Christopher Niesche: The downside of Victoria’s premier green energy plan

OPINION:

A quarter of a century after Victoria sold off its energy assets, the state’s premier, Daniel Andrews, is considering renationalising power generation.

In a stunning announcement last week, Andrews said he would relaunch Victoria’s
State Electricity Commission, which was split up and sold in the 1990s and provided A$1 billion to build new wind and solar power plants.

The policy reverses three decades of privatizations by governments that have seen the sale of companies such as Telstra, Qantas and the Commonwealth Bank of Australia, as well as many ports, generators and retailers.

“Unreliable, privatized coal will be replaced by clean government-owned renewable energy,” Andrews said. He also hasn’t ruled out becoming an electricity retailer as well.

Andrews also announced aggressive new renewable energy targets. It will set an emissions reduction target of between 75 and 80 percent by 2035 and advance its net zero goal by five years to 2045.

The new goal will force the state’s three remaining coal generators to shut down sooner than their owners planned.

The Loy Yang B coal-fired power station in Victoria’s La Trobe Valley, scheduled to close in 2047, will likely close in 2035. Jeff Dimery, CEO of plant owner Alinta Energy, said the early closure will cost jobs and left its employees shocked.

The company will have to discard an asset 12 years earlier than planned and replace it with new renewable energy. It’s good for the environment, but bad news if you’re unlucky enough to invest in Alinta. (However, it’s also possible that the world would have changed so much in the coming years that the power plant would have shut down anyway.)

But that’s just a consequence of Andrews’ goofy intervention in the market.

It plans to build renewable energy which will be 51% owned by the state government and 49% by pension funds.

“These power plants will not be for profit,” Andrews said.

It’s a big problem. Pension funds hold the retirement savings of millions of Australians and aim to maximize profits to ensure their members have a financially secure retirement.

Superannuation members will be dismayed to say the least if their funds are invested in Andrews Power Plants, leaving them with less money in retirement. They will be even angrier if they don’t live in Victoria and therefore reap the benefits of lower electricity prices, if indeed Andrews delivers them.

There is also sovereign risk.

Big business often cries foul and says that foreign investment and capital will be scared off if they don’t get what they want from the government.

In this case, they might be right.

Many businesses will think twice before locating or investing in Victoria after witnessing Andrews’ intervention in the market.

Australia’s energy market operator has estimated that A$230 billion of electricity assets, including renewable energy generation and transmission, will be needed for Australia to shift away from electricity generated at from fossil fuels.

There is a risk that Andrews’ intervention will scare off private sector investment, with wind and solar generators wondering if they should compete with what Andrews suggests is subsidized government production.

None of this is to say that there isn’t a big problem in need of urgent resolution.

Electricity prices paid by Australian households have jumped this year, thanks to the war in Ukraine, which has pushed up the price of gas. The world gas price effectively sets the wholesale price of electricity in Australia thanks to the country’s Byzantine energy market rules. Energy market futures point to another 37% rise next year.

The war will eventually end, but electricity prices won’t drop much, if at all, as we all start paying for the multi-trillion dollar decarbonization of the energy market.

The biggest issue will be the transmission cost. The cost of delivering electricity from generation sites to homes accounts for around half of retail electricity bills and this will only increase as the grid needs to be upgraded.

While there may be strong returns for private sector investors in building wind and solar, it is more difficult to make such a business case for transmission, and yet without improved transmission, the green energy will not be viable.

The entire energy sector suffers from years of ad hoc politics, which has hampered the certainty investors need to launch projects.

So something has to be done.

But this is not a billion dollar privatization of state power generation.

There is no easy solution, and Andrews’ policy is more like the ad hoc policy we’ve had for the past two decades.

He is currently facing an election, and the policy looks more like a political gamble to convince voters that he can do something about electricity prices rather than a well-thought-out solution to the market confusion of energy.