ADDRESS TO AUSTRALIAN ENERGY WEEK
FRIDAY, 11 MAY 2018
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Thank you everyone for the invitation to be here this morning. I gather you heard from my colleague, Josh Frydenberg, and since then John Pierce and Kerry Schott.
Can I at the outset thank the Energy Security Board (ESB) for the work they are doing. I said last week, I’m not sure Kerry really knew what she was getting herself into I suspect – moving into the fraught area of energy policy.
We in the Opposition welcomed the recommendation from the Chief Scientist to establish the ESB. Particularly we welcomed the appointments of Kerry, a much esteemed public servant with lots of experience in market reform in other sectors, and also Clare Savage who I think has one of the best brains in energy policy around the place, to join the leaders of the three agencies. This has been a great step in trying to deal with what is a terrifically difficult, complex, highly contested area of policy.
Right now, at the end of Budget week, everyone is focused on distributional analysis of different tax plans. But I can assure you that it is not going to be long before the national political focus shifts back to energy policy.
In the media, in the Parliament, in the Coalition party room, at different state levels, particularly as we have some state elections coming up, this is going to be an area that continues to see a much focused national political attention.
I think the surprise was, for a very long time, that it wasn’t getting more attention at a national level. Players in the energy sector, big energy users, households that were very conscious of what was happening to their bills, got a sense much earlier that we were moving more deeply into a genuine energy crisis in this country.
That’s what we find ourselves in and, unlike previous energy crises that this country and others have faced, this crisis is not the result of an external shock, like the oil shock of the 1970s; this is largely self-inflicted. It is the result of a series of public policy failures that, perhaps with housing affordability, constitute the most significant public policy failure at a national level for the last couple of decades.
People have started to understand in some detail how we have ended up in this energy crisis. It wasn’t just one failure; it was a series of failures.
The network investment that led to very big, baked-in costs for households and businesses I think is better understood with the benefit of hindsight.
We’ve also seen a range of things happen to the wholesale market as the supply overhang has been pared back.
We’ve seen the closures of Northern and Hazelwood amongst some other power stations with that generation not being replaced in the usual way, with the usual market signals – high wholesale power prices are supposed to pull through new generation. That really is a product of a lack of investor certainty at a national level because the national Parliament has been fighting tooth and nail over climate and energy policy probably for the best part of over two decades now – but certainly for the past 10 years.
Fighting tooth and nail in a way that doesn’t give investors any certainty there is a framework that at least the major parties can agree on into the future.
On top of that we have seen a profound shift, arguably a profound failure, in the gas market in the eastern market which has seen prices spike substantially. With gas setting the price in the NEM much more frequently than has traditionally been the case, that has exacerbated the wholesale power price spike we have seen.
Although we have seen a burst of investment as companies move to invest and discharge the Renewable Energy Target for 2020, if we are not able to land an investment framework of the type Kerry has just taken us through, we are going to see investment in new generation start to taper off again after 2020.
I think it is relatively well understood how we got ourselves into this position.
Less easy to see is a clear path that gets us out – and that is what I want to talk about.
A key challenge, in spite of the fact there is no one cause or one solution to the energy crisis, is trying to rediscover some investor certainty. To create for some confidence for investors that rules around investment at least are going to be able to be put in place in a way that endures beyond federal election timeframes.
That is what we have been focusing on particularly over the last couple of years. There have been, as I’m sure you know, a number of different iterations of this policy.
The Emissions Intensity Scheme phase leading into the COAG at the end of 2016 – I think we almost got there. We had a consensus by all state governments, Liberal and Labor alike, pretty much every business group within the electricity industry and outside it, the Federal Labor Opposition, the Farmers’ Federation; you even had the Young Nationals Party in New South Wales supporting an EIS. We almost got there and it got pulled away at the last minute.
Then the Chief Scientist was drafted to see if he could do something better than that. Once again we had a very substantial consensus around the key 50th recommendation, the Clean Energy Target. But again, that got pulled at the last minute because of a pretty similar revolt in the Coalition party room in Canberra.
Now we are dealing with the third iteration in recent times, which is the National Energy Guarantee (NEG).
The ESB has been very generous with its time with the Federal Opposition in briefing us about the NEG at its different stages since it was first released in letter form to the Prime Minister.
Development of the NEG
I just want to give you a sense of how Federal Labor’s view of the NEG has developed since that time.
My first impression, I have to say, was that the idea of putting a framework into the NEM architecture instead of bolting something on like the RET or even the CET was immediately attractive.
I think that was going to lead to a level of simplicity, if you like, for investors and users that was immediately attractive. But obviously in its first iteration, a six or eight page letter, given the complexity of this sort of policy, we needed more detail to provide any sort of substantial response to it.
As the detail started to roll out, Federal Labor’s concerns reflected a lot of concerns that I read in the submissions; from the industry, from energy user groups and other stakeholders in that first period of consultation. From Federal Labor’s point of view, at least, I could summarise our concerns in one sentence, which was there was a risk of over-doing the reliability obligation and under-doing the emissions reduction obligation.
I must say that I think, leaving aside the emissions reduction questions for a second which remain the enduring difference between us and the government, the progress that has been made in the latest publication, the high level discussion paper, has been really significant.
The concerns that people, and certainly I had, which were picked up in the submissions, of gold plating emerging again in light of the reliability obligation has been significantly mollified by the eight step process that Kerry just took us through.
More generally from Federal Labor’s perspective the design of the reliability obligation is now looking much more comfortable for people.
It has been a rather tortuous approach to designing some of the other obligations under the NEG, apparently in an attempt to avoid any appearance of carbon trading in the scheme. That might be me leaping at shadows but I think a whole range of stakeholders, including Federal Labor, were concerned that some of those design elements had the potential to damage the depth and liquidity in the contracts market and, also, to reduce transparency and entrench the market power of the big gentailers. Again, I think that was reflected in a very substantial number of the submissions including from the big gentailers themselves.
An enduring problem from our perspective is the lack of ambition in emissions reduction, but again this is not a matter Kerry and the ESB determines. That will be an arm wrestle that takes place in the Federal Parliament. But we are very focused on making sure that there is the ability to adjust the NEG to reflect different positions that will be taken in the national Parliament.
A couple of other concerns that we have are around the use of offsets in discharging the emissions reduction obligation.
I certainly take the view as a matter of general principle that there is not a strong argument in favour of the electricity generation sector being able to use offsets, whether they are domestic or international offsets, to discharge emissions reduction obligations.
My view is that will simply defer investment. Also my view is this is the sector that has the lowest cost abatement opportunities really of any sector available to it. It should be using that to invest in new clean energy technology.
There are other sectors of the economy that absolutely will need substantial access to offsets because they really don’t have, in some cases, any technology available, let alone a low-cost technology to abate their inherent emissions -clinker production in the cement process, steel making, and a range of others for that matter.
Labor’s main concern with the NEG
The core difference between Federal Labor and the Federal Government is around the emissions reduction obligation. Bill Shorten reiterated last night in his Budget Reply Speech Federal Labor’s position of an economy-wide 45 per cent emissions reduction between 2005 and 2030.
The other difference we have is that it seems, over the last year and a half or so, we have walked into a position that the electricity generation industry only does its mathematical share of the economy-wide emissions reduction task.
That is not, in my view, the orthodox position anywhere around the world. The electricity sector does, as I said, have the lowest cost emissions reduction technology available to it. What’s more, emissions reduction in the electricity generation sector will drive decarbonisation – particularly as we see the electrification of transport, broader industry and a whole range of other sectors of the economy that don’t in a direct sense have much emissions reduction technology available to them.
This is a deep concern that we have that the government sleepwalked into this position that the electricity sector only does its mathematical share. We found, for example, that Treasury has done no cost-benefit analysis from an economy-wide perspective of this decision that was taken purely within an energy policy prism. There was no consultation with the agriculture department, with industry, or other sectors of the economy directly affected by this position.
As I said, the latest paper has addressed pretty much all of the concerns except those enduring differences that we have with the government which, at the end of the day, can only be resolved in the national Parliament through a federal election.
We also heard a pretty clear message from business, both within the electricity industry and users of the electricity industry that they wanted the COAG members and the Federal Opposition to allow this process to continue. We were happy to do that because we think this is an important opportunity that can’t be let slip to deliver the investor certainty that is so important.
That is where we are at the moment on the NEG and we look forward to continuing to watch the work the ESB is doing. We admire the level of consultation the ESB and the agencies are undertaking with a range of experts, the industry, and other industry users.
Emerging developments in the energy sector
We are also trying to keep a close eye on other emerging and quickly developing areas within this industry, some of which Kerry talked about in her presentation. We are watching the integrated system plan very closely as that develops.
We are also watching closely what is happening in the technology space.
There is a bit of rock and roll, a bit of pizazz about the battery sector, but actually watching how this technology is rolling out, what it is delivering in terms of security and other senses for the market, is really interesting. It’s important that the government and other agencies leave space for that technology to continue to develop fast and to allow flexibility in this technology as we start to see the costs come down.
At a more traditional level, we’ve been watching stories emerging, including over the last couple of weeks about companies investing in quite substantial pumped hydro; the expansion, potentially, in New South Wales of the Shoalhaven project, projects in South Australia, projects that companies are focused on in Queensland, all at around the 200MW size – while we also come to grips with what Snowy Hydro 2.0 means at a range of levels, for the market; for pumped hydro, reliability, and for taxpayers given the Commonwealth government is now the sole shareholder. We are focused on that very closely as well.
I’ll conclude my remarks by picking up a point Kerry made, which I think is a really important thing for us to try to shift closer to the centre of this energy debate. This debate has been heavily focused, at times exclusively focused, on the supply side of energy. What we have seen over the last decade is Australia move from being a low-cost energy economy to a relatively high-cost energy economy.
When you analyse the unit price of electricity and gas in the eastern market, it is hard to see how you get really substantial reductions in that unit price of electricity and in gas. Yes we can free up the supply of gas, but there is not a lot of cheap gas available, to get out of the ground. And a lot of the costs that we have talked about in electricity have also, to a degree, been baked into the system. But we haven’t yet seen the behavioural change that you have seen in other economies that have moved to a relatively high-cost energy base.
There is much more that we can do to stimulate a discussion around the demand side, beyond the discussion we’ve seen around demand response being used to support the reliability of the system, to just helping businesses and households to use less energy.
This was a central part of Labor’s Australian Investment Guarantee that Chris Bowen announced several weeks ago that would see some immediate expensing of investment in new capital, whether it is upgrading your boilers or refrigeration, or investment in software which allows you to manage your energy usage much better.
That immediate expensing is something businesses have been talking to us now about for an extended period of time. They need to invest in kit, software that allows them to use less energy – recognising the unit price of energy has increased and is unlikely to decrease significantly in the foreseeable future.
More ambition and more heft behind the National Energy Productivity Plan is also something we’re very focused on.
The last full year results saw the nation’s energy productivity improve by just 0.4 per cent.
We are close to the most energy inefficient economy in the OECD – particularly in industrial terms.
We just haven’t paid enough attention over time to these questions and a future Labor government would want to see the demand side of this policy debate moved far more to the centre of energy policy than it has been.
Thank you for the opportunity to be with you, I wish you all the best for the rest of the conference.