S&P's sobering warning on energy policy vacuum
As The Australian Financial Review has been warning for over two years, long before the government abandoned the National Energy Guarantee, there is a policy vacuum at the heart of Australia energy policy that needs to be fixed to provide some level of investment predictability. In order for that to be credible, Australia needs some sort of policy framework that accounts for emissions reductions over time in line with our international commitments while also ensuring enough baseload power for reliability. That gives investment certainty over time, and importantly helps to smooth the transition from centralised, coal-fired baseload energy, to low-cost renewables.
Yesterday, that view has been backed up by global ratings agency, Standard and Poor's, which has warned that the policy vacuum at the heart of Australia's energy policy has delayed investment in on-demand energy. More than that, as the Financial Review has also been arguing, S&P thinks that the government's interventionist approach, complete with the its self-styled "big stick" that it takes to the energy "bandits" will not encourage further investment, and that its measures could actually reduce competition.
In a way, the global ratings agency is half agreeing with Energy Minister Angus Taylor. Mr Taylor's basic point is that too many renewables have been force-fed into the system through high Renewable Energy Targets, undermining the economics of baseload power by subsidising zero-marginal cost electricity, that does not work all the time. And the baseload it forces out of the system is mostly cheap, because it is generated by old power stations whose capital cost has already been paid off. It is simple economics. Mr Taylor is also right to criticise what he calls the "virtue signalling" present in much climate policy: the need for federal and state governments to be seen to be leading on this issues, rather than carefully calibrating Australia's response with other comparable nations and maintaining energy competitiveness. Yet his government's response to this, to throw out any sort of market framework is, so far unconvincing.
In fact, the government's response to these historical interventions is to declare the market broken and propose an array of interventions of its own to fix the situation. So it, in concert with its agency the Australian Competition and Consumer Commission, will directly intervene into the market to set a government-mandated default price to end supposed gouging by big electricity retailers. It will even resort to breaking up these companies should they not behave in accordance with the government's wishes. And as Financial Review political editor Phillip Coorey reported on Monday, the government is already threatening the big energy companies with a royal commission should they not come to heel.
This big-stick approach to energy regulation will almost certainly be counterproductive in getting more investment within the energy industry in the long run, but it is also unclear that it will work to genuinely drop prices in the short term (although there may be some short-run effect leading up to a federal election that has to be held by May, as the big energy companies seek to avoid a bigger stick than necessary). In the long run, the higher prices, brought about by the closure of the likes of Victoria's Hazelwood power plant in March of 2017, actually provide the market with the signals to invest more capital into the sector. And notwithstanding the price which the government seeks to lower by threat, it is unclear why investors would be lining up to risk capital in a market where the government wields a big stick and could break up your companies
That means that the onus is on Mr Taylor and the Coalition to come up with a sustainable – and realistic – framework for the National Energy Market. The big stick is not a desirable long-term solution. Nor is the government's other proposed intervention: to underwrite contracts for new builders of electricity generation.
Failure to do so will mean the states continuing to go free range on energy policy, a continued shortage of investment in future generation and a possible Labor government with a 45 per cent Emissions Reduction Target and a 50 per cent Renewable Energy Target.
Thursday, September 20, 2018
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