Issue 228, April 2024
A quarter of 2024 is now behind us and this is clearly shaping up to be another messy year of energy debate in Australia with the role of power prices remaining high on the agenda while the row over the intrusion of wind and solar “factories” on agriculture and the wild environment grows ever louder. Meanwhile, for southern Australia, the prospect of shortages of gas during extreme peak demand days is no longer a distant threat but one for next year, according to the Energy Market Operator. Producers are not sanguine about timely additions to supply. Of course, politics and the energy debate are ever intertwined and now one of the big events of this year’s political agenda, the Queensland State election, a major harbinger of how things could go in the next federal election, is less than eight months away. Woven in to all this is a louder media debate about nuclear power – specifically whether the current ban on its use in Australia should be lifted. This is now almost certain to be a headline issue at the next federal election. Never a dull moment, as they say in the classics.
“Gas production is forecast to fall faster than demand in the south, driven by declining production from Bass Strait, which has historically supplied around two-thirds of southern Australia’s gas” – Daniel Westerman, AEMO chief executive.
“From 2028, supply gaps will increase in size as Bass Strait production falls significantly” – Westerman.
“The development of Victoria’s immense low-cost onshore gas reserves, which do not require fracking, is blocked by concealment politics and poor local media” – Robert Gottliebsen, business columnist of The Australian newspaper.
“Our members exploring for, extracting, processing and transmitting gas play a hugely important role in Australia’s energy needs and yet they are being demonized by clueless activists” – Australian Workers Union national secretary Paul Farrow.
“The latest report points to the risks of not moving quickly enough to get Victorians off polluting methane gas and making a fast shift to clean renewable energy” – Joy Toose of Environment Victoria.
“Gas is a source of flexible electricity generation that will allow ever-greater amounts of renewable energy to be added to the system” – AEMO’s Westerman.
“The warning bells are getting louder as report after report forecasts gas shortfalls and exposes the urgent need for new east coast supply” -- Samantha McCulloch, CEO of Australian Energy Producers.
“How many warnings will it take before governments act to enable the urgent development of gas supplies?” – McCulloch. “After more than a decade of energy policy missteps and inaction, households and businesses are facing higher energy prices and increased risks of blackouts and gas shortages”
“The government is delivering policies to better manage projected supply issues” – federal Climate Change & Energy Minister Chris Bowen.
As the nuclear power debate hogged Australian media headlines in the first quarter of the year, a new opinion poll for Nine Newspapers disclosed that less than a quarter of respondents are now opposed to the technology.
The survey by Resolve Political Monitor found that 23 per cent of those polled were against the Australian use of nuclear energy versus 36 per cent who favor it. Another 27 per cent of respondents “do not have strong opinions and are open to the government investigating” a change of policy. Fifteen per cent declared themselves undecided.
The Sydney Morning Herald noted that support for use of nuclear had “ticked up” from October when a previous poll found it was 33 per cent.
Resolve Political Monitor added that 59 per cent of respondents in the 18-34 and 35-54 age groups it canvassed supported nuclear use or were “open to the idea.”
This growth in support has triggered a campaign by the Clean Energy Council lobby group using billboards in 2,200 locations decrying the push to lift the nuclear ban as “a distraction.” In a website newsletter, CEC says “it is now clear that the clean energy industry fears the nuclear push will create more uncertainty for the renewables sector already battling with bottlenecks and roadblocks in planning decisions, network capacity, (grid) connection delays, social licence and market regulations.”
The Australian newspaper reports that CEOs from large energy companies tell it they are encountering “significant project delays for renewables development,” one warning that the situation is likely to result in higher costs and more complexity and disruption in the federal government’s transition aims. They say that community opposition to development of new transmission infrastructure is a key issue.
The paper reports a submission by Delta Electricity to the Energy Market Operator, which is running a consultation process for its latest version of its “energy roadmap,” that states: “Coal-fired generation will need to be maintained for longer than assumed or modelled for system security and reliability of the NEM.” Another by EnergyAustralia warns: “The coincidence of timing for many projects in the late 2020s suggests a risk of drawing on scarce labor and other resources with likely cost pressures.”
AEMO has estimated that construction of utility-scale wind and solar farms will need to triple by 2030.
The Energy Market Operator is concerned about gas shortfalls in the southern States on days of peak demand from next year and the potential for seasonal shortfalls from 2026.
This outlook looms despite the completion of storage and pipeline projects in the past year that were seen as helping to offset declining production from fields in the Bass Strait – from which supply will possibly more than halve between now and 2028.
The problem was the centre of debate at the Australian Domestic Gas Outlook conference presented by Quest Events in Sydney at the end of March.
Steve Davies, CEO of the Australian Pipelines & Gas Association, told attendees there needs to be “a long-term structural fix” to ensure substantial new supply. “Governments must act to de-risk gas investments,” he said. “For gas-powered generation, this means inclusion in the (federal) capacity investment scheme.”
Under the present arrangements, he added, “there is no guarantee gas will be there when it is needed.”
Adam Watson, chief executive of APA Group, claimed the transition to net zero is threatened by the limited availability locally of gas. “Without gas,” he said, “we are going to see major disruptions to energy security and costs will increase.”
David Berman, Exxon Australia’s commercial director, added that “chasing sizably lower domestic gas prices requires significantly shorter regulatory timelines because a third of the gas consumers will require on the east coast between 2025 and 2030 is not in production.”
Energy Producers Australia points to AEMO’s warning that gas generators may soon have to burn diesel at extra cost to plug supply shortages as a signal new sources are needed urgently. CEO Samantha McCulloch says: “The policy failure is underscored when diesel, a higher emitting and more expensive fuel, may be needed for electricity because governments have stifled new gas projects with approval delays and compounding interventions.”
She told the ADGO conference Australia needs to stop “putting ideology ahead of competitiveness and ultimately emissions reductions,” adding that a national plan is urgently needed to address near-term gas supply shortfalls in both the east and west.
In its submission to the 2024-25 federal budget consultation, the association points to no release of new acreage for petroleum exploration since August 2022. Releases are normally held annually.
Current energy concerns are not just confined to eastern Australia – a new assessment warns that energy project development in Western Australia is flatlining.
The Guardian newspaper reports that modelling presented to the WA government shows the SWIS grid for the State’s south-west, which includes Perth, now relies on gas for 38 per cent of power supply with another 27 per cent coming from coal-burning generators. While more than one in three of the State’s households have rooftop solar, the SWIS’s renewables supply is 15.5 per cent for wind farms and less than two per cent for utility-scale solar.
The Guardian points out the WA government’s own modelling indicates that, to achieve its emissions reductions targets, the State will need to install 50,000 megawatts of new, large-scale renewable generation by 2042.
In a statement to the newspaper, the government says: “While our path to net zero will be unique, given the State economy is supported by hard-to-abate industries, our decision to retire all State-owned coal-fired power plants by 2030 will play a major part in WA decarbonization.”
The government adds that it has committed to investing $3.8 billion in wind farm and energy storage development.
The Australian Gas Infrastructure Group told the Domestic Gas Outlook conference at the end of March that WA needs 1,000 megawatts of gas-fired power generation built in the next six years, “which requires 250 terajoules per day of gas that must come from somewhere,” said executive general manager Jon Cleary.
The federal government must fix fiscal settings to encourage long-term exploration "because they've done a great job at killing it", he argued.
Meanwhile the Albanese government has announced that it proposes to make more than 7,600 square kilometres in the Indian Ocean around Bunbury available for offshore wind development.
The zone lies 20 kilometres off the coast to the south of Perth and Energy Minister Chris Bowen says it is intended to accommodate 20,000 megawatts of wind capacity.
In the face of immediate hostile reaction to the announcement from local communities, Bowen has hastened to assure them the area of the zone is “far from fixed” and will be considered against public consultation now under way. Possible impacts on the marine environment are a central cause of community angst.
Energy Consumers Australia says there are “just too many” barriers preventing households getting better retail energy deals and this is a particular problem for people in financial stress or experiencing disadvantage.
The lobby group, which represents residential and small business customers, adds that “pricing structures are too complex and difficult for consumers to understand their bills – many people simply cannot participate in a market as arcane as this one.”
The comments come as consumers are being warned by analysts not to expect large decreases in costs from new electricity bill benchmarks to be set by the Australian Energy Regulator in July.
Advisory firm Energy Edge says that, while wholesale power costs have come down from record highs, they remain elevated. At the same time, it points out, rising interest rates and inflation are pushing up network costs, which are a bigger share of the final bill consumers receive, comprising about 40 per cent of the charges.
Forward wholesale costs “are not tipped to decrease in any material way,” Energy Edge says.
AER released its draft determination on the default market offer for 2024-25 in mid-March, signalling a marginal fall for consumers, depending on where they are located and how much energy they use.
Responding to the announcement, Energy Consumers Australia declared that the effectiveness of the DMO is being “called in to question.”
It added: “The rapidly evolving energy market and changing customer usage behavior will likely soon render redundant the idea of a reference price suitable for many people.”
In its draft determination, the regulator notes that it also is examining whether to alter its methodology to adapt to a changing market.
Renewables advocacy organization Solar Citizens claims it is “offensive” to suggest that the proposed 2024 DMO “provides any meaningful relief to many New South Wales households, especially in regional areas.”
Federal Energy Minister Chris Bowen told media after the AER announcement that he found the draft decision “encouraging.” He argued that getting more renewable energy in to the power system to reduce prices and carbon emissions is “the task at hand.”
The federal government is seeking to gee-up its lagging energy transition progress with what it calls the biggest tenders ever held in Australia.
Under its new capacity investment scheme, the government is seeking bids for development of 10,000 megawatts of wind and solar generation capacity in two rounds during the rest of 2024.
The process comes on top of a first auction for 2,400 megawatt hours of storage capacity to be installed in Victoria and South Australia – for which bids closed in March.
More tenders are slated to be pursued in 2025 and 2026 under the scheme.
The Clean Energy Council estimates that the 23,000 MW of renewable capacity to be pursued overall through the CIS will require $52 billion in investment – with a further $15 billion needed for 9,000 MW of dispatchable capacity.
The cost to taxpayers of the scheme is unknown at this point as that depends on bids from project developers who will have to nominate floor and ceiling prices based on quarterly revenue. If revenue per MWh is below the floor, the government will pay developers a percentage of the shortfall – and developers will need to pay the government a percentage of excess profit.
The government has not provided any estimate of taxpayers’ financial exposure.
Commenting on the tender process, Tony Wood, Grattan Institute’s energy program director, told the Australian Financial Review that the energy industry is struggling to understand how the scheme will work, “with lots of details still to be worked out.”
WattClarity CEO Paul McArdle says the CIS “comprehensively ends the 25-year NEM experiment in market-driven investment, with decision-making now reverting to State and federal governments.”
Meanwhile Green Energy Markets points out that the 23,000 MW of new capacity the federal government wants delivered by 2030 will not be enough to meet its aim to see 82 per cent of renewable generation by the decade’s end.
GEM estimates another 9,000 MW will be needed.
The Energy Users Association, representing large Australian users of electricity and gas, claims that energy security is threatened by delays in development of new supply projects.
EUAA says that both gas developments and new wind and utility-scale solar investments “just aren’t keeping pace with the needs of consumers.”
Chief executive Andrew Richards says a combination of delayed project approvals and market uncertainty “are the biggest issues facing the gas industry and its millions of customers.”
Speaking at the ADGO conference, he accused Victoria of engaging in a “jihad” against gas over the past decade – and Samantha McCulloch of Australian Energy Producers added to the invective by declaring Victoria “ground zero for irresponsible energy policy.”
In 12 months from late March 2023 until almost the end of last month, power generation in the NEM saw production of 87,443 gigawatt hours from black coal-burning plants and 31,844 GWh from lignite plants.
In this period, wind farms sent 28,079 GWh to the grid, hydro power delivered 15,096 GWh and large-scale solar produced 15,320 GWh.
The estimated use of rooftop solar PV reported on the OpenNEM website was 23,834 GWh.
Gas-fired units provided 10,054 GWh to the market.
Judith Sloan has eaten my lunch!
I was just settling to write this column for this issue when The Australian newspaper website published a new contribution by Sloan, a high-profile economist whose acerbic media commentaries are widely read.
“Why the National Electricity Market is on its last legs,” read the headline.
Which was exactly the point I intended to write about in the April “Last Word.”
As Sloan says, “what started as a market-based dispatch and trading scheme in the late 1990s to connect electricity generating capacity in all States bar Western Australia and the Northern Territory has descended in to a chaotic combination of federal and State rules, regulations and subsidy arrangements.”
The bottom line, she says, having canvassed the market’s history and current government interventions, “is that the NEM was once a great innovation, providing cheap and reliable energy to retail customers and business…… (but now) is an almighty mess heading essentially towards a chaotic, centrally-planned system.”
Sloan is not the first knowledgeable commentator to point to the fate of the NEM.
For example, professor Stephen Wilson, an energy economist of 30 years’ experience, has been calling out the situation since 2016, when in a public talk he said the market was “sleepwalking back to central planning.”
In 2020 he wrote a commentary for Paul McArdle’s WattClarity website on the messy debate about the market’s design and in November last year a paper for the Institute of Public Affairs in which he argued “we have been testing Australia’s electricity market to destruction for over a decade.”
One of Wilson’s past themes has been “how do we reform the market before we reach the top of the cliff?” Sloan’s latest commentary effectively declares the cliff top is before us.
Where to from here? Whether we can be comforted by our guides going forward being the present State and federal governments, and especially federal Climate Change & Energy Minister Chris Bowen, is a matter of strongly divided opinion.
Sloan is one who has made her skepticism on this point widely known, as evidenced in a column in The Spectator Australia some 20 months ago in which she wrote “one of the most logic-defying – OK, gobsmacking – pronouncements by governments is the decision to exclude fossil fuels from a capacity mechanism attached to the NEM.”
There has been a large amount of critical commentary in this vein.
One of the points from it all that resonates with me (although I confess I can’t remember the source) is that sound engineering, not ideology, has been at the heart of the past success of the NEM and now engineers have been given the flick by politicians, their advisers and what John Stone, in the 1980s when he was Secretary of the federal Treasury (and I was executive director of the national upstream petroleum association), used to excoriate as “the meretricious players.”
Sloan reports a conversation with someone with deep knowledge of the NEM whom she asked in 2022 “What is Plan B here” and got the retort “What is Plan A?”
Sloan, in past commentary, added the point that “arguably calamitous planning” has been made worse by State governments (again from both sides) “going their own way.” She declared: “It’s very easy for all this to end in tears as investments don’t go according to plan and costs blow out.”
Bowen can’t be accused of being the father of this situation – a rugby team of ministers from both sides of politics share that “credit” over a decade – but he is the ringmaster of the present circus and owns the current plan for the decarbonization of the NEM by 2030, a target that is looking less and less likely to have a happy landing.
On a final note (for now), the Prime Minister, so far as I know, has still not reacted to a trenchant letter he received from Adi Paterson, former head of the Nuclear Science & Technology Organisation (ANSTO), late last year. In it, Paterson warned that the current approach “compromises the fundamental integrity of the electricity grid.”
In an interview with Sky News in December, Paterson said that he had looked through the plans for the future of the NEM and – as an engineer – he could not see how they can be achieved.
“We’ve lost the plot because we are trying to pursue renewables, not low carbon energy,” he told Sky. “We do not seem to understand that always on, always available electricity, underpins everything else.”
It’s the nature of our modern media that there is a goldfish attitude to issues – they are seen and forgotten in the flick of a tale – and I think it is also worthwhile in the context of this commentary to remind readers of the judgement of international analysts Rystad Energy back in October, a perception I’ve not seen mentioned again since its first, brief, appearance in newspapers.
“Australia’s power market,” said Rystad, “is now the most volatile in the world as losses of supply lead to huge price fluctuations.” In this regard, it bunched Australia with Japan and the Philippines plus the US states of California and Texas.
It’s very different perception of the NEM from two decades ago.
Keith Orchison
27 March 2024