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Power play: how governments can better direct Australia’s electricity market

Energy Energy pricing Energy industries Coal-fired power Power resources Electricity demand Australia
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Governments feel compelled to respond when electricity supply is lost or when prices are too high. But ad hoc and uncoordinated actions, which may provide short-term relief, usually makes things worse in the long run. Recent and current government actions imperil the success of Australia’s great energy transition. This report shows that there are better ways to respond.

Intervention in the energy market by the Commonwealth, state, and territory governments has become de rigueur in recent years. Governments have increasingly responded to price shocks or reliability problems by building or subsidising new generation assets.

The South Australian Government started the trend with its rushed and expensive investment in diesel generation. The Federal Government has followed suit with its Snowy 2.0 pumped hydro project, and its program to underwrite new generation investment. This approach of ‘picking winners’ ultimately just crowds out other investments, many of which are better able to deliver what the market needs.

A range of other policies further chill investment. The Federal Government’s Liddell closure taskforce deters the investment needed to replace this ageing coal power station. Retail price caps, state and federal, and the Federal Government’s ‘big stick’ policy increase risks for investors, causing them to hesitate.

If governments show restraint and pull back from these ad hoc interventions, investors can deliver new generation capacity. Governments can encourage investment through the current transition phase by implementing transparent and rule-based policies.

Transmission investment is slow, often taking six or seven years. Governments can help by allowing networks to recover the cost of early planning works, even if the project does not ultimately proceed.

Managing coal closures is also critical – consumers cannot afford another sudden closure as occurred with the Hazelwood power station in 2017. But existing rules to prevent this are likely to be ineffective. We propose that coal generators be required to put funds into escrow to ensure they comply with closure dates that they nominate in advance, to protect consumers and drive timely replacement investment.

More than 20 years ago, Australian governments created an electricity market and established market agencies to deliver reliable, affordable power. Like any other tool, markets need to be maintained to make sure they still work well. Governments are appropriately reviewing the design of the National Electricity Market to assess whether it remains fit-for-purpose. Governments should similarly review the roles of the market agencies, particularly that of the Energy Security Board.

Governments must fix up the climate policy mess they have created. The Federal Government has considered and rejected five potential climate policies over the past decade, and state governments have filled the resulting vacuum with uncoordinated and chaotic renewable energy targets. If the Federal Government is unwilling to provide clarity, the states should do so through a state-based, but nationally-consistent, emissions reduction policy.

If the private sector is second-guessing possible government intervention, the outcome will be higher prices and lower reliability. It is in governments’ interests to ensure a well-regulated market delivers efficient investment and robust competition. The ultimate beneficiaries will be consumers, who will get what they expect, want, and deserve – affordable, reliable, and cleaner power.

Related Information

Grattan Institute suggests government should drop its power play on energy (aud… https://www.abc.net.au/radio/programs/am/government-should-drop-its-power-play-…

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Grattan Institute Report No. 2019-09