The Energy Crisis and the Finkel Review Explained



Read any paper, news headline or QandA #hashtag, and you’ll be led to believe Australia is in the grips of an energy crisis – a crisis so serious that we should all be wondering if our lights will turn on tomorrow. But what is an ‘energy crisis’? What were the chain of events that led us here, and what does it mean for me?

A well performing national electricity system needs three things: reliability, affordability and low carbon emissions. A decade of what can only be described as shambolic energy policy has led to an insecure system still dominated by coal, where consumer costs are rising every year.

Unfortunately, energy policy has become a political hot potato, between South Australian Premier Jay Weatherill’s press conference face-off with Federal Energy & Environment Minister Josh Frydenberg and @ElonMusk’s #batterybet for SA, many people have been left understandably confused about how we got here. To make things easier to understand, I’ve compiled some of the crucial events surrounding the National Electricity Market and cut through the political bull in this explainer.


Record SA Wholesale Prices – July 2016

On July 7th, the wholesale price of electricity in SA spiked to over 800% of the historical average in similar years. This spike reflects a general trend of increasing wholesale energy costs across the country, which ultimately means higher costs for consumers. But what has caused this price volatility? The record prices in SA, in particular, were caused by a combination of a low wind power generation and limited supplies from other generators in the state, but Australia-wide, there is a significant lack of investment in new generation capacity to replace old, recently-retired generators. When 50-year-old coal stations finally begin closing down, investment uncertainty means that there is nothing to replace them.


SA Statewide Blackout- September 2016

We all saw the headlines and political banter – and no, the blackouts were not the fault of wind power. The Australian Energy Market Operator’s investigation concluded that the statewide blackout was caused by severe weather crippling transmission lines setting off a chain reaction of inbuilt network safety mechanisms resulting in a black grid. Drama ensued, with political point scoring evidently more important than strong governance.


Closure of Hazelwood Power Station- March 2017

Engie, the owners of Hazelwood Coal Fire Station, announced the plant would be shut down after 50 years in service, citing the plant’s age and dwindling economic viability as reasons for the closure. The shutdown leaves a considerable gap in Victorian generation capacity and will cause significant of job losses. And yet, there is still no credible plan on where to from here.


The Finkel Review – June 2017

Early June saw the release of Blueprint for the Future: Independent Review into the Future Security of the National Electricity Market (AKA ‘The Finkel Review’). This review is intended to bring some certainty back into Australia’s energy market and was headed up by Australian Chief Scientist and former Monash University Chancellor, Dr. Alan Finkel AO. In his address to the National Press Club in Canberra on 21st June, Dr. Finkel demonstrated a superior understanding of Australia’s energy market, in comparison to the politicians who actually control Australia’s policy direction. On the causes of wholesale price increase, Dr. Finkel debunks the notion that power price increase are a result of investment in renewables over coal;

“But for the longer term, it became clear to us that a more fundamental, underlying reason for rising prices in the wholesale market…is investor uncertainty. That uncertainty revolves around current and future emissions reduction policies.”

The report’s recommendation of a Clean Energy Target (CET) is designed to end this long and costly period of uncertainty and put downward pressure on power prices (contrary to what many pro-coal politicians will tell you). In his speech, Dr. Finkel addressed the challenges the Australian energy market may face in the future, and emphasised the concept of disruption. According to Dr. Finkel, disruptive forces are positive because they are the drivers of change, but if the system is not prepared or does not have the flexibility to adjust, then it can hinder development:

“A second technological disruption are the nearly two million rooftop solar generators that householders have installed…[electricity demand] now ramps rapidly up and down during the day to the extent that it becomes difficult for slow-responding baseload generation to cope. The market into which coal generation operates has been forever changed.”

Sadly, as soon as many politicians read the words ‘Clean Energy Target’ and hear of the decline of coal, alarm bells start to ring inside their head, and their agenda blinds them from recognising that we must reduce our carbon emissions. We signed the 2015 Paris Agreement and are therefore obliged to follow a certain path in emission reduction. The government announced shortly after the release of the report that it had accepted 49 of the 50 recommendations put forth by Dr. Finkel and his colleagues. Not surprisingly, the only one which was not accepted straight away was the Clean Energy Target, which is effectively the cornerstone of the report. If the government decided to replace it with a less-effective alternative, it would only lead to more of what the report attempts to redress: investor uncertainty and higher consumer prices. In the future, more disruptive forces will undoubtedly emerge, which is why the Australian energy market requires certainty and an effective market-based mechanism to reduce emissions. Without one, we run the risk of further uncertainty and further price hikes in our energy bills.


What can we do?

Ultimately, what does this all mean for everyday consumers; should we be worried about the ‘lights turning on tomorrow’? The short answer is yes, the lights will come on, though this might not be the case if we continue on the same policy trajectory. Your bill is inevitably going to increase, and Great Barrier Reef will continue to be affected by global climate change as fossil fuel generation continues to dominate.

As consumers, our options for action are limited. The best piece of advice we have is to switch to an energy retailer who is holding environmental credentials, actively investing in renewable generation in Australia, and backing consumers to make informed decisions about the way they use power. You can also let our government know that it’s time for genuine policy action and evaluation of opportunities presented in the recent Finkel Review.


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