Re-set gives Coalition space to refresh its energy policy

In the week that Malcolm Turnbull stopped being prime minister, you may not have noticed that another man also ceased to occupy a top job. It was Andy Vesey, chief executive of AGL, Australia’s largest electricity company.

There had been rumours of his departure in recent months. He is returning to the US, leaving his company in rude financial health, particularly for a utility, but one that has extremely frayed relations with the federal government.

In 2013-14, the company reported an underlying profit of $562 million. In 2017-18, the figure was $1.023 billion, an increase of 82 per cent in four years.

The dividends have risen from 63c in 2013-14 to $1.17 in 2017-18 and the return on equity has gone from 7.5 per cent to 13 per cent.

This sort of return on equity is extraordinary. It beats the big banks and puts AGL, as a utility, ­almost in a league of its own in world terms. (The other big Australian energy companies are doing very nicely, I should add.)

An obvious response to these figures is, of course, good luck to the company and the shareholders. But here’s the thing — the principal factors that have driven these results are the rise in wholesale price of electricity and the subsidies paid to renewables. The margin on retail customers is a smaller, although significant, part of the story.

For all the marketing guff of the company — “we’re getting out of coal by 2050” and the like — the vast bulk of the company’s profits continue to be sourced from thermal electricity, mainly coal-fired power stations.

Now, one of the main reasons for the difficulties between Vesey and the federal government was the company’s determination to close its Liddell coal-fired power station, located in the NSW Hunter Valley, in 2022.

Vesey was not having a bar ­of keeping the plant continuing, or selling the plant to ­another interested party. The loss of output from Liddell would be made up from other sources, ­according to Vesey.

But this is where the company’s alternative strategy looks a bit dodgy. Bear in mind that the output of Liddell is about 1680 megawatts. Vesey had plans for new generation capacity of only 1215 megawatts and a great deal of this new capacity has not been given the investment go-ahead.

Some of the new generation is pretty small beer, such as the Barker Inlet power station in South Australia, which has a capacity of 210 megawatts. The proposal to ship in liquefied natural gas via Crib Point in Victoria has not been approved and there is strong local opposition. And some of the other parts of the additional capacity are unreliable renewable energy, including a wind farm at Silverton in far western NSW.

At least Vesey was frank enough to acknowledge that the closure of the Hazelwood and Northern coal-fired plants, neither owned by AGL, had resulted in higher wholesale electricity ­prices. At this stage, there are strong reasons to expect a similar outcome from the closure of Liddell.

So how will the federal government proceed in light of the fact the national energy guarantee has been sent off to the policy knackery? And what can we expect from the appointment of the able Angus Taylor to the role of Energy Minister?

The first thing to say is that delinking energy policy and emissions targets is a step in the right direction. The renewable energy sector claims the emissions cut of 26 per cent that is our Paris Agreement commitment will be met by the early 2020s. This is overwhelmingly because of the acceleration of investment in renewable energy, which has been the result of the distorting renewable energy target.

Taylor needs to accept this as a given and concentrate instead on prices and reliability. He also must be firm in signalling to the renewable energy sector that the days of subsidies are coming to an end.

In any case, the sector’s claim that renewable energy is now cheaper than thermal generation means that any ongoing subsidies, including from state and territory governments, cannot be justified.

Taylor’s best bet is to use the ­report of the Australian Competi­tion & Consumer Commission on retail electricity pricing as a guide. Most of the other reports into electricity commissioned by the federal government in the past few years have been inadequate, slanted or otherwise unconvincing: think Alan Finkel and the Energy Security Board, in particular.

Having said this, it is important the government not overegg the message about getting tough with the electricity companies; getting out the big stick and the like. Talk of forced divestment of assets is premature.

While the electricity market has some special features, and bear in mind that electricity is an essential service, there are some ­enduring rules that still prevail. Additional reliable supply will bring down prices across time and competition is important to ensuring this happens as well as securing a good deal for customers.

It is critical that any short-term measures do not work to maintain, or even increase, the market share of the big three gentailers: AGL, Origin and Energy Australia. Smaller players are important, both in terms of restraining the big players as well as injecting innovation into the market.

The two most useful ACCC proposals the government should act on quickly is to firm up proposals for new dispatchable plants with big industrial users as anchor customers, and to insist that retailers provide a default market offer to customers based on a set maximum price.

In the first case, the gentailers would be specifically excluded from participating. Given that there are several live proposals for the minister to consider, this option should be pursued with speed and determination. Making sure the retail part of the market works better for customers, particularly loyal ones, is also a high priority.

Notwithstanding the effort and enthusiasm that former environment and energy minister Josh Frydenberg applied to his role, his achievements were few. Some of the measures he introduced had a distinctly illiberal and anti-market feel to them; for ­example, removing the appeal rights of the transmission companies and poten­tially banning gas exports.

Taylor will bring a new perspective to the energy portfolio, working with market forces and creating incentives that can benefit households and businesses. There is a lot at stake for the ­government.