The ugly truth about energy policy

After years of indulgent decision-making, Australia is in danger of losing its long-term relative energy price advantage. Politicians need to get back to basics on energy policy, before it's too late.

Almost a year to the day since he quit the Gillard government and his resources and energy portfolio, Martin Ferguson has laid down some markers for federal and state governments on policy-making.

Attending last week’s Energy State of the Nation forum staged in Sydney by the Energy Policy Institute of Australia, Ferguson provided his views on a range of issues that bedevil current energy supply.

In particular, he underlined three key steps:

First, he said Australia must have an integrated approach to climate change and energy policies to ensure the efficient delivery of services as well as carbon emissions abatement.

Second, federal and state governments need to continue to work together on energy market reform.

Third, federal and state governments need to demonstrate leadership to deliver sufficient gas at competitive prices on the east coast.

Ferguson conceded that both sides of politics have at various times lost sight of basic principles in designing energy policy.

They could do much better, he argued, if they accept the best way to attract efficient investment is through open and competitive markets where price signals from consumers underpinned decisions.

He used the talk to tell his predecessor and successor, Ian Macfarlane, who included energy in his industry portfolio in the Howard government and has it again today, that the white paper the Gillard government delivered in December 2012 is still relevant, although he acknowledged that the pace of change in energy markets here and overseas has continued to accelerate in the past 18 months.

The media attention Ferguson attracted with the talk tended to focus on his tough views on the renewable energy target.

The RET, which was legislated in its present form when he was energy minister but under the hands of successive environment ministers Penny Wong and Greg Combet, is undermining the resilience of the east coast power market, Ferguson said. It is delivering subsidised new capacity in to a market that actually requires generations to exit.

The scheme, he added, is distorting price signals in the NEM and impacting on efficient investment needed to deliver energy at lowest costs.

While Ferguson’s views in this presentation were equally trenchant on topics such as coal seam gas development, retail power price deregulation and privatisation of government power assets, the talk on the forum sidelines (as it is more widely when energy industry members gather these days) was on the two-pronged problem of energy market security and energy prices.

The scale of the issue was brought home in another paper at the ESON event, delivered by Jim Snow, director of consultants Oakley Greenwood.

Snow said that the present state of the markets is a consequence of policy decisions made over a number of years.

“They may have seemed reasonable at the time,” he argued, “but their full impacts are now coming to light and will become more obvious over the next three to five years -- and more unpalatable.”

“Do we even now understand the consequences of these decisions?” he asked.

Snow’s thesis, and he is far from the only one to hold it, is that Australia is migrating away from its long-term relative energy price advantage and the consequences should come as no surprise to economists.

Local energy demand is reducing -- this will continue and consumption is becoming far harder to forecast, he said.

Local businesses are losing any competitive advantage they had from our energy prices and this has become a tipping point issue for them on top of other pressures such as poor productivity and a high-value dollar.

“They will restructure, reduce, seek alternatives, or simply offshore more production.”

Snow pointed to the packed food industry as an example of energy users “flying below the radar” as they react to prices.

Food in glass or cans and frozen food is simply cheaper now to produce elsewhere for a sector that is dominated by major international brands, he pointed out, and the situation, to him, has a similar feel to when Australia “lost the rag trade,” as the textile industry restructured fast in reaction to the dropping of import tariffs. That time 100,000 jobs were lost.

It needs to be remembered, Snow said, that the competitive advantage of low-cost energy is not just enjoyed by industry -- it flows through to affordability for consumers, a strong example today being house prices, now affected by the higher cost of glass, bricks, wallboard, roofing and concrete

As well, there is rising energy poverty in the residential sector, bringing its own political challenges, he added, “and this is set to compound in colder states like Victoria as gas price rise”.

In the present market environment, Snow said, power suppliers, in turn, have just two choices: raise prices or write down asset values.

Taken together, the views of Ferguson and Snow at ESON paint an ugly picture for policymakers: the years of indulgence in decision-making are over, the populist or ideological chickens are coming home to roost and the time for hard-nosed attitudes informed by real understanding and focused on joining the dots across the energy/carbon policy spectrum is now.

Otherwise, observed Ferguson, state governments will need to be able to explain to an angry electorate why they haven’t taken adequate action to moderate energy prices.

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