Will our energy policy makers remain lost in a climate change fog? Tristan Edis 15 February 2016

Will our energy policy makers remain lost in a climate change fog?

Energy market analyst and carbon policy expert Tristan Edis argues that Australia's key energy regulatory institutions have handled the carbon reduction challenge poorly, and a changed approach is needed. This article is taken from Efficiency Insight, the EEC's quartely e-zine. Click here to subscribe. 

Our energy regulatory institutions – the Australian Energy Market Commission which decides on the rules of our energy market, the Australian Energy Regulator which enforces these rules, and the Australian Energy Market Operator which manages its operation – could be considered the ultimate climate change sceptics. 

This has left them blindsided and poorly prepared to consider how energy efficiency, embedded generation and demand management could not just reduce carbon emissions but also reduce costs for energy consumers.

To clarify my provocative remarks, they are climate change sceptics not because the staff within them believe there’s some vast conspiracy to fabricate the scientific research on the earth’s climate.

Rather it’s because since the inception of the national regulatory system for Australia’s gas and electricity markets, senior government officials have resisted any attempt to incorporate any consideration of environmental impacts into the objectives of the regime.  The AEMC and the AER are explicitly instructed by the following overriding objective within the National Electricity Law:

The National Electricity Objective is to promote efficient investment in, and efficient operation and use of, electricity services for the long-term interests of consumers of electricity with respect to price, quality, safety, reliability, and security of supply of electricity; and the reliability, safety and security of the national electricity system.

Price is important. Reliability is important. Safety and security are important. But the fact that electricity is the largest source of Australia’s greenhouse gas emissions and that Australia’s electricity is also the most emission intensive in the developed world is completely irrelevant.

This was done for extremely good reasons and is also why they have also kept out consideration of social impacts. But it risks creating a myopic and ultimately more costly approach to management of our energy system.

Firstly it should be said in defence of those that have sought to keep the National Electricity Objective simple and focussed, that energy markets shouldn’t be used as the instrument to cure all the world’s ills.  Multiple, conflicting objectives risk leaving our energy policy makers and regulators in a quagmire of complexity when often there are better, more targeted ways of addressing social and environmental problems. 

For example, if we are concerned about the welfare of the socially disadvantaged then we can best assist them not through subsidising the cost of power (which well-off people also consume), but by ensuring welfare payments keep up with the cost of living and keeping unemployment low.  As another example, the toxic by-products of coal combustion such as mercury or sulphur dioxide could be partly contained by trying to encourage energy conservation and reducing the waste of electricity. But electricity also comes from sources other than coal that don’t have these kinds of nasties, so it’s far more effective for our state environmental protection agencies to directly regulate the coal power stations that emit these toxic substances.

However when it comes to greenhouse gases we face a serious problem.

The policy mandarins have generally been characterised by a consensus that the best, most efficient way to contain greenhouse gases would be to put a price on them, either through emissions trading or a carbon tax. Put this in place and voilà, no need for energy regulators to worry about greenhouse gas emissions specifically, because they’d get wrapped up within the overall electricity price. The AEMC and AER can then go about their normal business trying to optimise for lowest overall possible price, just as set out in the National Electricity Objective.

However there’s just one little issue– Australia’s politicians and the electorate haven’t come round to the same consensus as the policy mandarins. They have debated and argued over the introduction of a carbon price going back more than two decades with considerable acrimony. Instead there is a strong preference amongst the electorate (not just in Australia) for policy measures that are directly tied to tangible technological means of reducing emissions, like for example subsidising solar panels or banning the sale of highly inefficient appliances.

In addition most people and most organisations in the world aren’t the amazing calculating machines that the policy mandarins (who have typically been trained to think like classical economists) assume them to be. For all people’s whinging and moaning about electricity prices, the reality is that most households and most businesses don’t put very much effort into thinking about cost-effective and relatively straightforward ways they might use less of it. Countless studies stretching back to the 1970s energy crisis have found time and again that households and businesses don’t implement simple technologies for saving energy that would provide extraordinary financial returns without sacrificing on other attributes.

The end result of this breakdown between energy policy mandarins’ expectations of how the world should work and how it actually works in reality, is that our energy regulatory institutions are being left behind in a wake of changes to the energy system wrought by efforts to lower carbon emissions other than a carbon price.

It is certainly true that a number of these emission reduction efforts haven’t been as well thought out as they should have been.  But the general direction of the interventions - which have been to increase the amount of renewable energy supply and to reduce demand via improved energy efficiency - are completely consistent with what’s required to meet an overarching goal of containing global warming to 2℃.  This is an international goal both sides of Australian politics have signed onto.  Furthermore Environment Ministers have spoken about the need for deep emission cuts in the realm of 50% or more since the early 2000s. 

You would have thought that if our energy institutions took the Australian Government’s commitment to such a goal seriously they’d have been war gaming and thinking through how to design an energy system that is increasingly dominated by renewable energy, demand for energy from the grid might go down rather than up, and demand might need to become more flexible.

This is starting to happen, but from an outsiders perspective it appears to be reluctant and only after the changes have become so embedded that they can no longer be ignored. 

Network costs – a financial disaster

The area where the greatest stress is evident is in how we regulate and pay for the electricity network.

In the decade leading into the commencement of the national energy regulatory regime which began in 2007, Australian state and federal governments’ environment officials, in conjunction with governments overseas, had been working on implementing a range of measures to improve energy efficiency of things as varied as refrigerators to industrial motors to new homes and commercial buildings.  For the most part these measures made very good economic sense beyond the environmental benefits.

Unfortunately the mandarins developing the regulatory rules surrounding the energy market were either blissfully unaware of this or deeply sceptical that such measures would achieve anything.

The end result has been a financial disaster. Network businesses were granted the right to invest and guaranteed a return on billions of dollars in additional network capacity, while consumers’ power demand barely grew.

On top of this solar power systems, which can bypass a large proportion of the electricity network, have now become a highly competitive source of electricity. Again this was a product of more than a decade of deliberate international government effort. Solar systems, which used to be horribly expensive, are now anticipated to be one of the lowest cost means of decarbonising power supplies in sunny locations such as Australia.

A further emerging development is the internet of things, which enhances our ability to shift power demand across time far more easily.

No one knows with certainty what will be the cheapest means of achieving the dramatic reductions in greenhouse emissions required within the next 30 years to contain global warming below 2℃. But there’s a better than even chance it will involve technological changes at the customer end of the power line.  Technologies that would have allowed us to decarbonise with little change to the existing structure of the energy market in carbon capture and storage, as well as nuclear power, have fallen well short of the outcomes their proponents envisaged over the last decade and a half. Furthermore large rises in the price of gas in Australia mean it isn’t likely to play an important transitionary role in decarbonisation either.

The views of the energy policy establishment, perhaps best personified by the recent Energy White Paper as well as the prior Labor Government’s White Paper, don’t appear to have come to terms with this.  They seem to still approach issues from the perspective that the existing supply infrastructure should be protected from change. 

This reached ridiculous proportions during the recent review of the Renewable Energy Target where the government argued the target should be reduced primarily because it was leading to an oversupply of electricity generation capacity. But an oversupply of electricity generation capacity isn’t a problem for anyone other than owners of existing power stations.

Reform of electricity pricing for small electricity consumers seems to also be proposed not so much from the perspective of the future need to enhance the flexibility of the market to respond to changes in the supply-demand balance (which becomes more valuable as you increase the amount of renewables in the system). Rather it appears to be more about ensuring the costs of investment in the existing network infrastructure are recovered without encouraging further reductions in energy consumption from the grid. Recent hikes in fixed charges unrelated to customers’ behaviour by some power companies are a worrying sign of where this might go. They are completely inconsistent with economic efficiency and will also increase the costs to society to decarbonise. They serve to illustrate that the decision by the AEMC to entrust monopoly network businesses themselves with developing the shape of new pricing structures was like putting the fox in charge of the hen house. 

Meanwhile progress on development of a wholesale market in demand response that would reward reductions in demand as an alternative to expensive peaking power plants has been painfully slow.

Advances in energy efficiency, customer-embedded generation such as solar and the internet of things provide a prized opportunity to decarbonise the economy at lower cost to consumers.  This is precisely because they allow consumers to lessen their need for quite expensive existing capacity from conventional suppliers. Energy policy and regulatory rules that are framed around the idea that past investments in capacity must be protected from such advances, or entrusting monopoly network businesses to play nice with emerging competitors, will make the task of decarbonisation far harder and more costly for consumers than it needs to be. 


Tristan Edis is an energy and climate change/carbon policy and market analyst who has worked in government, consulting, clean energy industry and the media. He is Director – Analysis & Advisory at Green Energy Markets and blogs at