Green paper Groundhog Day

While last week’s headlines were on the Federal government’s grandstanding around the replacement of Liddell, the NSW productivity commission has been quietly putting together a set of recommendations for the state’s energy sector. Its green paper looks at productivity opportunities right across the economy, and includes an energy section alongside education, transport, water, transport and housing. The commission seeks feedback on its draft recommendations before presenting the final set to the government.

In drawing up recommendations it has focussed on practical recommendations that meet four criteria:

  • They provide the greatest productivity gains at the lowest social cost.
  • It is feasible to identify and address the problem.
  • New South Wales can implement reforms directly, without complex and lengthy negotiations with other governments
  • They align with other NSW Government priorities

Its findings are sensible rather than revolutionary. They note that while reliability is important, there is a cost trade-off that must be considered and so government policy on reliability should be consistent with consumers’ willingness to pay. In doing so, there is a fairly gentle poke at the NSW government and its Energy Security Target – which is either redundant or

Ongoing climate policy uncertainty inhibits new generation investment, which in turn can risk increased wholesale prices over time. Accordingly, the government should pursue – ideally in concert with other states – “an integrated climate change and energy policy that is technology-neutral and prices carbon dioxide emissions”.

Demand management could be a useful contribution to system management, but NSW has yet to fully roll out smart meters. So, the state should look at ways to accelerate the rollout and then adopt cost-reflective network pricing.

Energy subsidy programs are complex and overlapping and would benefit from simplification.

The state’s inability to find a way through competing interest and concerns to develop what gas it has has left it vulnerable to gas shortages. Land use regulations are seen as the key to allowing appropriate gas field development, adopting principles of: not favouring one land use over another; adopting evidence-based decision-making, and; minimising the regulatory burden required to achieve balanced outcomes.

Sectoral regulation (at the state level – the issue does not seem to be with the NEM-wide energy market bodies) is fragmented and could be rationalised and streamlined by bringing regulatory responsibilities under one roof.

If many of these recommendations seem familiar, it’s because they are. Numerous major reviews of the electricity (and sometimes gas) industry by various governments and agencies have thrown up similar recommendations for a decade or more. An integrated carbon and energy policy that utilises some form of carbon pricing was recommended in the ACCC’s Retail Electricity Pricing Inquiry (2018), Dr Alan Finkel’s Independent Review into the Future Security of the National Electricity Market (2017), and way back in 2002, the report of the Warwick Parer-chaired review panel, Towards a truly National and Efficient Energy Market. These are just the energy or electricity-focused reviews. Numerous climate change policy reviews, notably Professor Ross Garnaut’s two reviews came to the same conclusions.

Concerns over consumers paying too much for reliability over and above their willingness to pay came up in the ACCC and Finkel reviews and also the Productivity Commission’s Electricity Network Regulatory Frameworks Inquiry Report (2002).

The value of smart meters and cost reflective pricing was recognised by the ACCC, the Productivity Commission and the Parer report (although this report referred to interval meters, which shows how technology can change even as the underlying issues remain unresolved). Finkel did not focus on the price side but recommended consumers gain access to real-time consumption data, which requires smart metering.

The other Green Paper recommendations also have echoes in at least some of these reports. Note that, unlike the Green Paper, they are national level reviews. So, what’s the problem? Why are we stuck in Groundhog Day for energy reform with the same sensible recommendations recurring without being fully implemented?

Firstly, there is some selection bias here. In all these previous reviews, many of their recommendations were successfully implemented. The outstanding items are by definition the harder nut to crack. It’s not enough to apply economic logic to these issues. There are clearly material social and political barriers that need to be addressed. Productivity Commissions generally don’t have the remit or the resources to navigate through these – that’s what governments are for, although the best reviews include some consideration of how they might be addressed. Nevertheless, unless the NSW government shows some enthusiasm for tackling the barriers – and even if it does there’s no guarantee of success – we can expect similar recommendations to pop up in another thoughtful and cogent review document in a few years’ time.