Our electricity sector is a national disaster due to political infighting and self-centred corporate policies interacting with agenda-driven community groups.
I could not see any way out until a report titled “Fixing Australia’s electricity mess: a case for industry super fund investment” hit my desk. Suddenly, a direction for solutions, including long-term lower prices, lower emissions and investment appear possible.
Solving a difficult problem starts with determining what the problem is, then what’s causing it. Then you look at what happens if you don’t address the problem.
That process usually breaks solutions into parts, making an overall answer easier. And that’s what the industry funds have done.
When the report was being written, the ALP was expected to win government so there are a few plugs for ALP policies like carbon pricing, which is a pity. But the base solutions are politically and technology neutral and don’t depend on entering the political morass of carbon pricing.
The industry funds dominate the provision of equity capital in Australia and their power is increasing. Therefore, their analysis of what is wrong with electricity and how it can be fixed is important. And it gives us the chance to reach some form of consensus.
First, the problem.
The funds say Australia is experiencing “a policy-induced energy drought”. The only politically acceptable investments appear to be “relatively small-scale, quickly deployed renewable wind or solar projects”. If this investment policy is continued, we will face a disaster.
The description of that disaster is chilling: “As the prevalence of intermittent renewables supply rises (solar and wind facilities pushed by state governments) there are more periods of the day when the price of renewables generation falls to negligible levels. Baseload generators (usually coal) begin to experience lower rates of returns due to losses they occur at these times.
“Over time, the more marginal of these baseload plants shut down. To shore up supply, more investment is needed. But most of that investment mainly flows to intermittent renewables generation, which further undercuts traditional baseload generation. This resulting dynamic can create a downward spiral of supply unreliability and price volatility.”
The “unreliability” and “volatility” enables usurious organisations (my words) to emerge that have electricity available when the renewables can’t supply. They exploit their leverage to the full and charge enormous amounts, and we have no choice but to pay.
The essence of the problem is states are installing renewables without back-up or investment in the grid, and the industry funds warn that this might go on for decades, raising prices and increasing the likelihood of blackouts.
The cost of providing back-up is large and changes the economics but for the most part is ignored.
So what happens if we keep this up? The industry funds are in the business of investing for their members’ retirement and they paint a grim picture. Eventually, it will affect the social fabric of the nation. The impact is summarised thus: “Remaining on this path will be economically destructive and (will) interfere with the value of long-term portfolios for investors.
“(Our) economy requires cheaper electricity and alternative energy sources (and) secure supply to remain globally competitive. Our nation, with its burgeoning population, is hungry for new and improved infrastructure. More roads, tunnels and pipelines. More buildings, brick pits, new aluminium smelters, steelworks, concrete and paper manufacturers, chemical works and refineries. But no one is building them and some are closing down.
“The reason is that all of it requires more energy and we have experienced a policy-induced energy drought in Australia.
“In 2018, the regulatory uncertainty surrounding climate policy is high and rising. The electricity sector is important to Australia’s security, competitiveness and the overall efficient functioning of the economy on many levels.
“Electricity is used by all sectors across the economy and as such it is a cost input for all sectors. Rising electricity costs lift total costs and prices for output, reducing enterprise competitiveness.
“For households, electricity is the predominant form of energy consumption and increases in household electricity prices can lead to reduced consumption of many other goods and services. Furthermore, lower income households are disproportionably impacted by rising energy costs.”
In the IMD’s 2019 World Competitiveness Yearbook, Australia ranks 55th on energy infrastructure, from 29th a decade ago.
Now for the industry fund solutions, which they can back with capital. We need to invest in our grid and while this is canvassed in the report, the most obvious solution is the Faraday grid, a “system architecture that can deliver power from anywhere to anyone across the grid’’, as the company says. We need to test its suitability and any rival technology. If the sums look right, we need to negotiate a place on the Faraday grid schedule after London and Tokyo. If capital is required, the industry funds will put their hands up.
Then we move to the industry fund solution to the forces creating the “energy drought”. They start by pointing out that “in the normal course, portfolio investors would be lining up to fund long-term solutions in this changing industry for Australia’’.
“But so far, the silence from investors is deafening. This is no surprise given the uncertainties around climate policy and related environmental, social and governance risks. Without consistent policy settings, this situation is unlikely to change,’’ the report says.
Australia should focus on creating competition for the long-term supply of capacity and energy at given emissions targets. This can be achieved by auctions of contracts of 20 years or longer. The contracts would provide cashflow certainty to enable investment that would increase efficiency and lower costs.
“These contracts would need to strike a balance between being enforceable by law to provide certainty to investors and being capable of responding to technological and other changes. These are not insurmountable mechanism design problems. Once the goals are clear, they could then be worked through with the investment community
“On the demand side, contracts would be purchased by state governments, but also private sector agents, motivated at securing reliability of supply and price.’’
A vital part of the contract evaluation would be the consequent carbon reduction.
The industry funds say the national energy market mechanisms would still be important under a market underpinned by long-term supply contacts.
They say that under their scheme it is possible the government may eventually have to act as the investor or underwriter of last resort in electricity markets.
The scientific consensus is that emissions of greenhouse gases need to be close to zero before the end of this century (others say it needs to be quicker). It seems reasonable to assume there is no path to achieving this end that does not involve replacing existing technologies with zero emission alternatives.
The industry funds say their scheme of phasing in long-term contracts would enable the introduction of new non-carbon technologies as they are a developed.