Issue 152, December 2017
As we edge towards the end of a spectacularly messy year for energy on Australia’s east coast, writes Keith Orchison, there are more reasons to be concerned about what 2018 will bring than there are for hope that stakeholders’ most cherished wishes for durable policy solutions will be realized. Any substantial threat to electricity supply over summer will only exacerbate the situation – and it is now clear after the Hobart CoAG Energy Council meeting that, at best, some form of the “national energy guarantee” could not be introduced until the second half of 2018. A new year’s wish could be, to quote the Grattan Institute, that our politicians start focusing on the substance of the energy debate rather than the headlines – but that’s a big ask in the present environment. As a lawyer put it recently: “The question for us all is whether we want to a little bit more for reliability and security of supply or pay out lots more in wider social welfare costs due to an unreliable, insecure system?”
The Australian National University’s Hugh Saddler has proposed a way out of the seemingly never-ending wrangling over energy modeling (which is again at the centre of the dispute between South Australia and the federal government over the “national energy guarantee”).
Saddler says: “Models, while useful tools, are not infallible. They are only as good as the assumptions on which they are based.”
A way to stop the bickering over modeling, he suggests, is for the federal government to use public money, perhaps through the Australian Renewable Energy Agency, to fund an open-source model which can then be used to test electricity policies.
Allowing all interested parties to investigate and validate such a model, he says, “would go a long way towards restoring public trust in what has otherwise been largely a short-sighted and self-interested debate over the future of the energy market.”
Energy Security Board chair Kerry Schott has taken to the letters column of a national newspaper to set the record straight on the aftermath of the CoAG Energy Council meeting in Hobart at the end of November.
Ministers, she points out, have “not yet considered any future work program” for the ESB, rebutting media reporting that the panel will be including more emissions targets in its 2018 activity.
Schott says the immediate focus of the ESB will be on how the “national energy guarantee” will work and how compliance in the market will be “monitored and rewarded.”
The second key focus for the Council, she adds, needs to be implementation of the 49 recommendations it has accepted from the Finkel report.
Such approval, she says, “is remarkable in itself – we must keep this momentum moving forward.”
Meanwhile Prime Minister Malcolm Turnbull has declared that his government’s new energy policy will be “fully fleshed out within five months.”
The Australian Energy Market Operator’s CEO, Audrey Zibelman, says “we all need to calm down” about NEM security of supply this summer.
She has told Reuters news agency that she is “absolutely confident” the operator has “put together an incredibly comprehensive and robust plan” to manage generation. “We are in as good a position as one could be.”
Following the closure of the 1,600 megawatt Hazelwood plant last March, Zibelman says in a statement, close to 2,000 MW additional resources will be available this summer, including the return of 833 MW of gas-fuelled power from existing generators and more than 1,000 MW of generation and demand response reserves.
The operator’s “summer readiness” report notes that “while we know unexpected events can happen and do happen to power systems, we have pursued a thorough plan to address most foreseeable events and have undertaken contingency planning to address the unforeseeable quickly and effectively.”
The report also notes that the Bureau of Meteorology is projecting this summer will see a higher likelihood of heatwaves than in most years and a higher chance of extreme heat in south-eastern Australia. Cities with the highest chances of greater than normal hot days and the risk of longer heatwaves are Melbourne and Adelaide.
Historically, AEMO comments, supply in South Australia and Victoria has been tested when the latter State’s demand exceeds 8,000 MW
Specialist consulting company SMR Nuclear Technology has sent a submission to the Energy Security Board warning that it will be “imprudent” to leave small modular reactors out of Australia’s forward plans for the electricity transition.
The company says SMRs with unit capacity of between 50 MW and 300 MW are “particularly suitable” for the local grid as they are designed with load-following capabilities enabling them to work with variable renewable energy.
“As with wind and solar energy, nuclear costs are coming down, with important strategic implications for the NEM,” technical director Tony Irwin says in the submission, asserting that, on recent overseas analysis, SMRs could be the lowest-cost generation available.
He points out that electricity generation carbon emissions in Australia in calendar 2012 were 191 million tonnes – and in the year to March 2017 they were 188 Mt “despite billions of dollars spent on wind and solar.”
Irwin adds that in 2015-16 Australian exports of uranium oxide concentrate fed international electricity production of 280 terawatt hours, enabling an emissions saving of 250 Mt if this power had come from fossil fuels – “and yet Australia does not take advantage of this valuable resource.”
If the law is changed to allow for nuclear power use here, he says, a 300 MW nuclear plant could be provided by 2030 and around 3,000 MW of SMR capacity by 2040.
Lawyers Gilbert+Tobin have cautioned the Australian Competition & Consumer Commission about its approach to its ongoing review of the NEM retail market.
In a review of recent events, the firm says that “unfortunately” the ACCC in its preliminary report on retail power prices has developed conclusions that “simplistically target old scapegoats like ‘gold-plated’ networks and vertically-integrated gentailers” as the drivers of higher bills.
“In terms of solutions,” it adds, “it is to be hoped that the ACCC does not follow the UK experience where similar market review work has led to ill-conceived calls to re-regulate consumer tariffs – a move which would have drastic negative impacts for new UK market entrants and smaller retailers.”
The ACCC supply and pricing report is scheduled to be delivered to the federal government at the end of June.
A five-minute settlement for NEM spot prices, to be introduced in July 2021, is “fundamental change” that will help get the market ready for new technologies, according to the Australian Energy Market Commission.
The settlement shift from 30 minutes will support investment in battery storage, new gas-fired peaking plant and demand response, the commission says. The change will align the physical electricity system with the price signals of the market.
AEMC chair John Pierce says: “Price signals that align with physical operations lead to more efficient bidding, operational decisions and investment. Over time this flows through to lower wholesale costs which make up around a third of a typical electricity bill.”
The commission says setting the time for change in 2021 gives the electricity industry a timetable for building new fast-response generation and other technologies, enabling investment decisions to be made now.
The Greens have responded to the decision by calling on the CoAG Energy Council to over-rule the AEMC and order the change to take effect next year.
In a submission to the AEMC in October, the Australian Energy Council, representing generators and retailers, cautioned that, with variable renewables taking up an increasing proportion of the NEM mix, a shift to five minute settlement could see traditional peaking generation withdraw from the market if their start-up and fuel costs exceeded what they could earn from “needle peaks.”
This, it said, would have the effect of increasing wholesale market costs.
The AEC said the complexities of the change, including a requirement for major IT investment, need a “significantly” longer period than the July 2021 deadline.
Energy users are losing faith that politicians, regulators and suppliers can solve the many issues the energy sector faces, says the Energy Users of Australia association representing large users of electricity and gas.
EUAA chief executive Andrew Richards argues that energy policy has been “going backwards for a decade” and welcomes the interest of the CoAG Energy Council in keeping working on the “national energy guarantee.” Intent to keep the process moving forward – “even if they are only baby steps” – can only be seen as a positive.
At present, he says, without a national energy policy in place, there is no signal for investors, contributing to a reduction in new supply investments and competition, “both of which are critical factors in increasing wholesale energy prices.”
Meanwhile the Australian Chamber of Commerce & Industry says it welcomes AEMO comments on measures to address energy reliability this summer but is concerned they won’t impact on rising costs.
AEMO, adds ACCI chief executive James Pearson, says the cost of additional reserves, if drawn upon, will be borne by consumers. “Paying extra in order to get through summer without loss of supply should not be happening in a country with an abundance of natural energy resources. It is an indication of the extent to which industry infrastructure has been compromised.”
Pearson declares that “many Australian businesses are already at breaking point due to rising costs.” He says members are telling ACCI that there will be job losses and company closures without urgent action to put downward pressure on energy prices.
Seventy per cent of Australian electricity consumption is by industry and commerce.
The Australian Industry Group’s CEO, Innes Willox, has also said higher wholesale electricity costs are “sapping profits” across industrial consumers. “For some businesses the situation is life or death.”
Willox has told media that manufacturers increasingly have plans to reduce their energy bills by investing in their own supply, including on-site renewables and participating in larger-scale generation and storage projects – but, he says, these intentions will “go nowhere if the rules of the game remain unsettled.”
Reviewing the “national energy guarantee” proposal, Matt Rennie, EY’s Oceania power and utilities leader, warns that greater red tape represents a risk for suppliers.
“For every free market option, there’s a catch,” says Rennie, “and for utilities much of the immediate impact of the NEG will be on process.
“Australia’s energy generators will have to convince both the government and energy retailers that they have the capacity in place to meet forecasted demand and there will be long days in the back office when the system begins,” he says.
“Energy retailers will perhaps face the most compliance costs as, like generators, they will be subject to more scrutiny and the need for more transparent processes. It is difficult to see how retailers will avoid the need to disclose portfolio data to regulators, for example, and this will be a significant issue to overcome.”
Nonetheless, Rennie declares, the NEG proposal “opens up exciting possibilities” for the energy industry. EY sees “see big opportunities for gas exploration, pipelines and power plants to support peaking supply (and), for those companies solely in coal, now is the time to diversify into gas and renewables.”
Rennie adds that the NEG also offers an opportunity for suppliers to revalue dispatchable capacity and perhaps for some to consider how to safely extend the life of coal-fired plants. As well, he says, the NEG’s “potentially strong signals to the market” will see investment in renewables extend far beyond the RET.
“Our message to industry? Hold your nerve. The NEG will bring big changes, but they are positive.”
The federal government, via the Australian Renewable Energy Agency, is pushing another $20 million towards the feasibility study in to building a second Basslink between Tasmania and Victoria.
The support comes as Hydro Tasmania claims that the “battery of the nation” project, still at the scoping and feasibility stage, needs Basslink 2 to be viable.
Hydro Tasmania CEO Steve Davy says more interconnection will signal that the island State’s own energy security is “beyond assured” and the NEM can benefit from its surplus power, including new pumped storage capacity. It is estimated that the State’s existing 2,500 MW capacity could be doubled over 10 to 15 years through storage, boosting the efficiency of existing hydro systems and private sector investment in wind farms.
Energy Networks Australia has welcomed ongoing work on Basslink 2 feasibility, with CEO Andrew Dillon saying “a more connected system is a more reliable system.”
Meanwhile ownership of the existing 370 kilometre Basslink project may change hands. Keppel Infrastructure Trust of Singapore is reported to be investigating divestment of the business which it acquired in 2007.
Victoria has become the first Australian State to embed its renewable energy target in legislation.
The Andrews government’s VRET requires 25 per cent of electricity generated in Victoria to come from renewables by 2020 and 40 per cent by 2025. This is estimated to require about 5,400 megawatts of new capacity to be built. Currently 17 per cent of the State’s electricity supply comes from renewable resources, including hydro-electricity and rooftop solar power
In calendar 2016, when Hazelwood power station was still operating, 54,066 gigawatt hours of electricity was generated in Victoria by NEM-registered plants – with 3,972 GWh coming from hydro systems and 3,475 GWh from wind farms (equal to 13.7 per cent of production).
The State government has launched the first of a proposed series of reverse auctions to build wind and solar farms, seeking bids for 650 MW at an estimated construction cost of $1.3 billion.
Western Power, Western Australia’s government-owned networks business, is seeking regulatory approval to raise $7.88 billion in revenue from its customers in the five years to 2022.
The proposal involves $6.2 billion for both capital expenditure for transmission and distribution systems plus operating expenditure in the south-west integrated grid. CEO Guy Chalkley says that, if the plan is approved by the WA Economic Regulation Authority, “we expect very small increases to the network charge which will translate in to a very low impact on residential customer bills over five years.”
The network’s submission to the ERA says that an average household (using 5,200 kilowatt hours a year) would have its bill rise $37 between this financial year and 2022.
The row over mass market end-user power and gas bills that has occupied much of 2017 has been refuelled by Victoria’s Essential Services Commission, which asserts that big discounts offered by retailers “don’t translate” for customers.
New analysis of the Victorian market sees the ESC chair, Ron Ben-David, reporting that average standard contract prices for power in the State rose five per cent over the past year – with gas prices going up 16 per cent.
At the same time, says Ben-David, the cost for consumers of failing to meeting discount contract conditions rose “significantly.” A customer not meeting conditions, he claims, could pay an extra $314 (an increase of 27 per cent) for electricity and $189 (16 per cent) for gas.
He declares that “the potential for energy consumer confusion is growing worse every year,” saying retailers are “flooding the (State) market with more than 200 often unintelligible contract offers” and “luring customers with offers of steep headline discounts that bear no relation to the amount they will end up paying because of steep penalties for late payment.”
The report has appeared at a time when the Andrews government is considering re-regulating mass market energy costs via an optional standard contract with a set fixed price, a move strongly opposed by retailers.
It was followed in late November by the State government announcing a deal with the three largest retailers – AGL Energy, Origin Energy and Energy Australia – which, it is claimed, will see more than 285,000 Victorian customers with rebates that could save as much as $440 annually from 2018.
A report on south-east Australian offshore gas supply prospects by the federal Department of Industry, Innovation & Science warns that there are a number of potential market impediments to resource development, including “structural and strategic barriers” and infrastructure access problems.
The study also cautions that any increase in gas supply from existing projects in the short term will only result in a faster erosion of reserves with implications for long term security of supply.
It says that “future [offshore] production sources will continue to shift from the high volume, shallow depth, high-quality gas fields to low volume, deeper, low-quality gas fields and most will effectively backfill existing capacity rather than create net new gas volumes for the market.”
The review also acknowledges that low international oil prices and the declining quality of local gas resources are adversely affecting new developments in the four geological basins studied.
Federal Resources Minister Matt Canavan says Australia is facing a “tightening window” to develop new gas supplies for the east coast.
Noting that supply from existing offshore south-east Australian developments is expected to continue at current levels over the next five years before declining, he warns that the capacity of suppliers to respond rapidly to unanticipated increases in peak winter demand is an issue.
Canavan says opportunities to increase short-term supply are limited. “The only way to increase reliable and affordable supplies is to identify new onshore and offshore resources. We need to find greater supplies both offshore and onshore. Given it takes five to ten years to get gas from discovery to production, we need to move now.”
He adds that the Andrews government decision to ban onshore gas exploration means that Victoria is becoming increasingly reliant on offshore gas. “This is a risky strategy. They are gambling with the future of Victorian manufacturing.”
Malcolm Roberts, chief executive of the Australian Petroleum Production & Exploration Association, says the report “confirms what industry has been warning for years: that there is a pressing need to develop new gas supply to meet the energy demands of businesses and homes.” It is, he adds, “yet another wake-up call for governments to support developing onshore gas supply.”
The Cooper geological basin, which extends across South Australia and Queensland, is to be the focus of a $30.4 million evaluation study by Geoscience Australia and CSIRO as part of the federal government’s push to unlock more east coast gas supplies.
The review will include consideration of the environmental safety of hydraulic fracturing in the region in potential new fields. Gas has been produced in the basin since the 1960s – there presently 160 producing fields – and fracking has been included in upstream petroleum activity there for 40 years.
The federal government says in a statement that the new work will evaluate selected areas that are prospective for shale and tight gas, “not only to boost supply to the eastern States but also to support strong regulation of unconventional gas projects.”
APPEA’s Malcolm Roberts says choice of the Cooper Basin as a priority area to boost east coast supply could help put downward pressure on gas prices.
He declares that “Australians have had enough of hysterical anti-gas campaigns that are driving up energy costs. Finding new sources of supply is essential if we are to provide relief to families and businesses who are struggling.”
Roberts adds that communities and traditional owners in the Cooper want to see new development providing it is responsible.
It’s that time of year – when one of my priorities is to buy myself another big desktop diary and start filling in key dates, not least the conferences lying ahead.
The three that go first in to the diary are the Australian Domestic Gas Outlook event (in Sydney 28 February and 1-2 March), Australian Energy Week (9-11 May in Melbourne) and the 2018 conference of the Australian Petroleum Production & Exploration Association (Adelaide, 14-17 May).
I am especially looking forward to the last day of February because I get to chair the ADGO opening day with a speaking list that includes once-again federal Resources Minister Matthew Canavan, the New South Wales Energy Minister Don Harwin, the ACCC’s Rod Sims, Paul Adams (Jemena MD), Mick McCormack (APA Group MD), Phaedra Deckart (AGL’s general manager for energy supply, talking about the company’s LNG import project), former WA Premier Colin Barnett on the merits of a trans-Australia gas pipeline, Warwick King (CEO, Asia Pacific LNG, on strategies for unlocking new gas supply), David Maxwell (MD, Cooper Energy), Ian Davies (Senex Energy MD), Matt Kay (CEO, Beach Energy), Malcolm Roberts (chief executive of APPEA on the regulatory reform needed to unlock resources), former federal Energy Minister Ian Macfarlane (now chief executive of Queensland Resources Council, speaking about strategies for securing Australia’s position in the global energy market) and Richard Cottee (MD, Central Petroleum).
And that’s only day one! The rest of the ADGO program includes Michael Vertigan (chair of the CoAG Gas Market reform panel), Tim Bradley of the federal Department of Industry, Innovation & Science (examining Australia’s five-year gas outlook), Mark Collette (head of energy at EnergyAustralia), Mark Samter of Credit Suisse, Matthew Warren (CEO of the Australian Energy Council), Steve Davies (CEO, Australian Pipeline & Gas Association), Jamie Lowe (head of regulation at Engie) and Bruce Hockman, chief economist of the Australian Bureau of Statistics, analyzing what the bureau’s data tells us about the natural gas an energy markets.
I’m interested to see Malcolm Roberts, in talking about the upcoming APPEA conference, sounding several optimistic notes – to wit that many upstream companies are now emerging from the painful adjustment to the “lower for longer” price environment, what he sees as “exciting” offshore and onshore petroleum projects being launched and greater recognition in the energy policy debate of the importance of gas for energy security and Australia’s transition to lower carbon emissions.
The level is ongoing support for the long-running APPEA conference is evidenced by more than 80 per cent of its large exhibition space being sold by the end of November.
Roberts predicts “2018 will be a decisive year for (Australian) climate change policy.” And, not surprisingly, he also takes the opportunity of a new year’s perspective to invite the States and Territories to “step back from the self-destructive course of locking up onshore gas reserves.”
As he says, “it is becoming more and more obvious that short-term political decisions to stop local projects are locking in unnecessarily tight supply and higher prices.”
In this context, it is also interesting to see the recent Jemena submission to the Australian Energy Market Commission’s review of strategic priorities. While declaring itself supportive of Australia’s commitments to reduce emissions and move to a carbon neutral system by 2050, Jemena rightly notes that, to date, this transition has not been well co-ordinated and, in particular, the problem is a lack of a long-term energy and climate policy agreement between the federal government and the States.
The extent to which there is hope that this can be remedied is about to be put further to the test in the governments’ discussions via the CoAG process in the first half of 2018. Holding of breath is not advised.
Meanwhile, as Jemena says, the short-term focus of interventions attempting to reduce the cost of living pressures on consumers is only serving to create greater uncertainty for market participants. “It is stalling investment in desperately needed new energy supply and infrastructure – which is the most cost-effective, viable and long-term solution to the east coast crisis,” the company tells the AEMC.
Stealing some lines from Grattan Institute, homes and businesses – particularly energy intensive businesses – are going to continue to face a big squeeze. Can consumer businesses survive the energy cost pinch? And what will the impacts be on jobs and regional centres if they can’t?
These are questions that will loom large in the new year’s conferences with the added edge that 2018 is looking increasingly like the year when push comes to shove for business consumers.
Still, federal Energy Minister Josh Frydenberg is hopeful. He told a forum in London en route to the CoP 23 climate change meeting in Bonn in November that he thinks our political debate “has come a long way – I think people are tired of the argy-bargy that has gone on.” He’s certainly half right.
Keith Orchison
30 November 2017
