Will Canberra finally call time on the utilities’ snow job?

Could it be that the Australian government has finally woken up to the fact that they have been conned by the electricity industry in this country – at least for the last decade.

If it wanted to sum up its series of announcements over the last few weeks relating to network investment, today’s announcement on the contracts for closure, and tomorrow’s release of the power of choice review, it could go something like this: “The degree of regulatory capture by the electricity industry was greater than even Professor Ross Garnaut could have imagined. And we’re not going to stand for it any more.”

Well, if only. Probably not the last bit.

Resources Minister Martin Ferguson confirmed on Wednesday that the contracts for closure scheme was, as RenewEconomy suggested a fortnight ago, “dead in the water.” The planned buyout of 2000MW of the dirtiest brown coal generation will not go ahead, after failure to agree on a price with any of the generators involved – the massive Yallourn and Hazelwood generators in Victoria, and the smaller and ageing Playford, Collinsville and  Energy Brix generators in South Australia, Queensland and Victoria respectively.

The buyout of generators has been promoted by environmental groups, in particular, as the most cost-effective, and symbolically powerful way to close brown coal generation and to achieve emissions reductions. That might have been right, but once the government said in its Clean Energy Future package that it would compensate the generators to ensure they should stay open, as well as negotiate with some to pay them even more to ensure that they eventually close (in an orderly fashion), the policy looked an absurdity and was doomed to failure.

It has put Ferguson in the unusual position of having to talk down the value of coal-fired generation, while the generators – treated with a weak carbon package they had been instrumental in diluting (remember the nonsense about the lights going out?), and $5 billion of compensation – realised that they would make more money staying open.

Garnaut had said that the proposals – both the compensation and the buyout – were unnecessary and  inefficient; all that was needed were loan guarantees to ensure that there were no sudden closures (which is what they got in addition). But the government didn’t listen. The extent of regulatory capture by the industry – identified by Garnaut – was so complete that the industry got everything it wanted, just as it had managed to bamboozle the government over the gold plating of electricity networks, and continues to do so over the setting and structure of retail tariffs.

Garnaut’s dismissal of the need for compensation are simply reinforced by recent trends in electricity consumption. The fall in demand and the impact of energy efficiency measures, reduced consumption and the impact of renewables – both large-scale wind and rooftop solar – shows that Australia has a lot of excess generation.

The environmental groups are absolutely right to express their outrage, and to suggest that the compensation package for brown coal generators should now be removed, because this compensation simply favours the brown coal generators over the black coal generators – and clearly, it is no longer needed. That would be the appropriate response of a government that now realises it has been hoodwinked all along the value chain.

The environmental groups also suggest the renewable energy target should be increased – and it is true that would be one way to make the brown coal generators, and the black coal generators for that matter, squirm a little in their board seats. There are other things the government should do, too, such as resist the efforts of network operators and retailers to deny access to rooftop solar, or change the tariffs so that the economics of solar are no longer so appealing. The utilities are perfectly aware that a high penetration of rooftop solar is a greater threat to their business than the carbon price. The government needs to get more independent experts on its advisory panels.

It will be interesting to see what happens now. It may actually produce some surprising results. Alinta, for instance, said today it would now look at the options for solar thermal generation in South Australia, where it has already closed Playford B, and is now using the 540MW Northern Power station as a sort of summer peaking plant. Both are expensive and old and running out of coal. They have a limited future, and Alinta may be just playing with words, but it must also be aware of the grass-roots campaign being organised by NGOs, surveys that favoured solar over gas by a ratio of 1,000 to one, and things like the Walk for Solar event. The decisions taken at Port Augusta promise to be a powerful symbol of what happens next in energy in Australia.

Note: Not that the Coalition has anything to crow about on this – they proposed exactly the same buyout policy, minus the initial compensation and minus the carbon tax. Yes, Mr Abbott, as you described it today, it was always bad policy.