Media & Speeches

Free the Private Sector to Fix the Power Problem

This opinion article by Grant King was published by The Australian Financial Review on 21 June 2017.

The Finkel report into the security of electricity supply has sparked a predictable debate about the best way to bridge energy and climate policy. If further evidence were required that we need to settle this debate, it arrived with the announcement this week of further significant increases in retail electricity prices.

At its simplest, the increases in the wholesale cost of electricity have been caused by the mandated increase in renewable energy and the lack of investment in generation required to maintain reliable power supply at the lowest possible cost. Opposition to the development of fossil fuels, particularly gas, has also added to costs.

Australia’s energy resources have historically been a competitive advantage for our businesses while delivering competitively priced energy for households. However, we have put this at risk through many years of inconsistent, poorly designed and poorly implemented policies reflecting the extreme ideologies of either eliminating the use of fossil fuels or questioning the need to respond to climate change at all.

Chief Scientist Alan Finkel has attempted to call a truce through a series of comprehensive recommendations that are designed to bridge climate and energy policy.

At its core the report has recommended the establishment of an emission reduction trajectory through to 2050 and allowing the current Renewable Energy Target (RET) to lapse and be replaced by a Clean Energy Target (CET). Economic purists would argue that spreading the task of carbon reduction across the widest possible base through a carbon pricing or emissions intensity scheme would be less costly, but these alternatives have to some extent already been tried or ruled out by the current government.

With this in mind the CET is the next best alternative. Importantly, it is in principle fuel- and technology-neutral; it doesn’t attempt to pick winners, and for this reason should be supported.

However, in practice, the Finkel report does not make specific recommendations about how ambitious the emissions reduction trajectory should be other than to ensure it delivers on the government’s chosen target. The report also avoids recommending what threshold should be used to determine which generators are eligible to create certificates. Set the threshold too low and the CET will act like the RET. The detail has again been left to our politicians, who have repeatedly proven themselves incapable of bringing policy certainty to this issue.

For some there is no bridge required because they believe the goal of energy policy is solely to ensure a reliable, affordable supply of energy and any additional policies to reduce emissions unnecessarily drive electricity costs higher. Others argue that, because energy use is the major driver of climate change, energy policy should be subordinated to the goal of reducing carbon emissions, no matter the cost.

These at the extremes will not be happy with Dr Finkel’s key recommendations because they don’t seek to call a winner on this debate. Rather they recognise the practical reality that capital markets have made a call on this issue and that modest, practical and reliable progress is the way forward.

The markets believe governments, locally or globally, will ultimately require carbon emissions to be reduced. Until the mechanism is made clear, markets will factor a substantial carbon risk into investment decisions. This uncertainty is discouraging investment in generation, increasingly driving up the cost of electricity.

In Australia, this is clearly evidenced by calls for the government to build a coal-fired power station on the assumption that the private sector won’t take the carbon risk associated with that investment. If government were to finance a new coal-fired power plant, it would further frighten private investors and force taxpayers to potentially bankroll a second, third or fourth power station. Once the government starts down this road, it may not be able to stop. Every dollar spent would be money taken away from other worthwhile public investments.

Dr Finkel has passed the ball to our politicians and they have a choice: they can take the risk on carbon by building the next power station – and continue building them until such time as the price of carbon risk becomes clear – or they can clarify that risk for investors by seizing Dr Finkel’s report and committing to it for the longer term.

If our politicians can agree on this, the necessary investment in power generation will occur, resulting in a more reliable supply of electricity at lower cost than would otherwise be the case.

This is far too important for the competitiveness of Australian business, the jobs that business creates, and the cost of living to remain unresolved for solely ideological or political purposes.

The Finkel report makes clear that the big decisions are still with our politicians. It is time for them to decide the way forward.

Grant King is president of the Business Council.