Earlier this week the government, on the Electricity Security Board’s advice, decided a policy that will substantially tear up our electricity market.

AEMO CEO Audrey Zibelman, Energy Security Board chair Kerry Schott, Energy Minister Josh Frydenberg, Prime Minister Malcolm Turnbull, AEMC chair John Pierce and AER chair Paula Conboy at a press conference on energy issues on Tuesday. Alex Ellinghausen

In its place will be quantity obligations that will require retailers to procure electricity from specific sources according to requirements to be determined by the Australian Energy Markets Commission and Australian Energy Market Operator (AEMO).

In essence this approach mirrors recent proposals by President Donald Trump’s Energy Secretary to require retailers to procure power from coal generators that, without that obligation, would close. In the US, as here, this is being dressed up as an energy security policy.

This latest wheeze marks a new low in the quality of Australia’s political and administrative processes in the energy sector.

Some time back, the government wisely commissioned Dr Alan Finkel to undertake a review of the issues. After working carefully, Dr Finkel produced a measured and credible report that deserved and won widespread support.

CET was better than this

Although the latest proposals are formally advice from the Electricity Security Board, the Australian Energy Markets Commission (AEMC) and particularly its chair, John Pierce, appear to provide the thought leadership underlying the advice.

To be clear, the AEMC has presided over the failure of network regulation. It has staunchly defended retail markets widely considered to be highly problematic and has overseen wholesale electricity and gas markets that are now delivering prices that are higher than ever before.

The Limited Merits Review (LMR) process recently abolished by the Commonwealth was designed by the AEMC.

As best I understand the latest policy – the document that sets it out is profoundly opaque and confusing – it will establish procurement obligations through administrative fiat. In place of prices to determine who produces, how much they produce and which signal when to expand or contract the government policy, it leaves this to the AEMC, assisted by the AEMO. As in the US, if adopted, such a policy is a gargantuan change of direction and from the side of the political spectrum that ostensibly promotes markets.

Central planning bureaucracy

This is central planning in the context in which the political imperative is to sustain old and inefficient coal generators that a market, left to its own devices, no longer values. If for no other reason than many of the plants are already near the ends of their lives. Evidently the attraction of this approach for the government is that instead of brawling with market participants over the closure of coal capacity – as the government has done with AGL over the closure of the Liddel power station – with the new policy such plants will stay open because retailers will be obliged to purchase their production. Retailers will of course pass the cost of this on to consumers.

The Prime Minister has said that this approach means no more subsidies. That is simply not true: if you oblige someone to buy something that they otherwise would not, you are requiring that the buyer subsidise the seller.

But lest we imagine that sustaining old coal plants will jeopardise the decarbonisation of the power sector, somehow in this new policy, Australia will also decrease emissions by developing renewable electricity production in proportion to its national emission reduction commitments pursuant to the Paris Agreement.

Shambolic policy making

So, we are being sold a wonderland in which consumers are obliged to subsidise the continued existence of coal plants that would otherwise close, and also somehow this policy will deliver new renewable generation to meet Australia’s emission reduction policy. And lest we imagine that this means higher prices, we are told that this is not the case: in fact prices will be even lower than with Dr Finkel’s approach. Here you can have your cake and eat it. Credible? Not in the slightest.

This is shambolic policy making. It arises from the sort of woolly and wishful thinking that underlies so much of the failure that we see in almost every corner of Australia’s energy markets.

Political actors will do what political actors do.

It is up to our institutions to provide independent and credible advice that speaks truth to power. The latest machinations suggest we are making no progress.

How disappointing after the thoughtful and measured leadership that Dr Finkel provided.

Yet again our polity has snatched defeat from the jaws of victory.

Dr Bruce Mountain is Director Carbon and Energy Markets at CME.

This article originally appeared 18 October 2017 in the FINANCIAL REVIEW

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