Investing in cheaper, cleaner energy and the net zero transformation is one of the five productivity pillars identified by Treasurer Jim Chalmers.
In writing about how the new ministry was equipped to address these, I observed that it was hard to fault Energy minister Chris Bowen.
I did suggest that he has been too timid and hamstrung by the federal-state imbroglio. The question is whether there is any alternative pathway.
To his credit, Mr Bowen has been getting ministers onto the ‘same page’. The cornerstone of this is the National Energy Transformation Partnership, supported by bilateral Renewable Energy Transformation Agreements.
The latter have only been announced with South Australia, Western Australia and the Australian Capital Territory. The Energy ministers’ website says one has been announced with Victoria but includes no details.
The partnership document contains a graphic that describes five elements of the framework for the transformation.
The third of these is labelled ‘energy governance reforms’. However, it appears the ambition for reform only extended to ‘fast-track’ work to include emissions reduction in the objectives of the energy laws.
The key characteristic of the partnership and reforms thus far is to further disaggregate the national system through state derogations and the transfer of authority from the market institutions to committees of state officials.
An example of the former is SA setting its own reliability standards, and of the latter, a committee of officials seeking to coordinate gas and electricity planning to ‘improve integration between gas and electricity system planning and analysis, including on demand scenarios as end-users decarbonise.’
The reliability standard in the national market establishes maximum wholesale prices, which signal to investors how much extra capacity is valued.
The SA-specific standards are proposed to drive specific investments supported by the government. However, once built, these assets can’t be restricted to the SA market; more generally, the interconnected nature of a single grid makes reliability achievement a common good.
Similarly, the Australian Energy Market Operator (AEMO) already develops detailed short to medium-term gas and electricity plans and integrates the two through estimating the future electrification of gas in the Integrated System Plan.
Is there an alternative to this process of being hamstrung by state governments?
The existing governance arrangements were progressively implemented from 2004. Established by the Australian Energy Markets Agreement, the governance is formed by three ‘national’ energy laws covering electricity, gas and retail.
The extent to which they are national varies depending on the extent of interconnection, except in the case of retail, where Victoria opted out of the entire regime. The laws are actually legislation of the SA parliament adopted by reference (and derogation) by other states.
The extent of variation is perhaps reflected in the fact that the definition of ‘small customer’ is determined by each state separately. These laws establish the Australian Energy Market Commission (AEMC) and the AEMO.
The Australian Energy Regulator (AER) is the third institutional element, established under the Commonwealth Competition and Consumer Act.
The AEMC makes the rules that AEMO has to follow in operating the market and that the AER has to use to establish network prices and regulate retailers.
Unusually for such a commission, the AEMC cannot initiate rule changes itself. It can only act on requests for rule changes from ministers or anyone else
More recently, energy ministers gave themselves the power to make rules directly, but only those recommended by the Energy Security Board, an entity they later abolished.
Energy ministers have a history of asking the AEMC for advice and not acting on the advice they receive.
The stand-out issue of introducing locational marginal pricing rather than zonal pricing in the wholesale spot market has been an ongoing saga. Suffice it to say that ministers sided with producers against consumers.
The fact that the arrangement continues to fail is demonstrated by the creation of a NEM Review. This is not, however, a review of the whole market, merely a review of ‘wholesale market settings’.
With three well-staffed agencies responsible for guiding, operating and regulating the market, a review designed to address a narrow aspect of market design should be able to be managed ‘in-house’.
The substantive difference is that the ‘independent’ review is actually more directly politically controlled.
The threshold question is whether this federated approach to the energy system is desirable or necessary. It certainly is costly. A network of n nodes has n(n-1) links between them. Let’s leave out the non-interconnected WA and NT. Six governments talking with the feds and the market bodies is a lot of conversations.
However, the bigger cost is the compliance cost. The retailers and generators are mostly national businesses that have to deal with differing state regulations despite the notionally ‘national’ system.
These are, of course, both costs common in any sector in Australia with significant state government regulation. The low-hanging fruit of ‘red tape reduction’ as a productivity measure is stripping state functions and making them national.
The question is whether there is anything different between the states necessitating their involvement. The answer is no! Electric energy flows through conductors according to the laws of nature, not of man; economic incentives follow the common behaviour of humans, not of states.
The existing arrangements make a mockery of the Westminster system. Energy is regarded as a state responsibility, but no parliament can hold a minister accountable when no agencies are under their authority.
Energy laws are never properly debated in any parliament because once the collective agrees, the SA Parliament just dutifully enacts them.
The national energy system needs to be managed nationally, and Mr Bowen can utilise the political capital of the new Albanese government to rearrange energy governance so that it is governed by national law and national institutions.
This pathway is already trodden in other spheres, such as company and consumer law.
Ideally, the change is agreed to by the states. Nine years ago, the Finkel Review recommended:
“By mid-2018, COAG leaders should agree to a new Australian Energy Market Agreement that recommits all parties to taking a nationally consistent approach to energy policy that recognises Australia’s commitment in Paris to reduce emissions and governments’ commitment to align efforts to meet this target with energy market framework.”
The review was commissioned by COAG leaders, not the energy ministers’ collective. The collective endorsed 49 of the 50 recommendations in July 2017, including this one. The report and the ministers’ response were tabled at a COAG leaders’ meeting but never discussed.
Since the states have shown little appetite for change, the Commonwealth could act unilaterally. Three heads of power can be used:
- The corporations power: The Commonwealth used the corporations power to introduce the ‘big stick’ legislation. Almost all the parties in the market are corporations – even those still owned by State Governments.
- The national defence power: The Commonwealth uses national defence power to regulate electricity infrastructure under the critical infrastructure regime.
- The foreign affairs power: The Commonwealth has committed to the Paris Agreement. The nation has no hope of meeting its emission reduction targets unless we can better manage the energy system.
The Commonwealth can pass the legislation with these heads of power.
- Would the states object?
- Does any Premier really want to be politically responsible for energy outcomes over which they no longer have control?
- Would they go to the High Court to overturn the legislation?
Hopefully it won’t come to that. By enlisting the authority of Prime Minister Albanese to initiate the discussion with first ministers, not committees of officials, Chris Bowen could achieve real energy system reform.
David Havyatt is a former telco executive, former adviser to Federal Labor ministers and former advocate on behalf of energy consumers. He is a long term observer of Australian innovation policy.
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