Guest Post: Frank Jotzo on Labor's new energy policy using the #NEG and the need to do so much more

Labor's policy can smooth the energy transition, but much more will be needed to tackle emissions

Frank Jotzo, Crawford School of Public Policy, Australian National University

The Labor party’s energy policy platform, released last week, is politically clever and would likely be effective. It includes plans to underwrite renewable energy and storage, and other elements that would help the energy transition along. Its approach to the transition away from coal-fired power is likely to need more work, and it will need to be accompanied by good policy in other sectors of the economy where greenhouse emissions are still climbing.

The politics is quite simple for Labor: support the transition to renewable electricity which is already underway and which a large majority of Australians support, and minimise the risk that its proposed policy instruments will come under effective attack in the lead-up to the 2019 election.

By aiming for 50% renewables at 2030, the party has claimed the high ground. That goal and perhaps a lot more is achievable, given that the large investment pipeline in electricity consists almost entirely of wind and solar projects, and that new renewables are now typically the cheapest options to produce energy with new plants.

The question then is what policy instruments Labor would use to facilitate the transition from coal to renewables.

NEG games

The government’s abandoned National Energy Guarantee (NEG) policy is now a political asset for Labor. If the Coalition were to support it under a Labor government, the policy would effectively be immune to political attack. If the Coalition were to block it, Labor could blame many future problems in electricity on the Coalition’s refusal to endorse a policy that it originally devised.

The NEG has many warts. Some of the compromises in its design were necessary to get it through the Coalition party room. That no longer matters, and so it should be possible to make improvements. One such improvement would be to allow for an explicit carbon price in electricity under the NEG, by creating an emissions intensity obligation for electricity generators with traded certificates. This is better than the opaque model of contract obligations on electricity retailers under the original version.

Underwriting renewables

But the real action under a Labor government might well come from a more direct policy approach to push the deployment of renewables. In his energy policy speech last week, Shorten foreshadowed that Labor would “invest in projects and underwrite contracts for clean power generation, as well as firming technologies like storage and gas”.

As interventionist as this sounds, it has some clear advantages over more indirect support mechanisms. First, it brings the costs of new projects down further by making cheap finance available – a tried and tested method in state-based renewables schemes. Second, it allows for a more targeted approach, supporting renewable energy generation where it makes most sense given demand and transmission lines, and prioritising storage where and when it is needed. Third, it channels government support only to new installations, rather than giving free money to wind farms and solar plants that are already in operation.

Managing coal exit

Where renewables rise, coal will fall. Labor’s approach to this issue centres on the affected workers and communities. A “just transition authority” would be created as a statutory authority, to administer redundancies, worker training, and economic diversification.

This is a good approach if it can work effectively and efficiently. But it may not be enough to manage the large and potentially rapid shifts in Australia’s power sector.

Contract prices for new wind farms and solar plants now are similar to or lower than the operating costs of many existing coal plants. The economics of existing coal plants are deteriorating, and many of Australia’s ageing coal power plants may shut down sooner than anticipated.

All that Labor’s policy says on the issue is that all large power plants would be required to provide three years’ notice of closure, as the Finkel Review recommended. But in practice this is unlikely to work.

Without any guiding framework, coal power plants could close very suddenly. If a major piece of equipment fails and repair is uneconomic, then the plant is out, and operators may find it opportune to run the plant right until that point. It’s like driving an old car – it runs sort of OK until the gearbox goes, and it’s off to the wreckers right then. It is unclear how a three-year rule could be enforced.

This is effectively what happened with the Hazelwood plant in Victoria. That closure caused a temporary rise in wholesale power prices, as new supply capacity gradually fills the gap.

One way to deal with this would be to draw up and implement some form of specific exit timetable for coal power plants. This would give notice to local communities, provide time to prepare investment in alternative economic activities, and allow replacement generation capacity to be brought online. Such a timetable would need a mechanism to implement it, probably a system of carrots and sticks.

Batteries, energy efficiency and the CEFC

Most public attention was given to a relatively small part of Labor’s energy policy platform: the promise to subsidise home batteries. Batteries can help reduce peak demand, and cut electricity bills for those who also have solar panels. But it is not clear whether home batteries are good value for money in the system overall. And the program would tend to benefit mostly upper middle-income earners.

Labor’s platform also foreshadows a renewed emphasis on energy efficiency, which is economically sensible.

Finally, Labor promises to double the Clean Energy Finance Corporation’s endowment with another A$10 billion, to be used for revolving loans. The CEFC is already the world’s biggest “green bank”, co-financing projects that cut emissions and deliver financial returns. Another A$5 billion is promised as a fund for upgrading transmission and distribution infrastructure. These are big numbers, and justifiably so - building our future energy system will need massive investments, and some of these will be best made by government.

Big plans for electricity, but what about the rest?

Overall, Labor’s plan is a solid blueprint to support the electricity transition, with strong ambition made possible by the tremendous technological developments of recent years.

But really it is only the start. Electricity accounts for one-third of national greenhouse emissions. Emissions from the power sector will continue to fall, but emissions from other sectors have been rising. That poses a huge challenge for the economy-wide emissions reductions that are needed not only to achieve the 2030 emissions targets, but the much deeper reductions needed in coming decades.

A national low-carbon strategy will need to look at how to get industry to shift to zero-emission electricity, how to convert road transport to electricity or hydrogen, and how to tackle the difficult question of agricultural emissions. More pre-election announcements are to come. It will be interesting to see how far Labor will be willing to go in the direction of putting a price on carbon, which remains the economically sensible but most politically charged policy option.

As difficult as electricity policy may seem based on the tumultuous politics that have surrounded it, more seismic shifts are waiting in the wings.

Frank Jotzo, Director, Centre for Climate Economics and Policy, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australian Targets

Tuesday, November 27, 2018