Finkel Review, blueprint for Australia’s electricity market: “the real work has still to be done”

Mount Piper coal power station in Australia

The blueprint for Australia’s future electricity market released recently by Australia’s chief scientist Alan Finkel pleases some but not all market watchers, writes Fereidoon Sioshansi, publisher of the newsletter EEnergy Informer. For some critics, the real work on climate and energy policy in Australia has still to be done.

Imagine a world without electricity,” those are the starting words of the so-called Finkel Report released in June 2017 amidst much anticipation in Canberra, the capital of Australia. The official name of the report is Independent review into the future security of the National Electricity Market (NEM): Blueprint for the future.

Following last year’s blackout in South Australia, Finkel, Australia’s Chief Scientist plus a panel of 4 other experts, were tasked to propose a blueprint for the future. The panel’s mission was to “recommend enhancements to the National Electricity Market (NEM) to optimize security and reliability, and to do so at lowest cost,” noting that it is being submitted during a public debate about international commitments under the Paris Agreement. Australia’s current government, not unlike the US under President Trump, does not appear wholeheartedly wedded to the global treaty – or equivocates on its commitments.

In the report’s Preface, Finkel says, “If, as I hope, this blueprint is adopted by you, then our NEM should return to being the high-performance servant of our community that it once was.” As an official report to Australia’s Prime Minister Malcolm Turnbull, it says all the right things.

Australia has a once-in a-generation opportunity to reshape our electricity system for the future.” But is this that future?

Finkel and his fellow panelists point out the obvious such as, “Australia’s electricity system is in transition” and that “the rate of transition is rapid.” That much we already know.

The blueprint also makes other obvious points such as stating that the report is focused on 4 key outcomes:

• Increased security;
• Future reliability;
• Rewarding consumers; and
• Lower emissions

Adding, “These outcomes will be underpinned by the 3 pillars of an orderly transition, better system planning and stronger governance. What is there not to like?

The report offers many recommendations, more than most can absorb – from mundane to profound. As everyone recognizes, it is a rather complicated topic. The bulk of the report is covered by spelling out and embellishing these recommendations. It says, “Australia has a once-in a-generation opportunity to reshape our electricity system for the future.” But is this that future?

Much publicity

While it is hard to say how much of its recommendations will be accepted and/or implemented, it is fair to say that the report has already generated much publicity – not all in agreement with the report’s main recommendations.

The Australian’s headline on 14 June 2017 read “Turnbull faces revolt on power.” The Australian Financial Review’s headline on the same date read: “Coalition in revolt over climate fix.” It said: “Finkel has provided a roadmap for energy policy that is determined to set off the freeway of carbon pricing in any form and seek instead the scenic backroads of encouraging renewables without discouraging the burning of coal.”

Another paradoxical aspect of the Australian energy market is that despite massive reserves of natural gas and rising LNG exports, the current infrastructure is inadequate to deliver sufficient gas to domestic markets

Giles Parkinson, the editor of RenewEconomy noted that “Finkel has been focused on trying to find a pathway through the toxic energy politics in Australia, and accommodating the Coalition’s modest climate targets, rather than seizing the moment and outlining what can and should happen, and what Australia would need to do to meet the Paris climate targets.” 

Parkinson goes on to say, “Finkel suggests a wave of market and regulatory reforms, but appears to rely heavily on the Australian Energy Market Commission, whose snail-pace approach to reform and new technologies has driven most players crazy with frustration – apart from the incumbents, of course.”

Another paradoxical aspect of the Australian energy market is that despite massive reserves of natural gas and rising LNG exports, the current infrastructure is inadequate to deliver sufficient gas to domestic markets resulting in supply scarcities and price spikes, which have led to higher retail energy prices.

Adam Smith

Professor Iain MacGill, Joint Director of Centre for Energy and Environmental Markets (CEEM) at University of NSW said, “Finkel had the impossible job navigating between the challenge of affordability, security and environment, and the policy sensitivities of the present Coalition government, in particular its conservative wing.”

“As such, the report is more oriented towards political science than climate science,” adding, “It certainly provides a possible basis for breaking the present climate policy deadlock in Australia with its proposal for a clean energy target …”

In MacGill’s opinion, “Regardless of its limitation, the key work of implementing coherent and effective climate and energy policy still lies before us.”

“Australia’s electricity pricing problems do not lie in the costs of producing electricity…. the charge for transporting electricity and the charge for selling it is much more significant”

Bruce Mountain, Director of Carbon and Energy Markets (CME), writing in the Australian Financial Review (10-11 June 2017) said, “The remit of the Review, and Dr. Finkel’s approach to it, has been to focus on electricity production and in particular greater short-term power system security and a pathway to investment in lower emission generation in the longer term,” adding:

“Necessary and worthwhile as this may be, the main part of Australia’s electricity pricing problems do not lie in the costs of producing electricity. For all but the very biggest electricity users, the charge for transporting electricity and the charge for selling it is much more significant than the charge for its production. It is expansion in these network and retailers’ charges that explains Australia’s precipitate decline from the top to the bottom ranking in international electricity price league tables.  The issue underlying such dismal failure – political economy – remains completely untouched.”

Mountain adds, “Almost 250 years ago Adam Smith exhorted: ‘Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.’ It is a famous phrase, cited as often as it is ignored.” 

There is certainly a lot to read in the Finkel report, and depending on one’s perspective and vested interests, there is something for most, if not in the whole, then certainly in parts of the blueprint. It remains to be seen how the blueprint’s recommendations will be implemented and when.

And as Parkinson, MacGill and Mountain point out many of Australia’s electricity market ills are political in nature – the most challenging to address. In the meantime, as Finkel warns, next summer’s heat waves, bushfires and storms are not far away. Politicians must act, sooner or later.

Editor’s Note

Fereidoon Sioshansi is a long-time energy consultant and author. He is also editor and publisher of EEnergy Informer, a subscription-based monthly newsletter that has been around for many years. This article was first published in EEnergy Informer and is republished here with permission. 

Sioshansi’s latest book project is Innovation and Disruption at the Grid’s Edge, published in June 2017. It contains articles by two dozen experts on “how distributed energy resources are disrupting the traditional utility business model”, including contributions from:

• Audrey Zibelman, CEO of AEMO and former Chair, New York Public Service Commission
• Michael Picker, President, California Public Utilities Commission
• Paula Conboy, Chair, Australian Energy Regulator, Melbourne, Australia
• Analysts from Poyri, CSIRO, TU Delft, University of Freiburg and many others