Scott Morrison’s energy policy explained: The good, the bad and the ugly

Prime Minister Scott Morrison and Energy Minister Angus Taylor spent a month or two figuring out what their “big stick” policies might mean in practice.

Then in a flurry last Tuesday they set out their thinking on the reliability obligation, the default offer for retail power, US-style trust-busting powers and government-backed investment mechanisms skewed towards coal.

The shift away from policy aimed at sharply cutting carbon dioxide emissions and towards “fair dinkum” power evident since the downfall of former prime minister Malcolm Turnbull remains intact.

If anything it is more pronounced. The default price, underwriting and break-up powers described by Taylor last week go beyond the Australian Competition and Consumer Commission’s recommendations in its retail electricity report.

Carbon emissions are the missing leg of the three-legged stool that EnergyAustralia chief executive Catherine Tanna told The Australian Financial Review‘s National Energy Summit would all be essential for companies to invest in the generation that is needed for prices to fall and supply to be reliable.

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Reliability obligation

Morrison and Taylor’s first order of business was to junk the emissions obligation from the National Energy Guarantee. But it isn’t clear that they ever intended to junk the reliability obligation – the other arm of the NEG.

The reliability obligation requires energy retailers to procure enough “firm” dispatchable power to meet their customers’ needs, where a gap in supply identified by the Australian Energy Market Operator isn’t filled by the market a year out.

Energy Security Board chair Kerry Schott and deputy chair Clare Savage lobbied publicly and privately for it to proceed, and Morrison and Taylor embraced it.

It was a bridge too far for the Victorian Labor government to agree to it in the shadow of an election in which the Greens will attack them from the environmental left.

But on Friday energy ministers asked the ESB to rewrite the NEG bill that it drafted for the Council of Australian Government’s Energy Council to adopt in August – just before the leadership change – to excise the emissions obligation.

The goal is that the energy ministers will adopt the reliability obligation at their December meeting, and that it can be implemented from July 1, 2019.

Ministers also asked the ESB to start work on a long-term “market framework to support reliability … from the mid-2020s as the market transitions”.

The energy market bodies that work under the ESB are working on a series of initiatives apart from the reliability obligation – day-ahead markets, strategic reserves, a tariff for wholesale “demand response”, and an Integrated System Plan for transmission and distribution.

These are all aimed at shoring up the grid as the mix shifts to cleaner energy. But there is tension over how many new mechanisms they can impose upon the “energy only” National Electricity Market without impairing its efficiency as a market by deterring companies from undertaking stand-alone investments.

Morrison and Taylor’s interventions add to that tension. The long-term market framework project aims to get on top of that.

Default offer

The government has asked the Australian Energy Regulator to come up with a reference bill for typical customers in each NEM region by April, for implementation by July 1.

The ACCC recommended a default market offer because it found that energy companies set artificially high “standing offers” and were too slow to move customers who didn’t shop around and were ripped off by these offers to a better deal.

This “loyalty tax” is often paid by customers who are elderly or otherwise ill-equipped to get the best deal, and ACCC chair Rod Sims and Morrison and Taylor are determined to eliminate it.

But typical annual savings will not be nearly as great as the savings for households moving from standing offers to market offers claimed by the government – from $369 in south-east Queensland and $411 in NSW to $652 in Victoria and an eye-popping $832 in South Australia.

The ACCC found typical savings for households moving from standing offers to market offers range from $105-$106 in NSW and south-east Queensland, to $140 in South Australia and $140 in Victoria.

These savings could be smaller by the time the default offer gets through COAG’s processes. On Friday ministers asked the Australian Energy Market Commission to review the impact of the default offer on “competition issues and customer impacts” in Queensland, NSW, ACT and South Australia. (Western Australia, Victoria and Tasmania have state-based retail market regulation.)

If the default offer is set too low it could make it harder for small, new retailers to compete because they have higher costs. Queensland has the lowest retail margins and doesn’t want the default offer to fatten them up.

Breaking up is hard

Morrison and Taylor want a last-resort power to break up large vertically integrated energy companies if they don’t play ball and lower their default offers quickly.

Energy companies are skittish about this. The ACCC didn’t advocate it and neither has any of the competition policy reports of the past 20 years – Harper, Dawson or Hilmer.

Break-up powers exist in the US, UK and Europe but competition experts here argue it is virtually impossible to predict if the separated bits will be viable on their own; if not, the move could reduce rather than increase competition.

Experts who favour it – such as Allan Fels – say it should be a general power supervised by the court and not aimed at exacting retribution from a specific, unpopular industry such as energy.

Government-backed power

The ACCC recommended a tightly defined, technology-neutral mechanism for the government to underwrite firm “new” generation that has customers for five years but can’t attract competitive finance.

The ACCC mechanism was only for years six to 15 and pitched at a low $45-$50 per megawatt hour, designed to underwrite finance but not equity risk.

But the government’s measures are much broader, exacerbating fears that they could have a chilling effect on stand-alone investment in new generation.

They propose to back by a variety of means any firm technology, including upgrades and “life extensions” to existing generation, without necessarily limiting the support in price or duration. The government is rushing to identify projects worth backing by early next year – a process which typically takes longer than a few months – ahead of the election.

Plant life extensions are just what coal-power owners such as Trevor St Baker want. That – and Taylor musing about indemnifying coal plant against a future carbon price – deepened suspicion that Taylor and Morrison are bent on boosting coal power.

Labor will oppose divestment powers but has also indicated it will honour any contracts entered into by the Morrison government, so as not to raise “sovereign risk”.

It has not shown its hand on an indemnity against a future carbon price, which would defeat its purpose, but presumably sovereign risk-aversion applies here too.

Emissions

Building more coal capacity would also make it almost impossible for the government to achieve the 26-28 per cent target it agreed at the Paris climate talks. Morrison and Taylor say Australia will meet its Paris obligations “in a canter”.

This looks true for the electricity sector, which is decarbonising thanks to the boom in wind and solar energy, if it is only required to deliver pro rata emissions cuts.

But it isn’t true of the economy as a whole. Official government projections show emissions increasing since 2014 and until 2030. CSIRO reported to the government last year that the electricity sector would have to cut its emissions by 52-70 per cent for the economy as a whole to hit the Paris target, because of the difficulty of cutting emissions in agriculture, transport and heavy industry.