The Liberal cabinet have officially dumped the contentious National Energy Guarantee (NEG), but Scott Morrison and new Energy Minister Angus Taylor are now faced with a policy vacuum which they urgently need to address.
The combination of modest wages growth and higher electricity prices are hurting Australian households, who have been forced to endure a 56 per cent increase in real terms on their electricity bills over the last decade. The NEG, formulated to address the “energy trilemma” of security, reliability and affordability on a national scale (excluding WA and the NT), was the Turnbull government’s answer to the crisis, but ultimately sparked its demise.
In their rejection of the defunct NEG, the new Ministry stressed that emissions reductions have been stripped away from the energy portfolio. Taylor instead has revealed a renewed focus on affordability for households and businesses, and hopes to be recognised as “the Minister for reducing electricity prices”.
A policy approach with affordability as the primary goal should come as welcome news for consumers. But how did a country with such abundant natural resources get itself into such a dire position in the first place?
The short answer: through decades of continuous government expansion and interference in the energy sector. At all stages of the supply chain, successive governments have made decisions which have set the National Electricity Market (NEM) on the wrong course.
Solar tariff schemes
State governments nationwide have implemented excessively generous solar feed-in tariff schemes. The subsidy paid to consumers for the installation of and energy produced by their systems outweighs the value of the electricity by many multiples. The ACCC has found that solar customers are paying an average of $538 less than non-solar customers, while the cost of the scheme is spread across all electricity users.
Renewable Energy Targets (RETs)
Renewable energy targets are the primary policy instrument for encouraging the uptake of low-emissions electricity generation. Australia taxpayers currently finance a plethora of emissions reduction initiatives domestically and globally, but these are also accompanied by a number of State-based RETs. In Victoria, South Australia, Queensland and Tasmania, these State-based RETs commit to renewable generation above federal schemes, adding another layer of complexity and distortions to electricity markets.
By 2030, Federal renewable subsidies alone are estimated to have cost the taxpayer more than $60 billion, yet renewable energy currently accounts for just 15 per cent of our total electricity generation. Moreover, Australia produces just 1.8 per cent of greenhouse gas emissions globally. Despite our government’s drive to subsidise and incentivise renewables, Australia’s current emissions reduction efforts have reduced global emissions by an average of just 0.0004 per cent per year since 2000.
Gas exploration ban
The availability of gas at a lower price is being stifled by the volume of LNG exports from the East Coast combined with a government ban on on-shore gas exploration and development. This comes at a time when the recent exit of two large coal generators in South Australia and Victoria accentuates the importance of gas-powered generation for energy security and affordability.
Pricing structures by electricity retailers are often difficult for customers to understand, and are a factor in the poor outcomes consumers are currently experiencing. Retailers often benefit from large percentages of the customer base being disengaged from the market and remaining on high-priced standing offers. Consumers who have been active in the market, however, have been the beneficiaries of competition. As a result, retailers are able to make very attractive offers to retain customers, effectively through cross-subsidies paid by their inactive customer base.
In such an environment, smaller retailers and new entrants compete only for engaged consumers where the market is low-margin and price sensitive. The current competitive landscape in the retail electricity sector therefore does not allow for competition to drive efficiency and innovation in the market.
So what exactly should new Energy Minister Angus Taylor, who has asserted his primary goal as minister is to reduce power prices, be doing to fix our overly regulated and complex electricity sector?
According to Taylor:
Poorly conceived interventions in the past leave us no choice but to make interventions if we’re going to get things back on track quickly.
But pursuing more interventionist policies to rectify previous government intervention is not the answer. Repeated market intrusions from both parties at the state and federal level are the reason Australia has an energy crisis in the first place. Nevertheless, policymakers can resolve this with a number of reforms.
Abolishing renewable energy targets and subsidies
Achievement of the various state and federal RETs, as well as the subsidisation of renewables through feed-in tariffs will not address climate change, and have resulted in higher prices while decreasing energy security. As such, policies which favour renewables over other generation sources should be abolished entirely.
The optimal mix of energy generation should instead be decided through a competitive, market-based approach – where companies respond to the needs of consumers and businesses rather than interest groups. Carbon conscious households and businesses who endorse renewable energy can then instead choose to purchase energy from zero-emissions sources over cheaper alternatives at a premium.
Such a model would also foster a more attractive environment for investment in commercially viable renewables and battery technology, a sector currently being distorted by interventionist government policies.
Liberalising all generation sources
Lifting the ban on gas exploration and development is vital to the future security of Australia’s baseload electricity supply, and will result in significant downward pressure on prices in the long term.
But Australia remains politically disengaged from another source of energy we possess an abundant supply of – uranium. Nuclear energy is a readily deployable, carbon-neutral energy source. It’s endorsed by the Minerals Council of Australia, but it consistently remains outside the sphere of political debates on energy. Lifting the moratorium on nuclear power will allow market driven responses to provide cheap, clean and reliable baseload supply.
Fostering dynamic and competitive retail markets
The UK government has recently assisted in moving disengaged electricity users on poor value default electricity deals onto collective switching arrangements, and has had extremely positive outcomes. The campaign was run to recruit consumers into an aggregated block to achieve buying power and saved each household an average of $550 AUD on their existing contracts.
Moreover, legislating measures to remove “noise” for consumers when trying to understand complex contracts and offers from retailers can reduce information asymmetries between the consumer and retailer, and result in better informed purchasing decisions.
For the past decade, Australia’s energy policies have been overly complex and confusing, and have changed seemingly as regularly as our Prime Ministers. Bringing power prices down is not as simple and straightforward as new Energy Minister Angus Taylor asserts, and certainly will not be achieved by further government intervention in the electricity market. Investors have little confidence in our NEM, and are desperately seeking a clearer and more consistent energy policy.
Scott Morrison and his “Minister for reducing electricity prices” have an opportunity to restore security, reliability and affordability to the NEM following the abolition of the NEG, and establish a clear energy policy which will benefit all Australians. But they must see that another layer of poorly executed fiscal intervention in the sector is not the answer.
The heavy handed government involvement in the NEM we’ve become accustomed to must be halted, and a market-based approach needs to be adopted. Not only will it provide the most economically efficient outcomes, but also allows for greater individual choice for Australian households and businesses.
Economic Research Intern and Mannkal Scholar from Perth, Western Australia. Josh studies economics, and aims to work in the financial services sector.