FUTURE OUTLOOK
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ast year, the mess that is Australian energy and climate policy became clear to all: governments, businesses and households. There were threats to electricity supply, the shutdown of major power plants without adequate replacement, further rises in electricity and gas prices, concerns about excessive profits for retailers, and neverending rancorous political debate over key reform proposals. It took too long, but industry finally got the message that when it comes to energy, it can no longer assume an untrammeled right to just get on with business. And unfortunately, governments discovered that direct, reactive intervention is far easier and popular in the short term than development of credible, stable policies. While energy market reform has generally served Australia well since the mid-1990s, that position gradually unravelled in the past decade. Today, the list of bad outcomes makes sober reading. Issues in the sector Regulation of network businesses has been problematic, and this is a big part of the electricity bill for households and small businesses; the asset values on privatisation have been questionably large, leading to prices that exceed real value; and the allowed rates of return for those businesses were much higher than is consistent with a regulated business that should see low returns in exchange for low risks. We have had no effective, credible climate policy. Attempts such as Labor’s fixed-price Emissions Trading Scheme or the Coalition’s Direct Action policy have either been ill-conceived or inadequate. The policy environment on this issue has been more toxic than most. The result has been a sustained period of investment uncertainty when older generation plants have been shutting down – not good for reliability or prices. Weaknesses have been growing in the market structures – again, not good for reliability or prices. Market reforms that began in the 1990s were never completed; historical over-investment led to complacency; government ownership was and remains problematic; and there has been increasing market concentration and poorly competitive markets in electricity generation and retail. The gas market has become increasingly dysfunctional. Opening the closeted east coast domestic market was very badly handled; the pipeline capacity market and the wholesale gas trading markets need reform; and the inconsistency of the
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national approach to regulation of gas development remains an embarrassment. Governance of the energy sector needs to be overhauled. The recommendations of the 2015 Vertigan Review on this subject were mild, but even those have not yet been fully implemented. And the effectiveness of the recently constituted Energy Security Board has yet to be tested. The supply problems of 2016–17, notably in South Australia but also in other states, ongoing high prices, and the need for integrated energy and climate policies led to a plethora of reviews and reports, most of which delivered recommendations in the second half of 2017. Taken together, they give hope; they may just provide a framework for focused action in 2018.
The framework to move forward This framework has several major elements: The Finkel Review is a blueprint for the National Electricity Market and it should be implemented. A planned transition to a low-emissions economy requires a long-term reduction trajectory and a policy such as a Clean Energy Target (CET) to get there; reliability issues that could emerge with increasing levels of intermittent supply need to be addressed via a generator reliability obligation, three-years’ notice of plant closure and maybe a strategic reserve; a new energy market agreement should be negotiated to reaffirm commitments to a truly national approach to energy policy; and planning should take a stronger role even as it complements the market. The Energy Security Board has delivered its first assessment of the health of the National Electricity Market. The conclusion; it’s not very healthy. The Board also recommended a National Energy Guarantee to address the political difficulties with the CET and provide a more comprehensive approach to ensuring the future availability of dispatchable capability in an increasingly volatile wholesale market. If adopted, this approach would be a world leader in integrating energy and climate change policy. The Australian Competition and Consumer Commission (ACCC) published reports on the gas and electricity markets that raised serious concerns about the way market flaws are pushing up consumer prices. On gas, the ACCC noted real but inadequate improvements. On electricity, it identified cost structures and market concentration as issues. Further reports will keep the spotlight on the flaws and the need for corrective actions. The elimination of the Limited Merits Review for network regulation was a major