Issue 216, April 2023
Anyone who thought the federal election last May would see the emergence of less turbulent Australian energy markets must surely now appreciate they were mistaken. Not only is the domestic scene still mired in unrest and uncertainty for energy suppliers and customers but political developments affecting gas have Australia’s trading partners, notably Japan, increasingly on edge. What the outcome of the March State election in New South Wales will mean for energy stakeholders within its borders remains to be seen as the ALP cannot govern in its own right and will have to depend on support from the Greens and other crossbench MPs, already a well-publicized problem for the Labor national government, not least with respect to power, gas and emissions policies. As well, April will see a milestone for the NEM and NSW electricity supply: the beginning of the closure of the Liddell coal-burning power station, source of up to one electron in 10 for the State grid, putting greater focus on system reliability and affordability at a time when power bills are contributing ever more strongly to community cost-of-living angst.
“Our number one energy priority is keeping the lights on” – Jihad Dib, expected to be the new NSW energy minister after the ALP election victory. “One of my major concerns is that the renewable energy zones (in NSW) do not appear to be on track to deliver 12,000 megawatts of new generation or 2,000 MW of long-duration storage by 2030.”
“I’m not going to let the power run out in NSW and I’m not going to rule out buying Eraring power station” – incoming State Premier Chris Minns.
“Old coal capacity is leaving. Gas peakers continue to play a critical role, but there are questions over whether they will run short of gas to operate before they are switched to clean fuels. Replacement renewable generation, transmission and storage assets are facing a mix of delays from pandemic-snarled supply chains and slow approvals processes” – Australian Industry Group CEO Innes Willox.
“Even though the outlook had improved slightly over the past six months, the fundamental challenge of keeping the system stable during the transition away from fossil fuels remained daunting” – Australian Energy Market Operator CEO Daniel Westerman.
“There will be big and lengthy tests applied to new projects when the need for energy security is at a premium” – Graham Lloyd, The Australian newspaper.
“When you put all your eggs in one basket what happens when you drop the basket?” – former federal Attorney-General Philip Ruddock.
“Australia is at grave risk of sleepwalking in to an energy crisis” – John Kehoe, Australian Financial Review economics editor.
Just what will it cost to electrify all Australian homes? There are currently more than five million Australian households using gas.
Speaking at the Australian Domestic Gas Outlook conference in Sydney, TasGas CEO Phaedra Deckart asserted the bill would be between $5,000 and $10,000 per household to take all gas appliances out and replace them with electricity.
Most households, she said, would struggle to afford this in a high inflation, high interest rate environment.
Her comments were made as activists, including Rewiring Australia, are lobbying the Albanese government to allocate $2.5 billion in the May federal budget to support electrifying half a million Australian homes as a first step to pursuing the task on a mass scale as well as allocating $10 billion to the Clean Energy Finance Corporation to “amplify” the work.
The Australian Gas & Pipeline Association is calling for independent modelling of the concept’s total cost for taxpayers and households.
APGA claims the costs have been so far “downplayed” by transition proponents and that they could exceed $66 billion – an estimate that has been attacked by activists as “overcooked” and evidence that the industry is “in a panic” over the issue.
The Federal Opposition, itself under considerable pressure after its loss of the Victorian seat of Aston in a by-election, declares consideration of electrification subsidies for the budget is another example of the government “doing deals” with the Greens and independent senators to garner support for its policy program.
CSIRO says the east coast power market is likely to need a 10 to 14-fold increase in electricity storage capacity between 2025 and 2040 to keep pace with a transition to renewable energy and the mooted electrification of the building and transport industries.
Releasing a new “roadmap” focussing on storage issues, outgoing CSIRO chief executive Larry Marshall said “reaching net-zero is a wicked challenge” requiring a “robust” pipeline of projects using diverse technologies to cope with an expected growth of variable renewable energy’s share of NEM supply, rising from 25 per cent in 2020 to 64 per cent by 2030 and 94 per cent by 2050.
The report says up to 69 gigawatt hours of storage capacity will be needed by 2030 – and current commitments are for 3.7 GWh. It adds:
“Currently there are only limited commercially mature options for this and the most widely deployed — lithium-ion batteries and pumped hydro — face supply chain risks and geographical constraints respectively.”
It also says that it is crucial to conduct further analysis to better understand Australia’s requirements for multi-day and seasonal storage, the trade-offs that exist and the technology pathways available.
Meanwhile, the Clean Energy Council says investment in large-scale renewable energy and storage accelerated in the last quarter of 2022 but “the pace remains inadequate.” The lobby group says total investment commitments in the sector reached $6.2 billion last year.
The Australian Energy Market Commission says delivering the step change scenario in the market operator’s integrated system plan will cost $242 billion in generation, transmission and storage – “and that is
above current commitments,” says commissioner Tim Jordan.
Addressing a conference in Sydney in March, Jordan said energy and battery storage would require $64 billion of this outlay.
He added that, of the 46 gigawatts of dispatchable storage required by 2050, about one-third – 16 GW – would need to come from utility-scale batteries and pumped hydro. The remaining two-thirds – 31 GW – would come from virtual power plants, vehicle-to-grid and other distributed technologies.
Petroleum suppliers have seized on a warning of a possible south-eastern States gas supply shortfall this winter on peak demand days because of severe weather conditions to underline the need for new investment as soon as possible.
Samantha McCulloch, CEO of the Australian Petroleum Production & Exploration Association, says the latest market operator concerns call for government strategy to encourage supply. “Energy security and affordable prices for consumers are at stake.”
Her view is reinforced by Credit Suisse analyst Saul Kavonic, who told the media “federal government gas pricing policy is exacerbating and hastening the shortfalls.” Kavonic declared that “the market direction is inevitably heading towards terminal decline, more government controls and breaking of contracts in coming years (even if not the intent today).”
Analysts EnergyQuest in their latest quarterly review comment that “In a two-month period that included the Christmas break, the Albanese government has completely upended the basis for producing, selling, and exporting gas in Australia.” They say the reforms legislated in late December give the government far-reaching powers to intervene in the market, adding “until the new rules around reasonable pricing are clear, explorers and producers alike will struggle to justify ongoing investment in supply.”
EnergyQuest note that finance for new oil and gas infrastructure was already hard to obtain prior to the government’s intervention, which, they say, will make financiers even more reluctant as investment certainty and long-term regulatory stability has degraded significantly. “New supply from explorers and mid-tier producers is now significantly less certain to come online.”
The latest spark for controversy over gas supply – with the Greens and other activists sustaining demands for no pursuit of new resources – has been provided by the Australian Energy Market Operator warning that “a risk of gas shortfalls each year from winter 2023 to 2026 in all southern jurisdictions remains under extreme weather conditions and periods of high gas-powered electricity generation, with those risks further exacerbated if gas storage levels are insufficient.”
The operator points to a forecast of a growing decline in Bass Strait fields’ supply to Victoria this winter compared to 2022.
AEMO says total available supply from the State’s Gippsland region will drop 13 per cent from 326 petajoules in 2022 to 284PJ this year and more than halve to 130PJ in 2027, at which point Victoria would become a net importer in the winter months.
Another key factor is the failure to date of the proposed Port Kembla LNG import terminal to progress. AEMO says it no longer considers the planned facility as an “anticipated project,” due to a lack of customers. In earlier market reports the operator had identified the terminal as averting a near-term supply deficit by adding an extra 500 terajoules a day of gas into the domestic market ahead of the 2023 winter.
The situation raises the prospect of gas contracted for export by Queensland producers needing to be commandeered to fulfil domestic requirements, which, in turn, has seen concern being expressed by the Japanese government through its Australian embassy. The federal government will announce a decision on 14 April on whether export volumes will need to be diverted to the domestic market in the September quarter.
Eastern States households and small businesses will get to know next month just how much more they face paying for electricity in the new financial year.
The Australian Energy Regulator’s final determination of the new “default market offer” – the standard power retailer charge – will be announced in May to take effect on 1 July.
In its draft determination announcement in mid-March, the AER said the price for 600,000 residential consumers in South Australia, New South Wales and south-east Queensland will rise between 19.5 and 23.7 per cent while for small businesses the increases will fall between 14.7 and 25.4 per cent.
Victoria's Essential Services Commission has released its default offer with an even larger 30 per cent increase in household electricity prices and 31 per cent for small businesses. The decision affects 455,000 customers. The ESC says a typical Victorian household bill will rise from $1,403 to $1,829 per year while small businesses can expect an increase from $5,620 to about $7,358.
The regulators emphasize that the DMO is a safety net price and encourage consumers to shop around for the best retailer deals they can get.
The Australian Energy Council says the draft decisions “reflect extremely tough market conditions.” It adds that higher wholesale power prices have left no room for energy retailers to absorb costs. “Retailers are already dealing with razor-thin margins. Failing retailers would be a worst-case scenario for everyone.”
Energy Consumers Australia says: “There’s no doubt that these price hikes, on top of double digit increases in retail electricity and gas prices this past year, will place increasing stress on households and small businesses who are already contending with a range of cost-of-living pressures.”
It adds: “While this current price crisis will ease, as a number of global and domestic factors are already reducing wholesale electricity prices, we cannot count on retail electricity and gas prices falling below pre-crisis levels. If anything, the risk is that the scale of investment required in additional renewable generation, transmission and distribution network capacity and storage in the next decade will sustain high retail electricity prices.”
Federal Climate Change & Energy Minister Chris Bowen, who had promised a $275 drop in household power bills before last year’s federal election, says that consumers would be paying even more if not for the caps on gas and coal prices imposed by the Albanese government. "The draft increases are up to 29 percentage points lower than the AER projected in late 2022, more than halving the increase that was expected before the government acted on skyrocketing coal and gas prices," he noted in a media statement.
Rooftop solar PV investment by households and businesses rebounded strongly in the second half of 2022, the Clean Energy Regulator reports, with last year’s total, after a slow start, reaching 2,800 megawatts and 315,000 systems.
CER chairman David Parker says 2023 may be a record year for the rooftop technology if the trend of late 2022 continues.
The regulator also reports that commitments were made in 2022 to building 4,360 MW of large-scale solar plants and wind farms across Australia, a 50 per cent rise on 2021. In all, he says, there is 6,800 MW of capacity under construction “or will be soon.”
Parker says the total of rooftop PV installations nationally has now reached 19,560 MW.
Originally it was claimed that the 466 megawatt Callide C4 coal-fired power plant at Biloeia in Central Queensland would be operational again in May last year after an explosion seriously damaged it 12 months earlier.
Then the market was told it would re-open in May this year.
Now the operators are claiming a staged return will start in October and run in to 2024.
The adjacent 466 MW Callide C3 plant, which was taken offline in October 2023 because of structural issues with its cooling plant, was due to return to service in November last year. This was changed to June this year and is now said to be happening at the end of September.
However, in another twist to the saga, it has been announced that the State-owned CS Energy’s partner in co-ownership of the Callide C venture, Genuity (formerly InterGen Australia), has gone in to voluntary administration. CS Energy is said to be examining acquiring Genuity’s stake in the plant.
In a brief media statement last month, CS Energy declared “we remain committed to a safe and timely reinstatement of the Callide C power station units and are working through our options to achieve this.”
The Australian Financial Review reports that future wholesale power prices for Queensland jumped $15 per megawatt hour after the latest news.
The outage is claimed to be the longest in the history of the NEM, which came in to being in 1998.
Leading analysts EnergyQuest have made a potent point in their latest quarterly review: after giving itself unprecedented powers to control the energy market government will now be held responsible for any future problems – and, if past behaviour is a predictor of the future, the response will be more intervention.
The analysts are talking specifically about the shenanigans over south-eastern gas supply but the point extends to all the energy sector. As signs often say in shops: “if you break it, you buy it.”
The rolling maul that is the current gas debate of course drags in electricity security and price, too.
As EnergyQuest put it, “The east coast gas market is far from being ‘fixed’ and the government may yet face the choice between breaching export contracts with key trading partners or having the lights go out. Given the capacity limitations of pipelines from Queensland to southern States and the ongoing retirement of coal fired power generation, we may see both these outcomes at once.”
They also note: “For the best part of a decade, the fight was between Labor and the Coalition over whether Australia should pursue credible emissions reduction in terms of the goals set in the 2015 Paris agreement. Australian voters ended that fight at the Federal election in May 2022 by giving Labor a majority in the lower house – which also nullified any power sought by the teal independents. But voters also doubled the representation of the Greens in the Senate, effectively giving them a veto on legislation in the upper house, and thus set the scene for the next round of the climate wars. This time, the battle is between credible reduction in emissions and the magical, fanatical thinking of the Greens that imagines new gas supply can be shut down overnight. It is easy to prosecute dumb and dangerous policy when your party will never have to take responsibility for the consequences.”
Just so.
EnergyQuest go on in the March-published review to emphasize that, with respect to the past year’s energy price panics, one of the causes has been “botched decarbonisation” along with freak weather, the Ukraine war and the recovery from the pandemic. By “botched decarbonisation” they mean closing down fossil fuels like coal generation faster than they can be replaced by firm, cleaner alternatives.
They point, as others are doing, to the prospect of NEM reliability gaps emerging from 2025, something the Australian Energy Market Operator is now acknowledging.
The most recent AEMO report says: “These gaps widen until all mainland States in the NEM are forecast to breach the reliability standard from 2027 onwards, with at least five coal power stations totalling approximately 13 per cent of the market’s total capacity expected to retire: Liddell (1,260 MW, April 2023), Eraring (2,840 MW, August 2025), Callide B (700 MW, 2028), Yallourn (1,540 MW, 2028) and Vales Point B (1,320 MW, 2029).”
As EnergyQuest say, the challenge of safely managing this transition is now magnified by the decision of energy ministers to rule out a capacity mechanism including coal and gas.
And, as I have done in past issues of this newsletter, they quote the former head of the Energy Security Board, Kerry Schott, who declared the ministers “have dropped the ball on firming capacity because it’s become so non-politically correct to talk about gas.”
Schott is not alone in being perplexed about how the NEM can be run on renewables and batteries when there could be weeks of rain preventing recharging of batteries and also wind droughts.
We are now reaching the stage where this is not just the butt of casual media argy bargy and political game-playing.
Supporters of the green transition repeatedly declare that there are plenty of planned developments – renewable, storage, transmission and demand response – that can mitigate the market risks. AEMO talks of a “strong pipeline” of such projects. But the devil is in their delivery with many impediments in the way, among them supply chain issues and skills shortages because Australia is competing with other countries on these fronts.
As just one example, S&P Global are projecting that the global net zero push will see a doubling of demand for copper, which is vital for most clean energy technologies.
How many Australian consumers/voters realize that the boosters of an urgent energy transition are basing their optimism on a perfect world for local project developments – and do any of The Mob (nodding to Paul Keating) really need reminding that, in 2023, this is about as real as the Tooth Fairy?
Keith Orchison
3 April 2023