Garnaut fails to understand the real issues when it comes to electricity

Professor Ross Garnaut’s latest report is deeply concerning to the energy sector on two counts in particular. Firstly, his continuing refusal to recognise the need for assistance for generators to transition to a low emission future and secondly, his curious forays into network regulation in the National Electricity Market.

The Energy Supply Association of Australia rejects Professor Garnaut’s position of refusing assistance to electricity generators to transition to a low emission future as it risks achieving a smooth transition to a low emission electricity sector.

Australia’s economy and society depends on energy and the community rightfully demands a first‑class supply of energy from the industry. To meet these high expectations, businesses in Australia’s energy industry invest in, operate and maintain a world‑class energy supply chain. Australia’s energy users today enjoy a supply of energy that is exceptionally safe, secure, reliable and efficient, with prices that are low by world standards. The energy industry is proud to underpin Australia’s economy and way of life.

Australia has benefited immensely from its energy industry over the last century, but because of its historical development and Australia’s low‑cost, readily accessible coal reserves, Australia’s energy supply today is relatively emissions intensive. As the energy sector is Australia’s largest source of emissions, energy supply must transform to a lower carbon intensity if Australia is to achieve domestically deep emissions reductions in the long term.

The task of transforming Australia’s energy supply should not be underestimated. Even abatement targets belittled by some commentators as insufficient will be difficult to achieve. The commercial, financial and technological challenges for the sector to reorient five decades of investments based on fossil fuel to low emissions alternatives are significant.

To assist the businesses that will power Australia into the future to respond to the new expectations of the community, it is essential that the right policy settings are in place to make a smooth transition. The energy supply industry strongly supports an efficient, equitable and enduring emissions trading scheme enabling a smooth transition to a low emission economy and delivering reliable electricity. In contrast, failure to achieve the right settings will increase the risk of a disorderly transition and undermine energy security.

Against the significant challenges for the energy sector to adjust to climate change policy, Garnaut’s final report is simply a continuation of wanting to treat the symptoms instead of the causes.

The policy of providing loan guarantees for assets in distress caused by the clumsy application of a carbon price is just not sensible.

This does not assure energy security because companies in this situation will have no ability to trade their way out of financial disaster despite the guarantee, leaving the Australian tax payers exposed to a massive loss. It must be recognised that the proposal of loan guarantees to highly emissive generators is very different to the situation of guarantees to banks during the Global Financial Crisis. While banks were expected to recover once market conditions stabilised, the intention to keep increasing the carbon price will intensify financial pressure on generators.

A recent Investment Reference Group Report commissioned by the Government indicated that the allocation of capital to Australia’s generation sector on the best possible terms depends fundamentally on the government treating existing capital with care while resolving carbon policy uncertainty.

The transition to a low emission energy sector comes at great cost and it is in the national interest to minimise this by encouraging – not dissuading – capital from our shores.

In this sense, allowing equity in businesses to be destroyed without compensation as proposed by Garnaut is self‑defeating. The electricity industry is one of the most capital intensive in the world and the massive re-build and re-investment required in Australia to modernise infrastructure and reduce carbon emissions presents the sector with an unprecedented capital raising challenge. According to a recent speech by the Minister for Resources and Energy, between $72 billion and $82 billion could be required for investment in new electricity generation and transmission by 2030. If further investment in distribution networks, gas pipelines and associated infrastructure is added to this, the overall investment task for the energy sector could exceed $220 billion.