BidEnergy Insights

If the Pudding is Magic - grab it with both hands!

Posted by Stuart Allinson on 29-Jun-2017 11:29:59
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When the Finkel review was tasked with examining energy security, price and our Paris commitments on emissions reductions, there was natural scepticisim about the ability to positively affect all three.

A so-called magic pudding.

Yet here we are in one of those rare moments when this is possible.

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“Unprecedented” and “crisis” are two overused words – both apply to our energy markets.  As a director of BidEnergy, two things are abundantly clear: first, if current prices persist, businesses have signalled privately that they will exit Australia as an unsustainable place to do business. Second, when the “big three” energy retailers announce price rises this year of 20%, this is against the headline tariff rate. Organisations with bargaining power negotiate well below this rate and are experiencing increases of up to 100% on their energy bills.

High prices ought to encourage new sources of power supply to enter the market, but high volatility and prolonged uncertainty, positively discourage the finance sector from underwriting the investment necessary for these long-term assets. In effect, old, inefficient generators are exiting the market and not being replaced quickly enough to balance supply and demand, leading to unsustainable prices.

Of course, the key to the policy trilemma is to bring investment certainty to a sector that has been conspicuously deprived of it for the last 10 years. Easy to say, yet harder to do, whilst energy supply is pivotal to global emissions, climate change is a classic “wicked problem”, a complex web of issues, causes and solutions. Our politicians are caught in an unenviable position between the scientific community and managing diverse community expectations.

It is too simplistic to characterise our energy sector as a “market” when, in reality, it is an amalgam of quasi-regulated sub-markets. Energy and politics are inextricably linked globally and Australia is no exception. Indeed, our energy sector has some acute structural issues and there is a case for some limited government intervention. However, if this is done clumsily, it will actually make a tough problem worse in the short term and institutionalise government intervention over the long term.

I have some skin in the policy game; I was an advisor on the Direct-Action Policy, which has brought some much-needed certainty to Australia’s emissions abatement. I am sceptical about the integrity of international emissions trading schemes and in my view, an Emissions Intensity Scheme is an elegant way forward in a world where there is no “perfect” solution. It does not unduly penalise high emissions technologies and it does not raise revenues as a tax would.

But to a large extent, my views are beside the point. A reasonable policy that attains majority support and is not kicked around like a political football, meets the public interest test of creating investment certainty to get us on to a Paris trajectory. Early cross-party agreement on a policy that tackles emissions would deliver confidence in the future and have an immediate downward impact on prices - one of those rare magic pudding moments.

This is where the Low Emissions Target recommended in the Finkel review is virtuous. Political parties of different colours are willing to give it a go, creating pre-conditions for investment certainty. It also has the added merit of being readily understandable by the electorate and if implemented with some nous, will encourage – and at least not discourage – private sector investment in efficient plant independent of fuel source.

We are at a watershed moment and the community is tired of revolving door politics. If agreement can be reached the whole thing can be taken off the political agenda and business can get on with doing what it does best – serving their shareholders and growing the economy for the benefit of the nation.

The alternative is to keep kicking the can down the road, as we have for the last 10 years, but with irreversible consequences.

 

Stuart Allinson is a director of Melbourne technology company BidEnergy and is a Member and former Acting Chair, of the Climate Change Authority. The Climate Change Authority has recommended a Low Emissions Target as an alternative to an Emissions Intensity Scheme.

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Topics: insights