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Navigating Australia’s Energy Policy


Sarah Fung

By

August 2nd, 2018


Australia’s energy market has long dominated media headlines. Sarah Fung discusses a number of key reports released this year which make short, medium, and long-term recommendations on what investments need to made to ensure the stability and sustainability of the energy market.


 Navigating Australia’s energy policy

Energy prices, seemingly always on the rise, and climate policy continue to dominate headlines. These issues have become more topical with the release of an array of reports and policy recommendations by the government and its agencies. Beneath this sea of recommendations and acronyms is the message that reliability of energy supply urgently requires focus. Investments need to be made into transitional energy, like gas, and more cost-effective mechanisms are needed to direct investment into renewable energy.

Background

To understand the problems and recommendations we need to understand the structure of Australia’s energy market.  A large part of Australia’s power is operated through the National Energy Market (NEM): the electricity grid that covers Queensland, NSW, ACT, South Australia, Victoria and Tasmania. This wholesale market connects power between electricity generators, distributors and retailers. Customers typically purchase energy through retailers who manage customers’ energy purchases through the NEM1.

Over the 2016/17 year, 77% of Australia’s energy was generated by coal, 9% by gas and 14% by renewable or other energy (these numbers do not include rooftop solar)1. The NEM is a ‘spot market’ where supply and demand is matched with power being generated and dispatched simultaneously. The Australian Energy Market Operator (AEMO) is responsible for monitoring electricity supply, ensuring demand is met and that the cheapest generator supplies demand, this ensures that cost efficiency is maximised.

ACCC report: the retail and wholesale market

The ACCC recently released their Retail Electricity Pricing Inquiry reviewing the retail electricity market. The report focused on how consumer affordability and market competitiveness could be increased in the energy generation and retail markets.

A key finding was that consumers have faced a real increase of 35% in their electricity bills, because of heightened network infrastructure and wholesale electricity costs2. In the wholesale market, this has been due to increased market concentration caused by: closures, retirements and acquisitions of energy generation assets. This has been exacerbated by a poorly planned transition away from coal-powered technologies with many coal-powered generators being retired as they reach the end of their productive lifetime.  There has been little incentive and time for energy suppliers to respond to subsequent shortfalls in capacity through adequate investment in less carbon-intensive technologies like gas and renewables.

These issues are further exacerbated by significant shortages in competitively priced gas, which is the favoured replacement for coal in the short term. Furthermore, excess spending on network infrastructure to distribute energy from wholesale to retail customers has led to increased costs passed on to the customer that outweighed customers’ willingness to pay for reliable energy2.

The ACCC, therefore, made the recommendation to reduce market concentration by preventing acquisitions that result in more than twenty per cent control of market generation capacity. To improve consumer affordability, it also recommended lowering supply chain costs by providing rebates to offset the over-investment in network infrastructure. Additionally, it recommended that to increase the simplicity of retail electricity pricing for consumers, identified as a cost inflator for incumbent customers2.

AEMO report: the wholesale market

The AEMO also recently released their Integrated System Plan: a strategic plan for the next twenty years for the NEM focusing on the wholesale market. Its findings recommended the flattening of grid demand by increasing the deployment of rooftop photovoltaic solar and local energy storage. The current bedrock of low-cost reliable energy is approaching the end of their technical lives, threatening almost thirty per cent of the current energy supply3. The report further highlighted the falling cost of new renewable energy as storage technologies improve and distributed energy resources, like gas and hydro emerge as key to a low cost and reliable energy future3.

The report’s analysis led to some short, medium and long-term recommendations. In the short term, it was recommended that low-cost existing energy sources should be maximised, such as coal, while investing in renewable resources to replace retiring resources and stabilise energy security3. In the medium term, the recommendations were to facilitate the support of Renewable Energy Zones (REZs) to improve energy connectivity between regions and provide greater access to storage3. In the long term, this was to ensure the operational feasibility of REZs and reliability of the grid3.

Verdict

These reports’ findings align with the centrepiece of the current government’s proposed energy policy – the National Energy Guarantee. They provide a specific and supporting framework for the Coalition’s proposed implementation of The National Energy Gaurantee4. There has, however, been critiques of the proposed recommendations because they lack technology neutrality and seem to be biased towards certain industries, namely coal and gas. The AEMO has faced criticism for its recommendations that there should be an increase in REZ’s investment. If an increase in investment REZ’s is not closely monitored and delivered, it risks creating excess network infrastructure expenditure that will ultimately reduce consumer affordability.

The latest delivery of reports and policies surrounding energy reflects the debate surrounding Australia’s energy policy. It is a complex area with numerous stakeholders in play. Many market specific issues need to be considered such as: the industry’s natural monopoly, its need for high investment, government intervention, and the looming threat of climate change. However, the underlying consensus and direction of these latest reports demonstrate that energy policy and analysis may gradually be reaching an agreement.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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