South Australia's energy plan deals a blow to state-federal relations

The last couple of days have brought the differences between state and federal energy policy into stark contrast. South Australia has unveiled an energy plan in which the state takes a much greater role in the energy industry. The plan includes storage, a new gas plant and greater powers for the state over the National Electricity Market.

SA has the highest proportion of wind energy in Australia – and the federal government has consistently blamed this for the widely reported blackouts last year.

In a acrimonious joint press conference with South Australian Premier Jay Weatherill on Thursday, federal energy minister Josh Frydenberg reiterated that states are responsible for the stability of their electricity system. The federal government has cast doubt on the legality of the plan.

Is reliability a state responsibility?

The federal government has repeatedly claimed that the SA government can’t keep the lights on. More generally, it has implied that the states are responsible for electricity system stability.

Under the National Electricity Market (NEM) framework, these statements are somewhat misleading.

The SA electricity industry is entirely privatised. The NEM governance framework is run by national institutions under the Council of Australian Governments Energy Council, a forum of federal and state energy ministers. This framework is supposed to ensure the system reliably delivers electricity to all consumers.

System security and reliability are the responsibility of the Australian Energy Market Operator. Network investment is the responsibility of private network businesses, overseen by the Australian Energy Regulator.

This governance system leaves little space for the SA government to take action to ensure system security. On the contrary, the NEM was set up to remove direct government involvement in the electricity sector. This was because a market was considered more efficient to achieve the same service.

The federal government has blamed wind energy for SA’s reliability issues. But, even if wind is one factor among many, did the SA government exacerbate the risk of blackouts?

South Australia has actively encouraged co-existence of wind farms and farming activities in its planning legislation. Land use planning laws can have great influence on the uptake of large-scale renewable energy, as Victoria shows.

While state renewable targets have been blamed for uneven investment in renewable energy, the SA target of 50% by 2050 is not actually backed by a particular mechanism. Wind generators settled in South Australia because it has good wind resources and favourable planning laws.

They were financed under the federal Renewable Energy Target, but also by the ACT reverse auction schemes, which led to considerable investment in SA.

The review of the NEM, chaired by Chief Scientist Alan Finkel, will consider how climate and energy policies can be aligned. As the policymaker for the NEM, the COAG Energy Council should be the responsible authority, not individual states, to resolve any mismatch.

Is South Australia breaking the rules?

Apart from public investment in storage and gas, SA’s energy plan aims to give the state energy minister “strong new powers to direct the national market in case of an electricity supply shortfall”. The federal energy minister has implied that some of the SA plans may be illegal and that the government will be seeking legal advice.

But is SA breaking any rules?

The governance arrangements for the NEM are based on an intergovernmental arrangement, which relies on federal-state cooperation. The Australian Constitution contains no clear powers to regulate for energy. This means that having both levels of government work together to overcome these constraints was necessary to set up and manage a national electricity system.

The intergovernmental agreement that sets up the NEM is the Australian Energy Market Agreement (AEMA). All governments – state, territory and federal – have signed this. The AEMA covers the setting up of the market institutions and legislation. Based on this document, all states have passed state legislation that contains the National Electricity Law.

The AEMA includes provisions for amending legislation. These mean that only the COAG Energy Council can amend energy market legislation. Whether the council would agree to SA ministers getting special powers is doubtful.

However, the agreement is political and not legal. Indeed, one clause states that “this agreement is not intended to give rise to legal obligations” for the state and federal signatories.

Where does this leave SA’s plan? It does not break the law, but, depending on how the actual legislation is drafted, it may well fail to pass COAG.

A dangerous development or much-needed leadership?

Due to the limits of the constitution, intergovernmental arrangements play an important role in Australian policy-making. An increasing number of agreements covers areas such as water, environment or trade.

As we’ve seen with debate about the Gonski deal on education funding, these agreements require trust between all parties and should not be lightly departed from.

SA’s frustration with the lack of COAG leadership and the blame game for the blackouts is understandable. The SA energy plan may galvanise energy market reform and lead to a better system. It can be interpreted as taking leadership in the energy-climate debate, where none has been forthcoming from the federal government or COAG.

On the other hand, a danger exists that other states decide to follow SA’s example. With a review of the market in process, one-sided action seems counterproductive.

An agreement on a timely and fair energy transition needs all parties at the table. It will need national coordination and a whole-of-system perspective. Finkel’s task of overhauling the electricity market may just have been made even harder.