Federalism, policy formation and the energy market transition in Australia

Proposed Study

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Aim of research

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The aim of this research is to analyse the implications of energy policy making within the Australian federation for the transition of the energy markets toward a low carbon emissions system. The key question to be answered is whether the energy regulatory and governance framework in Australia is adaptive to changing policy demands and is able to produce effective policy in the future.

The study will draw upon rational choice and institutional theory to analyse the cooperative federalism institutional arrangements that were put in place consequent to the Australian Energy Market Agreement (AEMA) (Council of Australian Governments 2002) in the early/mid-2000s and which form the basis of significant policy activity today.

The study will analyse the way that public policies aimed at effecting a transformation of the energy market are affected by the federal institutional arrangements. The effects of these institutional arrangements on policy formation and implementation will be analysed based on historic case studies, with a view to drawing conclusions about the positive and negative implications of these arrangements.

Context of research

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Need for energy market transition/transformation

The Australian government has acknowledged the need for a substantial transformation of the Australian stationary energy markets (electricity and natural gas) in order to achieve a radically lower level of carbon emissions, in order to fulfil Australia’s obligations under the United Nations Framework Convention on Climate Change Paris Agreement (COAG Energy Council, Commonwealth of Australia 2015). Stationary energy accounts for roughly half of Australia’s carbon-equivalent emissions (Department of the Environment 2015). This calls for a process of transition. A transition can be defined as “transformation processes in which society changes in a fundamental way over a generation or more.” (Rotmans 2001) This definition is apt because change in the energy sector is expected to be profound and ongoing until at least 2050.

The notion of an energy market transition is a multi-dimensional one, incorporating not only far reaching technical changes to the technologies and techniques used to coordinate complex energy systems, but also implies a need for supporting commercial, legal, institutional and sociocultural measures (Rohracher 2008). The need for such transitions is recognised in a large number of countries which have historically depended significantly on fossil fuels for stationary energy, such as the United Kingdom (Energy 2050: making t...), Germany (Conceptualizing {Germ...), and China (Andrews-Speed 2012) to name a few.

Carbon intensive fuels have had a historic cost advantage and due to the asset specific nature of investment in the stationary energy sector and its major users, inhabit systematically important roles in Australia’s economy today. Commercial forces alone are unlikely to effect such a transition, and deliberating how to support the transition is a highly active area in public policy. Public policies can significantly affect the process of transition (Kern 2009, Rotmans 2001).

Relevance of federal institutional governance structures

Institutions and actors are important for policy formation. In particular, federations are thought to have significant implications for the process of policy making and effectiveness of administration (e.g. (Fredriksson 2009, List 2000, Fitzgerald 1996, Morton 1996)) as well as for the kind of ideologically informed solutions which are adopted (Weingast 2009).

Policy made in federal states is highly relevant to the climatic problems that the Paris Agreement seeks to address. Of the top 20 emitting countries (from the consumption of energy), 9 are federations, accounting for 46% of the emissions of this group. If we include the arguable de-facto federations of Spain and China this brings the total up to 81%.(Union of Concerned Scientists) Australia is responsible for 1% of global emissions from the consumption of energy.

The process of policy formation in federal states has notable features that have been the topic of academic research and scrutiny, and each of these may have a bearing on the formation of effective energy transition policy.11For instance: Federations may exhibit relatively high degrees of policy stability over time —(Tsebelis 2002) There are opportunities (and also hinderances) for states in federations to pursue policy innovation —(Kotsogiannis 2006) States may be put into a state of competition for financial resources, affecting policy —(Mintz) Federations provide a relevant environment for the diffusion of policy ideas between policy makers, resulting in divergence and convergence of solutions between states and between levels of government —(Shipan 2012, Carlson 2008)—.

The Australian energy policy context

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Energy policy in Australia is developed in a federal context, and one which is heavily affected by the commercial, legal, and institutional legacies of previous energy policy reforms.

Since the 1980s the electricity industries of many countries have gone through processes variously dubbed reform, restructuring, liberalisation or privatisation depending on the extent of the changes made and the ownership structure prior and subsequent to the reforms.

Australia underwent an energy reform process from the early/mid-1990s which restructured an electricity sector that was dominated by vertically integrated utilities owned by the State and Territory governments, supplemented by a mixture of municipal concerns and privately owned generators. Reform of this sector began in 1991 with moves to establish a national interconnected transmission grid to link up the then islanded state networks.

In 2001-02 a second major report was commissioned by the Council of Australian Governments (COAG) to take stock of progress to date and point a strategic direction for further reform. The COAG Energy Market Review (Council of Australian Governments 2002) recommended the establishment of a national energy regulator, harmonisation of regulatory arrangements between the states, greater consistency between electricity and gas regulation and a roll out of interval meters across the nation. This review set the agenda for many elements of the 2004 AEMA (and its later revisions). The AEMA therefore embodies many ideas both about what constitutes good policy, and what constitutes good institutional design, that were endemic to its era and were part and parcel of the same reform program.