Keynote address at AFR National Energy Summit Sydney

Speech

9 October 2019

ANGUS TAYLOR: Thank you to The AFR for the opportunity to be speaking here today.

It’s no secret of course that energy policy has polarised politics in Australia for most of this century and Mike painted that picture very clearly in his introduction. The biggest losers have been consumers as ill-directed subsidies and distortions have driven investment and effort without concern for price and reliability.

Now, it’s time to accept the facts, put the proselytising behind us and knuckle down to solve the biggest problems that confront us.

We believe that our central challenge is to balance the unprecedented investment in intermittent renewables with attracting and retaining reliable electricity supply that’s available when you need it, not just when nature is kind - and, that means investments in attracting and retaining hydro, gas and coal.

Now for many years, the main feature of the electricity market has been a dramatic investment in intermittent renewable power - as Michael pointed out - alongside ageing coal generators, and a shortage of affordable gas.

Until recently, renewable energy subsidies dressed up as targets have driven much of this investment. That meant more wind and solar generation crowding out the investment in generation that can deliver on demand as required.

More importantly, or more recently at least, the falling cost of solar PV has played an extremely important role alongside increasingly aggressive state and territory subsidies.

Now in the eyes of some, renewable subsidies are great policy. It has certainly led to phenomenal investment with Australia leading the developed world in terms of investment per capita in clean energy in the last year, as you’ll see in this chart on my left.

I think the facts really matter in this debate.

That’s Australia, on your left hand side, our investment per capita in 2018 in renewables, in solar and wind compared with other leading countries around the world. It has been absolutely extraordinary as Michael pointed out. We are double the next country in that comparison which is Japan.

Renewable energy, or renewable electricity is now averaging a quarter of the electricity generated in the National Electricity Market.

Electricity emissions are falling rapidly and we’re well on track to reducing emissions by 26 per cent in the NEM - eight or nine years ahead of the 2030 Paris target year. And that’s contributing to a very clear pathway to reach our 2030 targets across the whole economy, despite the pressures we’ve felt from the growth of our very, very successful LNG industry in recent years.

But record investments in renewables are associated with falling reliability and rising prices.

In South Australia Labor’s 50 per cent state renewable energy target led to amongst the highest prices in the world, with falling reliability.

Victoria, has the same policy, with the same outcomes. 200,000 consumers lost power in January and Victoria has the highest wholesale prices in the NEM now.

We can expect the same wherever governments pursue these policies without balancing investment in dispatchable generation.

This really matters.

Affordable, reliable energy matters to productivity and it matters to fairness. It is amongst the most basic of services to industry, small business and households.

Make it unaffordable and the least equipped wear the greatest burden.

Now, electricity markets enter the danger zone when on-demand or dispatchable generation crosses the critical threshold of falling below peak demand.

You’ll see in this next chart that Victoria and South Australia are in the greatest trouble.

You can see that South Australia and Victoria are at that critical threshold, or worse than that critical threshold where dispatchable capacity is at or below peak demand. Not true in New South Wales, while Liddell is still open. Not true in Queensland. Not true in Tasmania as long as they don’t have a drought.

Both those states, Victoria and South Australia, lack the generation they need to consistently meet demand and to contain prices, although South Australia is now working very, very hard to address this.

The worst case scenario is when the sun goes down, wind is not offering much and one or more coal or gas generators is struggling to reach capacity.

In less challenging circumstances, a shortage of dispatchable capacity puts upward pressure on prices.

We see this in the next chart, which shows us strong correlations between shortages of dispatchable capacity and price.

What you see there on the vertical axis is price in January this year, and on the horizontal axis the dispatchable capacity minus peak demand, so the excess capacity if you like in that state.

And you see it very clearly - Victoria and South Australia highest prices, worst position in terms of dispatchable capacity. Very, Very clear correlation.

Daily pricing last January in Victoria tells exactly the same story, with low prices during the middle of the day when the sun is shining and wind is blowing, and price spikes when the sun goes down.

We see that on this chart here. You see demand in the white line, and the yellow line showing the prices. January 2019 Victoria we see the peak in the morning before the wind cuts in, and a peak in the evening when the sun goes down which is alleviated when demand starts to fall way later on in the evening, and a peak at 11.30 in the evening.

If we go back in time, Victoria was short of capacity in 2009, when prices rose and reliability fell, so we’re seeing exactly the same pattern in the historical data and that was addressed when the a gas fire generator, a new one, was completed, taking pressure off prices and improving reliability.

Since then no dispatchable generators have been built in Victoria, Hazelwood exited, gas exploration and development has ceased or has been banned, so serious problems have re-emerged.

And we see that in this chart, with the number of days with price above $5,000 in the orange line and the blue line shows the excess dispatchable pattern.

So we had a problem back in 2009 - prices were spiking, new capacity came in, prices came under control. Again, new problems emerge with the closure of Hazelwood. I’ll come back to that in a moment.

This is all set to get worse without reforms. The economics and engineering of inflexible baseload coal and gas generators are deteriorating fast as utilisation drops.

Worse, if the owners of baseload generators fear future policy bias to intermittent renewables, or fear carbon pricing, they will understandably hesitate before investing in those generators.

Some still believe that the right answer is to double down on more aggressive renewable energy targets or emissions targets and associated subsidies.

Labor took that policy to the last election, and some Labor states persist with those policies.

I think that can only be described as policy insanity given the clear impact on price and reliability, and the implications for Australians, particularly in the absence of mitigating policies.

Reckless targets will end badly, and we believe, as does the ACCC, that the subsidies should be scaled down and phased out, at a sensible pace.

The low and falling costs of solar, in particular, will ensure enough renewable investment to smash our targets in the electricity sector.

Despite areas of disagreement in what I’ve just described, there are some things that I think most wise heads can agree on coming out of that.

First, retaining and attracting on-demand dispatchable capacity is absolutely crucial.

Secondly, competition and reliability have been impacted by the withdrawal of big baseload generators like Hazelwood, hitting hardest when the sun goes down or the wind doesn’t blow even if prices are low, or even negative when nature co-operates.

Thirdly, we know hydro can play a role in providing flexible on demand power which is why the Commonwealth is investing in Snowy and MarinusLink, but ready access to affordable gas for flexible generation will also need to play a big role to address the challenge of an otherwise unstable grid.

Fourthly, there will need to be investment in transmission to address these issues, particularly as new generation connects to the grid.

However, States can’t rely on dispatchable generation across the border as a solution to all their problems.

Finally, beyond pumped hydro, zero emissions dispatchable generation or storage is mostly still immature outside of niche applications. Batteries, hydrogen, carbon sequestration, biofuels or even the new nuclear technologies all have potential and some targeted applications like batteries for short term frequency control, but the economics and engineering of these technologies for broadscale deployment are still challenging.

We shouldn’t pretend any one of them is a silver bullet at this point.

Now if we can agree on those propositions, then I think there are some clear pathways forward that the industry can agree on.

That ultimately means getting back to basics. Focusing on the needs of the customers – households, small businesses and industry.

Most customers simply want affordable, reliable electricity knowing that emissions reductions aren’t adding to their costs. It’s pretty simple what they are asking for.

Time and again we’ve seen industry participants and commentators swept up in the excitement of complex new programs represented by the latest fashionable acronym that everyone pretends to understand but few ever do.

This is an industry that loves a new acronym, and we are not short of them.

We have the RERT, RRO, Rit-t, Rit-d, FCAS, COGATI, LRET and SRES.

At times governments have flirted with or even temporarily implemented a number of other acronyms – CET, NEG, CPRS, ETS to name a few.

We believe we need to focus on making the most of what we have.

In an ideal world, policy makers should design the market to focus on the needs of customers as I’ve outlined, and then let the market rip without any further changes.

Of course we should aim to minimise shorter term interventions or, at the very least, align them with natural evolution of the market. But the extraordinary distortions that we’ve seen in recent years need to be addressed with some urgency.

So what does all that mean in practice?

Well, first, we need strong signals to invest in dispatchable capacity where we are short.

We are short in South Australia and Victoria, and we have real risks in NSW.

In electricity markets, the cap price signals a need for capacity, but the market is relatively immature and illiquid. The signals simply aren’t strong enough.

Once the Retailer Reliability Obligation is triggered in individual markets where it’s needed, it is likely to strengthen incentives.

When these obligations are triggered, it will be a test of the effectiveness of the RRO.

The reliability standards are set at a lower level than many other countries around the world, we only plan to meet the reliability standard every second year, there’s no reserve margin is built and in AEMO’s modelling of peak requirements extreme scenarios are given low probabilities. This will need ongoing evaluation.

The future of the RERT, the Reliability and Emergency Reserve Trader is also an important consideration. It’s a short-term mechanism, not a genuine strategic reserve, and some take the view that a longer term strategic reserve is ultimately going to be necessary.

The Government’s new Underwriting New Generation Investment program is building a reserve, with the added objective of increasing competition.

Encouraging demand responses can help with all this, and the AEMC is proposing rule changes in this area, but its impact shouldn’t be overstated particularly in the short term.

If there is one message I want to pass to industry participants and investors, it is this: we must ensure there is a strong incentive to invest in dispatchable capacity, particularly in markets where reliable capacity is dangerously low. Doing so will not just improve reliability and security – it will put downward pressure on prices.

Along with longer term market signals to encourage dispatchable capacity, we need participants to commit to meet customers’ daily needs ahead of time, with consequences for failing to meet those commitments.

As more generation becomes more intermittent, the need for participants to deliver firm supply ahead of time increases.

There are essentially two pathways.

The first is day ahead scheduling commitments with clear penalties for failure to deliver, or a day ahead settlement system.

AEMO and AEMC are working on this, and I have asked them to bring forward the best pathway forward as quickly as possible.

This idea is not new. Most European and North American regions now have day ahead markets, and the Finkel review recommended their consideration. Now it’s time to get on with it.

We also need to strengthen the process for retaining dispatchable generation in the system- mostly baseload coal and gas - in the absence of a compelling replacement plan. This will have more impact on pricing and reliability than anything else we do in the short term.

The threat of premature closures is dire.

Price forecasts have consistently underestimated the pressure on inflexible coal and gas generators when the sun is shining.

You simply can’t keep burning gas and coal all day to supply electricity for a few hours when the sun goes down if you’re a baseload generator.

Finkel rightly recommended a 3-year or longer notice period for the closure of generators. That’s a good start and it’s helping, it’s giving us the heads up. But the planned closure of Liddell provides us with a case study on whether that alone, combined with other mechanisms like the RRO, is enough.

We can’t take any risks, or we will repeat the disaster of the Hazelwood closure in Victoria, so we have put together a taskforce to work through this issue for Liddell.

The objective is clear - we either need like for like replacement in terms of reliability and affordability, or life extension.

Some vague hope of transmission, intermittent generation and demand management filling the gap is not good enough.

For too long this industry has suffered from the triumph of hope over reality. Not this time.

The goal must be to create a sensible precedent for how we deal with planned closures in the future.

Third we need to strengthen Frequency Control and Ancillary Service markets, FCAS markets – that means rewarding the fixers.

As we lose dispatchable generation from the system and distributed solar generation grows at unprecedented levels, as we heard from Michael, system security is threatened even before reliability.

Frequency and voltage fluctuations are an increasing risk. Restart becomes a major challenge.

Inertia, systems strength and restart capability necessary to stabilise frequency and voltage were once free services, provided by big thermal generators. This is no longer true particularly in South Australia and Victoria. We need to fill those gaps as quickly and systematically as possible.

Maintaining a healthy level of dispatchable capacity in the system goes a long way towards a solution, although more targeted and granular standards and markets are also likely to be necessary.

Household systems, for instance, will need to become much more responsive to local and network wide needs.

Many other countries have gone down this path, and we can learn from them.

Gas has an enormously important role to play in the electricity grid in coming years as I’ve already suggested, let alone as a standalone fuel source to households, small businesses and industry.

Gas can reduce emissions and provide flexible back up to solar and wind. A mix of gas and solar, for instance, can deliver emissions of less than half of the current average across the NEM.

The Government has launched a series of initiatives to improve gas industry outcomes. In particular, we need the local prices to consistently reflect a genuine international netback, and the best way to achieve that will always be more supply.

Now, this debate typically focuses on reservation.

We already have de facto reservation.

Once supply exceeds domestic demand and export capacity, the remaining gas must be reserved. In the absence of new export facilities, and we’re not likely to see that any time soon, all the excess gas must be reserved.

So my number one message to the gas producers and state governments is deliver more gas production, and fast. And that means getting rid of moratoria - now.

While we shouldn’t overstate the potential for transmission investment to address some of these challenges, we shouldn’t ignore its role.

Many state ministers are looking to connect dispatchable generation across the borders as a backstop for their failing grids. Often they’re looking to connect to the same generators. On a good day, this may work. On the worst day it won’t.

Strengthening interconnection isn’t a panacea but it can play a role.

At the very least transmission can strengthen competition and connect new generators.

Our current transmission networks are typically highly regulated, with incentives often distorted and a slow process for gaining regulatory approval.

The Rit-t process can adapt in theory, but it will need to adapt in practice.

Adaptation of Rit-t is part of the MarinusLink project. I’ve asked the CEFC, the Clean Energy Finance Corporation and the regulatory agencies to look at the roles they can play in addressing transmission issues and that includes considering alternative transmission funding and financing models without putting pressure on state and federal budgets, consideration of more granular locational pricing, and ensuring that the system has a user pay focus wherever possible.

While the Federal Government recognises the role it can play in facilitating major interconnection, we don’t intend to usurp the role of the states at the local or regional level.

Now, as the ACCC and others have pointed out, the NEM is not working as a competitive market should.

In fact, the ACCC describe the markets conduct as unacceptable and unsustainable.

Economic modellers of the NEM don’t agree on everything, but most now agree that wholesale prices are well above what we would expect in a competitive market.

Well targeted investment in reliable supply and competition will put downward pressure on prices, even if there are some additional costs.

We took our big stick competition reform legislation to the election, and we have introduced it to the House of Representatives.

The DMO, the reference price, the consumer data right, and the competition reforms in front of the Parliament address many of the issues raised by the ACCC.

We will continue to monitor the outcomes, but to those who say competition reforms discourage investment, I say the risk of abuse of market power is the real deterrent. The risk of abuse of market power is the real deterrent.

The best answer for the industry is to embrace its customers and deliver competitive market outcomes, even if it involves some short term sacrifice.

That’s what corporate responsibility should be about, and it is what middle Australia wants.

Longer term, emission reductions consistent with reliability and affordability requires research, development and deployment of new technologies, particularly low cost longer duration storage.

We have taken for granted the role of coal and gas in delivering cheap long duration storage.

Hydrogen, batteries, biofuels, nuclear and sequestration all offer potential, but all require further R&D and sensible deployment pathways without trashing industries and regions.

We should approach this technology strategy with a degree of humility about what we know, and what we still have to learn.

It will also require close collaboration with other countries – understanding where we can play a leadership role and where we can’t.

In Hydrogen, for instance, the Government is investing over $140 million already, as well as developing a National Hydrogen Strategy with the work of Alan Finkel, because we believe we do have an important role to play in that technology.

Now, where all these initiatives can be pursued by the Commonwealth, we are getting on with it.

In many cases, further reforms require COAG support.

I have written to the ESB, as well as AEMO and the AEMC, asking them to focus on this agenda, and I will be bringing forward a Commonwealth sponsored paper outlining this agenda to upcoming COAG Energy Council meeting.

This work will need sustained focus and a sense of urgency, without distractions.

It’s also important to recognise the role of the states and territories in all of this, first of all through COAG, but they play an equally important roles through their direct policies – on renewable subsidies, gas exploration and investment, coal generation and transmission. They can be a force for good and we committed to collaborate with the states and territories that do the right thing.

We will also call out bad behaviour and we won’t accept accountability for errant states and territories.

Above all, this is about putting customers first.

Small businesses, households and communities dependent on industry all want the same thing - reliable, affordable energy, while we meet our international emissions obligations without trashing jobs and incomes.

Thank you very much

Minister for Energy and Emissions Reduction