Almost every day we hear from Federal Liberal and National Party politicians about how bad energy prices have gotten.
According to their leader Peter Dutton, our electricity prices have “skyrocketed” since Labor came to power. This is all, “thanks to Anthony Albanese and Chris Bowen’s renewables-only policy trainwreck” which has led to Australians, “paying some of the highest power prices in the world.”
On this point it is indeed perplexing that skyrocketing energy prices could be the fault of the Albanese Labor Government’s roll-out of renewables.
That’s because the awkward thing – for both Labor and the Liberal-National Parties – is that Labor’s policies haven’t actually done much yet to increase the level of renewable energy in the grid.
Yes Labor does have ambitious goals for the future, but as the Liberal Party’s shadow energy minister Ted O’Brien himself pointed out in a speech to the AFR energy conference in October last year:
“Final investment decisions for renewables have gone down, not up, since the Albanese Government came to office. Labor needs 6 to 7GW of new renewable generation installed every year to 2030, but only 1.3GW reached final investment decision last year and only 1.6GW in the first half of this year. Renewable investment is stalling.”
Now it should be said that since O’Brien gave that speech investment commitments to new renewable energy projects surged. The Green Energy Markets Power Projects Database has 4.3 GW of renewable energy project commitments in 2024. But not much of this can be attributed directly to Labor policy.
The truth is that while politicians of all political colours like to pretend they can change the world in an instant, building new power infrastructure takes a bit of time.
Labor’s Rewiring the Nation policy to expand transmission is yet to complete any new transmission capacity because new transmission takes several years to plan, let alone construct.
In addition, the Albanese Government was half-way through its current term of government before it thankfully accepted that renewable energy investment was stalling and they needed to implement additional policy to achieve their renewables targets.
This policy – the Capacity Investment Scheme – is genuinely ambitious, but it only just announced the first set of projects it hopes to have built a few months ago in December.
Most of these projects will take at least another two to three years before they are completed. Rooftop solar installations meanwhile have remained at similar levels to what they were over 2020 and 2021, but Labor’s only meaningful policy to support rooftop solar and batteries won’t be implemented until after this coming election (if they win).
So Labor’s renewables policies haven’t yet had the chance to inflict a cent on your bill, let alone anything reckless.
So if it’s not Labor’s reckless renewables policies that are to blame for our current high energy prices, then what is it?
Well it turns out that energy prices have been rising significantly long before Labor came to power.
Often the focus seems to be on retail power prices that householders pay. But a large part of these prices is driven by network costs. Given politicians never seem to ever argue about how our regulatory regime over power networks operates (it’s actually rather bad so they should), but instead endlessly argue about power generation, then this isn’t the appropriate reference point.
Instead, we need to look at the price paid to power generators in the wholesale electricity market. If we look at this, we see the prices paid when Labor was previously in power in the 2012-13 financial year were far, far lower than in the 2021-22 financial year when the last Liberal Government concluded.
This is even though the carbon price was in place in 2012-13 but was long gone by the 2021-22 year. Prices over the current financial year to date meanwhile have fallen noticeably from 2021-22, except in Tasmania.
Now, it is true that wholesale power prices went completely berserk over May and June of the 2021-22 financial year, by which time Labor had taken power federally. But given they’d barely had to chance to warm their seats on the government benches since the election on 21 May 2022, it seems a tad unfair to suggest this was their doing.
Over the current election campaign Peter Dutton has also made much of how he will lower gas prices. But again the historical record for how gas prices have unfolded while the Liberal National Party was in power doesn’t look good.
So is it the Liberal and National Party that’s really at fault for high power and gas prices?
No.
The thing is power prices and particularly gas prices would have increased considerably over 2012-13 to 2021-22 irrespective of whether it was the Liberals or Labor that was in charge.
The key driver behind escalating gas prices was that there was a bi-partisan policy that stretched across the Liberal Howard Government then the Labor Rudd-Gillard Government and finally the Abbott Government. This was to allow gas producers to consolidate and set up huge gas liquefaction export facilities.
Back in 2014 I had a conversation with Labor’s former resources minister Gary Gray where he explained that both he and the Liberal’s Ian Macfarlane saw their role as stewards for the growth of the LNG industry – with an expectation this would lead to increased employment and wealth for Australians.
It was well understood by policy makers at the time that this would irrevocably hike-up Australian east coast gas prices to the far higher prices that prevailed in Japan, Korea and China. At that time there was a conscious decision to allow exports without any restriction or obligation on gas producers to prioritise Australian consumers over customers overseas.
This rise in gas prices was then expected to flow-through to power prices as well. Back in 2014 NEM power prices were relatively low with the power market considered structurally oversupplied.
Yet in presentations to investors, both AGL and Origin Energy explained very clearly how their acquisitions of coal power stations from the NSW Government would end up paying off handsomely.
This would be because as the gas export facilities in Gladstone Queensland commenced operation, they would suck up vast amounts of gas that would lead to a spike up the price of gas across the entire east coast. This would then force gas generators to hike up their bidding prices to recover these higher fuel costs leading to much higher wholesale power prices for these newly acquired coal generators making them much more profitable.
But another interesting wrinkle to this story was that coal miners were also keen to shift their prices up to export-parity. This opportunity would arise as old contracts struck with the NSW Government back when it owned the coal generators expired.
By the time of the invasion of Ukraine and the withdrawal of Russian supplies of gas and coal, the trap was set with coal and gas producers free to hike up prices astronomically off the back of rising prices overseas.
In some brilliant journalism, the business section of The Australian newspaper (which no one writing for the rest of that newspaper seems to have read) revealed that one of the key factors that led to the electricity market crisis of mid 2022 was that:
“Centennial Coal, owned by listed Thai company Banpu, in 2022 quietly sold shipments of coal to international buyers rather than meeting agreements to supply the Eraring facility. It was a decision that caused significant losses for Origin Energy, fuelling the country’s energy market crisis.“
According to this little noticed, but incredibly important bit of investigative journalism, Centennial decided that the price it could earn exporting coal at that time outweighed any damages it might have to pay to Origin from failing to meet its contract deliveries.
The Eraring Power Station was then left suddenly and unexpectedly short of fuel. Gas power plants meanwhile were facing their own gas supply crisis and struggled to cover the gap, leading to power prices skyrocketing.
The reality is that the large rises in both gas and power prices are a result of a structural shift where gas, and to an extent coal prices, became linked to export markets in Asia.
The growth of renewable energy has helped to partially offset that, but outside of the middle of the day, the scale of renewable energy deployed remains insufficient to break the nexus between the price of gas and the price of electricity. However the suggestion that renewable energy is driving up electricity prices is completely ludicrous.
The chart below, using AEMO data, illustrates the relationship for each NEM mainland state between wholesale spot market prices and the share of and wind and solar in the generation mix. It clearly shows that as the share of wind and solar rises power prices decline across every single state.
Peter Dutton’s announcement that he will put in place a requirement for Queensland gas exporters to reserve 50 to 100 petajoules of gas for Australian consumers unfortunately will do little to help the situation.
This is because his plan to radically curtail the growth of renewable energy will mean that we will be forced to use more gas to fill the gap from retiring and increasingly unreliable coal power plants.
Seven coal fired power stations are due to retire before the Liberal-National Coalition have said they could build just their first nuclear power plant in 2037: Eraring, Yallourn, Callide B, Bayswater, Vales Point and Gladstone.
The chart below illustrates how much extra gas we’d need to generate the amount of electricity that these power stations produced last year. This is a huge amount of extra gas demand in the Australian context – it is roughly equal to the entirety of current east coast demand for gas across not just power generation, but also manufacturing, and residential and commercial sectors.
So rather than renewable energy being the cause of energy price rises, it is actually likely to be an important part of the solution. But is just one part of several interventions that are needed.
We also need to strengthen competition policy, including using distributed energy as a competitor to electricity networks. We need to reinvigorate our energy efficiency standards program, particularly with the goal of phasing out gas in residential premises, as the Victorian Government is considering.
We need to apply energy efficiency standards to rental properties (again an area where the Victorian Government is showing leadership) or at the very least make landlord tax concessions contingent on meeting such standards. We should aim to enhance and extend the energy efficiency and peak demand reduction target schemes beyond NSW and Victoria.
And we need to implement reforms to how electricity network revenue and pricing is regulated. None of these initiatives are easy to implement, but they will dramatically lower energy bills for Australian householders far beyond anything our politicians are currently offering at this election.
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