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The Finkel Report

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The Finkel report is looking into solving Australia’s core energy problems of reliability and price.

These were the central tenets of Dr Finkel’s terms of reference but he appears to have subsumed them to the need to settle the issue of emissions reduction.

There is a justification for this: a settled bipartisan emissions reduction target is an essential precondition for future investment in the energy sector but, as Dr Finkel has pointed out, Labor has already rejected the notion of a bipartisan target and consequently investment stability.

As a result the government may as well forget about a clean energy target and focus on delivering cheap and reliable energy.

This is what the conservative element of his backbench is telling him: don’t be seduced by Labor’s offers to help fix the problem and deal with the cost of living issues.

It’s obvious that implementation of a clean energy target would make electricity more expensive.

The argument that implementation of the Finkel report would result in a reduction of an average $90 in household electricity bills when compared with business is a red herring.

It’s hardly much consolation for the financially stressed households of Australia, which are facing energy price increases of $600 in the coming financial year, for Finkel to say that, under his proposals, their household electricity bills will only go up by $520 a year.

Moreover the report is implicitly admitting that the current price trajectory will continue because of the choice of energy mix that results from the clean energy target.

The report’s sketchily outlined mechanism for the implementation of the clean energy target does amount to imposing a price on coal, despite the denials of ministers, like Julie Bishop, who have been asked about it.

It operates by granting credits to low emission technologies.

The financial benefits of these credits are realised by selling them to distributors who are required to ensure that, on average, the power they sell meets the clean energy emissions target.

The more coal fired base load power they sell, the more credits they have to buy and the stronger the demand for credits, the higher the price will be.

These increased costs will be passed on to consumers.

The Finkel report is very murky on how savings to household energy bills are to be achieved but the report puts heavy emphasis on demand management.

There are copious mentions of technology like smart phones and smart meters and other devices that can be used to reduce demand for energy, particularly at peak times, but these suggestions will not carry a lot of weight with ordinary consumers.

As a panellist on ABC’s ‘The Drum’ said last week when she complained about her gas bill doubling, the company told her it was because she used gas between 6 and 8 at night.

In other words, if you want to lower your gas bills, start eating salads.

There is merit in major consumers like aluminium smelters managing their demand so they contract energy at stable prices but this requires stability of energy supply as a precondition.

The mechanisms proposed by the Finkel report for ensuring grid stability involve new layers of bureaucracy.

This starts with the imposition of new security obligations that will be imposed on generators.

There are additional rules that will have to be applied by state governments.

The national grid will be divided into regions and there will be obligations on the managers of those regions to ensure that there is enough inertia in the system to deal with so called ‘black’ events.

The report also recommends ‘Generator Reliability Obligations’ which means that intermittent generators like wind and solar need to have back up power so that they can maintain a basic level of despatchable power.

The report also adopts the Energy Policy Institute of Australia’s suggestion that the Council of Australian Governments (COAG) develop an integrated national energy plan which actually determines the composition of the power generation within the grid.

However the report pre-empts COAG’s choices when it comes to this plan by proposing a clean energy target.

The report also suggests that the Australian Energy Market Operator should effectively take control of renewable energy investment by developing a list of potential priority projects which would facilitate the development of renewable energy zones across the country.

This is critical to the Finkel plan because it suggests a trebling of wind power over the next 13 years.

The report also suggests that there should be an energy security plan to sit alongside the national energy plan.

It also proposes the establishment of an Energy Security Board to manage the security of the grid.

This includes managing the transition process including the closure of the old coal fired generators.

The report recommends that the baseline coal fired generators be required to give three years notice of any decommissioning.

As it presently stands there is one of those generators due to close in 2022 and then there will be no closures until after 2030 unless they are forced to close by emission reduction targets.

This new regulatory apparatus will inevitably add to costs even though it will increase stability.

It will also require a consensus across the political class in Australia, not only between the major parties at a federal level but also at a state level.

Maintaining such a consensus in a situation where prices continue out of control seems like an impossible task.

The Finkel Report appears to have put the cart before the horse.

Given that its mandate was to develop a policy approach that ensured grid stability and lower electricity prices in the short to medium term, it would seem sensible to resolve these issues before embarking on measures to fix the emission reduction issue.

The government has announced that it’s on track to meet its Paris Agreement targets but, at the moment, this is heavily dependent on the renewable energy target which is the primary cause of instability in the grid.

Finkel has made some good suggestions for overcoming these problems and these could be introduced as an early phase response.

Once the grid has been stabilised the government will need to deal with issues related to future despatchable capacity which means fixing the gas problem.

That having been done the authorities could turn their attention to emission reduction.

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