Tuesday, September 08, 2020

National Cabinet misfires on energy ministers’ ‘tasking’

George Santayana’s dictum “Those who cannot remember the past are condemned to repeat it” should be foremost in the mind of policy makers as we face a period of economic change and stress. The history of Australia’s energy markets and the policy making approaches provide valuable lessons that should guide future policy. We are at another critical juncture due to the announcement by Scott Morrison in May that the Council of Australian Governments (COAG) is no more and is to be replaced by the National Federation Reform Council, the National Cabinet, and six National Cabinet Reform Committees announced in June.

Following National Cabinet on Friday the Prime Minister told his media conference “We also agreed to the tasking of the National Cabinet Subcommittee on Energy … with short and medium-term priorities, and that does include the resetting of the gas market.”

Later, as reported in Australian Energy Daily, a media release provided a little more detail:

Energy National Cabinet Reform Committee

Leaders agreed to the tasking for the Energy National Cabinet Reform Committee. The Committee will progress critical reform of the energy system as a key component of Australia’s economic recovery. It will work to ensure an affordable and reliable energy system to support job creation and economic growth for the long-term benefit of customers.

The Committee’s work program will focus on developing:
    • Immediate measures to ensure reliability and security of the electricity grid ahead of the 2020-21 summer
    • The redesign, by mid-2021, of the National Electricity Market to take effect after 2025; and
    • A package of reforms, by July 2021, to unlock new gas supply, improve competition in the market and better regulate pipelines.
These reforms will ensure the market serves consumers by promoting efficient investment, operation and use of energy services, and by delivering secure and reliable energy at least-cost.

At the time of writing that was the only detail available.

The National Cabinet has missed the opportunity to reset energy sector governance and make real progress to managing the energy transition at least cost to consumers while maintaining security and reliability.

As the Energy National Cabinet Reform Committee energy ministers have had at least one meeting without the leadership of the market bodies present and without issuing a communiques from the meeting. Decision making without expert advice and in secret seems to be the fundamental change. This is the wrong direction, reform needs to empower the independent institutions and reduce the role of ministers.

The Council of Australian Governments (COAG) effectively ran from the Special Premiers Conference in October 1990 to its aboloition in May; in effect it existed from recession to recession. Despite the mythology, electricity sector reform in Australia wasn’t a result of Hilmer’s report on National Competition Policy, it was a decision of the second Special Premiers Conference in July 1991. The practical step taken at that meeting was the creation of the National Grid Management, as the Communique records:

The Council will encourage open access to the eastern and southern Australian grid and free trade in bulk electricity for private generating companies, public utilities and private and public customers. It will also co-ordinate planning of the generation and inter-connected transmission systems and encourage the competition sourcing of generation capacity and the use of demand management.

The National Electricity Market itself was created as a code agreed between the operators authorised by the ACCC. It wasn’t until the June 2001 COAG meeting that a commitment to a National Energy Policy created the Ministerial Council on Energy as one of its priority actions. COAG noted that “The new Council will have responsibility to provide effective policy leadership to meet the opportunities and challenges facing the energy sector and to oversee the continued development of national energy policy.”

This body subsequently became the Standing Council on Energy and Resources in June 2011. The latest iteration, the COAG Energy Council notes on its webpage that it was “a Ministerial forum for the Commonwealth, States and Territories and New Zealand, to work together in the pursuit of national energy reforms. The Council was established by the Council of Australian Governments (COAG) in December 2013 as part of a decision to streamline the COAG council system and refocus it on COAG’s priorities.”

The 2001 policy recognised the progress that had been made since 1991, but noted “there remain immediate and long-term issues that need to be addressed.” The issues they cited were National Electricity Market (NEM) issues of capacity, interconnection, pricing, (including transmission pricing), NEM governance, and regulatory overlap, the facilitation of increased market penetration of natural gas and improved demand management.

The agreed national policy objectives were listed as:
  • Encouraging efficient provision of reliable, competitively-priced energy services to Australians, underpinning wealth and job creation and improved quality of life, taking into account the needs of regional, rural and remote areas;
  • Encouraging responsible development of Australia's energy resources, technology and expertise, their efficient use by industries and households and their exploitation in export markets; and
  • Mitigating local and global environmental impacts, notably greenhouse impacts, of energy production, transformation, supply and use.
We need not go any further into the detail of the 2001 policy, the outcomes of the high-level independent strategic review of medium to longer term energy market directions also established by the policy, or the specific tasks COAG assigned to the MCE. It is sufficient to simply compare the outcomes of the “effective policy leadership” of the Energy Council against the objectives specified.

The doubling in prices of electricity and gas in the decade after 2007 is well documented, the former in detail in the ACCCC’s Retail Electricity Price Inquiry. The ‘success’ in developing a natural gas export industry has come at the expense of the efficient use of gas by industries and households. And the ongoing failure to effectively join emissions policy and energy policy has been the fundamental failure of the last decade.

This failure was well described in the 2015 Review of Governance Arrangements for Australian Energy Markets chaired by Michael Vertigan. The review concluded that:

The pace of change in the energy sector is arguably unprecedented; and a ‘strategic policy deficit’ exists which has led to diminished clarity and focus in roles, fragmentation and a diminished sense of common purpose.

The most recent attempt to close the strategic deficit was the creation of an additional market body, the Energy Security Board, made up of the leaders of the three existing bodies plus independent chair and deputy chair roles. This structure has been recently reviewed and the intention is to replace it with a simple Market Bodies Forum.

To find an explanation for these very explicit failures we need look no further than Stephen Littlechild’s 2006 description of the reform process in the preface to Sioshansi and Pfaffenberger’s Electricity Market Reform: An International Perspective:

Proponents of electricity reform have had many and diverse aims, not always mutually consistent. The Introduction suggests that “the over-riding reform goal has been to create new governance arrangements that provide long-term benefits to consumers.” These benefits are to be realized by creating competitive wholesale and retail markets to improve efficiency and responsiveness to customer preferences, by incentive regulation of privatized transmission and distribution networks to improve their efficiency and facilitate competition across them—and, I would add, by reducing the role of government and political interference generally.

It is in the last of these objectives that the Australian arrangements have so spectacularly failed. Unfortunately, the National Cabinet has not recognised that there is something fundamentally wrong with the governance arrangements, and that reliance on a committee of ministers seems to be the cause of the problem. The ‘tasking’ from National Cabinet is doing little more than saying ‘keep doing what you are doing but look at improving gas supply.’ The latter follows the 2016 creation by COAG of the Gas Market Reform Group that completed its task in 2018, so in effect they are being instructed to redo this work.

A contrast between telecommunications regulation and energy regulation reveals that the superiority of the former isn’t really because of the clarity of the national constitutional responsibility, it is because the independent regulatory institutions (the ACMA and to a lesser extent the ACCC) have very clear mandates and full authority.

National Cabinet really needs to undertake its own review of the governance arrangements for energy rather than just effectively giving the cabal of energy ministers its fourth name in twenty years. To encourage National Cabinet, here are a few simple steps that could be taken:
  1. Recommit to the Australian Energy Market Agreement, but refresh it and rename it the Australian Energy System Agreement. Extend the scope of the agreement to incorporate safety regulation and supply of all energy services in Australia. Make the core objective of the new agreement the transition of Australia to a net zero carbon emissions future (without a date though all states and territories have a 2050 or earlier target).
  2. Recognise that the corporations power gives the Commonwealth the ability to legislate for energy (as it has recently done with the market conduct rules) and move the legislative authority to the Commonwealth. However, maintain a Council of Energy Ministers, and for constitutional clarity still have States adopt the national laws.
  3. Create a new body – let’s call it the Australian Energy Authority – that replaces the Australian Energy Market Commission. Give it very clear objectives about managing the transition at least cost to consumers while maintaining security and reliability, with protection for vulnerable consumers.
  4. Make the AEA the secretariat to the Council of Energy Ministers and abolish the committee of senior officials that currently sits beneath the Council. Give the AEA the ability to make subordinate instruments (Rules) on its own volition. Provide for the ability for the Council of Energy Ministers to disallow subordinate instruments.
  5. Make the Chair of the AER and the CEO of AEMO ex officio members of the AEA. Change the legislation so that the powers, role and function of AEMO is specified by the AEA rather than in the legislation. Transfer some of the regulatory functions from the AER to the AEA, the AER should be focussed on the regulation of the natural monopolies.
The creation of strong independent agencies is not an undemocratic action. Our democracy is primarily defined by parliaments not the arrangements of executive government; indeed as an institution parliaments evolved to place constraints on executive governments.

Reconfiguring how often Energy Ministers meet or how many officials are in the room is not a substitute for substantial governance reform.

And finally, if governments really want to know how to increase the supply of, and reduce the price of, gas for industry there is a relatively simple solution. The most recent published Australian Energy Statistics cover the year 2017-18. Of 4,731 PetaJoules of natural gas produced in Australia, 1554 went to domestic consumption. A third of this, 572 PJ, was consumed in electricity generation.

While AEMO’s projections in the Integrated System Plan are for there to be no new gas peaking plants built it still foresees this demand for gas. However, more renewables backed with both short term storage and long term storage (batteries and off river pumped hydro) are a substitute – indeed they have characteristics that outperform gas. An aggressive program supporting the development of storage – in particular smaller distributed pumped hydro projects than Snowy 2.0 - will release more gas for industry. Considering that industry, with the exclusion of mining, only consumed 432 PJ accelerating renewables and storage would double the gas available to industry. 

Life is what happens while you are busy making other plans JWL

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