Review of Finkel Report

Problem: Generators are loathe to add new electricity generating capacity due to uncertainty regarding the regulatory and legislative regimes. Solution?: According to the Finkel Review, "By 2020, the Australian Government should develop a whole-of-economy emissions reduction strategy for 2050."

This is not just breaking a walnut with a sledgehammer, it is using a piledriver to decimate said walnut. This is the unfortunately highly ideological underpinning of an otherwise well thought through document with some excellent suggestions, both policy and technical, for improving the National Electricity Market's grid stability.

Part of the problem here relates to an inadequate defining of the problem. It reminds me of Hitchhikers Guide to the Galaxy, where a huge computer takes millions of years pondering the question "What is the meaning of life, the universe and everything" only to tell those desperately wanting the answer that it is "42". This then leads to the building of an even larger computer (the earth), to determine what the real question being asked was!

One of the excellent recommendations was that generators be required to provide adequate notice of closure (three years). Given recent events in both South Australia and Victoria, where state governments have ill-advisedly rapidly closed down baseload coal-fired power stations with little to no thought as to replacement, this recommendation should apply to state governments and instrumentalities as well.

There are large assumptions made in concluding that business as usual will be more costly to consumers than a clean energy target or an emissions intensity scheme. The first is the assumption that there needs to be a dramatic decrease in emissions, that technology will not do most or all of that work as a matter of course, and that we necessarily need to stick with the Paris targets in any case (the targets are not binding). The next is that these are the only games in town in a policy sense, and that business as usual cannot provide investment certainty.

In terms of assumptions regarding technology, we need only look at the NBN. We were told there was no choice but fibre, and that the taxpayer had to pay, on average, over $2000 per person for the NBN. I argued at the time that we should not be dictating technology, and the correctness of that view is coming to pass. Tests with the new 5G network indicate that it is capable of speeds significantly greater than even the fastest NBN speeds currently available. How is that $8000 investment in the NBN for a family of four looking now?

Leaving aside climate change science (a whole other can of worms), just in a policy sense the issue is incredibly complex (in the early 2000's, in order to calculate offsets, there was a lot of work done in determining the mass of different types of tree's roots for their size in order to determine how much carbon dioxide they absorbed, for example). This is clearly problematic.

Now we come to the issue of Finkel's solution. Apart from inadequately defining the problem (the question is actually quite simple, how do you provide investment certainty for generators?), they have come up with a solution that actually does not address the problem, despite the scale of the "solution". The simple thing is, an ETS policy was bipartisan in 2006 and 2007, yet we have no ETS today. Just because you may have a bipartisan policy, and draft laws in a bipartisan fashion today, does not mean that it provides any investment security at all. A government, having the numbers, could change whatever policy is in place at any time, and that secure investment decision then becomes highly problematic.

The solution to this is comparatively simple. First, tackle the problem as narrowly defined (don't try to answer the "life, the universe and everything" question). It is just about investment certainty for generators, so it behoves us to deal with the specifics of this problem in a way that would provide complete investment certainty for generators. In terms of generators having investment certainty, allow them to build and operate the power station under the legislative and regulatory frameworks that were in place at the time that the investment decision was made, and approval was obtained. Require that the government then, in a contract with the generators, have a penalty clause in place if the government, subsequent to the decision and approval, retrospectively adds requirements.

For example, if a generator builds a coal fired power station with no carbon dioxide emission requirements, and a future government then requires the coal fired power station to purchase carbon credits under a scheme that they have legislated, then the government has to pay the generator the entire cost of those carbon credits while that policy is in place, plus a further percentage of that cost as a penalty to government for changing the framework from that which was in place when the decision was made. In that way, a government would not go about changing the 'state of play' for that generator for two reasons. The first is the penalty that they would have to pay over and above the repatriated cost to the generator. The second is that the message Australia would send globally is that Australia constituted a large sovereign risk, meaning that a lot of foreign investment would dry up.

In this way, rather than a huge framework change to the entire Australian economy, the specific issue of investment certainty would be dealt with within the narrow confines of that specific issue. It would result in a policy that would offer far greater investment certainty than that proposed in the Finkel review, in that there is nothing to stop legislative changes in the future to any economy-wide scheme which could still be subject to legislative change, giving less certainty than the model proposed here.