Energy investment needs a clear de-carbonisation path

The Warburton Review is the latest slap in the face to energy market certainty in Australia. It leaves clean energy investors all at sea while, as AGL notes, unprofitable dirty power stations may fire back up.

Dick Warburton’s review of the Renewable Energy Target has yet again highlighted the unfortunate politicisation of energy and climate policy in Australia. Quietly released on the same day was AGL Energy’s warning that the overhang of high-carbon power capacity in Australia risks preventing investment in renewables and the broader power sector. This hammers home that the main problem facing Australia’s electricity sector is the fact that the government has created an environment of such political uncertainty that energy policy is coming unstuck.

The repeal of the carbon laws, the huge question mark over the future of the RET, and the failure to deal with market distortions around pollution production are all symptoms of an electricity market increasingly unfit to deal with the unavoidable challenges it faces.

The problem of uncertainty cannot be solved by chopping renewable energy investment off at the knees. That gives short-term relief to the operators of coal power stations but scuppers everyone else: it punishes investors in clean energy, boosts greenhouse gas emissions, and doesn’t lower power prices.

It also overlooks that the rest of the world is forging ahead with renewable energy. In the US, half of new power generation in the next five years will be from renewables, even as coal generation equivalent to Australia’s entire coal fleet is shut down. About 20 per cent of China’s electricity already comes from renewable energy and the aim is to take this up to 30 per cent by 2020. For Australia to pull back from renewable energy now shows the absence of any awareness or long-term strategy.

It is inevitable that Australia will need to move to decarbonise its electricity sector. Both our major political parties have supported the internationally agreed goal to avoid a 2 degree increase in global temperature. Major energy companies also say they accept the conclusions of the scientific community that climate change is a real threat.

But missing from most of the current discussion is an honest appraisal of what this means for our power supply. Meeting the 2 degree goal requires electricity production around the world to reach nearly zero emissions before 2050, as modelling by the International Energy Agency has shown. For Australia, this means that the emissions intensity of electricity needs to fall by 97 per cent, from 773g of carbon dioxide per kilowatt-hour to 27g CO2/kWh, according to research by ClimateWorks Australia, ANU and CSIRO.

Decarbonising electricity to this degree is important not only because it reduces emissions from Australia’s single largest source of carbon pollution, but because decarbonised electricity is essential to reduce emissions from other sectors, such as transport (i.e. the use of electric vehicles).

For zero-emissions power to enter a stagnant or declining market, high-emission power plants need to exit. There’s certainly plenty of surplus capacity that is old, inefficient and highly polluting. So why isn’t it going? 

Policy uncertainty strikes again. As AGL notes, unprofitable capacity is staying in the market on the basis that a reduced RET might improve its prospects (also, we note that emissions intensive plants have been emboldened by the repeal of the carbon price which, through time, would have driven out the old intensive stations). There’s some irony in the fact that the major power companies, which endlessly complain about the need for stability to reduce investment risks and costs, have contributed to this environment by crusading against the RET.

Meanwhile, other major emitting countries, including our major trading partners, are busy developing plans to further reduce emissions beyond their current 2020 targets. Post-2020 targets are to be attached to the Paris climate agreement at the end of next year, although many countries will be putting forward their initial negotiating position much earlier. Underpinning their new targets is a growing foundation of policies to price and limit emissions, support for renewables (144 countries have targets for renewables, up six from last year) and save energy.

Unfortunately, the current wrangling over Australia’s energy sector isn’t looking beyond the next six years. This is unsustainable: policy uncertainty costs consumers as well as power companies, both in terms of higher prices and higher pollution.

The RET’s success in mobilising investment in clean energy should be maintained so that Australia’s electricity sector can play its full role in achieving our long-term national interest of avoiding dangerous climate change. This should be complemented with broader policy interventions that ensure the timely exit of Australia’s most polluting power stations and the broader decarbonisation of the economy.

But, ultimately, certainty in the electricity market needs a policy framework that incorporates a zero emissions goal with bipartisan political support. Anything less merely leaves the risk of steeper, swifter emission cuts in future. Without this, our electricity sector will not be able to adapt and our economy will become increasingly vulnerable to climate impacts and the relentless global drive towards clean energy. 

Erwin Jackson is deputy chief executive officer of The Climate Institute. Olivia Kember is the national policy manager of The Climate Institute