Energy has become the issue du jour for governments and oppositions alike across Australia. This heightened political focus is reflected in the number of reviews and assessments currently underway. They stand at more than 25 with two Commonwealth further reviews announced last week[i].
The bodies given responsibility for undertaking the latest special review on power system security electricity prices and emission reductions have noted that “there has been significant consultation on matters covered by this current special review, most recently through the Authority’s special review on Australia’s climate goals and policies (which covered policies for electricity generation and concluded in 2016), and for the Independent Review into the Future Security of the National Electricity Market (the Finkel Review)”. Are we now effectively beginning to see reviews into reviews?
The National Electricity Market (NEM) - its wholesale and retail elements and the network regulatory framework have all been the subject of ongoing monitoring since their creation. Some of the analysis being undertaken and listed below is part of this regular assessment of aspects of the market and its operations, although even this element has been expanded over recent years. In addition, there are rule change proposals that come under assessment and not covered by our list. At the moment there are 14 rule changes under review by the Australian Energy Market Commission, including a substantial proposal for Five Minute Settlement, which would be compulsory for generators, scheduled loads and market interconnectors and is currently the subject to consultation[ii].
Other work underway, however, reflects the energy issues that have begun to emerge – increased power prices, reliability concerns, lack of investment in firm generation at a time of power station closures – and the public attention they are receiving. This follows an extended period with a lack of enduring and coordinated national policy, and the substitution of patchwork policies, often at a jurisdictional level.
Interestingly a dissenting report to the recently concluded Senate Select Committee’s inquiry into the resilience of electricity infrastructure in a warming world touched on this and noted that “almost every witness” at the inquiry agreed that failure to articulate a plan to transition to a low-carbon future is crippling the energy industry[iii].
The lack of national policy certainty is now the single biggest driver of higher electricity prices. The electricity cost of sustained national policy inaction is effectively equivalent to a carbon price in excess of $50 a tonne[iv]. We have seen volume weighted average prices in the NEM go above $100/MWh and a lack of investor appetite for new build because of low confidence levels in future policy settings even though funding is both cheap and plentiful (note the multiple bidders for the much lower risk NSW electricity networks, despite their multibillion dollar price tags).
The number of reviews underway may suggest that government is struggling with not so much solving the problems, but trying to redefine them. In short, policy uncertainty and lack of coordination has led to increasingly obvious issues and in the short term the political answer is often a review. But as stated by leading industry, social, environmental and other organisations “finger pointing will not solve our energy challenge. More than a decade of this has made most energy investments impossibly risky.... The result is enduring dysfunction in the electricity sector”[v].
It would be difficult for any sector to operate with the lack of certainty that plagues the energy sector. Uncertainty is widely recognised as being a drag on the economy. The Reserve Bank attempts to track the effects of uncertainty. Government and opposition should aim to reduce uncertainty as much as possible by communicating credible and agreed plans, although the fact that there were no less than four dissenting reports from the main report of the Senate Select Committee into the resilience of electricity infrastructure in a warming world illustrates how far we are from bipartisanship. The question for Australia at the moment is how much all the reviews underway will provide clear guidance, and identify the best solutions followed by appropriate policy action, or just add to the continuing uncertainty.
Reviews and assessments currently underway or recently completed include:
[i] Climate Change Authority and AEMC Special Review on Power System Security electricity prices and emission reductions and ACCC to investigate and report on Australian gas markets and market transparency
[iv] Australian Energy Council submission to independent review into the future security of the National Electricity Market, page 32
[v] Joint statement by Climate Roundtable (Australian Aluminium Council, Australian Conservation Foundation, Australian Council of Social Services, Australian Council of Trade Unions, Australian Energy Council, The Australian Industry Group, Australian Steel Institute, Business Council of Australia, Cement Industry Federation, Chemistry Australia, Clean Energy Council, Energy Efficiency Council, Energy Networks Australia, Energy Users Association of Australia, Investor Group on Climate Change, St Vincent de Paul Society National Council, The Climate Institute and WWF Australia), 13 February 2017.
In February Texas endured a winter storm that dragged temperatures well below freezing. Electricity generation plant and gas infrastructure proved unprepared for these temperatures and around a third of the state’s effective capacity went offline for some or all of this period, just as demand was spiking to a new winter record.
A perennial discussion in energy market policy is the contest between what we are ultimately trying to achieve: “customer benefits” or “market benefits”. When making market rules, or building monopoly assets, rules require that we assess “net market” benefits. A number of recent government policies have been justified on customer benefit assessments alone.
The economics of traditional plants are well understood, but since their construction, the way they need to operate has changed substantially. This has been driven by a combination of the age of the plants as well as the large influx of renewables, which is changing the supply and demand patterns of the grid.
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