Energy challenges highlighted by white paper

The NSW Productivity Commission recently released a white paper, “Rebooting the economy”, which, amongst other things, has highlighted some of the challenges facing the energy sector.

Among its 60 recommendations 10 are focused on the energy sector (energy-related recommendations are included in the table at the bottom of this article).

Much of the media focus on these was around it suggestion that the ban on nuclear power for electricity generation from small modular reactors (SMRs) should be lifted. What went largely unnoticed was its discussion of the importance of coordination between jurisdictions to achieve the best and most cost-effective outcomes for energy users.

It notes that moving from a predominantly coal-based generation fleet, to a new portfolio mix requires coordination between industry, consumers. Governments and national agencies like the Australian Energy Market Operator (AEMO) and the Australian Energy Market Commission.

“Unfortunately governments do not yet agree on how this transition should be guided. The lack of agreement has given rise to competing, even conflicting, interventions that risk making the energy transition more costly than it needs to be,” the report says.

The Commission notes that the National Electricity Market’s (NEM) “rigorous” governance arrangements provide the incentives for the sector to deliver efficient prices, as well as supply reliability.

It argues that proposals for interventions in the NEM outside the existing governance arrangements “should be required to demonstrate they are necessary to address a gap”.  

Its recommendation on interventions for NSW is that they “should be developed and implemented through the NEM’s governance structure.

“Any NSW Government intervention in the system should first:

• establish a clear justification
• show that NEM governance will not resolve the problem
• be subject to rigorous cost benefit analysis that demonstrates value for money of the solution and superiority to alternative options.”

Elsewhere in its white paper, the commission also notes that Federal interventions make private investment less viable with investors requiring higher returns to compensate for the risk of un-expected interventions.

The Energy Security Board has also identified this as an issue for the sector and In its post-2025 market design options paper, the ESB has proposed that governments considering interventions be exposed to principles that will help guide them to “least harmful” measures.

How did we get here?

While the white paper provides insight into the stages that led to the fracturing of energy policy in Australia, it points to the lack of a unified and stable emissions policy as a key factor.

The uncertainty and complexity of emissions policy, with the lack of a single, lasting national carbon price put “a brake on investment” in new electricity generation capacity.

It highlights that since the abolition of the carbon price in 2014 all state and territories have adopted a net zero emissions target by 2050, along with supporting policies. In the case of Queensland and Victoria this has been in the form of state renewable energy targets, while NSW has adopted its Electricity Infrastructure Roadmap. At the same time the Federal Government has undertaken measures like the Underwriting New Generation Investment program.

The commission argues two initiatives would improve the prospects for private generation investment (although they are unlikely in the current policy climate):

• A lasting national price on greenhouse emissions from the energy sector;
• Bipartisan commitment to the national institutions.

“In short, investors are awaiting a resolution on carbon pricing that allows the NEM to work as it was designed.”

It acknowledges that the lack of Federal Government support for a national approach, leaves the only option to arrive at that is via the states and territories coordinating. “That scenario is not unrealistic” based on recent responses to the COVID-19 pandemic showing the potential for “multi-jurisdictional collaboration”.

Outside of that national approach, the white paper notes that the task of achieving net zero is complicated by a lack of a uniform, cost-minimising policy across jurisdictions.

“Australia is now attempting to reach net zero using uncoordinated and inefficient state and territory policies and steps like state-based RETs are rewarding specific technologies rather than system outcomes.

“Reaching the target via this route risks imposing higher economic costs than a single national mechanism that creates incentives across the Australian economy.”

In considering the NSW Electricity Infrastructure Roadmap, it acknowledges its aim of coordinating private investment in new capacity as the State prepares for coal generator closures.

But in considering the Roadmap’s Energy Security Target, the NSW Productivity Commission argues it should be defined in terms of the national reliability standard:

“The NSW Electricity Strategy commits the Government to review the National Electricity Law and Rules to identify national regulatory burdens that can be removed, streamlined, or clarified. This commitment is a sound one. The clear case for regulation to be determined by consumer valuation through a single, national framework suggests the Target should be revisited. Before reliability interventions are implemented, they should be evaluated based on consumer willingness to pay for further improvements.”

The commission notes that the Roadmap’s Infrastructure Safeguard has been designed to lower the cost of capital for generation projects to speed up investment in dispatchable capacity, but that this will transfer some risks currently borne by investors onto consumers.

While it may bring forward investment, the commission has also flagged there are also some risks that will need to be managed, such as:

• New capacity potentially accelerating generator closures.
• Greater concerns about further interventions adding to risk and potentially discouraging investment.

The paper also notes there is a risk future governments will charge losses to taxpayers rather than distribution companies and the scheme could see less efficient investment if tender criteria such as “community support” and “location” are given too much weight.