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House of Assembly - Fifty-Fourth Parliament, First Session (54-1)
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National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill

Second Reading

Adjourned debate on second reading.

(Continued from 28 February 2019.)

The DEPUTY SPEAKER: The member for West Torrens has the call.

The Hon. A. KOUTSANTONIS (West Torrens) (11:39): It is very generous of you, sir. Thank you very much. I am in great anticipation of this debate. Again, there is more national reform on energy from the COAG Energy Council. That COAG has been grappling—

The DEPUTY SPEAKER: Member for West Torrens, you are the lead speaker, I assume?

The Hon. A. KOUTSANTONIS: Yes, I am. Thank you very much again for your generosity in giving me time to catch my breath. Is there anything else you want to tell me?

Members interjecting:

The Hon. A. KOUTSANTONIS: Thank you very much for the interjections from the Government Whip. Again, we are here debating a national reform, a national reform that has been the subject of a great deal of controversy nationally. As we enter into the caretaker period of the commonwealth government, and then into an election campaign, with no doubt sometime over the next few weeks or months there being a general election at the commonwealth level, the issues we are debating here today will be debated at a much more fulsome level nationally.

Make no mistake, when an energy security board develops the retailer reliability obligations, I think developed by the Australian Energy Market Commissioner, Mr John Pierce (I hope I am not speaking out of school by informing the house of that), what we are enacting today is part of the National Energy Guarantee. But, of course, the part of the National Energy Guarantee we are implementing today is the part that has nothing to do with carbon—nothing to do with carbon whatsoever—because, for whatever reason, the commonwealth government cannot agree on a national energy guarantee, they cannot agree on energy policy, they cannot agree on a path forward to generate investment in the energy sector.

A wise investment in the energy sector is important for a number of reasons, the first being liquidity in the contracting market of the National Electricity Market. Liquidity is everything. What has caused the malaise across the country at higher wholesale prices is that large gentailers, that is, generators who are also retailers, have made sure that they have constrained the market, and by constraining the market they have created a market of illiquidity, They are not writing new contracts; therefore, the price of existing contracts is inflated and therefore wholesale power prices are higher than they should be. When wholesale power prices are higher than they should be, it is the consumer who suffers.

As the consumer suffers, we see through legacy privatisations and decisions of governments across Australia to either gold plate their infrastructure through transmission and distribution, and then, of course, to pass on those costs to consumers. The most modern example of that is the current government, which, before the election, was promising a $200 million injection of taxpayer funds to lower the cost of an interconnector between New South Wales and South Australia. They have now withdrawn that money. That money will now be paid in full by the consumers; therefore, the promise of a $200 million reduction in infrastructure costs through a regulated return that will be charged to consumers is now gone.

The Treasurer has pocketed that money and members opposite unanimously support it, which is an interesting point of view given that the government opposite has been claiming that they want to lower power prices, that they went to the election promising a $200 million injection into the construction of an interconnector, but have now withdrawn it, which means that that cost will be borne by consumers. Congratulations to members opposite: you saved yourselves $200 million and charged us the rest, not that I think the people of South Australia will congratulate you on it, but I suspect that they will be very disappointed.

The government has been very generous in giving me a briefing on what the National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill does, no doubt the same briefing that every member of this parliament had. To avoid members of the government reading out the same advice I was given, I am going to read it into the record so that we do not have to duplicate the process over and over again and we can get this important national reform passed. I point out to the minister and government members that the opposition will support this legislation through all stages of the parliament, unamended in this house and the other.

In order to enact this legislation as quickly as possible, I recommend to the house—but I do not think the house will accept my recommendation—that the minister and I be the only speakers. No doubt members opposite are going to inform us of their knowledge of the retail reliability obligation from the important notes handed out by the minister, which was very generous of him.

Mr Patterson: Don't underestimate our team. Don't underestimate them.

The Hon. A. KOUTSANTONIS: No, I don't underestimate your team. I know exactly what they are capable of.

Mr Patterson: They are very, very capable.

The Hon. A. KOUTSANTONIS: I know exactly what they are capable of. I have seen it firsthand. Apparently, according to the minister, contracts provide retailers with a more consistent price for electricity—thank you to the government for that piece of advice—which in turn, apparently, according to the government, allows them to write longer term contracts with consumers. For generators, apparently, contracts provide a steadier stream of income. This firmed revenue enables them to obtain financing for new investment. What the government is attempting to do is give more certainty to the retailers in the hope that with this obligation, whether there is a shortfall or not, those retailers will attempt to secure new generation, either by contracting it or building it themselves, because they are being made more profitable.

For generators, the firm revenue will enable them to obtain finance for new investment. Further, for generators, greater levels of contracting will have the effect of increasing their commitment to operate their generation, as a failure to generate at times that they are contracted to would leave them exposed to financial risk, the government says. In other words, sometimes generators do not dispatch, sometimes they do not offer their generation to the market and, as a consequence, wholesale prices increase and retail prices increase. The government is hoping, by writing more contracts, that there is a greater incentive.

An honourable member interjecting:

The Hon. A. KOUTSANTONIS: Yes, they are the ones who drafted this. Yes, I know—or because they do not want to have a price on carbon. The Retailer Reliability Obligation is probably the largest form of government intervention in the electricity market that we have ever seen. This basically changes the market forever. We will no longer have a free market. It will be a highly regulated market, and I know members opposite are big fans of regulated markets—

Mr McBride interjecting:

The Hon. A. KOUTSANTONIS: No, I did not change the market. I did not want a market: I wanted government-owned utilities. I do not believe in markets in monopolies, in the same way that members opposite say they do not believe in a market for water. Apparently now I am hearing from the member for MacKillop that he does, which means a lot of things for SA Water, which I will expand upon later on, so thank you for belling the cat, member for MacKillop.

An honourable member: Very interesting.

The Hon. A. KOUTSANTONIS: It is very interesting that he believes in markets in all circumstances for all commodities at all times. I do not. I do not believe that essential utilities, like electricity, should be unleashed on South Australians as a monopoly and then pretend somehow that it is a market, and then come back 20 years later after a privatisation and say you are bringing in a retailer reliability obligation. It is basically saying that you failed. Anyway, we will go on.

The government tells us that the Retailer Reliability Obligation is designed to incentivise retailers despite it being a regulatory obligation, and other market customers—that is, liable entities—to support the reliability of a National Electricity Market through their contracting and investment strategies. That is, the ESB, AEMO and AER want to dip in and get hold of the capital of shareholders of these private companies and use it to improve the liquidity of the National Electricity Market, something I am sure every conservative member of the government would support across the board. I can see the member for Morphett smiling in agreement.

An honourable member: A very good member.

The Hon. A. KOUTSANTONIS: He is a good member, a much better member than he was a footballer, I understand. That is what your colleagues have told me. I do not know.

The Hon. D.C. van Holst Pellekaan: He's good at both.

The Hon. A. KOUTSANTONIS: He's good at both, the minister says.

Mr McBride: In your dreams.

The Hon. A. KOUTSANTONIS: In my dreams, the member for MacKillop says, assisting me again. The government tells us that the retailer reliability obligations are designed to incentivise retailers and other market customers liable to support the reliability of the NEM. Through their contracting and investment strategies, liable entities are expected to contract in a variety of ways to meet their reliability obligations.

To unpack this for the free marketeers opposite, if you want to participate in the 'National Electricity Market' (and I say that in inverted commas for Hansard), you will be given these obligations and you will meet these obligations or suffer penalties. That is all fine; we are supporting this. The government goes on to say that the obligation should increase contracting—it does not say that it will, it does not say that it is inevitable, it says that it should increase contracting to reduce the risk of reliability shortfalls by incentivising deeper and more liquid contract markets, reducing wholesale spot price volatility. Let's unpack that a bit.

The government, the commonwealth government and all the COAG states, all the NEM states, including this government, believe that by grabbing hold of existing retailers and applying these stringent regulations about what they should do with their capital and when, the people outside the NEM are going to rush in and say, 'What a great market. I have to get involved in this. I want to get a piece of this myself,' and increase contracting and decrease volatility in the wholesale market by somehow increasing competition by having more contracts written.

Apparently, it will also increase demand response. Let's unpack that. Demand response can be two things: it can be a generator sitting idle that is not part of the NEM coming on, but traditionally it is a very large user in the NEM being told to get off. The member for MacKillop will be well aware of the Portland smelter, which is like a circuit-breaker for the Victorian electricity market, and those employees are constantly under the sword of Damocles, as it were, about having to be shed to deal with demand response.

Of course, it can get a lot more detailed when households are incentivised to turn off their air conditioners and just leave the fans going, that is, the compressor in the air conditioner turning off, or where people who have batteries and solar panels to use a demand response, where you may be paid to go off grid for a moment during times of high demand, or it may be a forced demand response, where people load shed to meet these demands.

Importantly, the government believe and they are telling this house that the Retailer Reliability Obligation will increase investment in dispatchable energy. The free marketeers of the Liberal Party are telling us that by regulating new obligations on existing retailers to within an inch of this market's life, it will not scare off capital, it will not push investment away, it will actually draw more investment in to this market. They are courageous assumptions.

Again, we will support the government in their endeavours in this magical world where regulation of a market and a reliability obligation on retailers will actually mean that these retailers will go out and borrow more money and invest more money into dispatchable electricity in South Australia to avoid any penalties that the NEM, AEMO and AER will impose on those retailers who do not meet their obligations. Bold, it is bold. But, again, if you do not want to simply price carbon, this is the method you have to go through to incentivise investment. You have to use a gun rather than anything else.

The government tells us that under the Retailer Reliability Obligation (RRO) there is a high level requirement for AEMO, the market operator, to annually undertake an assessment on whether there are potential reliability gaps in the future.

Members interjecting:

The Hon. A. KOUTSANTONIS: I am glad that the experts are here. AEMO is being told by the Energy Security Board and COAG that their job now is to check gaps going forward. I would have thought that would have been core business for a long time, but apparently we are getting to this now.

If the market operator was told by the government assessors that there is a material reliability gap, it may make a request of the Australian Energy Regulator. So the market operator then goes to the regulator and the regulator makes a reliability instrument. This is where the beauty of the free market will kick in in the NEM, where the free marketeers of the government will now use regulation to use a government agency housed in Treasury in Canberra to tell the publicly listed investors in the energy market that they have a reliability gap and they have to invest more to meet that gap, or contract more.

So again I say to the government and the national bodies introducing this legislation: what a great incentive for new players into the market. Perhaps prices will increase so dramatically under these measures that it will attract new players into the market; I do not know. But if this measure is to lower household prices, and there is a massive regulatory burden put in place on shareholders and their capital and what they do, I am not quite sure how you get the new investment. I am sure the minister will explain that in his concluding remarks.

The government goes on to tell us that should the regulator make a reliability instrument it will trigger an obligation on energy retailers (which they love; any company would love these new obligations on them) to contract with generation, storage and demand response so that there are sufficient contracts in place to meet their share—which will be calculated, no doubt, by some experts somewhere sitting down working out how much each retailer's obligation should be—of a one in two year peak demand. Then the government tells us that should it occur during the forecast reliability gap period. Let's unpack that.

Contract with generation, that is the first part. The government are telling us that with this extra reliability standard this new generation will be available that they will contract with to provide extra energy into the market, either newly constructed generation, like all the new power stations that are popping up across South Australia, or it could be renewable energy; it could be stored energy through pumped hydro, batteries, whatever it might be. It is making an assumption that there actually is new generation that it can contract with.

What happens if it cannot? We then move to storage or to demand response. So you are sitting in these boardrooms using shareholders' money, and you have a legal responsibility to use shareholders' money in the most appropriate and cost-effective way; if you do not, as a director your indemnities do not cut it.

Mr McBride interjecting:

The Hon. A. KOUTSANTONIS: The member for MacKillop agrees with me, which is slightly disconcerting. However, I take his word for it because, having seen his declaration of interests, he is a man who knows how to invest.

So you are sitting on the board of AGL. There is this retail obligation on you: you must contract with new generation or build new generation, have storage or use demand response. What is the cheapest? Is it new generation? I would have thought not. Is it storage? I would have thought not. What is the cheapest option? Demand management: 'Just turn your lights off for a minute. You won't, will you?' That, I fear, may be the consequence. It might not be.

To be fair to the government, this is a national reform that other Labor governments have agreed with. The ESB is made up of experts, as is AEMO, as is the AER and as is the AEMC. No doubt, they have thought this through. No doubt, they believe that this may work and that shareholders and their directors will take the alternative options of more generation or storage and that they will be profitable over the longer term—say, the seven-year period—rather than demand response. My fear is that they may take the demand response option, but I trust the experts.

We are told by the government that, based on current forecasts by AEMO, South Australia's one in two year peak demand is approximately 2,900 megawatts. I think that is probably a little bit conservative, given the economic boom members opposite are talking about and all the new industries coming into South Australia; no doubt, that will grow year on year out. The new companies that are moving, especially into Murray Bridge, and that new Big W—oh, that is closing; I forgot about that. Jobs growth and participation rates are going up. Actually, no, they are not; the jobs growth rate is at zero and participation rate is falling.

The NAB survey that was out today or yesterday showed some of the worst conditions in Australia, but no doubt the government is optimistic about the economy growing and there is going to be an influx of migrants into South Australia, into regional South Australia, to work at abattoirs. That is going to be the growth industry in South Australia. People living in Europe and people living in Asia are going to want to move to South Australia to work in abattoirs. I can see the ads now.

We are then told by the government that the Australian Energy Market Operator will be empowered legislatively, by law, to perform the function of procurer of last resort as a safety net (that sounds like a good idea; why not?) to secure resources necessary to ensure reliability if a gap is still evident a year out. We have the forecast and there is a gap. Step 1, build new generators? No. Invest in storage? No, you pay for it. Demand response? There is not enough. We will procure it. Who pays for that? Consumers. We will be charged that in our bills.

If this regulatory response to getting more generation into the market and to getting more contracts written in the market all fails because we cannot have a carbon price or a mechanism to incentivise new investment in generation, the government wants the parliament—this is the commonwealth government and every state government—as our last resort to go to the people of our constituencies and say, 'You need to pay for this backup generation. You need to procure this generation. We're not going to tell you how we're going to do it. We're going to go out and do it 12 months in advance and then we're going to charge you in your bills.'

I am sure South Australians will carry all of us on their shoulders when they thank us for passing this legislation because we cannot have a simple mechanism in place to incentivise the market to decarbonise and make new investments. We are going about it with a sledgehammer rather than a scalpel.

As we have said time and time again, the government has agreed to this legislative reform through the COAG process. Because it is a COAG process, a national reform, and we are the lead legislator, I will respect the precedent that we have set, and what the member opposite did when he was a shadow minister, and pass this legislation. Should it fail (and I think it probably will, but we will see), then of course we will have to come back and look at it.

The government then tells us that the energy regulator—again, an agency of the department of treasury and finance in Canberra—will have the ability to apply penalties on liable entities should they not have enough qualifying contracts in place to meet the demand at the right time with amounts not exceeding, for either a natural person or body corporate, $1 million for a breach relating to a reliability gap period and $10 million for a breach by a body corporate. That relates to a second or subsequent reliability gap period.

The free marketeers opposite are telling us that people are going to rush into this market, build generation, build storage, build all these great alternatives to create more liquidity in the contract market of the National Electricity Market 'because we are going to put in bigger penalties if you don't'. I am not sure how that logic works, but I am sure that all members of cabinet who signed off on this reform are fully aware of what it is they have agreed to. No doubt the minister was fully aware when he was at the COAG of what the Energy Security Board was asking all the states to sign up to.

We are told by the government that generators providing energy, indeed emergency reserves provided by generators, are not restricted by the market price cap. I repeat that: generators providing emergency reserves are not restricted by the market price cap and the Australian Energy Market Operator (AEMO) may therefore procure at a higher rate. That is generous of them, isn't it? The government wants us to agree on legislation that allows the market operator to suspend the rules of the National Electricity Market and say, 'We are going to go out to emergency reserve generators and pay a higher price than everyone else who is in the market gets paid.' Again, what a great incentive to get into the NEM. What a great incentive!

The costs of the Reliability and Emergency Reserve Trader mechanism were appropriately $52 million in 2017-18 and $34 million in 2018-19. Who paid that? Constituents, people in our electorates, on their bills, which was very generous of them. No doubt, they will be so pleased to know that the government opposite in this parliament has agreed to increasing the potential for that cost year on year out as a result of this retailer obligation that the government want to impose on South Australians who they tell us will lower energy prices through more regulation by creating more liquidity in the markets by introducing harsher penalties. No doubt, that will create an influx of new generators into the market. But do not worry; we are supporting this legislation. It will pass.

The government goes on to tell us that the procurer of last resort function and civil penalties, therefore, provide a strong disincentive on the people who are in the NEM, that is, liable entities, against noncompliance and ensure that the market participants respond effectively to the investment signals provided by the Retailer Reliability Obligation. I want to make a few points about what the government is telling the opposition in the parliament about that point.

From my memory, we have not increased thermal generation in this state since Pelican Point power station. I could be wrong, but I think that was the last time we increased our thermal generation capacity. There were, of course, the government's emergency generators, but they are not participants in the NEM. They are just emergency reserve operators.

All the new generation coming in to the National Electricity Market, from what I can ascertain, is not from new coal-fired or gas-fired turbines but from renewable energy. It is solar-powered plants, either on house rooftops or an industrial scale, it is wind farms, it is hydro, potentially in Tasmania—and Snowy 2.0, if that ever goes ahead—and storage, which is moving at a great pace.

But the government want us to believe that, through penalties and a stick but no subsidy, there will be more investment in base load generation, perhaps through storage. To be fair to the government, they contemplate storage as being an option, which will make a lot more renewable energy dispatchable, but I see no incentive in here for that. We took a storage target to the last election which the government did not adopt. Indeed, one of their first acts was to abolish our renewable energy target.

So the government want us to agree to regulate the National Electricity Market quite coercively, impose massive penalties on retailers if they do not meet a reliability gap set by the Australian Energy Market Operator and that that will somehow incentivise them to build more generation, more storage or demand response. If that cannot happen, they want to waive the rules of the National Electricity Market operator to be able to go out and procure new energy, regardless of the cost, and charge South Australians for the privilege of it in their bills. Somehow, this will incentivise more generation.

The question I ask the government is: if privatising ETSA did not result in any new generation being built, how will harsher penalties on the monopoly market you created through that privatisation incentivise more players to come into the market and offer more electrons for sale, creating more liquidity? I assume what the government will tell us is that an interconnector will incentivise more renewable energy to be built because they can dispatch into another market despite other markets also building renewable energy at a rate of knots, trying to get hold of the credits that are available under the commonwealth government's scheme and, indeed, state-based mechanisms that are in place in Queensland and Victoria. I assume one day they will be available in New South Wales.

So if there will be a glut of renewable energy and storage, and these penalties are in place and there are no more incentives in place nationally, which the current government is calling on the commonwealth government to remove, I find it hard to see how this will work. Of course, while we are legislating all of this, we are facing a change of government nationally. I do not want to presume what the outcome of that election will be, but it looks like, if you read the polls, there is going to be a change. But anything can happen. I do not want to be someone who says that Bill Shorten will be prime minister in two months because who knows? Anything can happen.

Let's assume for the sake of this argument that the polls are right and that we are heading for a change of government. The current opposition has adopted the National Energy Guarantee (NEG) as an opposition policy, the same policy that former prime minister Malcolm Turnbull and the current federal Treasurer Josh Frydenberg took through the Coalition party room four times successfully but could not implement.

Let's say it is implemented. I would assume that the National Energy Guarantee will incentivise more generation and may incentivise more procurement of equipment, storage and other forms of dispatch in the NEM because of the certainty it will give industry. If it does, I know that this was always a part of the National Energy Guarantee, but I suspect this was always a safeguard. I suspect there were members of the commonwealth who suspected the NEG, in its full form, might never get through. I wonder how long this legislation will remain or whether it will work.

I congratulate the minister on one aspect of this legislation. He has sought something that other states did not, probably because of the excellent advice he received from his agencies, whom we both recognise as being exceptional, namely, that the South Australian minister may intervene in the reliability gap within a shorter time period than other ministers can. I do not know why, and I still cannot understand why, other member states did not wish to take that power for themselves as well. I think it is a very prudent thing to do because of what the government has implemented—because I think this is high risk. I think this is high-risk poker.

However, I understand the pressure the minister would be under, given that the commonwealth government wants the Retailer Reliability Obligation put in. I understand that the NEM states have all agreed unanimously. I think Victoria came on last. From my discussions with ministers on COAG, I understand that some see it as already being redundant because of the potential for a change of government. I do not know, but my big concern is the message we are sending the market by adopting this. It is a very blunt instrument, and members opposite are putting it all on eight black. They are putting it all on one number, everything. If it pays off, fantastic; if it does not—well.

I would hate to think that units at Torrens Island are going to be mothballed. That would be a disaster. That would be an absolute disaster.

An honourable member interjecting:

The Hon. A. KOUTSANTONIS: Well, blackouts and price increases.

Members interjecting:

The Hon. A. KOUTSANTONIS: I enjoy listening to the laughter of members opposite thinking that they have it all right in this bill. I enjoy the laughter of members who are currently in government and who relied on the measures we put in place to keep the lights on during the last summer but are now selling them. It will be interesting to see again next summer, but of course the members opposite claim that they know better than anyone else. We will see.

As I said, we will pass this legislation because it is a national reform. We will pass it through all stages of this house and the other house, maintaining the precedent set—regularly broken by members opposite when they were in opposition, but we will not be doing that. We do not break pairs or precedents. We maintain the traditions of this house and our parliamentary democracy because they are important.

Members interjecting:

The Hon. A. KOUTSANTONIS: I say with a straight face: I have not broken a pair in my life. The other member has only been here two minutes and apparently he is an expert on House of Commons practice. Mind you, he was my lawyer for a while when I sued a Liberal candidate, which I thought was very generous of him. It was great to have such a fine lawyer representing me taking on a Liberal candidate. Interestingly, that Liberal candidate now votes Labor and my lawyer is now a Liberal member of parliament.

I am not quite sure where that takes us, but I again offer my support to the minister and his legislation. I offer my good wishes to the minister on this reform. I offer my support for a speedy passage. I hope that the minister now gets up to close this debate, that he gets up now to debunk everything I have just said, so that we can move on to other important matters and pass this important national reform immediately and see wholesale prices tumble just from the thought of this legislation passing. I commend the bill to the house.

Dr HARVEY (Newland) (12:18): I am very pleased to rise today and support the National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill. This is an important bill. We need to do everything we can to ensure that South Australian households and businesses have secure and reliable power. In fact, electricity has been a fairly controversial or much talked about issue over recent years. I can particularly remember many, many conversations in my own community about power, particularly the price of it as well as the reliability.

In fact, one day in particular I remember was the day after one of the retailers announced an enormous increase—an enormous increase—in the price of electricity in about the middle of 2017. What really struck me was that, for all the issues that come up during a campaign and when you are out doorknocking, as many of us did during that period, this was the one time when something had come up in the news the day before and every person I spoke to the next day was talking about it.

I think that highlights the extent to which this affects everybody, whether it is people at home and their own energy prices or whether it affects the place where they work and whether or not that workplace can continue to afford to employ them, and then the impact that has on the broader state economy. This is not only a very important issue overall but also it is very important to constituents within my electorate, and I am sure all electorates in this state.

This bill implements amendments to the National Electricity Law, which energy ministers agreed to at the COAG Energy Council in December last year. This is an important amendment that will improve energy reliability for South Australians and ensure that the reliability of our grid is being regularly assessed for any future shortfalls so that they can be addressed prior to causing inconvenience to South Australians. As a result of this bill, the Australian Energy Market Operator (AEMO) will be required to assess our energy market and then identify whether there are any potential future reliability gaps.

AEMO will be required to carry out this assessment each year and to identify potential reliability gaps three years ahead of when they would be likely to occur. Should AEMO identify such a gap, it then requests to the Australian Energy Regulator that a reliability instrument be made, which requires energy retailers to build on their contracting and investment arrangements to increase dispatchable capacity. Retailers will then need to demonstrate that they will be able to meet their share of peak demand one year ahead of when the supply shortfall is likely to occur.

Importantly for South Australia—and I certainly congratulate the minister on his work on behalf of our state—the COAG agreement included amendments that apply specifically to South Australia, recognising that in recent years South Australia has experienced supply issues that have not been forecast by AEMO three years ahead of when they would be likely to occur. In light of this, the bill includes provisions that enable a South Australian minister to make a reliability instrument 15 months ahead of when the gap is likely to occur.

It is simply unacceptable that, due to supply issues, South Australians could be prevented from switching on the lights. We must take the responsibility to ensure that South Australians have access to secure and reliable power seriously, and so too must our energy retailers. This bill provides that, should a retailer breach their responsibilities during a reliability gap period, a maximum penalty of $1 million for a first breach and a maximum of $10 million for a subsequent breach will be applied.

Importantly, this bill provides for AEMO to act as the safety net procurer of last resort. This allows AEMO to enter into contracts to secure our energy reserves for the forecast reliability gap period if it is still forecast one year out from when it is likely to occur. Certainly, the reliability of our power in South Australia is a very significant issue, and it is significant across all parts of our community. I am sure for some of us when we lose power it is more of an inconvenience in our homes.

It means that, in minor cases, for a short period of time we have to find torches and candles, or whatever other things, to keep things lit, but for a lot of people it actually does have some very serious implications. In fact, I can remember particular examples during the statewide blackout, when on Lower Eyre Peninsula power was out for a number of days and even things like the expiry dates on medicines for families were put at risk because they had limited access to refrigeration. Also, there were issues in some of our hospitals, particularly the Flinders Medical Centre. I am sure hospitals have backup in place to deal with these situations, but sometimes they do not work when they should. Nevertheless, having an unreliable system more broadly still puts risk on these systems.

Of course, businesses, whether they be supermarkets or shops, have things that need to be kept cold, which they then need to throw out if power is out for too long. Larger industrial processes require large amounts of energy for heating things, whether it be for making glass or big furnaces for smelting and making steel and all those sorts of processes. They need to be kept constantly hot, otherwise, after period of time, they cool down, and some very, very serious damage is being done, not to mention the loss of productivity for that period of time, which costs an enormous amount for those businesses, and that has an enormous impact on our state's economy. There is no question that reliability is a significant issue, and in South Australia we have seen firsthand what happens if we have issues with reliability.

This bill very much complements the policies that the Marshall Liberal government is implementing to secure reliable and affordable power for South Australians. It would be remiss of me not to touch on some of our initiatives that will make a real difference to South Australians. Certainly, one of our most exciting initiatives, particularly for local MPs like me, is our Home Battery Scheme. The scheme provides subsidies for households with solar panels to install home batteries so that they can make more use of the energy that their solar panels generate, directly reduce their own bills and reduce pressure on the grid as a whole. Already, we have seen some households have their power bills significantly reduced after signing up to that scheme.

It is important to note that, on one hand, there are significant benefits to households that have these solar panels, particularly now with lower feed-in tariffs and people being out during the day at work, when their panels are doing the most work and all the power is being exported for a relatively low price. With a battery, they are able to store power during the day and then use it in the evening, which is often the peak period, to reduce their total consumption of energy off the grid and make savings. Also, the fact that those people are coming off the grid or having a reduced reliance on the grid during those peak times reduces the overall demand during peak times for the whole state, and that contributes a benefit for everyone, even those who do not have solar panels. That is a very important part of this policy.

This scheme really does tick all the boxes: it reduces demand on the grid and increases capacity; it is also environmentally friendly and, most importantly for households, it reduces the cost of bills. I have certainly been thrilled by the number of local constituents who have told me that they are certainly very interested in signing up to this scheme, and, in some cases, already have. This is a good, positive example of policies being implemented to make a real difference to South Australians. I would certainly encourage anybody with solar panels to consider joining the scheme.

Of course, an energy policy cannot be dependent on one particular initiative, so we have a whole suite of them. Another very important one is the interconnector with New South Wales. As members in here I am sure will recall, in December last year a memorandum of understanding was signed between the South Australian and New South Wales governments establishing the framework for cooperation that will ultimately lead to the building of this interconnector between our two states. The memorandum of understanding was an important step in progressing the interconnector, which will lead to lower power prices and more reliable power for South Australians. I note that in years gone past the then Labor government supported this initiative but has since changed their mind for reasons best known to themselves.

What this means for South Australia is quite significant. At the moment, we are linked to the National Energy Market primarily through the Heywood interconnector into Victoria and also the Murraylink, the DC connection up through the Riverland, which has a smaller capacity. However, by and large, we are reliant to a great extent on the Heywood interconnector and also what is happening in Victoria. That is fine most of the time, but occasionally, if something goes wrong with the interconnector, as we saw in December 2016, and we end up with 200,000 homes without power, that is certainly a case of us putting all our eggs in one basket and being reliant on one connection.

There are also other benefits in adding an additional connection and having an alternative for when something goes wrong with that connection. Often, the demand profiles between Victoria and South Australia can be similar. We have similar weather patterns: if it is really hot in Adelaide, then it is likely that the same day or the next day it will be really hot in Melbourne as well, and then you have significant demand across that part of the NEM.

This is in contrast to New South Wales, and particularly Sydney, which would very rarely have similar weather patterns to us. What this means is that additional interconnectivity would allow for the sharing of power between different parts and regions of the national energy market to more easily match the demand for supply across different regions. That is, obviously, very important.

The other benefit is that it is not unusual in South Australia for the temperature to be in the low 20s, quite windy, perhaps still sunny, but maybe not. We are generating a lot of power in South Australia, particularly through wind energy, but there is not the demand here, so we end up not only with wild fluctuations in the spot price but with excess energy, which, with the additional interconnectivity, could be exported into another market, particularly New South Wales, which is right in the centre of it.

Also, the opposite is true. When we do not have so much of that renewable energy available and it is really hot, then we have the ability to supplement our own generation with more affordable generation from interstate, where there is not such a great demand, and helping to stabilise the price. The alternative, if we go it alone, is that we pay more; that is really the result. Greater interconnectivity will mean the sharing of power across different markets to deal with the differences in supply and demand that can occur.

Western New South Wales has seen quite large developments in large-scale solar, with quite a large solar plant around Broken Hill and Nyngan, and there is also some industrial activity out that way that benefits from power coming out of South Australia. There are a lot of benefits to come from an interconnector, once it is built. It is great to see so much enthusiasm for this policy from different bodies concerned with energy throughout the country.

There is, of course, another important component to our energy policy and that is the role of grid-scale storage, which was, until right at the very end, completely neglected by the previous government. They were very interested, and I think everyone in this house supports renewable energy, but when you have intermittent energy it is important to be able to dispatch that and at least try to match it with when you need the energy. The fact of the matter is when the generation of energy is reliant on the environment you cannot control when it is available and when it is not.

So headlong pushing down a particular path without matching that with some means for storing it, and dispatching it when you need it, leads not only to massive price fluctuations but also to issues with reliability. It is great to see that we are committed to grid-scale storage in a technology-neutral fashion, as it is not for politicians to decide what the best technology is—we will let engineers and other experts make those decisions—but we are very pleased to see that as part of our plan.

As I said, the bill we are talking about today complements the suite of policies we took to the last election and includes the Home Battery Scheme, interconnector and other things. Our policies are making real differences to South Australians and have attracted praise from the Australian Energy Market Operator in its report on the South Australian energy system. This is a significant turnaround from being the laughing-stock of the entire nation as a result of the high electricity costs and embarrassing blackouts that occurred under the previous government.

I congratulate the Minister for Energy and Mining on his work on the bill and, more generally, on his work in cleaning up the mess—just another example of our cleaning up the mess left to us by those opposite. I commend the bill to the house.

Mr HUGHES (Giles) (12:34): I was not going to speak on this bill—I am just here carrying out my parliamentary duty—but I could not resist the level of provocation, so I figured I would get up to say a few words. Not long after the government was elected, I was up in Port Augusta listening to the member for Stuart in his role as the minister. It was at a very good conference. The minister got up and spoke about energy, as he should. The interesting thing was that, when you strip away all the confected differences in the approach to energy and electricity production in this state, there was little significant difference.

Clearly, there are some elements that are different. We could reflect upon some of the members opposite when they were in opposition and how incoherent their approach to energy in this state was at times. They were literally all over the place. I remember some words from the member for Gibson that always stuck in my mind. While in opposition, he said, 'We support cutting in half renewable energy production in this state,' going on to say, 'as do most people on my side'. It was a totally bizarre comment. He got up and said that. It is in Hansard. Go back and have a look.

At various times, the leader of the opposition was an incredibly strong advocate for renewables and attacked the former premier when he appeared not to be as supportive as in the Rann period. He attacked us for not being strong enough when it came to renewables, then attacked us when we reinstated our strong position on renewables. When we talk about storage, one of the issues has been the lag effect between the growth of renewables and the growth of suitable storage mechanisms.

The previous government had a relatively good history on this, taking into account the rate of technological improvement that was going on. We were willing to put money into a number of pumped hydro projects, some of which will hopefully start getting the yellow equipment out to start producing some worthwhile projects in my electorate and also close to the member for Stuart's electorate. Goat Hill might well be the first pumped hydro project to get off the ground in South Australia—let's hope. Sanjeev Gupta is talking about pumped hydro in the Middleback Ranges. I think that is still some time away, but progress is being made in that area with their studies.

We put some money into the Cultana escarpment pumped hydro project, as did the federal government, so we might well see some pumped hydro projects in this state. As a government, we put money into the Hydrogen Roadmap, an incredibly important piece of work that I hope is not going to be allowed to drop in this state because it could have very important consequences in the long term for our state in a whole range of opportunities. We funded two hydrogen projects—one down in Port Lincoln and the other near Crystal Brook. That one is running into a degree of controversy because of the wind farm that will be co-located with that particular project. They were incredibly worthwhile initiatives.

The initiative that we undertook with the virtual power plant is incredibly worthwhile for a number of reasons. I am pleased that the current government are continuing on with that. Let's hope that stage 3 is something that comes to the fore. One of the deficiencies with what we have at the moment when it comes to battery proposals—and I will say this for the current state government and I will say that for the opposition's policy at a federal level—is that it does not go far enough. It primarily benefits those people who already have solar and it benefits those people who, in general, own their own houses.

The thing about the virtual power plant that we, when we were in state government, were actively pushing was that stage 3 would address those people in rental accommodation and especially in Housing SA accommodation who do not have access to solar and do not have access to batteries. We do not want to see them further disadvantaged, even though the point has been made that by moving to batteries it will depress overall prices, which is a good thing. But for people on low income in the rental market to get a benefit, there has to be policy directed at that. Even if stage 3 of the virtual power plant does not stack up, for whatever reason, there still needs to be policy directed at people in Housing Trust properties in this state because they are seriously disadvantaged when it comes to power prices.

A lot has been made of the blackout, and we get it again and again. I actually thought at the time that the federal government's response was absolutely disgraceful. Here we had an intense weather event that took out transmission assets. When you look at reliability, reliability is not about renewables; it is not about generation: reliability is to do with the grid. When it comes to significant blackouts and load shedding in this state and nationally, most of the faults are concerned with the grid and with transmission assets.

Again and again, and especially interstate, we have seen traditional thermal power stations just stop operating, and often on occasions not in a predictable way. Sometimes, you have to suspect that internally, within those companies, it has been in a predictable way to bid up electricity prices. There is no question in my mind that over an extended period there has been real price gouging on the part of the private sector in the operation of electricity assets, nationally. That is an absolute disgrace and anything we can do to address it needs to be done.

We talk about the interconnector and, as stated, our position at times has changed. In principle, interconnection is incredibly important. If you are going to have renewable assets in this state, if you are going to have renewable assets in other states and the different climatic regimes at different times, in principle interconnectors are a sound way to go. What you do not want to do is disadvantage investment in generating assets in our state. It is about getting that balance right.

I mentioned the hydrogen facility at Crystal Brook and the controversy about wind farms. One of the issues that should be revisited—and I am sure the member for Flinders would be a fan of this as well—is a massive, untouched wind energy resource on Eyre Peninsula. During the period of the Rann government, a green grid study done was on the Eyre Peninsula with its 10,000 megawatts, and 2,000 megawatts identified as something that could be readily exploited. That would be worth revisiting, given the spatial conflicts regarding wind farms that you sometimes find in other parts of the state.

On Eyre Peninsula, given the massive resource there, there is an opportunity to do it in a way that is not going to generate as much conflict and in a way that will benefit the state and the nation. As part of that particular proposal at that time, interconnection figured very prominently. It is something we need to get back to, and I am sure an incoming Labor government at a federal level will be keen to look at Upper Spencer Gulf as a renewable energy hub.

When you start talking about renewables, there is a degree of complementation between solar and wind. As a state, we are in the incredibly fortunate position of having a global-class wind resource on Eyre Peninsula and elsewhere and a global-class solar resource. They complement each other and would be enhanced by a range of pumped storage ventures and would be enhanced by grid air batteries and household air batteries.

We can have the argument, but in number of ways you are better than your federal colleagues. A whole bunch of troglodytes at the federal level have gone through the Liberal-Nationals government like an absolute wrecking ball. We need to address climate change seriously. It is a global challenge, but we can do a hell of a lot in this state, and we can do it in a way that will seriously advantage this state.

For many years, I have been one of the advocates for renewables because you just know that, ultimately, it is going to reduce the price of power in this state. It is just common sense because we are shifting from a resource-based industry to a technology-based industry, and so you get economies of scale kicking in, as well as all that learning through manufacturing. The cost keeps coming down and coming down for both solar and wind. That is going to continue, and it is going to put South Australia in an incredibly powerful position. That is the page that we should all be on. I suspect that the minister might well be on that page, so I am not going to be overly hostile.

But I return to the day when power assets were knocked out in this state because of that intense weather event. The day after, I was at the steelworks in Whyalla. The people there were facing incredible challenges, which they got through, which is a credit to the hard work and the intelligence of the people who worked at the steel industry. During that weather event, there were some calibration issues with the wind farms that were on a default from the manufacturers, a default that had been addressed in Europe 10 years before. You would have to ask: where were the national agencies in paying attention to that particular issue? It is interesting that in Port Lincoln, on Eyre Peninsula, the backup unit is a traditional thermal unit and it failed to respond. I do not know whether legal action is still going on about that.

When it comes to energy and when it comes to electricity, I think that South Australia has an incredibly positive future. I am one of those in this chamber—and I am sure there are others—who are incredibly mindful that the greatest threat that we face is complacency when it comes to climate change. We have some of the climate deniers at a federal level in the Liberal Party and the Nationals. I think those people are increasingly being seen as idiots, just totally denying the overwhelming balance of the scientific evidence. But the greatest threat is actually complacency.

There are probably people in this chamber who do not realise just how fundamental the failure to address climate change or global warming is and that we can play a not insignificant role, given the opportunities we have. This failure means that our kids and their kids will be living on a fundamentally different planet because we are on track at the moment for a 3˚ to 4˚ average global temperature increase.

When we say that it is up to the engineers, economists and others, it is not. This is about values and setting a framework that reflects those values. That is what is going to drive the engineers, economists, scientists, researchers and all the others. This is an issue that we have to address and we have to start to seriously address it within the next decade.

Mr PATTERSON (Morphett) (12:50): I rise to speak on the National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill. As we have heard from others, the mix of electricity generation in the National Electricity Market includes more and more electricity from intermittent sources, such as wind and solar. While that has occurred, it has exposed the need for a mechanism that will ensure the reliable supply of energy for households and businesses in the National Electricity Market under various weather conditions. I say that because weather now not only affects consumer electricity demand, say, in a hot spell with air conditioners, it is also a basis on which intermittent sources generate their electricity, so it is also on the supply side of the electricity ledger.

The current existing National Electricity Market is an energy-only market in which generators are paid only for the energy they produce to meet demand, so whether or not they have spare capacity standing by they are paid for what they actually produce. This was designed at a time in the 1990s when the National Electricity Market was based predominantly upon these large centralised base load generators, with gas peaking plants to cover the differences between the minimum and maximum demands that occur throughout a 24-hour cycle and also over seasons.

But it is not only Australia's National Electricity Market that is changing its generation mix; energy systems around the world are also transforming. It is a clear case of technological disruption. We have talked about how technology with these intermittent sources is impacting generation and it is something that all businesses have to contend with in the modern world, not just in electricity markets.

In this case, there is no generator that can be immune from economic pressures when revenues do not cover costs. Now that the older dispatchable generators are being challenged by these intermittent renewable generators—there is an up-front cost for these intermittent sources, the capital, but then the ongoing costs are a lot cheaper in comparison to the thermal generators—we really need to reassess the energy-only market that applies here in Australia and also place a value on the reliability of the electricity being supplied. We have to ensure that the supply of electricity can be matched to the demand at a particular time and dispatched.

The bill we are talking about addresses some of the dispatchable energy requirements because we know that, if the National Electricity Market lacks sufficient dispatchable capacity in any region—because it goes throughout Queensland to south-east Australia in any region to meet customers' peak demands—this will result in supply interruptions and also very high pool prices during those times of dispatchable scarcity, which will eventually flow on to customers. While overall there may be a lot of wind and solar available in the system, if that cannot be dispatched because of weather conditions, for example, then that will produce scarcity.

I think this was realised in September 2017 when the Australian Energy Market Operator (AEMO) reported on the dispatchable capability of the market and recommended development of a mechanism to retain existing investment and provide incentives for new investment in flexible dispatchable capability. There has certainly been a large investment in intermittent sources and it was a matter of trying to manage that and match that with dispatchable capability.

I should mention, as I did before regarding the world situation, that it is not a problem that is unique to Australia. Many other international jurisdictions are having to adjust their electricity markets in response to potential generation shortages as they deal with increasing quantities of intermittent renewable generation. Various options are being explored throughout the world to address this problem, including strategic reserves, capacity auctions that are run by a central agency or decentralised retailer obligation models, similar to what we have before us.

For example, Germany is developing a strategic reserve of around 5 per cent of their generation capacity to make up shortfalls in times of peak usage. Several markets in the US and the UK have also recently introduced capacity auction mechanisms. France last year also adopted a decentralised retailer obligation model. You can see that different jurisdictions have different models. A lot of this is primarily because each energy market has its own history not only in terms of how it got to where it is now and the laws that surround that but also the regulatory structures around that. It is not just Australia that is trying to come up with this as a mechanism.

When looking at this, the Energy Security Board has recommended a retailer obligation model as its capacity mechanism. The idea is that it will integrate with the existing energy market—the energy-only market—to ensure that electricity is available when needed. That will be done by encouraging appropriate generation and demand response capacity and availability. Demand response is also about making sure that that energy is dispatchable when required.

Under this scenario, AEMO takes a central role in determining how much capacity is needed, which the retailers must then procure. The primacy of AEMO in this mechanism gives a level of certainty for customers and consumers, because requirements for capacity are set well in advance of any expected peak demand events.

The flipside is that AEMO is also responsible for the accuracy of peak demand forecasts, so that is not without risk in a way because with this approach the retailers may well meet their obligations but the operator gets the demand forecast wrong. That is a risk, but you can see that, with the 10-year forecast and then updating them on a yearly basis and refining them as we get closer to anticipated forecast, that risk is mitigated. But it is worth noting that it is a forecast, and those forecasts also need to be scrutinised by other bodies to make sure they are correct.

The bill that comes before this house occurs after the energy ministers at the COAG Energy Council on 19 December 2018 agreed to implement the Retailer Reliability Obligation. The Marshall Liberal government, as the lead government in this sector, is delivering this important national reform, which is a mechanism designed to ensure the electricity system operates to reliably meet electricity demand at the lowest cost and complements the current spot market.

The Retailer Reliability Obligation is designed to incentivise retailers and other market customers to support the reliability of the National Electricity Market through building on their contracting and investment strategies to underwrite investment in dispatchable capacity by encouraging earlier and longer term contracting.

Again, it is trying to take into account that, while there is intermittent generation and capacity being brought into the market, it is also offset by making sure there is a dispatchable component that goes with those intermittent sources. Doing that will give households and businesses confidence that enough generation will be available to meet their electricity needs. I seek leave to continue my remarks.

Leave granted; debate adjourned.

Sitting suspended from 12:59 to 14:00.

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