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Prime Minister Malcolm Turnbull’s power play

Prime Minister Malcolm Turnbull’s power play

When Prime Minister Malcolm Turnbull exited the stage at the Brisbane Convention and Exhibition Centre on Wednesday after making a keynote speech on energy, the almost 500 people in the room were left in no doubt about the message the PM wanted to deliver.

Turnbull, who lost the Liberal Party leadership over an attempt to support an emissions trading scheme in 2009, was tying the future of his Coalition government to the promise to bring down power prices.

Although previous prime ministers, including former Labor leader Julia Gillard and Turnbull’s predecessor Tony Abbott, also made similar claims over the past 10 years, Turnbull was effectively pitching his leadership on the ability to reverse the escalation in electricity prices seen in recent years.

“The thing to be obsessed about in this business is lower energy prices,” Turnbull told the Queensland Media Club. “That should be the obsession. The customers, citizens, businesses want lower energy prices. That’s what we’ve got to deliver.

“That’s our goal. That is the test.”

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Power prices, inextricably linked with the cost of living, will be one of the key battlegrounds for the “Super Saturday” byelections later this month as well as the next federal election which is due by early next year.

Heavy lifting

The release of the comprehensive 369-page report by the Australian Competition and Consumer Commission report into electricity pricing on Wednesday is another attempt to patch up flaws in the National Electricity Market where real power prices have increased 56 per cent in the past 10 years.

It was a stunning critique of the failures of the NEM. The ACCC report runs in parallel with the Turnbull government’s National Energy Guarantee which federal Energy Minister Josh Frydenberg is hoping to land next month – provided the ambitious minister can convince state and territory ministers to get on board.

Prime Minister Malcolm Turnbull has tied his leadership to lower power prices.

Prime Minister Malcolm Turnbull has tied his leadership to lower power prices.

Glen Hunt/AAP

If anything it will make the task harder for Turnbull and Frydenberg to land the NEG because a lot of the heavy lifting required in the ACCC recommendations – from splitting up state-owned generators in Queensland or voluntarily down-grading the regulatory base of networks – would be borne by the states.

But senior government sources confirmed the Turnbull government will attempt to keep the two issues separate, despite the ACCC referencing the NEG throughout its report.

Turnbull and Frydenberg don’t have a Plan B. It’s the NEG or nothing.

They want to land the NEG next month and then deal with the ACCC recommendations after that. They are banking on the NEG – with its emissions and reliability obligations on big power generators and users – to provide stability for the massive influx of renewables coming into the energy mix but also put downward pressure on prices.

Power prices have increased 56 per cent in the past 10 years.

Power prices have increased 56 per cent in the past 10 years.

Technology neutral

One of the upsides of the reaction to the ACCC report was appeasing pro-coal MPs on the backbench who have been getting louder in recent months about how coal was being neglected by the NEG, which is the Turnbull government’s less elegant alternative to the Finkel Review’s Clean Energy Target proposed last year.

The ACCC recommendations include a proposal for the government to underwrite low fixed-price energy off-take agreements for new generation projects to encourage competition.

Both Turnbull and ACCC chairman Rod Sims say it was technology-neutral and not aimed at getting new clean-coal projects off the ground, but the recommendation has been seized upon by pro-coal advocates, including Resources and Northern Australia Minister Matt Canavan, as a way to get new coal stations built in Australia.

Power prices, inextricably linked with the cost of living, will be one of the key battlegrounds for the "Super Saturday" ...

Power prices, inextricably linked with the cost of living, will be one of the key battlegrounds for the “Super Saturday” byelections/

Jessica Shapiro

It’s worth keeping in mind that pro-coal advocates, such as then deputy prime minister and Nationals leader Barnaby Joyce, had the same reaction to the NEG when it was released late last year – being sold the line by Frydenberg that it would do more to keep coal in the national energy mix than the CET. After the dust settled and industry pundits predicted no new coal power would ever be built, the grumblings began again.

A similar outcome is expected this time, but for the moment the so-called Monash Forum of pro-coal MPs have backed a few key recommendations from the ACCC report – even if the federal government may not adopt them in the end.

As part of the NEG, Nationals MPs have been pushing for up to $5 billion in taxpayer funding to build new coal-fired power stations and maintain existing ones.

Political risk

If anything it will make the task harder for Turnbull and Frydenberg to land the NEG because a lot of the heavy lifting ...

If anything it will make the task harder for Turnbull and Frydenberg to land the NEG because a lot of the heavy lifting required in the ACCC recommendations.

Alex Ellinghausen

But the underwriting mechanism, whereby Canberra would become a guaranteed buyer of last resort for electricity off-take after the first five years of a new generation project, seems to accomplish the same thing in their mind.

As NSW Liberal MP Craig Kelly, one of the government’s most outspoken advocates of cheap energy, put it, the underwriting scheme would eliminate the “political risk” that has made coal generators reluctant to invest during a decade of policy uncertainty.

Deputy Prime Minister Michael McCormack, who has come under pressure from the Nationals partyroom to take a more pro-coal line with the NEG, argued on Friday the ACCC gave the green light to taxpayer support for coal.

“Coal has to be part of the mix. We’ve got plenty of it, we’re exporting plenty of it, why don’t we use more of it for our domestic power needs?” he told Sky News.

Turnbull and Frydenberg have been careful in their public comments on the recommendation. The Prime Minister, correctly, speaks of how the recommendation is technology-agnostic, which lets him leave the door open to coal but avoid actually committing to supporting it.

Coupled with subsidies for renewables winding down, Turnbull’s approach is to leave it to the market to sort out the energy mix, within the framework of the NEG with its requirements for reliable baseload power at an affordable price while meeting Paris emissions reductions targets.

Energy trilemma

It’s noteworthy though Turnbull this week has skated over the last element of his “energy trilemma” and emphasised price and reliability, a nod no doubt to the hip pocket pressures families are feeling.

The Prime Minister, correctly, speaks of how the recommendation is technology-agnostic, which lets him leave the door ...

The Prime Minister, correctly, speaks of how the recommendation is technology-agnostic, which lets him leave the door open to coal but avoid actually committing to supporting it.

ACCC chair Rod Sims has also emphasised his recommendation doesn’t favour any particular energy source. While not precluding coal, he says the only projects which had been canvassed that could tap into the underwriting scheme were gas and “firm” renewables, potentially involving storage.

While Turnbull may have bought some peace by promising to further examine the ACCC’s recommendation, there are signs it is fraying. So far, he is resisting backbenchers’ demands that the underwriting mechanism be incorporated into the NEG but MPs are reframing its scope.

The ACCC wanted the guarantee limited to small and emerging players in return for offering new generation for commercial and industrial energy users but backbenchers believe it should also cover extending the life of existing coal-fired generators.

“We can’t keep these things going forever but at the same time we’ve got to try to keep them going as long as we can,” Kelly told AFR Weekend.

Any move that leaves taxpayers helping support coal is unlikely to wash with the Labor states. Despite the government’s determination to keep the ACCC recommendations separate from the NEG – negotiations which are entering the critical final stages with the states – Queensland’s Energy Minister Anthony Lynham argues they are inextricably linked.

Grassroots campaign

While Coalition MPs fret the NEG by itself cripples coal, left-wing activists GetUp and Greenpeace claim it isn’t sufficiently supportive of renewables.

They have launched a grassroots campaign, to be backed with TV ads, targeting the Labor governments in Queensland and Victoria in the hope that one of them can kill it off. (It takes just one state or territory in the National Electricity Market to veto the entire NEG.)

What is clear from the fall-out from the ACCC’s extensive report is even with a scaling back of renewable subsidies, the economics of a new coal-fired power plant being built any time in the next decade has not improved.

Despite the headlines, few see that proposed scheme as likely to drive construction of a new coal power plant, both because of the carbon risk still involved and the proposed level of government underwriting – at $45-$50 a megawatt-hour, well below what’s needed for new-generation low-emissions coal.

“There’s no suggestion from Sims that there would be any future indemnity against carbon constraint in the future so you still have that risk: That’s where coal looks hard,” according to Grattan’s Institute energy program director Tony Wood.

“My view is you put your environmental constraints in place and let the market work it out.”

Rattled investors

For the major power suppliers, the ACCC’s recommendations would mean significant changes on many fronts – if they became reality.

Investors have been rattled, with AGL Energy and Origin Energy still some way from recovering the almost $1.7 billion wiped off their combined market value after the ACCC report landed.

The concerns have been focused on limitations to further growth in generation in key markets as well as on the impact on the retail side from the ACCC’s “default” tariff proposal, seen as a move toward re-regulating prices.

But Ed McManus, chief executive of upstart online retailer Powershop, says industry players need to acknowledge the need for reforms.

“Industry should have an open mind to all of this and be prepared to work with government and get the best outcome for consumers, and ultimately industry itself,” he says.

“The need for investor certainty is well acknowledged, and when you’ve got this level of consumer and political concern [over electricity prices] you don’t have that.”

Lights out

The government guarantee proposal has raised eyebrows because of the level of intervention in the market that it would represent, imposing future commercial risks on taxpayers. The ACCC’s “default” tariff proposal is also seen by business as a surprising recommendation from the competition watchdog.

Despite a push earlier this month for the Turnbull government to establish a royal commission into power prices – with power companies joining banks as the corporate bad guys – the ACCC report has cleared the air and increased the momentum for delivery of a solution to the nation’s energy crisis.

Wood says that by focusing on the energy affordability issue, the ACCC report should sit alongside the Finkel Report, which dealt with security and reliability, and the NEG which brings all the issues together alongside the requirement to reduce emissions.

“It’s like we’ve now got the three pieces of work which address the three parts of the energy trilemma: we don’t need any more reports,” he says.

“But how it is all going to fit together is interesting. How that is actually going to be done at the same time as making sure that the lights don’t go out in summer and that sort of stuff is going to be difficult. It will require enormous cooperative federalism which is always challenging.”

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