Stephen Anthony | Jim Chalmers' pitch to remake capitalism needs to face one key test

So having asked by the newspaper for a view I begin with the robust benchmark of Labor stalwart Paul Keating who always prioritised the working poor over vested interests including the incumbent cultural or business elites. A perennial benchmark that serves our purpose for this frank analysis.

Keating applied his policy test when he cut personal income taxes, broadened other taxes, slashed tariffs and balanced budgets with Peter Walsh.

The Keating test is do the tangible benefits for a given policy doctrine or prescription outweigh the costs for ordinary working Australians.

Further, would an independent agency such as the Productivity Commission (whom Keating leaned on heavily for advice and credibility) support the bona fides of of given policy prescription especially against the scourge of special interests.

This is one way to avoid the last Labor government's determination to mastermind "nation building" projects such as the National Broadband Network that have had disastrous financial consequences.

Chalmers has worn out lots of shoe leather visiting the Productivity Commission's offices in Canberra over the past nine months. No doubt he appreciates Keating's soft spot for the institution.

For mine the key test for Chalmers' doctrine of greater government involvement in shaping markets and co-investment with the private sector is whether it can survive the Keating test. And critically, can the Chalmers doctrine be applied to the most pressing policy challenges crossing the Treasurer's desk and the cabinet table.

What are the most pressing challenges facing the Treasurer right now?

In no particular order they are funding: affordable housing; aged care; defence capability; the energy transition NDIS, public debt interest; and real tax reform.

It's disappointing that the Productivity Commission has done virtually no foundational work in any of these policy areas over the past decade. Chalmers is correct when he argues there is a big role for efficient and competitive private enterprises to help role out the public programs.

So let's think about how this might work practically in the case of Australia's (and the globe's) pressing existential threat - the energy transition. If anyone doubts the gravity of this threat consider the following:

First, current policy settings are already depriving many people in our community of inexpensive power. A recent survey by Melbourne Institute of 1000 people in December found that 32 per cent of young adults, or people who earn below $50,000, could not afford to heat or cool their homes to a comfortable level, while 35 per cent of poor Australians had skipped meals to afford bills.

Second, current policy settings are inadvertently driving up costs because they fail to optimise over the sources of generation to reduce emissions whilst securing reliable power generation.

In other words, we draw too much intermittent power and not enough firm power. This leads to higher prices for consumers and the likely loss of all our heavy industry.

Third, the cost of all this bad policy is mainly borne by working class energy consumers and the federal taxpayers who will have to flip the bill for pretty much every suboptimal state government policy and rewiring the national grid as well as adding additional renewable energy generation.

So what practical actions has Mr Chalmers available to him to fix the energy market?

First, he could have the Productivity Commission or some similar independent economic and engineering analytical capacity to undertake a comparable annual study to our 2019 Industry Super Australia analysis which examined all the feasible energy transition technology options.

The independent study would consider the need to retain the existing value embodied in the infrastructure associated with coal-fired power stations. This is needed to prevent these incredibly valuable assets from simply being trashed.

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One feasible technological possibility here is small modular reactors.

Alternatively retrofitting coal-fired power stations with ultra-high temperature thermal storage is also a possibility given recent technological developments.

Thermal storage entails superheating an appropriate heat sink media such as graphite that can drive the existing utility-scale steam turbines at conventional power plants, thus eliminating the need to burn coal or gas. It can harness the potential of solar and wind generators, while providing a network backup.

Regardless of the available technologies, the Productivity Commission could deliver the rigour necessary to provide guidance on their selection, mix and implementation.

Second, he could have an independent agency advise him how to make much better use of solar and wind technologies. We know that based on a recent ANU study that some Australian solar farms are having half their output curtailed by grid congestion in some instances. Macroeconomics' own study came to this conclusion over 12 months ago. Presumably the answer here is a mix of short-term batteries, hydro, and again long-duration thermal storage options.

Third, we need to establish regulatory frameworks which support the entry of supporting technologies into the energy markets.

For Mr Chalmers to bring home the bacon in energy policy he must overcome the chaos that is Australia's energy markets and policy.

For mine the simplest way to do this and which accords with his broader vision for the Australian economy is to direct attention towards an optimising policy approach and technological mix.

This puts the federal Treasurer and Treasury in the driver's seat in terms of restoring order and equilibrium to Australia's disparate energy markets and participants including the state premiers.

Our key message here is that the allocation and deployment of capital can't be achieved without a strong policy framework and the purview of institutional capital being an integral part of the equation.

Treasury must take command of energy policy like it did in the 1980s and 1990. It must assist Energy Minister Chris Bowen and the federal Treasurer since it's ultimately picking up the tab and Mr Chalmers' elite assault team when he assumes the role of dealer at the table in the fiscal energy poker game with state governments and other market participants.

Notice that the our policy prescriptions did not cost a single dollar and presumably would raise productivity growth geometrically. That approach would generate revenue windfalls for Australian governments and reduce the direct costs of the energy transition to a fraction of current estimates.

Notice also that our policy prescriptions provide a technological leveller to help normalise energy markets and so penalise those participants that are currently gaming the system. Best of all it would help working Australians.