Australians should be deeply concerned about the signals coming from the Turnbull government since this month’s release of Chief Scientist Alan Finkel’s landmark report on the future of Australia’s electricity system.
On Tuesday the government announced a new package of policies for the electricity sector. This includes asking the Australian Energy Market Operator (AEMO) to look at “how to ensure that new continuous dispatchable power is provided, including what support is needed to promote new investment”.
Effectively, the government is asking AEMO to identify whether Australia has enough “baseload” generation and, if not, how the government should go about getting more.
In simple terms this marks a further reversion to central planning, either purposely by stealth, or accidentally through ignorance. The rushed nature of the announcement, without any forewarning, suggests the latter.
Going to plan?
Central planning can provide politicians with the illusion of certainty and control. When governments don’t see the outcomes they want in the market – in this case reliable and affordable energy (and, for some politicians, new coal-fired power stations) – taking command offers them the opportunity to deliver those outcomes.
But this presumes that governments know better than the market. History tells us they don’t. The result is often expensive and excessive building of new generation that does not guarantee reliable supply.
Some see this policy as the government walking away from its obligation to reduce emissions in the electricity sector. Others believe it signals success for the Minerals Council Australia (MCA) in its push to have the government build new coal-fired power stations.
The MCA has reportedly urged the cabinet to embrace a “reverse auction” scheme instead of the Clean Energy Target (CET) recommended by Finkel. Under a reverse auction scheme, the government would tender for new electricity generation. The lowest bid wins, and the winning bidder would receive a contract guaranteeing revenue for the electricity it generates.
Certainly, if the government were to choose a mechanism to procure new electricity generation, reverse auctions look like the obvious policy. Such auctions are common; indeed, the federal government already uses them to buy emissions reductions from a range of economic sectors under the Emissions Reduction Fund. The ACT government also uses them to procure large-scale renewable energy.
But reverse auctions are generally not used as a central climate change policy. Instead, they operate alongside emissions-reduction polices to encourage the development of specific types of generation technologies. In Germany, for example, reverse auctions are being used to incentivise new wind generation. The MCA will doubtless be hoping that the auctions specifically call for new, cleaner coal technologies.
Let’s be clear. The government’s announcement does not go as far as the MCA’s proposal. AEMO appears to have the responsibility for determining whether and how new electricity generation will be bought to market, and the government has not rejected Finkel’s CET proposal.
But nor is the announcement simply the government pressing forward with the “strategic reserve” suggested by Finkel. A strategic reserve is an insurance policy, ensuring enough backup generation is available in case something goes wrong in the market. Prime Minister Malcolm Turnbull’s announcement on Tuesday indicates that new generation will not simply be built as backup, but will play an active role in the market. After all, baseload generation is useless if it sits there and does nothing.
Proceed with caution
There are numerous reasons to be concerned about this announcement. It is not clear how such a proposal would work with any emissions-reduction scheme such as a CET. Providing simultaneous incentives for low-emissions generation through a CET and for “baseload” generation through a separate scheme sounds like a recipe for an expensive, unreliable system. And it would make meeting Australia’s emissions targets more complex.
Nor is it clear that Australia even needs more “baseload” generation at the moment. Signals in the electricity market suggest that if Australia needs anything it is flexible generation that can respond to sudden changes in demand and supply. This is not coal; it is gas, or perhaps battery storage.
Most of all, the announcement follows a broader trend of increasing government involvement in the electricity market. Whether it is the Commonwealth with its proposed Snowy 2.0 scheme, South Australia’s plan to build a state-owned gas power station, or Queensland’s manipulation of wholesale prices, electricity is now government business.
Anyone who thought the Finkel Review might bring some much-needed policy certainty to the electricity market is being rapidly disabused of that idea. Instead of fostering investor confidence, the government has just telegraphed the fact that it is prepared to intervene directly in the market. Any risk-averse investor will run away as fast as they can.
Once government starts intervening in the market, it will have to keep doing so. If you listen closely, you can hear the sound of two decades of market primacy in the electricity sector being flushed down the toilet.