Abbott's energy end point

Alan Kohler is right of course (We need to talk about energy, not rates, May 2) . With the opinion polls predicting doom for the Gillard government, we need to know what an Abbott regime will deliver in energy policies.

Naturally the Coalition is going to say the least it can to avoid providing a target for Labor – except to announce loudly that it will kill the carbon tax and other aspects of the "clean energy future” policies.

However, there is a major challenge waiting for Tony Abbott once he moves in to The Lodge – and it relates to the fact that the Coalition now controls government in Australia's three largest electricity-consuming regions: NSW, Queensland and Victoria.

Customers in these states consume almost 79 per cent of household power. They consume slightly more than 79 per cent of business power.

Seven million of nine million Australian residential customers are in the three states. Almost 900,000 out of 1.8 million business account holders are based there, too.

This is where the twin issues of energy security and end-user prices have their biggest impact.

Assume Abbott wins a majority big enough to carry him through the next two elections – that is to 2018-19 or 2020-21 depending on whether he goes for a double dissolution to sort out a recalcitrant Senate.

This means the states – NSW in 2015 and 2019, Victoria in 2014 and 2018 and Queensland in 2016 and 2020 -– will all be going to the polls during the Abbott ascendancy, with energy costs continuing to be a "white hot” issue, as Barry O'Farrell described it last year.

Federal governments have major influence over electricity supply – through measures like a carbon price, a renewable energy target, national energy efficiency measures and national standards for power station carbon intensity. They can also buy in to state generation by paying coal plants to close down (as Gillard proposes to do).

But they can't force measures – like smart meter roll-outs and time-of-use charges – to drive a change in peak power demand, perhaps the biggest single issue impacting user prices through network charges. Nor can they force the privatisation of state-owned businesses. They can't force the private sector to invest. They don't control state project planning processes.

Moreover, they may chair the CoAG ministerial council on energy, but it is the group as a whole that has to agree on changes, for example, to the national energy law or the east coast electricity market rules.

What all this boils down to is that an Abbott government will need to work with the Baillieu, O'Farrell and Newman governments – as well as with the other states – to achieve some key changes to electricity supply over the next decade.

No matter how the Greens and their camp followers may howl, two issues dominate the energy supply landscape: reliable delivery of user needs, and prices.

During the tenure of an Abbott government – assuming a huge victory next year and two or three further successes riding on that initial big majority, pretty well the story of his predecessors, Malcolm Fraser and John Howard – it is highly likely that east coast electricity prices will double and that gas prices will too.

It is highly likely that, although the regulators will try every which way to constrain network capex and opex, the 2014-19 east coast construction outlays will be of the order of $20-25 billion – to meet demand growth, especially of peak power, to sustain reliable supply and to replace a large amount of aged infrastructure.

The 2009-14 east coast network capex is $34 billion.

It is a certainty that the cost of the renewable energy target will be higher than today because the legislation requires it to more than double present output – and the Coalition supports the Gillard government's RET.

It is equally certain that there will be about half a million households on the east coast suffering 'fuel poverty' by 2017 – that is, they can't pay the bills – and a high chance that many more will be plagued by 'fuel stress', the combined impact of power, gas, telecoms and petrol bills eating in to their disposable income.

No less alarming for Canberra and the NSW and Victorian governments is the prospect that there could be a substantial slump in manufacturing in the face of high energy prices, with or without a carbon price.

Major Energy Users Inc, representing many of the largest industrial energy users, has told Martin Ferguson's energy white paper process that: "Competitively-priced electricity has enabled the establishment of a manufacturing sector that otherwise would not have been viable in the light of many other factors such as scale, high labour costs, distance from markets, lower tariffs and industry assistance.”

Consultants Ernst & Young have reported that, on the back of low energy input costs, Australian manufacturing electricity consumption rose from 24,300 gigawatt hours a year in 1973-74 to almost 67,000 GWh in 2009-10, the point at which the global economic crisis started biting here.

Today manufacturers account for 28 per cent of national power demand, the highest sector, followed by residential demand at 26 per cent and commerce and public services (e.g. hospital, education institutions, etc) at just under 24 per cent.

Major Energy Users points out that competitive pricing of natural gas has also been important as an energy source and a raw material for a number of industries. But Australia has lost its competitive advantage in electricity in the past eight years, it asserts, and is poised to encounter the same problem with gas.

"The decline in our competitive energy advantage has been accompanied by many manufacturing plant closures,” it claims. "While the Aussie dollar appreciation has been a factor, electricity price increases are a major cause. Continuing price shocks will lead to further closures.”

Major Energy Users says strategic reviews being undertaken by a number of manufacturing and energy-intensive, trade-exposed industries at present "inevitably will lead to more closures unless the large increases in input costs cease”.

The problem for Abbott, O'Farrell, Baillieu and Newman is that energy price increases will not cease on their watch.

Ironically, if there is a dive in power consumption because of a big manufacturing slump, householders, small business, commerce and public services will end up paying more for the sunk investment in networks – the cost has to be recovered and a smaller base dictates higher tariffs.

Abbott is also not going to be able to just pick up Ferguson's white paper and claim it as his own – because the document, perforce, is centred on the Gillard government's "clean energy future” policies.

Abbott and his cabinet are going to have to devise a forward strategy for energy that is robust and attractive to investors of many stripes, not to mention voters – and they can't spend four years doing it as the Rudd/Gillard regime has done.

Large energy projects need three to five years to progress from "let's go” to commissioning.

(If you want an example of how difficult these developments can be, take a squiz at Origin Energy's Mortlake gas power station in western Victoria. It has been plagued by delays, including those caused by incessant bad weather, and is now promised for full operation by mid-2012, well beyond the initial target.)

Messing around with energy policy until late-ish in this decade is a good way to deliver more supply problems early in the ‘twenties.

In his pursuit of political power, Abbott is now confronted with the problem of the little old lady whose dog chased cars – she could afford to ignore it until the damned thing caught one and brought it home!

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.