Issue 197, September 2021
If the stresses of the latest Covid problems were not enough for a large part of the Australian population, a major focus of media hyperbole to which they were exposed in the past month has been on “code red” coverage of the new IPCC report on climate change ahead of the Glasgow UN summit. How much of this washes over a distracted audience is a good question, but it also seems likely to reinforce the general view that Australia as a country (as opposed to what some States are doing or say they will do) is “not doing enough” to reduce carbon emissions. Lack of political and media focus on the impacts of “net-zero” on consumers and the economy is a factor, too, of course. Another round of local hand-waving (and/or wringing) can be expected at the end of next month when the summit is convened and then we move on to the next federal election (current bet in Canberra circles is this will be in March – when, in eastern Australia, there is the prospect that, apart from Covid, attention may be on the performance of the rickety NEM in the summer and on consumer power bills). One of the oldest clichés is “time will tell” – and, in this case, it will.
“Ninety-four companies have set and revealed a decarbonization target over the year to 31 March” – the Australian Council of Superannuation Investors. “There are now 49 companies with net-zero commitments.”
“Investment in new large-scale solar and wind farms and the number of construction jobs in renewable energy fell dramatically in the first half of 2021” – the Clean Energy Council.
“Australia now has the most solar per person of any country in the world, the most wind and solar of any country outside Europe and the highest uptake of household solar in the world” – federal Minister for Energy & Emissions Reduction Angus Taylor.
“Too often climate policy discussion has been dominated by fantasy scenarios: either one where a single country acts alone or one where the whole world moves in perfect harmony to a globally consistent carbon pricing system. Neither scenario matches the messy multi-speed reality” – Innes Willox, CEO, Australian Industry Group.
“All governments and NEM participants support the need for a market that manages the energy transition. This is a big deal. It needs and deserves a big dose of leadership and co-operative federalism” – the Grattan Institute’s Tony Wood.
A public opinion poll published by Essential Report in mid-August records that 61 per cent of respondents favor the setting of a nation-wide “net-zero” carbon emissions target for 2030, including a plan for the closure of all fossil-fuel power stations, with a transition to renewables and battery storage, by the end of the decade.
Those supporting these steps include 34 per cent “strongly in favor” and 29 per cent “somewhat” in favor with 24 per cent “neither supporting nor opposing.”
The poll also found 63 per cent of respondents favor introduction of a levy on “high carbon-emitting industries” to “encourage them to switch to renewables.”
However, only 47 per cent of the poll’s respondents favor phasing out new petrol cars by 2030.
Seventy per cent of those polled favor more government subsidies for rooftop solar power and household battery storage.
Another poll – of 15,000 voters by YouGov for the Australian Conservation Foundation, released at the end of August – shows that just 28 per cent of respondents saw action on climate change as the most important issue affecting their vote at the next federal election. Another 39 per cent saw the issue as important but not the most important for their vote and 33 per cent responded that it was not important to them at all.
On the net-zero issue, the poll finds that 32 per cent of respondents want Australia to reach this target by 2050, another 41 per cent want it done before 2050 and 27 per cent are in the “too fast/no target” bracket.
The Australian Energy Market Operator says its has received “overwhelming” calls from NEM stakeholders for it to include a net-zero by 2050 scenario in its annual forward planning reports.
In response, AEMO is now offering two central scenarios in its 2021 review. One canvasses “steady progress,” with the transition led by existing policies, corporate carbon emissions goals and rising take-up of household solar PV systems, and the other is based on progressive tightening of abatement targets to meet an economy-wide net-zero goal by the middle of the century.
The net-zero scenario sees the bulk of the transition happening in the 2030s and 2040s. It includes a large-scale shift to use of electric vehicles in Australia and a move by homes and businesses to electric heating rather than gas.
The “steady progress” scenario allows for the ongoing impact of the Covid pandemic, with global economic growth affected by a slow recovery and a retreat in to isolationism and protectionism across the world.
Data provided by the OpenNEM widget for the 30 days to the last weekend in August, the closing month of winter, demonstrates again the dependency of the eastern market at this point on fossil fuels.
Of the 15,901 gigawatt hours sent to the NEM grid in this period, 10,571 GWh was from plants burning black or brown coal in the three States (NSW, Victoria and Queensland) that make up the bulk of the market’s consumers. Gas plants provided another 1,058 GWh.
The coal portion represented 66.4 per cent of the power sent to the grid.
On the renewables side, wind farms contributed 2,223 GWh, solar farms 635 GWh and hydro power 1,366 GWh.
The estimated use of rooftop solar power was 1,163 GWh.
The Australian Energy Regulator reports that 2020-21 saw the lowest wholesale power prices in the east coast electricity market for the past five financial years.
In its annual review of electricity and gas prices, the AER says all regions of the NEM saw prices below $75 per megawatt hour, with hydro-powered Tasmania the lowest at $45 and New South Wales the highest at $72.
However, transmission line and generation outages (including the Callide explosion) resulted in Queensland recording its highest-ever prices for a calendar year second quarter of $141/MWh while NSW reached its highest level since 2007 in May and June at $129.
The NSW prices were also influenced by the early onset of winter with the State having its coldest day in a century on 10 June.
In a new report published in mid-August, the Grattan Institute asserts that “governments need to act now” in Australia to curb industrial emissions if they want to achieve net-zero by 2050.
The institute notes that the industrial sector is responsible for 30 per cent of national emissions coming from 194 large facilities.
“The climate clock is ticking,” the institute declares. “We can’t wait around for an economy-wide carbon price that is the most efficient solution.”
It adds that net-zero by 2050 is “a tough target,” requiring an unprecedented pace of asset replacement “starting now.”
Among the steps the institute proposes is an “industrial transformation future fund” established by the federal government to support low- and zero-emissions industrial asset replacements “from the 2030s onwards.”
It also proposes that State governments should expand energy savings schemes to encourage emissions improvements “across thousands of smaller industrial facilities.”
The Grattan report suggests that an “industrial transformation future fund” could be started in 2023 with an initial $10 billion endowment, topped up each year with $1 billion to 2030 – which the institute claims would be enough to fund grants of $21.6 billion between the start of the next decade and 2050.
Tony Wood, the institute’s energy and climate change policy director, says the federal government needs to “send the right signals” because every decision made by heavy industry to renew, refurbish or build an industrial assets “potentially locks in emissions for coming decades.”
The latest report follows one the institute issued in July recommending the phasing-out of petrol and diesel cars by 2035.
Federal Energy Minister Angus Taylor is telling other federation governments and the community that the reforms now proposed by the Energy Security Board for the east coast power market are a “once in a generation opportunity” to “ready the system for the future.”
To this, the ESB chair, Kerry Schott, adds that remodeling the NEM to remedy the current “extensive and disruptive change” must come first in pursuing Australia’s transition to a lower-carbon economy. “The most important thing is to get on with it,” she said in a newspaper interview.
Schott declares that what the ESB is recommending is “not just a tweak around the edges – it’s about a whole redesign of the NEM.”
In the opposite corner as governments gear up to come to an initial landing on the reforms in September – the final word will lie with the “national cabinet” initially created to deal with the Covid pandemic – are wind and solar companies, battery manufacturers, some consumer groups and green activists, arguing that the capacity mechanism proposal will have “a chilling effect” on VRE investments and will act as a subsidy to coal-fired power plants in particular and fossil fuels more widely.
The ESB itself, in its advice to ministers, acknowledges that there are “significant stakeholder concerns” over the “physical retailer reliability mechanism” – which will require retailers to enter in to contracts with generators to have capacity available at times when the grid is stressed.
Tim Nelson and Joel Gilmore, both executives at Iberdrola Australia and associate professors at Griffith University, say in a commentary of The Conversation opposing the change that “unless carefully designed, the proposal may enable coal generators to keep polluting when they might otherwise have closed.” They call for the arguments from coal generators and the ESB to be given closer scrutiny.
Schott retorts to critics that the intent of the reforms is “not to stop the exit of coal-fired power at all.” In fact, she adds, for decarbonization, “that exit should be as quick as possible but you still have to make sure you’ve got enough essential services and dispatchable power.”
She says that what is missing in the current NEM situation is a national consensus to plot the best transition. “It would be very helpful to have a national emissions policy – to state the bleeding obvious.”
The largest gentailers are arguing for “a well-designed capacity mechanism,” saying it will “avoid capacity shortfalls and associated jumps in electricity prices for customers.”
The Australian Energy Council, representing the main gentailers, is calling on governments to proceed “carefully” and has welcomed the ESB acknowledgement that market bodies will need 12 to 18 months to complete work on the details of reforms.
Meanwhile, the largest employer association, the Australian Industry Group, says that at this point the capacity mechanism is “impossible to evaluate given the vagueness of (current) information.”
Origin Energy CEO Frank Calabria believes the design of the NEM needs to adequately reward system security and reliability.
Speaking to journalists in August about company financial year results, Calabria said current market reform is “not about the extension of coal at all” but about the transition from coal to new forms of dispatchable capacity “in an orderly and appropriate way.”
Calabria said the role of Origin’s Eraring power station in the Hunter Valley, the largest coal-burning plant in the country and supplier of a quarter of NSW electricity, has changed markedly in the past 12 months as the rising roll-out of wind and solar power makes running it around the clock unprofitable.
In a stock market statement, Origin Energy said it had cut the value of its power station portfolio by $583 million because of lower wholesale prices and new supply expected to enter the NEM.
Amid the loud public controversy over the Energy Security Board’s generation capacity payment proposal, the praise from the networks sector for grid strengthening changes has gone almost unremarked.
Energy Networks Australia says it is “noteworthy” that the ESB’s “essential system services” work is non-controversial. “There can be no energy transition without transmission,” says CEO Andrew Dillon, adding “the integration of renewable technologies in to the grid will be an ongoing focus.”
The New South Wales government says it has received investor expressions of interest in its New England renewable energy zone for 34 gigawatts of wind and solar power plus storage – more than four times the proposed capacity of the area.
The New England zone is one of five REZs the government proposes to pursue. Another, Central West Orana, attracted 27 gigawatts of interest for 3 GW of intended capacity.
State Energy Minister Matt Kean describes the investor response as “overwhelming,” declaring NSW has a “once-in-a-generation” opportunity to realize his government’s energy future. He claims the New England REZ will deliver some $10.7 billion of investment.
Auctions of investment in the zones are scheduled to start next year.
Meanwhile, the State’s transmission business, TransGrid, says in its annual planning report that it received 5,665 megawatts of capacity requests for linkage to its system last year but had only hundreds of MW available. It warns that the NSW network is becoming increasingly congested.
Under the NSW government plan, 12,000 MW of solar and wind farm connections will be required by 2030.
After a decade in which the technology expanded overseas but hardly rated a mention in public debate in Australia, offshore wind farms have been given a higher profile in the Energy Market Operator’s scenario planning.
In its latest report, AEMO says it has identified four “significant” wind power areas off the coasts of New South Wales, Victoria and Tasmania with potential capacity of up to 40,000 megawatts.
One of the zones is offshore Gippsland where the 2,200 MW Star of the South project continues to pursue federal and Victorian government environmental approvals for a 250 turbine development. The proponents are aiming to commence operations in 2028.
The New South Wales government has given a $1.3 billion hybrid hydrogen/gas power station development planned at Port Kembla “critical and significant infrastructure” status, with Deputy Premier John Barilaro declaring the project is “a gamechanger – and not just for NSW.”
The 635 megawatt plant is a project of Andrew Forrest’s Squadron Energy company and has also been supported by the federal government. It is intended to be built close to a $250 million LNG import terminal Squadron has started to develop at Port Kembla.
The company says the power station will run on gas from its targeted opening in summer 2023-24 and will be able to also burn hydrogen when the resource becomes available.
The “sun tax” row has ended in what appears to be broadly a win for households while helping to ease the pressure of the rooftop solar boom on service companies.
The Australian Energy Market Commission has resolved a two-year controversy pitting distribution businesses against consumer bodies and PV supporters by introducing a new rule (with a long lead-in time) requiring DBs to deliver services encouraging household solar installations and reporting to the regulator what they are doing to promote the technology’s greater use.
Networks will be able to offer pricing plans that encourage households to export electricity to the grid at peak demand times but they will not be able to impose bans on the popular sales unless there are technical requirements for constraints – although they can charge fees for exports at times when the system has access to substantial generation being available o the grid.
The AEMC says “tough new obligations” will make the businesses accountable for a solar and battery friendly grid. It adds that a worst case scenario will see PV households earning at least 90 per cent of what they currently gain from sales.
The commission’s CEO, Ben Barr, says the rule change means that networks now have an incentive to upgrade the grid to allow more use of solar power and to be ready when electric vehicles start being used in large numbers.
The new arrangements will take effect in mid-2025. Clare Savage, chair of the Australian Energy Regulator, says it will publish a draft export tariff guideline for community feedback next year.
“We want household solar investors and distribution companies to know we will work with them to develop guidelines that encourage network investment that supports the grid and the environment and is good news for retail bills,” she adds.
There are now 2.8 million homes and businesses across Australia with rooftop PV installations and the number continues to rise steadily – but roughly a third of households are renters with no access to PVs while they still have to bear the network costs created by the installation boom, raising social justice issues.
Many companies in Victoria are “really suffering” because of rising gas prices, says Rod Sims, chairman of the Australian Competition & Consumer Commission.
Large users, ranging from glassmakers to paper and cement, are once again facing gas prices above $10 per gigajoule – compared with $3 to $4 for Bass Strait supplies in the past – and “this is really hard because (it) can wipe out profits pretty quickly,” he warns.
The latest ACCC report on the domestic gas market points to a shortfall of two petajoules in the east coast market next year and of 6 PJ in the southern States if LNG producers export all their output. The commission says a 2022 problem is “increasingly likely.”
Previously the Australian Energy Market Operator had forecast southern State shortfalls from 2024 but now it, too, is warning “risks have emerged for 2023 under certain conditions.”
Sims says the Queensland producers “have to make sure the local market is supplied.”
Victorian consumers – there are two million homes in the State connected to gas supply as well as 65,000 commercial users of the fuel and 600 large industrial users – are on the front line if a significant supply problem emerges in 2022.
Innes Willox, CEO of the Australian Industry Group, says the new commission report shows the lower domestic gas prices last year were a blip – and Andrew Richards, CEO of the Energy Users Association, says LNG producers may not be living up to promises made to the federal government to help domestic customers.
Federal Resources Minister Keith Pitt has a request on his desk, made in July by large gas users and a major union, to cap gas exports. He has told journalists the government expects gas producers to keep to the arrangement made with it in January.
There are five projects under consideration to build LNG import terminals on the east coast, the earliest of which could be providing supplies in winter 2023.
Consultancy EnergyQuest warns that the Port Kembla project and other LNG import developments “are not in the bag by any means and, in their absence, the southern States could be hostage whatever the weather gods decide to dish up.”
The Australian Petroleum Production & Exploration Association, responding to the ACCC report, says manufacturer concerns are being addressed. It adds that billions of dollars of new investment are being outlaid to bring more gas in to the domestic market.
Federal Energy Minister Angus Taylor has called on manufacturers of batteries for power storage to be “more transparent” about the risk of fires.
In a newspaper interview about the aftermath of a fire at a storage development near Geelong in July, Taylor declared it a “wake-up call” for the renewables industry as grid-scale batteries are being increasingly introduced to the NEM.
“Batteries have an important and growing role to play in our energy system, but we need to ensure these new technologies are integrated safely in to the grid,” he told the Australian Financial Review.
The Geelong fire, he added, showed that manufacturers need to be transparent about how to handle such incidents, “which are very difficult for emergency services to manage.”
Taylor said it is “disappointing” that Tesla, the American manufacturer of the battery that caught fire, has not responded to media inquiries about the incident.
The Financial Review reports research at Newcastle University has thrown up 40 fires in large, lithium-ion storage systems internationally, some dating back to 2012.
Whatever else one might say about the Covid lockdowns, they do provide ample time for reading – and, in preparing for each newsletter, I read a lot.
One of the latest on my reading list has been an Energy Policy Institute of Australia commentary written by Stephen Anthony, chief economist at consultancy Macroeconomics Advisory and an adjunct professor at the University of Canberra. You may read the whole paper by going to the EPIA website; here I paraphrase, canvassing what has caught my eye.
For me, the eye-catching began with the opening key points: “Science and public opinion is forcing governments around the world to commit to major reductions in emissions over the next several decades. This creates a problem for Australia: we lack a credible national policy for energy and lack a national technology-based energy plan to guide investment in electricity generation and emissions reduction. Current policy settings are a mixture of technology choices based on political expediency, defending existing rent seekers, opportunistic market intervention and poor to non-existent economic analysis.”
Now I am the first to acknowledge that reinforcement of one’s own opinions is highly attractive – and reading on I found that the rest of the paper sat four-square with my own mindset, too. (And this doesn’t happen very often, I must report.)
Anthony, whose work background includes stints at the federal Treasury and Department of Finance, at the International Monetary Fund and the private sector with six years as chief economist of Industry Super Australia, offers these thoughts further on:
“Australia seems to be drifting towards a policy of trying to produce electricity by relying on solar and wind while at the same time prohibiting nuclear and having no possibility of grid-scale back-up. This makes it unique among large industrial economies. This certainly seems to be politically expedient. It raises a concern, however, that, like teacher’s pets, solar and wind are given favorable treatment and large-scale changes are being made without serious analysis. It has a chance of leaving us looking very foolish. The recurrent theme of “doing it our way” might be good for a song. But it doesn’t do much to inspire investor confidence. Is this blind preferential approach a good way to bet the economy?””
Anthony’s paper runs to 11 pages – and I strongly recommend that newsletter readers make the time to read it in full. He proposes a number of actions to address the current situation and they are all worth consideration and discussion.
The critical problem, it seems to me is that the federation’s political leaders (regardless of party) over the first two decades of this century have dragged us so far down a slippery slope that recovering a workable route in the next few years might be beyond them.
As it happens, on the same day I read Anthony’s paper I also saw a report from Germany that, it seems to me, highlights just how slippery these climate-related policy slopes can be.
The Germans have been held up time and again during Angela Merkel’s long leadership, which ends in September by her choice, as the example “par excellence” for us here in addressing climate policy. So this report is all the more salutary.
Again, I recommend you read the story for yourselves. It was published on August 22 by Bloomberg (no less) under the heading: “Germany flirts with power crunch in nuclear and coal exit.”
Among other things, it says that:
(1) Germany has now got the highest electricity prices for households in the European Union.
(2) Wholesale power prices have jumped 60 per cent this year to their highest levels since 2008.
(3) Most of the generation is in the north and the grid, after a decade of inability to expand it, is too weak to carry adequate supplies to the large loads in the south.
(4) One of the country’s biggest challenges today is to keep the lights on, especially in a harsh winter when neighboring countries may not be able to feed the Germans power.
You don’t have to look far on the Web for other media reports in similar vein about the hassles in Germany.
The point for us here is that the potential for even bigger problems than are currently under scrutiny n a reformed and highly greened NEM can’t be discounted as this decade wears on – and, I’d add, we are also not helping ourselves by continuing to ignore the opportunity offered by new nuclear technology to be part of our grid security and reliability solutions.
Keith Orchison
31 August 2021