Central planning is failing Australia’s energy transition

In its election manifesto, the newly returned government re-committed to the energy policy it took to the electorate in 2022, with a few additions.

The centrepiece of the policy is a commitment (“target’) that renewable electricity will meet 82 per cent of electricity demand by 2030. This commitment is at the heart of the (legislated) obligation to reduce Australia’s greenhouse gas emissions to 43 per cent below 2005 levels by 2030. Can the returned government’s renewable electricity policy be delivered? If not, what might be done? 

Over the term of the last government, renewable electricity in the National Electricity Market increased by 10 percentage points to about 40 per cent of production, measured over 12 months. Five of the 10 percentage points came from more rooftop solar and the remainder from new wind and solar farms. 

Getting to 82 per cent in the next five years will require the rate of renewable expansion to roughly quintuple compared to the rate it grew over the term of the last government, after taking into account that ever more renewable production will increasingly (and necessarily) be curtailed as variable renewable penetration increases. 

Much of the transmission grid is now congested, so most new wind and solar farms will need to wait on transmission expansion. But transmission is being developed much more slowly than governments and the Australian Energy Market Operator (AEMO) have predicted. 

The first leg of a new interconnector between Victoria and New South Wales has yet to proceed. AEMO recommended this project in its inaugural 2018 Integrated System Plan (ISP) and predicted it would be operational by 2023. The developer has said it will begin construction after the Victorian election in late 2026. The project has yet to receive all the necessary approvals. It would not be surprising if it never gets built.  

All the other transmission lines that AEMO has “actioned” are now estimated to cost between 4 to 6 times more now than their first claims, and none are close to being delivered by their estimated completion dates. 

Renewable developers have not managed to overcome the opposition of communities directly affected by their proposals. One of the last acts of the previous federal Infrastructure Commissioner (appointed by the Morrison Government) was to publish a survey that relayed the frustration of local communities with transmission companies and renewable developers.

The current Infrastructure Commissioner (appointed by the Albanese Government) has recently vented his frustration that the last commissioner’s recommendations (which were accepted by state and federal governments) are not having the desired effect. Affected communities continue to complain that the energy transition is being done to them, not with them.

So, to answer our first question, having generally failed to secure the support of affected communities and landholders, we don’t think the government’s renewable electricity target will be met. And so, there is no chance that the government’s (legislated) emission reduction commitment will be met.

Though few are willing to say this publicly we have yet to find officials, market participants or experts who disagree, behind closed doors. 

So far, the policy response to the lack of progress has been to strengthen central control. Just one year after AEMO’s first ISP was published, ministers promised new “fast-track” arrangements. Three years after that, “reforms” were made to “super-charge” the ISP. The pressure now is to extend the central planner’s remit beyond transmission and into making its generation and storage forecasts “actionable”. 

Many jurisdictional governments are supportive of this centralisation. Their financial capacity to drive the expansion of renewable energy, transmission and storage at the rate the Federal Government is demanding is inadequate.

In this context, a federal government that is willing to commit large amounts of taxpayers’ money, and take responsibility for the problem, is increasingly attractive, even if it is unable to deliver. 

Others are sympathetic to more central planning. Transmission companies want to expand their regulated assets and are attracted to policy that delivers this. Renewables developers and their financiers see advantage in passing market, operation and development risks on to governments if that means their projects get over the line. 

Environmental advocates are also typically sympathetic to centralisation on the basis that in a time of war on climate change, generals should be in charge. 

However, some economists, perhaps even most, are sceptical. The track record of central planning in western democracies is one of persistent and profound failure, or in the jargon of the bureaucracy, “unintended consequences”. Electricity supply has not been an exception to this and even in its short history, the ISP proves the rule. 

What can be done?

Local negotiation should replace central diktat. Renewables developers, transmission and distribution companies should be encouraged to seek agreement with interested parties including retailers, producers, customer groups and landholder representatives. Competition in transmission and distribution should be encouraged. 

Government would still be responsible for establishing policy direction and for providing financial support for those policies, where needed.

Regulators will have an important role in helping to facilitate such negotiations, and where the parties can’t reasonably agree, making decisions. AEMO’s generation and transmission expansion remit should be pulled back to the provision of advice.

Such “negotiated settlements” might extend to many areas, including the determination of the revenues of network monopolies, the structure of their charges, network access rights and approval (or not) of contentious projects.

Through such negotiation, new ideas and workable compromises may arise from which others can learn. Developers will find out what customers and landholders really value. And empowered customer groups and landholders may find an ability to compromise that evaded them when protest was their only option.

Central planning in electricity supply in Australia is failing. Doubling down is no solution.

Negotiated settlement is not a magic wand and will bring its own set of challenges. But it has proven successful where tried and should receive the benefit of the doubt.