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COAG Energy Council paves the way for big electricity reform


Source: AFR, 22 Aug 2016

The COAG Energy Council, Australia's chief body of energy and resources ministers, gave a renewed push to energy market reform when it met on Friday. While climate change remains a huge problem, the meeting gave urgently needed substance to creating a truly national approach to integrate energy and climate policies.

Recent very high wholesale electricity prices in South Australia, along with the six-month failure of the transmission connection between Tasmania and Victoria, no doubt concentrated ministerial minds. Federal Environment and Energy Minister Josh Frydenberg, who chairs the council, used these alarming events to secure a new commitment from ministers to reforms in the national interest in four critical areas.

First, to increase gas availability and reduce prices, the council agreed to establish two wholesale gas trading hubs and arrangements for the trading of pipeline capacity. A Gas Market Reform Group will implement these highly significant reforms, providing a focus on outcomes that has been lacking to date.

The gas pipeline industry will resist likely adoption of the Australian Competition and Consumer Commission's recommendation for a new test to decide whether pipeline pricing should be regulated. Governments should hold their nerve, since the test would only be triggered if a pipeline had substantial and ongoing market power and if regulation would deliver better outcomes.

In another obstacle to change, the Victorian government was the only jurisdiction not to support collaborative efforts to increase onshore gas supply. With luck this will change when the Victorian Parliament completes its inquiry into onshore unconventional gas and its current moratorium on new gas development.

Second, electricity network prices have been the biggest cause of power price increases in recent years. The council had previously agreed to introduce network prices that directly reflect the demand that consumers put on the network at different times. Such pricing will reduce peak demand and ever increasing network costs. Yet, states have shown lukewarm support to date, leading the council to seek advice from officials on actions to drive implementation.

Officials have also been asked to examine the way in which the Australian Energy Regulator's decisions on network prices are reviewed. At present, the Australian Competition Tribunal conducts a review of challenges to the regulator's decisions, which can then be appealed in the courts. The process is drawn out and inefficient. In NSW alone, about $7 billion of consumer savings or business profits is in dispute over the current five-year regulatory period. One sensible reform being considered is to abolish the role of the tribunal altogether.

Fixing these issues will reduce power costs while opening the potential to engage consumers more in their energy choices.

Third, ministers and industry and consumer representatives all emphasised the need to integrate energy and climate change policies. Yet too often, jurisdictions talk nationally but walk parochially. Climate change and renewable energy policies being planned by state and territory governments have the potential for unintended impacts on system reliability and cost at a national level. On Friday, Frydenberg secured a major breakthrough. Officials have been asked to advise the council on the economic and operational impacts of state and territory emission reduction policies. This positive step should also include federal emission reduction policies. If this initiative succeeds, it may re-open a door to co-operative federalism.

Finally, the council recognised the scale and speed of the energy transformation that is under way. It agreed to enhance its own strategic focus and to provide more resources to the Australian Energy Market Commission, the body that sets the rules under which the markets operate. These changes should expedite rule changes and improve the commission's capacity. Yet there remains a risk that these changes to market governance may not be enough for an energy system that must be disrupted and protected at the same time.

The proposed reforms bring challenges. Some will be resisted by commercial or political vested interests, others by individual states or territories.

Many stakeholders and observers will be disappointed that the council did not explicitly include policy reforms directly linked to climate change, such as specifically including it in national energy objectives. This was always a bridge too far for 2016. Realistically, the best outcome will be if the council's recognition that clear and credible climate change policy is vital in order to attract investment in reliable and affordable energy gives Frydenberg a case to take to the 2017 review of federal climate change policy.

The council's good words must produce real outcomes. Frydenberg said today's Australians will not thank ministers if the lights go out. But an unsustainable energy system contributing to unmanageable climate change will be even less welcome to tomorrow's Australians. The new minister has made a start to avoiding both and we must all hope that he succeeds.

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