Australia’s Energy Future

Australia has some of the most plentiful energy resources in the world. The last two decades, however, have paradoxically seen high and rising energy prices. In just the past decade, Australian electricity prices have increased by 116 per cent. That’s compared with a 26 per cent economy-wide inflation and a 34 per cent increase to average wages.

And according to consulting firm CME Australia, 2017 was the year that Australia became home to a jurisdiction with the highest energy prices in the developed world—South Australia. While NSW, Queensland, and Victoria had the 5^th, 7^th, and 9^th highest prices, respectively. For perspective, electricity costs 47 cents per kWh in South Australia, 39 cents in NSW, 36 cents in Queensland, and 35 cents in Victoria, compared with just 30 cents in the European Union and 16 cents in the United States.

Rising energy prices hurt households. Combined with modest wages growth, higher energy prices have led to a greater share of household disposable income being directed toward paying the bills. The 2017 Finkel Review into the National Energy Market found that a typical low income household is now spending up to 9 per cent of its household income on electricity bills. Due to this, the number of people being disconnected from their energy supply has increased sharply, both in Victoria (140 per cent) and South Australia (122 per cent) over the past six years.

But it’s not just households who are feeling the pinch. Small, medium, and large businesses are all struggling to absorb the additional cost of operating. In June of this year a family run recycling business in Kilburn, South Australia, announced it would be closing after 38 years, putting 35 people out of work in a state with the nation’s highest unemployment rate. The trigger? A spike in their monthly electricity bill from $80,000 to $180,000.

The recently released Australia Consumer and Competition Authority inquiry into retail electricity pricing gave many other examples, such as a retail grocer reporting a 53 per cent increase in their electricity bill in just one year. Companies in the printing industry saw their annual bills increase by up to 48 per cent. And a winery in South Australia faced a 160 per cent annual increase to their electricity costs.

High and rising electricity prices have a knock-on effect through the economy. The World Economic Forum’s latest Global Competitiveness Index found that in just the past year the quality of Australia’s energy supply plummeted from ranking 22^nd to 44^th out of 137 countries. Businesses see Australia’s energy supply as becoming substantially less reliable—and it is showing. Business investment in Australia as a percentage of GDP is now lower than during the Whitlam years. This ultimately holds back employment growth, productivity, and wages growth.

Given these negative economic and social effects, it is worthwhile examining the causes of high energy prices—continued failed government intervention—and the changes we need to make to achieve better policy outcomes, such as getting Australia out of the Paris Climate Agreement and reforming laws that discourage resource development.

GOVERNMENT INTERVENTION

How did Australia, a country with over 1000 years’ worth of coal, plentiful gas, and 40 per cent of the world’s known uranium deposits, find itself in this situation? The answer is years of repeated failed government interventions under the false pretence that reducing emissions is in our national interest.

The original sin of Australia’s energy policy was to embrace emissions reductions as a worthy objective. Two decades ago the Howard Government completely accepted the left-wing orthodoxy on climate change with the release of its climate change strategy, Safeguarding the Future: Australia’s Response to Climate Change. Amongst other measures, the strategy saw the introduction of the first incarnation of the Renewable Energy Target (RET). The RET required electricity retailers to source an additional two per cent of their electricity from renewable sources by 2010. A modest intervention, to be sure. But from little things big things grow.

The last two decades have seen a never-ending expansion of government interference in the energy market. In 2009, the Rudd government expanded the RET, forcing electricity retailers to acquire 20 per cent of total energy generation from renewables. Aside from the flawed policy objective of lowering emissions, the implementation of the RET was laughable.

To provide certainty to industry—that is, a guaranteed market share to rent-seekers—government legislation specified that the Gigawatt hours (gWh) of renewable energy that would be required to meet the 20 per cent objective would be 41,000 gWh. But the bureaucrats got this completely wrong. Rather than 41,000 gWh equating to a 20 per cent energy generation share for renewables, a 2014 review found that, due to energy generation demand being softer than previously expected, 41,000 gWh of renewables would actually result in a 28 per cent renewable share by 2020. In this context the Abbott government reduced the RET to 33,000 gWh by 2020, equating to around a 24 per cent renewable market share.

A cursory understanding of economist Friedrich Hayek’s ‘knowledge problem’—that the decentralised nature of information renders top-down decision-making impossible—would have revealed the folly in this approach. Further, this so-called reduction to the RET was still a four percentage point increase on the original policy and, moreover, far inferior to abolition.

Aside from the RET, the last decade has seen a smorgasbord of energy market interventions and regulations. In 2012, the carbon tax was introduced, as was a range of energy efficiency requirements on products such as air-conditioners, fridges, and commercial and residential buildings.

Lathered on top of these federal requirements is an array of interventions by state governments. State-based RETs—which commit to renewable energy generation above the federal scheme – are currently in place in Victoria, South Australia, Queensland, and the ACT. In addition, Victoria has a ban on coal seam gas and a moratorium on onshore gas development. Western Australia has banned fracking in the state’s south west and imposed a state-wide moratorium. The Northern Territory also has a moratorium on fracking.

This is not to mention the red tape and regulation placed on coal development and extraction. Project proponents face an imposing approvals and assessment processes at both the state and federal level. The Tad’s Corner coal project in the Galilee Basin in central Queensland required 5000 licenses, approvals, and permits for the pre-construction phase alone. The Adani coal and rail project spent seven years in the approvals process, fought more than 10 legal challenges, and had to prepare a 22,000-page environmental impact statement. And the project may still not proceed.

Despite the Abbott government’s repeal of the carbon tax in 2014, government interventions in the energy market—from broad guarantees to piles of compliance on exploration—have consistently pushed coal out of the market to make way for renewables. And because renewables are more expensive and less reliable, prices have risen while reliability has dropped.

THE NATIONAL ENERGY GUARANTEE

This brings us to the federal government’s most recent intervention. The so-called National Energy Guarantee (NEG) is an exemplar of short-sighted, complicated, and clumsy public policy. There are two components to the NEG: the reliability guarantee and the emissions guarantee. The emissions guarantee will require electricity retailers to purchase a certain amount of low-emission energy, which will mostly come from renewables, with some room for ‘clean’ coal. The reliability guarantee will require retailers to purchase an offsetting amount of energy from coal, gas, or renewables with battery storage.

The emissions guarantee is predicated on Australia meeting its Paris Climate Agreement requirement to reduce emissions by 26 to 28 per cent on 2005 levels by 2030. You might at this point be questioning what the difference is between the NEG and all of the other policies which required renewable energy usage to reduce emissions. The answer is that there is none.

As mentioned above, the RET forced energy retailers to purchase a certain amount of energy from renewable sources, which has the effect of punishing coal and subsidising renewables.

Earlier in 2017 a Clean Energy Target was briefly considered by government and then discarded. It would have forced retailers to purchase a certain amount of energy from low-emissions sources, such as renewables, at the expense of coal.

Similarly, the Emissions Intensity Scheme, also briefly considered and then discarded a year earlier than the CET in 2016, would have forced electricity retailers to source energy from low carbon intensive sources, again shifting the energy mix from coal to renewables.

The carbon tax punished high-emissions technology, such as coal, and favoured low-emissions technology, such as renewables.

The NEG will also force energy retailers to meet emissions reductions targets, again forcing a shift from coal to renewables.

There is a common theme underwriting all of these failed interventions: the plainly false idea that it’s in Australia’s national interests to have a policy that explicitly seeks to lower carbon emissions.

The IPA’s recent book Climate Change: The Facts 2017 outlines some of the errors in climate science and the ways in which the extent and consequences of climate change and global warming have been overstated. Aside from these important criticisms lies the inescapable policy reality: Australia accounts for just 1.5 per cent of all greenhouse gas emissions. Australia could completely de-industrialise, and end all manufacturing and energy-intensive industry for no noticeable impact on the global temperature.

The futility of Australia’s emissions reductions efforts is immediately apparent from the data. According to the International Energy Agency, approximately 400 billion tonnes of carbon were emitted globally from fuel combustion from 2001-14. Over the same period the Climate Council of Australia, a renewable energy lobby group, estimated the RET reduced emissions by just 22.5 million tonnes. This means the RET resulted in 0.005 per cent fewer carbon emissions globally over a 14-year period. This is the equivalent of a reduction of 0.0004 per cent per year on average, equating to effectively no change to global temperatures. It is simply not in Australia’s national interest to have an energy policy predicated on emissions reductions.

SOLUTIONS FOR A BETTER ENERGY FUTURE

The bad news is that repeated failures by state and federal, Labor and Coalition, governments have led to Australia’s energy crises. The good news is that the crises can be resolved with some simple policy reform.

The first step is to untether energy policy from emissions reductions requirements. In practice this means following the United States and withdrawing from the Paris Climate Agreement.

The second step is for state and federal governments to deregulate the coal and gas sectors. This means removing bans and moratoria on onshore and offshore gas development and making a number of changes to the Environment Protection and Biodiversity Conservation Act (EPBC) 1999. Ideally, the EPBC Act would be abolished and responsibility for environmental protection would be returned to the state governments.

If the EPBC Act remains, we should abolish section 487 which enables green ‘lawfare’, remove the ‘water trigger’ and nuclear actions as matters of national environmental significance, and re-introduce the one-stop-shop process which enables states to assess and approve proposed projects

The third step is for the Goods and Services Tax (GST) formula to be radically reformed. GST administration may seem a world away from energy policy, but they are actually closely linked. The current GST formula redistributes income between states based on revenue raising capacity. But revenue raising capacity is partly determined by the policies implemented by state governments, and policies which restrict coal and gas development and favour renewables reduce economic growth and, in doing so, reduce potential revenue. In this way the current GST system favours state governments which discourage development of their natural resources. Hence, the current GST system should be replaced with one that doesn’t discourage economic reform. This could be achieved by allowing the state governments to keep the revenue they raise, or distribute the GST on a per-capita basis. Either approach would be vastly superior to the current approach.

We should be optimistic about the prospects of reform.

Just a few years ago it was unthinkable that a government led by Tony Abbott could repeal the carbon tax. Belief in action on global warming is still in vogue, but less so than a decade ago. And the withdrawal of the US from the Paris Climate Agreement, the ongoing investment in coal by the Chinese, along with Australia’s continuing energy crises, will create the conditions at home for true leadership to emerge and end two decades of energy folly.

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