how energy markets failed and what happens next

how energy markets failed and what happens next

There’s no single solution. The former energy minister Angus Taylor was right when he said we need a “capacity market” to ensure there’s always power in reserve to deal with fluctuations in supply. The current Energy Minister Chris Bowen is right when he says we need more interstate transmission lines and more new renewable energy capacity, and he’s right when he says that 10 years of uncertainty about climate policy have chilled investment in the energy system. NSW Energy Minister Matt Kean is right when he says AEMO needs more visibility of individual generators’ capacity to supply. Many people, including my Grattan Institute colleague Tony Wood, are right when they call for more gas to be made available for the domestic market, including a windfall-profits tax on gas exporters if necessary. Others are right when they say more investment in batteries, storage, and energy efficiency are needed. It’s all of the above.

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What is critical is avoiding quick-fix market reforms and ad-hoc government interventions that respond to the problems in front of us right now but leave the market unable to respond to future challenges. This decade will be one of the most challenging the energy system has faced, as it transitions away from coal and gas to meet the government’s target of 82 per cent renewable energy in less than eight years. Ministers (on behalf of us voters, citizens, and energy users) need to be clear what they want. Promises of cheaper electricity aren’t enough: it has to be clean and reliable, and the system that delivers it has to be able to withstand shocks and anticipate and respond to risks.

Ministers then need to decide the best way to deliver. The next decade involves a lot of risks, and these need to be shared equitably between governments, consumers, generators, fuel suppliers, renewable energy developers, and energy network owners and operators. Sometimes markets will be the best way to do this, sometimes regulation will do the job, and other times it will require governments to carry risk as well. Sharing information about risks, who is carrying them, and whether they are increasing, will be key.

Hemingway also observed that “everyone behaves badly – ​​given the chance”. It will be very tempting – but counterproductive – for politicians and commentators to jump into blame games and restart the climate wars. It will be tempting for state ministers to go their own ways. But the energy system operates better when they all work together.

How it started is less important than making sure it ends well.

Alison Reeve is the Grattan Institute’s deputy program director, energy and climate change.

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