Garnaut fails to understand the real issues when it comes to electricity

Investment of this magnitude will not happen by itself; it will require the energy industry to have the confidence to commit to very large investments that can generate returns over the lifetime of the assets (which may run to several decades).

Australia will need to attract overseas debt and equity as well as domestic investment if it is to find the capital to meet this investment task; the sector is internationally exposed in this regard. Given the ubiquitous regulatory risk of investing under carbon policy, Australia consequently must take steps to ensure it presents as an attractive destination if it is to raise this capital in the volumes required and at the lowest possible cost. In direct contrast to this imperative, destroying equity investments through a disorderly transition will send a profound and damaging signal to the international investor community about Australia’s sovereign risk and raise the risks of doing business in its energy sector. This will have consequences in higher equity risk premiums, which will add to the cost of energy supplied to the community.

The transition to carbon pricing will be most successfully made by ensuring any carbon pricing scheme recognises up-front the disproportionate losses – for debt and equity – and recompenses them.

However, it is important to recognise that the industry’s calls for appropriate transitional arrangements are not tantamount to allowing a business as usual approach, rent seeking, or ‘payments to polluters’. The affected generators will still face the carbon cost and will have to make sound business judgements about whether to continue operating (and face the ever-increasing carbon cost) or close down. But given the multi‑billion dollar extent of impairment to assets from carbon pricing, sound transitional arrangements will ensure that the companies are able to close plants in a controlled fashion and importantly be able to reinvest in the new low emission technologies that will be required.

For this reason, the Association rejects any implication that the industry is trying to short change the community or that consumers and industry are adversaries in the changeover to carbon pricing. The generation assets under threat were built at a time when there was no cost on greenhouse gas emissions and no clear prospect of when or how such a cost might be introduced. The direct beneficiaries of these investments were households, businesses and large industrial producers who paid considerably less for their energy use than if either a carbon price had been in place or less‑emissive technologies had been chosen instead.

Additionally, Australia has never introduced such massive structural change without supporting the affected industries to adjust to their new environments. The Australian automotive industry is a prime example. By 2021, it will have received more than $12 billion to transform its operations as tariff protection rates are reduced.

But by using Garnaut’s approach, the electricity industry which drives Australia’s economy would be provided with no assistance whatsoever to fundamentally alter its emission performance, dramatically increase its chances of stranding billions of dollars of assets in the process and as a result, threaten the reliable supply of electricity.

This approach is not sensible. It is poor policy and is more likely to hinder rather than help Australia achieve a low emission outcome.

The Energy Supply Association of Australia is also disappointed and dismayed with the way the network and related regulatory policy issues in the National Electricity Market have been treated in the most recent Garnaut Report.

It is unfortunate electricity prices had been rising strongly over the past few years, but the causes of these cost increases and the options for keeping any future increases to a minimum is a much more complex area than the report appreciates.

Among other things, the report contends government-owned network companies have an incentive to over-spend compared to privately owned companies; that peak load growth is avoidable; and that inter-state electricity connections should be bolstered.

It is unfortunate that the report has again strayed in to a technically complex area that is well beyond its remit and expertise.