Grattan Institute
Submission to the Energy White Paper
February 2014
Name: Tony Wood
Organisation: Grattan Institute
Position: Program Director, Energy
Email: tony.wood@grattan.edu.au
Key summary points
Reliable, affordable, sustainable energy is a critical requirement for economic development and
growth, for social cohesion and for environmental sustainability. Australians have enjoyed the
benefits of reliable, affordable energy for many decades and through multiple political cycles. This
outcome has been the result of an abundance of primary fuels and generally stable energy policy,
even as major changes have occurred over that time.
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Australia does not currently have a comprehensive climate change policy that can inform the
critical investment decisions that will determine the future reliability and affordability of our
energy supply. This was work-in-progress with the previous government, and the current
government is currently focused on implementing a climate change plan focused on meeting
a 2020 target for emissions reduction. Australia’s energy strategy, to be documented by the
2014 Energy White Paper will be incomplete until this gap is addressed.
Open and transparent markets, both internationally and domestically, have sustained
Australia’s energy sector and should continue to do so. The role of government should be to
ensure that policies support such market structures and are supported by complementary
policies that address market failures and barriers.
There are many uncertainties in the critical areas of fossil fuel markets, energy technology
development and climate change politics. Energy policies must be resilient to such
uncertainties and not based on any particular forecast of outcomes.
The structure and governance of the energy markets need to be addressed to ensure that
the unfinished reform agenda is delivered and the market is best able to meet new and
potentially disruptive changes that can already be reasonably envisaged.
In sections 2-8 of this submission, we address the issues on which the Issues Paper has sought
comment. We do not claim expertise or knowledge on all of these issues, and have provided
comments only where we felt capable of adding to the considerations of the White Paper
development. Furthermore, that this submission is made at level of broad principles. In some areas
we have referred to policy research published by Grattan Institute, and have not reproduced that
material in this submission. We do anticipate that further input may be appropriate at later stages in
the Energy White Paper. Finally we can offer to expand on any of the comments or issues raised in
this submission or to respond to any queries that may arise.
1. The Security of Energy Supplies
Ways community expectations can be better understood and reflected in reliability
standards
Grattan Institute published a report in December 2012, titled Putting the customer back in front:
how to make electricity prices cheaper. In that report we identified that there had been a
disconnection between the reliability standards imposed by state governments and the value that
electricity customers place on reliability. The result has been over-investment and higher cost to
consumers that is could be justified by a more robust approach.
We made recommendations to address this issue, including the transfer of responsibility for setting
reliability standards from state governments and the need for more quantitative analysis to inform
the setting of reliability standards. Whilst referring to that paper’s recommendations, we specifically
endorse the introduction of a national reliability standards framework and urge the Standing Council
on Energy to address this issue.
The value of developing fuel reserves to meet Australia’s international oil security
obligations, and augment domestic security
While Australia has abundant reserves of coal and gas, this is not the case with petroleum. There
may be potential to prove reserves through the development of unconventional oil resources,
specifically shale. In the meantime, continuing breach of international obligations should be
addressed. Whilst we do not claim specific expertise in this area, the issues seems to be more one of
international commitments that any genuine concern about domestic security. Further, the potential
to develop liquid fuels from the abundant gas and coal reserves or the more widespread adoption of
gas as a transport fuel remain opportunities. The alignment of fuels and vehicles with any particular
technology (from LNG to hydrogen and electric vehicles) requires timely and commercial
development of a complex and capital-intensive supply chain. The immediate role for government
could be to determine whether there are material market barriers to the development of
alternatives fuels for vehicles and that would augment domestic transport fuel security.
Ways to increase new gas sources to meet demand and measures to enhance transparency
in market conditions
The development of coal seam gas and LNG export facilities on the east coast and the consequent
linkage with international gas markets have led to a significant increase in local domestic gas prices.
These have previously been insulated from the global or regional markets through a lack of export
infrastructure, and the regional prices that have driven the development and investment in LNG
facilities are markedly higher than Australia’s east coast domestic prices. This is due to a
combination of strong regional demand growth, a lack of alternative suppliers and the current
prolonged shutdown of Japan’s nuclear power stations.
The physical gas market may be tight, particularly into New South Wales, over the next few years.
However, there a several alternatives that could resolve the issue through commercial processes.
Grattan Institute’s report, Getting gas right: Australia’s energy challenge, addressed this and other
gas market issues in detail and we will not restate the full arguments in this submission.
With more than $160 billion forecast to be invested in LNG production, the export industry is good
for the economy. Governments should therefore resist self-interested calls from some industries to
cap prices or reserve gas for the domestic market. Protectionism may provide some short-term price
relief for targeted industries, but ultimately it leads to higher prices and damages the economy.
Yet government and industry both have vital roles in ensuring the market works efficiently.
Governments must:
• Resolve the coal seam gas impasse in New South Wales.
• Create a more transparent gas market that includes new trading hubs, such as Wallumbilla
in Queensland, and a gas price index that provides clear information to all players.
• Remove barriers to efficient supply by freeing up trading of pipeline capacity and moving
towards elimination of joint marketing arrangements as the market matures.
Issues relating to the regulation of energy infrastructure
The structural of energy infrastructure regulation has evolved since the momentum created by the
Hilmer Review of 1983 and maintained through elements of competition reform that included the
National Competition Authority and the application of competition payments. The concerns that we
have regarding the need to renew the reform agenda, address issues of overall market governance
and asses the role and functioning of the Council of Australian Governments (COAG) and the
Standing Council on Energy are covered in Section 2, below. The roles of the Australian Energy
Market Commission (AEMC) and the Australian Energy Regulator (AER) are sound in themselves and
we support their continuing. We also note that there have been calls to separate the AER from the
Australian Competition and Consumer Commission. This would seem to a second order issue at best.
2. Regulatory Reform and the Role of Government
Priority issues, barriers or gaps within the COAG energy market reform agenda
The COAG reform package is, in our view, focused on the right areas. However, in observing the
outcome of the agenda’s implementation through COAG and the SCER, two problems emerge. First,
the list of actions under the reform agenda is almost certainly too long and poorly prioritised to be
effectively managed with the existing governance structure. Second, since the late 90s, there has
been a steady shift from a focus on outcomes to a focus on actions. These problems are exacerbated
by the politicised nature of the two bodies and the relative infrequency of their meetings. The
following are recommended:
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The reform agenda’s active list needs to be prioritised or substantially reduced.
Alternatively, an additional body needs to be created with specific accountability for
overseeing the market reform agenda.
There needs to a fundamental shift back to a focus on delivering the outcomes of the reform
agenda, possibly supported by the reintroduction of competition or reform payments.
There is well documented evidence that the European energy system is not coping well with the
combination of low growth and the mandated increase in supply from intermittent energy sources.
In Australia, falling demand and the Renewable Energy Target have already led to significant over
supply in generation capacity. In some networks and at some times, adverse consequences are also
apparent. Low wholesale prices may be a short-term benefit and a shift to lower emission energy
supply is both desirable and needs to be accelerated in coming decades. However, consideration of
the current market structure and its capacity to continue to deliver reliable and affordable energy
should be one of the issues under consideration for the Energy White Paper.
Possible approaches and impacts of review of tariff structures including fixed network
costs, further time-of-use based electricity tariffs and the use of smart meters.
In the absence of carbon pricing, the Renewable Energy Target (RET) has delivered significant
abatement at reasonable cost. However, its role in the context of an emissions trading scheme or
alongside the Government’s Direct Action Plan are more problematic, it suffers from several
fundamental design problems that are now emerging and its future will be the subject of
increasingly heated debated as the 2014 review approaches. Grattan Institute will contribute to the
Review.
There is a need for reform of electricity network tariffs. The existing structure is not cost-reflective,
provides poor signals to consumers and leads to cross-subsidies and freeloading. The problems are
steadily being exacerbated through the impact of falling electricity demand. These issues were
identified in Grattan Institute’s report, Shock to the system: dealing with falling electricity demand.
That report noted that consumers are faced with an increasing array of choices for how they source
and consume electricity. These include the option to generate electricity on-site, rather than
sourcing it all through the network. The combination of rising prices and increasing use of ‘smart’
electricity meters are giving consumers both the incentive and the means to better manage their
electricity consumption. Consumers are increasingly empowered to make informed trade-offs. For
example, to save money on running costs, a household may decide to spend more money to buy an
energy efficient refrigerator, air conditioner or television.
Policy makers cannot predict how technology will change electricity markets in the future. Battery
storage, electric vehicles and ‘smart appliances’ that change their usage patterns in response to the
needs of the electricity system are all on the horizon.
Consumers should be given more ways to manage their electricity use. But policy makers should
address deficiencies in existing tariff structures that enable and encourage some customers to
reduce their electricity costs at the expense of others. The introduction of tariffs that more
accurately reflect the cost of building and running the system will lead to more economically
efficient decisions by consumers. Grattan Institute Energy Program’s next report will make
recommendations on how this objective can be achieved, and will be released close to the
government’s release of the Green Paper.
Possible measures to promote greater price transparency in gas markets
Australia’s wholesale gas market and its pipeline trading market are relatively illiquid and opaque.
This largely reflects the history of investment in new, capital-intensive infrastructure, and the need to underpin that investment with long-term contracts, usually with large take-or-pay conditions.
While the Australian market is less developed than that of the USA for example, there are measures
that could be taken to improve price discover and market efficiency. The possibility of such reforms
has been highlighted by industry bodies representing shippers and system users and by the
Australian Energy Market Operator (AEMO). They were also referred to in Section 2 of this
submission. These measures should be a priority for the Standing Council on Energy to implement.
Areas where further privatisation of government-owned assets would contribute to more
effective regulatory frameworks and better outcomes for consumers.
Grattan Institute analysis tested the hypothesis that government-owned companies are inefficiently
investing in their networks. It found that these companies have a larger regulated asset base (or
physical infrastructure) per customer, and spend more on capital and operations, than do privately
owned companies. Government-owned companies also tend to spend more per kilometre of line
compared to privately owned companies when customer density is taken into account.
Applying more robust corporate governance to these businesses will deliver substantial cost
reductions. More certain gains may be achievable through privatising the businesses, though such a
move may be politically challenging. The SCE should identify actions to drive such changes.
3. Growth and Investment
Commercial or market initiatives that could enhance growth and investment in the energy
and resources sectors.
 Climate change and shifts in global and regional fossil fuel markets represent fundamental
considerations for energy policy. Consideration of political and technology uncertainty must
be a primary consideration in setting energy policy.
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Australian government’s involvement in international climate change and trade forums
should focus on open and robust fossil fuel markets and efficient climate change policies.
A clear linkage must be made between energy and climate change policy to provide
guidance to investors in energy supply infrastructure.
Investment in energy supply and infrastructure is relatively capital intensive and long-term in nature.
Therefore investor confidence in the outlook for markets and policy key policy direction is essential.
However, there are several areas where uncertainty is a simple reality and structural shifts could
occur with major implications. In particular, shifts in global fossil fuel markets and international
climate change policies are likely to have major implications for Australia’s coal, gas and uranium
exports. Uncertainty Government policies in this area must not be tied to particular forecasts.
Rather, plausible scenarios should be considered and options developed and actively reviewed that
are resilient to changing circumstances.
Australia’s interests are likely to be best served by robust and open international fossil fuel markets,
incorporating developments in climate change policies as they emerge.
Domestically, climate change policies and carbon pricing that flows from effective climate change
policies are a major determinant for investment decisions on key supply infrastructure such as
power stations. Whilst there is general political consensus on accepting the global commitment to
avoiding more than two degrees warming, there is no such consensus on medium-long term policy.
The current government shares its predecessor’s 2020 emissions reductions targets, but currently
has no comprehensive climate change policy beyond that timeframe. This represents a major threat
to efficient investment and creates unmanageable risks for investors.
The government has stated intentions to address longer term targets in 2015 and presumably
address how it will develop a climate policy beyond the current Direct Action Plan in parallel with
that process. Whilst climate change policy, per se, is outside the scope of the Energy White Paper, it
is so critical to effective energy policy and efficient investment that some form of formal linkage
must be a critical common policy element.
4. Trade and International Relations
We are not in a position to provide any comment on these issues at this time.
5. Workforce Productivity
We are not in a position to provide any comment on these issues at this time.
6. Driving Energy Productivity
The current suite of energy efficiency measures, ways these could be enhanced to provide
greater energy efficiency or possible new measures that would enhance energy
productivity.
Efficient and transparent pricing is the most efficient vehicle to secure optimal energy efficiency.
There is evidence that rising prices and expectations of further such increases are a factor in the
unprecedented falling demand for electricity across Australia over the last five years. Government
action should focus on identifying barriers to the efficient operation of the market and implementing
actions that would address these barriers. One example lies in network tariff structures where a
move to more cost-reflective pricing should be a priority. The current methodologies are not wellplaced to manage falling demand, and Grattan Institute has made relevant recommendations in its
report, Shock to the system: dealing with falling electricity demand.
Appliance and building standards can be effective tools to enhance consumer decisions, particularly
where information asymmetry and availability disconnect consumers from suppliers.
The use of demand-side participation measures to encourage energy productivity and
reduce peak energy use.
The electricity intensity of Australia’s economy has been falling over several years, largely through
structural change. It is a concern that total factor productivity of the sector has also been falling.
Whilst this outcome may be partly attributed to the nature of the investment cycle in electricity
infrastructure, analysis by Grattan Institute and others suggests that the trend is continuing. Policies
that look to regulatory reforms to efficiently smooth demand are likely to be worthwhile.
7. Alternative and Emerging Energy Sources and Technology
Ways to encourage a lower emissions energy supply that avoids market distortions or
causes increased energy prices.
 A credible, long term and widely based price on emissions is the first and most important
measure to encourage the development and deployment of lower emissions technology.
 Policies should support the widest range of technologies to deliver the lowest cost lowemissions energy supply in the long term.
The trend towards lower emissions energy supply is global and likely to be ongoing. However,
policies that drive this trend, the rate of the trend and, most importantly, the possibility of abrupt
and disruptive change create challenges for policy makers and investors alike. As recommended
above in regard to fossil fuel markets, the appropriate response is to develop no-regrets policies and
options that are resilient to a range of plausible scenarios and are continuously reviewed as
developments occur.
Australia’s energy markets are currently distorted through the failure to price the environmental
impact of greenhouse gas emissions. This means that the community is subsidising higher emissions
energy supply. The first and most important policy measure to encourage an efficient move to lower
emissions energy supply is to establish a credible, long term and widely based price on emissions. It
is both very likely and economically efficient that such a measure will increase the average price of
energy supply.
There is an implication in the Issues paper that the current mix of mandatory targets and grants
represents a cost-effective approach to the development of renewable and other alternative energy
sources. If that implication is intended, it is wrong.
The Australian policy landscape is littered with the poor outcomes of badly designed and poorly
implemented policies and programs that confused climate change and technology development and
technology deployment in their objectives. These include various capital grant programs and rebates
and the Renewable Energy Target, and range across federal and state and territory governments.
Policy development in this area must learn from the mistakes of the past.
There needs to be a clear and explicit distinction between policies that are focused on the research
and development of new, low-emission technologies and those focused on the commercial
deployment of such technologies. This is a challenge, since may technology proponents have a
vested interests in confusing the distinction.
Australia is also not alone in implementing policies that either explicitly or implicitly support the
development and deployment of specific energy technologies or groups of technologies. There may
be sound policy reasons for this approach, but they are rarely articulated. In the absence of such
rationale, policies to support low-emission technologies should not be technology-specific per se,
but should, where be appropriate, be designed to support the widest range technologies that will be
likely to deliver the lowest-cost, low-emission energy supply.
Market mechanisms to address climate change will be the most effective and efficient. However,
such mechanisms are not efficient at deploying low-emission technologies that are expensive now,
but may be low cost in the future. These issues were fully described in Grattan Institute’s report No
easy choices: which way to Australia’s energy future. A model that could form a solution was
described in the report Building the bridge: a practical plan to deliver a low-cost, low-emissions
energy future.
The need to review existing network tariff structures in the face of rapidly growing
deployment of grid-backed-up distributed energy systems, to ensure proper distribution of
costs.
Network tariff restructuring is a priority issue for the reasons noted in this description and in the
face of falling electricity demand. We have made comments on this issue in other sections of this
submission and will not repeat them here, but also refer again to the Grattan Institute report Shock
to the system: dealing with falling electricity demand.
9. Additional Issues
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It is in Australia’s interests to have an explicit review of the potential for nuclear energy in
the future supply mix.
Nuclear energy should be included The Issues Paper spends very little time addressing the questions
of Australia’s future energy mix in the light of plausible scenarios that could emerge when global and
domestic policies begin to address the challenge of climate change. In particular, our current
dependence and likely ongoing dependence on fossil fuels means that we should probably give more
explicit consideration to the role of CCS technologies, both internationally and domestically.
Secondly, developments in nuclear power, although taking place outside Australia in both policy and
technology, may represent a path that should be at least open to consideration. The uncertainty
regarding CCS technologies and the cost of other low emission technologies and the long timeframes
that would be involved support this consideration.