Australia’s energy trilemma explained

Energy policy is one of the most pressing issues of our time. The environmental and economic stakes for getting policy right are substantial.

Recent events have served as timely reminders of these high stakes: the coral reef is rapidly bleaching due to climate change; South Australia, a world leader in solar and wind energy production suffered a 48 hour statewide blackout last year, and Australians will experience a 20 per cent increase in their electricity costs in 2017-18, in part because of retiring coal-fired power plants and rising natural gas prices.

The Trilemma

These events together highlight a critical energy trilemma: in the face of rapid technological change in the energy sector, policy needs to evolve to achieve three objectives:

• meet Australia’s Climate Change commitments under the Paris Agreement;
• ensure stable supply of energy so the ‘lights don’t go out’ (again);
• mitigate rising electricity costs, particularly for vulnerable and elderly households.

Addressing this challenge is akin covering a floor with a rug where the rug is just a bit too small.

• coal-fired power plants have provided stable, low-cost energy supply to Australians for years, yet they are very heavy polluters;
• wind and solar energy is clean with zero production cost once windmills or solar panels are in place, but they only generate power when the wind blows and sun shines, thereby creating energy supply instability;
• natural gas is significantly cleaner than coal and can readily provide stable energy supply, but its cost is rapidly rising on the international market.

In short, each of these three primary sources of power solves two of three problems. No matter how you position the rug, one of the corners of the room is uncovered.

The urgency to solve the trilemma could not be stronger. Since 2010, ten coal-fired power plants have closed in Australia, with 18 remaining; in the next 20 years, it is expected that nine more will close, which collectively generate 16 gigawatts of power.

Australia requires transparent and stable policy guidance to ensure new investments are made to replace these plants and the power they produce, while still meeting our climate commitments under the Paris Agreement, and keeping the costs of electricity down and ensuring stable electricity supply.

Yet, since 2008, Australia has exhibited an extremely unstable policy environment, with a revolving door of Prime Ministers from Rudd to Gillard to Abbott, where climate policy was consistently at the centre of conflict. This substantive policy uncertainty has limited much-needed new investment in the grid.

Now the country is starting to see some of the fallout from a lack of policy guidance: blackouts and substantial increases in electricity costs.

Adding to these challenges is the need for flexibility in policy design to ensure energy markets are adaptable to future technological change. This includes grid-level battery storage that can help smooth out intermittency in energy production with solar and wind; clean capture storage that helps create ‘clean coal’; and digital technologies that will enable new electricity pricing to encourage behavioural change among households to reduce overall costs of operating the energy grid.

Talking Energy Policy with Josh Frydenberg and Mark Butler

It is against this context that I will moderate the Carbon Session at the upcoming Melbourne Institute Economic and Social Outlook Conference. The session should be a good one: it involves Energy Minister Josh Frydenberg from the Coalition, and Shadow Minister for Climate Change and the Environment Mark Butler from the Labor Party.

And there is no shortage of material to discuss, particularly the substantial, 202-page Finkel Review into the Future Security of the National Electricity Market that was published in early June. We will also talk about the Paris Agreements, why it is so difficult to generate bi-partisan support over energy policy in Australia, the challenge of rising natural gas prices in the international market, and market power in the energy sector.

Importantly, the session will involve a question and answer period. If you want to get a leg-up and submit a question that I can take into consideration in moderating the Carbon Session, please email me at byrned@unimelb.edu.au.

Thanks to the Melbourne Institute, and the willingness of our elected officials to be involved in the conference. We have a great opportunity to openly discuss and gain insight into policymaking aimed at addressing these critical problems facing Australia, and the world.

The Economic and Social Outlook Conference is co-hosted by the University of Melbourne’s Melbourne Institute, Applied Economic and Social Research and The Australian newspaper and will he held in Melbourne, July 20-21, 2017. Register here.

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