Yesterday's NSW wholesale electricity prices were over one hundred fold the average -- a reminder of the sensitivity of the nation's supply and demand balance.
Canberra has sought the Industry Commission's advice on government measures to promote energy efficiency. While we can never have a surfeit of efficiency in anything, it is rare that we would look to government to foster this. Markets promote efficiency by acting on people's self interest to reduce costs, ration supplies, find substitutes and so on.
Special circumstances that make it appropriate for government to guide firms and individuals in searching out efficiency measures arose, so it was argued, from the energy crisis of the 1970s. Adopting Club of Rome notions that the world was running out of resources -- especially energy resources -- and that market solutions would not cope, regulations to promote energy conservation were introduced.
Concerns about natural shortages of energy have now abated (Australia has hundreds of years supply of coal, while the world's known supply of oil has tended to grow). Special efforts to promote energy efficiency have therefore become as redundant as a bland Bauhaus diet of cereal to promote calorific efficiency in food production.
Over the past decade however, the greenhouse fear has re-armed the energy efficiency regulations. Seamlessly, policies to save the world from resource exhaustion became policies to save the world from the fate of the boiling frog. The greenhouse scare furnished the adrenaline that brought waves of energy efficiency policies building on the earlier programs in an ad hoc and ill-targeted manner.
Costing these measures is difficult and no official document attempts it.
The measures imposed on the gas and electricity industries fall under two main headings -- subsidies for certain activities and taxes that require consumers (via the electricity retailers) to buy some of their energy from more expensive low carbon sources.
Excluding a bewildering array of research grants and spending through CSIRO and the universities, the energy efficiency subsidies amount to an annual $120 million from the Commonwealth and a further $30 million from the States. They include funding low emission technologies, industry partnerships to promote energy efficiency, and demonstration programs.
On present settings, by 2010 taxes aimed at reducing greenhouse gas emissions will amount to some $670 million a year. These are based on separate schemes by the Commonwealth, NSW and Queensland Governments. Rather than raising revenue these taxes are designed to divert spending to lower greenhouse gas emitting electricity sources.
The Commonwealth's Mandatory Renewable Energy Target (MRET), will by 2010 cost consumers $380 million per annum. MRET operates by requiring electricity retailers to use increasing proportions of renewable energy -- wind will eventually comprise the bulk of this. By 2010 over four per cent of electricity must be derived from these exotic sources and the subsidies allow them a price twice that of conventional electricity sources.
The NSW scheme places a tax on power stations graduated by their intensity of carbon emissions. By 2010 the scheme will cover some 20 per cent of the state's electricity at a cost to consumers of $220 million.
The Queensland scheme requires electricity retailers to source 13 per cent of their energy from gas. By 2010 its cost may reach $68 million.
Not only do these taxes impact unequally across Australia, but they have markedly different affects on what is ostensibly their main goal -- the reduction in greenhouse gas emissions. In terms of cost per tonne of CO2 abated, the Commonwealth scheme works out at $38. This cost is threefold that of the NSW scheme. It compares with estimates by ABARE of a $15 per tonne general carbon tax, required to enable Australia to meet its Kyoto target.
In addition to these measures there are regulatory requirements that are even more difficult to cost. These include mandatory energy efficiency standards for domestic appliances and buildings, and cross subsidies required for wind generators' poles and wires.
The plethora of measures amount to a micro-management of the mitigation of carbon dioxide and other greenhouse gas emissions. This is never likely to be a successful policy approach. The agencies and jurisdictional rivalries within government will always prevent such an approach from providing the most efficient policy tools.
Many would envisage the optimal approach requiring the replacement of these measures by carbon taxes or the creation of tradable carbon rights. Practical difficulties impeding this include questions as to the appropriate rate of such taxes, or means of vesting the tradable rights. Many of these questions reflect uncertainties from the likely future effects of global warming, as well political issues that inevitably arise from taxation proposals that would have variable effects on different sectors of the economy.
Even so, given the policy commitment to an emission reduction strategy, a severe rationalisation of Australia's many energy efficiency and abatement programs would seem to recommend itself. A precursor to this would be some auditable hierarchy of return in terms of dollar cost per unit of abatement that each of the present measures entails.
Finally, any measures that raise prices or discourage new investment must be framed in the context of the rising demand for energy. The dividend from discouraging low cost new investment will be power cuts and soaring prices.
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