Economic and Political Outlook 2021
Check out CEDA's new report featuring insights from economists and political commentators on the year ahead.
Alan Finkel’s electricity review offers a chance to break the political impasse over climate and energy policy. Its key recommendations, including for a clean energy target – which would support a gradual transition from coal to renewables – are supported by cabinet, accepted by the Labor party, and embraced by large parts of Australia’s energy industry. But some Coalition parliamentarians are pushing for new coal fired plants, which would further weaken the environmental ambition of the package and lessen the prospect for a bipartisan approach.
The Finkel Review focused on reliability of power supply, providing a host of practical recommendations. It made the important recommendation for government to develop an economy-wide emissions reduction strategy for 2050. Yet the politically most difficult topic, and one that industry would most like to see resolved, is emissions reductions policy.
Finkel suggested a reduction in power sector emissions at least the same as the national emissions target of 26 to 28 per cent, and this was modelled for the Review. That is weak in comparison to what needs to happen to meet the Paris goal, and weak compared to what can be done, given the opportunities for transition in Australia’s power supply.
In any scenario of nationally cost-effective emissions reductions, Australia’s power sector emissions are cut by much more than the national average. That is because it is easier and cheaper to cut carbon in the power sector than in many other parts of the economy, given the fossil fuel power plan fleet is ageing and renewables are plentiful and ever cheaper. Longer term, near-zero electricity generation and large scale electrication of energy use is the key to decarbonisation.
For implementation, Finkel proposed a Clean Energy Target (CET), effectively an expanded version of the existing Renewable Energy Target. A CET would provide a financial incentive to invest in cleaner power generation. It is more complex and possibly less efficient than an “emissions intensity scheme” that was seen as the preferred option until Coalition backbenchers stomped on it late last year. Both are second-best to a comprehensive carbon trading scheme.
A CET as envisaged would also give some certificates to gas power stations. It could be geared to differentiate between coal power plants of different emissions intensity, by setting the benchmark at a higher level. This need not weaken the scheme, because a CET has a second parameter that determines its stringency, namely the amount of certificates that retailers have to buy.
Finkel also recommended that wind parks and solar farms should pay for electricity storage and backup to ensure dispatchable electricity. This would increase the cost of new renewable plants.
Meanwhile, some Coalition parliamentarians and the coal industry are talking about building new coal fired power stations, and the PM has not ruled out new coal plants. The latest suggestion is that the government would run reverse auctions for the supply of electricity that meets a reliability standard and that this would be open for coal. Government support would be needed for any new coal plant, because new coal plants are unlikely to be competitive in the market and because they would carry large carbon liabilities over many decades.
As AGL’s CEO pointed out, the future belongs to renewables with energy storage and some gas. Finkel also pointed out that investors prefer solar and wind as they are simply cheaper. Public opinion is overwhelmingly in favour of renewables over coal. And new coal plants without carbon capture and storage are incompatible with the longer term need to deeply reduce emissions levels.
The real question is how quickly the existing coal fired power fleet will be replaced with renewables, gas and storage plants. A CET could accelerate that process and provide better investment conditions, but only if its political survival seems assured and if it has meaningful ambition. Policy uncertainty has hampered investment in Australia’s energy system for over a decade.
If a start was made with a CET now, then future governments could ramp up ambition and put in place a more comprehensive and integrated policy framework. The CET could co-exist with, or be overlayed by, emissions trading covering other sectors. Longer term, putting a proper economy-wide price on carbon should be the policy ambition.
If the Coalition were to decide not to put in place a new mechanism to support investment in low-carbon electricity, then this would come with a bitter irony: given that the Labor party supports the idea of a CET, there is a large underlying majority for the policy in Parliament. Theoretically, a climate and energy policy package could be passed together with the Labor party. But the more the compromise is made at one end of the spectrum – such as support for new coal fired power – the less chance there is for bipartisanship.
Business and the Australian community would thank the political system for getting over the party political climate policy wars. It still seems a distant prospect.