How to ensure Bowen’s underwriting scheme doesn’t create another Snowy 2.0 debacle

A few months ago I wrote an article stating that the federal government was trying to hide a do-nothing emission reduction policy in the electricity sector behind some incredibly optimistic economic modelling prepared by Reputex.

Well, they aren’t trying to hide anymore.

The announcement by the federal government that it will implement an auction system to underwrite 32GW of renewable energy and energy storage projects is nothing short of a revolutionary policy initiative.

If done well, and in combination with other reforms to planning, transmission roll-out and electricity system management it could completely transform our electricity system and dramatically reduce emissions.

Thirty-two gigawatts is a huge amount of new capacity, and while we need to see more detail, the basic policy structure outlined could be very effective in driving substantial new investment in renewable energy and batteries.

However, the move to abandon a market-based mechanism in the Renewable Energy Target and instead opt for awarding underwriting contracts to specific projects carries an increased risk of political considerations driving project and technology selection decisions rather than economic efficiency.

We have a very stark warning of how badly this can go wrong if we don’t put in place strong legislative guardrails to keep politicians at a safe distance from project selection decisions.

Snowy 2.0 is billions of dollars over budget and several years late.  I suspect the Tasmania’s Marinus Link and Battery of the Nation pumped hydro, as well as Queensland’s Pioneer pumped hydro project will suffer a similar fate.

But it is not just about keeping politicians at a distance from project and technology selection. We should also be concerned about politicians’ and bureaucrats’ temptation to add an array of qualitative criteria to project selection evaluation processes which can often be incredibly subjective.

These qualitative criteria often add cost, but it can be very hard to evaluate how much cost and then balance this against any benefit that might come from a project satisfying this criteria.

These subjective criteria can also open the door to corruption. That’s because when it becomes hard to judge the relative merit of one project versus another, government officials and politicians can more easily get away with awarding contracts to parties that don’t deserve it.

Government officials can invoke some vague and obscure advantage on these criteria for selecting a poor project which those outside government, or even rival tenderers, lack the information to independently test.

Back in 2011, when I was at the Grattan Institute, I wrote a report with John Daley detailing how market based mechanisms had proven to be far more effective than tendering programs in delivering emission reduction outcomes and building industry capability.

(It was in two parts with one part for those not deeply engaged in climate policy and another part for the policy wonk nerds).

At the time of publishing the report we warned Greg Hunt, while he was in opposition, that he avoid structuring his “Direct Action” Emission Reduction Fund along the lines of prior tendering schemes, and instead focus entirely on selection based solely on lowest cost.

While I’ve spilled considerable ink criticising Hunt over the years, credit to him that he ultimately heeded our advice.

I sincerely hope that the federal government picks up this report and re-reads it ahead of developing the detailed design for the operation of its underwriting regime.

In fact, I would argue that it should implement an auction system for awarding contracts that operates as close to a market as a possible, with non-price criteria used only for qualification to participate in the auction.

That will then leave price as the sole determinant of which projects are ultimately selected.

I would also argue that the underwriting contract terms arrived at from the auction become a standing offer available to anyone who can deliver a new renewable energy or energy storage project producing power by a set date, even if they weren’t part of the auction.

Another concern is that the federal government has explicitly excluded projects below 30MW from participating in its initial underwriting mechanism. Yet these are precisely the types of projects that can get around the roadblocks and delays we face in building new transmission lines.

It also means households, a rather important political constituency, receive no policy support for helping the country reduce its emissions. An underwriting mechanism isn’t the right way to support households, but they can be – and should be – an important and cost-effective part of the solution.

Lastly, I would also ask that the Albanese government pluck up the courage to banish the ghost of Tony Abbott from our policy corridors and reconsider the merits of a market-based mechanism for driving emission reductions in the electricity sector.

There are some major advantages to an emission reduction policy where government sets the target but then leaves it up to an array of individuals and businesses to make their own decisions about how to best meet that target.

Those closest to a project will be in the best position to balance the array of criteria that go into making a project viable. In particular they need to balance the cost of the project against the inherent underlying market value of the electricity it might produce at different times of day and location.

The wide array of complex trade-offs faced by projects can never be completely and effectively evaluated by a government tender panel.

If we instead opt for a market mechanism such as an expansion of the Renewable Energy Target, then those who make the decisions to select projects to proceed are those who bear the financial consequences of getting that decision wrong.

Tristan Edis is Director of Analysis and Advisory at Green Energy Markets. Green Energy Markets provides analysis and advice to assist clients make better informed investment, trading and policy decisions in energy and carbon abatement markets.