The battle for a workable energy policy – July 2017

Filed under: Environment and Indigenous Affairs, Climate Change, Environment, Politics, Australian Politics,

Ahead of the much anticipated presentation of Chief Scientist Alan Finkel’s final report on the national energy market to the COAG meeting in Hobart on Friday 9 June, there were signs that the major political parties were moving towards a possible breakthrough to the impasse on climate change and energy policy which has deadlocked this key area of policy making for a decade and led to an effective investment strike in major energy capacity and infrastructure – to the mounting dismay of business and policy makers.

The final Finkel report recommends “a Clean Energy Target as the mechanism for the electricity sector. As part of the orderly transition, generators should also be required to provide three years’ notice of their intention to close. This will provide time for replacement capacity to be built and for affected communities to plan for change. AEMO should also publish a register of expected closures to assist long-term investor planning.”

The report also says, “The reliability of Australia’s future electricity system will be underpinned by an orderly transition that integrates energy and emissions reduction policy. All governments need to agree to an emissions reduction trajectory to give the electricity sector clarity about how we will meet our international commitments. This requires a credible and durable mechanism for driving clean energy investments to support a reliable electricity supply. Governments need to agree on and implement a mechanism as soon as possible. Ongoing uncertainty is undermining investor confidence, which in turn undermines the reliable supply of electricity and increases costs to consumers.”

Over recent weeks, aided by a series of reports, recommendations and emerging policy changes, the major parties have been moving towards possible agreement on what has been variously described as a Clean Energy Target (CET) or a Low Emissions Target (LET) to serve as the cornerstone of climate change and energy policy. It would be an alternative to Emissions Intensity Scheme (EIS) which was most recently scuttled by conservatives in the Coalition led by Tony Abbott, after Environment and Energy Minister Josh Frydenberg raised it as a possibility at the end of 2016, when announcing an Environment and Energy Department review of how Australia could best meet its emissions commitments.

This review, which was to run in parallel with the Finkel energy review, is ongoing and due to conclude at the end of 2017.

The Finkel report, which was due to be made public after being presented to COAG on Friday afternoon, was commissioned following widespread blackouts in South Australia when storms knocked out transmission lines in late 2016 and the finger-pointing between state and federal governments which followed, which served to highlight the failure to develop a workable national energy policy.

Adoption of a CET or LET would allow the Government to move away from its reliance on the widely-derided Direct Action policy introduced by the Abbott Government, which Prime Minister Malcolm Turnbull inherited and which at present remains the main mechanism for Australia meeting its Paris Climate Change Conference emissions reduction target of 26-28 per cent below 2005 levels by 2030.

While there has been a marked change in the possibility of agreement across the major parties, there are still plenty of that things can go wrong, notably that any LET which is acceptable to Labor and could allow the development of a planned trajectory of emissions reductions while ensuring security of energy supply and restraining energy prices for business and households is unlikely to be acceptable to the conservative wing of the Coalition, for whom climate change scepticism, opposition to emissions controls involving market mechanisms which put a price on carbon and disdain for international climate agreements is both an article of faith and an important part of their armoury in the on-going struggle against Malcolm Turnbull.

Likewise for Labor, no matter how genuine their search for a workable emissions reduction scheme which would allow them to clarify their own emissions reduction policy, the opportunity to drive a wedge through the Coalition over what has always been a key internal difference in the Coalition which it has repeatedly but unsuccessfully attempted to paper over, is an important consideration.

As Labor leader Bill Shorten said on Thursday, “We are saying to Malcolm Turnbull, if you need a hand staring Tony Abbott down, we will do it with you.”

The key building blocks ahead of the delivery of the final Finkel report to COAG on Friday 9 June are detailed in the Energy Policy section in the following pages. They are:

  • a new report by the Climate Change Authority and the Australian Energy Market Commission that says wholesale electricity prices are above long-run costs by around $27 to $40 per megawatt hour because of policy uncertainty triggered by protracted political in-fighting about carbon pricing. In commenting on the report the CCA said an EIS would be the best mechanism to ensure energy security consistent with emissions reduction but recommends the adoption of a LET “as an alternative policy given that the EIS has been ruled out by the Commonwealth Government”.
  • Energy Minister Josh Frydenberg announced plans to amend the Clean Energy Finance Corporation Act to allow investment in carbon capture and storage (CCS).
  • The Government released a Low Emissions Technology Roadmap that was commissioned last year from the CSIRO.
  • Mr Frydenberg again ruled out introducing an emissions intensity scheme (EIS), saying it would threaten the stability of the electricity sector.

Highlighting the challenges faced on energy security and pricing, on Thursday Canberr’s near-monopoly power supplier ActewAGL announced a 19 per cent increase in electricity prices and 17.3 per cent rise in gas prices following approvalritory’s independent pricing authory which said, “Australia’s wholesale electricity market has seen dramatic price rises in 2016 and 2017 and this unfortunately means that retail electricity prices will increase sharply.”

ActewAGL chief executive Michael Costello admitted the price hikes were “unprecedented” and blamed them on “10 years of uncertainty in national energy policy” which had left investors paralysed.

On Friday ahead of the COAG meeting The Australian Financial Review reported, “Dr Finkel will argue the business as usual approach is now the most expensive option. This will directly counter the views of Tony Abbott and other conservatives who are resisting policy change.

“Dr Finkel will also recommend that the operators of all large power generators, be they coal, gas or even large-scale renewable, must give three years' notice before closing a facility. This is to avoid a repeat of the rapid announcement and closure of Victoria's Hazelwood power station by French operator Engie earlier this year which took away one quarter of Victoria's base-load power and is contributing to the new price hikes on July 1.

“To improve stability of renewable energy, Dr Finkel will recommend new generation investment must have a degree of storage capacity such as batteries, or back-up generation capacity.

“This would ensure if there was another situation like South Australia's black-outs last September – when a freak storm wiped out transmission lines and caused a state-wide black-out, cutting off SA from the National Electricity Market – battery storage would kick-in to keep the lights on.”

The AFR also reported, “Dr Finkel now believes a clean energy target, also known as a Low Emissions Target (LET) is preferable to an Emissions Intensity Scheme (EIS) which was Labor's preferred policy. It is believed this is partly because the high cost of gas means a potentially quicker phase out of coal fired power under an EIS would create stability problems because gas would be too expensive to replace coal and while renewable storage was still underdeveloped.”

Discussing the alternative carbon reduction schemes Fairfax’s Peter Martin gave the following basic outline of a LET: “Described by the Climate Change Authority as a second-best alternative to its preferred option of an intensity scheme, a low emissions target would operate pretty much in the same way as the current renewable energy target. Electricity suppliers would be required to source a certain proportion of their power from renewables or other very low emission sources such as highly-efficient gas or even coal plants, should they ever be built.

“Its biggest drawback is that if it's all there is, there's no guarantee it won't change. The government might be lobbied to weaken it (making lobbying a very cost-effective proposition) or another government might impose a grander scheme on top of it. Potential investors in new plants might be forgiven for holding back. Given the dizzying array of changes since Howard first proposed an emissions trading scheme 10 years ago, it would be hard to blame them.”

One of the key issues to be determined out of the Finkel report will be the baseline of emissions above which emitters will be penalised. The AFR also wrote” A baseline of around 0.7 would enable coal using as yet undeveloped carbon capture and storage technology but the Minerals Council wants at least 0.75 which would enable to construction of high efficiency, low emissions coal-fired power stations, known as HELE.”

Writing in The AFR Phillip Coorey noted that shortly before he lost the 2007 election John Howard proposed a baseline of 0.2 tonnes of carbon per megawatt hour, which “would be considered too severe in today's political environment.”

He wrote, “The irony is that if Mr Howard won the November 2007 election, Australia would have both a emissions trading scheme and a rigorous clean energy target and would be far more advanced in terms of energy transition and cleanliness. Instead, it has been a decade of ailing infrastructure, ballooning prices and supply volatility.”

But there is also the political challenge that “If Malcolm Turnbull wants to bring the right-wing of his party with him, he may have to allow the more generous baseline. Already Tony Abbott has indicated that enabling HELE to qualify as low emissions would be one of his key requirements.”

The Grattan Institute's energy program director Tony Wood said it would ultimately be up to the federal government to set the baseline and sort out the details about how an LET would work in practice. “The lower the threshold the more it looks like an extension of the Renewable Energy Target and the higher the threshold it would look like an Emissions Intensity Scheme. It's likely to be in-between. This is broadly a move in the right direction.”

An LET would allow existing coal-fired power stations to stay in Australia's energy mix rather than get squeezed out of the market before their natural life. But Mr Wood said although carbon capture and storage was not commercially viable now, any new mechanism, such as LET, should be open to its inclusion closer to 2030.

Sean Kelly, a former adviser to Labor’s Kevin Rudd and Julia Gillard, writing in The Monthly’s daily edition said, “The (Finkel) report itself is actually not likely to surprise anyone…. It’s really the machinations of various politicians around the Finkel report that are interesting.

“It seems increasingly likely that Malcolm Turnbull and his minister Josh Frydenberg will support a low emissions target (LET). They need some policy that isn’t Direct Action – Tony Abbott’s ridiculous scheme – but nothing so radical that it might be painted as a genuine price on carbon. The LET is that policy.”

Bill Shorten has written to Malcolm Turnbull, arguing that “After a decade of toxic politics surrounding energy and climate change policy, Australians are looking for both major parties to co-operate on a way forward.” He is open to a Low Emissions Target, if Turnbull is.

“This is a big shift for Labor,” says Kelly. “Having invested an enormous amount of energy in arguing for other, more stringent policies, the ALP is now open to compromise. While it is possible to describe a LET as a ‘carbon price’ or even an ‘emissions trading scheme’, the truth is that it’s much less either of those things than Labor has proposed up until now.”

Kelly wrote, “Most policy areas present clear advantages to one side and dangers for the other. Climate has become that rare issue that both sides hate. Many Liberals – at least those not allied to Abbott – understand the dangers of looking like dinosaurs. Labor is terrified by the ability of the Coalition to attack it on power prices.

“There is also a legitimate policy argument that the only way of delivering stability in this sector – and therefore encouraging investment in renewable energies – is by getting bipartisan agreement. “That’s a significant point, not to be dismissed. (Though you might also argue that locking in a not-very-good policy is rarely a great result.)

“But beyond this, Shorten is entering a complicated arena, in political terms. The first thing to note is that he risks handing a very big victory to Turnbull… But Labor’s imprimatur would mean a lot. Shorten may yet come out of this looking like the man who ended the climate wars. But so might Turnbull.

“Shorten and (Labor’s environment spokesman Mark Butler) are saying loudly that this is not the policy they’d prefer, and that they will insist on certain conditions.” Kelly argued, “while maintaining that this isn’t the best policy, they also have to make the case that it’s good-enough policy, which partly explains why they’re urging Turnbull to stand up to Abbott. If everyone knows Abbott opposes the policy, it must be alright policy, and thus Labor won’t be seen to have compromised too much. That’s not the only reason, of course. Daring Turnbull to stand up to Abbott has the additional advantage of stirring the conservatives up.

“But it also has an additional disadvantage. If Turnbull does succeed in bedding this down, he’ll have had his standing-up-to-Abbott moment, and in a policy area with which the public strongly identify him. And he’ll have got it without even having had to be very ambitious with policy. After all, even sometime climate sceptic Barnaby Joyce doesn’t mind the LET.”

Nationals leader Barnaby Joyce told The Australian Financial Review he believed a LET was the way forward which could allow the development of next generation coal-fired power stations as well as renewable energy. “This is more likely to do it. Affordable and reliable energy is better delivered by this model than any other model,” he said.

Further Reading