National Energy Guarantee holds out prospect of an energy truce

It would be possible for Bill Shorten to accept the mechanism but fight on Labor’s own targets.

It would be a triumph of hope over experience but there are signs the Turnbull government’s new energy policy may terminate the catastrophic Australian legacy of the past decade and offer the path to resurrection of a viable national energy policy.

The climate change wars are not over. Any such thinking is false. The Turnbull government and Shorten Labor will go to the next election with radically different policies. But a partial, even decisive, truce on pivotal issues could be emerging with long-run gains for the country.

Amid the confusing complexity there are three immediate realities: Malcolm Turnbull and Josh Frydenberg have won a powerful internal victory within the government; there is significant goodwill towards their new policy from industry, business and analysts to vest it with a genuine prospect; and the immediate test rests with the three Labor states — South Australia, Victoria and Queensland — which can continue the saga of political destruction or change their ways and become responsible adults.

The Labor states are grieving and angry. They were not consulted. They have been fighting Turnbull over energy policy for the past year — now they are expected to buckle and submit. That goes against every instinct and pride. But that is the price of responsibility. Energy is a shared obligation and the new policy fails unless the Council of Australian Governments — the Prime Minister and premiers together — seal the deal.

It has taken Turnbull and Frydenberg a year to devise the new framework, the main reason being the core objectives changed due to the evolving crisis in the power sector. But this policy defines Turnbull, his leadership and his fate. It makes or breaks his prime ministership. It puts the Liberal Party and Coalition on a fragile new path with new energy priorities.

The best way to grasp what happened is to assess the new position at two levels — within the government and within the country. Within the government, Turnbull has repudiated the politics of 2009 when he fell to an internal revolt driven by a Tony Abbott crusade for lower power bills and against a carbon price. This week Abbott was marginalised in the partyroom. The reversal in Turnbull-Abbott fortunes is stark.

At midyear Abbott signalled he would make energy policy the showdown moment as he attacked the Finkel report’s clean energy target. For the past six months the orthodoxy, correctly, was that Turnbull would struggle to get a viable policy through the partyroom without a revolt that might even risk his leadership. More recently, Abbott made clear politics should prevail — he wanted maximum product discrimination from Labor, ditching the Paris emissions reduction targets, a new coal-fired power station built and a coal versus renewables battle with Labor.

Turnbull and Frydenberg ditched the CET but went in another direction: Turnbull’s priority was a policy that worked and got investment running again in reliable power. He prioritised price and reliability as goals but stood by the existing 26-28 per cent emissions reduction target under the Paris deal; in short, a trifecta of objectives.

In a slick operation the new policy was endorsed by the cabinet, the ministry and the partyroom. It’s done and dusted. It won’t be returning to the partyroom. As the week advanced a few backbenchers had a few doubts, and it is vital for Turnbull and Frydenberg to keep the waters calm — a tricky job.

The pro-Abbott populist conservatives have taken a big defeat. Their media lobby will be furious and hostility towards Turnbull will intensify. But they have a major problem. Their core judgment that electoral prospects are maximised by ditching the Paris targets and pledging to a coal versus renewables fight is not the best road to election success. Indeed, it would mobilise a massive coalition of progressive forces against the government, sure to spell its doom.

This policy is a belief statement by the Turnbull Liberal Party — that under Turnbull the Liberals believe in emissions reductions (the Abbott policy as prime minister) while seeking to contain power bills. In short, shared goals are the only way forward. The burning test if the policy fails or if Turnbull has a serious election defeat becomes: will this position then be reopened?

The policy approach is the upshot of Turnbull-Frydenberg collaboration, perhaps the most intense the Prime Minister has had with another minister on a single policy. The decision was worked through the cabinet subcommittee on energy. But the key lies in the growing reliance, as the year advanced, on the regulatory agencies.

This culminated with Turnbull’s rhetorical statement: it’s not my policy, it’s the policy of the Energy Security Board chaired by Kerry Schott, a vastly experienced public servant. Indeed, the only real data on the policy last Tuesday was the eight-page letter from Schott to Frydenberg outlining the scheme. The regulators became Turnbull’s shield.

They helped to vest the scheme with credibility and shatter the fears it would be a purely political fix. Also shattered were the predictions of many of Turnbull’s opponents — that this was a zero-sum game where Turnbull must lose because the upshot would be an untenable fix to appease the conservatives or a sound policy that would provoke a full-scale meltdown within the partyroom.

The policy was a conceptual surprise. It embodies new thinking that creates a tension between the old stakeholders with their blind ideological prejudices on the left and right to intervention on behalf of renewables and coal. In design and political terms the key is the separation of the mechanism from the targets — that means it would be possible for Bill Shorten to accept the mechanism Turnbull proposes but fight on Labor’s own targets and impose those targets if he wins the election.

This point is understood by Turnbull, by Labor and by the regulators. If realised, it means you can generate fresh investment without bipartisanship on everything. The point, however, is that federal Labor is not a current decision-maker. It has no need to take a definitive position now. It has time to burn and politics to play while Turnbull deals with the premiers. Remember, however, that Shorten and his leadership team previously decided they would support the CET recommended to Turnbull by the Chief Scientist.

This was a strategic position — Labor wanted to ensure after any election win there was a policy mechanism legislated which meant it would be saved from repeating the Kevin Rudd agony of trying to establish a scheme from ground zero, a task that cost Rudd his job.

The Turnbull scheme is part technocrat, part politics. Its essence is to tie together the twin goals of system reliability and emissions reduction in two guarantees imposed on energy retailers to source their contractual obligations to meet a minimum amount of reliable power (coal, gas, hydro) and meet their share of the Paris emissions targets (26 per cent for the sector).

The key features of the policy are that, first, in a pivotal change it builds a compulsion for reliable power into the system (to prevent blackouts), since new reliable power investment had become almost extinct, leading to blackouts and disruptions.

Second, it moves towards ending subsidies and the huge rorts represented by the renewable energy target, now 95 per cent done by having no new subsidy scheme for renewables and allowing Turnbull and Frydenberg to argue the falling cost of renewables has made subsidies unjustified, a stance that infuriates the left.

Third, it shifts towards government neutrality in energy sources, with John Pierce, chairman of the Australian Energy Market Commission, offering the ringing critique that this debate has been plagued for years by experts asserting what this or that technology can achieve when “you can be sure” that a few years down the track the results of technology will be different from the forecasts. The moral was to deliver policy aims, not technology preferences.

The regulators advised their scheme was a “lower-cost” way to meet emissions reduction targets and the reliability guarantee meant retailers must hold forward contracts to deliver secure baseload power.

Frydenberg says this meant that by 2030 renewables would contribute 28-36 per cent of the total energy mix, with solar and wind providing only 18-24 per cent. These shares are significantly below the Finkel report projections and far below Labor’s projections.

They are ridiculed by the Greens and Labor as a virtual shutdown of the renewables sector, with Shorten declaring Turnbull would “trash renewable energy in Australia”. Labor has nailed its beliefs to the wall — it flies the renewables banner against Turnbull and will go to the next election with its super-ambitious 45 per cent 2030 emissions reduction target and its 50 per cent renewables target. This constitutes a huge policy chasm.

As expected, Turnbull made no commitment to build a new coal-fired power station — but his policy implies, as Frydenberg said, more investment in upgrading coal-fired power and presumably the extension of such plants. This occurs under the reliability guarantee, a policy that does not choose coal but demands more reliable power. Frydenberg projects his policy means by 2030 coal and gas still provide 64-72 per cent of the energy mix, higher than Finkel and far higher than Labor. If Coalition conservatives are not satisfied by this mix, there is no helping them. But the critical question asked by Coalition MPs now becomes: what is the winning point of distinction our policy offers over Labor? It is the question Abbott, of course, will put in the belief there is no compelling answer.

The answer, from comments by Turnbull and Frydenberg, seems to be: Labor will keep huge subsidies for renewables at the cost of higher power bills and system reliability. The question then becomes: can Turnbull sell this proposition?

Much of this depends on the vexed debate about price. This is the exacting test and truly great trap. After preventing blackouts the Turnbull-Frydenberg priority is price reductions for business and families. Yet many of the factors that drove higher prices are now embedded in the system and cannot easily be eliminated. The regulators in their letter said their assessment was a reduction in residential bills in the order of $110-$115 a year over the 2020-30 period. The modelling is not done. The government has requested such modelling. Labor has mocked the policy as a non-policy because there is no modelling evidence and price relief of only 50c a week. Shorten mocks Turnbull for being unable to “guarantee” price reductions.

If we have learned anything from the past 10 years, however, it is that politicians offering guarantees about precise relief in power bills over the course of a decade should never be believed. Given the multiple factors identified by the Australian Competition & Consumer Commission in driving power bills, politicians should never give such guarantees. Sadly, they seem to be demanded as part of our destructive cycle where the impossible is demanded and when the impossible is not delivered, we stage a hysterical performance about broken promises.

As for Labor, it is brazen beyond belief. It has produced no economic analysis to show the impact on the economy and price structure of its 45-50 per cent targets that it took to the last election and, presumably, will take to the next. Labor looked confused last week as it bagged Turnbull’s policy while simultaneously saying it looked like a price on carbon or an emissions intensity scheme that Labor once backed. In fact, Labor can keep playing politics both sides of the fence — for a while.

It can have fun teasing the conservatives on the Coalition backbench they have endorsed a carbon price and see how many are stupid enough to be provoked. But Labor needs to beware sanctioning the destruction of a scheme that industry needs and that could become an asset for Labor post-election.

Turnbull and Frydenberg know from Julia Gillard’s fate (agreeing her policy was a “tax”) that words are bullets in this game. Hence Frydenberg’s mantra this is about “no subsidies, no taxes, no carbon price, no trading systems.”

The regulators have helped mightily, with their letter saying: “There are no subsidies or certificates involved in this guarantee and in this sense it does not involve a price or tax on carbon.” Pierce said on Thursday: “Carbon price — the short answer is no.”

The initial reactions of SA Premier Jay Weatherill and Victorian Premier Daniel Andrews were pure politics, branding the scheme the work of Abbott and a “subsidy to the coal industry”. This is nonsense, but they constitute a serious warning to Turnbull, who wants the states on board but keeps attacking them. His timetable of a November COAG at which the states agree seems improbably ambitious. Queensland may be in caretaker mode at the time. Indeed, with upcoming elections it is uncertain who will be governing in SA and Queensland.

If energy policy gets traction in these campaigns — and that seems inevitable in SA — the results will influence Turnbull’s fate. If the states decide they want their own renewable schemes the logic of Turnbull’s policy seems clear: their publics will pay higher energy prices.

At the national level the joint statement this week from Chris Bowen and Mark Butler was important — it left Labor’s options open. Any test for Shorten comes far later when Turnbull, if COAG backs his scheme, may introduce legislation to authorise the electricity sector emissions reductions at 26 per cent, a level Labor won’t accept. At that time Labor can reply on the separation between the mechanism and the targets.

The initial reaction from industry is positive. If Turnbull gets COAG on board, then he has won. The momentum will gather. But have no doubt, this is a real hurdle. The question remains: will Turnbull let Labor premiers destroy his policy and thereby ruin his credibility and destroy his prime ministership? The stakes are this high.