In August 2017, the Productivity Commission (Commission) issued its five-year productivity review entitled ‘Shifting the Dial’ (Report). The Report, which enquires into Australia’s productivity performance and includes recommendations on productivity-enhancing reforms, is the first in a regular series of similar reports to be undertaken at five-yearly intervals by the Commission.

In this report, energy markets were identifid as a market where there are potentially significant opportunities for productivity gains. The findings in the Report signal a once-in-a-lifetime role for regulatory reform and stewardship by all levels of government in energy markets to effectively, efficiently and sustainably respond to important challenges currently confronting these markets.

Cleaning up the ‘mess’ in energy markets

In its Report, the Commission describes the state of energy markets as a ‘mess’ linked to a lack of clarity on emission reduction policies, increasing reliance on intermittent and variable renewable energy, moratoria on gas exploration and development, and the commencement of gas exports from the east coast. According to the Commission, these factors have left Australian energy markets in a ‘fragile state’. The key challenge is how to resolve these issues while maintaining an affordable, reliable and sustainable supply of energy going forward — dubbed the ‘energy trilemma’ by the recent Finkel Review (2017).

The Commission’s Report includes recommendations to address this challenge, namely:

  • Strategic direction of energy markets: Providing clear and considered long-term strategic vision for energy markets, including:
    • a clear transition path from current arrangements
    • centrality of energy consumers
    • striking a balance between reliable, affordable and sustainable energy.
  • Reduction of carbon emissions: Stop the piecemeal and stop-start approach to emission reduction, and adopt a proper vehicle for reducing carbon emissions that puts a single effective price on carbon.
  • Pricing: Clearly articulate an acceptable trade-off between reliability and cost of energy supply and achieve more efficient pricing, by ensuring:
    • prices paid to producers reflect any additional costs they impose on the system (such as frequency management for generators of renewable energy)
    • access to the grid, rather than just use, can be priced (so people using the grid as a back-up pay for this service)
    • prices to consumers reflect the nature of the demand that they require from the system.
  • Technological neutrality: Ensure short-term fixes are technologically neutral and move the system toward a sustainable long-run outcome.

Role of government in enhancing productivity in energy markets

Improving Australia’s productivity for the benefit of all Australians is not an easy fix. It will involve a concerted effort by a variety of industry participants across a broad range of sectors. Governments clearly have an important role to play in influencing productivity growth, particularly through their policies and regulations.

In the context of energy markets, the Commission notes that no one jurisdiction can fix the issues currently confronting these markets. Rather, all Australian governments will need to work cooperatively. Moreover, the Commission also notes in its Report that the ability of governments to develop and implement policies and regulation that are aligned with the public interest critically depends on public participation in regulatory processes, particularly in light of recent evidence illustrating that distrust in government is high and engagement in politics is low by absolute and historical standards.

While past reforms in the energy sector have delivered some important benefits, particularly the introduction of competition into many elements of the energy supply chain; the changes and associated challenges faced by the sector call for another major regulatory shift to deliver affordable, reliable, sustainable energy supply for the benefit of Australian consumers and the Australian economy.

To help ensure that these outcomes can be delivered, a comprehensive stock-take and assessment of policy and regulatory levers is called for in combination of an identification of how these levers can be cooperatively and collaboratively activated by government and interested stakeholders. Governments will clearly play an important role in ensuring stewardship of regulatory frameworks applicable to energy markets in this context.