What we have achieved and where the parties will lead us with energy policy

Though the notion of energy policy can be very broad, its commonly understood framework comprises first the policies governing the gas and electricity industries and secondly the interface of energy and environmental policy, in particular greenhouse gas emissions and energy conservation. This assessment compares and contrasts the major parties' approaches to achieving an efficient energy industry while pursuing social objectives and meeting environmental goals.

Policies Covering Electricity and Natural Gas Supply

It is only over the past decade or so that electricity, and to a considerable degree gas, was anything other than a state based industry totally under state government control and, for the most part, ownership. The present arrangements, which still do not fully apply in Western Australia and the Northern Territory, have replaced state monopolies with a market-based supply industry. The industry now comprises a mixture of government firms (in NSW, Tasmania, and most of Queensland, WA and the NT) and privately owned businesses. In the generation and retailing sectors all these firms compete with each other. The natural monopoly areas of local distribution and most long distance transmission are controlled at arms length from government by regulatory agencies like IPART in NSW and Victoria's ESC.

Overwhelmingly, the changes to the market structures have been bipartisan. They have been undertaken within the framework of National Competition Policy. The most recent modification has led to the creation of the Australian Energy Regulator as a semi-autonomous part of the ACCC and the Australian Energy Market Commission in place of the National Electricity Code Administrator. These changes bring the national gas and electricity regulations under a single agency structure and are intended to expedite decision making procedures. Significantly, they include some commitment to ensure a more harmonised national set of regulatory procedures and a steady abandonment of the administrative roles conducted by the 13 state regulators, which presently control pricing and network access conditions.

The Commonwealth Minister has been a major force in pushing through these measures but has enjoyed the general support of his Shadow counterpart, as well as from the State Ministers, particularly Victoria's. This unusual degree of cooperation offers greater confidence that the agreement can be put into operation.

Much will rest on continuing cooperation if we, in the event, achieve the foreshadowed faster resolution of specific market rules issues as they arise, the elimination of the state based regulators and the greater consistency in trading rules (especially those governing electricity retailers).

Some of the matters involved in States wishing to retain controls go beyond the simple issues of ministerial empires. Governments have been keen to ensure that cross subsidies are in place in electricity and gas to offer benefits to regions and to the less well off. There is little sign that these concerns are diminishing, though the greater openness of markets, with implications of incumbent suppliers having their more profitable customers cherry-picked automatically puts pressure on governments to release pricing strangleholds.

Of course such cross-subsidisation is alien to efficiency and contrary to the competition reforms to which all governments have acceded. The National Competition Council has sought to pressure the states on the matter, including recommending suspension of some payments to Queensland, the most blatant offender. Contrary to its obligations, Queensland has no plans to fully open its markets to retail competition and lift price caps and, along with NSW, has a system of mandatory insurance that benefits state based retailers.

Similarly, the public ownership of the generating industry in NSW, Tasmania and Queensland gives governments in those states a different set of interests. In Queensland, there is evidence of the government using its planning powers to hamper investment from new non-State owned generators. Tasmania has used its monopoly generator to finance the Basslink transmission link to the mainland, a link that few consider could have been viable at the present time without such a subsidy. NSW has used its own planning powers to attempt to thwart the construction of a new power station committed to, perhaps unwisely, by one of its state owned retailers.

Regulatory arrangements for gas pipelines have been highly contentious. These largely stem from misguided bureaucratic attempts to lower prices so that they reflect marginal costs not competitive market outcomes. They also represent the aspirations of the ACCC to retain its regulatory control powers even when there is commercial rivalry. State governments, in particular Queensland, and the Commonwealth Minister have sought to limit the ability of the ACCC set competing pipelines' prices rather than leaving them to market forces. The main focus of attention has been the rival Moomba and Bass Strait pipelines to Sydney. A more difficult issue concerns the Dampier to Bunbury pipeline which has been bankrupted by the determinations of the WA regulator.

Greenhouse Issues

While industry policies, consistent with National Competition Policy, have sought to reduce energy prices, environmental impositions are driving them up. 

It is the intersection of energy and the environment that nowadays provides most political fuel. The Mandatory Renewable Energy Target (MRET) is the centrepoint of current government policy. This is an obligation on energy retailers and other users to source specific quantities of energy from designated low carbon dioxide emission sources. Wind power is the dominant eligible source. The obligation is tradeable and there is a fall back tax of $40 per MWh for businesses failing to secure their required allocations (existing trades are a little under the $40 penalty). The current cost per year can be estimated at some $360 to $380 million in increased energy bills by 2010.

On the face of things there are major differences between the Government and Opposition, differences that reflect their positionings between courting the green vote and avoiding excessive costs:

• Labor favours ratifying the Kyoto agreement which would both put greater pressure of Australia to undertake abatement activity and, arguably, open up international markets for the trading of emissions;
• Labor also favours "lifting the (MRET) from its current two per cent of energy to five per cent". The current target is actually 9,500 GWh by 2010 which is to rise to 20,000 GWh by 2020. Although the current target is expressed in energy units, the ALP proposal for five per cent of energy is an approximate doubling of this and has been estimated by the Government to bring a cost of $11 billion compared to $5 billion from the present plans;
• NSW already has in place a supplementary MRET provision which entails a further $40 million annual cost to consumers, and the State ALP Ministers are consulting on how to bring in a more ambitious scheme in the event of a re-elected coalition government;
• Aside from its MRET scheme, the Commonwealth Government's greenhouse related energy policy is strongly focussed on subsidies for emission reductions and for the creation of carbon "sinks". Its program, Securing Australia's Energy Future, announced in July 2004, contains new expenditures addressed to greenhouse gas reductions of over $700 million. Annual Commonwealth expenditures, including MRET and other existing programs, are of the order of $840 million per annum. 

These major differences are narrowed by two considerations. First, the present government is acting as though it has, in effect, ratified Kyoto and accepted the scientific view that significant human induced global warming is taking place. Australia negotiated a relatively low target (eight per cent above 1990 levels by 2010-2012), a position that reflects some acceptance internationally that Australia, as a major resource based economy, competes more directly with developing nations which do not have onerous greenhouse gas emission obligations. In addition, some felicitous re-definitions of the level of obligation, plus the policies already introduced, mean that Australia is in fact much closer to its target than all but a handful of those that have ratified Kyoto.

The Government's expressed concerns at formally ratifying Kyoto stem from the universal acknowledgement that the reductions encapsulated in the treaty are totally inadequate for bringing about a stabilisation of greenhouse gas emissions. The Government argues that ratification will bring future costs in terms of allocations below business-as-usual on a scale that is unaffordable. In this respect, the Australian Constitution (like that of the US) tends to lock-in such legislation in contrast to the European Constitutions where decisions of the Government of the day can readily be changed. The Government therefore is not contesting the view that global warming is a real threat but opposes incurring additional costs from the Kyoto tax or tradeable rights approach to its mitigation as inferior to using R&D to find technological solutions. 

For its part, a Federal ALP Government, if elected, would doubtless re-visit those of its policies with major cost implications and consequent impositions on households and industry. After all, it was a federal ALP Government that stood out against many of its own advisers and insisted upon Australia's relatively low Kyoto target.

In the event of a continuing coalition government in Canberra, state ministers have indicated that they will consider a cooperative approach to bring about a substantial further movement towards greenhouse gas abatement. There is little chance of this succeeding if only because of the imperatives of state based development priorities. The Victorian Minister, for example, has been careful to claim a special position for the intrinsically more CO² emitting brown coal generators. More importantly, it is implausible that Queensland will accede to an agreement among state ministers. This is because, in essence, such an agreement would require Queensland to relinquish its apparent destiny (derived from its low cost coal) to become the centre for the siting new electricity generation and entail subsidies to the southern states. 

Concluding Comments

Considerable advances have been made in the electricity and gas supply industries in bringing about a national market and ensuring market forces do their job in driving down prices and ensuring consumers obtain the quality of supply for which they are prepared to pay.

Tensions remain about the appropriate policy approach to greenhouse gas emissions. Though differences between the coalition and the ALP are real, these are easy to overstate. The key difference is the increased requirement under ALP policies for the replacement of fossil fuelled electricity by wind power. Wind and other renewable alternatives are more than double the cost of coal based electricity generation. In addition, the intermittent nature of the lowest cost major renewable resource, wind power, brings about a need for increased capacity to ensure reliability - a study for the South Australian Government (pdf, 560kB) indicated that only 8 per cent of the capacity for large scale wind power can be classed as firm, hence this form of power requires back up for 92 per cent of its capacity. 

In the event of a continued coalition government in Canberra, it is possible for ALP controlled State Governments to reach an accord on emission reductions and impose this nationally. However this is an unlikely outcome since it would involve States voluntarily foregoing - indeed, reversing - particular natural advantages in comparative energy costs.