Incoming Reserve Bank governor Michele Bullock has warned that coal closures could drive energy prices higher

Sky-high energy prices could increase even further if the closure of coal-fired power plants is not matched with renewable generation and storage capacity, incoming Reserve Bank governor Michele Bullock has warned.

The sheer volume of investment required to meet Australia’s target of net zero by 2050 could also push inflation higher over the medium term.

In a speech to the Australian National University on Tuesday, Ms Bullock warned a failure to invest in sufficient alternative generation capacity would pose a major risk to the Australian economy.

Michele Bullock: “We’ll be taking decisions for the time being until next year at least month by month.” Martin Ollman

The Albanese government is aiming to lower emissions by 43 per cent of 2005 levels by 2030 and increase renewable energy to 82 per cent of total generation across the power system.

Ms Bullock will take the reins of the RBA on September 18, in the midst of the most acute inflation outbreak in decades.

Progress reducing inflation has bolstered expectations the RBA may be done with interest rate rises. Markets price almost no prospect of a 0.25 percentage point rate rise at outgoing RBA governor Philip Lowe’s final board meeting on September 5.

However, Ms Bullock did not rule out lifting the cash rate beyond 4.1 per cent if it appeared the central bank was not on track to return to its 2 to 3 per cent inflation target by the end of 2025.

“We may have to raise interest rates again, but we’re watching the data very carefully. And we’ll be taking decisions for the time being until next year at least month by month,” Ms Bullock said.

Asked what her priorities were as governor, she said getting inflation back to target and implementing the 51 recommendations contained in the RBA review were central.

“Getting a culture of sharing, debate and ... respectful challenge. And that’s something that I’m very, very passionate about,” she said.

Student protestors interrupted the start of Ms Bullock’s speech at Australian National University in Canberra, querying why interest rate rises may cost 140,000 jobs and chanting “we’ve got a housing fix, tax the rich”.

The soon-to be-governor kept calm, pausing from her scripted introduction and saying it was good to see activism was alive on campuses even if it was at her expense.

Pointing to the decarbonisation of the energy grid, Ms Bullock said there was a great deal of uncertainty about whether renewables would pick up the slack from the closure of coal-fired power plants, despite a sixfold increase in renewables generation since 2006.

“Coal-fired power plants are scheduled to be shut down over the next three decades,” Ms Bullock said.

“This could put upward pressure on energy prices if coal plant closures arenot matched by renewables supply and storage.”

Ms Bullock said there was a possibility that inflation could be higher over the medium term as a result of the large amount of investment needed to make net zero a reality.

The International Energy Agency estimates that annual investment in clean energy needs to triple by 2030 to achieve net zero globally.

“If realised, this is expected to have some sizeable and possibly volatile effects on overall inflation,” Ms Bullock said.

“On the other hand, the argument can be made that rapid adoption of renewables or faster-than-expected improvements in clean technologies could push energy costs down even more quickly than anticipated.”

Adding to the uncertainty was the prospect that coal plant closures may be delayed to ensure sufficient energy generation capacity.

“But this comes with other risks – for example, coal plants may be more prone to outages as the infrastructure ages,” Ms Bullock said.

“Furthermore, slower coal plant closures would require more rapid reductions in emissions in other sectors to meet national emissions targets.”

About 150 countries representing 92 per cent of global GDP and 88 per cent of emissions have pledged to achieve net zero carbon emissions.

While international demand for Australian thermal coal could decline by 99 per cent by 2063 if global temperature rises were limited to 1.5 degrees, Ms Bullock said this could be partly offset by new industries.

“For example, Australia has significant endowments of several of the minerals identified by the IEA as important inputs for the energy transition – including cobalt, lead, lithium, nickel, vanadium and zinc, which are used in products like batteries, solar panels and wind turbines,” she said.

“Global demand for lithium is projected to increase significantly over the next 40 years, expanding Australia’s potential export market.”

Ms Bullock said more frequent weather-related disruptions could make the RBA’s job harder if their inflationary effects lingered.

“The longer inflation is allowed to remain high, the greater the risk that expectations will drift higher, and the greater the real economic costs will be of bringing inflation back down.”

Warmer temperatures may also have implications for the viability of certain crops and the agricultural industry more broadly.

With John Kehoe

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