The states are shedding power and their responsibility

Victorian Premier Daniel Andrews and Minister for Energy Lily D'Ambrosio.

Most people assume the National Electricity Market covers the nation, but neither Western Australia nor the Northern Territory takes part.

And it is not national in another sense: it is not controlled by the federal government. Using Britain as the model, the NEM was established by the federal government but effectively is owned by five states and the ACT. The appointments to the various regulatory bodies that are part of the NEM’s architecture must be agreed by them, for instance.

It was created to better co-ordinate their electricity supplies and to facilitate trade across borders using an agreed set of rules. The NEM has five interconnected regions and the underlying operational system balances supply with demand — most of the time.

It started in late 1998 although Tasmania did not join until 2005. There is often some confusion about an assumed link between the NEM and the privatisation of electricity assets. In fact, the NEM has always operated with a mix of privately and government-owned assets. In Queensland, the electricity assets remain government-owned.

Initially, the NEM worked well, with real electricity ­prices falling until around the mid-2000s. But with the introduction of the renewable energy target — it was first implemented in a small way in 2001 by the Howard government but was seriously ramped up in 2009 — the blame game started.

The federal government increasingly has been regarded as the guilty party for rapidly rising electricity prices, which doubled in real terms across the decade to the end of last year.

But with the RET working towards its effective conclusion — the target set in 2015 for next year has been met — and the value of the renewable energy certificates sinking rapidly, it’s time for the federal government to step away from playing a central role in the NEM and hand responsibility back to the states and territories.

This shift is made more pressing given the looming disaster created by the Victorian government by pushing its own ridiculously ambitious renewable energy target, the VRET. This sets a goal of 25 per cent renewables by next year and 40 per cent by 2025.

It’s not quite as bad in Queensland, although that state also has a foolish renewable energy target — 50 per cent by 2030 — which at least is unlegislated, unlike Victoria. The fleet of relatively new coal-fired generators in that state will underpin reliability for some time as well as maintain its slightly lower prices.

Last week, the Australian Energy Market Operator released its Electricity Statement of Opportunities. The document differed from predecessors in two ways: there was discussion of the cost implications of the difficult market position in several regions; and there was emphasis placed on the need for more dispatchable generation.

Victoria, in particular, looks to be heading for a potentially rough patch across summer, with a significant probability of load shedding — the technical term for the lights going off — on hot days. With two major power stations experiencing outages and needing repair, the prediction is that between 260,000 and 1.3 million households could be without power for four hours.

Notwithstanding this warning, astonishingly, the Victorian government has announced its intention to further legislate the VRET to include 50 per cent by 2030. The clueless Energy, Environment and Climate Change Minister, Lily D’Ambrosio, unconvinc­ingly claims the VRET boosts jobs and drives down energy prices.

And check out his howler from D’Ambrosio: “Victoria’s investment in renewable energy will significantly improve our energy supply and reliability in the coming years — that why it’s so important we continue driving investment in this vital industry.”

But having more intermittent energy doesn’t make it less intermittent, particularly in a small state such as Victoria. The sun still sets and the wind doesn’t always blow. And battery backup is wildly expensive and of short duration.

Just last week, the news filtered through that the electricity-hungry aluminium smelter in Portland, in the southwest of Victoria, is in financial trouble because of power issues. Direct employment at the smelter is about 600, with a further 150 contractors.

The point here is that these are Victoria’s problems caused by the Victorian government’s ill-considered policies. The VRET is likely to lead to the premature closure of the Yallourn coal-fired power station, leading to a repeat of the Hazelwood experience in which wholesale prices almost doubled with that plant’s exit.

Undermining dispatchable power sources while subsidising renewable energy, the installation of which is often at odds with the preferences of local communities, is a highway to higher prices and lower reliability.

Spurred by looming power shortages, there were several predictable self-serving pleas from business groups last week — think the Australian Industry Group and the Business Council of Australia.

As they have done in the past, they pressed for some sort of bipartisan carbon-constraining energy policy certainty to spur new investment. These groups blame the absence of such federal policy for the electricity crisis.

Let’s be clear, what they are calling for is a carbon tax, either explicit or hidden, and we know what happened to that when it was introduced by the Gillard government. And let’s also be clear that a carbon tax has not solved all the problems around the world — the EU, Canada, parts of the US — and it is just misleading to suggest otherwise.

Certainly the federal government is attempting to sort out some of the problems by backing new sources of dispatchable power; by imposing a default price on retailers; by working with some of the states (and companies) to keep some plants going; by introducing a new reliability requirement; and investing in Snowy 2.0.

The bottom line is that if you are worried about electricity ­prices and reliability as well as the possible exit of businesses through power costs, drop a line to premiers Daniel Andrews or Annastacia Palaszczuk. Their policies are causing the real harm. Only their actions can stop the rot.