Friday exclusive: What next for the Energy Security Board?
Born of politics: is it time for the ESB to design its own demise?
By Adam Morton
The Energy Security Board (ESB) was created in August 2017 with a clear and specific purpose. It would take chief scientist Alan Finkel’s blueprint for the National Electricity Market, commissioned by then-energy minister Josh Frydenberg, and breathe life into it.
Finkel made 50 recommendations, but in political and public terms the ESB quickly became attached to the toughest – coming up with a policy that could address the “trilemma” of how to ensure system reliability and lowest possible prices while reducing greenhouse gas emissions. When Finkel’s solution, a clean energy target, was rejected for not passing muster with climate policy sceptics in the Coalition government, the ESB was charged with designing its replacement: the national energy guarantee (NEG).
Famously, that failed even more spectacularly. It was at the heart of the political story of the year, having been formally adopted by the Coalition before growing internal unrest over emissions reductions led to both the policy and a prime minister being discarded.
The chaos in national climate and energy politics long pre-dates the ESB, but some energy industry observers still took this as evidence the board had not delivered. What was the point of it if not to find a policy that could win bipartisan support in Canberra?
“They’ve failed the main test,” says Danny Price, the managing director of Frontier Economics, a former advisor to the Coalition on energy and emissions policy and one of the ESB’s sharpest critics. “It was created to come up with a political solution. If you’re born of politics, you should be able to manage it and they clearly haven’t.”
Interpretations of the ESB’s role in the death of the NEG were muddied by it having blurred the line between advisor and advocate. Its chairwoman, former Sydney Water chief Kerry Schott, publicly urged the COAG Energy Council to sign up, prophetically warning it could slide off the table if not agreed by late August. By October, she appeared to be taking its rejection personally. “I’m still going through the stages of grief, and I haven’t left anger yet,” she told an Australian Financial Review energy summit. “I characterise the general state-of-affairs right now as anarchy."
It left some to wonder about the ESB’s role. But any doubts about its future, at least in the medium-term, were swept aside at the COAG Energy Council meeting in late October. The communique from the meeting made clear it would continue to be a major player in driving changes in the system.
Central role
Federal, state and territory energy ministers asked the ESB to draft amendments to national electricity law to bring in a retailer reliability obligation – effectively the part of the NEG that remained when the emissions reduction obligations were stripped out. The amended draft bill is now open for comment. Schott and deputy Clare Savage, a former Business Council of Australia executive, will present the final legislation to the council’s December meeting. The obligation should be in place by July.
The ESB will provide recommendations for any rule changes needed to deliver an integrated system plan, advice on a “long-term, fit-for-purpose” framework to support reliability from the mid-2020s and present a forward work program for ministers to endorse. An ESB spokeswoman says other ongoing jobs include work on several of the Australian Competition and Consumer Commission (ACCC) retail pricing recommendations.
It is notable that the ESB’s name appears throughout the communique, but the existing market bodies – the rules-making Australian Energy Market Commission (AEMC), the law-enforcing Australian Energy Regulator (AER) and the system-running Australian Energy Market Operator (AEMC) – barely get a look in. While the Australian Competition and Consumer Commission has assumed focus as the federal government’s main energy advisor as it strives to show it can bring consumer prices down before next year’s election, the ESB remains firmly in the plans of the energy ministers.
“Whatever happens federally, whoever wins the next election, it will still have a central role to play,” says one COAG Energy Council insider of the ESB. “Whether it would continue or not is not even a question that has even been discussed.”
The view inside and outside the Energy Council is that the states like the ESB primarily because they can direct it and get quick responses. Early concerns within the council that it was too focused on doing what Malcolm Turnbull and Frydenberg wanted - a perception not helped by the five ESB board members directing some written advice to the federal government rather than the council - have subsided since the leadership change in Canberra. Having dropped the NEG, Scott Morrison and new energy minister Angus Taylor are focused elsewhere.
Does the rationale stand up?
The ESB started life as a recommendation in Finkel’s blueprint. He suggested it would bring the three market bodies closer together to make the energy system more adaptable, with faster rule changes, improved monitoring and better long-term planning. The five-member structure - an independent chair and deputy plus the chief executive of AEMO and the chairs of the AEMC and AER - was also his team’s idea.
Several observers say the goal was primarily to bypass the AEMC, which some see as slow and conservative in delivering the market rule changes the states and some industry players wanted. Where the AEMC has independence, the ESB can be instructed to work in areas the ministers saw fit. Thinly staffed, it is reliant on other agencies and departments for resources, further blurring its role.
According to Price, the result is a governance nightmare, with the AEMC all-but sidelined and AEMO chief executive Audrey Zibelman, a vocal reformer recruited from New York, getting a greater opportunity to push the rule changes she believes she needs to run the electricity market. That AEMC chairman John Pierce is understood to be alone on the ESB in opposing changes that influence the energy market's operation exacerbates the issue.
“The big problem is the ESB just ran over the top of the processes already in place, and too many people don’t understand that those processes were crucial to encourage investors,” Price says. “A new government should come in and kill it off straight away.”
Bruce Mountain, director of the Victoria Energy Policy Centre at Victoria University, highlights another issue: that putting the leaders of the three energy market bodies on the ESB makes it difficult for their organisations to draw contradictory public conclusions.
"The energy minister and prime minister repeatedly spoke of the ESB as independent experts. Why do independent experts need to be corralled into one organisation that then speaks for them?” he says.
He says the involvement of the AER, AEMC and AEMO in the ESB should be reconsidered. “Independence means that leaders of those authorities, and their key staff, should be welcome to critically appraise policy proposals and speak their mind without fear or favour.”
Pierce recently proposed another solution, telling the Australian Financial Review summit that energy could benefit from an arrangement similar to the Council of Financial Market Regulators, a non-statutory body that is led by the Reserve Bank and designed to improve efficiency and promote stability in the sector. He said it would ensure a formal process through which the bodies could work together, with top down coordination. Pierce declined to comment for this story.
Moving forward, moving fast
Tennant Reed, principal national advisor at the Australian Industry Group and an energy market expert, is more positive about the ESB’s role. He believes much of the criticism stems from the Coalition abandoning the NEG and argues it should not carry that blame. “I think that effort was well intended and there are still many useful things for it to do,” he says.
Reed says the ESB is less risk averse and takes a bigger picture view than any one statutory body can. Both are important at a time of major transition in the market.
He says the ESB, and Schott and Savage in particular, is uniquely placed to drive an integrated system plan and to quickly recommend legal changes to ensure long-term reliability. While the NEG is off the table this side of an election, he expects the push for a “trilemma” policy – including a mechanism to reduce emissions – will pick up pace next year. “Nothing of substance on emissions is likely to get done until after the federal election, but once we get there the ESB is well placed to do it,” Reed says.
Tony Wood, energy program director at the Grattan Institute, says the ESB has support from both the Coalition and Labor and expects it will continue whoever wins next year’s election.
In the short-term, he says its reputation will be enhanced if it can deliver meaningful recommendations for a reliability obligation before Christmas. In the medium-term, it could benefit from the Energy Council clarifying its role, including giving it a greater budget so it is less reliant on other agencies.
But he stresses it was always meant to be a short-term body. At some point before 2020, he says, attention should turn to how the AEMC, AER and AEMO will work together without it.
“The question ahead for the ESB is to design its own demise,” he says.
Adam Morton is a freelance journalist based in Hobart. He also writes for Guardian Australia, Nature and the BBC. He was an editor and senior writer for The Age.