Welcome to Taylor-ball: How the game has changed in Australia’s energy markets

“It’s all about markets.” That’s the constant refrain of the federal Coalition government every time it announces a new intervention on Australia’s energy sector. “Our focus is also squarely on harnessing the power of new technology and allowing natural markets to operate,” prime minister Scott Morrison said last week.

Except that it’s not.

The Coalition’s lack of any overarching energy policy, its grab-bag of market interventions, including its transmission-for-fossil-fuel-deals with NSW, where Morrison made those comments, have had the opposite effect. Investment is stalling, the government’s chosen technologies are not new at all, and prices are forecast to rise because of it – just as the rush of new renewables had finally begun to have a dampening effect.

Welcome to Taylor-ball. It’s the new energy game devised by energy minister Angus Taylor. Liberals have long claimed a deep attachment to markets, except when it produces outcomes they don’t like. That at least partially explains the $US5 trillion of annual fossil fuel subsidies identified by the International Monetary Fund.

In Australia, Taylor has discovered that the best way to control the energy market is either not to have one, or seek to control all the levers.

Hence the government’s refusal to spell out a long-term or even short-term policy, its interventions such as the “big stick” legislation, and price controls, and the new substitute for a federal plan – a series of bilateral deals with states that plays off funds for grid upgrades with commitments to dig up fossil fuels. Not so much a quid pro quo as a “grid pro coal”.

But the intervention that is having the most impact is the one least mentioned – mainly because the government is doing so little about it, to devastating effect. It’s that lack of action that is now seen, along with the issues about grid congestion and connection delays, as perhaps the biggest single impediment to new investment in the country.

The Underwriting New Generation Investment program, or UNGI, was launched in late 2018 – not long after Taylor’s rise to the energy portfolio – with some fanfare, and with great urgency. It was imperative it be done quickly,.

It was a call for projects for “fair dinkum” power, a 24/7 power supply that could hold the grid together and keep the lights on in the face of the hordes of wind and solar projects invading the country’s network. The terms of the program were loose and vague, allowing the government to choose pretty much any project it wanted. And there has been little transparency, or movement.

Candidates had a matter of weeks over the Christmas and New Year break in 2018 to get their proposals in, as a short list would be drawn up a few weeks later, with final submissions due by the end of March – in time, perhaps, to get a few contracts out before the May federal election, which the Coalition expected to lose.

In the end, the only commitment made before the election was to Tasmania’s “battery of the nation” project, which got a $56 million grant it hadn’t applied for, but was happy enough to get, ostensibly to fast-track its planning for a huge pumped hydro scheme and new connectors across Bass Strait.

A short list of 12 projects from the more than 60 offered was produced: five pumped hydro (including the battery of the nation), six gas generators, and one small coal upgrade. A further $10 million was allocated for a “two-year” study into potential projects in north Queensland, including a new coal plant, to keep the LNP happy. (It shouldn’t need two years to conclude they are delusional about new coal geneators, but the politics are delicate).

Not much has happened with UNGI since. The urgency to get something out the door before the election has evaporated. That’s because Taylor has found – like the grid bottlenecks that are strangling investment decisions in new wind and solar projects – he can influence the flow of investment decisions for new “dispatchable” generation projects.

The Coalition was returned, much to its own surprise, in May. It took until a day or two before Christmas, before it announced that two projects – both fast start gas generators in Dandenong in Victoria and Gatton in Queensland – had been chosen to move to the next phase of the UNGI program

But there are absolutely no details: The nature of the “underwriting” is not revealed, nor is it scope; the project timelines are not mentioned. They appear not to have been finalised. APA, the owners of the Dandenong project, would not answer questions about funding, the nature of the support, the project’s timing, or even if the project had development approval. Quinbrook, the owners of the Queensland project, referred RenewEconomy back to the government.

It should be noted that these are not “baseload” power plants, but “peaking plants” that might only be used for a few dozen hours each year. These fossil fuel generators are getting subsidies, while their main technology threat, big batteries, are now being rolled out with no government support.

All of this would be of little consequence were it not for the impact of these interventions on the broader market. Having lined up 12 projects of potentially significant scale scattered around the main state grids the government has hit the pause button. Will they, or will they not, go ahead. It’s leaves the market with no clarity, and little ability to make their own investment decisions.

Do investors go ahead with their own 30-year project or do they not? Will they get finance? And on what terms? Taylor’s team seems happy to drag out the program for as long as they can, knowing that most rival projects – and there tens of billions of them in the pipeline – will hold off decision making.

The battery of the nation project, on its own modelling, will likely result in billions of dollars of other projects being sidelined. Ditto with Snowy 2.0. How can a competing pumped hydro project in South Australia make a decision on investment while it waits to see if a neighbouring competitor gets a handout from the government?

So Taylor finds himself in control. And few, apart from the ever hopeful shortlisted project owners, are happy. This “unjustified” intervention is cited in a survey by the Clean Energy Council as the one of the key things – along with the lack of any overarching policy, and the well documented connection issues – holding back investment.

AGL made its position clear very early,  saying the process lacked clarity, would likely distort markets and created “perverse” outcomes that would “further inhibit” market signals for new investment, and even lead to the early closure of existing generators.

That view has been repeated by just about every major utility and investor. The Grattan Institute says the government’s decision to back Snowy 2.0 pumped hydro scheme, and to propose underwriting for up to 12 different coal, gas and pumped hydro projects, would effectively bring competing private investments to a halt.

Even the head of the Energy Security Board, Kerry Schott, said Taylor’s intervention in the market, from setting price caps to its own underwriting program, would stop private investment. For good measure, she labelled Taylor’s favoured coal technologies, and the units he is trying to keep open, and which Morrison says he wants to “sweat”, as dinosaurs.

Government intervention in energy markets is not new. The renewable energy target is one mechanism, but that at least set a target, a pricing mechanism, and allowed the market to set the price and choose the projects. It has been phenomenally successful, apart from when the government – urged by Taylor – tried to intervene and threatened to close it, and brought investment to a halt because of the uncertainty.

Reverse tenders are another popular, and very effective, mechanism. But these, at least, are held with clear guidelines, probity checks, and deadlines. Regrettably, most – with the notable exception of the ACT, and maybe South Australia – do not reveal the final contract price, but at least there is some visibility on timing and investments. And things do get built.

Taylor’s scheme is neither a market, nor is it new technology as Morrison insists. Pumped hydro has been around for decades, and so has gas, and so have coal-fired generators.

Nor is it timely. Taylor’s press release announcing the short list in March last year said an objective of the UNGI scheme would be to target a “25 to 30 per cent reduction in wholesale prices in each NEM region by 2021.”

But none of these UNGI projects will see the light of day by that time. Such wholesale price reductions may well be achieved, but only through the wind and solar investments under the RET (which the Coalition tried to kill), and which are now drying up, sparking warnings of a reversal in those price gains.

Taylor’s office refused any on-record replies to RenewEconomy’s questions about the timing and details of the UNGI program. But the gist of what we were informed was that talks with APA and Quinbrook continue, as they do with the other shortlisted projects, and there was some stuff about a “holistic” and “flexible” approach.

But here’s the rub. There is, following the bushfire crisis, a growing expectation from the public to get moving on renewables and this energy transition. Even the big utilities insist they are willing to get on with it, and embrace those new technologies, via a market.

The Australian Energy Market Operator is drawing up a 20-year blueprint, investors are looking at opportunities to replace the ageing coal and gas generators that must exit the market sooner or later, and even the regulator and rule-makers are trying to catch up.

But it seems too much to hope that the Coalition government might produce a policy that helps smooth that transition, even with the overwhelming evidence of lower costs and huge economic opportunities from renewables, and the other new technologies (battery and hydrogen) they keep talking about.

At the very least, the industry might hope the government would step out of the way, if it wasn’t interested in a policy pathway. What they’ve got, however, is a great big bollard blocking the path to decarbonisation. And it’s not entirely clear how they get around it.