Signals of change

From global risk assessments and climate adaptation to the complexities of ‘free’ electricity offers, Alan Pears looks at some of the forces driving change in Australia’s economy and energy system.

Accelerating and increasingly disruptive global and Australian change

Our media is flooded with coverage of wars, tragedy, transformation of politics, and the risks associated with dependence on other countries for energy, essential products and services. Much of this is alarmist and reactive. But this trauma and chaos are opening up disruptive change—both positive and negative—with some negative changes actually driving positive ones. For example, US President Trump’s efforts to kill off clean energy and climate action are backfiring, accelerating electrification, local energy solutions and renewable energy.

So, it’s interesting to look at the risks perceived by global business leaders, such as the members of the World Economic Forum in their most recent survey of member views on risks to business, shown in the graphic. Although this survey was conducted before the recent conflict, geoeconomic confrontation—polite language for inter-country conflict—was the top perceived risk over the coming two years. Misinformation and disinformation, and societal polarisation, came next. WEF members seem to have got those right.

Fourth comes ‘extreme weather events’. WEF members seem to accept climate science and can see the disruption caused by increasingly extreme weather events. More interesting is that, over a ten-year timeframe, they rate extreme weather events as the top risk, followed by ecosystem collapse and critical changes to Earth systems. It seems that WEF members understand that the increasing frequency and intensity of extreme weather events have broad impacts on businesses.

Of course, this doesn’t mean they will all innovate rapidly. Many CEOs and board members will be aiming to maximise short-term profits and delay or undermine some policies, especially if they are nearing retirement. They are paid to deliver profits, not help save humanity and the planet. The challenge for governments is to develop frameworks that incentivise actions that deliver both.

In Australia, mandatory disclosure of carbon emissions by major businesses—not just emissions-intensive ones—is being phased in. The Australian Accounting Standards Board and ASIC approach, under the Corporations Act, is an example of a mechanism that can deliver both outcomes. It is focusing company boards and senior management on their own emissions and those of their supply chains. Regulatory requirements include mapping out strategies to reduce emissions and evaluating business risks associated with climate change. Public disclosure makes this a reputational and ‘licence to operate’ issue. There are quite a few webinars, websites and consultants chasing this work.

Recent surveys of the Sydney and Melbourne office building markets showed strong interest in, and high occupancy of, low- and zero-carbon office space, while vacancy rates in the rest of the market remain high. Smart office tenants are repositioning.

Australian politics
State governments and potential federal and state governments have a range of climate policy positions, so there are no guarantees that present moderate progress won’t be dumped. But shifting business and community perceptions may have interesting implications.

The lived reality will create challenges for politicians. For example, Victorian Liberal leader Jess Wilson was Director of Energy and Climate Change at the Business Council of Australia. At that time, the BCA took a constructive approach to climate policy, supporting “accelerated action to reduce Australia’s national emissions” and the transition of the Australian economy to net zero by 2050 “in an orderly and economically prosperous way”. The BCA argued that emissions reduction and economic prosperity could be pursued together, reflecting a broader shift in business attitudes towards climate policy.

When campaigning for the state seat of Kew in 2022, she advocated for climate action: “Taking action on climate change and paying less for electricity are important issues for Kew locals, including me. That’s why we’re acting.”

Yet she now leads a party with a very different perspective on climate issues. It will be interesting to see how her position, and that of the Liberal Party, evolves as the lived experience of climate change becomes more visible and federal government regulatory measures, community pressures and business perceptions of risk continue to build. For example, Infrastructure Victoria’s recent climate risk report states: “Victoria faces an escalating climate challenge that demands urgent action … Victoria’s infrastructure will face increased climate risks.” The report paints a challenging picture of the emerging costs and disruptions. It highlights the need for much greater focus on preventive action, which is typically more cost-effective than repair and reduces the risk of disruption to communities and the economy.

Other Infrastructure Victoria reports, such as Weathering the Storm, explore practical actions that could reduce impacts.

‘Free’ power and retail energy pricing
The dilemmas facing retail energy consumers are becoming increasingly complex.

The proposed ‘free three hours of power’ schemes mean that electricity retailers and network operators will make a loss during those periods, as they face some unavoidable costs unless abundant renewables and inflexible coal generators drive prices negative. This means consumers who can’t, or don’t want to, shift demand will pay more—unless other creative solutions emerge. The electricity tariffs proposed by retailers in NSW, Queensland and South Australia have been released, as shown below.

Some retailers will charge very high prices between 3pm and 9pm, while others will charge very high fixed daily charges. I suspect that not many consumers will choose to adopt these tariffs, for reasons I outline below. While the promise of free electricity has been a vote-winner, other options could have been attractive but less disruptive. For example, consumers could be paid a bonus on each bill, based on the cost reductions resulting from the use of cheap renewable electricity. Seasonal variation in the price discount could be linked to seasonal variations in solar and wind generation and changing demand.

The ‘free’ option is clearly not free when the tariffs being offered are considered. If we look to potential future problems, governments may have to backtrack. Coal-fired generators still provide quite a lot of daytime electricity; and their lack of flexibility displaces renewables and drives low and negative prices. When they are retired, daytime wholesale prices may be higher.

Emerging technologies will also compete to use cheap daytime power, potentially driving up prices for renewable electricity. Tasmania already imports a lot of cheap ‘excess’ renewable electricity so stored water can be conserved for the generation of high-priced electricity exports to Victoria, especially in winter, as outlined in the 2024 Institute for Energy Economics and Financial Analysis (IEEFA) paper that Amandine Denis-Ryan and I published. Pumped hydro projects such as Snowy 2.0 will eventually seek cheap power to pump and store water. Industrial high-temperature heat technologies such as E-TES (electric thermal energy storage) need to use low- or zero-emissions electricity to heat their storage capacity.

I am on a tariff that gives me cheap electricity, at under 10c/kWh, for five hours each day, but I pay 34c/kWh the rest of the time—5c/kWh more than the flat tariff.

I must make a decision based on mathematics and an assessment of probabilities that, overall, I will be better off on this tariff based on my likely usage patterns. Many Australians with limited numeracy struggle with such analysis. And my retailer can change the tariff structure. I suspect that one reason for the low level of trust in the energy sector is that many people feel that being charged high prices at times when they believe using electricity is essential or important is a form of exploitation. Many buyers of solar systems have felt let down by regulators and retailers as feed-in tariffs have crashed. The low level of interest in Virtual Power Plants, which allow energy retailers to ‘manage’ the operation of equipment a consumer has paid for—even if the retailer has contributed to the cost—is not surprising to me.

When people buy appliances or a building, they lock in significant parts of their energy consumption for many years. Often those decisions involve many factors beyond energy, or even no consideration of energy at all. So they may perceive that most of their potential to ‘flex’ would come from changing behaviour in ways that are not appealing to them. Enthusiastic adoption of rooftop solar and, more recently, batteries often reflects attempts to take some control, rather than risk exploitation by allowing third parties to manage them for profit.