Energy and climate policy certainty is essential for investment in steel

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The ongoing uncertainty and indecision in Commonwealth government energy and climate policy impedes investment and adds risk to Australia’s steel industry and value chain.

Energy pricing and supply is a critical issue for a trade-exposed industry such as Australia’s domestic steel value chain. 

Australia’s industry, businesses and households are being squeezed by soaring energy costs and energy supply uncertainty, dampening investment and employment and contributing to a reduction in household budgets and consumption. 

Successive governments at both federal and state levels have grappled with energy and environment policies. Their objective of delivering a coherent and lasting policy framework that delivers investment in energy generation and supply to affordably meet the increasing demand of businesses and consumers while meeting Australia’s international greenhouse gas emissions commitments remains elusive. 

The ASI supports a renewed focus on the development of a coherent national energy policy framework to deliver long-term stability and investment certainty to business, and an affordable and reliable electricity supply on which our factories, businesses, schools, hospitals and homes can rely. The ASI also supports the ACCC’s 2018 reports into Australia’s electricity and gas markets and welcomes recommendations that we hope will foster competition and bring down prices. We endorse the government’s commitment to give the ACCC an ongoing role in monitoring electricity prices and market behaviour and recommending reforms to ensure there is adequate competition.

The ASI position on energy and climate change

• The ASI strongly advocates a fair and equitable approach to addressing climate change, which delivers real reductions in global emissions
• The ASI supports the intentions of the international climate agreement developed at the 2015 Paris Conference of Parties as well as the Intended Nationally Determined Contributions of the countries where we operate. We recognise that the changes required to achieve these targets will require organisations around the world to reduce greenhouse gas emissions (GHGs) to transition to a more sustainable economic model. It is vital to our industry that these commitments are consistently applied internationally. We urge the Australian government to continue to exert influence to ensure continued global commitment to Paris and consistency in the application of these targets   
• Steel products play an essential role in sustainable development given steel’s inherent strength, versatility, long life cycle and endless recyclability. The recent surge in wind and solar energy installations has led to increased demand for steel in Australia
• ASI members are pursuing opportunities to improve energy efficiency in their operations, support the development of renewable energy and set targets to reduce the greenhouse gas intensity of its various manufacturing facilities.  

ASI major members have been warning of an imminent energy costs crisis for some time. 

This is now on us. 

Many major manufacturers had forecast electricity costs to increase by over 93% between FY2016 and FY2018, with gas costs increasing 33% over the same period.

These increases are being faced by manufacturers, businesses and households across the country – dampening investment and employment and squeezing household budgets, which, in turn, squeezes consumption throughout the economy.

• Energy is a major cost to all businesses and is a major threat to Australia’s competitiveness
  • As a trading nation, Australian industry competes with other nations, both as an exporter and as a local producer competing with imports
  • Capital flows to where ever the greatest risk-adjusted return is. The ASI has already heard of manufacturers undertaking serious reviews into whether they should move off shore
• The increase in domestic gas prices since 2015 has cost Australian gas users approximately $3.5 billion per annum. For electricity, the cost to users of rising electricity prices is over $3.7 billion per annum
• In part, these cost increases are the result of tightening of supply – reduced electricity generation capacity available after the closure of Hazelwood and demand for LNG exports putting pressure on domestic gas supplies
• But they are also a result of policy failure:
  • failure to have an adequate transition plan that would maintain affordable and reliable baseload electricity generation, while the country undertakes the long-term transition to a greater share of renewable electricity generation with storage
  • failure to allow exploration and development for new gas resources
  • failure to ensure that energy markets are as transparent and competitive as possible.

Potential impact of climate policy on industry competitiveness

Examining climate policies and their actual implementation sector-by-sector around the world (and particularly in competitor countries) provides some important lessons for Australian policy: 

1. Competitiveness issues are an inevitable consequence of carbon policies that focus on the production of emissions rather than consumption
   • All policies affect imports and exports differently, and the non-uniformity of policies around the world enhances this effect
2. The nature of the Paris Agreement puts Australia’s ability to remain competitive globally under pressure
   • The Paris Agreement allows for considerable variation between countries
   • In a sense, the prospect for uniform policy responses is further away under Paris 
   • This accentuates the importance of competitiveness effects
3. Focusing on outcomes at a macroeconomic level obscures what is going on at an individual sector level
   • Macroeconomic outcomes — e.g. an impressive reduction in emission growth in China in recent years — say nothing about the treatment of individual sectors within an economy and tend to hide underlying competitiveness effects
4. Competitiveness needs to be understood on a sector-by-sector level
   • Competitiveness matters to individual sectors and so the impact of policies must be understood at a sector level. If not, policies can unintentionally exacerbate adverse competitiveness outcomes
5. The implementation details of a policy are crucial
   • A range of case studies, and China in particular, illustrate the vast difference between the notional impacts of a policy and the actual impact ‘on the ground’
6. There is a big difference between the announcement of a policy and the actual implementation of that policy.

Australian policy development

The recent turmoil over energy and climate policy is having a significant impact on Australian consumers, businesses and our members. The Australian steel value chain is a significant consumer of energy. A coherent federal government energy policy that has the support of the state governments and offers improved long-term predictability of pricing and stability, certainty of supply and clarity over emissions reductions targets and strategy is essential to long-term investment planning within the steel sector. The ASI believes the National Energy Guarantee (NEG) that was proposed by industry and was close to being adopted as government policy was the right approach as it focused on reliability and affordability, as well as emissions reduction.

We now urge the new leadership and ministry of the federal government to redouble its efforts to develop a coherent Australian Energy and Sustainability Policy that can be supported by the state governments and by industry to attract investment in new power generation capacity and to provide certainty to industry.

This policy must explicitly account for competitiveness issues, not as an add-on or afterthought, but as part of the process of policy development. 

• The ASI supported the recommendations of the Finkel Review to improve the reliability and security of the National Electricity Market. However, these recommendations won’t address the causes of the energy price crisis in the short-term
• Australia’s baseload generation mix is almost uniquely reliant on coal-fired generation. Unlike most other major developed economies that have nuclear generation in their mix, Australia doesn’t. Many make much greater use of gas generation than Australia, which lags in this regard because of the very high domestic price of gas
• Australia doesn’t lag in renewable and hydro generation – however, the amount of electricity we produce from these sources is very close to the average for the major economies
• Because of the fragility of our baseload generation mix, we need to be very careful about any policy that puts it at risk
• Australia’s energy policy must:
• recognise that the transition to a new energy model over time will need to balance the (competing) objectives of affordability, reliability and emissions reduction. The transition and the end game are different stages of this journey
• be agnostic in terms of energy generation technology – provided that the three objectives are balanced (renewables need to reflect the cost of making them reliable/dispatchable, while all energy sources need to reflect their environmental impact)
• provide policy certainty that supports necessary investment in new capacity
• ensure there is adequate competitive tension in both generation and retail to prevent the gaming of the system, including amending National Electricity Market (NEM) rules where necessary to prevent such gaming
• change the narrative and talk in terms of regaining our competitive advantage in energy cost and transition to lower carbon environment that meets our climate commitments
• Gas is a very important transition fuel but is currently very expensive for two reasons: what reserves we do have are being sold overseas; and new supply is being restricted in some states (even conventional gas is under a moratorium in Victoria)
• The formerly proposed NEG began to address Australia’s energy crisis by ensuring that policy focused on reliability and affordability, as well as emissions reduction. This approach was fairer – because it was designed to ensure an affordable and reliable dispatchable electricity supply, on which our factories, schools, hospitals and homes rely – while also reducing emissions
• The proposed NEG gave electricity retailers a lead role in implementing the reliability and emissions targets. It remains very important that retailers (and gentailers) do this in a way that is transparent and offers the lowest cost for electricity consumers
• It was proposed that the ACCC would have a critical role in monitoring the effectiveness of the NEG, including its effectiveness in reducing prices. The ASI supported the ACCC having an ongoing role monitoring electricity prices and market behaviour and recommending reforms to ensure there is adequate competition
• We support the ACCC report into the Australian energy market and welcome the recommendations within it that we hope will foster competition and bring down prices. This is the other side of the coin complementing the proposed NEG
• There remains a lot of detail to be worked through to develop and implement the policy framework required – either a new policy, or to move forward with the NEG (the devil will be in the detail):

1.     It is very important that the policy is robust enough (‘investment grade’) to attract additional investment in supply (particularly dispatchable supply) to put downward pressure on prices. The Energy Security Board (ESB) states that a greater level of contracting with existing generation will encourage investment and offering of capacity into the spot market to meet contractual obligations (in this way, the proposed NEG represented a financial solution to a physical problem). It is not clear, however, whether retailers are currently over or under-hedged, whether the market will need to be over-contracted to meet physical reliability standards, and therefore whether increasing contract volumes will deliver more physical capacity

2.     Care will be required in the design of the policy to ensure the additional costs required to satisfy the reliability and emissions guarantees do not counter the improvements in affordability anticipated through increased supply. Reliability and abatement should not come at any cost. And the cost of compliance should not be under-estimated – compliance requirements need to be fit for purpose without being onerous and costly to large energy users and other consumers

3.     The proposed NEG represented a significant shift in the way that the wholesale electricity market operates. The government needs to ensure that forthcoming policy supports an efficient market that has end users’ best interests at the forefront. There is a risk that meeting reliability and abatement targets via the contract market could: increase contract complexity; fragment current contract products; reduce transparency of pricing structures; decrease competition; decrease market liquidity

4.     The policy must include an Emissions Intensive Trade Exposed (EITE) exemption from the emissions-reduction component, as currently occurs under the Renewable Energy Target (RET)

5.     While the NEG is based on the electricity sector delivering a proportionate share of emissions reduction, it will be critical to understand the abatement policies that will be applied to other sectors and the abatement burden they will be expected to shoulder. The outcomes of the federal government’s 2017 climate change policy review are critical here.

We look forward to working with the federal government, regulators and the states to get that detail right.