Present tense

This weekend I have been reading an English newspaper report on a leading football club manager complaining about “the knee-jerk British society in which the heat of the moment is all-consuming, the weight of the present is the only thing that matters and longer-term consequences are an afterthought.” How apt that is as a description of Australian society, too, and how often this effect plays out in our policymaking, fuelled by the popular media and, of course, social media – not least in recent times for energy,

In this “heat of the moment” environment the quite important latest report of the Productivity Commission has flickered briefly in our public discourse and then focus rushed on to other matters.

There are a number of areas where the commission’s review of Australian productivity deserves close attention. Energy is one of them. The PC’s acerbic perspective on the topic received brief media mention and is already seemingly lost under the “weight of the present.” After all, it is already almost week-old news………

The commission, warning that “the costs of getting the energy system wrong are just too large to contemplate,” calls for government co-operation on reforming the NEM to be a priority and sums up its recommendations like this:

Australian governments must:

› stop the piecemeal and stop-start approach to emission reduction and adopt a proper vehicle for reducing carbon emissions that puts a single effective price on carbon

› clearly articulate the acceptable trade-off between reliability and cost

› achieve more efficient pricing, by ensuring that prices paid to producers reflect any additional costs they impose on the system (such as frequency management), that access to the grid, rather than just use, can be priced (so people using the grid as a back-up pay for this service) and that prices to consumers reflect the nature of the demand that they require from the system

› provide clear strategic direction to the expert bodies and a clearer accountability for outcomes

› let the market regulators and participants get on with their work, holding them to account for the outcomes

› ensure that short-term fixes are technologically neutral and move the system toward a sustainable long-run outcome.

What prospect is there that CoAG leaders meeting next month will embrace this advice in full and set in train steps to implement it? In a word, zero.

Federal, State and Territory governments are deep in their energy/carbon war bunkers and “longer-term consequences are an afterthought.”

As Peter Harris, the PC chairman, puts it (I’m quoting from a report in The Australian), CoAG is “the place where good policy goes to die.”

In its commentary on energy (at page 159 of a 255-page review), the Productivity Commission says: “With electricity and gas making up 2.5 per cent of GDP, and being an essential input for all industries, the cost of failure to resolve the problems will only rise in the future. It is too difficult to put a price tag on getting energy policy right, in large part as the counterfactual — what would happen if we continue to try to muddle through without clarity on carbon pricing — is impossible to define. Nonetheless, the returns from (our proposed) reforms would be worth many billions.”

With a nod to the Finkel report, the commission adds “The issues affecting the sector are complex and their solution requires considerable technical expertise as well as good regulatory and institutional design. This requires solving the immediate problems, but also needs to be mindful of transforming the energy system so that it will deliver for consumers in the long as well as the short run.”

The PC calls on governments (ie CoAG) to: “restore national agreement on simple, clear objectives — that recognise the inherent tensions between prices (costs), reliability and emissions and provide guidance on acceptable trade-offs — then leave the field to expert implementation.” It adds: “determine which institutions do what — then let them get on with their work, holding them to account for their stated responsibilities.”

With respect to the last point, it also says: “The core of the regulatory architecture is three expert bodies — the Australian Energy Market Commission, the Australian Energy Regulator and the Australian Energy Market Operator. They respectively develop policy with governments, regulate and run the system. In theory, such institutions have the advantage for governments that they can moderate the inevitable political pressures governments face to act spontaneously given popular concerns. But in practice, insufficient use has been made of the independent expertise and public explanations of those three bodies when forming energy policy.”

Meanwhile, the media, having seized briefly in the past week on what is the most political of the commission’s energy comments (pricing carbon), have skittered away to other, momentarily more juicy topics.

Included in what the PC says is an observation that government agreement on 49 of Finkel’s 50 recommendations “is not a pass mark.” – and I add that between the CoAG Energy Council lip service and implementation of the 49 steps still falls a very large shadow.

The commission also declares: “A broadly accepted commitment on emission reduction targets over the investment profile for electricity assets is essential to give firms sufficient confidence to make the investments needed to deliver electricity at the lowest possible cost and the right levels of reliability for users over the next few decades.”

It says: ” It is a principle of every properly-designed pricing system that the charge should reflect its harms. Thus carbon emission intensity is necessarily a matter to be reflected in the regulated pricing system. The compromises necessary to do this are much-debated, but what should be accepted is that low carbon technologies (such as solar and wind generation) are inherently part of the properly-priced future.”

It buys in to the seemingly endless political fighting over a renewable energy target in this way: “The Commission has previously criticised the use of renewable energy targets (RET) on the basis that they are not technology neutral, and so are distortionary compared with the policy of putting a price on carbon. But we have also acknowledged they have been an important tool in delivering on emissions reduction commitments.

“Finkel’s recommendation for a low emission energy target (LET) would be an improvement on the RET. It would better reward lower emitters, and depending on its detailed design, would move Australia’s energy market closer to the outcomes that would arise from full carbon pricing.

“The critical point is that while there are various ways of placing prices on carbon, establishing an agreement on one of them, even if not perfect, provides a guide for investment toward the lowest cost emission reduction options. These costs must include any additional cost imposed on the network by choice of any particular technology.

“The RET is specified in terms of gigawatt hours of renewable electricity and not in terms of emissions. It was formulated and operates independently of wholesale electricity markets and is not explicitly incorporated into the spot price. This has created problems as it effectively pushes the cost of intermittency and frequency management onto the purchasers of electricity rather than onto the producers of renewable energy.

“While the low marginal cost of renewable generation means that these producers can sell into the grid when they were producing (as they would have the lowest priced bid), they do not have to pay for the reserve capacity of other generators that are needed when renewable production falls relative to demand. This may be a problem with any certificate-based scheme based on the production rather than the delivery of electricity. Prices need to be able to be based on not just when the electricity is delivered (by bidding into the spot market for five minute contracts), but also its availability.”

Coincidently, the commission’s review has paralleled delivery of a draft electricity market report to the UK government by Oxford professor Dieter Helm (their version of the Finkel report). In it, Helm comments: “The scale of multiple interventions in the electricity market is now so great that few if any could even list them all and their interactions are poorly understood. Complexity is itself a major cause of rising costs and tinkering with policies and regulations is unlikely to reduce costs. Indeed, each successive intervention layers on new costs and unintended consequences. It should be a central aim of government to radically simplify the interventions and to get government back out of many of its current detailed roles.”

Quite so.

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