Big stick & big picture

I attended the business forum lunch in Sydney in August 2012 when Julia Gillard, in political strife over power prices (conflated by her opponents with her carbon tax), threatened to “take a big stick” to the electricity networks.

Five years later Malcolm Turnbull is wielding the prime ministerial stick with vim in an environment where power prices are much higher than they were in 2012 while his opponents and many in industry pursue him to introduce a carbon energy target.

Just how dangerous it is for political leaders to make promises about electricity bills can be demonstrated by a reminder: in December 2012, Gillard told Australians (after a much-hyped CoAG leaders’ discussion on energy) that a NEM-wide pursuit of household smart meters and time-of-use charges plus a national standard for network reliability would save the mass market $250 a year for each home – a headline promise that has failed to deliver to the tune of billions of dollars for households in aggregate over the past five years.

Five winters of discontent later, Turnbull’s own big stick approach embraces:

  • A legislated ban on networks challenging regulatory revenue decisions through the courts
  • Sooling the Australian Competition & Consumer Commission on to major energy retailers (the villains du jour) for examination of how they frame their charges – and personally hauling retail leaders in twice to demand action to herd householders towards taking up cheaper contracts
  • Running a major review via Alan Finkel’s task force which has seen CoAG commit to 49 recommendations for market change
  • Floating a proposal for the federal government to acquire the assets of Snowy Hydro from Victoria and New South Wales plus making qualified commitment to build “Snowy 2.0”
  • Leading a move to interfere in LNG exports in an effort to force more gas in to the east coast domestic market
  • Taking the most recent headline-hitting step in the form of pressuring AGL Energy to continue operating Liddell power station beyond its closure point of 2022 or to sell it to someone who will.

The mind boggles at what could eventuate politically if this summer does bring further supply problems, especially in Victoria and New South Wales.

Meanwhile Turnbull points to “10 years of colossal policy failure” and adds that the stability and security of east coast electricity supply has been reduced by pursuit of intermittent renewable energy at the expense of 24/7 dispatchable power “without very much thought,” denouncing the “ideology and idiocy” that has brought us to this point.

“There has been too much energy policy debate,” the Prime Minister declared at a mining industry dinner in Canberra, “built on glib slogans, on ideology, with political arguments with no basis in fact or reality.”

His government, he avers, is determined to base its approach on economics and engineering and to pursue a “policy trifecta” of affordable, reliable energy able to meet national carbon emissions reduction goals, embracing solar, wind, gas, hydro power “and, of course, coal.”

Lost in the wash of political brawling and media hyperbole in the past week has been a careful assessment of the wholesale power market situation and the latest Turnbull government thrust on generation by the Australian Energy Council CEO, Matthew Warren, representing generators and energy retailers.

“To manage system reliability and affordability, the market operator may want to buy some time and seek to extend the life of some (coal) generators,” Warren writes on the AEC website. “That may be a sensible and cost-effective solution.”

But, he goes on, “each power station is different – some will be better suited to this (life extension) option than others.” Decisions about whether or not to extend the life of any existing generator will need to be made on a case-by-case basis and as part of a national energy strategy.

Warren adds: “The cost of extending the life of old coal and the terms under which (such plant) would run need to stack up against competing technology solutions to do the same job. The whole system would need to reflect the emissions reductions targets agreed by successive governments.

“If it is not commercially prudent for the owner of a power station to re-invest millions of dollars to extend its life, then who should pay for it? How do we make sure this is the most efficient investment? What are the other options and what would they cost? Would (these extended-life plants) remain in the market or form part of a strategic reserve? In this case, how would (such) plant remain viable?”

These are questions the federal government should address and quite quickly because waving big sticks is not a solution, only a gesture. They are questions that need to be initially considered by economists and engineers before political decisions are made.

However, the space available for decisionmaking is shrinking, given the lead times power projects require (including upgrading existing plants). As the market operator says in its latest review of the NEM, noting the proposed Liddell closure in 2022, “time is of the essence to obtain the appropriate level of resources to support overall system reliability.”

Which raises another question: do the federal government and the CoAG Energy Council believe they have been fully and properly briefed on the complexities of the relationship between adequate system strength and the combination of synchronous and non-synchronous generation in the NEM, and especially the three southern mainland States? Back in April I recall CSIRO making the point that effective market-based approaches need to be developed to provide assurance of capacity, balancing and ancillary services important to system security. This is an issue that extends to the meshing of high voltage transmission and generation across the NEM, bringing in the links with Tasmania and Queensland.

Can CoAG be sure that what is being pursued politically (in Canberra and the States) will provide the right underpinning for the strength of the grid (and therefore ultimately the cost of the power supply)? Is this a task for the new Energy Security Board, a product of the Finkel review, and when might governments have advice?

The challenge here is particularly potent for the federal government. Its task is to hold the ring that is the NEM for the benefit of the community and the economy as a whole. States, as they keep demonstrating, will always pursue their self interest regardless of what Paul Keating dubbed “the big picture.” As the gas imbroglio, a core part of the issues of power security and cost, continues to demonstrate, State (and territory) political leaders will also ditch the interests of their own communities to maintain a grip on government in an environment where green activism and the social media carry so much clout in key seats, as witness the unscientific bans on new gas development.

Turnbull is right to say that a problem – the “energy crisis” – years in the making will take years to resolve but there also needs to be recognition that each additional misstep now further erodes our capacity to climb out of the power pit we are in.

The Australian’s Paul Kelly may well be right to say this past weekend that it is the credibility of Turnbull’s energy policy for the long run that will decide whether the issue can work to the Coalition’s advantage at the next federal election – but the temptation is always there for leaders to reach for the “big stick” for political gain rather than to ensure their policy’s foundations are strong.

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