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A report by Frontier Economics has found that Australian politicians have failed to manage the challenge of reducing greenhouse gas emissions from the electricity generation sector.

The report, produced for the Australian Energy Council, details how policy failure has deteriorated both the security of the power system and the market investment environment, as opposed to the industry’s reaction to the market conditions created by these failed policies.

The reports says there are two main aspects to this policy failure:

  • The failure to appreciate that pursuit of emissions reduction from the electricity sector would fundamentally alter the way the power system functioned. This failure to recognise the gravity of the changes required to meet the emission reduction challenge has meant that the constant and incoherent tinkering with the energy market has exposed energy consumers to unnecessarily high costs and deteriorating energy security.
  • The rejection by various governments and political parties of all persuasions of emission reduction schemes that properly integrate emission reduction arrangements into the energy market.

In combination, these policy failures have resulted in a power system operating at its physical limits. In this environment, where generation capacity is scarce, prices reflect this outcome.

The report says that this price outcome is what the National Electricity Market was designed by the government to do under these circumstances. Instead of trying to address the root cause of the problems resulting in these price and power security outcomes, the Federal Government has drafted legislation to prohibit three types of electricity business conduct the government blames for the poor consumer outcomes:

1) Failure of electricity retailers to pass-on reductions in supply chain costs to residential and small business customers through lower retail tariffs (Retail pricing prohibition).

2) Failure of electricity generators to offer, or to offer on reasonable terms, financial contracts to potential counterparties for the purpose of substantially lessening competition in any electricity market (Electricity financial contract liquidity prohibition).

3) Electricity businesses bid or fail to bid in the electricity spot market in a way that is fraudulent, dishonest or in bad faith and/or for the purpose of distorting or manipulating prices in the spot market (Electricity spot market prohibition – base case and aggravated case).

The report says that collectively, these new government powers to micro-manage the industry to disguise market outcomes that are borne of government policy failure will create a diabolical investment environment, the inevitable result of which will be taxpayers funding and underwriting all future investments.

To conclude, the report says, Given the sheer magnitude of the future investment required to achieve Australia’s obligations under the Paris Agreement, the States had better start making substantial changes to their public finances to pay for these costs, including determining which taxes to raise and/or which spending programs to cut.’

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