ADDRESS TO THE AFR ENERGY SUMMIT 2018
WEDNESDAY, 10 OCTOBER 2018
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Thank you for the invitation to be at what is becoming an important, locked-in annual event, the Energy Summit; inviting the wise and the good to come and talk to you about energy policy and, for a bit of variety, inviting a couple of politicians as well to kick it off.
The Fin, I think, is a really appropriate host because, after many decades of excellent journalism, you've carved out a really important role in detailed, quality analysis of the energy crisis that has unfolded over the last couple of years. You were very much ahead of the curve in understanding and analysing what was happening to the domestic gas market as the Gladstone LNG export operations started to kick off, and your writing continues to bust through the shibboleths that attach to energy policy in this country, a bit like barnacles attach to ships.
I want to pay particular tribute to the self-described "power rangers" - Angela Macdonald-Smith, Mark Ludlow, and Ben Potter - who are assisted ably by the usual stable of business and politics reporters in the Fin, delivering really quality journalism in a highly contested and complex area of policy. Particularly at a time when that depth of analysis is becoming increasingly rare in media, not just here in Australia but across the world.
I imagine also that, when the agenda was being prepared for this summit, people were imagining that we’d be placing the glaced cherry on the freshly-baked National Energy Guarantee, and celebrating finally the end of one of the critical front lines in the dreadful climate wars. But such optimism, I might say in hindsight perhaps because I shared it a bit, such optimism again underestimated the level of toxicity that attaches to energy policy and politics in Canberra.
For those who remember the events in 2009 when Malcolm Turnbull last lost his leadership of the Liberal party, there was, as the famous baseballer Yogi Berra said, a lot of deja-vu all over again. It was the same players, over the same issues, with the same result, particularly for Malcolm Turnbull, but more broadly I think, for climate and energy policy. There was, though, an important difference back in 2009, in the sense that the energy system back then was in relatively rude health. There was a substantial supply overhang that meant that wholesale power prices were relatively low. There was abundant and cheap gas in the gas market. So to a degree, politicians were able to fight it out over climate and energy policy with little immediate impact in the real world.
Things are very different today. The latest instalments in the energy chapter of the climate wars have taken place against a backdrop of a deep energy crisis here in Australia. That energy crisis that has been unfolding for a couple of years now is quite different to previous energy crises we’ve experienced in Australia, in the sense that it is not the product of an external shock. This crisis is largely self-inflicted and it reflects a very deep, profound public policy failure over a couple of decades.
I think we now broadly understand how we got ourselves into this mess. There is no single cause you can point to but a series of substantial policy failures at a state and federal level. We know that there was, with the benefit of hindsight, substantial overinvestment in networks over the course of the last ten or fifteen years, particularly in New South Wales and Queensland, that has baked high costs into the system for businesses and households. We also know that the supply overhang has gone and a lack of broad based investment in the system means that market power has largely shifted from consumers to producers in the wholesale electricity market. A fact that, contrary to what Angus Taylor was saying just then, has been exacerbated by the spike in gas prices with gas setting the clearing price far more often than it traditionally has done in the wholesale energy market.
I think there is also now more of a consensus about how we might find our way out of this mess, although the events in Canberra over recent weeks have demonstrated that the consensus is far from complete.
The crisis in electricity at its heart reflects the failure to manage the profound transition that is underway in this sector. In part, that transition is simply a matter of timing – our coal fleet, built largely in the 60s, 70s and very early 1980s, is coming to the end of its life, and it simply needs to be replaced. In large part, though, that transition also reflects climate imperatives that were reinforced earlier this week by the report from the Inter-Governmental Panel on Climate Change (IPCC) as well as a fair dinkum, to use Angus’ terminology, a fair dinkum revolution in generation technology through renewable energy.
There is, though, still a wide-spread view amongst many politicians in Canberra, and many media commentators (who often stray into being players in this debate), that there are two paths open to Australia for our energy future; there’s the path that involves new coal-fired power and a path that involves new clean energy, particularly renewable energy that’s firmed up. I have a very clear view: there are not two paths like that facing Australia. Instead the two paths facing us are whether we resist or whether we manage the clear transition to a clean energy system. Canberra, particularly under this government, has chosen the path of resistance.
Now, electricity is not the only sector experiencing profound disruption through technological innovation. But, what marks out electricity is that this is an essential service. No one gets hurt if you miss your Saturday night movie as you transition from the DVD store system to streaming. But mismanaging the transition that’s been largely driven by technological disruption in the electricity sector has profound consequences for consumers, as we now know all too clearly. Every other developed economy is also undergoing this transition, but what's really notable is that almost all of those other developed economies, in Europe and parts of North America, have a clear plan to deliver confidence to consumers and investors that the transition is going to be managed well.
In Australia we’ve taken more of an approach of 'winging it' – placing a great deal of emphasis on the political Holy Grail of finding a market mechanism that has the political support of both major parties - even if we don’t agree on levels of ambition, or the pace of transition, agreeing at least on the investment rules that operate into the future. As we all know, we almost got there in 2016 with the Emissions Intensity Scheme that had all of the state governments, Liberal and Labor alike, pretty much all business groups on board, until it was taken off the table at the last minute after a Coalition party room revolt led by Tony Abbott.
We almost got there again in 2017 with the Clean Energy Target recommended by the Chief Scientist, Alan Finkel - again, broadly supported by business groups across the economy, by state governments Liberal and Labor alike, and by the then-Prime Minister Malcolm Turnbull, Josh Frydenberg and federal Labor. Again, though, that was taken off the table because of a party room revolt led by Tony Abbott.
And we got tantalisingly close this year with the National Energy Guarantee. The new Prime Minister Scott Morrison, when he was still the Treasurer, pointed out that he had not seen an initiative in his ten years in parliament that had broader support than the National Energy Guarantee. There was not a business group in the country that I’m aware of that did not support the NEG, but still Scott Morrison was forced to walk away from it nonetheless.
Now, we confront a position where investors are faced with no rules to guide their investment decisions once the Renewable Energy Target starts to taper off over the coming months. Bizarrely, I think, Angus Taylor the new Energy Minister said in his first speech as Minister that governments ‘shouldn’t even try’, to use his words, to deliver investment certainty in this market. Frankly I think the proposition that the national government does not have a role to underpin investor confidence in an essential service in a mixed economy is utterly ridiculous. Investor confidence particularly matters in a system that is undergoing a profound transition amidst rapid technological change. And the lack of certainty that is flowing from the political fight that continues in Canberra is going to have real consequences for households and for businesses.
I’m sure that you all remember the former Prime Minister, Josh Frydenberg when he was Energy Minister and Scott Morrison when he was Treasurer, all trumpeting the modelling that demonstrated that households would benefit from a $550 saving if the National Energy Guarantee was implemented. Most of that, frankly, through investment in renewables that is happening right now through the RET, but about $150 of it through removing the risk premium that currently attaches to the financing cost of electricity generation investment. You remember that very well I’m sure – we had it shoved down our throats for months.
But, the very same modelling also pointed out that a failure to put in place the National Energy Guarantee would see prices rise. Failure would see wholesale power prices rise by about 27% and the average household bill rise by about $300. We’re already seeing, it’s been reported in the Fin Review, the futures markets starting to price in those increases for 2019 contracts.
So 'where do we go from here?' is the question that you will all be pondering for the next couple of days, I imagine. As I wrote in the op-ed that the Fin Review was kind enough to publish today, my view is very clear about this; worldwide, the transition to clean energy is irresistible and irreversible. Of course, we need to find a mechanism that will underpin investor confidence to make that transition a smooth one. But, we also, in the immediate circumstances, need to recognise that the solution we’ve been banking on for a number of years - a bipartisan market mechanism - has been snatched away. One of the major parties, and it wasn’t Labor, has walked away from the table in terms of trying to find that bipartisan mechanism.
It’s important to understand the difference between what happened a few weeks ago in Canberra and what happened in 2016 and ’17. Because the government didn’t walk away from the National Energy Guarantee per se; they walked away from the table because they can’t countenance any agreement with Labor over climate and energy policy whatsoever. That has profound implications for the venture that we’ve all been embarked upon for a number of years to try and find a bipartisan market mechanism.
We’re talking now to stakeholders about the implications of what happened in Canberra a few weeks ago - particularly, talking to stakeholders – producers and consumers – about their views about the National Energy Guarantee going forward; the reliability obligations elements of it, but also the emissions reductions elements of it. We’re also, understandably I think, talking to stakeholders about different ways to underpin the investor confidence that is going to be needed over the coming years. We’ll be considering the implications of those discussions in the coming weeks and will have more to say about this in due course, as we move into the federal election season.
I think it’s also important to say that consumers have, obviously, been poorly served by this energy crisis. More broadly, it’s now clearer that consumers have been poorly served by the privatisation and deregulation of a retail market that has not delivered the price benefits that were promised to them by those state governments that undertook those privatisations and deregulations over the course of the last couple of decades. That’s why we announced very shortly after the release of the ACCC retail report that we would support a default price replacing the hodge-podge of standing offers that currently operate in the electricity market. Obviously, as Rod Sims said, this needs to be a price that has sufficient headroom in it to allow good robust competition between retailers around genuine discounting that is clear and transparent for consumers to understand.
There is much to like in the ACCC report as we work our way through it and engage with stakeholders about the different recommendations. But I do want to make the point, particularly after what Angus Taylor has said this morning and over recent weeks, that the ACCC report is not an alternative to good investment rules. The ACCC itself made it very clear that its recommendations should have been taken as a complement or an adjunct to the National Energy Guarantee that would have put in place those investment rules - a fact that the new Energy Minister glides over I think as he waxes lyrical about big sticks and ‘fair dinkum’ power, whatever that means.
I’d also like to see this energy debate shift from the focus that has overwhelmingly been on the supply-side of the energy system, to a greater focus on the demand-side of energy. Historically, as I think you all understand, Australia has been a relatively energy-inefficient economy. Our low historical energy prices have simply meant that big investments to become more energy efficient - in the way that European or Japanese economies have – simply didn’t make economic sense.
Businesses and households now, though, are caught in a trap where we confront relatively high energy prices – gas and electricity prices – but still have relatively low energy productivity and efficiency. Indeed, we have levels of energy productivity or efficiency that are slipping even further behind OECD averages and the rates that we see in some of our competitor nations like China. The government’s National Energy Productivity Plan, which was developed back when Tony Abbott was Prime Minister, is hopelessly inadequate. Its target of a 40% improvement in energy efficiency by 2030, even if it were achieved, would see Australia slip even further behind OECD averages and the average efficiency and productivity rates of other competitor nations.
We will be arguing for stronger and more ambitious energy efficiency and productivity policy. Not just a demand-focussed mechanism that focuses on the reliability and security of the system, which I think has been a welcome focus from AEMO over the last 12 or 18 months, but one that focusses on energy efficiency and productivity as the key way of driving down energy bills for businesses and households. There will be difficulty in getting really sharp reductions in the unit price of electricity in the foreseeable future – I think people understand that; we want to see wholesale prices come down, we want to see some of those retail margins come down. But, the pathway to really substantial reductions in power bills for business and households lies in a really aggressive approach to energy efficiency and productivity of the type that exists in developed and developing economies around the world.
Labor's Australian Investment Guarantee announced by Chris Bowen some months ago is just one example of the way in which a Labor Government would support businesses in particular to accelerate those changes. A guarantee that will provide accelerated depreciation, or immediate expensing, for the sort of capital investment and software upgrades that will make businesses more energy efficient in an environment where there are relatively higher unit prices for electricity and gas than we’ve been accustomed to in the past.
In closing - if this transition in our energy system is managed well, Australia will retain a strong comparative advantage once it has worked its way through the global economy. Levelised cost of electricity (LCOE) assessments of all of our major competitors against Australia’s show that we have lower costs of clean energy than China, India, the EU and the US - all because of the extraordinary solar, wind and other renewable resources that we have here on our continent.
We also have abundant supplies of the minerals that are going to drive 21st century energy and transport systems – minerals like lithium, nickel, cobalt and rare earths that I think are now starting to be recognised as a great opportunity for a 21st century minerals economy in Australia - particularly in the West, but in other states as well.
But we are not managing this transition well at all. We need a government and a parliament in Canberra that puts in place a robust transition plan that places consumers back at the centre of this essential service - at the centre of a system that has pushed them to the periphery. We need a plan that gives investors the confidence they need to build the new generation of infrastructure that replaces our ageing, increasingly unreliable generators. And we need a plan that ensures that those communities that are going to be most directly impacted by this transition are supported in what the Paris Climate Agreement described as a ‘just transition’.
We’ve got a long way to go, though, and I think the events of the past couple of months in that political game of snakes and ladders saw us slip down a very long snake indeed. I welcome this Energy Summit; it’s a great opportunity to have some sensible debate about what Canberra, business, and consumers can do to manage this transition much better than we’ve been doing so far.
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