An Economic Analysis of Energy Policy in the Australian Market

This report provides an economic analysis of Australia's energy policy, focusing on the challenges within the electricity market. It examines the issue of supply shortages, particularly in the context of LNG exports and the closure of older, inefficient power plants. The report explores the interplay between free market principles and government intervention, including the government's support for new coal-fired power plants and the potential role of renewable energy sources. It also considers the economic concepts of supply and demand, market efficiency, and the impact of externalities. The report recommends strategies to improve the energy market, such as increasing domestic supply and promoting renewable energy sources, while also advocating for a balanced approach to government intervention to ensure a secure and affordable energy supply for Australian residents. The report concludes by emphasizing the importance of a well-designed policy framework to address the challenges in the Australian energy sector.

Running head: ENERGY POLICY IN AUSTRALIA
Energy Policy in Australia
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction................................................................................................................................2
Essence of the Story...................................................................................................................2
Economic theories and concept..................................................................................................3
Supply shortage and high price in the electricity market.......................................................3
Free market.............................................................................................................................5
Government intervention and efficiency................................................................................5
Recommendation........................................................................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

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Introduction
Energy is the basis source of economic activity. Any disturbance in the supply not
only affects the daily life but also hampers production activity. In Australia, this major sector
is going thorough different problem. One serious problem is the excessively high price
resulting from the supply shortage. Therefore, energy ministry in Australia is focusing on a
security on the supply side. Alternative sources are welcomed in addition to the existing
sources. In the report, a close look is made on ministry’s reliance on newly build coal plants
for an undisturbed electricity supply.
Essence of the Story
The coal based energy plants are generally considered inefficient because of huge
emission of pollutant wastes and gases. However, the new coal plants are built with an
advanced technology. In the new plants, advanced energy efficient technologies are installed
to reduce the emission. With this improvement, these plants have become new source of
energy supply and expected to solve the problem of supply shortfall. Josh Frydenberg, the
energy minister is in support of this energy mix strategy. In a recent press conference,
concern is shown for the new plants and federal government even agrees to provide necessary
support (theguardian.com 2017). However, any intervention is the energy market is promised
to be made without hampering its free market environment. As like supply, Australian
economy can experience a mix of free and regulatory market.
Government is taking time to make any firm decision because objective of the
government is to not only provide an uninterrupted power supply but also meet its target of
clean energy mission (Gillingham et al. 2013). Support of the government to the new plants is
subject to its support from free market forces. Policymakers in the nation are trying to make

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integration between the energy and climate policy under the broad policy framework. This
will increase certainty in the investment environment and attract greater investment in the
market. Once the investment assurance is built, then government support can be withdrawn.
The new plants then yield best outcome for the energy market. Another source for secure
energy supply can be renewable energy storage. The renewable energy sources are able to
make significant thermal generation.
Additionally, in the report stress is given on putting pressure of domestic suppliers to
increases their supply for domestic use and put a limit on rising price.
Economic theories and concept
Supply shortage and high price in the electricity market
Supply at a certain point of time represents the available quantity in the market at
existing price. There are factors other than price that cause a change in the supply. Change in
supply is captured by the outward or inward shift of the supply curve. In case of rise in
supply, supply curve shifts outward (Mahanty 2014). With no change in demand, this results
in a low price and high market output. In times of decline in supply the curve shift inward
leading to high price and low output.

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Figure 1: Supply shortage and price rise
(Source: Mahanty 2014).
A leftward shift of the supply curve increase the price from P to P1 and decreases
quantity from Q to Q1
In Australia, supply shortage in the energy market causes severe problem in the power
supply. One reason for shortage in supply is the supply shortage in the LNG market. The
LNG generators are highly involved in export activity causing shortage of domestic supply
(Hua, Oliphant and Hu 2016). Another factor behind shortfall of supply in comparison to its
demand is shut down of old inefficient plant under clean energy target mission. Therefore,
increasing supply from alternative sources and increasing availability of domestic supply are
considered for setting right energy policy for the state (Foran et al. 2016).

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Free market
Free market is a place where sellers and buyers have equal rights to take their own
decision related to buying and selling. There are no forms of regulation. The free forces of
supply and demand give the best outcomes given resources (Rader 2014). Intervention in this
market results in inefficiency. Realizing the importance of free market, energy ministry is
making repeated thinking before doing its intervention for the new plants. Any interventionist
strategy in this regard will be left open for the interest of free market. Therefore, the reliance
is still on free market strategy (Dean et al. 2017)
Government intervention and efficiency
Free market is the most efficient form of market. However, there are situation where
free market fails to ensure efficiency. Presence of any type of externality is one such factor.
Hence, the government needs to intervene to ensure efficiency in the market. However,
government sometimes gives support to new entrants in the market. Newly build plants are
often unable to compete with the existing firms (Friedman 2017). This argument is
considered making the newly build plants as a secure future source of energy. However, the
support is not permanent. Once the plants are fully developed they should left unregulated in
the free market and this assures possibly best outcome.
Recommendation
Making a secure energy supply at a reasonable price is the responsibility of
government. However, in the last few years there are difficulty in balancing demand and
supply in the energy market. High electricity price resulted for a lack of supply is becoming
a major problem for Australian residence. Government should focus on increasing the supply
of resources for domestic use. Mineral resources are often export largely lagging its supply
behind the demand. Fixing export quantity can be one way to increase domestic supply.

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Relying too much on coal-generated power plant is not a viable option. Instead, utilization of
renewable energy source should be the focus.
Conclusion
The report has made an economic analysis of a news article on Australian energy
policy. The policy discussed here is to provide assistance to new coal plants. The objective is
to make an energy mix utilizing the old plants and new plants. The intervention will not be
too much stringent. Rather the intervention decision largely depends on the support from free
market. Recommendations are given to improve the energy market scenario. Australia has
sufficient mineral resource. By rightly utilizing its resources and designing an appropriate
policy framework Australia can resolve the problems to this vital sector.

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References
Dean, E., Elardo, J., Green, M., Wilson, B. and Berger, S., 2017. Principles of
Microeconomics-Scarcity and Social Provisioning. Pressbooks.
Foran, T., Fleming, D., Spandonide, B., Williams, R. and Race, D., 2016. Understanding
energy-related regimes: A participatory approach from central Australia. Energy Policy, 91,
pp.315-324.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University
Press.
Gillingham, K., Kotchen, M.J., Rapson, D.S. and Wagner, G., 2013. Energy policy: The
rebound effect is overplayed. Nature, 493(7433), pp.475-476.
Hua, Y., Oliphant, M. and Hu, E.J., 2016. Development of renewable energy in Australia and
China: A comparison of policies and status. Renewable Energy, 85, pp.1044-1051.
Karp, P. (2017). New coal plants have a role in Australia's energy future, Josh Frydenberg
says. [online] the Guardian. Available at:
https://www.theguardian.com/australia-news/2017/aug/13/new-coal-plants-have-a-role-in-
australias-energy-future-josh-frydenberg-says [Accessed 22 Aug. 2017].
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Rader, T., 2014. Theory of microeconomics. Academic Press.

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