We need to talk about energy, not rates

While Australia obsesses over ineffectual rate cuts, a capital strike against base load power generation is set to devastate businesses unless politicians get their act together, fast.

I’m sick and tired of monetary policy and fiscal policy.

Monetary policy doesn’t make much difference anymore because these days the losers from a rate cut (older savers) almost equal the winners (younger borrowers), thanks to the ageing of the population and the high savings rate. And, in any case, the banks run almost as much monetary policy now as the RBA.

Actually, I can’t prove this but I suspect yesterday’s rate cut will have virtually no impact on the economy whatsoever. That’s because deposit rates will come down by 50 basis points, but bank lending rates will only fall by about 35 basis points. That means the slight preponderance of borrowers over savers on which monetary policy is based will be offset by the fact that the benefit to borrowers will be less than the loss to savers.

And fiscal policy no longer exists at all. It was used, briefly, to good effect during the GFC, but now "budget surplus” has once again become a slogan – nothing to do with economic policy, merely politics: a box to be ticked to create the appearance of economic credibility where none exists (this goes for both sides of politics).

What we should be talking about day in and day out, and more importantly doing something about, is energy policy. That’s because there is an actual crisis up ahead caused by politics, which must be resolved by politics.

Australia is suffering a capital strike against base load power generation. None has been built for many years and very little is proposed, and what little is proposed is being held up by political uncertainty.

The government’s Investment Reference Group last year estimated the total investment required on electricity generation, transmission and distribution at $240 billion between now and 2030, or $13 billion a year.

This at a time when more than that amount of money is also proposed to be spent on new resource projects for export. The competition for both labour and capital will be brutal.

The Clean Energy Future legislation, providing for a carbon tax from July 1 this year and an emissions trading scheme in 2015, is meant to provide certainty, after five years of madcap turmoil. But of course any policy from a government that’s polling 27 per cent against an Opposition promising to repeal that policy is, by definition, uncertain.

Actually, amend that: there is some certainty. It is certain to be repealed, in favour of… well, something that makes no sense. Tony Abbott has promised that he will call a double dissolution election when his repeal of the CEF legislation, presumably along with his own replacement bills, is blocked by the Senate, as it surely will be. That will add a few more months of uncertainty before capital will start flowing into electricity generation once more, assuming that the Coalition’s policy makes sense by then.

Tristan Edis in Climate Spectator has forensically and expertly laid bare the contradictions at the heart of the Coalition’s Direct Action carbon abatement policy (From Direct Action to Abbott's gospel truth? April 24; Putting action into Direct Action, May 1), so there is no need for me to repeat that today.

In fact what will be needed from the next Coalition government is not just a climate change policy that makes sense, but a whole new Energy White Paper.

The Minister for Resources, Energy and Tourism, Martin Ferguson, released a draft Energy White Paper last December, and there have been nearly 300 submissions about it so far. That draft is based on the current package of laws called Clean Energy Future.

If they’re all thrown out, as promised, then the new minister will have to start the process all over again. By the way, the shadow minister is Ian Macfarlane, who came within a bee’s willy of negotiating an emissions trading scheme in 2009 with the then minister, Penny Wong. Presumably he no longer believes in that crazy stuff.

Anyway, aside from whatever carbon abatement costs are imposed by either political party (they both have the same reduction target of 5 per cent by 2020), electricity prices are already set to double by 2017 because of chronic under-investment in east coast transmission and distribution over previous decades.

This price increase cannot be avoided – it is already locked in. In fact, it will be greater than that if the 20 per cent renewable energy target is to be met because renewable generation is always further away, so that transmission costs more.

The only antidote to the huge, looming increase in the price of electricity, not to mention the possibility of brownouts caused by the lack of investment in base load power, including nuclear, is energy efficiency.

Unless urgent action is taken, the rising price of power will destroy manufacturing and retail businesses far more effectively than the internet and the currency, which has a tendency to go down as well as up.

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