Keynote address at the UBS Annual Australasian Conference Sydney

Transcript

18 November 2019

E&OE

ANGUS TAYLOR: It is great to start today for a week which will be a big one in policy circles for energy.

It will culminate with the state and territory energy Ministers meeting, a COAG meeting, Council of Australian Governments meeting in Perth later this week.

I’m looking forward to capping off what has been a very productive year in energy with that meeting in Perth.

Now, when I took over the role back in August last year, as the Minister for Energy, the Prime Minister gave me one clear KPI: that was to get prices down whilst we make sure we keep the lights on.

That’s a simple KPI in theory but much harder in practice.

The energy market has been highly politicized, and I don’t need to tell people in this audience that. And it is going through a rapid change.

It is one of the most contentious and the political portfolios we have ever seen in this nation and it touches every Australian.

We should never forget it is a utility service for Australians.

It is an essential service where reliable, affordable energy has been a competitive edge for Australia for decades that is no longer perceived to be true.

Soon after the election many implored me to deliver the next energy silver bullet.

People wanted an acronym, they wanted a promise of salvation and they wanted it to be one policy.

Now, I always found this peculiar – energy is a massively complex area, and it is an agenda as big as any other. Yet where other portfolios have a suite of policies – in energy, people just wanted one.

I’m now convinced that was because for so long energy was not a problem in Australia.

Energy didn’t need interventions and it was not in the headlines.

It was cheap, it was reliable and it was boring.

What people must realise is that we are in a post-boring energy world.

I have enjoyed the challenge of being a part of that over an extended period of time and I am proud of our accomplishments.

In just under a year we have accomplished a lot. 

And most importantly we are now seeing a turn in price.

It’s too early to declare victory but we are seeing very promising results.

The recent CPI figures show that for the first time in recorded history we’ve had three consecutive quarters of wholesale price reductions – the first time that has happened in our recorded history.

The AEMO Quarterly Energy Dynamics report shows that gas prices have also fallen.

Wholesale gas prices in Q3 2019 averaged just under $8 gigajoule over the quarter, down from $9-10 and as much as $20 when you go back a few years.

Prices are for gas are on average of 16 per cent lower than in Q2 2019 domestically and Q3 2018, reaching the lowest level since 2017 and even some of the prices we saw back in 2016, but at the same time we now have an LNG export industry which is the biggest in the world.

I’m encouraged, but I know that we have a lot more to do if we are going to meet and beat our wholesale price target.

The futures prices are promising. Quarter 4 2021 prices are well within our $70MWh price range and up to $20 cheaper than in quarter 4 in 2020.

If you analyse the financial data by state, there are important insights - strong falls in the wholesale price in South Australia and Queensland, a mixed result in New South Wales and serious concerns in Victoria.

Victoria’s wholesale price has been consistently worse in 2019 compared to 2018 for every month of this financial year.

The reason for that is clear – Victoria has a lack of reliable generation, essential to contain prices and keep the lights on when the sun doesn’t shine and the wind doesn’t blow, particularly on peak demand days.

The comparison of peak demand and available reliable generation, one of my favourite analysis to understand the market is very simple but a very effective way to demonstrate what’s happening to price and reliability.

Sadly, Victoria has gone from a very strong position to a very weak position, with the closure of Hazelwood, no replacement investment in dispatchable generation, and of course a moratorium on gas hampering the ability of new gas generators coming into the market.

Gas would have been the obvious replacement, but the gas moratorium is hampering those prospects.

Given the recent progress but the ongoing challenges, there two parts to our focus from a policy point of view. One is, attracting and retaining reliable supply, and the second is putting customers first.

Those might seem like obvious points but I can tell you that when I came into this job they were not at the centre of the debate.

Let me start with supply.

There has been no shortage of new investment in this sector.

We have seen record investments in recent years - easily the highest in the G20 in the last financial year in terms of variable renewables, with more than a quarter of our electricity now generated by renewables.

For that reason, emissions are falling rapidly in the electricity grid.

But until recently, we have seen almost no investment in new dispatchable supply, and that is a dangerous situation.

We are using a carrot and stick approach to address this.

We have shown the industry that we will intervene and invest if they won’t but we have also made it clear that it is not our first choice.

If industry steps up – we step back.

Over the last year we have carefully built a range of levers and tools to get the right balance in supply – particularly new investment in supply.

They’ve been carefully developed to work together and we have a multi-level policy approach.

The Underwriting New Generation Investments program, the Retailer Reliability Obligation, the Grid Reliability Fund, the Priority Transmission Taskforce and the Liddell Taskforce have given us a set of tools that we have not had before.

But the focus is clear.

We need to have a balance in our supply of dispatchable generation alongside those record levels of variable renewable generation.

Now none of these are grand mechanisms that will revolutionize the market.

What they do is serve to encourage the market to be more competitive, more responsive and more balanced and most importantly what we are looking to do is encourage private sector investment to get that balance right.

We are starting to see new private sector dispatchable projects coming into the market – with new generators in SA and Tasmania opening over the last month and an announcement of another new generator from EA just last week.

In very limited circumstances, we are directly investing ourselves in dispatchable supply.

Snowy is the obvious example because we own it.

We are also working with the Tasmanian government on MarinusLink to support their investment in the Battery of the Nation, in their local hydro assets because they own those Tasmanian assets.

But first and foremost we are seeking encouraging others to invest, to increase competition and to increase supply.

While a grant or a subsidy mechanism like a Renew Energy Target may seem attractive to some policy makers and indeed some investors – the risks are high, the impact is high and the consequences are hard to predict.

I much prefer, and we much prefer as a government, supporting tangible investments made by the private sector based on tangible business cases.

A commercially focused customer and a private sector equity investor is the best indication of success – it always has been and it always will be.

I did mention Snowy being one exception to this rule, where we have invested directly through $1.38 billion of equity.

Before we signed off on that deal and soon after I came into this portfolio, I crawled all over the numbers for that project and that left me with two clear insights that have helped to shape my time in the role.

First – the extraordinary need for storage and backup in the National Electricity Market over the next decade, it is an enormous need.

I am convinced that good investments in storage and back up for when the sun doesn’t shine and the wind doesn’t blow will deliver solid returns for investors.

But that leads to my second insight, which is that we need to ensure there are strong market signals to investors to encourage those investments.

Strengthening of the cap market is central to this, because it sends a signal about the need for new dispatchable capacity.

That market needs to be more bankable, with more liquidity and transparency over longer time frames.

The Retailer Reliability Obligation will over time encourage more liquidity in that market.

Some have argued that Snowy 2.0 will suppress the market and there is no doubt it may have an impact, but I encourage you all to do your numbers.

The sheer quantity of variable renewables that are coming into the market means that much more investment in complimentary flexible, dispatchable capacity in particular is needed.

One way we are trying to encourage these investments and to encourage competition is through our Underwriting New Generation Investments program that I mentioned earlier.

I’m pleased with the progress of the program and I look forward to announcing our agreements with projects in the relatively near future.

It took a while for people to realise that it wasn’t free money.

We want projects that are positive in the market, where we are prepared to underwrite excessive risks but free money in my view never leads to good decisions.

It takes away your requirement to be accountable to investors and the market.

If people have to still turn a profit to pay back debt and make a return on equity, they will be hungry and that will be helpful.

And in this vein we have also announced recently a $1 billion package to establish the Grid Reliability Fund.

The Fund, which will be administered by the Clean Energy Finance Corporation, will support the private’s sector investment in new energy generation, storage and transmission infrastructure including Underwriting New Generation Investments shortlisted projects.

We will be able to draw on the energy and financial markets expertise that has seen the Clean Energy Finance Corporation invest more than $7 billion in clean energy since its establishment about 7 years ago.

The Fund will back energy storage projects, transmission and distribution infrastructure and also grid stabilising technologies at a time when they are needed.

Now alongside more balanced investment in our generation and transmission assets, we also see a market that has been hampered by high horizontal concentration, vertical integration, and a lack of focus on customers.

We have been alive to this threat since we commissioned the ACCC to do a report on the competitive nature and structure of the market, and we have been working to protect consumers in this environment.

Our Default Market Offer came into effect on 1 July and we have already seen standing offers according to the AER and to the ACCC are substantially down. Medium retail prices are also on their way down, as are some of the practices that we have seen the in the past with respect to areas like sneaky late payments.

Now, whilst we are seeing good results on price reductions, we need to be sure that retail players do pass on savings in the wholesale market through to customers.

And that is where our recently passed legislation has gone through the reps and the Senate - the Big Stick legislation as it is colloquially known or our competition reforms in the elector market will ensure that we are seeing that and we are not seeing manipulation in the market place which is absolutely crucial, particularly for new competitors in the market place.

To deliver on the reforms, that we need to continue to see or that we are seeing, we are working at many different levels. At times we are working unilaterally, at times we are working multilaterally through COAG, Council of Australian Governments, and at times bilaterally with states.

Through the COAG Energy Council, we are working with the jurisdictions across Australia to deliver a long-term, fit-for-purpose market.

To me this is the great challenge of 2020 – we have got to get that design of the market right for the next decade and deliver it in a way that the market can adapt while recognising the change fatigue that I do see in the industry.

We have got to learn from the lessons of the past and ensure that any market design is iterative and does not lead to massive shocks and revolutionary changes.

And don’t be mistaken – the flood of renewables into our system has been a revolution – and it is only we are just starting to manage and harness.

As I’ve said, we have made good progress in 2019.

Prices are coming down, we are seeing the first new reliable generation in the market for many years, and we are continuing to the build the tools and to put those in place to make sure that customers come first.

I am not going to lay out my entire vision for 2020 today, but I will leave you with how I plan to work with my state colleagues.

We have had productive discussions with my state colleagues over recent months. As I said earlier there are foundational problems that we have all got to address together at COAG and there are individual jurisdictional responsibilities and issues as well.

Our goal over the coming months and year is to develop a series of state deals with our counterparts on the specific issues that they face.

We have begun early discussions on what they will look like. Each state is different and each deal will focus on the particular challenges of that jurisdiction using the toolkit we already have.

Clearly, for example, the Battery of the Nation and MarinusLink projects are a cornerstone of what Tasmania is seeking to do.

Each state deal will focus on key elements and will involve the Commonwealth partnering on joint projects, as I say using the toolkit we have.

But we can only do work with the states to get their electricity grids right where those states are collaborative and bring something to the table.

As I said we are making good progress and turning the tide on price, but 2020 will be the year that locks those two items - turning the tide on price and reliability - into the energy sector for the next decade and establishes a market and a pipeline of investments that will carry us through to 2030.

We have got to get this right. We have got avoid the grand schemes and giant leaps and work collaboratively across all levels of government and the private sector on the price and reliability challenges that impact the lives of everyday Australians.

Thankyou.

Minister for Energy and Emissions Reduction