Issue 120, April 2015
Welcome to the fourth issue of the newsletter for 2015, writes Keith Orchison, as the re-elected New South Wales Coalition government sets itself to pilot its network privatization program through State Parliament and confronts the looming challenge of insufficient gas supply – while the federal renewable energy target row rolls on and the wait for the energy white paper continues.
Perhaps the biggest issue emerging from the New South Wales election campaign, after weeks of misleading and eventually xenophobic propaganda against power network privatization, is the challenge for the Labor Party on a broader front: can its leadership address Australia’s major, long-term energy issues to achieve optimum outcomes for the community at large or is it going to remain trapped in a valley of negativity, hemmed in by trade union self-interest on one side and fear of the Greens on the other?
The doyen of Australian political journalism, Paul Kelly, is accusing today’s Labor of political bankruptcy in the wake of the election, arguing that it is tied to union interests, hooked on pro-green politics and reliant on vote-gathering via hysteria.
Stephen Galilee, CEO of the NSW Minerals Council and former member of John Howard’s and Ian Macfarlane’s staff in Canberra, asserts that “Labor’s political identity crisis is becoming starker with every election.”
The schism in Labor’s energy approach was highlighted in late March by a pro-gas development talk from its federal resources spokesman while (literally) at the same time the NSW wing of the party was promising to kill off the State’s best hope for gas production within its borders
The inability of NSW leader-on-training-wheels Luke Foley to rise to the occasion is less important, in the bigger scheme of energy things, than Labor’s overall inability to stop playing politics with issues that affect the lives of all Australians and all businesses.
To say that the fault nationally does not lie all on one side – the Coalition has been as guilty of playing combat politics with energy issues as its main opponent – does not excuse Labor from its failings.
For energy investors today, a great fear is that the Labor could come back to office federally in 2016, or even 2019, with nothing in its energy policy sack but more populist gestures and more efforts to ward off the Greens’ encroachment on its urban seats.
The best advice both sides of politics received during the election campaign came at the Australian Domestic Gas Outlook conference four days before the State election from Martin Ferguson, subject at present to an attempt to eject him from the Labor Party after his intervention pointing out the dishonesty of its NSW poll propaganda.
“Call me old-fashioned,” Ferguson said, “but I still subscribe to the theory that good policy makes for good politics.”
Getting the Coalition re-elected on a pledge to sell electricity assets was the first leg of a big hop, skip and jump challenge for NSW Premier Mike Baird.
He succeeded handsomely in the first move, with the final Legislative Assembly result seeming most likely, as counting continues, to deliver the Liberals and Nationals 54 seats versus 34 for Labor.
Now he must clear the hurdle of a State Legislative Council vote before the new Treasurer, Gladys Berejiklian, can oversee the first auction for a 100 per cent lease of transmission company TransGrid, targeted for sale before the year’s end.
This will leave two distribution businesses, Ausgrid and Endeavour Energy, to be part-leased well after the Australian Energy Regulator has finalized their revenue determinations for 2015-19 (possibly this month).
The draft determinations demand significant reductions in opex and capex outlays by the pair (and rural Essential Energy, which is not up for sale) and, according to the networks, will lead to substantial job losses.
Meanwhile, the NSW Legislative Council election result, with 4.2 million votes tallied and counting still continuing, appears to have delivered 1.69 million supporting the Coalition government, 1.2 million for Labor and 365,000 for the Greens – or 43.5 per cent of the primary vote versus 31.5 per cent and 9.4 per cent.
Taken with the Legislative Assembly victory, this in a sense is a double mandate for Baird’s privatization program, the election having been touted by his opponents and many in the media as a referendum on the issue.
With the support of two Christian Democrat Party members in the Legislative Council, the Baird government will be able to pass the privatization legislation – although CDP leader Fred Nile wants a LegCo select committee inquiry before the vote.
With respect to the other contentious energy issue in NSW, the development of coal seam gas projects, resource sector lobbyists are pointing out that the Greens, fierce opponents of CSG, actually went backwards in the 2015 Legislative Council vote: garnering thousands fewer supporters than in the 2011 poll and seeing their share of ballots fall back from 11 per cent.
How far and how fast Baird’s government can move to ensure at least an adequate physical supply of gas for the State by winter next year is one of the major questions now awaiting an answer.
Martin Ferguson’s criticism of NSW Labor/trade unions’ anti-privatization propaganda was not the only attack on the position by a senior party figure during the State election.
Former State Treasurer Michael Costa, part of the Morris Iemma Labor administration destroyed by an anti-sales campaign, wrote a blisteringly critical commentary on the issue in the mass circulation “Daily Telegraph” eight days before the poll.
Costa, also a former head of Unions NSW, said the State has been “cursed” for more than two decades by a “dishonest debate” on electricity privatization “which has resulted in a small, privileged special interest group, the electricity unions, maintaining their advantages at the expense of the general good.”
He accused the 2015 Labor/unions campaign of “lie after desperate lie in an attempt to frighten the electorate.”
The former Treasurer has calculated that, had the unions not derailed the initial privatization attempt by the Carr/Egan Labor government in the 1990s, the State would have reaped $35 billion in today’s dollar values to spend on other infrastructure.
Costa believes that the “gen-tailer” sales pursued by the Rees and Keneally governments in Labor’s final years in office – before the party was thrown out in a landslide in 2011 – have “preserved feather-bedded, inefficient work practices” and “destroyed the financial value of the generators.”
The result of the “gen-tailer” approach, Costa wrote, is that the State received $5.3 billion for assets worth $15 billion, forcing the Coalition on coming to office to “virtually give away” the physical assets “to avoid enormous financial risks, estimated to be in the billions of dollars.”
Costa also lashed out at the role of the unions in “forcing on (Labor) governments” policies “dressed up as concerns about network reliability.”
He said that they have “resulted in over-capitalized, gold-plated networks with inefficient and costly maintenance practices” and have delivered large end-user bill increases.
“These costs,” said Costa, “(have added) hundreds of dollars to average residential bills.”
The upstream petroleum industry is well pleased with the Productivity Commission research paper on barriers to an efficient gas market.
The Australian Petroleum Production & Exploration Association says campaigns for market interventions such as domestic gas reservation should now be “consigned to the scrapheap.”
The real issue, it asserts, is providing a regulatory environment that will enable more gas to flow in to the east coast market.
Paul Fennelly, acting chief executive of APPEA, says the commission report is a welcome contribution to a debate that “has been too often characterized by misinformation and poorly-considered policies.”
He says the commission has been a champion of free markets and free trade and its key finding in the new report – that developing a gas export industry on the east coast will deliver a net benefit to the Australian community – is particularly welcome.
He also lauds the PC view that removing regulatory burdens restricting gas exploration and production, particularly in NSW and Victoria, will provide a clear pathway to allowing the market to work more effectively and to bring on more supply.
Fennelly adds that Western Australia, the only State with a gas reservation policy, should now abolish the measure as “the costs imposed on the economy far outweigh any perceived benefits.”
In the report, the Productivity Commission says the integration of the east coast gas market in to the Asia-Pacific region “represents an opportunity for the community to earn a higher return from its substantial non-renewable resources.”
The commission also sees scope for improvement in the relationship between the gas industry, landholders and affected communities in a voluntary code of practice plus a compensation regime that better reflects farmers’ costs of engaging with the explorers and producers.
The Harper inquiry in to national competition policy is urging policymakers to finish the job of electricity reform launched by its predecessor two decades ago, the report by Fred Hilmer.
The new panel, chaired by Deloitte’s Ian Harper, says it “sees significant benefit” in a national framework for reliability standards, pointing to the link between painful prices rises over the past five years and jurisdictional activity in this area.
It also pushes for adoption of the NEM legislative and institutional arrangements by Western Australia and the Northern Territory, saying that, while geography and transmission costs militate against physical union with the market, there are benefits to be gained without connection.
The panel reminds policymakers that reform in this area is important because energy is a critical input to other sectors of the economy and increased competition will place downward pressure on consumer prices.
“Reform of the electricity and gas sectors is well-progressed compared with other sectors,” the report comments, “but it is unfinished businesses,” pointing out to CoAG that reforms to which it committed in December 2012 are still not complete.
They should be finished within two years, it says.
The panel chides some governments for making changes to the agreed National Electricity Retail Law template. This will detract from the originally intended benefits, it says.
It also urges the federal government to pursue a detailed review of competition in Australian gas markets.
An Essential Report opinion poll has found 33 per cent of respondents have become a little more concerned about the threatened environmental effect of climate change over the past two years.
Nineteen per cent of those questioned say they are much more concerned – this group is dominated by people supporting the Greens.
Thirty-seven per cent of the poll respondents say their concerns have remained “about the same” over two years and eight per cent have become less concerned.
The poll also finds that 45 per cent of the respondents say that incentives for renewable energy are the policy change they most support – but only 33 per cent of them think the renewable energy target is too low.
Thirty-two per cent think it is “about right” and 27 per cent are in the “don’t know” category.
Only 34 per cent of a group polled in NSW before the election said they trusted the Coalition to manage the State’s future energy ends versus 26 per cent for Labor and 14 per cent for the Greens. This question recorded a 27 per cent “don’t know” response.
Securing the future of the NSW energy mix will be the topic of a Committee of Economic Development forum to be held in Sydney on 24 April.
It will feature James Baulderstone of Santos, Martin Ferguson in his capacity as chair of the APPEA advisory board, David Moult, CEO of Centennial Coal, and Kylie Hargreaves, deputy secretary of the State Department of Trade & Investment.
The 200-plus attendees at the Australian Domestic Gas Outlook conference in Sydney in late March were reminded of the critical role of gas in industry by Samantha Read, CEO of the Plastics & Chemicals Industry Association.
Ten per cent of gas is used nationally as feedstock for the manufacturing of chemical and plastic products, Read said, and in NSW it is 25 per cent.
Gas, she added, is one of the key raw inputs that makes the plastics and chemicals industry an Australian “super-connector,” providing inputs to 109 of this country’s 111 industries.
The chemistry industry, she pointed out, itself contributes $11.6 billion annually in value-added to the national economy and directly employs more than 60,000 people to whom it pays $6 billion a year in remuneration.
“We can manufacture Australia’s future with gas,” Read told the ADGO attendees, “but this won’t happen without the (supply) certainty required for (factory) investment.”
Today’s level of uncertainty for domestic industrial gas users is “serious,” she said, with a “profound effect” on manufacturers using the fuel as an unsubstitutable feedstock in facilities operating 24/7.
Research, Read added, had shown that gas supply tightness and prices increases now being predicted could cost the chemicals and plastics industry $13.7 billion in output and 4,000 jobs by 2021.
It is critical, she said, for a “whole-of-community” recognition to be built of the value of gas through the industrial supply chain.
Federal Labor resources and energy spokesman Gary Gray told the Australian Domestic Gas Outlook conference in Sydney that he, Martin Ferguson and (Coalition) Industry & Science Minister Ian Macfarlane all belong to the “extreme middle” faction in energy politics.
Underlining the point, Gray spoke out against proposals to reserve gas for domestic use – a move being strongly promoted by the Australian Workers Union and a rump of manufacturers – and in favor of coal seam gas development and the use of hydraulic fracturing in gas operations.
Gray said the policy challenge today for State governments is to “maintain Australia’s century-old land compensation regime for resources owned by the state and to generate a long-term revenue source through royalties and rents with the best possible environmental protection.”
For the federal government, he added, the policy challenge is to “ensure the best possible environmental protection and more gas production.”
He lauded the South Australian and Queensland administrations for “bold and bipartisan” policy decisions and sensible co-operation with the federal government.
In a week in which the Labor leader in NSW was pledging to kill the $2 billion Santos CSG development at Narrabri if he won office – a move condemned by Ferguson as “economically irresponsible” – and a month in which the new Labor Victorian government was pursuing extension of a moratorium on onshore activities, Gray told the Sydney audience that CSG exploration and production represents “an immense opportunity,” particularly for regional Australia.
“We face the realistic choice of gas production with modern techniques and technology or no production at all – and that makes for an easy choice,” Gray asserted. “We have an abundance of gas and we must use all our ingenuity to produce it and get it to market.”
All east coast States, he declared, should be focused on removing impediments to supply and on maximizing market trading and pipeline access to supply opportunities within their borders.
“The best way to slow the increase in east coast gas prices lies in bringing more gas to market through reducing investment barriers, more appropriate and balanced regulatory frameworks and better community engagement,” he said.
The inability of the mainstream federal parties to reach a bipartisan stance on the renewable energy target remained in sharp focus at Easter, months after they were supposedly nearing agreement before Christmas.
As the nation marked its Easter holiday and as federal parliamentarians departed Canberra for a break that will last until the Budget session opens, the Clean Energy Council lamented that neither Labor nor the Coalition had responded to its latest proposal that the RET be set at 33,500 gigawatt hours of contribution to the national electricity production mix in 2020 instead of the current 41,000 GWh (which the CEC and other renewables advocates swore a year ago could not be breached without the ruin of their industry).
The Abbott government remains committed to cutting the RET to 32,000 GWh and Labor says it won’t settle for less than a target in the “mid to high 30,000s.”
However, the CEC statement is seen as setting an upper limit on what the Coalition might be prepared to accept – while federal Labor is perceived as already laying the ground for the next national election and its need to gain voting preferences from the Greens.
Greens leader Christine Milne’s stance is that the government can be forced to back down on the 41,000 GWh RET as, she says, it has on Medicare and university fees.
“Now is the time to redouble our efforts to force this backdown,” she said in a Good Friday media statement.
Meanwhile the solar lobby is pressing for a 50 per cent renewable energy target by 2030.
Industry & Science Minister Ian Macfarlane told media as the parliamentary session ended that the government had already increased its RET offer three times in negotiations and was now proposing a 23 per cent target for 2020.
“Each time we increase the target, we increase the likelihood that the scheme will fail.”
He said that the Coalition’s current position is “already above the number (where) I believe we can be confident that the scheme is sustainable.”
He added: “The challenge to double the size of the renewable generating sector in the next five years (compared with) what it built in the past 15 is enormous.
“To keep increasing (the target) increases the risk the scheme will default and collapse around us. We are now at the top limit of what we believe is the safe band in terms of the scheme being sustainable.”
Macfarlane has indicated that the government will seek to reach a deal with crossbench senators who hold the balance of upper house power to amend the RET legislation on his terms, which include a concession to leave the small-scale solar scheme unchanged and to remove the requirement for biennial reviews.
However, energy and manufacturing industry is concerned that this will not produce a bipartisan arrangement offering certainty and that the issue will be a political football again in 2016.
Chris Judd, managing director of wind turbine manufacturer Senvion Australia, a subsidiary of India’s Suzlon, has told a London newspaper that the ending of bipartisan support for the RET “has killed foreign investment and stalled the (local) industry.”
The federal government has fired its first shot in the political campaign that will hog considerable media time between now and the UN’s supposedly seminal carbon management summit in Paris at the year’s end.
Through the Department of Prime Minister & Cabinet, the government launched an issues paper in the week before Easter inviting public comment on Australia’s post-2020 emissions target.
The paper says that the government will announce the target by mid-2015 and that the chosen level will represent “(our) fair share of the global effort needed to respond to climate change.”
The chosen target, it adds, will be “consistent with continued strong economic growth, jobs growth and development in Australia.”
The government’s energy white paper is said to be likely to be published in April but how this document can take a long-term view of policy without the new carbon abatement target being settled is a mystery to many informed observers.
The issues paper notes that factors putting pressure on national greenhouse gas emissions include expected 17 per cent economic growth between 2014 and 2019 compared with a forecast 12 per cent for other advanced economies, population growth averaging 1.6 per cent a year compared with 0.4 per cent in the rest of the developed world, a 60 per cent contribution to domestic energy supply from coal compared with 20 per cent on average for other developed countries and a 95 per cent contribution to all energy consumption from fossil fuels versus an OECD average of 81 per cent.
The paper also comments on a critical factor affecting any meaningful step at the Paris summit: it is estimated that on presents trends 74 per cent of the world’s primary energy needs will be met from carbon-based sources in 2040 against 80 per cent now.
One of the key aspects of the forward projections is that, despite much media hype, China’s “peak coal” outlook in 2030 – when its consumption is expected to be four billion tonnes a year – does not represent a sudden dive in demand thereafter.
Credible forecasts from Chinese sources indicate that the peak will be followed by “plateau coal,” with consumption from 2030 to 2040 averaging about 3.5 billion tonnes.
Meanwhile the PM&C issues paper highlights the fact that Australia’s carbon emissions per capita have fallen by 28 per cent since 1990 and by 20 per cent since 2000.
The paper adds that emissions per unit of GDP have fallen 52 per cent since 1990 and 35 per cent since 2000.
It is hard to argue with the view that Australia’s energy policy development over the past decade has been tarnished too often by rank political opportunism and, with respect to climate change, gas supply and utility privatization, blatant scaremongering.
To describe the energy policy environment today as excessively politicized is an understatement.
The situation is especially bedevilled by the way successive political leaders, federal and State, have treated climate issues as dominant to energy policy, pursuing votes when, mostly not being stupid people, they must know that carbon abatement cannot safely be used as a basis for picking long-term winners and losers in power generation and gas supply.
The hallmark of far too much energy policymaking today is short-term political gain (with a stand-out example of the genre the last gasp offer from NSW Labor’s Luke Foley in the State election campaign to kill the $2 billion coal seam gas development in the Pilliga scrubland near Narrabri in order to woo votes from followers of the Greens and pick up perhaps two rural seats).
A separate but important aspect of the games that are played has been the manipulation of utility reliability standards by the electrical trade unions of State governments, a key contribution to higher network costs and major spikes in end-user power bills, the trigger for wide-ranging voters unhappiness and all manner of Bandaid promises to make things better.
This latter point has been exposed anew by a former Labor and trade union senior figure, Michael Costa, for a time NSW Treasurer, in a vigorous intervention in the State election via a mass-circulation newspaper (see “Caustic Costa” in this newsletter issue).
The high profile coverage by the tabloid newspaper (which has some three million readers a month in Greater Sydney and the rest of the State) of Costa’s accusation that the Foley-led NSW Labor and the trade unions were running a campaign of “desperate lies” – and that union activity had cost both taxpayers and power consumers billions of dollars – must have had a strong impact on the State’s voters a few days before the poll.
The NSW election outcome is now history (and Labor’s defeat well-deserved) but the whole episode, and others that have gone before it from both sides of politics, serves to highlight a situation that is working against the interests of the Australian community in terms of wasted money, wasted opportunities and current and potential job losses.
A strong energy strategy for Australia, one that has a horizon well beyond the immediate political cycle, must be built on policy certainty and stability.
Critical elements of this, as the Energy Policy Institute and others keep declaring, are bipartisan support for policy integration and a long-term vision, with buy-in by State and Territory governments as well as Canberra.
We need to be clear what this means.
EPIA made a very important point recently: “So-called bipartisan policy derived from a political negotiating process that is not based on unbiased analysis will be no more certain and stable than policy decided unilaterally.”
The shenanigans over the RET are a fine example of this.
Any wind farm or solar investor who thinks that what (if anything) emerges from the current rolling renewables maul involving Labor, the Coalition and a slew of self-interested parties will make for certainty over the next 15 years has rocks in his or her head, a point that may be brought home to them by bankers they approach for financial support.
A reporter covering the Australian Domestic Gas Outlook conference I co-chaired in Sydney on the eve of the NSW election wrote that frustration at the paralysis gripping the domestic gas supply sector was palpable among the 200-plus attendees; I agree and can point to the same reaction at other Outlook conferences covering energy more generally.
Being politically clever (in the short term) but policy weak appears to have become a hallmark of today’s Australia’s energy strategy scene.
In behaving in this way, many of our current crop of politicians are demonstrating that they do not care about energy security (in its broadest sense). Those that do understand and care have not been greatly successful in leading the way to a long-term, bipartisan strategy.
This is dangerous for the community as a whole.
In the long term it is also not good politics for the mainstream parties as they end up struggling with fresh crises.
Those temporarily in leadership of these parties, in the words of Martin Ferguson addressing the ADGO forum, should see the short-term allure of opportunism for what it is.
If they can’t or won’t, the media should do much more to bring home the point for the community.
For once, we saw this happening in the NSW election and its impact on voters was obvious. (Caught out, the Labor movement is now looking for a scapegoat; its leadership should look in the mirror.)
The NSW election result is an indication that, when the dangers of opportunism and dishonesty are brought strongly to their attention, a majority of the community will not reward those whose only goal is political gain.
The big question is whether this can be leveraged to orient mainstream political leaders more generally towards good, long-lasting policy?
Keith Orchison
4 April 2015
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