How will we break the endless energy circle?

 “We smashed the Kyoto 1 and 2 (targets),” Australian prime minister Scott Morrison recently said, adding “and I believe, we'll absolutely be able to deal with our present target out to 2030 with no impact on electricity prices at all”.

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Morrison was referring to Australia’s track record on hitting emissions targets and confirming the country was on track to meet those agreed under the Paris Cop 21 agreement of 2015. So has the new prime minister cracked the energy policy trilemma of reliable electricity at something like the old coal-driven prices with Paris-accord emission cuts?

"We can have the reliability of coal generation but at the cost of higher emissions - and with no prospect of a return to the good old days of cheap electricity.”

I think not: I would argue, along with the respected Grattan Institute, high electricity prices are here to stay.

In their July report, “Mostly working: Australia’s wholesale electricity market”, the institute’s energy experts, Tony Wood and David Blowers, warned wholesale prices are “very unlikely” to return to their 2015 levels of around $50 per megawatt hour.

“Over-supply, as a result of historic over-building, is disappearing, and gas prices will stay higher than they were in the past. And new generators, using any technology, including coal, cost more,” they say.

Wood and Blowers estimate 60 per cent of the rise in electricity wholesale prices since 2015 is the result of reduced surplus capacity and 40 per cent is due to increases in coal and gas prices.

“Additional, subsidised renewable supply could put some downward pressure on prices but this will be transitory because the ‘intermittency’ of wind and solar energy will ultimately have to be paid for.”

The Grattan conclusions followed a warning by Geoff Carmody, a former Treasury economist and co-founder of Access Economics, that the Turnbull government’s promise to substantially cut energy costs, improve reliability and honour the Abbott government’s Paris emission cut commitments was unachievable.

“With foreseeable technologies, we can choose to achieve any two of these objectives, to any extent we like, if we are prepared to pay the price. But we can't do so for all three. One (or, two, or all, to some extent) must miss out,” he said.

Emissions reduction is expensive and neither “free” renewable energy nor the coal-fired generation so beloved of the Nationals and conservative Liberals offers a magic solution.

The Australian energy market operator, AEMO, says investment in renewable energy is now the least expensive way to make the sort of cuts to emissions agreed by the Abbott government (two governments ago) in Paris. 

But renewable energy is not cheap. The most productive areas for wind and solar generation are away from the major cities, which means additional investment in long-distance transmission.

Moreover, the unpredictable intermittency of wind and solar energy means there must be additional investment in back-up fossil-fuel generation, dispersed renewable energy generation, transmission and battery storage.

Carmody points out South Australia’s wind generators, for example, are backed up the state’s own gas generators and by Victoria’s brown coal generators via the Heywood interconnector.

We can have the reliability of coal generation but at the cost of higher emissions - and with no prospect of a return to the good old days of cheap electricity. We can have cuts in emissions and temporarily lower prices with the surge in supply from new renewable generators - but with less reliability or higher prices to cover the cost of backup supply.

With the current state of technology, the best Malcolm Turnbull (prime minister of the last government) was ever likely to achieve was a trade-off involving modest price cuts that would leave consumers feeling seriously disappointed.

Can the latest prime minister realistically do better?

We know he can in theory. Economists have shown the least-cost way to achieve emission reduction is through the imposition of a price on carbon emissions - as was proposed by the governments of John Howard (Liberal) and Kevin Rudd (Labor) and implemented by Julia Gillard (Labor).

A broadly-based emissions trading scheme would have the capacity to absorb state emission reduction targets and reduce the burden on electricity prices and the economy by capturing lower-cost emission reduction opportunities in transport and other sectors of the economy.

And a “consumption-based” carbon price, as proposed by Carmody, would be less damaging to jobs and profits because trade-exposed industries would be effectively excluded.

That might not solve the electricity price problem for hard-pressed households but it would be better for the economy and, as a result, result in more tax revenue for the government. It would then be open to the government to offset the income effect of higher electricity prices, at least for lower income households.

However, carbon prices are taboo, as perhaps, is the Turnbull government’s substitute, the National Energy Guarantee, or NEG.

The politicians now find themselves again circling endlessly around the same opposing arguments.

On the one hand, as the opponents of the NEG say, Australia is too small to make a significant difference to global warming, except as part of a concerted global effort. For them, this was good enough reason for Australia to curb its emission-reduction ambitions now the US has abandoned the Paris agreement. 

Yet many other voters clearly take a more Churchillian view: it is incumbent on countries like Australia to keep battling the global greenhouse menace while we wait for the Americans to re-join the struggle. Coalitions, they would argue, are more likely to coalesce around an established core of activism.

Perhaps more pressing is the question of whether the private sector will invest in generating capacity that is inconsistent with an overall strategy of emissions reduction.

Investors in new generation and transmission infrastructure must base their decisions on their expectations of energy and climate policies over the next 30 to 50 years.

They must make a choice: to go with the weight of scientific opinion and the wishes of the rising tide of voters born after 1980 on the one hand or the policy preferences of older voters, the coal-producing regions and conservative politicians on the other.

The risk of under-investment in the private sector is very real. For that reason, Wood and Blower argue governments must provide stable energy and climate-change policies so there are clear incentives for energy producers to invest when supply tightens and prices rise.

It is possible the combination of continuing high prices and a bipartisan commitment to emissions reduction might be enough incentive for the necessary private investment. However, the big question is whether the current administration’s attempt to fudge its way around its deep internal policy divisions is politically sustainable.

The looming election undoubtedly has killed the taste for daring policy experimentation in the short term.

However, surely it is now clear a more politically sustainable energy policy requires a better public understanding of the difficulties and trade-offs involved in meeting the challenges of energy and global climate change.

An obvious first step would be for the government to take the Grattan Institute experts’ advice and tell consumers the harsh truth: higher wholesale electricity prices are “the new normal”.

Governments and the energy industry must be more honest and more transparent.

Despite a stream of reports and modelling exercises, the energy sector’s investment in transparency is insufficient. You only have to compare its effort with that of the Reserve Bank, which goes out of its way to inform the public of its policy options, its uncertainties, and the thinking behind its decisions. It does that because it has discovered genuine transparency and accountability are empowering.

Politicians have failed to insist the sector energy sector follow the central bank down that path. And yet it is politicians, especially in the major parties which must make the hard decisions of government, who are the long-term losers.

Unless the vast majority of scientists have made terrible, multiple mistakes over manifold factors, global warming is not going away. Nor will the pressure for change. Governments can veil the inadequacy of their policies in misleading claims and hope technical change gets them off the hook. But their luck will run out. Indeed, it may be running out now.

Alan Mitchell is a former economics editor of The Australian Financial Review

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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