Market approach to energy
The Australian energy sector is a byzantine mess of government mandates, bans, taxes, subsidies, and more government agencies that most people can remember. Australia does not have a properly functioning energy market — we have a complex energy bureaucracy that operates through central planning and top-down control.
Central planning has a poor track record, and unsurprisingly our centrally planned energy sector is suffering from the predictable problems of mal-investment, inefficiency, and shortages. Equally predictably, the political response to inefficient central planning is to suggest even more subsidies, mandates, and government agencies designed to impose more bureaucratic solutions.
The recent spike in energy prices in Australia is partly caused by poor investment decisions in the past. Investment in coal-fired power was not maintained, while investment in alternatives was insufficient to fill the gap. In response, some commentators are now calling for more coal power investment while other commentators are demanding more alternative power investment, but what both sides have in common is the implicit belief that these sorts of investment decisions should be made by a central planner.
The market approach is to remove distortionary taxes and subsidies, legalise all energy options (including nuclear), relax the onerous red and green tape that often strangles new investments, address the political risk premium, and then let competing energy producers make their own decisions. Suffice to say, energy bureaucrats hate this approach because it reduces their power and influence, and prevents them from picking winners.
The point about the political risk premium is crucial. The energy sector involves very long term investments, and if there is a legitimate threat of heavy-handed political interference in the future, that presents a very real threat to current investors. As advocates for coal power point out, the threat of anti-coal political activism has created a large political risk, leading to the underinvestment we see today. The solution to high political risk is either to create long-term policy certainty (which is difficult in this age of energy activism), or to introduce a system of regulatory compensation, where current investors are guaranteed that they will be fairly compensated for the impact of future political activism.
A competitive market approach to energy would incentivise more investment in efficient and effective long-term energy supply. If wind and solar power are becoming cheaper than coal and gas (as often claimed) then a competitive market will shift towards renewables naturally, without the need for mandates or subsidies. If coal or nuclear power are more affordable and/or reliable, then they will attract further investment. The market system is politically neutral and so it doesn’t guarantee any particular mix of technologies. This is good news for people who want cheap and reliable energy, but it’s bad news for bureaucrats and activists who want to centrally plan our energy future.