Elmer Funke Kupper
Earlier this month, the Australian Energy Market Operator (AEMO) confirmed what every household and business already knew: we no longer face an energy crisis. We’re right in the middle of one.
Australians pay amongst the highest power prices in the world. Depending on the state, they could pay as much as 57 per cent more than the European average, double the price in Norway and three times the price in the USA.
The comparison with Norway is interesting. Norway has competitive energy costs and built up a $1 trillion wealth fund from its oil resources. They delivered both. It’s sad that Australia got neither.
And now, despite sky-high prices, we face potential energy shortages. It must rank as one of the worst policy and execution failures in our country’s history.
So, what do we now do? My recommendation to our Prime Minister would be twofold.
First, intervene in the energy market. It is necessary. More about that later.
Second, speak the following words when you set out your agenda.
“Implementation of our long-term plan requires bi-partisan support. The polls have the Labor Party ahead right now. There is a chance they will win the next election, or the one after.
“To give all households and businesses certainty, it is important they commit to this plan, as we have. That way, no matter who is in government over the next decade, we move forward as a nation.”
The Coalition’s media advisors, party strategists and right factions will have collective fits. Good. These words will win votes.
Addressing the causes
In designing our policy measures, we should first reflect on the causes of the current crisis.
Australia is one of the largest producers of gas in the world. It has almost limitless capacity for solar and wind energy. The question then is why we are not leading the world in clean energy production and at the same time have the most competitive electricity and gas prices.
There are a few reasons.
First, when Australia developed its gas resources, it decided that domestic supply should be subject to the same market forces as the global market. Worse, domestic supply was not guaranteed. This makes Australia unique amongst gas-exporting countries, and not in a good way.
Second, Australia has multiple energy policies. Renewable energy targets and power generation policies are set by each state separately. Every attempt by Canberra to coordinate becomes a reason to negotiate. In a country with only 24 million people this makes no sense.
And third, almost everything in the policy environment is short-term and subject to change at every election. Businesses can’t invest on that basis. Even the most politically difficult countries in Europe provide energy policy certainty.
We need to take radical steps to fix each of these issues.
The government is taking a few first steps. They include ensuring that existing power supply is not reduced any further, committing to Snowy Hydro 2.0, and asking retailers to make customers aware of alternative offers.
And now the government is treating to impose export controls on gas producers.
These efforts are helpful, and a few go to the heart of the issue we face: reliable baseload supply.
We should be clear, however, that these efforts won’t reduce electricity prices. They may merely slow the rate of increase.
Moreover, we should not ignore the material flow-on impact of higher energy costs faced by businesses, public services and the health care sector. They will have to pass their increased costs on to consumers. It risks becoming a serious drag on our economy.
Therefore, there is a case to tackle the issue in a very different way. One way is to work backwards and ask this simple question: what will it take to deliver materially lower energy prices by, say, 2020? Start at the end and make decisions to deliver it.
If we approach the issue this way, we quickly find that even bigger steps are needed to get the result we’re after.
This doesn’t make what the government is doing wrong. It just forces us to take the steps necessary to turn energy into a competitive advantage for our country. Which it absolutely should be.
Here are a few suggestions get the result we’re after.
First, short-term government intervention in the energy market seems inevitable. Whatever the domestic demand for gas and electricity is, must be delivered, and at a globally competitive price. Guaranteed.
This means implementing domestic gas supply guarantees, and probably electricity price controls. They could be released when sufficient new baseload capacity comes on stream. This could be a decade away.
This is a big call by a previous “big company CEO”, who is committed to free markets. I still am, but not at all costs. When markets are this broken – irrespective of the reason – we have to act.
The companies that developed Australia’s gas fields, and bought the powerplants, distribution networks and retailers will resist intervention that hits their bottom line. Their challenge is to come up with an alternative to intervention that makes a serious difference in the next two to three years. It’s hard to see how they can.
Second, the government should invest in power generation, covering both traditional baseload power and renewable energy. As part of this, the government should publish its baseload and clean energy targets.
The investment in baseload power generation should be material, and cover existing capacity such as Liddell, and new power plants.
Coal will have to remain in the mix for longer. I don’t like this reality either, and it will push out our clean energy targets by 10 years or so. But a reality it now is, of our own making. Best we get on with it.
When it comes to renewables, we should make a serious 20-year commitment to be the global leader in solar energy. A government that is willing to advance this agenda at speed should expect strong support from voters.
Third, Australia should make private investment in solar energy, and other alternative energy sources, highly attractive and keep it that way for at least a decade. This is not just about homes; it is also about industry. Every rooftop of every Bunnings and every major supermarket should be full of solar panels, supplying them and the surrounding businesses. This idea is not new; it is time we make it happen.
Fourth, to make all this work, the government must centralise all energy policy and energy mix decisions for the country. This is the only way we can get long-term policy certainty and consistency of delivery across states. Our energy resources are national, so it is time we organise ourselves this way and give the task to professionals.
And finally, we should consider nuclear power in the energy mix. But there is no chance that nuclear energy will be accepted in our political system.
Elmer Funke Kupper is a private investor and a former chief executive of the ASX