Energy and climate: What’s coming in 2015?

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With many people just coming back to work it’s a good time to take stock of the agenda that will impact industry in the coming year. On the energy and climate policy front, 2015 is shaping up to be a very big year indeed.

There is some major unfinished business left over from 2014 – especially the need to resolve the future of the Renewable Energy Target. Australian large scale renewables investment fell 78% between the third quarters of 2013 and 2014. Without a stable, bipartisan agreement, investment in the energy sector will continue to stagnate. And that will mean higher bills for energy users, who would pay the direct costs of the RET without getting the benefit of additional generation which otherwise will put downward pressure on wholesale electricity prices.

The Government and the Opposition still have time to prevent this with a deal that moderates the target without deep cuts, recognises the situation of energy-intensive trade-exposed industries, and does not impact on existing investments.

Natural gas supply will remain in the spotlight on multiple fronts. The domestic price rises driven by LNG exports are starting to bite, with serious consequences likely for domestic industry. Supply remains tight, given the enormous export commitments and slower than expected growth of Queensland gas production; look for further debate over NSW coal seam gas after the March election, and for the new Victorian Government to launch its promised Parliamentary inquiry into unconventional gas production.

Complicating matters is the recent steep fall in global oil prices; in East Asia, natural gas is priced according to oil-linked formulas, and by exporting LNG to East Asia, Australia is importing oil-linked pricing.  Will we see domestic prices rise by less than previously feared? Will export contract prices be reset downwards, eroding the national benefits of LNG? It seems clear that additional export projects will not go ahead for some time, if ever – but will gas exploration and production also be hamstrung, particularly given the political barriers to unconventional gas? Producers and consumers of gas now both have deep cause for concern.

Climate policy will be busy on all fronts. The Emissions Reduction Fund, which passed into law against many commentators’ expectations in late 2014, will open for business this year. The first reverse auction for carbon abatement credits seems guaranteed to succeed, given the volume of pre-existing credits produced under the Carbon Farming Initiative. But how big the supply will be at the second and subsequent auctions is unknown. Projections of Australia’s future greenhouse emissions are likely to be revised down, but there will remain a yawning gap between business as usual and the bipartisan -5% 2020 target.

With the Government so far unwilling to make use of low-cost high-quality international carbon units to help meet Australia’s target, a lot rides on the effectiveness of the auctions, the attractiveness and integrity of the crediting system, and the ability of the Government to keep ponying up the funds required.

Debate may also flare about the role of the emissions safeguard mechanism. The safeguard imposes emissions baselines – yet to be settled – on big emitting sites, and penalises those who exceed their baseline. Whether or not this will impose costs on industry or contribute to the targets depends on rules that will have to be negotiated with industry by around mid-year if they are to be formally issued by the legislated 1 October deadline.

2020 is now not far off, and thoughts will increasingly turn to subsequent targets – presumably deeper ones. The Government has asked a high-level departmental taskforce to prepare options for post 2020 targets by mid-year.  As part of its deal with the Palmer United Party to pass the ERF, the Government also commissioned the Climate Change Authority to answer the same question – and make assessments of whether Australia should return to emissions trading and how it should meet its international commitments.

Major economies like the EU, the United States and China have already announced major targets, and all countries will be under pressure to do so well ahead of the critical climate negotiations in Paris at year’s end.  Those discussions are intended to sign off on a major new agreement built bottom-up from the commitments nations are willing to make, rather than imposing targets top-down.

It’s going to be essential to understand the nature of those national commitments. For instance, South Korea’s national Emissions Trading Scheme commenced on 1 January this year – a major development – and we are likely to get more detail in coming months on China’s eventual transition from current experimental regional ETSs to a national scheme.

But both South Korea’s scheme and the Chinese testbeds include high levels of free permit allocation to ensure that trade-exposed industries remain competitive, even as emissions are constrained. Australian observers need to be careful about simple conclusions.

There’s more – much more, with the final Energy White Paper due at some point and a range of huge debates over electricity network regulation, how to price network services, and what to do about the current oversupply of the electricity market (if we can agree that this is a problem, which is less obvious to energy users than to producers).

We can dig deeper in future posts. But it’s clear enough that 2015 is going to keep us all very busy indeed.

What are the most important climate and energy issues for your business in 2015? Have your say below.

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Tennant Reed
Tennant is Principal National Adviser – Public Policy at Ai Group. He has worked heavily on climate and energy issues, advising Ai Group’s Leaders’ Group on Energy and Climate Policy and developing reports on natural gas supply, energy prices and energy efficiency. He also works on a range of issues related to manufacturing and innovation. Previously he was an adviser in the Department of Prime Minister and Cabinet, working on fiscal policy, stimulus and infrastructure.

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