The Coalition’s national energy guarantee
Over breakfast on Thursday morning, industry leaders spoke plainly to Prime Minister Malcolm Turnbull about what they needed from his new energy policy.
One of them, Chris Jenkins, the chief executive of defence systems supplier Thales Australia, summed up their attitude to the history of turbulence in one of the most highly charged policy areas of the past decade.
“It’s devastatingly difficult to make long-term investment plans,” Jenkins told Turnbull at the Australian Industry Group’s hastily convened full-house breakfast at the National Press Club.
“Industry are the ones creating the jobs for the future – current generation and future generation. Having that confidence to invest for the long term – investment cycles of 10 years, 20 years – is key for us. So bipartisan support is going to be everything with this policy.”
Thanking Turnbull for taking “some of the ideology and the emotion” out of the energy debate, Jenkins asked how the prime minister planned to secure Labor’s backing. He didn’t really get a straight answer.
“We’ve invited the opposition to support this proposal,” Turnbull responded.
“They do not have to have the indignity of supporting a proposal prepared by me and Josh and Scott and Barnaby. This is a proposal that has come from the Energy Security Board.”
Comprising regulators and industry leaders from the energy sector, the five-member Energy Security Board was convened just two months ago on the recommendation of chief scientist Alan Finkel.
In just nine weeks, it has produced and presented what Turnbull is calling a “game-changer” energy plan.
The prime minister regularly emphasises the board’s independence and the fact that the federal–state Council of Australian Governments (COAG) appointed it, prompting some commentators this week to describe its members as “human shields”.
He and his environment and energy minister, Josh Frydenberg, along with Treasurer Scott Morrison, the deputy prime minister and Nationals leader, Barnaby Joyce, and others on cabinet’s energy committee, believe that the plan the federal government has elicited from the board will put downward pressure on electricity prices and stabilise the system.
They also believe that of all the proposals in the past decade, this goes closest to being sufficiently acceptable, both politically and economically, for all major parties to successfully transition Australia permanently to a low-emissions future.
But Turnbull’s response to Jenkins went to the heart of what has derailed agreement through five federal governments and risks doing so again: successive leaders’ desire to use the twin issues of energy and climate change for political gain.
Reaching agreement requires deft manoeuvring, compromise and resisting that temptation. Yet from government and opposition, the messages are still mixed.
The Turnbull plan – known as the national energy guarantee – would impose two sets of new obligations on energy retailers, designed to avoid blackouts and lower both greenhouse gas emissions and prices.
Under what’s being called a reliability guarantee, the retailers would be obliged to buy a minimum percentage of their energy from dispatchable sources – that is, power generation that can be readily adjusted to meet the real-time demands of the grid. These could be baseload sources such as coal, gas or pumped hydro, but also potentially wind and solar power, traditionally sources of intermittent power only useable immediately but becoming dispatchable as storage technologies improve.
That guarantee would have to be legislated at the state level, requiring state governments’ support just as the existing national electricity market does.
Under the emissions guarantee, which would be imposed under federal legislation, the retailers would also have to ensure their overall energy mix from combined sources didn’t exceed a set level of emissions.
They would have to enter contracts to supply energy at specified emissions levels to help meet Australia’s international commitment to reduce overall emissions by 26-28 per cent on 2005 levels by 2030.
The government is yet to quantify what the electricity sector’s contribution would need to be, a figure that then affects the depth of cuts needed in other sectors. Retailers failing to meet the obligation would be deregistered.
Turnbull and his colleagues believe retailers could avoid having the first obligation conflict with the second by buying increasing amounts of dispatchable power from renewable sources, either pumped hydro or wind and solar with batteries attached.
But battery technology is still developing and the price of renewables is forecast to have a long way further to fall.
The national energy guarantee would replace the current renewable energy target that expires in 2020 and relies on subsidising renewable energy.
Coalition MPs have been told privately that the emissions reduction imposition on retailers would be low in the early years of the plan’s implementation but would rise steeply as the 2030 deadline for meeting Australia’s Paris commitment approached.
By then, the government anticipates, renewable energy will be so much cheaper and batteries so much better that buying more of it will be not just painless but advantageous.
Turnbull hinted at that in his breakfast speech, saying the Energy Security Board would advise retailers on the “least-cost path” to deliver their required emissions reductions by 2030 and they would be able to “back-end more of that as costs come down”.
“If anyone doubts the progress in battery technology, check what would have been regarded as a 1990s supercomputer sitting in your pocket – your smartphone,” Turnbull told the business breakfast.
The proposed national energy guarantee is also an alternative to the clean energy target that Alan Finkel proposed but which would have also involved subsidies. The government argues subsidies are no longer needed because renewable energy is now so cheap. Conservatives in the Coalition also happen to strenuously oppose them.
The government says the energy plan is about affordability, reliability and responsibility, reflecting its political and policy priorities in descending order: making power cheaper, ensuring there is plenty available, and adhering to the commitments Australia has made with regards to emissions reduction.
The headline sales pitch for this week’s announcement was about household savings.
The Energy Security Board suggested the plan could eventually cut power bills by up to $115 a year, compared with current forecasts for bills between 2020 and 2030.
But the government has confirmed there is no substantial modelling behind that estimate.
That modelling is still being done and is scheduled to be presented to state premiers at the next COAG meeting in November.
The opposition is ridiculing the proposed savings as possibly as little as “50 cents a week, in three years’ time”.
The government’s public relations challenge is that this plan won’t bring any fast relief to power bills.
Lower prices are simply the likely byproduct, as the chairwoman of the newly convened Energy Security Board, Dr Kerry Schott, confirmed.
“That’s not what the guarantee is about,” Schott told ABC TV’s Lateline. “The guarantee is about providing a reliable power system and meeting the emissions targets set in the Paris agreement. What will happen when those mechanisms are put in place is that prices are likely to come down and they’re likely to keep coming down.”
On the face of it, the reliability guarantee is a way of preserving the role of coal and gas in Australia’s energy supply.
But renewables are becoming increasingly attractive alternatives because they cost much less to produce and can be switched on and off much more easily than power stations.
With battery storage reducing the baseload advantage of fossil fuels and investors indicating they are moving out of coal, government ministers believe the transition will occur naturally under its plan.
The Greens are far from convinced.
Their analysis, based on Finkel’s modelling and the plan’s available detail, suggests the proposed national energy guarantee could actually lead to renewable energy forming a smaller part of the mix than otherwise.
Under the current national electricity market, it’s forecast to make up 35 per cent of Australia’s overall energy use by 2030. Under the new plan, that forecast is 28 per cent to 36 per cent.
“This scheme is worse than doing nothing,” Greens MP Adam Bandt said. “At a time when we need more wind and solar to cut pollution, the NEG will likely mean less renewable energy. It takes a particular malevolence to not just cut support to renewables but to actively pull them out of the system.”
Privately, senior government sources expect the proportion of renewables in the mix may rise further as technology advances and prices fall. But they won’t say that publicly and risk upsetting their parties’ right wing.
Labor is also concerned the scheme could actually retard the current growth rate in renewables.
Opposition Leader Bill Shorten is calling the proposal “a headline without a story” and a “hostage note” from Turnbull to his predecessor and chief critic, Tony Abbott.
“This plan has got a lot of problems with it,” Shorten said. “No detailed modelling, no guarantee on lowering prices and no great hope for the renewable energy industry and renewable energy jobs … There is so little detail in this piece of propaganda from the government … When they’ve done their homework come back and talk to us.”
And yet, behind closed doors and increasingly in public, other senior Labor figures are not ruling out opposition support.
“The more people look at this policy, it does look like it may well be another way of doing an emissions intensity scheme … managed by the energy retailers rather than managed by the government,” Tony Burke told Sky News.
“We’re still working our way through it. We still don’t have all the detail you need to make that conclusion … It might end up being something that Labor can support.”
Privately, senior Labor figures say the proposed plan’s structure – bare though it is at the moment – would potentially transition without major disruption to a full-blown emissions trading scheme under a future Labor government.
And that transferability would help give industry the certainty it seeks – if Labor agrees to support it.
The government’s messaging is no more consistent.
Malcolm Turnbull is appealing to both federal Labor and the states to end “the climate wars” and support the plan.
“We’ve got to stop this ideological, theological nonsense about energy,” he told the business leaders. “This is a time for clear-eyed, hard-headed, businesslike leadership.”
Yet he blasts the opposition at every opportunity and mocks particularly the South Australian government for past blackouts, which he blames on closing down coal-fired power stations and relying to heavily on renewables too soon.
“It was an extraordinary, idiotic absence of mind – a failure to recognise that you have to keep the lights on,” Turnbull said.
South Australia’s premier, Jay Weatherill, is not amused.
And then there’s the language the federal government won’t use.
Senior ministers deny point blank that their proposed plan is effectively a new form of emissions trading scheme or carbon price.
“They will manage this as part of the electricity generation they already buy and sell,” Turnbull said. “They will not be creating another certificate or other trading system.”
That argument relies on the fact that it involves retailers, not generators. It also involves existing contractual arrangements rather than a whole new system, and lets the retail market establish the price for various forms of energy without government subsidising renewables or penalising carbon-heavy fossil fuels.
Yet the government acknowledges the plan contains a mechanism forcing energy retailers to bring down emissions.
The retailers themselves believe that amounts to a de facto carbon price. They seem to be fine with it.
“Yes, of course it is,” says Matthew Warren, chief executive of the Australian Energy Council, which represents major electricity and gas wholesalers and retailers.
Warren says those big retailers that also generate their own power would be able to manage the mix internally to meet the emissions requirements under the new plan.
But smaller retailers would have to adjust the mix of energy they buy. That would create a market within the electricity industry, pricing various energy forms according to their carbon emissions.
“Anything that derives investment in the electricity sector in the 21st century, if it’s going to work, has to reflect the carbon price – the carbon risk,” Warren told Sky News.
“There is a value that’s attributed to the risk of carbon in all investments. It’s one of the reasons why it’s easy to find investors for renewable projects.”
Conservative critics of Turnbull’s energy plan are pointing to his own comments from 2010, when he was defending an emissions trading scheme.
“If you say we are going to cut our carbon emissions but we are not going to put up electricity prices, we’re not going to have a tax, we’re not going to have an ETS, it isn’t going to cost anybody anything, that is … delusional,” Turnbull said at the time.
Turnbull had just lost his job as opposition leader to Tony Abbott, defeated by a single vote for offering bipartisan support for the then Rudd Labor government’s proposed scheme.
But that was then. Time and technological advances have expanded dramatically the options for achieving emissions reduction.
The government believes the development and refinement of solar panels and wind turbines, and the advent of battery storage, make it possible to transition to renewables without significant extra expense.
But the head of the Energy Security Board, Kerry Schott, declined to commit to any specific cut to household bills. “I don’t think anybody can guarantee a price reduction about anything actually, because what happens with prices depends on too many things,” she said.
They include the level of supply.
Making power cheaper and more stable requires investment in generation, which requires certainty through policy bipartisanship.
But like Bill Shorten, Malcolm Turnbull can’t seem to help himself.
“He went right off the reservation this morning,” Turnbull said of Shorten.
As parliament rose for the week, the prime minister was borrowing another Liberal prime minister’s line, once used about interest rates.
“Energy bills will always be higher under a Labor government,” Turnbull said. “Energy will always be unreliable under a Labor government.”
Even the path to bipartisanship is pockmarked by insults.
This article was first published in the print edition of The Saturday Paper on Oct 21, 2017 as "Ambitions intensity scheme". Subscribe here.