Fuel for thought: Grattan Institute’s Tony Wood

Grattan Institute energy program director Tony Wood
Grattan Institute energy program director Tony Wood

ES&D catches up with the energy program director of the Grattan Institute – the country’s leading think-tank on public policy reform – to explore the interface between policy and investment, and the importance of ensuring regulation doesn’t get in the way of change.

ES&D: You joined the energy industry in 1994 and have been energy program director at the Grattan Institute for four years, in the thick of an unprecedented period of disruptive technologies, tariff reform and climate change policy. What’s it been like working in a think-tank amid such upheaval?

Tony: It’s been an interesting rollercoaster. Back in the early and mid ‘90s there was expectation energy was a pretty boring industry. It was mostly vertically integrated electricity and gas, mostly government-owned and we produced most of our electricity from coal – and that looked to be the way of the world for a long time yet. But that began to change around the time of the National Competition Policy (Hilmer) Review, and the introduction of privatisation and competition policy. The Kennett Government started the whole process, somewhat out of budget necessity, selling off the network businesses, and change has been a constant for the energy industry ever since.

We’re now seeing climate change emerge as a fundamental issue for the energy sector, certainly in countries like Australia, but also just about everywhere in the world. And finally, for the first time we’re also seeing changes in technology and consumer preferences starting to have an influence on the way in which electricity is bought and sold, as well through things like PV on roofs, battery storage and so forth. It’s been a remarkable journey.

ES&D: The Grattan Institute is independent, relying on fact-based analysis and lively debate to change the minds of policy makers. But surely this is challenging given the energy industry is – particularly at the moment – so politicised.

Tony: It’s been a difficult time, particularly because of the politicisation of climate change policy since the early 2000s. This is because two-thirds of the greenhouse gas emissions produced in Australia come from the energy sector, so what we do with energy and what we do with climate change policy are inextricably linked. And yet, the Federal Government’s Energy White Paper, which was published only a few months ago, gives hardly any recognition of this importance. Climate change policy has even been partially responsible for the demise of a least two prime ministers, Kevin Rudd and Julia Gillard.

So, it’s been a very politicised issue, both between the two major parties and even inside parties. Of course, it’s also an issue where the Greens have played a significant role. So when you look at what could have happened and what has happened, while most people would feel we’re one of the only countries to have removed a carbon price policy, it’s not true to say Labor or the Greens have been free from culpability of the situation we find ourselves in today.

Most of the other areas of energy policy, however, have been situations in which there has been broad bipartisan support. Every now and again you see situations, such as in the recent elections in Queensland and New South Wales, where there was certainly some push back on privatisation. But at a Federal level, we’ve had bipartisan support for many issues associated with energy, including competition policy, the whole issue around the gas industry and even the concept of nuclear energy.

ES&D: Are we in a situation now where investment uncertainty will hinder the development of renewables in Australia?

Tony: Uncertainty around policy will hinder investment in the energy sector full stop – renewables or nonrenewables. I’m not sure categorising everything as renewables or non-renewables is actually the most effective way to go. If it wasn’t for climate change, we would continue to produce all of our electricity from coal. It’s not as if we’re running out of coal – environmental damage is the only reason we’re looking to use something other than coal and the fact we don’t currently include the environmental cost of producing power from coal in the cost of coal-fired power. But we do have climate change and one way – not the only way – to reduce greenhouse gas emissions is to have more renewable energy. So the question becomes, “how do we start a transition so we are seriously decarbonising our electricity sector in the next 30-40 years?”

ES&D: Given this is an industry that grew up in the last 120 years, 30-40 years isn’t a long time to undergo such a dramatic transformation.

Tony: Indeed, it’s a very short period of time and, because of that, there are big challenges to face. The absence of a clear policy framework, or a long-term carbon price, is the biggest challenge the industry faces in the period ahead. There are other challenges, but this is the biggest. What we should have is integrated energy and climate change policy, but we don’t.

ES&D: How does the Institute prioritise the most pressing problems faced by the energy sector? Funded by companies and philanthropic
organisations, surely the Institute can’t enter into every debate.

Tony: Actually, given we’re interested in the important policies – those having a significant impact on Australia’s full economy, including the non-cost of environmental damage – it’s pretty simple to identify half a dozen pressing issues at any one time. We do follow criteria. If a problem is going to be solved by commercial decisions without policy intervention, then we aren’t interested. Fundamentally, Grattan is a policy think-tank, so it has to be an area where one of the challenges is policy. And of course, climate change and energy are very policy-driven. We also have to be satisfied we can identify and make recommendations on policies that will improve outcomes.

ES&D: What’s the Institute’s history with climate change policy, and will it stay a part of the debate moving forward?

Tony: We did a lot in the climate change space three to four years ago. In the very recent past we haven’t done major pieces of work on climate policy because it’s been so politicised. But as we move into the next phase, once Australia sets its post-2020 greenhouse gas emissions reduction targets, we will certainly have some more things to say in regards to what policies are most effective.

ES&D: A number of scenarios have recently emerged for Australia’s energy future, one where consumers leave the grid on mass. Is this overestimating the impact of distributed generation?

Tony: Because of all the uncertainty we‘ve talked about, anyone who thinks they can forecast anything in the energy sector is having a lend of themselves. If you look at the reality of the situation in Australia, the vast majority of consumers live in urban cities, they are connected to the grid, they are used to an extraordinarily reliable system and it is, broadly speaking, pretty affordable. In the past five years, electricity prices have risen above cost of living – thanks to poor regulation. But even then, this is not the issue that drives most people’s day-to-day lives. If you look at a typical household, to be able to produce your own electricity from solar with some sort of battery storage you would need a roof several times larger than most households have, and you’d need a battery. The total cost might be around $70,000 or $80,000. You’d also have to be willing to go for 10-15 days a year on average without electricity. So in short, a mass defection from the grid is very unlikely. You’d need to see some massive breakthroughs in both battery and PV, beyond what anybody is currently expecting for this outlook to change. There will be some people who feel very passionately about leaving the grid, who are prepared to pay $60,000-80,000 because they can, and they’re passionate about it.

ES&D: What about embedded generation? Will this change the way electricity is purchased and consumed in the near future?

Tony: Certainly, there are parts of the system in rural and regional Australia, and even on the fringes of the grids, where people and communities will choose to put embedded generation or embedded storage in the grid itself, rather than investing more into the grid and making it bigger. That’s definitely a change we can envisage. At the end of the day, electricity is electricity is electricity. It’s not like a new mobile phone in a sense it gives you more in the way of telecommunications. Electricity is the same stuff, but what will change is, at certain points of the day, you’d be buying electricity from the central system, and at other times you’ll be selling it back to the central system. If we do what we were just talking about, having PV on our rooftop and batteries and so on, we’ll be using electricity at the very least as back up. And we’ll be paying for it differently. So the fundamental role of the networks will change, and the economic model will change.

ES&D: If we manage the transformation into the new electricity system poorly, consumers will pay in the way of subsidies and charges. If it’s done well, industry and consumers will benefit from a more efficient, sustainable and affordable system. How well are we tracking?

Tony: There are a few critical areas we have to catch up in, and some where we will have to take a more long-term view. I’ll quickly cover three of these main areas. Firstly, as a result of a lot of the things we’ve been talking about, the fundamental nature of the network is changing, and yet the way we price and pay for the network hasn’t changed. Network tariff reform, for good reason, should now be at the top of the energy reform list for the COAG Energy Council. From a policy perspective, it’s not going to be easy and governments will baulk at the challenge. Even though network tariff reform would result in fairer and eventually cheaper energy prices, there will be losers in the short-term, and governments don’t like doing anything that creates losers in any way shape or form.

The second area revolves around the National Electricity Market itself; the supply side. How does the market, which has been built around very large coal and gas power stations, continue to provide electricity efficiently, reliably and affordably, amid a fundamental change in the physical nature of electricity supply? That’s an open question, and one we need to be asking. Otherwise we could see some of the same problems happening in Australia that have already happened in Europe, in terms of a lot of uncertainty and financial stress on the sector.

Thirdly, we have an absence of clear policy direction on climate change – and this is going to get worse and worse and time goes by. The only reason it has not got worse in Australia already, despite the debate we’ve already had over the RET, is because of a combination of falling consumption and oversupply. No one has to actually build anything new because the market is oversupplied. But as that market moves towards being in balance, as it will do in the next 10-15 years, then there will be a big issue.

ES&D: What about the Australia’s commitment to climate change on an international level?

Tony: We do have a major challenge in terms of what we’re going to do internationally about our commitment to climate change and what it means for our energy sector. The biggest issue is to get bipartisan support broadly. Both sides of government are never going to agree on everything, but they do need to commit to being a part of the global movement to address climate change in a unified way.

Now the Government has announced its targets, we need to have a sensible domestic policy, and that has major implications for the national energy sector. Today we generate 83 per cent of our energy from coal and gas, and there are many people who argue to be a serious part of the game, we have to generate zero per cent electricity from coal and gas in something like 35 years time. That’s not very long.

ES&D: Most of what you’ve discussed would typically be addressed by an economist, yet you’re not an economist. Instead, you’ve described yourself as an “industrialist-turnedenergy-policy-botherer”. How has your background enabled you to bring new ideas to discussions surrounding energy policy?

Tony: What interests me is the interface between policy and investment. Policy for it’s own sake doesn’t make sense. What’s the point? The point of policy is to produce outcomes we all want, which is affordable, reliable and sustainable energy – and good policy produces the right investment to do this.

For the middle part of my career I was with a part of Boral Energy, which then became Origin. It was a fantastic opportunity and I saw a lot of the change I’ve been talking about at this company. I then worked with the Clinton Foundation and, in various parts of the world, I had the opportunity to see first-hand how difficult energy issues are in countries like China, Malaysia and India, and in the Pacific, in Vanuatu and the Solomon Islands and the like. I then worked with Professor of Economics at the Australian National University Ross Garnaut in the middle of all that in 2008-2009 on his Garnaut Climate Change Review. That’s where I started to became seriously interested in good
policy and how the world is responding to climate change. The Clinton Foundation was all about asking, ‘how do you solve the problem’ and ‘how do you harness the engine of commerce to deliver an outcome we all desperately need?’ So I’m in a somewhat unusual position, to have
that background in investment and to combine this with an interest in policy to hopefully have an impact on this debate. And of course, I’m surrounded by a team of very smart economists at Grattan.

ES&D: It’s certainly an interesting time to be finding solutions to some of the country’s most pressing energy problems.

Tony: You wouldn’t have predicted this 20 years ago, but here we are. Sometimes you can severely swing between overwhelming naïve optimism and pessimism, but that’s what makes this industry interesting and what keeps our brains working. Hopefully we can bring something useful
to this debate.