Australian Financial Review
Tuesday 24/4/2007 Page: 62
Blackouts, higher energy prices and misallocated resources: that's the chilling scenario painted by a government taskforce on Australia's energy future if federal and state governments do not opt for policies to create an efficient energy sector.
The Energy Reform Implementation Group's warning is a far cry from the recent media debate on energy, which has focused on the greenhouse gas problem of Australia's polluting coalburning power generation. ERIG says that unless energy markets are made more efficient via a combination of privatisation of government electricity agencies, less regulation and a truly national energy market, investors may be far less willing to put their money into new generation capacity.
Blackouts and higher prices are just some of the possible outcomes. Investment uncertainty also feeds into the greenhouse debate. ERIG and consultant KPMG make it clear that another "important barrier" to investment lies in the confusing multiplicity of state and federal greenhouse policies, and-the uncertainty of future constraints. Canberra alone has 80 different greenhouse programs. "ERIG was struck by the significant concerns raised by market participants about market uncertainty in relation to possible future greenhouse abatement schemes," the group says.
KPMG cited one potential investor as labelling greenhouse policies a "shambles", while another said investing in such circumstances would be akin to "gambling". One investor with billions of dollars to put into new base-load capacity told KPMG it had pulled out because greenhouse policies - or lack of them - meant "we could not value the potential impact with any degree of certainty".
It is not just energy suppliers getting nervous. KPMG reports that major energy users may be more likely to invest offshore in the absence of greater certainty on greenhouse policy here. "The risk is that the federal government's efforts to avoid sending industries and jobs offshore by refusing to introduce some form of unilateral carbon pricing signal will be undermined by the very uncertainty created by a policy that energy sector investors believe is neither credible nor sustainable," KPMG says.
The vicious circle involved here is almost unbelievable: government inaction in creating a privatised, competitive and national electricity market threatens supply shortages, blackouts and higher prices. Moreover, jumbled greenhouse policies threaten a capital drought that could derail not only the generation investment needed to fix these problems but also the installation of the clean coal technology and perhaps nuclear plant necessary to combat harmful emissions.
ERIG's solution is to recommend to the Council of Australian Governments a more co-ordinated strategic approach to the energy sector", leading to full privatisation of all state-owned electricity assets and a reinvigorated push towards national markets. Where states do not fully privatise NSW is the worst offender - ERIG wants much stricter competitive neutrality, including the end of market distortions and price regulation.
So what did COAG do when it met on April 13? It picked up on many of ERIG's regulatory concerns, including the creation of a new national energy market operator, but it ignored a major thrust of ERIG's findings to encourage new investment - privatisation or enhanced competitive neutrality - and it argued over a climate-change agenda.
Momentum in energy market reforms has slowed: the nation needs an estimated $35 billion in new generation capacity by 2030 and markets are sending clear signals they are wary of investment, given market distortions between private and state operators, and the "shambles" of greenhouse policies. If anything, the problem will worsen as Prime Minister John Howard's coalition and the Labor states face off on rival emissions trading systems in the lead-up to the federal election.
COAG just doesn't see the links between on the one hand the jumble of state-based and largely state-owned electricity systems, the apprehension in the private sector to the free kicks afforded state ownership and the confused greenhouse signals, and on the other the potential impact on crucial new clean-power projects.
Business Council of Australia president Michael Chaney has tired of the "theatrics" of COAG, a politicians' club he says needs reform. When it comes to energy policy and COAG, Chaney hasn't seen the half of it.
Allan Fels is dean of the Australia and New Zealand School of Government.
Fred Brenchley is a former editor of The Australian Financial Review.
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