Energy needs better regulation, no more no less

The complexity and importance of energy sits awkwardly with simple regulation-versus-deregulation arguments. The energy markets need a lot of rules to work at all; natural network monopolies require regulation to protect consumers who are stuck with the bill; but successive State and Federal Governments have attracted immense private capital and reduced the drain on the public purse by promising a predictable and welcoming environment for energy investment.

That promise looks increasingly shaky. The broadly drafted divestiture powers proposed by the Federal Government are intended to frighten energy market participants into good behaviour, but in practice seem more likely to encourage them to sit pat and avoid investment. Ad hoc interventions by all levels of government increasingly sideline the core design of the National Electricity Market. Decision making around gas developments is often a political battleground rather than a disinterested process in which industry and the community can share confidence. The lack of a clear, credible and durable long term emissions policy for energy is a major source of uncertainty for energy investment.

Not all is bleak. We are in the midst of a major burst of renewables investment, driven by a combination of the Renewable Energy Target, State policies, and the response of energy users and suppliers to high power prices and ever-cheaper wind and solar costs. There are multiple options for natural gas supply taking shape or seeking approvals – from Narrabri to pipelines to import terminals and more.

We need to do better, however. Electricity prices are high and supply is still tight in peak periods. New investment and reinvestment can help with both, but the current wave of capacity additions will soon break and what follows is completely unclear. Gas prices are high and supply and demand will be out of balance in the next five years without further action. New supply may not see prices fall below export parity, but its absence could easily see prices surge far above international levels. Households and businesses of all sizes are under pressure, with energy intensive manufacturers at increasingly serious risk.

There is more to regulation than light touches, firm hands and big sticks. The steps that we need to take are largely not about having more or less regulation, but doing it better.

Transmission lines can unlock the cheapest electricity resources or waste billions on wrong assumptions about supply options and demand growth. If developers keep too much risk nothing gets built – and if energy users bear too much risk they may be paying for a whole herd of white elephants. A regulatory test for investment is meant to get the balance right, but the current version is far too slow and limited in the costs and benefits it can consider.

Smarter rules are needed elsewhere in the energy system: to provide more ways to reward demand response; to encourage the efficient provision of enabling infrastructure for distributed energy resources like solar, batteries and electric vehicles; to change pricing structures and incentives so those resources are used to create value for the whole system.

Gas development should face neither blanket bans nor a Wild West. Strong science-based rules, clear timely decisions and credible enforcement are needed to earn community confidence and provide a workable environment for the gas industry.

The Big Stick of forcible divestment sounds appealing to some, and the Government suggests it would be kept in reserve – like Gondorians grasping for Sauron’s Ring, ‘not used, I say, unless at the uttermost end of need.’ It is hard to believe this assurance. Calls within and outside the Government to broaden the power belie it. The ACCC and the Harper Competition Review recommended against divestment as too big and risky a step, and they were right.

Financial assistance by all levels of government to new and existing generators is unlikely to stop, but it can be put on a more coherent and predictable footing.  The States and Commonwealth should coordinate with each other and the Energy Security Board to support the Integrated System Plan and deliver market-wide outcomes for affordability, reliability and emissions.

Integrating energy and climate policy remains critical. To ensure we get the investment we need it would be helpful to have a better guide to when old high-emitting assets may exit, and it is essential to know the specifics of how emissions and abatement will be treated over long asset lives. Market-wide policy is the gold standard, whether delivered at the national level or through collaboration among the States – who, after all, have the constitutional responsibility for power.

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