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Energy and resources: new government and Aust's industries Part 1

25 September, 2013

Having unseated the incumbent government, the Coalition will look to follow up on its promises. IBISWorld forecasts the potential effects of the new government's policies on key Australian industries.

Economic overview

The Coalition is widely viewed as the more business-friendly of the major parties and will endeavour to pass legislation that preferences small business. Policies include a 1.5 per cent cut in the corporate tax rate for small businesses and a rollback of some workplace reforms. By promoting investment and employment by small businesses, the new government is hoping to help the economy recover from a slump in business confidence and capital expenditure.

The controversial National Broadband Network (NBN), which will provide a major source of economic growth once built, is likely to be completed sooner under the Coalition's fibre-to-the-node plan. This should allow more Australians to take advantage of the economic potential of the internet sooner, but the slower speeds of the Coalition's NBN will reduce the long-term return of the network. Pledged new infrastructure projects will provide stimulus and help the economy transition from the mining investment boom.

The budget deficit was a focal point of the Coalition's election campaign, and despite a number of expensive pledges, it is expected to run a tighter budget than the previous government. This will reduce some of the upward pressure on interest rates, helping struggling mortgage holders. Lower interest rates will also help keep the Australian dollar down, which will assist Australian companies to compete internationally.

Energy and resources

Energy policies were crucial points of difference between the major parties in the election campaign. Following its victory, the Coalition aims to make significant changes to energy policies enacted by the former Labor government. The Abbott government is also likely to review gas reservation, export policies and repeal the Minerals Resource Rent Tax (MRRT). These changes come at a time when declining per capita electricity use in Australia is challenging the electricity upply division.

The downward trend of energy consumption is due to a number of factors, including the rollout of home installation solar PV systems at a household level limiting demand growth from consumers for centrally distributed electricity. Additionally, the adoption of energy conservation and efficiency programs has been to the detriment of a number of energy generation industries, as has the decline of electricity-intensive industries over the past five years.

The Coalition campaigned on a platform of reversing many of the provisions of the Clean Energy Future Plan (CEFP) and reviewing the Renewable Energy Target (RET) in 2014. The RET and the CEFP have been two of the most crucial pieces of legislation affecting energy markets. Currently, the CEFP targets the top 500 emitters of carbon dioxide in Australia, which includes almost the entire fossil fuel electricity generation industry. The plan has increased operating costs for fossil fuel electricity generators, while competitors in the hydro-electricity generation industry have benefited from the tax. To assist with the transition, fossil fuel electricity generators were compensated with an assistance package of $5 billion. Under current arrangements, the addition of new renewable capacity to the generation mix is mandated under the RET. The RET benefits wind farm operators, as wind technology is the most price competitive segment within the wind and other electricity generation industry.

The most important Abbott government policy change to the energy sector is the proposed removal of the carbon tax and the shift to an emissions trading scheme linked to European carbon prices. However, Labor and the Greens will almost certainly oppose this proposal, making it difficult for the
Coalition to pass it through the current Senate.

To successfully pass the reform through the next Senate (after July 2014), the Coalition will need to negotiate with the incoming minor parties to gain a Senate majority. Any changes to the carbon tax would also need to be included in the Federal Budget.

Based on these factors, IBISWorld forecasts that the carbon tax is unlikely to be repealed before January 2015. Reductions to the RET are more feasible, and could be achieved by June 2014 and possibly effective in 2014-15. There is an established process for reviewing the RET target. The formal review process means changes to the target are more likely to garner the bipartisan support necessary to alter the legislation before the Senate changes. A review of the current RET will almost certainly stall investment into wind and other electricity generation as companies hold off investment due to political uncertainty.

However, a reduction in the RET will benefit investment prospects in the fossil fuel electricity generation industry. The failure of the MRRT to bring in significant tax income from mining companies has supported the Abbott government's proposal to repeal the legislation. The tax has generated significantly less revenue than expected, while being expensive to administer. The tax brought in approximately $200 million in 2012-13. In May 2012, budget forecasts stated that the tax would generate $3 billion in revenue. This was later downgraded to $2 billion.

Source: IBISWorld

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