy Whitepaper, which took about five years to arrive. In comparison, this one took only a year and a half. White papers, and energy white papers in particular, have often been eagerly awaited in the hope that they will revolutionise the area in question.

So what is the Energy White Paper (EWP) and what does it mean for the energy industry and energy consumers, and has it revolutionised the government’s approach to Energy?

Firstly, the paper sets out the government’s energy policy agenda and strategy. It is best described in the paper’s own words.

It is “an integrated Australian energy policy framework. Australia’s energy policy will be consistent with the Government’s vision for economic reform and future competitiveness of Australian businesses in international markets through:

  • a lower cost, business friendly environment with less regulation, lower taxes and more competition
  • a more skilled labour force
  • better economic infrastructure
  • policy that fosters innovation and entrepreneurship.”

These are lofty goals. The question is, how does the government propose to address these in the context of energy policy?

As a starting point, in the case of the EWP, the government divides its policy outlook into three key areas: increasing competition (“to keep prices down”), increasing energy productivity to promote growth, and investing in Australia’s energy future.

Each of these is discussed in the context of the electricity, natural gas, liquid fuels, and coal and uranium resources. The first three are discussed from the point of view of end use commodities consumed by both residential and industrial consumers, while natural gas, liquid fuels and coal are also discussed in the context of export markets policy and infrastructure requirements. Uranium is treated purely as an export commodity with an interesting comment added almost as an afterthought about the government keeping an eye on the South Australian government’s review of nuclear energy.

While there is quite a bit of detail in each of the three broad areas, a lot of them are quite generic, such as statements about increasing competition and removing regulatory barriers and inappropriate taxes. The abolition of the carbon tax and mining tax is celebrated repeatedly throughout the white paper.

There are some noteworthy specific points. In the case of the section on increasing competition, several points are worth mentioning in the context of the government’s priorities in energy market reform. The following points are made (paraphrasing somewhat from the white paper):

  • Complete the implementation of priority energy market reforms agreed by the Council of Australian Governments Energy Council
  • Accelerate the roll-out of cost-reflective tariffs to reduce cross-subsidies between consumers and drive better uptake of enabling technologies (particularly advanced metering) that allow consumers to respond to price signals. This would encourage innovative products and services that give consumers more choice in managing bills and support greater competition

These are important initiatives. The first is definitely important; there is a great deal of unfinished business in the market reform space hanging over the progressive deregulation. In particular, privatisation of electricity assets and continuing to strengthen the power of the Australian Energy Regulator (AER) to ensure efficient expenditure on the electricity networks. This has already improved in recent years with the AER now applying benchmarking to determine capital expenditure efficiency.

The other key reform, which has nearly been completed, is the removal of retail price caps in the various east coast states. While the evidence from Victoria is mixed and retail margins may blow out, this is still necessary to create a truly transparent and efficient National Energy Market. Once retail competition is conducted on a level playing field across all states, it will be possible to tell what needs to be done to make competition effective.

The most important reform discussed in the white paper is the roll-out of advanced metering for facilitation of cost reflective tariffs. These are essential for the effective integration of new distributed energy technologies into the grid. They can lead to proper valuation of solar capacity, for instance, while appropriately reflecting the cost of peak demand in local distribution networks.

They will also prevent the networks going down the undesirable route of increasing standing charges to recover revenue potentially lost through dropping energy sales volume. Such moves will accelerate disconnections from the grid, leading to potentially economically sub-optimal outcomes over the whole system.

Next the EWP  focuses on:

  • Privatisation of state-owned electricity assets to increase productivity and competition
  • Further development of the national wholesale gas market to increase the liquidity and transparency of gas trading, and increase pipeline access
  • Facilitation of the responsible development of unconventional gas
  • Provision of reliable and competitively priced liquid fuel supply

Privatisation is important, as the current mix of government and state ownership is leading to distorted incentives for overbuilding capacity while possibly delaying integration of new and more efficient paradigms such as smart grids.

The gas market issues are also important as the LNG export boom and depletion of the conventional reserves in the south of Australia is leading to potential supply challenges. The points above are all valid. However, one wonders whether in practical terms the government can achieve much without investing in additional pipeline infrastructure to make a truly national gas market. Watch this space

The other noteworthy element of the EWP  is the focus on energy productivity and energy efficiency under the title “Increasing energy productivity to promote growth.”

Quoting from the paper:

“To increase national energy productivity, the Australian Government will:

  • develop a National Energy Productivity Plan that provides national action in cooperation with the states and territories and industry, covering the built environment, equipment and appliances, and vehicles
  • improve national energy productivity by up to 40 per cent by 2030.”

These are significant statements, and imply a real commitment to the goal. In particular, increasing productivity by 40 per cent in the next 15 years is not trivial and they should be commended on this target. However, the proof will be in the resources dedicated to this.

The final component of the EWP, “Investing in Australia’s energy future” seems to be rather vague and rely on policies such as industrial relations reform and redirection of research funds into areas of national competitive advantage. It is not clear how impactful either of those will be.

As an overall assessment of the Energy White Paper, it can be said that it is more significant to note what is left out rather than put in. There is little discussion of the need for decarbonisation to address climate change needs, and certainly little about policies targeting this.

Token mentions of the Emission Reduction Fund under direct action and continuation of support for (a reduced) renewable energy target leave one wondering whether it is an important aspect of the government future plans.

Finally, the overall direction of the paper suggests more of a refinement and tweaking of the national energy policy frameworks and direction, not a fundamental rethink of energy policy. This is not appropriate in a time of unprecedented market change, changes of a scale not seen since Edison and Tesla were fighting over AC versus DC power.

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  1. Tobin in Sydney

    And once again the Abbot government drops the ball when it comes to renewable energies.