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Keynote Address to the AFR National Energy Summit

Australia

10 October 2018

E&OE

ANGUS TAYLOR: Michael, Deloitte, well done for being behind this. Well done to The AFR for putting on what is clearly a really crucial conference, important conference, an important series of conferences that are shaping the public policy debate in this country, and I think in a very positive way.

I acknowledge my federal parliamentary colleague, Mark Butler, Shadow Minister for Climate Change and Energy. I think Kerry Schott and Audrey Zibelman are here from the Energy Security Board and AEMO, good to see you and many other luminaries from across the industry - it is wonderful to see you here in this all important conference.

When the Prime Minister Scott Morrison gave me this portfolio, appointing me as the Minister for Energy, he gave me one very clear KPI - one KPI. That was to lower power prices while we keep the lights on. Simple. No complexity there.

If you look over the most successful campaigns I've seen in politics, and indeed, in business over the course of my career, there is typically one common characteristic - clarity. Clarity.

Think of stopping the boats - we did it. Think of cutting the carbon tax. Think of three free trade agreements. Simplicity and clarity, and achievement. In each case the goal was clear, it was outcome driven and it allowed government, bureaucracy, stakeholders, private sector players to engage with confidence. They knew what we wanted and they helped us to achieve it.

Now, with absolute clarity in mind, my focus is to drive down energy prices for Australian households and businesses - small, medium and large - to prevent job losses, business closures and to provide relief for those facing energy bill distress.

As someone who represents an electorate that extends from outer urban Sydney, out into central western New South Wales, I see every day the real impact, the real impact, of high energy prices and prospects of unreliability on jobs, on households, on real people - and it matters, it matters.

I am equally focused, alongside getting prices down, on keeping the lights on and maintaining energy reliability and security in the National Electricity Market and elsewhere in the electricity sector across Australia.

Now, we have three core initiatives to achieve this goal of lower prices.

Number one, is to establish a price safety net for customers.

Number two, is stop the rip-offs that we have seen in the past.

Number three, is to back investment in fair-dinkum affordable and reliable generation.

Specifically, we're establishing a default price to stop price gouging for loyal customers. The most loyal customers are paying the most.

Indeed, in Victoria alone the ACCC has estimated that this loyalty tax has almost doubled in just four years.

The ACCC has estimated that this could result in savings of between about $118 and $420 for residential customers and $560 to $1500 for small businesses. For any struggling small business or household these are big numbers.

We'll also introduce new powers to keep energy companies in line, including warnings and enforceable undertakings against practices like market manipulation.

We'll support target underwriting investment and reliable generation to boost competition, supply, and reliability in the market. We have a shortage of affordable reliable generation in some markets, and this is set to worsen over time.

I am absolutely confident that these initiatives will drive down prices and help to re-establish the customer as the core focus of this industry in all of our activities.

Unfortunately, this has not always been an industry sharply focused on the interests of its customers.

Energy is an essential utility service - a point that needs to be remembered at all times.

Almost every Australian business and household needs to buy from an energy sector, and ultimately when an industry loses focus on the interests of its customers, particularly in the case of essential services, competitors and governments step in.

In financial services, the combination of reform and the growing investment in FinTech is a big risk and challenge for traditional incumbents.

Energy isn't different.

Now, while our focus is on lower prices, they don't need to come at the expense of a less reliable or less secure network. The lights need to stay on.

To be clear, sharp increases in the share of intermittent generation, well beyond even very recent forecasts, and Michael pointed this out in his comments up front, is making the task even more difficult. This has been exacerbated by the withdrawal of older coal generators, often encouraged by state governments - and we saw that with both Hazelwood in Victoria and Northern in South Australia.

I firmly believe these state governments should be placing much more emphasis on reducing electricity prices.

The ACCC has recommended that network regulatory asset bases in some states are too high leaving customers badly out of pocket.

The ACCC also found that splitting Queensland owned generators to reduce electricity market concentration could save households over $100 from their electricity bills each year.

A lack of competition from government owned assets, state government owned assets, is driving up prices for consumers in order to bolster often badly damaged state budgets.

The ACCC has also found that state feed-in tariffs further put strain on electricity bills.

Now, reducing fair dinkum, reliable generation, dispatchable generation it can be a call at the expense of unreliable generation, leaves our homes and businesses vulnerable to load-shedding and blackouts.

We cannot put our heads in the sand and ignore the challenges driven by weighting the grid rapidly towards intermittent generation.

Now, to illustrate this in graphic terms, we are of course, approaching summer and the peak time of system stress.

In its 2018 Electricity Statement of Opportunities, AEMO forecasts that Victoria's supply will be tight over this coming summer, so much so that there's a one in three chance of load-shedding or targeted blackouts unless we fill a gap of 380 megawatts of capacity across Victoria and South Australia - and this is despite the significant additional demand and supply responses damage for last summer totalling almost 2,000 megawatts.

AEMO will be implementing its 2018-'19 Summer Operations Plan based on lessons learned from the previous summer when blackouts were successfully avoided, but it was a close-run thing and will be critical to prepare well for this summer.

In the medium-term, the energy sector faces reliability challenges without further investment in supply that can respond when it is needed. We can see these challenges now, and they must be dealt with.

In 2017, AEMO was forced to make 25 market interventions to keep the lights on. That's more than double the number of times that AEMO had to intervene in the previous seven years combined. That is not a market working well. It is evidence of a market that is on life support.

On top of this, state and territory governments continue to unilaterally drive those targets for our intermittent generation without regard for reliability or security. Those targets - I don't need to tell any of you in this room - are driven by political imperatives because large investments in intermittent generation without concern for firming up that capacity will end badly on the worst days.

South Australians have discovered this in spades. The 50 per cent target of the previous Labor government has left them with prices amongst the highest in the world, along with reliability and security challenges. That's a challenge to keep the lights on, which desperately requires actions.

The loss of dispatchable generation in the system means that if nothing is done to address the investment issue, AEMO must continue to ramp up its interventions in the operation of the electricity market. And that's something we'd all prefer didn't need to happen. That includes curtailment of close to a third of the wind fleet in South Australia for a large proportion of the time.

Labor in Queensland, Victoria, and the ACT are all determined to go in the same direction at the expense of affordable reliable electricity for households and businesses.

Now, we are very confident in reaching a 26 per cent emissions target in a canter in the NEM. We are very confident. Particularly given a record investment in solar and wind, that Michael just outlined, well beyond even very recent forecasts, as I said earlier. Indeed, renewables investment this year will reach record levels, there is no question about that.

But this was never going to be enough to satisfy some state governments, so we're faced with this poorly supplied reliable generation rising intermittency, massive security and reliability challenges coming out of this space.

So, at the direction of the COAG Energy Council, the Energy Security Board has been working hard to deliver a mechanism that guarantees the reliable supply of energy for all Australians.

A retailer reliability obligation will encourage investment in dispatchable generation, generation that delivers when you need it, in the right place and the right time to ensure reliability in the NEM.

I'm committed to working with the state and territories through the COAG Energy Council to progress the implementation of the retailer reliability obligation, this is one of the highest priorities of the Commonwealth.

The details of that reliability obligation has been raised, and I will be raising the Commonwealth's commitment to the obligation at the next COAG Energy Council, now scheduled for 26 October.

The reliability obligation features a trigger to attract new capacity in the market where gaps are identified in any individual market ahead of time.

We need to be hard headed about where such gaps exist, taking account of the realistic contribution of different technologies peak demand requires. Once a market is forecast to have a gap in required capacity, retailers will need to take on obligations to meet their share of that demand.

Inevitably, that will focus on retailers investing in the contract and capacity necessary to meet demand well ahead of time.

It will also lead to retailers trading capacity with each other where that makes sense, and that trading in capacity, that investment in capacity is absolutely essential given the challenges we are facing.

I look forward to working with the Energy Security Board and my colleagues on the COAG Energy Council to secure Australia's energy future.

Keeping the lights on is not an option. It is a necessity in increasingly difficult circumstances, and both retailers, state governments, along with our work is essential to get the job done.

Now, the ACCC has made clear that a lack of competition is a serious threat to the interests of consumers in the electricity market. We are taking action to put in place the key findings of the ACCC's Retail Electricity Pricing Inquiry. These are absolutely central to delivering relief and security to households and businesses.

As I've said, we intend to implement a program to underwrite new, stable, low-cost generation to increase competition, supply and reliability in the system in line with the ACCC's recommendations.

We will also work with states and territories on improving transparency in the wholesale market and providing additional powers for the AER to address market manipulation in that market.

These initiatives - amongst others - will increase competition, reduce bad behaviour and, most critically, deliver affordable, reliable energy to Australia's households and businesses.

Now, we are already making progress in bringing down prices. We saw the retail electricity prices come down in Queensland, South Australia and New South Wales on 1 July. I want to pay tribute to the work that's been done by the industry - industry players who I know are here today - on delivering that first round of improvements to pricing and affordability for Australian households and businesses.

Further, as of August, the wholesale cost of electricity was down 25 per cent this year, with the price at a little under $70 a megawatt hour compared to $101 at the same time the year before.

The AEMC price trends report predicts that retail prices will fall by 7 per cent in 2018/19, and 8 per cent in the following financial year.

Electricity prices for consumers are starting to decrease because we are reducing the costs of transmission and distribution as well, by reforming the Limited Merits Review, in line with the telecommunications and water sectors.

Prices are also improving because retailers are stepping up, ensuring they offer their customers a better deal with more transparency - but more needs to be done.

In particular, something has been made in recent days - I want to focus on this for a moment - on a small recent increase in wholesale pricing, but that should be seen in the broader context of large drops in spot and future wholesale prices. A 27 per cent reduction since the fees of 2017.

Some unfortunately are seeking to use gas prices as an excuse.

Now, it remains to be seen what happens with gas prices in the coming months, particularly given our determination to ensure that exporters provide enough supply to meet domestic market needs at fair prices.

To put this in perspective, we’ve seen gas prices fall by as much as half from their peaks, which reached, for some customers, as much as $20 a gigajoule.

On top of this, based on modelling for its report, the ACCC told us that in a properly functioning market, one without any sort of coordinated bidding, a 10 per cent increase in gas prices would impact electricity prices by a very small amount - typically $1 to $2 a megawatt hour, which is less than 1 per cent of a typical electricity bill.

Now, we’ve started work, prices are improving, but this entire industry - everyone involved in it, all stakeholders, and that includes us - owe it to Australians to deliver more.

Put simply, if the industry focuses on consumers, customers and their interests, government can return to the light touch regulations that we would always prefer.