Monday, October 23, 2017

National Electricity Guarantee an Exercise in Politics

There’s a simple way to bring down energy prices, but the Coalition’s policy isn’t it

The National Electricity Guarantee announced this week is an exercise in political economy. If you simply were interested in ensuring cheap, reliable electricity on ­demand, the NEG would not figure among the policy options.

But the challenges of the government are many, including paying heed to the ill-judged commitment to the Paris climate agreement and the need to get states on board. An endorsement from Labor also would be helpful in providing confidence for investors, in the renewable and synchronous energy space.

Of course, the NEG still sticks in my craw. After all, when did central planning ever work? Has Malcolm Turnbull decided those experts in Gosplan, the Soviet Union’s state planning committee, and five-year plans were actually incredibly clever and we should be ­importing their ideas?

To be fair, electricity may be a special case. It is an essential service and there was always planning at the state level in years gone by, although it was undertaken chiefly by engineers rather than by people who think they know something about economics and business with nary any attention paid to the physics of the system.

You may say the only worthwhile part of the NEG is the ­reliability component — the requirement that retailers offset their purchase of intermittent ­energy with solid synchronous sources. By all means, purchase wind power, but the retailers will need to make sure there is available backup to deal with its intermittent nature.

Mind you, it’s important that this requirement is not fiddled by the retailers, which always would be a temptation. The detail will be particularly important.

So why bother with the emissions reduction part? Why would we not rely on market forces to achieve this outcome by believing the renewable energy sector that it will be able to out-compete all other sources of electricity generation? The answer is twofold. First, we should not necessarily believe the claims of the renewable energy sector. There is a high fudge factor in the assertion, including the failure to account for additional costs of transmission and distribution; the uncertain lifetime of some of the installations; and their actual load factors (the energy delivered as a percentage of their nominal capacity).

The second issue relates to what may be termed carbon uncertainty. In the absence of the government having a specific ­intervention to drive down emissions from the electricity sector, businesses will factor in a shadow price of carbon.

The expectation is a Labor government, with its pledge to double our Paris commitment and to have 50 per cent renewables by 2030, inevitably will introduce a form of carbon pricing, notwithstanding that such action has been political poison in the past. (Note that, in any case, the renewable energy target is a form of carbon pricing, at present sitting at about $80 a megawatt tonne.)

Banks and financiers also will be including carbon risk in their calculations, in turn affecting their willingness to provide finance for new electricity projects. Long-living coal-fired plants, even ultracritical ones with low-emissions intensity, will struggle to get up unless the funders can see a clear path into the future in terms of the handling of emissions reductions.

(A new high-efficiency, low-emissions coal-fired plant also will likely require gov­ernment guarantees, but that’s fine. It’s what the renewable energy sector is being given by state governments with their expensive reverse auctions funded by taxpayers.)

One of the upsides of the emissions reduction component of the NEG is that the price impact of high penetrations of renewable energy in particular states — for example, South Australia — will be sheeted home directly to consumers. Vote for a government that promotes high renewable ­energy penetration and pay the price. Not only is this fair but it is sending an efficient price signal in terms of the consequences of particular government policy stances.

That retailers will be able to meet the emissions reduction obligations by purchasing local or international carbon credits (rather than sourcing high-cost renewable energy) is probably the best economic feature of the NEG. With the price of international carbon credits so low at the ­moment — a few euros per tonne of carbon dioxide — this will be the way to go for many retailers. The option of buying credits should cap the cost of domestic abatement via the purchase of renewable energy.

Don’t forget climate change is a global issue and it doesn’t matter the source or location of the emissions reduction. Note also the government’s own Climate Change Authority has recommended this action as part of least-cost policy.

To be sure, there are some important issues raised by the parallel operation of a reliability obligation and the requirement to meet emissions standards on the part of retailers. Arguably, the gentailers — companies that operate in both the generation and retail space (think AGL, Origin, Energy­Australia) — will have a serious competitive advantage under the NEG, particularly in terms of ­accessing hedged contracts.

The worst case scenario would be the withdrawal from the market of some retailers, reducing the limited competition in this space. The option of forcing the gentailers to break up should be considered by the government.

Is the NEG just a form of carbon price in disguise? Is it really true that there will be no further subsidies for renewable energy?

For anyone who understands economics, whenever a constraint is imposed on an activity, an ­explicit or implicit price emerges. As noted, the RET throws off a carbon price of $80 a tonne of CO2, which is excessive by any standard. And recall that Labor’s carbon price started off at a tad over $23 a tonne. The way to judge the NEG is to ask the question: is the cost of abatement under the NEG lower than the adoption of the Finkel clean energy target? The ­answer is a clear yes. But this doesn’t mean there will be no further subsidisation of ­renewable energy. That’s what the emissions reduction guarantee does. It’s just that the degree of subsidisation will be considerably less than it is now, which again is a good outcome.

So should we believe that electricity bills will be $115 a year lower under the NEG? The short answer is that there can be no definitive prediction of this outcome. The Finkel proposition that bills would be lower by $90 a year clearly was manipulated and had no credibility. The $115-a-year figure is more simply derived: it is just the price response you would expect from getting more supply, particularly of reliable energy. The one missing piece of the jigsaw that the government should consider is the scope to change the bidding rules under the National Electricity Market. Under the ­existing arrangement, the highest bidder sets the price, which is paid to all the intra-marginal suppliers. The aim is to create an incentive to invest.

But it is clear the arrangement has failed to spur investment in reliable electricity while the RET has overwhelmingly driven investment in renewable energy.

The alternative is simply to pay all the bidders needed to meet market demand the actual price they bid. If this were to happen, then there would be significant scope for wholesale prices to fall.

To be sure, the renewable energy sector would complain. And the regulator would need to watch for strategic bidding. But this simple rule change offers the government the best chance to do something quickly rather than wait until after 2020. If I were them, I would be giving this option serious consideration.


Australia's big gas miners agree on supply for 2018

The country's biggest gas companies have agreed to "put Australians first" and boost domestic supply next year to help avoid a potential energy crisis.

But the prime minister warns that residents in Victoria and NSW will keep paying more for their power if their states don't free up their own gas resources.

Santos, Origin Energy and Shell on Wednesday committed to offering enough gas to the local market to cover an expected shortfall in 2018, following a meeting with Malcolm Turnbull and senior ministers in Sydney.

They will meet again next week to nut out the details of the agreement and an intended similar guarantee for 2019.

It means the federal government won't have to follow through on its threat to restrict exports, although it remains an option.

"They have stated that they will offer, as a first priority, domestic customers any uncontracted gas in the future," Mr Turnbull told reporters.

He says if the deal is honoured and there is not a shortfall of gas then there won't be a need for export controls - something that he doesn't "relish". "We want to see more exports, but Australians have to come first," Mr Turnbull said.

Two reports this week warned of a shortage of gas in 2018 of up to 107 petajoules - about three times larger than previously forecast.

Despite the deal, Mr Turnbull continued his push for Victoria and NSW to unlock their onshore gas resources.

Queensland produces most of the gas for the east coast, meaning those in the southern states have to bear the extra cost of transport.

"The failure of Victoria and NSW to get their onshore gas resources developed means residents of NSW and Victoria and businesses in those states are going to continue to pay more for gas than they otherwise would," he said.

It accounts for about 11 per cent of the gas bill for a typical Melbourne household, and about five per cent for the average Sydney household.


How to get the most out of school reform

Blaise Joseph

The focus of education policy must shift from 'more money' to instead investing in cost-effective, evidence-based practices. This is the purpose of the government's 'Gonski 2.0' review, but what does the evidence suggest schools should be investing in?
Give teachers fewer classes and more time outside the classroom.

Australian teachers typically spend an hour more teaching each day compared to the high-achieving countries. This means teachers have less time to plan, refine, and review their lessons, which have significant effects on teaching quality.

Early literacy and numeracy. Intervention to help underachieving students is most effective in early primary years. Teachers' education degrees do not equip them with the language knowledge necessary to effectively teach reading, and phonics instruction is not consistently taught well. Therefore, primary school teachers would be helped by attending professional development to improve reading instruction.

Classroom management training for teachers. Australia has high levels of classroom misbehaviour compared to the top-performing countries. Teacher education degrees do not consistently provide evidence-based practices to prepare teachers to handle misbehaviour. Teachers would benefit from attending professional development to learn and foster evidence-based classroom management techniques.

These investments would not have to cost the taxpayer more. For example, professional development in reading instruction and managing the classroom could be prioritised over less important training, and giving teachers fewer classes could be offset by increasing class sizes.

While theoretically smaller classes should facilitate better teaching, many recent studies indicate reducing class sizes has limited -- and inconsistent -- positive effects. Australia's class sizes are much smaller than several top-performing countries.

Technology is another common school investment not supported by evidence. Australian schools use technology significantly more than most of the OECD, but this hasn't stopped the decline in our literacy and numeracy results.

We must bring evidence back to the forefront of school spending; otherwise, the extra $23.5 billion of Gonski 2.0 funding will fail to improve student outcomes, letting down both students and taxpayers.


Aboriginal problems poorly addressed by governments

Indigenous service structures slowing progress

Charles Jacobs

A new QLD Productivity Commission report echoes CIS findings that a convoluted labyrinth of programs is creating a disconnect between service design and delivery for hundreds of remote Indigenous communities. This divide means that many services are failing to effect any actual change for those they are meant to help.

The problem lies with the structure of remote program design and delivery. In many cases there is a systemic dysfunction with the way service providers interact with Indigenous people. Programs aren't designed for the recipient, but for the provider.

For example, the  Community Development Programme (CDP) -- which sees Indigenous job seekers in remote areas undertake 'work-like' activities in order to receive income support payments -- is riddled with issues.

At face value, getting welfare recipients to be more proactive seems like a good idea. However, the running of the program is subcontracted to private providers, who both deliver and regulate the delivery of the service. Most of the providers are for-profit, and there can be a conflict of interest between sustaining their operations and achieving genuine outcomes for participants.

CDP providers receive per person payments from the government, and in many cases it makes more financial sense to keep someone on their books than to get them into actual employment.
Such structural flaws are present in countless areas of Indigenous service delivery, and reflect the significant detachment of many providers from the outcomes they are meant to achieve.

The QLD Productivity Commission recommends that to resolve this issue, Aboriginal and Torres Strait Islander communities need to become more 'ambitious' about improving outcomes for themselves.

One of the ways a number of Indigenous communities are doing this is through the establishment of business enterprises. An example from this week saw an Indigenous company awarded a $4.4 million contract for road development in Cape York. A proportion of the profits of these commercial activities are being used to fund social programs in communities, reducing the reliance on government funding.

Government has repeatedly shown it is incapable of providing services and programs to communities effectively. If there is to be real change on the ground, communities must be empowered to become actively engaged in the design and delivery process.


Posted by John J. Ray (M.A.; Ph.D.).    For a daily critique of Leftist activities,  see DISSECTING LEFTISM.  To keep up with attacks on free speech see Tongue Tied. Also, don't forget your daily roundup  of pro-environment but anti-Greenie  news and commentary at GREENIE WATCH .  Email me  here

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