Exclusive: Report warns investment in electricity has stalled, and existing policies won’t allow Australia to meet its Paris target

This article is more than 3 years old

This article is more than 3 years old

Australia’s chief scientist, Alan Finkel, has said investment in the electricity sector has stalled because of “policy instability and uncertainty” – and he’s warned that current federal climate policy settings will not allow Australia to meet its emissions reduction targets under the Paris agreement.

In a 58-page report that has been circulated before Friday’s Council of Australian Governments meeting between the prime minister and the premiers, Finkel has also given implicit endorsement to an emissions intensity trading scheme for the electricity industry to help manage the transition to lower-emissions energy sources.

While there is no concrete recommendation to that effect, the report, obtained by Guardian Australia, references the evidence from energy regulators that such a scheme would integrate best “with the electricity market’s pricing and risk management framework” and “had the lowest economic costs and the lowest impact on electricity prices”.

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Finkel also notes advice from the Climate Change Authority which says market mechanisms have the lowest average cost of abatement, and of the options modelled, an emissions intensity scheme “had the lowest impact on average residential electricity prices”.

The positive commentary from the chief scientist cuts directly across political arguments the Turnbull government has made since dumping its nascent attempt to use the review of the Direct Action policy to explore an intensity trading scheme for electricity – equating carbon pricing with higher power prices for consumers.

The Finkel report was commissioned by the energy and environment minister, Josh Frydenberg, at the last meeting of state and federal energy ministers, which followed the political controversy that erupted after South Australia endured a statewide blackout in September.

The Turnbull government has wanted to use the much-anticipated report as a springboard to wind back state-based renewable energy targets, which it says are making the electricity market less secure.

But while noting renewables present ongoing challenges to network stability, challenges that have to be carefully managed, Finkel has pointedly warned the federal government its current climate policy is inadequate as it stands.

He also makes the point that a lack of clarity at a federal level about policy and regulatory settings can also affect network security and prices for consumers.

Finkel’s report says the relatively short horizon of federal climate policy, coupled with the Abbott government’s attack on the federal renewable energy target, has put investment in abeyance.

“There is evidence that investment in the electricity sector has stalled and investors have become less responsive to investment signals,” the report says. “This is due to policy instability and uncertainty driven by numerous reviews into the renewable energy target and a lack of clarity about the policies to reduce emissions after 2020.”

“Investment in renewable energy dropped by 52% between 2013 and 2014 and has not yet recovered to the level required to satisfy the RET [renewable energy target].”

Finkel says there is a pressing need for clarity in policy to unlock much-needed investment in the national electricity market, and he says if the clarity fails to materialise, electricity prices will rise for consumers, and energy security will become more of an issue.

“For businesses to take risks on the future and invest, they need to be confident that emissions reduction policies and the mechanisms to achieve them are consistent with Australia’s international commitments and will not change drastically in the future.”

“Because of the long-term nature of electricity sector investments, investment confidence depends strongly on long-term policy signals.”

“The lack of predictability in the electricity sector creates uncertainty around which generation and network assets investors should either invest in or divest from.”

“If businesses do not invest when needed, this will impact on the security and reliability of electricity supply.”

He also says explicitly the current climate policy, which includes Direct Action, the RET, and the national energy productivity plan, will not guarantee Australia meets its Paris commitments. “While the electricity sector must play an important role in reducing emissions, current policy settings do not provide a clear pathway to the level of reduction required to meet Australia’s Paris commitments,” the report says.

Finkel says the RET is designed to achieve an increase in large-scale renewable energy generation to 2020 “but not beyond”. “The policy also ends in 2030, meaning that projects commencing in 2020 will need to recover their capital costs over only a 10-year period.”

He says the Direct Action policy has focused predominantly on land-sector abatement, with very few projects seeking to improve the efficiency of electricity consumption.

Finkel says the safeguard mechanism “is not calibrated to drive emissions reduction”.

The Turnbull government on Monday flagged an emissions intensity trading scheme for the electricity sector as part of its scheduled review of its Direct Action climate policy.

But the overture was dumped when Frydenberg folded in the face of internal pressure – a decision which has been widely criticised as short sighted and counterproductive by business, the energy industry and climate groups.

Friday’s Coag meeting will also hear a push from the South Australian government to revive emissions trading in the wake of the Turnbull government’s decision to preemptively rule it out.

But the push from the premier, Jay Weatherill, appears unlikely to secure unanimous support from other state governments.

South Australia has been leading the charge on an emissions trading scheme for the electricity sector for some months, but New South Wales rebuffed the push on Thursday. The Labor governments in Victoria and Queensland have also backed away from carbon pricing in favour of beefing up their state renewables policies.

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Before Friday’s talks, Malcolm Turnbull continued efforts to equate carbon pricing with higher electricity prices, and he revived previous criticism of the South Australian government’s positive disposition to renewable energy.

“What South Australia is doing is putting at risk the jobs of South Australians, the prospects of South Australian business. Jay Weatherill’s approach to energy has been condemned by the business community in South Australia, they’re appalled,” Turnbull told 3AW on Thursday.

“Major industrial centres – Whyalla, mines, Nyrstar mine and so forth – have had to close down because they don’t get reliable power,” he said. “The South Australian Labor government has delivered an absolute double whammy of not being able to keep the lights on and having the most expensive electricity in Australia.”

But the Labor leader, Bill Shorten, blasted Turnbull for his conduct over the course of the week. “Malcolm Turnbull is demonstrating that he is under pressure, that he is lashing out, and that now he is making terrible decisions about the future of climate change and what governments can do about it,” Shorten said.

“Malcolm Turnbull has been muted on taking proper action on climate change. He has been gagged from talking about the solutions we need to tackle harmful carbon pollution.”

“This week has become the sickest joke of climate change policy since Malcolm Turnbull got elected.”