Will Turnbull’s Coalition stand up to Australia’s energy oligopoly?

The conservative Coalition parties have spent much of the past decade railing against a “great big electricity tax”, and bowing to demands by powerful vested interests to can the carbon price and cut the renewable energy target.

But as the re-elected Coalition prepares to resume the business of governing the nation, it is faced with a harsh new reality: the age of cheap energy is over, at least it is with fossil fuels and current energy infrastructure.

Consumers across Australia are facing even bigger hikes in their electricity bills this year than they might have faced with the carbon price – and nearly all these increases can be attributed to actions by Australia’s energy oligopoly in defending and promoting their incumbent fossil fuel interests. And this is over and above the huge increase in fixed network costs that are the result of massive over-investment in poles and wires over the last decade.

The challenge for the Turnbull government is how to deal with the issue and challenge the powerful market players that dominate the industry. The actions of the energy oligarchs have forced record gas and electricity prices on consumers, they are hitting the go slow button on renewable energy, and are fighting proposals that could loosen their grip on the market and encourage rival technologies.

The answer is obvious – push the necessary buttons that will accelerate the much talked about energy transition, hasten the exit of coal power, and encourage the uptake of solar, storage and other technologies that could fast-track the democratisation of the electricity supply.

But the Coalition has shown little interest in this course of action, to date, turning instead to tired old myths about the benefit of coal power, the primacy of “base load,” and even flirting with the idea of nuclear energy. All this to a chorus of approval from the bulk of mainstream media who continue to peddle myths and misinformation about renewables.

Australia, right now, is experiencing extraordinarily high electricity prices, courtesy not of growing renewable energy penetration, as many in the media will tell you, but of rising demand, supply curtailment at coal and gas plants and record gas prices that have soared to nearly 10 times the price than they were just a few years ago.

The record gas prices can be sheeted back to the gas industry’s decision to invest $200 billion in new LNG export facilities, in the hope of making a motza from selling gas to growing Asian markets. But that market is now flooded with too much supply, international prices have fallen, and they may barely make a profit.

But supply issues in Australia to satisfy contracts with the LNG plants are causing gas prices in Australia to soar to record highs, and the situation has been worsened by yet more supply blockages.

This, in turn, has caused electricity prices to also jump across the market, and the price rise has been particularly acute in South Australia, at the end of the gas grid.

Last week, as David Leitch notes in his weekly National Electricity Market report, wholesale electricity prices averaged more than $500/MWh on three days, and once averaged $1,200.

Consumers are hurting, but generators are not. Despite AGL reporting last week it would take a $100 million hit to its margins because of the rising gas prices, its coal generators are reaping huge benefits. Morgan Stanley expects AGL’s full year profits to jump 12 per cent in 2016/17 because of these price surges.

“Our regular supply and demand analysis highlights that the current decadal high pool prices are a result of growing demand (up 1.9 per cent in FY16 vs pcp), restricted supply (there were a large number of planned and unplanned outages in 2H16) and higher gas costs feeding through to gas generation bid stack,” Morgan Stanley wrote.

Yet, as this happens, the state’s most efficient gas generator, Pelican Point is not operating, saying it is not economic for it to do so. Instead, it is lobbying the South Australian government to give it a subsidy, as part of the government tender for “low emission” technologies.

It was expected that this proposal could be challenged by a rival offer to build a 110MW solar tower and storage plant in Port Augusta, replacing the closed coal generator. However, John Hewson, eager to promote his own technology, has lobbied heavily against this, describing molten salt technology as expensive, unreliable, bird killing machines that rely on gas. It may go down as one of the most unhelpful interventions in Australia’s renewable energy evolution.

What is obviously needed is a push for new policies and regulations to accelerate the uptake of new technologies such as solar towers and storage, that will not just clean up the grid, but remove fuel price risk and take it out of the control of the energy oligopoly.

There are numerous examples of how the actions of a few powerful energy players are pushing up costs. One of those issues is the market power of the big players in small markets, particularly in Queensland and South Australia, where regulators have warned that prices can be distorted by the bidding patterns of a few players.

The Melbourne Energy Institute (MEI) estimates that in Queensland last year, re-bidding practices pushed up wholesale prices by $250 million, while the AEMC estimated a separate series of re-bidding practices in Queensland pushed up wholesale prices by $170 million.

Many expect the practice is continuing, but because of the complexities of the market, it is difficult to pin blame and find fault. Recent fines, such as those imposed by the Australian Energy Regulator on Queensland’s CS Energy, have been small and come nearly two years after the incident.

Now the incumbent oligopoly is trying to force the regulators to back off from implementing new rules that loosen their grip on the market, and encourage new technologies such as battery storage, and reduce costs. The regulators argue that the current rules cause market distortions. The major generators say they see nothing wrong, and claim any changes would be unworkable.

Meanwhile, renewable energy certificates are also surging to record levels – they reached $86/MWh last week, according to Marco Stella – on the assumption that the reduced renewable energy target will not be reached, and the powerful utilities who are reluctant to sign new contracts may now push for a further weakening or delay in the target.

The big utilities and coal generators have argued that there is too much capacity in the market, and no room for more renewable energy. But it is the marginal cost of expensive gas generators that is causing these huge gyrations and enabling the coal generators to profit. Yet, they still argue that they cannot close without being paid to do so.

And along with these record high wholesale prices comes the impact on new players. Small retailers are particularly exposed to gyrations in the market.

The answer for the Coalition government is pretty obvious. It’s time Australia joined the rest of the world in adopting ambitious renewable energy and emission reductions targets, and stopped pretending that fossil fuel technologies are the only answer.

There is a suite of policy options available to them: a carbon price, a higher renewable energy target, a longer-dated RET, and a RET mechanism that imposes penalties on utilities that fail to meet targets, rather than consumers.

They could impose emissions standards on coal plants, and vehicles. They could accelerate the exit of coal plants by imposing age limits. Most of all, they could instruct regulators to do all they can to remove the obstacles in the way of new technologies, and new business models that will not just clean up Australia’s grid, but make it more accessible to competitors and emerging technologies, and also cheaper for consumers.

None of this is rocket science. The (Labor-led) states and territories have shown how it can be done. Even John Howard illustrated how a government can “reach across” and dump its ideological opposition to proposals such as the carbon price.

But it comes down to whether the Coalition is serious about “jobs and growth” and “innovation”, or is just interested in protecting the interests of the big players at the expense of consumers.