Australia needs clear, stable policy to deliver secure, reliable, affordable power

16 March 2017

“Our energy system is the cornerstone of our economy, powering our industries, our cities and our homes. And so we must get our energy supply right. But at the moment we’re not,” chief executive Jennifer Westacott said, releasing the Business Council’s submission to the Independent Review into the Future Security of the National Electricity Market.

“We must take immediate action to restore the security, reliability and affordability of our energy systems while delivering the long-term signals needed for investment.

“The current design of our electricity markets relies on a lot of flexibility from our electricity system to handle peaks in demand and occasional system failures. New sources of lower emissions electricity generation are less reliable and don’t provide the same level of flexibility.

“There are also significant challenges with the availability and affordability of gas for electricity generation as well as for industry.

“Clear, stable energy and climate change policy will be critical to support much needed investment in the sector. Without new investment, we cannot deliver the security, reliability and affordability Australians expect.”

The Business Council’s submission recommends the Finkel Review focus on five key reform priorities:

1. Ensure security of electricity supply and restore community confidence in the operation of the National Electricity Market (NEM)

“The National Electricity Market performs reasonably well in all states except South Australia, which is literally at the end of the line,” Ms Westacott said.

“While we must learn from the South Australian experience, we must also be careful not to throw the baby out with the bath water. We need to preserve the broad architecture of the electricity market but with some specific changes currently being considered by the Australian Energy Market Commission such as a mechanism to obtain inertia and the development of fast frequency response.”

2. Create conditions for investments necessary to support the reliability of energy markets

“Electricity infrastructure is extremely expensive and investors need confidence in the market and confidence in policy settings before they can put large amounts of capital at risk,” Ms Westacott said.

“Information about the expected supply-demand outlook is a critical driver of electricity infrastructure investment decisions.

“To enable effective system planning and support efficient decision making, the quality of market information could be improved by publishing aggregate fuel supplies for each region over a period of time.

“To support a managed transition of the electricity sector, a three-year notice period for the withdrawal of large generators and consumers could be considered. This would also give communities time to adjust.

“We also need stable policy frameworks with minimal government intervention in markets to support electricity investment. Policies that suddenly shift from one place to another or see governments entering markets risk jeopardising, or at the very least confusing, this investment.

“On the basis of this, there should be no further changes or extensions to the RET. Although renewable energy targets are a source of market distortion, the RET has underpinned significant investments and it should be left alone. To make further changes would have a chilling impact on investment right across the sector. There is also no role for state-based renewable energy targets,” Ms Westacott said.

3. Improve affordability of energy supply to drive a strong, internationally competitive economy

“The international competitiveness of Australian industry depends on our comparative advantage in energy and restoring this must be a core priority for all governments,” Ms Westacott said.

“Increasing gas supply will be critical to all gas users and to reducing the cost of electricity. This is now an urgent national priority. Bans or moratoriums on the development of gas reserves must be lifted immediately.

“Other measures to improve the affordability of electricity include more efficient prices to encourage sharing of electricity infrastructure, greater energy efficiency and cutting the red tape that binds the sector.”

4. Ensure the necessary incentives are in place for the energy sector to make its contribution to achieving the 2030 emissions reduction target

“Australia’s 2030 emissions target has been set. What’s missing is the signal that will support the investment needed for the electricity system,” Ms Westacott said.

“A signal such as an emissions intensity scheme for electricity is both fuel and technology-neutral and preserves the broadest range of options to meet future emissions reduction targets. It also creates an incentive for investment in lower emissions generation technologies.

“As demonstrated in numerous modelling exercises, an emissions intensity scheme for electricity would manage sectoral abatement objectives at least cost. An emissions intensity scheme provides a subsidy for less emissions-intensive generation with the cost of the scheme paid for by more emissions-intensive generators. The net effect should be no increase in price for customers.

“In the medium to long term, an emissions intensity scheme will be the lowest-cost way for the electricity sector to meet its abatement objectives and it should be the principal policy tool.

“However, without access to competitively priced gas, an emissions intensity scheme could lead to multiple closures within one region in the short term, placing pressure on system security and regional communities all at once.

“An emissions standard or emissions cap should be applied to coal-fired power stations to ensure they do not extend their operating lives. While less efficient than an emissions intensity scheme, the transition may be easier to manage and provide clearer signals for new investment in the electricity system in the short term.”

5. Preserve optionality across all timeframes to achieve deeper reductions in emissions beyond 2030

“Australia can’t afford to put all its eggs in one basket as it moves away from emissions-intensive generation,” Ms Westacott said.

“Heavy-handed policies that favour particular technologies or operate outside the market, such as renewable energy targets, should be avoided as they shut off options and ultimately drive up costs.

“No generation options should be taken ‘off the table’ – including coal or gas-fired generation with carbon, capture and storage or nuclear – and no technologies should be automatically excluded from consideration by the Clean Energy Finance Corporation.”

Submission to the Independent Review into the Future Security of the National Electricity Market


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