Jun 23 2017

Ignore Finkel - and risk a collapse in the electricity market

Energy policy in Australia is a mess. Prices are rising sharply, reliability is deteriorating and we aren’t getting our emissions down at the rate we need to. 

A decade of energy policy flip flopping continues to undermine critical investment in new capacity. Escalating government intervention now threatens to destroy the electricity market we built to increase competition and lower prices.

By almost any measure the death of the national electricity market would be a colossal policy failure resulting in higher prices, re-regulation and un-reform. It would be a rejection of a market-based economy and a return to the government paternalism of the 1960s, and all that it entails. 

The destabilising force in all of this is climate change. Not the risk of climate change itself, which is manageable, but the ideological responses to it. At one end of the spectrum we have been told how the electricity system could magically and costlessly transform to 100 per cent renewable energy. At the other we are now being asked to ignore climate change altogether and just build new coal fired power stations. Neither view is anchored in reality.

Let’s review where we are: since 2012 we have seen 10 coal fired generators exit the National Electricity Market, taking more than 5000MW of firm, dispatchable capacity with them. Based on the age of Australia’s fleet of coal fired generators built in the post-war boom, we can expect to see the retirement of another 15,000MW over the next 15-20 years.

Retiring power stations at this rate without replacement is creating a serious supply-demand imbalance. It shorts the market for electricity and increases reliability risk.  It is creating the current crisis that is driving up household power bills, hurting small and large businesses alike.

Building new coal to replace old coal is challenging in Australia. It is extremely difficult to finance capital intense, 50 year assets with a high emissions generation profile.

The notion that governments should invest where the market fears to tread should be treated with extreme caution. First, if a government was to subsidise or underwrite a new coal fired generator, it better get ready to build nine more, as the scale of this sort of intervention will effectively chill an already weak investment market. Second, even if it gets built, there won’t be any new electrons entering the market for another seven years.

Third, the last time a government in Australia dabbled with this interventionist approach was the State Bank of South Australia. Taxpayers ultimately carry the financial risks for government intervention. The road to hell is paved with good intentions.

Since 2012 our industry has built more than 3500MW of large scale renewables and another 3400MW of rooftop solar behind the Renewable Energy Target and various state based subsidies.

These investments have helped to reduce emissions and saved some households’ power bills (at the expense of those without solar). But self-evidently it is not a like-for-like replacement. Nearly 7000MW of new renewables has not filled the demand-supply imbalance and isn’t bringing down electricity prices. Renewables are clearly part of the solution, but need to be matched with other investments that can guarantee supply.

Dr Alan Finkel’s task in reviewing the current state of the system has been to find a way out of the mess we are in; to bring down high prices, increase reliability and steer Australia’s electricity sector on a sustainable pathway for the 21st century.

What he has proposed is a clear improvement on what we have now; a move from a Renewable Energy Target to a Clean Energy Target combined with a Generator Reliability Obligation (GRO). The GRO requires all new generation to meet minimum requirements to keep the grid secure.

New generation will have to meet both an emissions and a reliability requirement. Coal struggles on emissions. Renewables struggle on reliability. A combination of technologies will be required.

The design of the grid of the future will be shaped by many things: the cost of technologies like renewables and storage, the price of gas, the ability of lower emissions coal to get cheaper and cleaner, the evolution of distributed energy like solar and the way consumers are incentivised to manage their demand.

We don’t know how these will play out. Yet we need to start building now. The Finkel Review creates a mechanism to get new firm-equivalent generation into the grid, and lets the market determine the portfolio of technologies that are best suited to the differing conditions in different regions. It does not pick technologies, nor does it exclude any. The most unlikely combinations may end up being viable.

It’s appropriate to debate the merits of this idea. But it’s worth reminding critics of the Finkel plan that no policy reform is a real threat, and the road we are currently on. Governments will find themselves the only investors in a dead electricity market, and will then need to find more than $200 billion to re-build the grid.

The significant benefits from competition policy that delivered us a competitive electricity market will be lost too. We would be foolish to abandon it due to policy inaction.

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