Energy and Climate Policy in Australia: Out of Touch and Out of Time?

Just before the leadership spill two weeks ago, Australia’s former prime minister Malcolm Turnbull discarded the carbon emissions reduction target contained in the National Energy Guarantee (NEG). The proposed legislation was aimed at reforming the country’s electricity market and addressing the “energy trilemma” of ensuring emissions reduction, grid reliability and power price affordability. Now, the new prime minister Scott Morrison has declared the NEG “dead” and will move to completely dismantle it.

It has concerned many that such an important piece of legislation became stranded amid political quarrels. Climate change is one the most pressing global issues and poses enormous threats to humanity overall, and to Australia in particular, which has experienced droughts during the hottest winter on record.

In this article, we discuss the main issues facing the country’s energy market as well as Australia’s international commitments to the Paris Agreement. Leveraging analytical insights from our Carbon Risk Rating, we also look at the way forward for Australian utilities.

The Energy Trilemma Explained

Australia’s carbon footprint problem. Australia accounts for approximately 1% of global GHG emissions, but the country has one of the highest per-capita emission levels, as well as one of the world’s most carbon intensive power grids. Australia is highly dependent on fossil fuels: electricity generation accounts for over one-third[1] of emissions and roughly 80% of electricity comes from fossil fuels, with coal being the dominant source. The use of renewables has been rising; they are expected to make up approximately 23% of national grid by 2020. Overall, however, Australia’s emissions continue to increase, hitting a record high in 2017.[2]

The Affordability Problem. Energy prices across the country have soared in recent years. Inquiries by the Australian Competition and Consumer Commission (ACCC) – which we flagged through our Controversy Research – have found that energy bills increased by 44% in real terms between 2007 and 2017.[3]

In a nutshell, the three main causes for the rising costs are:

• Increasing network costs (40% of the increase): Australia has one of the largest and longest geographically interconnected power systems in the world, spanning over 5,000 km through 40,000 km of transmission lines.[4] [5] Considerable capital spending to reinforce the ageing infrastructure occurred in the last decade,[6] and regulated network businesses were guaranteed returns on such investments.
• Wholesale generation (+17%): old coal power plants were closed and only partly replaced with gas-fired generation during a time of high gas prices.[7] Incentive schemes for renewables further increased costs by 17%.
• Market oligopoly (+26%): the “big three” vertically integrated generators and retailers (AGL, Origin and EnergyAustralia) hold large shares of the retail market and control 60% of generation capacity. The ACCC noted that electricity retailers have at times used complex, confusing and misleading behaviour, and issued 56 recommendations to bring down prices.[8] [9]

The Reliability Problem. Australia’s electricity grid routinely experiences peak demand issues, power outages and blackouts.[10] Extreme weather events, old coal power plants not operating at full capacity or being phased out, and increasing renewables entering the grid are all contributing to the volatility.

Committed to the Paris Agreement?

The new government has affirmed that its priority is not to cut emissions but to bring power prices down, and in doing so is also pressing utilities by threatening to impose price caps and launch further inquiries. Following recent reports of ongoing pressure from some of the more conservative and climate-skeptical politicians to exit the Paris Agreement, a withdrawal has now been ruled out and the government is unlikely to introduce any meaningful initiatives to start reducing emissions. [11] [12] This is despite, according to Climate Action Tracker, Australia’s policies being insufficient and the country not being on track to meet the 2030 commitments.[13]

In a June 2018 poll by the Lowy Institute, 59% of Australians said global warming is a serious threat which should be addressed, and 84% supported investments in more renewables.[14] With federal elections due in the next 12 months, can a government afford to go against voters who have expressed such unequivocal concerns about environmental challenges?

Investors and businesses have also shown support for climate policies. For example, the Investor Group on Climate Change, representing more than USD 2 trillion in assets under management, has consistently called for greater action and policy certainty, which are necessary for more investments in the energy sector.[15] Furthermore, the appointment of Scott Morrison as the new PM and of Angus Taylor as minister of energy, both supporters of fossil fuels, has prompted calls for investors to think more seriously about sovereign bond exclusions over climate change.[16]