Investors’ lament

One of the most noticeable aspects of my cherry-picking trek through the jungle of submissions to the Finkel task force is that the investment natives are not just restless – they are deeply unhappy (a perspective reinforced today by the head of the Business Council warning against governments taking over the energy market — a reference to recent developments — and reminding politicians that “we still have to have strong private enterprise making investments.”)

Supplier and user concerns are too many and varied to canvass in any one post on this site but a submission I have been scanning at the weekend serves as a good example of the investment tribe’s angst.

It has been sent in to Finkel by Bobbi Lambright, managing director of ATCO Australia, which owns much of the West Australian gas reticulation network and has interests in gas-fired power stations in Karratha (WA) and Adelaide. As with all the submissions about which I write, it covers far wider ground than can be dealt with here. My particular focus today is how Lambright’s paper sketches the investor mindset. (ATCO is headquartered in Calgary and is one of Canada’s largest energy companies.)

A capsule (in my words): The south-east Australian gas and electricity markets present enormous uncertainty. It is difficult to estimate the likely level and volatility of future prices – which makes it difficult to determine whether to invest, for example, to increase the production of the Osborne plant in South Australia or to improve its flexibility. However, this risk is well understood by businesses such as ATCO as is the longer-term issue of technological change; the greater barriers are the “constant state of flux” driven by uncoordinated policies between our governments, the lack of a coherent approach to abatement strategy, “policy based on crisis management rather than long-term goals” plus the “failure of NEM governance arrangements,” not least an inability to develop rules to place technologies on an equal footing (“by properly valuing them in terms of the value they generate or the costs they impose”) and subsidies driving further uneconomic expansion of renewable energy.

And the company adds pointedly: “What are investors such as ATCO to make of investing in a country uniquely endowed with gas reserves that cannot sustain policies that translate those endowments in to increased supply and lower prices?”

This is quite a mouthful but it shouldn’t be glossed over. Other investors will express their concerns differently or with different emphasis, but directionally it should be a weather vane for Turnbull and the premiers, Frydenberg and the energy ministers, seven east coast cabinets and federal Labor’s leadership.

It points to a lesson we should have learned over and over again since the 1970s about the resource sector but don’t seem to have done: if you pursue policy like monkeys writing Shakespeare you will end up scaring off key members of the investment community and dragging the country in to economic canyons from which it is difficult and costly to escape.

One of our abiding sins is that we are so well off here in terms of the breadth and value of our natural resources that “she’ll be right” is too often a guiding political principle. Except that, so far as power supply is concerned, as we have been seeing lately, she can just as easily be wrong and the consequences are not trivial.

Lambright and her business tell Finkel and his colleagues: “From ATCO’s perspective, the need to place the NEM and broader energy policy on to a stable footing cannot be overstated.”

They are not Robinson Crusoe in this respect. See many other submissions (to Finkel and other inquiries past and present). See and hear the constant laments in the serious business media.

There are a couple of other aspects of the ATCO submission that are worth underscoring (I said I was cherry picking).

One is this: “While technology has changed rapidly, we sit at something of a hiatus (because) emerging technologies – such as storage, intelligent networks and more sophisticated demand responsiveness – are not yet available at low enough costs with sufficient scale and reliability to ensure a fully secure and reliable low emission power system.”

That is something our mainstream political leaders in particular should read slowly and carefully several times or at least until the stars in so many of their eyes start to dim.

ATCO also says that it believes one of the most difficult issues faced by the task force is to ensure that, in seeking a rapid restoration of secure and reliable east coast power supply, it does not recommend changes to market arrangements that “are premised on a fixed view of the nature of the market that will best meet the long-term interests of customers.”

The submission adds: “During periods of technological and political flux, it is difficult to predict the best future mode of supply and the industry structure most likely to provide it.”

The company’s judgment on the NEM includes this: “The market has failed to adapt to the changing technological landscape (and to subsidies and policies bringing it about) because core services that are essential to (its) secure and reliable operation are not priced at all or are improperly priced.”

And it also says: “The governance arrangements for the NEM have proven inadequate for ensuring an orderly transition in the face of technological and policy change. This is, in part, due to initial design choices that are now not appropriate (such as the structure of network pricing) and the way in which proposed rule changes are raised, evaluated and (where necessary) put in place.”

It is unfortunate, declares ATCO, “that more radical change only comes about in response to a clear market crisis,” adding that “while the NEM and its governance arrangements are problematic, there is no doubt that the lack of coordination across renewable and carbon reduction policies has unmasked these faults.”

And one last point (at least in this post) that seems to me to need far greater focus in the public debate: lack of coordination in renewables policymaking, ATCO argues, has resulted in a lack of clarity about the true level of green subsidies. “It is, in practice, much higher than overt subsidies because renewables do not pay to correct the deterioration in security and reliability they engender, compounded by the withdrawal of investor capital due to increasing uncertainty.”

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