Why the Government’s Liddell intervention threatens long term energy strategy – September 2017

Filed under: Politics, Australian Politics, Trade and industry, Energy,

Before he took the Liberal leadership from Tony Abbott – two years ago this week, as Bill Shorten helpfully reminded us in parliamentary question time on Thursday – one of the key elements that distinguished Malcolm Turnbull from his predecessor was his support of market-based solutions for economic problems.

In 2009 he wrote, ‘While a shadow minister, Tony Abbott, was never afraid of speaking bluntly in a manner that was at odds with Coalition policy.

“So as I am a humble backbencher I am sure he won't complain if I tell a few home truths about the farce that the Coalition's policy, of lack of policy, on climate change has descended into.”

In the same article, originally on his personal blog, he also wrote, “First, let’s get this straight. You cannot cut emissions without a cost. To replace dirty coal fired power stations with cleaner gas fired ones, or renewables like wind let alone nuclear power or even coal fired power with carbon capture and storage is all going to cost money.”

The emissions debate has now morphed to include the energy debate but the key issue remains the same: is there a better alternative to a market mechanism?

And the energy debate itself is creating wider ripples about how the Government’s ad hoc interventions can be reconciled with the fiduciary duty of energy company CEOs and boards to act in the interests of their shareholders.

As energy prices and availability have become an escalating political problem in the face of the Government’s continued failure to develop a coherent energy policy, the Coalition under Mr Turnbull’s has increasingly intervened in the energy market to demonstrate it is doing something to about the immediate issue of energy prices and availability – announcing the planned Snowy 2.0 pumped hydro storage scheme, calling energy retailers to Canberra to agree to tell their consumers more about available energy plans and legislating powers to intervene over gas exports.

These were short term measures to deal with immediate energy market problems and consumer dissatisfaction which Tony Abbott in particular and some other members of the Coalition did so much to stoke from the time of his anti-carbon tax campaign and effective dismantling of an energy pricing mechanism.

At the same time as taking these short term measures to relieve price and political pressures, the Coalition under Mr Turnbull has been anxious to develop a serious medium and longer term energy strategy compatible with its Paris 2030 emissions reduction targets. It commissioned the Chief Scientist Alan Finkel to identify the challenges for Australia’s energy future and advise on a strategy: remember its title: Blueprint for the Future - Final Report of the Independent Review into the Future Security of the National Electricity Market.

So Malcolm Turnbull’s campaign against AGL over the planned closure of the Liddell power station in 2022 is more than just a continuation of the Government’s short-term measures to address impending energy shortages and price pressures: It has much more serious longer term implications for the development of a rational energy market and energy strategy.

His attacks on AGL over the closure of Liddell were launched off the back of the AEMO energy market report which noted that the planned closure will lead to an energy shortfall. (See Energy regulator warns of short and medium-term energy shortfalls).

But by pressuring AGL to extend the life of Liddell or sell it, the Government is not only misrepresenting the implications of the AEMO report, but is introducing a new element of uncertainty into the energy market and undermining the possibility of developing a longer-term, market-based energy policy.

Writing in The Conversation after the release of the AEMO report but before the Government began ramping up the pressure on AGL , David Blowers, Energy Fellow at the Grattan Institute said what was significant in the AEMO report was not its warnings about possible shortages next summer, of which it and others have repeatedly warned, but “ its view that action needs to be taken when Liddell, the AGL-owned power station in New South Wales, closes in 2022. That is five years away, and AGL has been trumpeting the decision at every opportunity, but AEMO is clearly not confident that the market will respond by delivering new generation, or storage, or demand response, to fill the gap.”

He argued “The report is understandably silent on what this ‘longer-term approach’ might look like, given that market design is tricky. But the report is unequivocal that a new mechanism needs to be in place by the time Liddell closes. If not, supply shortages – and the associated loss of power to consumers – will be far more likely.”

He noted that “What AEMO hasn’t done is call out the policy instability that has been a major reason we have got ourselves into this mess.”

As the Government increased pressure on AGL, Oliver Yates, previously the head of the Clean Energy Finance Corporation argued the Government’s response to AEMO’s warning undermined the development of a rational long-term market response. “What AEMO said is that if you want to close down coal-fired power stations in 2022 or 2025, you need the policy and arrangements in place that enable you to replace that capacity.

“And they said, if you do not do anything, and if we remain in the position of policy paralysis, and if you don't give me the powers that I need, that's (shortages) exactly what will happen.”

He noted that AGL had done the right thing telegraphing its planned closure of Liddell. “AGL was kind enough to announce almost two or three years ago that they intended to shut down Liddell in 2022.

“Even under the Finkel Review, they've only requiring that they give, coal-fired power stations give three years' notice; AGL gave about seven.

“Now what they enabled was the market to get on with working out how they were going to provide replacement capacity.”

“At the moment, most of the industry is trying to replace capacity based upon a projected closure date of coal-fired power stations” but, he said, “That's very difficult if a prime minister walks into the room and basically says, ‘Well, I know you've been investing on that basis, assuming all this is going to happen and you've been spending money developing projects, but I think I might just decide to legislate in some way and try and keep these clunkers open.’

“That doesn't help the market at all. It puts us into a position of paralysis all over again.

“It is the worst of all worlds: a market-based system but with extensive and unpredictable intervention by governments that tend to undermine investor confidence.”

Industry concern that the Government’s intervention is turning back the clock and making development of a rational policy more difficult and less likely is widespread. EnergyAustralia backed its rival AGL Energy in the shift away from coal power, arguing there are “much better options” – and “a whole lot cheaper” – than extending the life of an old and unreliable coal plant in New South Wales.

Speaking on the ABC EnergyAustralia’s head of energy, Mark Collette, said the industry’s view on the matter was “very clear.”

“I think there are much better options out there,” he told ABC TV’s The Business, citing his own company’s plans for more gas power, its own coal fleet, investment in more large-scale renewables, and internet of things solutions like demand management. “I think the industry has been very clear that there are a number of options to replace Liddell .… I’d be confident that all of the other companies have got irons in the fire,” he said.

By the end of the week the concerns about the Government’s approach to the energy industry were widening into broader anxiety across the business community about the implications of the Government’s pressure for corporate governance and the ability of companies such as AGL to act in the interests of their shareholders. EnergyAustralia chairman Graham Bradley argued, “The Prime Minister must appreciate that the AGL CEO is answerable to a board which has fiduciary duties which cannot be overridden by Prime Ministerial fiat. He cannot direct the company to make a decision against the long-term interests of its shareholders.” Mr Bradley said.

Australian Energy Council chief executive Matthew Warren said, “What we want the government to do is provide enduring bipartisan policy so we can complete the process of investing in the generation we need. But we can't get that. Instead we get intervention.”

He said, “AGL has already made a commercial decision about Liddell. The last time I checked companies are allowed to make commercial decisions,” he said.

Business Council of Australia chief executive Jennifer Westacott warned, “I can tell you this, this can't be solved without a cooperative approach with business because they have to invest.”

In a further escalation The Australian Financial Review in an article on Friday quoting Treasurer Scott Morrison (although not on this specific matter) suggested the industry could be put under further pressure through an ACCC inquiry which could look at splitting the major energy companies’ generating capacity from their retail distribution.

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