If you got in a time machine and told someone in 2008 that a decade in the future, energy policy would be the number one political risk issue at a national level, they would’ve written you off as a doomsayer. The energy sector has traditionally been safe and consistent, a picture of stable policy and long-term investment. Now, it’s a case study of what happens when political risk smashes into your business planning like a wrecking ball.
As the media frenzy over the successive energy policies of the last decade rolled on, market analysts have had their attention dragged back to national political news as they try to make sense of what is going on. Political risk, once a niche issue for heavily regulated or controversial industries, has received far more attention than it has in the past. This provides an opportunity for other traditionally safe industries to reflect and try to imagine future high-impact scenarios which they might have otherwise never considered.
Government risk is the effect of uncertainties that arise from government decision-making, actions or events on your business. It is an unavoidable part of occupying space in an open market. Governments respond to different incentives and on different timelines to the private sector, but it is a mistake to assume that this means they occupy different worlds. Every market is a fusion of private initiative and risk-taking, bureaucratic support and/or resistance, and sporadic involvement of political staffers or even ministers. Understanding how risks influence the market day-to-day is core business for executives and managers, but understanding how the rules of the game can change overnight and throw out all your old assumptions is a skill that many business leaders undervalue.
The lack of investment in the energy sector has been identified by AEMO as a key contributor to rising wholesale energy prices, alongside the smaller impacts of poorly managed regulation and privatisation, and the cost of green energy schemes. A key component of this lack of crucial investment has been a lack of confidence in the sector around the policy settings determined by successive federal governments. A market will adapt to new rules, whatever they are, but constantly changing rules will mean investors cannot determine what returns they may make, and so will look elsewhere to make their investments. The fact that this has not happened in your industry before does not mean that it won’t be the case in the future. Where once it was the case that successive governments maintained a steady policy environment, maybe due to the sector’s reasonably static technology use, issues like the energy generation mix are now hugely controversial.
Now that it is clear to risk professionals in every industry that risks stemming from government action (or inaction) can be enormous if unplanned for, senior business leaders should ensure they are across these risks as part of their core responsibilities as company directors. In the same way that a director must consider legal liability or compliance with regulatory standards, issues which can materially impact a firm, directors must show they have considered the potential impacts of government risk.
Sam Perkins is a Policy Analyst at FPL Advisory.
FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.
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