How did energy get so off course?

Share

by Sarah McNamara, Chief Executive, Australian Energy Council

In July, the ACCC released the final report from its inquiry into electricity supply and prices in Australia. Here, Sarah McNamara takes a comprehensive look at the recommendations in the report, and highlights the one critical factor we need to get right to avoid being faced with another detailed report in the not too distant future.

he National Electricity Market is one of the most examined, reviewed and regulated markets in Australia.  

Last year we had the comprehensive Finkel Review, and more recently, extensive work on the proposed National Energy Guarantee (NEG). Rounding out consideration of the electricity market is the Australian Competition and Consumer Commission’s (ACCC) forensic report into electricity prices.  

The 400-page ACCC Retail Electricity Pricing Inquiry is an exhaustive survey of more than 10,000 documents from across the sector and delivers 56 recommendations on how to ‘reset’ the National Electricity Market (NEM).

The debate which has followed its release highlights a simple truth known by anyone who works in the industry: we are living with the results of at least a decade of fumbled energy policy at various levels of government. So there are no real secrets why energy prices are high for the average household.

The Australian Energy Council doesn’t accept all the characterisations in the ACCC’s report, but it is a valuable outline of how we arrived where we are now. While many of its recommendations appear straight forward, others will take time to properly assess – this is highlighted by one of the report’s key points, that there can be unintended consequences with significant repercussions from not getting it right. In fact, it is how we got here in the first place.

The lead up and final release of the ACCC report revived strong debate on what is needed to ‘fix’ the NEM – ranging from more renewables to new coal-fired plants, price re-regulation, limits on ownership, asset breakups and government-backing for new entrants. It also encouraged renewed finger pointing variously at networks, at wholesale markets and generators, government green schemes and at retailers, privatisation, market interventions and government ownership to name a few.

Overall the report makes it clear that the electricity market has been compromised by the approach of policy, regulatory design and promotion of competition: “At all stages of the supply chain decisions have been made over many years by many governments that set the NEM on the wrong course,” it says.

So at different parts of the electricity supply chain, decisions were made over many years by governments of all persuasions and in different jurisdictions that ultimately led to the claims that the NEM is ‘broken’.

Despite this commentary, the NEM has operated as it was designed. The big bumps in the road have come from various interventions, with the biggest being in the form of not having bipartisan policy to manage the transition to lower emissions generation.

The ACCC has pointed to increased spending on networks, driven by reliability standards for some networks that were set too high. It also points to state government decisions over generation assets, excessively generous solar feed-in tariffs – like the so-called premium feed-in tariffs that effectively led to an ‘arms race’ as jurisdictions appeared to outdo their neighbours in supporting rooftop PV at a time when the costs of solar panels were much higher than today. The result, as noted by the ACCC, was that the subsidy to consumers for the energy they produced outweighed “by many multiples” the value of the energy. The cost of these premium schemes continue to be felt by all electricity users in their bills.

While political parties argued over the best way to shift to a lower emissions generation sector, the main pillar that was used to encourage low emissions electricity generation was the Renewable Energy Target (RET).

The RET has been effective at drawing wind and solar generation into the system, but has blurred investment signals for investors. The only policy for years was to support renewable generation, which accelerated the closure of older, firmer generation. And as this dispatchable generation closed it pushed up wholesale prices – again this is what the market was designed to do.

In fact, the ACCC notes that the NEM was designed to have high prices to prompt new investment in new generation. And because there was no emissions policy in place (aside from the RET, which drove just one type of generation) older, dispatchable plants were pushed out and not replaced.

The report suggests that existing generators had not invested and taken advantage of higher spot prices. But there was nothing to invest against – dispatchable generation tends to be long-life assets, so investors had not wanted to commit to generation until they understood what might be coming. They also find it harder to get financing given this carbon risk.

Higher prices were additionally exacerbated by an increase in gas prices, with gas generation becoming the price setter in NEM regions like South Australia with the exit of older, coal-fired plant.

The ACCC has also pointed to retailer discounting and electricity customer confusion as a factor in households paying more for their electricity. There is work underway to look at ways to address this and an acknowledgement from retailers that discounting can be confusing and requires addressing. Already we are seeing fixed price products entering the market. We can expect to see more changes.

If the ACCC’s work has told us anything, it is that getting policy wrong will ultimately lead to higher prices and distortions which, ironically, then require intervention to achieve a change in direction.

The ACCC has provided a rear view mirror look at how we got off track, and it has tried to present a map so we can navigate back onto a firm base.

We still have a way to go until we have smooth running, but all that is needed for consideration has been put forward and now it is up to government at all levels and of all stripes to agree. If they don’t, things will continue to go from bad to worse and we will be discussing another detailed report in the not too distant future.  

So now the hard work begins – implementing the myriad of suggestions on how to reset the electricity market.

CONTACT US

We're not around right now. But you can send us an email and we'll get back to you, asap.

Sending

©2020 Energymagazine. All rights reserved

Log in with your credentials

or    

Forgot your details?

Create Account