Feb 08 2017

Opinion piece: Another destructive decade in energy policy is not an option

Energy is a business.  We urgently need to start treating it like one again.  For the past decade this critical multi-billion dollar sector has been held hostage in an escalating ideological and political struggle over climate change.

This week the Prime Minister used his address at the National Press Club to position energy policy as a battleground Federal issue. While many of the points he made were sensible, his speech was the latest in an escalating cold war on energy and climate between the two major parties.

We now risk rolling into a second decade of energy policy uncertainty. This could be catastrophic for the cost and reliability of energy in Australia.

We are already experiencing the consequences of energy policy paralysis for the past decade. It’s not pretty. The "grid" as we know it is degrading in front of our eyes.  Power stations are closing and not being replaced.  Like the fleet of cars in Cuba, remaining owners are sweating remaining generators until and if the investment drought breaks.

Australian businesses and households are now feeling the results of this dysfunction via higher prices and increased unreliability.  Right now, there is no respite in sight.

Of course the real pivot issue isn’t energy, it’s climate change. In the vacuum of credible policy to reduce emissions the debate is framed by the extremes of the ideological spectrum. We are asked to choose between impossible solutions: building more coal fired generation (we can’t finance) versus running the grid entirely on renewables (we can’t, at least not yet).

Climate change is not a belief.  It's a risk.  In the middle of the last decade the global business community finally made sense of the growing concerns of scientists about the risk that greenhouse gas emissions from human activities were accelerating the natural climate variation of the planet, with potentially catastrophic consequences.

Unsurprisingly it was the insurance and re-insurance industry who began to calculate the potential liabilities and sounded the alarm.  This flowed on to banking and finance.  Climate change risks and the consequential constraints on emissions have been increasingly factored in to commercial transactions ever since.

Commercial consideration of these risks now occurs regardless of current climate policy settings.  In effect, it means it is not up to state and federal politicians, or US Presidents for that matter, to decide if climate change is real or not. That’s not the question any more. It’s how we manage the risk, which is real.

Australia's energy sector has been operating for the past decade with an implicit price on emissions.  All Australia’s energy businesses have effectively shelved any plans they once had to build new coal fired generation. Holding aside all other considerations, they are 50-year assets with a material carbon risk. This is only marginally improved by new coal technologies, or in the case of carbon capture and storage, are still too expensive. Put simply, you cannot finance coal.

Over the past decade the industry’s investment focus has shifted from coal and gas to gas and renewables. Some new gas generation proceeded, but has since stalled. While gas has a much lower carbon risk, further investment is unprofitable without some kind of effective constraint on emissions.

We've also seen some investment in renewables, facilitated by the renewable energy target (RET).  But now we are seeing signs this too is struggling.  The decision by one retailer to opt for paying the penalty price cap rather than source and surrender renewable energy certificates is a symptom of a deeper investment problem.

When it was increased in 2009, the RET was designed to operate alongside and converge with a national carbon price. The idea was the RET would support early investment in renewables projects, develop capacity and skill in integration until, by around 2020 the carbon price would be high enough to take over the role as sole investment signal for the entire sector.

Instead, for the past year the renewable certificate price has been hovering right against its ceiling price, and this in a time of higher wholesale electricity prices. Conditions have never been theoretically better to build renewables, but even with these support measures renewables are now caught by the investment paralysis.

At the end of March Hazelwood power station closes in Victoria’s Latrobe Valley, following Northern in Port Augusta last year. That’s more than 2000MW of firm generation exiting the market without any plan as to how we can give investors the confidence to replace it.

South Australia’s reliability issues are now well documented. Victoria is about to go into negative capacity reserves, meaning it does not have enough generation to meet periods of maximum demand. It is still going to be expected to supply South Australia with power during these times (normally heat waves), which means it will in turn need to rely on power from New South Wales and Tasmania.

In other words, everything has to go right to avoid blackouts, while power prices increase as we sustain demand but short supply. It’s an increasingly fragile system.

These problems and the impacts on industry and households will only worsen if we do nothing and sustain another decade of political standoff. It’s a destructive impasse that needs to end before we do more serious economic self-harm.

Credible national energy and climate policy remains the solution we need urgently. This means a nationally co-ordinated energy strategy and a clear and durable measure to constrain emissions. This can take many forms, but is unlikely to include arbitrary, populist targets or schemes for specific technologies. The difference between political window dressing and meaningful reform can be measured by the scale of the return of investors to the energy market. We need them back, at scale, and soon.

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