Energy policy takes centre stage

Today’s interview is with Josh Frydenberg, Minister for the Environment and Energy, to bring us up to date with what’s going on with the National Energy Guarantee, which as he says in the interview, is the last chance for a decent policy – at least for a while.

As I point out to the Minister at the start of my interview, he’s juggling three sets of numbers: the numbers in the party room; the numbers in the parliament; and the numbers in COAG – which is the meeting of the states.

Will he get it through? Well, it’s still got a long way to go, but as he says, it’s the last chance, and well worth understanding what’s going on.

Here’s Josh Frydenberg, Minister for the Environment and Energy.


Well, Minister, you’re juggling three sets of numbers, you’ve got the party room, the parliament and COAG eventually.  Let’s take them one at a time.  The first question with the party room is do you have to go back to the party room before you go to the COAG meeting in August?

The intention is to go to the party room with the legislation before it’s introduced into the parliament in the event that the COAG energy ministers meeting approves the national energy guarantee, that is certainly what we’re striving for.

This is after, so you won’t be going back to the party room until after the COAG meeting?

That’s the intention.

Right, so Craig Kelly seems to be talking about going and crossing the floor or at least not ruling it out and he is talking about there being war.  I mean, is there a danger that the coalition fractures over this before you even get to COAG?

Well, as you know, Alan, we’ve had an extensive debate in the party room about the national energy guarantee and there is a realisation within the coalition that business as usual is not an option and the national energy guarantee has independent modelling that shows that the wholesale electricity price will by 23%.  It also puts a premium on reliability which is increasingly important as more intermittent sources of pour, particularly wind and solar, come into the system and that’s the challenge that we saw play out in real time in South Australia and now starting to play out in other states.  So, the national energy guarantee is in the national interest, it will drive power prices down, it will drive reliability up and it will also provide a stable environment for which investments take place so that we meet our international Paris commitment.

When we talk about getting through the parliament usually we’re talking about the senate.  But, do you think that there’s any prospect that you don’t get it through the lower house as a result of coalition members crossing the floor?

You’re asking me to hypothesize about a hypothetical, Alan.  The reality is the national energy guarantee is a good policy, it could be a historic reform for our country and we’re determined to get the state and territories’ support, then to introduce the legislation into the parliament and have it legislated at both the federal and at state level.

Okay, let’s move forward to August COAG, are there any states, do you think, that are holding out at this point?

I think that the states do recognise, whether they’re Liberal or Labor, that this is a very important reform and it’s a chance that they don’t want to see missed.  We’ve had the broadest possible cross section of support for the national energy guarantee from the big energy users like the BHPs and the Rios to the industry groups like the BCA, the Australian Industry Group itself, ACI, irrigators, farmers, as well as the energy companies themselves.  Yes, the states do have some differences of opinion with the Commonwealth, for example about the emissions target, if you like, but I think they recognise that this an important reform and while we may have some disagreements about various issues there is a commonality of interest to get this done.

The NEAT target is 26% down on 2005 levels by 2030.  How would that sit with states having different targets of their own?

Well, the state targets will go towards the overall national target and that’s really important to understand that the states can pursue their own state based targets, I can’t stop them from doing so, I still hold the fundamental belief that having one national target is better than having a series of state based schemes but given that they are pursuing those schemes in states like Victoria and Queensland then what they do there will contribute to the overall target and I think they understand that.

But, is the reality that if one of the states, say Victoria, has a 50% target for example that lets some other states…

It’s a 40% target.

Well, its 40% target, some states might have targets that are higher than 26%, does that let other states off the hook effectively?

Well, as you know we as a country are striving to reduce our emissions so we should be seeing it on a nation-wide basis, or indeed in the case of the national energy guarantee it’s applying to the NEM and it is also a federal responsibility to enter into these international agreements such as Paris and therefore it’s a federal responsibility to set that emissions reduction target and we think 26% is the right number, it will see more renewables come into the system than is currently the case and while states can pursue their own targets every state will be contributing to the overall.

No, but what I mean is will each state have to do 26% or will the national target have to be 26% and if some states do 40%, 50% or 75% within that then Queensland or whatever it is might be able to do less than 26%.

There will be different levels of ambition in different states and it’s the overall 26% which the driving target.

But that won’t be fair, I mean that allows for almost a sort of tax competition in a way.

Not at all.  A state is allowed to determine, as you would expect, what goes on in its boundaries but it shouldn’t dictate what happens in another state’s boundaries.  The reality is it’s the federal government that sets the overall national target and we are doing so in a way that will see emissions reduced by 26% by 2030 on 2005 levels.  The other thing to point out is under the national energy guarantee there will be a reliability requirement and obviously as states pursue their own renewable investments whether it’s a contract for difference or their own particular scheme there will be a requirement to meet the overall reliability settings that AEMO put forward.

In relation to coming to the parliament, the upper house, with the eventual legislation assuming you do have it will you be going for a bi-partisan agreement with the Labor Party or should it go for the cross bench?

Well I think it’s always better, Alan, in these very contested political spaces that there is a level of bipartisanship.  I think for the investor community they would appreciate a level of bi-partisanship.  If the Labor Party wants to go to the next election with a higher emissions reduction target then that is their prerogative, we’ll obviously argue against it but that is their prerogative as the opposition.  But, what investors are crying out for is a level of certainty in the policy response and for the first time this will integrate energy and climate policy and avoid the hyper partisanship that we’ve seen in the last decade and a half which I think has prevented the level of investment that we require. 

Do you accept that the Coalition is primarily responsible for the hyper partisanship that’s been going on?

Absolutely not, I think that the carbon tax was a bad idea and when we abolished it we saw the single biggest drop in electricity prices ever recorded.

It was an emissions trading scheme, not a carbon tax, and Peta Credlin, the advisor to Tony Abbott, has admitted that not only was it not a carbon tax, that they deliberately turned it into a carbon tax in order to score political points.

Well, the reality is it was a carbon tax, it was a bad policy, we had every acronym under the sun, we’ve had the CPRS, we’ve had the ETS, we’ve had carbon taxes, we’ve had renewable energy targets, large scale, small scale.  We’ve even had recent talk about an EIS and then the CET.  I think what we’ve got now with the national energy guarantee is a policy recommended by the experts, namely the energy security board, it’s independent of government.  It’s an opportunity for us to settle this policy and provide the level of certainty that the system needs.  But, I do say one thing, Alan, about the national energy guarantee is that it is technology neutral in a way that some of the previous policies have not been.  For example, the renewable energy target is really industry policy, you’re providing a subsidy for renewable only technology.  In the case of the national energy guarantee you can reduce your carbon footprint by transitioning to gas or having high efficiency low emission coal fired power stations, you can have more batteries to go with your wind and solar, you can do a whole demand side response, a whole range of mechanisms that get recognised under the national energy guarantee. 

Having that technology neutral approach, I think, is one of the defining characteristics of it, it breaks from the past because it’s not a tax, it’s not a trading scheme nor is it a continuation of the subsidies.

Well, the trading scheme was technology neutral as well and just on the question of the Coalition’s role in making up this mess I mean it was a bipartisan policy.  2007 election John Howard had an emissions trading scheme as part of his policy, in 2008 it was still bipartisan.  The reason it became hyper partisan is because of Tony Abbott’s attacks on the carbon tax.  We could have had a bipartisan policy ten years ago and it’s the Coalition’s fault that we don’t. 

Well, Alan, that is your view, it’s not mine.

No, it’s a fact because that’s what happened, is all I’m saying.  You would accept that we’ve had ten years of hyper partisanship which has mucked up the energy policy.

Well, 15 years, and I do think as a country there’s no doubt we’ve mismanaged the transition.  I think that when the Labour government was in office they ignored the warnings on gas which saw a massive east coast export industry develop without preparing for the event of domestic restrictions on unconventional gas development, and in the case of Victoria onshore conventional gas development which has inevitably pushed up prices.  I think that the pressure that was brought to bare on some of the coal fire generators to close saw a big spike in the wholesale prices which we’re recovering from now.  Then, as you know there was an expectation of increasing energy demand as opposed to what we’ve seen which is a flatlining energy demand, the impact of which was a gold plating of the networks which Rod Sims and the ACCC highlighted have been the single largest factor contributing recently to power prices.  So, what we’re trying to do is tackle all aspects of the supply chain, reign in the power of the networks which we’ve abolished the limited merits review, get more gas into the domestic market before it’s available for export and that’s helped lower prices by up to 50%, to get a better deal from the retailers with their offerings because they’re so complex at the moment that half Australian households, 50% of Australian households, have not changed retailers or contracts in the last five years even though they’d save hundreds of dollars for doing so and then integrate energy and climate policy with the national energy guarantee. 

All of those things we’re doing and I should just put in a plug as well for the storage investments that we’re making through the Clean Energy Finance Corporation as well as Snowy 2.0 because we do need more storage, particularly pumped hydro, if we’re going to deal with the greater level of intermittency in the system.

It’s very interesting you mention that because I get all of your press releases by e-mail and there are bursts of press releases from you talking about storage and doing this on renewable energy…

Record levels.

But, you’re portraying yourself as kind of the renewable energy minister while at the same time last year attacking South Australia for its renewable energy thing, so it seems you’ve been playing both sides of the street there.  You’re putting out a lot of nice press releases about renewable energy and you got stuck right into South Australia last year, unfairly in my view.

Well, let’s put some facts on the table.  Under the Turnbull government we’ve seen a record level of investment in renewables, Australia is now the seventh most attractive place for renewable investments in the world and on a per capita basis the third, more so than France, Germany or indeed China.  We’ve got some 7,000 megawatts of renewable investments either committed or being built and last year $ 10 billion worth of renewable investment deals were closed.  So, there’s no doubt that under the Turnbull government the renewable investment has reached a record amount, both large scale and indeed small scale.  Then there’s the issue of managing the transition.  Now, if you take the view, which I do, that more renewables will inevitably come into the system because of the declining cost curve you do need to prepare for it.  That means you need to have a certain amount of backup and storage, and that’s where we were very critical of South Australia.  Because in his own words Jay Weatherill talked about a great big experiment in South Australia and he did not put the backup in storage, so much so that he had to go and spend millions of dollars on expensive polluting diesel generators just to keep the lights on. 

Our argument was always that if you are going to manage this transition you do need to have backup and storage, something which he ignored and that’s why I don’t resile from my criticism of him.

What do you think of the Abbott proposal to nationalise Liddell?

I don’t agree with it.  As a Liberal we want the market to work.

But, at the same time you don’t want them to close it.

We would like them to sell it.  We’re very supportive publicly of the concept of a third party purchasing that asset.  In this case it was Alinta who put the money on the table.  Again, wind the clock back, AGL purchases Liddell in Bayswater from Macquarie Generation against the wishes of the ACCC, they ascribe $0 value to the Liddell asset in their investor presentations, they then say to the world that, in their words, the asset was on a sliding scale to oblivion and that it needs to close in 2022.  You have another party that offers $250 million cash for it and to meet the extensive, which will run into hundreds of millions of dollars, remediation costs and then they get dismissed.  I think there’s no doubt that AGL did so because they were worried about the competition aspects of it, not necessarily the quantum of the bid.  They didn’t even offer them due diligence.  So, we had the head of the ACCC, Rod Sims, Alan, say that if Liddell was sold to Alinta prices would go down, competition would go up, and then we also had AEMO record that there would be a dispatchability gap of 850 megawatts should Liddell close without the necessary investment in the system.

So, we made the public case, the AGL board dismissed it and obviously we’re very disappointed with that.

Just finally, Minister, given all the numbers that you’re juggling what do you think the chances of us having a NEG, a national energy guarantee, are?  What percentage would you put on it by the end of the year?

Well, I’ll leave you to do the percentages.  What I would say is one, the policy is a good one, two, it’s in the national interests, three, if we miss it I don’t think another opportunity will come around soon.

You’re saying this is the last chance?

This is the best chance and another chance like this will not come around soon, and as a result you will see more expensive interventions in the market and you won’t see the level of certainty that we need to generate private sector investment.  Let’s not forget that Australia needs between 200 and 250 billion dollars worth of energy infrastructure investment by 2050.  That can’t come from government, government doesn’t have that sort of money at hand.  It can only come from the private sector and the private sector will invest where there is a level of certainty.  The national energy guarantee creates that level of certainty for the investment to take place and I’m really hoping that the states and the territories will get behind it when we meet in early August.

Thanks for joining The Constant Investor, Josh Frydenberg.

Great to be with you as always, Alan.

That was Josh Frydenberg, Minister for the Environment and Energy.