ProfRossGarnaut’sPublicLecture:EnergySecurity,ReducingEnergyCostsandMitigatingClimateChange:DoesFinkelSolvetheTrilemma?

Hosts:FacultyofBusinessandEconomicsMelbourneEnergyInstituteAustralianGermanClimateandEnergyCollegeMelbourneSustainableSocietyInstitute

6.00pmto7.30pm

MondayJuly32017

CarrilloGantnerTheatreSidneyMyerAsiaCentre,SwanstonSt,Parkville,VIC

RossGarnautACProfessorofEconomics,TheUniversityofMelbourneChairmanofZENEnergyIamgratefultoYannRobiouduPontfromtheAustralianGermanClimateandEnergyCollegeattheUniversityofMelbourneforhelpwiththecharts,toGerardDrewofZENEnergyforhelpwiththenumbersandforAnnabelGebbieforhelpallround.

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TheSouthAustralianlightswentoutonSeptember16lastyear.Anextremeweatherevent--unprecedentedinrecordedhistoryforitscapacitytodisrupthumanactivityinSouthAustralia—damaged23pylonsonelectricitytransmissiontowers.Inresponse,safetycontrolsautomaticallyshutdownamajorityofthewindturbinesinthestateandtheinterconnectorwithVictoria.Thesuddenlossofvoltageinthesystemcausedacompleteshutdownofpowersupplythroughthegrid.

Australianconsumerspayplentytothenetworkcompaniesforback-upservicestoavoidblack-outsortobringthesystembacktolifequicklyifitfails.The“blackstart”systemsthatshouldhavebroughtgasgeneratorsquicklytolifedidn’twork.SouthAustralianconsumerspaymillionsofdollarsayear,yearafteryear,tokeepdieselgeneratorsinplaceinPortLincoln.Theydothisincasethisbeautifulandproductivedistantcornerofourfar-flungnationalelectricitysystemiscutoffbyfailureofthetransmissionlinessomewherealongtheway.Thedieselgeneratorsdidn’tstartwhentheywereneeded.

SouthAustralianslostaccesstoelectricityforseveralhours—exceptingonlythesmallnumberwhohadbatterysystemsdesignedtooperateindependentlyofthegrid,andtheresidentsofafewplacesincludingKangarooIslandwhichhadindependentgeneratorswhichworkedwhenneeded.TheresidentsoftheEyrePeninsula,includingthefisherpeopleofPortLincolnwiththeirperishablecatches,werewithoutpowerforseveraldays.

LikeWorldWar1acenturyago,thefullseverityoftheSouthAustralianblackoutlastSpringhadmanycauseswithoutwhichitwouldnothavehappened.

Onecauseisthathumanityhasbeenslowinheedingtheclearconclusionsofresearchonatmosphericphysics.Failuretosharplyandquicklyreducegreenhousegasemissionsleavesusvulnerabletoincreasingseverityofextremeweatherevents.Anothercauseisthatpolicy-makersandthegridrule-makerfailedtoseetheimplicationsforindividualregionsofuniformnationalincentivestoincreasesolarandwindgeneration.Uniformincentiveshavehighlydifferentiatedeffectsacrossregionswithsolarandwindresourcesofwidelydifferentquality.UniformnationalincentivesencourageddisproportionateresponsesinSouthAustraliawithitssuperiorrenewableenergyresources.

Athirdcauseisthatpolicymakersandtherulemakerpresumedthatthegridcouldbemanagedinthesameoldwaywhenlargeincreasesinintermittentenergysupplywerechangingthenatureofstressesonthegrid.

AfourthisthatthemarketoperatordidnotmonitorthesafetysettingsonwindturbinestoensurethattheywereconsistentwithgridstabilityinAustralia’snewcircumstances.

Afifthisthattheregulatorauthorisedexpenditureonstandbygenerationwithoutensuringthatitwouldworkwhenitwasneeded.

AnydoubtsaboutthepriorityofenergysecurityincontemporaryAustraliawereremovedbytwosubsequentepisodes,twomonthsaftertheblackoutandtheninFebruarythisyear.AfailureonthehighvoltagetransmissionlinefromthelignitegeneratorsoftheLatrobeValleytoPortlandblackedoutalargepartofwesternVictoriaforlongenoughseriouslytodamagethealuminiumsmelter.ThelossofvoltageattheHeywoodsub-stationnorthofPortlandtrippedtheinterconnectorwithSouthAustraliaagain,andmanySouthAustralianhouseholdslostaccesstopowerforawhile.

AndthenaheatwaveofrareintensityanddimensioncoveredeasternAustraliaforseveraldays,increasinguseofelectricityenoughtothreatenthebalancebetweenpowersupplyanddemand.

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SupplytootherfacilitiesinNewSouthWaleswassecuredonlybydenyingpowertotheState’slargestuser,takingtheTomagoaluminiumsmelterintheHunterValleytotheedgeofcatastrophicfailure.NewSouthWalesEnergyMinisterDonHarwincommentedlastweek:“There’snobetterwayofunderstandingthecapacitiesandvulnerabilitiesofourgeneratorsthanbeinginaheatwave”,theMinistersaid.Indeed,wereitnotforthesolidperformanceofsolar,henoted,andotherrenewables,andthe“demandresponse”fromconsumersvolunteeringtoreducetheload,theresultcouldhavebeenmuchworse.“Cleanenergyperformedasforecast”,Harwinsaid.“Thermalgenerationdidnot”.

TheFinkelReviewwassetupimmediatelyaftertheSouthAustralianblackout.TheCouncilofAustralianGovernment—CommonwealthEnergyMinisterJoshFrydenbergandhisStateandTerritorycounterparts--appointedanexperiencedandablegroupledbyChiefScientistAlanFinkeltomakerecommendationstoensurethesecurityandreliabilityoftheAustralianenergysystemaswereduceemissions.

TheanxietiesoverenergysecurityfromtheeventsoftheSpringandSummershapedtheinitialpoliticalandmediaresponsetotheclosureinAutumnthisyearofoneofthelargestandoldestgenerators,anddistinctivelyAustralia’sdirtiest--theHazelwoodpowerstation.Asitturnedout,themarkethasbeenabletohandleadjustmenttomassivewithdrawalofgenerationcapacitywithoutanychallengesofartothesecurityandreliabilityofthesystem.

ThewithdrawalofalargeamountofsupplycapacityhascompoundedthemassiveupwardpressureonpricesfromtheAustraliandomesticgascrisisandincomparablyhighnetworkcostsandretailmargins.Powerpriceshavemovedtothecentreofnationalconcerns.

Meanwhile,thereisstrongsupportwithintheAustraliancommunityforthiscountrytodoitsfairshareintheglobalefforttolimitthedamagefromhuman-inducedclimatechange.

Wehavetodealwithanenergypolicytrilemma:theneedtoprovideenergysecurely,atthelowestpossibleprices,withgreenhousegasemissionsthatareconsistentwithAustralia’sobligationsintheinternationalclimatechangemitigationeffort.

APPLYINGTHETHEORYOFECONOMICPOLICY

Oursisaworld-beatingtrilemma.

Ortrifecta.Australiain2017iswearingtheleader’sshirtinthedevelopedworldcontestforhighelectricitypricesforhouseholds(BruceMountainsaysthatwehaverecentlyputourwheelinfrontofDenmark).

Wearewellentrenchedasthedevelopedcountrywithbyfarthehighestelectricityemissionsperperson.

Itseemstomethatin2017wearewellinfrontoftherestofthedevelopedworldonanxietyaboutsecurityofenergysupply.

Weweartheleader’sshirtintwoofthecontestsonlythroughanextraordinaryincreaseoverthepastdozenyearsincostsandinsecurity.Andtomaintainourcomfortableleadinthethird,wehadtoreverseatendencyforelectricityemissionsperpersontofallrapidlybyglobalstandardsintheyearsofcarbonpricing2012-4.

WilldiscussionandacceptanceoftheFinkelrecommendationshelpustoresolvethetrilemma,andescapefromtheunhappywinners’circle?

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Thethreepolicyobjectivesofenergysecurity,lowcostsandlowemissionsarepotentiallyinconflictwitheachother.Energysecurityinthecontemporaryworldcouldstillbewonbyholdingfasttooldsynchronousthermalenergyandduplicatingandstrengtheningcentralisedenergyinfrastructuretowithstandmoreintenseextremeweatherevents.Itwouldbemuchmoreexpensiveenergythanitusedtobebecauseofhighergasprices,andtheneedtoreplaceageinggenerationassetsatatimeofhighercosts.Wewouldhavetoforegoopportunitiesforturningourrichrenewableenergyresourcesintosubstantiallycheaperenergy.Andwe,thedevelopedcountrymostvulnerabletoclimatechange,wouldbestandinginoppositiontotheglobalefforttocontainthecostsofhuman-inducedclimatechange.

Theconflictsamongtheobjectivesarecomplex,andshifting.

Thetraditionalfossilenergywasoncecheaperthanthealternatives,withcoalasbaseloadandgasforbalancingfluctuationsindemand.ButthisisbeingchallengedinAustraliabythehugeliftinthermalenergypriceswithinternationalisationoffuelmarkets.Itisbeingchallengedaswellbytherapidfallinsolarandwindenergyprices,NewbuildrenewableenergyinAustraliaischeaperthannewbuildcoal,andmuchcheaperthangas.Newstorageanddemandmanagementtechnologiesallowdistributedgenerationandstoragetotakethepeaksoffdemandforgridaswellasgenerationservices,andreducecapitalcostsofthesystemasawhole.

Thetraditionalsynchronousgenerationwouldoncehavebeenthemostsecureandreliable.Buttheincreasingintensityofextremeweathereventsandcyberinsecurityaremakingtheoldcentralisedsystemsmorevulnerable.Thenewtechnologiesformanagingpartiallydecentralisedgridsisallowingpowersupplytocontinueacrossmostofanenergysystemwhenextremeweathereventshavecausedparttocollapse—astheyhavewithbushfiresinsouthernAustraliaandfloodsinQueenslandonseveraloccasionsinrecentyears;withHurricaneSandyinNewYorkandNewJerseyafewyearsago;andinSouthAustralialastyear.

Andthereductionofgreenhousegasemissionsrequireschangesintheenergymixandforthegridtobemanagedinadifferentwaytoprovidesecureenergy.

Therapidlychangingtrade-offsamongcosts,securityandemissionsmeanthatanyinitialchoiceoftheoptimalenergymixislikelysoontobeovertakenbyevents.

Inseekingtoresolvethetrilemma,wecandrawonoldwisdomfromthetheoryofeconomicpolicy.Thetheoryofeconomicpolicysaysthatweshouldchooseoneinstrumentforthepromotionofeachobjective.

Weneedoneinstrumentorsetofinstrumentstopromoteeachofenergysecurity;lowercosts;andreductionsinemissions.

ELECTRICALENGINEERINGANDENERGYSECURITY

ThetermsofreferenceoftheFinkelReviewwerebuiltaroundenergysecurity.TheReview’sFinalReportprovidescarefullyconsideredandhelpfulrecommendationsonenergysecurity.Togetherwithrecommendationsforreformonenergysystemgovernance—themselvesshapedtoaconsiderableextentbyrequirementsforenergysecurity--thisisthevaluableandenduringcontributionoftheFinkelReview.

Thecontestedissuesarethechoiceofemissionsreductiontrajectoryformodelling,andtherecommendationonaCleanEnergyTarget(CET).

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TheFinkelReview’srecommendationsonenergywarrantsupportwhetheronefavoursemissionsreductionsinlinewithAustralia’sinterestsineffectiveclimatechangemitigation,ornot.Alreadytheexpansionofrenewableenergysupply,includingdistributedsolarPVinhouseholdsandbusinesseshasgoneandhasmomentumtogotoofarforthestatusquotoserveourinterestsinenergysecurity.

TherecommendationsonenergysecurityhavetheAustralianEnergyMarketOperatorensuringthatfastfrequencyresponsecapacityandinertiaaremaintainedatlevelsthatensuresystemsecurity;decidingin2018whetherandhowmuchreservegenerationcapacityisnecessarytomeetstabilityrequirementsandthemechanismthroughwhichthiswillbesecured;requiringnewlarge-scalesolarandwindgeneratorstoprovidegridstabilisationservicestooffsettheirowncontributionstoinstability;anddifferentiatingrequirementsonsolarandwindgeneratorsaccordingtothecircumstancesoftheregioninwhichtheyareoperating.

ThelastoftheserequirementsimposesmoreseveregridstabilisationdemandsonsolarandwindgeneratorsinStatesthathavehigherproportionsofenergycomingfromintermittentsources.

TheReviewalsorecommendsthatgeneratorsprovidethreeyears’noticeofclosure.

Ontheseandotherpointsrelatedtoenergysecurity,theReviewdrawsonengineeringmodellingundertakenbytheMelbourneEnergyInstituteatthisUniversity.Themodellingdistinguishesbetweenminimumrequirementsofinertia,andfastresponsefrequencycontrol.Theformerismostreliablyprovidedbysynchronousgenerators—historicallyprovidedbythermalgenerationandhydro-electricity(towhichwecanaddpumpedhydrostoragewithitssimilarcharacteristics).Newtechnologiesareemergingtocarrypartorperhapseventuallyallofthisload.TheMEIworksuggeststhatsynchronousenergysourcesprovideaboutaquarteroftheminimumload.Butinanycase,theanalysissuggeststhat,withjudiciousmanagement,itwillbepossibletoreachtheproportionsofrenewableenergyinthemodelledtrajectories(upto64percentbelow2005levels)withexistingtechnologiesandwithoutthreateningthestabilityofthesystem.TheMEIReportnotesthaton-goingresearchmayreducetheminimumrequirementofsynchronousgeneration.

TheeconomicmodellingofthestabilityconstraintsbytheJacobsconsultancy,suggestslittleadditionalcostofpowerwithinthemodelledtrajectories.Thisconclusionisdrawnontheconservativeassumptionthatthesourcesofinertiaareconfinedtothoseavailablenow.RecentdiscussionofAustralia’spumpedhydrostoragepotentialhasdrawnattentiontomeansofgreatlyexpandingsynchronousgenerationatrelativelylowcostifthisisnecessaryforgridstability.

Fastfrequencyservicescanbeprovidedbysynchronousgeneratorsorbyarangeofnewtechnologies,includingbatterieswithsuitablydesignedcontrolsystems.Witheffectivemanagementbythemarketoperator,theprovisioncanbesecuredatlowcost.

Forthemostpart,theReviewleavesdecisionsonthedetailtotheAustralianEnergyMarketOperator,sometimesworkingwiththeAustralianEnergyMarketCommission.CoordinationistobeprovidedthroughanewEnergySecurityBoard,onwhichtheyarerepresented,alongsidetheChiefExecutiveOfficeroftheAustralianEnergyRegulator.

CLIMATESCIENCEANDEMISSIONS

TheReviewReportdoesnotdiscussclimatescienceoritsimplicationsforAustralianemissionsreductions.Itmakesnorecommendationontheappropriaterateofreductionofemissionsintheelectricitysector.ItsaysthatthetrajectoriesaremattersforGovernments.ItpresentstheresultsofengineeringmodellingbytheMelbourneEnergyInstituteandeconomicmodellingbytheJacobs

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consultancytotesttheimplicationsforenergysecurityandenergypricesofpursuingonespecifiedemissionsreductiontrajectory.

Nocaseismadeforthetrajectorythatismodelled.Inonesense,thisdoesnotmatter,becausetheReportdoesnotrecommendadoptionofthistrajectory.

Butitmaymatteragreatdeal,becauseothershaveslidintotreatingamodellingassumptionasarecommendation.

TheReviewrecommendsthatagreementbereachedacrosstheAustralianFederationonemissionsreductiontrajectoriesandameansofachievingthem.Itarguescorrectlythatthisisessentialforpolicycertaintyasabasisforinvestmentdecisions.Thatcertainty,inturn,iscrucialforloweringthesupplypriceofinvestmentinnewpowergeneration,andthereforetoholdingenergycoststothelowestlevelthatisconsistentwithmeetingsecurityandemissionsreductionobjectives.

Certaintyaboutpolicyonemissionsreductiontargetscanonlybebuiltaroundsharedunderstandingoftheemissionstrajectoriesthatservenationalinterests.

WhilethereisstrongcommunitysupportforAustraliadoingitsfairshareinaglobalefforttocombatclimatechange,therearesomeAustraliansinplacesofpoliticalinfluenceandauthoritywhowantnosuchthing.

Intheend,astablepolicywillhavetoemergepolitically,withoneviewprevailingovertheotherintheelectoralmarketplace.

TheanalogythatcomestomindisMedicare.TheWhitlamGovernmentintroducedMedibankinthefaceofrabidoppositionfromthemedicalprofessionandtheofficialOppositionparties.ItwasrepealedbytheFraserGovernment.Itwasre-establishedasMedicarebytheHawkeGovernmentin1983.TheofficialOppositionpromisedtorepealitagaininthenextfourelectioncampaigns.JohnHowardreversedhiscommitmenttorepealbeforethe1996electionandwon.TherehasbeenwidelybasedsupportforMedicaresincethen.

ForthereasonssetoutintheFinkelReview,therearelargeeconomicadvantagesinfindinganearlybasisforpolicystability.LaterinthislectureIwillsuggestawayofbridgingthepositionsofpeoplewhotakeseriouslyAustralia’sinterestineffectiveclimatechangemitigation,andthosewhofearthatplayingAustralia’sfullpartwillleadtoenergyinsecurityandhighenergycosts.

ThemodellingfortheReviewpresumesanemissionsreductiontrajectoryofminus28%on2005levelsby2030,64percentby2050andonehundredpercentby2070.

TheReviewnotesthatAustraliahasmadeacommitmenttotheUnitedNationstoreducetotalemissionsby26-28percentby2030.Itsmodellingisbasedonelectricitysectoremissionsbeingreducedby28percent.

Therearequestionstobeaskedabouttheoveralltargetandabouttheappropriateelectricitysectorcontributiontoit.

Theminus28percentispartbutnotthewholeofAustralia’sPariscommitment.

Australiahasalsocommittedtodoingitsfairshareinaglobalefforttoholdhuman-inducedtemperatureincreasesbelow2degreesCelsius,andascloseaspossibleto1.5%.

First,theoveralltarget.

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Theanalysisformy2008ClimateChangeReviewconcludedthatAustralia’sfairshareofa2degreeseffortwouldbea90percent(95percentpercapita)reductionfrom2000levelsby2050.Thelateandslowstartsincethenrequiresanearlyandfastfinish.

Otherapproachestoallocatingemissionsreductionresponsibilitiesfora2degreestargethaveproducedsimilarormoredemandingconclusions.TheAustralianClimateChangeAuthority,withstatutoryresponsibilitiestoadvisetheParliamentonemissionstargets,suggestedzeroemissionsby2046inits2014Report.DuPontandothersatthisUniversityinarecentarticleinNatureClimateChangesuggestarangeof82to98%reductionsbelow2005levelsBY2050.

Noneoftheseassessmentsrefertothe1.5degreeobjective.

TheParisagreementembodiedadynamicapproachtoemissionsreductiontargets.Thepartiestotheagreementacceptedtheendgoalsoncontainmentoftemperatureincreases.Theyagreedthateachcountrywouldpledgemediumtermtargets.Itwasoftheessenceoftheagreementthatthepartieswouldmeetperiodicallytoreviewthepledges,andassesswhethertheywereadequatetotheultimateobjectives.ThefirstreviewundertheauspicesoftheUNFCCCistotakeplacein2018.Eachcountrywouldreviseitspledgeatthattime.

Australia’scommitmentthereforeisnottominus26-28percentby2030.Rather,itisto26-28percent,andsuchadditionaleffortasiscommittedinfutureinresponsetocontinuingpeerandinternalreview.TheAustralianPrimeMinisternotedthatAustraliawouldreviewitspledgein2017,inpreparationforreconsiderationofourcountryplayingitsfullpartinthe2018ConferenceoftheParties.

Ihaveseenthecorrosionofaninternationalcommitmentinthedaytodaydynamicsofthedomesticpoliticalprocessbefore.My2008Reviewrecommended2020emissionsreductiontargetsbeforeweknewwhethertherewasgoingtobeanycommitmentatallbyothercountriestofollowtheconclusionoftheKyototargetsin2012.IrecommendedthatAustralianemissionsbereducedunconditionallyby5percenton2000levelsby2020,andbyupto25percentdependingontheactionofothers.ThefullrecommendationwasacceptedbytheAustralianGovernmentin2009,andsupportedbytheOpposition.TheconditionsthatwouldtriggerthelargerreductionswerecommunicatedtotheUnitedNationsFrameworkConventiononClimateChange.

IrecallameetingaddressedbythethenOpposition’sShadowMinisterfortheEnvironmentinthissameCarrilloGantnerLectureTheatreattheUniversityofMelbourneduringthe2013electioncampaign.TheShadowMinisterconfirmedthattheOppositionsupportedtheGovernment’scommitmenttotheUnitedNations.IaskedwhethertheOpposition’scommitmentextendedovertheconditionalandunconditionaltargets.TheShadowMinisterconfirmedthatitcoveredtheconditionalaswellastheunconditional.

Intheevent,othercountries’actionsrequiredanadjustmentofthetargettosomewhereintherangeofminus15tominus20percent.ThenewGovernmentstucktotheminus5percent,andthenewOppositiondidnotcontesttheslippage.

TheParisagreementhasbeenchallengedbytheelectionofPresidentTrump.SyriaandNicaraguaarelikelysoontobejoinedbytheUnitedStatesasnon-members.

MostsubstantialcountrieshaverespondedtotheUnitedStatesannouncementonwithdrawalbystrengtheningtheirdeterminationtomaketheParisAgreementwork.TheavoidanceofdangerousclimatechangeismoredifficultwithouttheFederalGovernmentoftheUnitedStates,butnotabit

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lessimportantforAustraliaandtheworld.Itisimportanttopreservetheintegrityoftheinternationalagreement,forthetimewhentheworld’sstrongeststateisagainabletoparticipate.

ThisisnotatimeforweakeningourinterpretationoftheParisAgreement.

Themodelledtrajectoryofminus28percentintheelectricitysectorisinadequateevenifweweretoacceptthatminus28percentisappropriatefortotalemissions.

TherehasbeenconsiderableresearchinAustraliaontherelativecostsofabatementinelectricityandothersectors.My2008Reviewshowedthatauniformcarbonpricewouldinducelargerproportionateemissionsreductionsintheelectricitysectorthanintheeconomyasawhole.ModellingbytheTreasuryandtheoldDepartmentofIndustryandEnvironmentsuggeststhattheoptimalrateofemissionsreductioninelectricityisaboutthreetimesthatintheeconomyasawhole(TreasuryandDIICCSRTE,201X).

Chart1:CommonwealthTreasuryandIndustryDepartmentmodellingoftherelationshipbetweentotalandelectricityemissionsreductions.

Thesestudiesoftherelationshipbetweenelectricityandtotalemissionsreductionspresumesimilarincentivestoabatementacrossallsectors.From2012to2014wehadincentivesacrossmostsectors.TheCarbonFarmingInitiativeinagriculturalandpastoralactivitieswasfundedbycarbonpricinguntil2014andbytheEmissionsReductionFundfrom2014untilthisfinancialyear.Emissionswereexpectedtofallsubstantiallymorerapidlyinelectricitythanothersectorswhenallsectorsreceivedsimilarincentives.Isitreasonabletoexpectsimilarratesofemissionsreductioninothersectorsintheabsenceofanyabatementincentivesatall?

ECONOMICSANDENERGYPRICES

Thepriceshouseholdsandbusinessespayforelectricityhavethreecomponents:thewholesalepricepaidtogenerators;thecostsofaccesstothepolesandwiresthatmovepowerfromthegeneratortotheuser;andthemarginforretailers.ThecreationoftheNationalElectricityMarketinthe1990sbroketheoldStateElectricityCommissionsintothethreeelements,andcorporatisedorprivatisedeach.Thefirstelement(wholesale)andthird(retail)weremeanttobecompetitive.Thethird(polesandwires),anaturalmonopoly,wastohaveregulatedinvestmentandprices.Wherestateownershipcontinuedinthecompetitivepartsofthesystem(wholesaleandretailsales),itwastobeguidedbytheCompetitionPrinciples,withoutGovernmentssubsidisingordirectingbusinessdecisions.

Thewholesalemarkethasperformedreasonablywellinrapidlychangingsupplyanddemandconditions.Theretailandnetworksegmentsoftheelectricitysectorhaveperformedpoorly.

TheFinkelReviewmakessomesensiblesuggestionsontheneedfornetworkplanningbyapublicbody,notablytheAustralianEnergyMarketOperator,inplaceofexclusiverelianceonprivateinitiativesoninvestmentbymonopolynetworkserviceproviders.Itnotesthatcorrectionofegregiouspastinvestmentsinthenetworksmayrequireeithercompulsoryorvoluntarywritedowns.ItleavesdecisionsonthesematterstotheproposedEnergySecurityBoard.Theregulators’roleincontrollingnetworkcostshasbeenstrengthenedbythedecisionoftheCommonwealthGovernmentlastmonthtotruncatenetworkcompanies’opportunitiestoappealdecisionsoftheAustralianEnergyRegulator.Ithasbeenstrengthenedaswellbyalargerecentincreaseinfunding.

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TheFinkelReviewnotestheproblemofmonopolyintheretailsegmentofelectricitysupply.ItleavesactiontotheAustralianConsumerandCompetitionCommission,whichiscurrentlyworkingontheseissues.

TheFinkelReviewconfinesitsdetailedmodellinganddiscussionofandrecommendationsonelectricitycostsandpricestothewholesaleenergymarket.Thishasbeentheleastproblematicsegmentoftheelectricitysectorsincethereformsofthe1990s.

ThereisanegativetonetosomeoftheReview’scommentaryonthewholesalemarket.Pricevariabilitytendstobeviewednegatively.Yetpricevariabilityinresponsetochangesinelectricitysupplyanddemandprovidestheincentivesforusersandproducersandtradersofpowertomakeuseofnewtechnologiesandbusinessmodelstofacilitateadjustment.Thereisgenerallyapessimisticviewofthepotentialforhighpricestoattractinvestmentinexpandingsupplycapacity.ThereisgenerallyanopenviewoftheroleofdirectGovernmentprovisionofgenerationcapacitytomakeupforinadequateprivateinvestmentresponse.Ihaveneversoughttomakeacasefortheuseofmarketsinallseasons.However,muchexperienceinformsusthatthatmarketsallocateresourceseffectivelywherethereisgenuinecompetition,supportedbypublicinterventiontoensurethatexternalcostsandbenefitsofprivateactivitiesaretakenintoaccount.

Ihaveamorepositiveviewofthewholesalemarket.Ithasadjustedsmoothlytotheabsorptionoflargeamountsofintermittentrenewableenergy.Ithasprovidedsignalsforclosureofninerelativelyhighcostthermalelectricitygeneratorsoverrecentyears.Thecurrentlyhighwholesalepricesareprovidinghugeincentivesfornewinvestmentingenerationcapacityalloverthenationalelectricitymarket,andforincentivesforstorageanddemandmanagementtoreplaceexpensivegaspeakinginbalancingintermittentrenewables.

Thewholesalemarkethasproblems,mainlyderivingfromoligopolisticmanagementofpricesinforwardmarkets.ThesearemostsevereattheextremitiesoftheNationalElectricityMarket,inSAandQueensland.Problemsofoligopolyarebestcorrectedthroughcompetition.ThisisthefocusofthecurrentACCCreview.

TherehavebeenthreerecentproposalsfordirectGovernmentinvestmentingeneration:theSAproposaltobuilda250Mwgasgeneratortoserveasanemergencyreserve;theCommonwealth’sproposaltohaveSnowyHydroprovide2000Mwofpumpedhydrostoragecapacity;andthenoisefromtheAustralianMiningIndustryCouncilandtheCoalitionPartyroomsaboutdirectCommonwealthinvestmentinanewcoal-firedgenerator.

Seriousdiscussionofthesemattersamountstoatransformationalchangeinthewholesalepowermarket.Thediscussionisamaterialdeterrenttoprivateinvestmentingenerationandstorage.ThereisaseriousriskofdamagetotheonepartofthereformedelectricitysystemthathasbeenservingtheinterestsofAustralianusersofpower.

ThereisroomfordebateaboutwhethertheoldintegratedpublicmonopolieswouldhavedeliveredpoweratlowercosttoAustralianusers.Thereisnodoubt,however,thatamixtureofprivateandpublicinvestmentinwhichnon-commercialobjectivesdrivepublicinvestmentdecisionsgivesustheworstofallworlds.

TherewasacasefortheSAinterventionafterthenationalregulatoryfailurescontributedtotherecentdisruptions.EffectiveimplementationoftheFinkelreformsrelatingtosecuritywoulddiminishthatcase.

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ItmaybethatexpansionofpumpedhydrocapacityintheSnowyMountainsisthemostcosteffectivewayofbalancingamajorexpansionofsupplyofintermittentrenewableenergy.Therearealternatives.TherewouldbelargebenefitsfromleavingdecisionsonSnowyinvestmenttoacompetitivemarket.Theinstitutionsprovidinggeneralsupporttocorrectmarketfailuresaffectingsupplyoflowemissionsenergy—ARENAandtheCleanEnergyFinanceCorporation—couldprovideassistanceeven-handedlybetweenSnowyandthealternatives.

Energysecuritymayrequireseparateincentivesforprovisionofreservecapacity.TheFinkelReviewsensiblyleavesthatforfutureassessmentbytheAustralianEnergyMarketOperator.Ifthiswerenecessaryforenergysecurity,investmentingasgenerationreservesinSouthAustralia,orpumpedhydrostorageintheSnowyMountains,ornewcoalgenerationinQueenslandcouldbelefttocompeteinanewmarket.

TheFinkelReviewcomparesthepriceeffectsofbusinessasusual,anEmissionsIntensitySchemeandaCleanEnergyTarget.Straightforwardcarbonpricing—acarbontaxoremissionstradingsystem—wasexcludeddespiteitsadvantages.Iamnotthepersontoquestiontheexclusion.TheRenewableEnergyTargetisalsoexcluded.

TherearetwomaindifferencesbetweentheCleanEnergyTargetandtheEmissionsIntensitySchemeasdefinedbyFinkel.TheCleanEnergyTargetisappliedtoretailersofpower,andtheEmissionsIntensitySchemetogenerators.TheReviewnotesthatapplicationtoretailerscanusetheadministrativemechanismscurrentlyinplacefortheRenewableEnergyTarget.

TheseconddifferenceisthattheEmissionsIntensitySchemeprovidesincentivessystematicallyforlessovermoreemissions-intensiveschemes.Itfavoursblackoverbrowncoal;HighEfficiencyLowEmissions(HELE)coalgenerationoverconventionalblackcoal;gasoverHighHELEcoal;coalorgasgenerationwithcarboncaptureandstorageovernakedgas;andrenewableenergyovercoalorgaswithcarboncaptureandstorage.TheCleanEnergyTargetprovidesincentivesforlessovermoreemissions-intensivegenerationonlyuptoalimitofemissionsintensity—proposedas600kgperMwhorpower.Abovethatlimit,ittreatsallformsofgenerationthesame.

Inthisrespect,theCleanEnergyTargetcanbeseenasahalfwayhousebetweentheRenewableEnergyTargetandtheEmissionsIntensityScheme.TheCleanEnergyTarget,liketheRenewableEnergyTarget,drawsnodistinctionamonggeneratingtechnologiesthataremoreemissions-intensivethanthespecified“cleanenergy”threshold.ThedifferencebetweentheCleanEnergyTargetandtheEmissionsIntensitySchemewouldbesmallinpractice.

Imyselfwouldseealiftinthe“cleanenergy”thresholdasanimprovementfortheCleanEnergyTarget.Raisingthethreshold(increasingthekgperMwh)wouldmaketheinstrumentmoreenvironmentallyandeconomicallyefficient.Itwouldfavourcleaneroverdirtiercoal.ItwouldencouragenewHELEoveroldlignitegeneration,whetherornotthishadpracticalsignificance.

TheFinkelReviewusesmodellingbytheJacobsconsultancytoshowthat,giventheemissionsreductiontarget,theCleanEnergyTargetgenerateslowerwholesalepricesthantheEmissionsIntensityScheme.

Thereisnoattemptateconomicanalysisrelatedtothesemodellingresults.Wearelefttoinspectalternativeoutputsfromturningthehandleonablackbox.

WeknowabitabouttheblackboxfromwhatissetoutintheJacobsconsultancyreport,andfromtheuseoftheJacobmodel,andofsimilarblackboxes,inothercontexts.

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BusinessasusualgenerateshigherelectricitypricesintheJacobsmodelfortworeasons.First,thesupplypriceofinvestmentinthermalpowergenerationishigherunderbusinessasusualbecause,intheabsenceofsettledpolicytoencouragelowemissionsenergy,thereisgreateruncertaintyaboutpoliciesaffectingreturnsoninvestment.

Morepowerfully,theabsenceofpolicyfavouringloweremissionsleadstolessrenewableenergyunderbusinessasusual.TheJacobmodel,forgoodreason,pointstolowerpriceswhenmorerenewableenergyisgenerated.

TheJacobsmodellingpointstolowerpriceswiththeCleanEnergyTargetthantheEmissionsIntensitySchemebecauseittreatshigheremissions(Victorianlignite)nolessfavourablythanloweremissionscoal(NSWandQueenslandblackcoal).TheCleanEnergyTargetthereforeleadstohigheremissionsintensityincoalgeneration.Toachievethespecifiedreductionofemissions,higheremissionsfromcoalarebalancedbyhigheroutputofrenewableenergy.Morerenewableenergyleadstolowerprices.

TheFinkelReportdoesnotpresenttheresultsofmodellingfasterratesofdeclineinemissions.Ifithaddoneso,theJacobsmodel,andthemostwidelyusedalternatives,wouldhavepointedtoevenlowerwholesaleelectricityprices.

IntheJacobsmodelling,realpricesunderbusinessasusualremainnearcurrentlevels,risingabitinrealterms.TheyfallbyalargeamountundertheEmissionsIntensityScheme,andmoreundertheCleanEnergyTarget.

UndertheJacobsmodellingoftheCleanEnergyTarget,theratioofrenewableenergygeneration(includingrooftopsolar)tototalenergysuppliedthroughthegrid(acuriousratiotoemphasise)is42percentby2030.Themajorityoftheincreaseisfromlarge-scalewindandsolardrivenbytheoldRenewableEnergyTargetintheperiodupto2022,andfromrooftopsolarexpansionthatdoesnotrelyonGovernmentincentives(aratiotogriddeliveryof9percentby2030).TheintroductionoftheCleanEnergyTargetisfollowedbyasharpdecelerationoftherateofexpansionoflarge-scalerenewableoutput.

Theparticularoutcomesdependonthedetailofcostassumptions.Itwouldbeunwisetobasebigchoicesonpolicyonaparticularmodellingresult

Itisusefultostepawayfromtheblackboxandtoexaminesomeoftheeconomicinfluencesonwholesalepricedetermination.

GeneratorsbidintotheAustralianwholesalemarketevery5minutes.InauniquelyAustralianwaythepricesareactuallysettledbyaveragingoverhalfhourperiods—thushandicappingtechnologiesthatarecapableofrespondingquicklytoandthereforeremovingimbalancesbetweensupplyanddemand.Australia,afterall,istheonlycountrywhosemajorhorseraceisahandicap,withfasterhorsesbeingrequiredtocarryheavierweights.ThehandicappingoftheswiftmaynotmattermuchfortheMelbourneCup,butitholdsbackproductivebalancingoftheincreaseinvariablerenewableenergyintheAustralianenergymarket.Finkelnotedtheissueof5minuteversus30minutesettlement,andsaidthattheregulatorsshouldworkoutwhetherthearrangementsshouldbechanged.

Butthatisadetail.

Generatorsbidintothemarketattheirmarginalcost.Thatisnearzeroforrenewableenergy—actuallynegativewhenthevalueofRenewableEnergyCertificatesistakenintoaccount.

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Largewindandsolarfarmsbidvolumesaccordingtoestimatesofoutput.Renewableenergyisproducedwheneverthewindisblowingandthesunshining.Thecapitalcostsoftheplantsarerecoupedwhentheaveragepriceexceedsthelongrunaveragecostofproduction.Thereisinvestmentinnewcapacitywhenexpectationsoffutureaveragepricesarehighenoughtorecoupcapitalwithanadequaterateofreturn.

Coalgeneratorsbidintothemarketatthecostofcoalplusotheroperatingcosts.ThisisverylowforVictorianbrowncoal,andsomewhathigherforblackcoal.Coalgeneratorsarekeptgoingiftheexpectedaveragewholesalepriceexceedstheiroperatingcosts.Somegeneratorsmaybidintothemarketatbelowoperatingcoststoensurethattheycanplacetheiroutput.Theyrelyonbalancingfromhigherpricesatothertimes.

Gasbidsintothemarketatahigherpricethancoal.Somegasgeneratorsuseheatthatiswastedinprimarygeneration.Suchplantshavehighcapitalcostsandloweroperatingcosts.Thesetendtoberunsteadilyoverfairlylongperiodsiftheyarerunatall.Othergasgeneratorsaremoreflexible.Theyhavelowercapitalcostsandusemoreenergyperunitofelectricityoutput.Theyareturnedonandoffmorequicklytotakeadvantageoftemporarilyhighprices.Thesearepeakingplants,wellsuitedtobalancingtheintermittencyofwindandsolar.Thecostofgaslargelydeterminestheoperatingcostsofbothkindsofgasgenerators,andespeciallythepeakingplants.Gaspriceshaveincreasedthree-,four-orfivefoldoverthepastfewyears.

Whileeachgeneratorbidsitsmarginalcost,thepricereceivedisthehighestthatbalancessupplyanddemand.

Coalenergyisproducedwithrelativelylittlevariationinoutput,solongasexpectationsoffutureaveragepricesexceedoperatingcosts.Newcapacityisonlybuiltwhenexpectationsoffutureaveragepricesexceedoperatingandcapitalcosts—conditionsthathavenotbeenmetforoveradecade.

LetuslookathowthesefactorsdeterminepriceincurrentconditionsinSouthAustraliasincetheclosureoftheNorthernPowerstationatPortAugustainMay2016,andinVictoriabeforeandaftertheclosureoftheHazelwoodgeneratoronApril1thisyear.

SouthAustralianowreliesonhighlyvariablegenerationfromwindandsolar,acombinationofbaseloadandpeakinggasgeneration,andbalancingflowsofpowerovertheinterconnectorswithVictoria.WindandsolarnowrepresentonaverageoverhalfofthepowergeneratedinSouthAustralia.

Whenthewindblowsstronglyandthesunshines,orwhenthewindblowsstronglyatnightwhendemandislow,nearlyallofthepowerusedinSouthAustraliacomesfromwindandsolar.Powerpricesarethenverylow.For12percentoftheyearaftertheclosureofNorthern,thepriceofpowerwaslessthan$10perMwh,oftenbelowzero.Theaveragepriceoverthistimewasminus$29perMwh(volumeweighted).Youheardcorrectly.Minus$29perMwh.

NowthattheNorthernpowerstationhasclosed,expansionofrenewableenergyinSAextendsthenumberofhourswhenrenewablessetthepriceatverylowlevels.Itreducestheaveragepriceofpowerwithoutriskthatitwillcauseapricespikebyencouragingthedepartureofacoalgenerator.

WhenSAdemandexceedsoutputofbaseloadgasandrenewables,pricehastobehighenoughtoattractpowerovertheinterconnectorfromVictoria.ThissetsthepriceattheVictorianlevel(onaverageabout$110sincetheclosureofHazelwood)plusamarginfortransmission.

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Whenoutputofrenewablesisparticularlyweakanddemandstrong,thepeakinggasgeneratorshavetobeattractedintooperation.Gasgenerationcostssetpricesatthesetimes.InSAintheyearaftertheclosureofHazelwood,theseconditionsruledfor35%ofthetime,whenaveragepowerpriceswere$171perMwh.

TheaverageSouthAustralianpriceoverthewholeyearwas$127perMwh(volume-weighted).

LargeamountsofpowerareproducedcontinuouslyatlowcostfromligniteinVictoria’sLatrobevalley.OccasionallytheLatrobeValleyplusrenewableenergyoutputexceedsdemandandpushespricestoverylowlevels.Wholesalepriceswerebelow$10perMwhfor3%ofthetimeinthesixmonthspriortotheHazelwoodclosure,.SuchlowpriceshavenotappearedatallsincetheclosureofHazelwood.

FormostofthetimeinVictoria,thestate’srequirementsaremoreorlessmetwithLatrobeValleypower,withsomecontributionfromrenewablesandimportsovertheinterconnectorsfromthreestates.Gaspeakingisrequiredattimesofstrongerdemand.GasseemstohavesetthewholesalepriceofelectricityinVictoriafor13percentofthetimeinthesixmonthspriortotheclosureofHazelwood(averageprice$86perMwh)and30percentofthetimesince($105perMwh).

Thisisacomplexsystemofpricedetermination.SincetheclosureofHazelwood,therehavefrequentlybeenlargeflowseastwardsacrosstheborderattimesofhighrenewablesgenerationinSAandrelativelystrongdemandinVictoria.OverthepastfewsunnyandwindydaysinSA,theflowshavemostlybeeneastwards,reversingonlyinthemorningandeveningpeaksofdemand.TheflowofrenewableenergyeastwardsoverthebordersincetheclosureofHazelwoodhasreducedtheincidenceofextremelylowpricesinSAandtakentheedgeofftheincreaseinpricesinVictoria.

Charts2to6illustratehowchangesingas,renewablesandcoalgeneration,andingasprices,caninfluenceaverageprices.

IttakeshugegrowthinrenewablegenerationcapacitytoreachthepositionofSouthAustralia,inwhichlow-costrenewablessetthepriceforasignificantpartofthetime.Oncethatpositionhasbeenreached—andsubjecttothedynamicsoftradewithneighbouringstates—amoderateincreaseinrenewablegenerationcapacityleadstoadisproportionatelylargeincreaseinthenumberofhourswhenpricesareextremelylowandlowersaveragewholesaleprices.

Foraslongastherearestillbaseloadcoalgeneratorsoperating,loweraveragepricesfromexpansionofrenewablesreducestheirprofitabilitybelowwhatitotherwisewouldbe.Whatitotherwisewouldbe,ofcourse,isnowextraordinarilyhigh,withhighgaspricessettingelectricitypricesforathirdofthetime.

Ifthefallinpricesfromexpansionofrenewablegoesfarenoughinajurisdictionthatstillhascoalgeneration,theclosureofoneplantliftsthewholestructureofpricesforawhile.Thedownwardpressureonpricesfromexpandingrenewablesthenresumes.

Chart2illustratesschematicallythepathofpricesovertime.

GasexportsfromQueenslandhavebeenthemostimportantsourceofupwardpressureonwholesalepricesintheNationalElectricityMarketoverthepast18months.WithgasdeterminingthewholesalepriceinSAfor35percentofthetime,andgasgenerationmoreexpensiveatthebeginning,athreefoldincreaseinthegaspricemorethandoublesthewholesalepowerprice.

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BoththegaspriceincreasesandtheclosureofHazelwoodhavefedintoextraordinaryrisesinVictorianpowerpricesoverthepastyear.GashassetthewholesalepriceinVictoriaabout30percentofthetimesincetheclosureofHazelwood.

Giventhedownwardtendencyorrenewableenergycostsandthelikelihoodthatthiswillplacecontinuingpressureforclosureofageingcoalplants,istheCleanEnergyTarget,orsomealternativemeansofpromotinglowemissionsenergynecessaryatall?Isitlikelytohaveanyeffectatall?Isthedebatemuchadoaboutnothing?

Someuncertaintyaboutthecostsofrenewablesisintroducedbytherequirementsforlargescalesolarandwindtopayforstabilityservices.Idoubtthatthatwilldomuchtoslowtheonwardmarchofrenewablepowergeneration.Butitmayforawhile.

ItispossiblethatcontinuedcostreductionswouldcausetheemissionsreductiontargetmodelledfortheReviewtobemetwithoutassistancefromtheCET.Ifthisweretoeventuate,theCleanEnergyCertificateswouldhavenovalue,andtheCleanEnergyTargetnorole.Expansionoflowcostrenewableenergyinthesecircumstanceswouldbeassociatedwithlowwholesaleprices.

Thepossibilityhasimplicationsforpolicychoice.

RECONCILINGDIVERGENTPERSPECTIVESONEMISSIONSTRAJECTORIES

SomeAustraliansarereluctanttosupportemissionsreductiongoalsthatwouldallowustoplayourfullpartinaglobalefforttomeettheParisobjectivesoutofgenuineconcernforenergycostsandinsecurity.Othershaveideologicalobjectionstomodernatmosphericphysics,orideologicalorvestedinterestsinoldwaysofsupplyingenergy.

IseeaprospectforbridgingthedifferencesbetweenthosewhowishAustraliatoplayitsfullpartinaglobalefforttomeettheParisobjectives,andthosewhohavenoobjectiontodoingsoifitcanbeachievedwithoutdamagingenergysecurityorraisingelectricitypricestonewlevels.

Thereisnowayofbuildingabridgeacrosstotheideologicalandvestedinterests.ButpeopleofsuchmindrepresentasmallproportionoftheAustraliancommunity,anditmustbepossibletoestablisheffectivepolicystabilitywithoutthem.

Isuggestthatweseektobuildsupportaroundtwoalternativetrajectoriesforemissionsreductioninelectricity,andletthecostofelectricityasitemergesovertimedeterminewhichofthemthatwefollow.

ThefirstcouldbeaLowestCommonDenominatortrajectory,embodyingalowlevelofambition.

ThesecondcouldbecalledaParisTrajectory,embodyingareasonablecontributiontotheglobalefforttoholdtemperatureincreasesbelow2degreesandascloseaspossibleto1.5degrees.

InotethatindiscussingtheFinkelReport,wearelookingatanemissionsreductiontrajectoryfortheelectricitysectoralone,andnotfortheeconomyasawhole.Theelectricitytrajectorywillneedtofallmorerapidlythanemissionsintheeconomyasawhole,forreasonsexplainedearlierinthelecture.

WewouldcommenceontheLowestCommonDenominatorpath.ShouldrealwholesalepricesfallaswemovedalongtheLowestCommonDenominatortrajectory,wewouldautomaticallyshifttoaParistrajectory.

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Iwouldhopethatthe“LowestCommonDenominator”trajectoryforelectricityemissionswouldbestrongerthanthatmodelledbyJacobsfortheFinkelReview.ThatshouldbeamatterforwidediscussionasweworkthroughtheclimatechangepolicyreviewthatthePrimeMinisterhassetintraininpreparationforthe2018ConferenceoftheParties.

ThesecondtrajectorywouldbemorecloselycommensuratewithwhatAustraliaasadevelopedcountrywouldneedtocontribute,ifwearetogivetheParistemperatureobjectivesagoodchanceofsuccess.AstartingpointwouldbethecarefulworkoftheClimateChangeAuthorityinits2014report.This,too,wouldneedtobethesubjectofextensiveanalysis,consultationanddebate.

Chart7presentstwopossibletrajectories,onebeingthatmodelledbyJacobs,andonesuggestedbytheClimateChangeAuthorityasbeingappropriatefortheeconomyasawhole.Theyarethereforpurposesofillustrationonly.

Whatlevelofwholesaleelectricitypricereductions,measuredyearbyyearandaveragedoverthemajorAustralianmarkets,wouldtriggerashiftfromonetrajectorytotheother?

Isuggestthatwetaketheaveragepricefor2017asabase,andshifttothe“Paris”trajectoryifandwhentheaccumulatedfallinrealpricesfromthebaseyearexceedsonepercentperannum.Thenewarrangementswouldcomeintoeffectin2021,sowewouldoperateonthe“LowestCommonDenominator”trajectoryinthatyearunlesstheaccumulatedfallinpricesfrom2017until2020exceedsthreepercentinrealterms.

Itwouldbethecumulativereductioninpricesfromthebaseyearthattriggerschange.Therewouldbearrangementsforsmoothingtransitionfromonetrajectorytotheotheriftheseweresolargeastobedisruptiveinsomelateryear.

Wewouldstayonthesteepertrajectoryto2050ifthefallinrealpricesuntilthenhadaccumulatedtoonethird.MostAustralianswhoworryaboutincreasingpriceswouldtakereassurancefromthatoutcome.

Australianswhobelievethatweshouldplayourfullpartintheglobaleffortonclimatechangewouldbeuneasyabouttheriskofourcountryholdingbacktheglobaleffortifelectricitypricesdonotfall.Isharethatconcern.Myanswertomyselfisthatweareholdingbacktheinternationaleffortnow,andtheproposalthatIamoutliningthiseveninggivesusachanceofcatchingup.

Letmesharemyownviewontherenewableenergycontributiontothepriceoutlook.This,forwhatitisworth,hasgrownfromadecadeofdeepinvolvementintheeconomicsofclimatechangemitigation,andrecentlyintensiveprivatesectorworkonrenewableenergy.Inmyview,thenewenergytechnologieswillbeapathtodecisivereversaloftherelentlessandimmenseincreaseinelectricitypricesoverthepastdozenyears.Movingontoasteeperemissionsreductionpath,withenergysecurityprovidedbyimplementationoftheFinkelReviewthroughrevitalisedregulatoryagencies,andsupportedbysomevariationonthethemeoftheCleanEnergyTarget,willdrivedownwholesaleelectricityprices,notonlytolowerlevelsthantheyareatpresent,buttopricesthatarenotablylowbyglobalstandards.

NootherdevelopedcountryhasanythingliketherenewableenergyresourceendowmentperpersonthatisenjoyedbyAustralia.Ifwegetourpolicyright,asthewholeworldmovestowardslowemissionsenergy,wewillemergeasthedevelopedcountrywiththelowestelectricitycosts.

Wehaveanopportunitytobetheenergysuperpowerofthelowcarbonworldeconomy.

RESOLVINGTHETRILEMMA

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Backtothetheoryofeconomicpolicy.

Wehavethreeobjectives:energysecurity;lowprices;andemissionsreductionsinlinewithourinterestsandresponsibilitiesinmitigationofclimatechange.

Weneedthreesetsofinstruments,oneforeachobjective.

Forsecurity,letsaccepttheFinkelapproach,supportedbytheexcellentworkoftheMelbourneEnergyInstitute.

Onloweringprices,letsembracethenewtechnologies,provideamorecertainpolicyenvironmentfortheirapplication,andacceptsomevariationonthethemeoftheCleanEnergyTargettodrivefasterexpansionoftherenewableenergythatwillforcepricesdown.Letskeeparbitraryinterventionsofgovernmentoutofgeneration,toavoidunnecessaryincreasesinthesupplypriceofprivateinvestment.Andletshaveourregulatoryauthoritiesensurethatthereisgenuinecompetitioninallpartsofthewholesalepowermarket.

Onemissionsreduction,letsfaceuptothefactsfromclimatescienceandinternationalcommitments,andputinplaceemissionsreductiontrajectoriesandpoliciesthatgiveusachanceofcontributingpositivelytoglobalactiononclimatechange.

Finkelhasgivenustheframeworkandmajorcomponentsforresolutionofthetrilemma.Wecanfillinthemissingpartsthroughseriousdiscussionoftheissues.

ChartsprovidedbytheAustralianGermanClimateandEnergyCollege,PhDcandidate,YannRobiouduPont