Issue 190, February 2021
In an environment where public focus understandably continues to be largely on the ongoing Covid crisis (and, for the media, in January also on the extraordinary events in America and, this being summer in Australia, on sport), it is hardly surprising that a significant Productivity Commission report on resources sector regulation has received barely passing attention – but the issues highlighted in it go to some critical factors for national post-pandemic recovery. As the commission says, it is hard to overstate the role of the resources sector for modern Australia. In more than a few ways, the sector is also a political football, not least for domestic energy supply – and 2021 will see this all rising to the fore again as the Glasgow global summit on climate change impacts locally, the more so if, as some expect, late this year also brings a federal election. The impact of inefficient regulation, allied with populist political interventions, on investors’ willingness to take development risks is an arcane subject that doesn’t crop up in pub and barbecue conversations even in normal times – the present times are nothing resembling normal – and yet this problem ricochets across the economy and eventually in to the lives of all Australians. This country is going to have trouble enough in the decade ahead coping with social and economic comebacks from the pandemic; our political leaders should make time now, even in this under-pressure governance environment, to ensure that the impediments identified in the commission report are addressed. Sure, it is a difficult time to take on the task, given other pressing demands, but it is work that, having been neglected for years, must be addressed.
“We all want to get there. It’s now about the how, not the if” – Prime Minister Scott Morrison tells a newspaper the political debate about a carbon-neutral future is over.
“Cheaper and more reliable energy is central to Australia’s economic recovery” – the Prime Minister.
“How Australia reaches net zero should include all options, including gas, carbon capture and storage and even nuclear power” – editorial in the Australian Financial Review.
“We are working to get the right balance between affordable gas for manufacturers and a price that encourages new gas development” – federal Resources Minister Keith Pitt.
“Repackaging the status quo will not produce the gas-fired recovery promised by the federal government” – Innes Willox, CEO, Australian Industry Group.
“There’s so much more that needs to be done to bring down domestic gas prices to a level where manufacturers can be competitive” – Andrew Richards, CEO, Energy Users Association.
Prime Minister Scott Morrison may have set a new tone for the national energy debate at the start of what some think will be a federal election year – and the federal opposition has changed its approach to bring “an economic perspective” to the policy area.
In an interview with The Weekend Australian newspaper, Morrison has declared there is “no longer any question about the need to work towards a net-zero emissions future” but he hedged on a timeline to pursue the target. “The timeline will depend on where the science is at and on our assessment based on the technologies.”
He also declared that abatement progress would be “about whether you can produce hydrogen at the right cost, about whether carbon capture and storage can be done at the right cost and whether we can produce low-emissions steel and aluminium at the right cost.”
However, the Prime Minister added that the government will not take a 2030 or 2035 emissions abatement target to the UN climate change meeting in Glasgow in November (an event postponed from 2020 because of the pandemic).
Morrison’s statement follows a comment to a seminar in December by his Energy Minister, Angus Taylor, who said: “We realize it (climate action) is important but you’ve got to get it right, too, because this has implications that are really profound for the economy.”
Early in 2021, Taylor’s office issued a statement that the Morrison government is “supporting the record levels of investment in renewable energy by backing every priority transmission project” under the Australian Energy Market Operator’s integrated system plan.
The federal Opposition retorts that the government’s ongoing support for fossil fuel generation undermines its commitment to renewable energy. (The ALP leader, Anthony Albanese, at January’s end reshuffled his shadow cabinet, moving Mark Butler out of the climate and energy portfolio and replacing him with Chris Bowen.)
Meanwhile, Morrison’s predecessor as prime minister, Malcolm Turnbull, continues to snipe at the government over energy policy (which played a substantial role in political in-fighting in the Liberal Party leading to his loss of office). Turnbull argues that “energy and climate policy remains a vacuum at federal level because of toxic politics.”
He adds: “It’s about the poisonous combination of right-wing populist politics within the Coalition, right-wing media and the fossil fuel lobby.”
Turnbull’s comments coincided with the release by senator Matt Canavan, his former resources minister, of a backbench call for the National Party to commit to a program of building more coal-fired power stations to bolster the manufacturing sector. The proposal argues that Australia will need between 6,000 and 19,000 megawatts of “reliable power to back up renewables over the next 20 years” and that this equates to building between four and 12 coal-fired power stations.
This push by Canavan and other Nationals has promptly drawn criticism from urban Liberal MPs in Sydney and Melbourne whose constituents are opposed to coal-burning power. They reject any move to subsidize new coal plants and call for the focus to be on renewables “backed by gas, hydro and batteries.”
Sydney MHR Trent Zimmerman, described as leader of the “NSW Moderate faction,” declares that building new plants is “completely inconsistent with the inevitable course of energy in Australia.”
The federal government’s current climate policy is to achieve carbon emissions 26 to 28 per cent below 2005 levels by 2030.
The latest edition (mid-January) of the Essential Report public opinion poll reinforces the fact that Australians still have widely differing views on climate change two decades after the issue rose to the top of political argument.
The poll reports a substantial drop in the percentage of respondents believing Australia is not doing enough about to address climate change – falling from 62 per cent in January last year at the height of a major bushfire season to 42 per cent this year.
Those believing enough is being done come in at 35 per cent versus 19 per cent a year ago – while those believing there is too much attention to the issue have risen slightly from eight per cent in January 2020 to 10 per cent now.
Major gentailer Energy Australia has told media it will make a decision on whether or not to build another 400 megawatt gas-fired power plant at its Tallawarra site in New South Wales by the end of March.
Investors are on notice from the federal government that it will pursue a new gas generator at Kurri Kurri, built by Snowy Hydro, if firm investment plans for new dispatchable generation in the State are not announced by the end of April.
The federal government’s January agreement with Queensland LNG producers has not delivered what manufacturers have sought for several years – price controls on gas supply to the southern States – while claiming it is “delivering what they really want,” the supply they need “at the cheapest possible price.”
Manufacturers continue to press for intervention to deliver them gas on contract at a lot less than $8 to $10 per gigajoule, more than double historic levels – but their demands are dismissed by the supply sector as “simply below the cost of production.”
The latest deal extends one negotiated in 2017 until 2023, with the exporters committed to offering factories uncontracted gas at competitive prices.
The arrangement has been attacked by the Australian Workers Union, which argues that Morrison, like his predecessor Malcolm Turnbull, “has caved in to exporters.” The union insists that “the only way multinational producers will ever sell gas to manufacturers at a reasonable price is if the government makes them do so.”
The Energy Users Association of Australia has welcomed the deal but says “there is so much more that needs to be done” to enable its factory members to compete internationally. EUAA chief executive Andrew Richards adds that adding new east coast gas supply is also crucial.
The Australian Industry Group describes the new arrangement as “a relatively negligible contribution,” saying there is “considerable disappointment” among manufacturers.
The Australian Petroleum Production & Exploration Association says domestic prices are lower than those paid by overseas buyers of LNG from this country. APPEA adds that the Morrison government has “taken the commonsense approach, recognizing the realities of the market.”
Meanwhile, ExxonMobil has announced that its $400 million development of the West Barracouta field in Bass Strait start production this year.
The company says there is “plenty of potential” left in the offshore Gippsland basin and it calls for “unnecessary cost, red tape and bureaucracy” to be taken out of the regulatory system to enable more exploration and development.
The upstream petroleum industry says a national challenge for 2021 is to return the sector to growth to support a post-pandemic economic recovery
Andrew McConville, CEO of the Australian Petroleum Production & Exploration Association, says government decisions taken now will “profoundly influence” the strength of the recovery.
APPEA proposes five steps for government action.
One is to reduce and streamline environmental regulation and another to simplify regulatory approval processes for development projects. APPEA also wants governments to “resist intervention” in markets and to promote more openness and competition.
The association is calling for governments to promote exploration in pursuit of further “vast” oil and gas resources, seeking improvements for investment allowances and other tax settings as well as a “sensible” offshore infrastructure decommissioning policy.
APPEA says it will continue to “advocate strongly on the role of natural gas in work to reduce national greenhouse gas emissions and to maintain energy security.
The arrival of heatwaves at the end of January had the east coast market operator, suppliers, network operators and large power users on edge, but at least, as the month closed, south-eastern Australia had so far been spared the large, wide-ranging bushfires that put the grid under considerable pressure at the start of 2020.
The NEM grid coped with regional bursts of high heat in the days leading up to Australia Day 2021 with the market operator not needing to reach for generation reserves it had negotiated in advance of summer.
In the seven days of the late January heatwave, New South Wales generators sent 1,287 gigawatt hours of power to the grid while the State imported 135 GWh and the estimated use of rooftop solar power was 124 GWh. Of the electricity sent to the grid, 1,030 GWh (or 80 per cent) was from NSW coal-burning plants – versus 72 GWh from solar farms, 75 GWh from wind farms and 79 GWh from hydro plants.
In the NEM as a whole in this period, 3,817 GWh was sent to the grid while estimated use of rooftop solar power was 381 GWh.
Total generation from black coal plants was 1,974 GWh while Victoria’s brown coal generators provided 772 GWh. Wind farms provided 330 GWh, solar farms 199 GWh and hhydro systems 300 GWh. Coal generation met almost 72 per cent of market grid requirements.
The Australian Energy Market Commission is to fast track examination of a NEM rule change request aimed at better identification of emerging risks to the security of the east coast power system.
The inquiry has its roots in the controversial September 2016 “system black” event in South Australia. It took until May last year for the CoAG Energy Council to formally make the rule change request.
While 2020 was a horror year in Australia for so many people in so many ways, the solar power industry is celebrating installing a record 3,000 megawatts of rooftop capacity, taking the national total for the distributed technology to 20,000 MW. This follows a record year in 2019, too, when 2,132 MW was installed.
The sector says the annual growth rate for the past four years has been more than 33 per cent, bolstering claims that Australia leads the world for the uptake of solar on a per capita basis.
The 2020 installation level was achieved despite Victoria’s extended pandemic lockdown keeping workers off roofs and difficulties in importing equipment from China, also caused by Covid issues.
The Clean Energy Regulator forecasts that another 13,000 MW of rooftop solar will be added between now and 2025.
As the year turned, it seemed that claims and commentary about hydrogen – especially “green hydrogen” – were everywhere in the media.
Exemplifying the hyperbole, the ABC ran a large feature headlined “What is green hydrogen, how is it made and will it be the fuel of the future?” This followed on the heels of business leader Andrew Forrest using his ABC Boyer lecture to urge a “nation-building” pursuit of “green steel” via hydrogen energy (as the media organization put it) to “fix our climate and the economy.”
Forrest says his company, Fortescue, a major iron ore supplier, will pursue the use of hydro-electric power and geothermal energy to launch a “green steel” prototype plant later this year. (Almost all the world’s current steel supply is made using iron ore and metallurgical coal, accounting for eight per cent of global carbon emissions.)
This is a goal also being pursued by a Swedish steel company, SSAB.
Meanwhile, another steel industry magnate, Sanjeev Gupta, owner of GF Alliance, is reported to be considering a 2,000 to 3,000 megawatt renewables development to serve his Whyalla operations in South Australia.
International consultants McKinsey says conventional steel production still retains “a cash cost advantage” but this would change “as soon as hydrogen prices drop and carbon dioxide charges increase.”
As 2020 ended consultants Ernst & Young published their latest renewable energy country attractiveness index – and lifted Australia in to third place out of 40 nations assessed, influenced by proposals to pursue “green hydrogen” and exports to Asia of solar-based electricity as well as “investors driving renewed growth in the renewables sector.”
The EY report notes an international surge of interest in the hydrogen technology.
“Clearly,” the consultants says, “ there are high hopes for renewables in Australia – but fossil fuels still account for 79 per cent of total power generation.”
Consultants Ernest & Young say Australia’s investors in renewables are “facing headwinds” because of grid stability and power price volatility.
EY adds that, with a half dozen coal-fired plants exiting the east coast system over the next 15 years “and the only material replacement other than Snowy 2.0 being significant volumes of non-synchronous generation,” price volatility could be a major long-term issue.
When Grant King, past CEO of Origin Energy and past president of the Business Council, participated in an Energy Policy Institute of Australia webinar last November focusing on the federal government’s low emissions technology statement, he made a point of major significance that keeps on getting lost in the wash of our debates on climate and a local transition for electricity supply.
The peg for King’s comment, of course, was the net-zero by 2050 target being embraced so widely and being relentlessly pushed on the Morrison government ahead of the UN summit in Glasgow in November this year.
King said: “There is only one sector of the (Australian) economy forecast to reduce emissions (between 2020 and 2030) – only one of 11 talked about – and that’s the electricity sector.
“Electricity generation currently contributes around 32 per cent (of national emissions). It is projected to fall to about 25 per cent. So, by 2030, we still have 75 per cent of emissions to go and no technology pathway that is obvious as to how that’s going to occur.
“I believe our obsession with energy and fossil fuels has distracted us from the fact that there are many sectors of the economy needing to make progress in this area – and very little plan to do it.”
He emphasized that the government’s technology roadmap is not an energy response but an economy-wide one.
King also urged focus on a fundamental premise about the managing the national economy in the map exercise: “We should not give up our incredible legacy of resources – mineral resources, energy resources and agricultural and landscape resources.” To achieve desired climate outcomes, he added, this legacy needs to be built on, not wasted.
This is good, commonsense thinking but we don’t hear it being expressed by our political leaders or the commentariat.
In the run-up to the UN summit in Glasgow and a possible federal election in the same late-2021 time frame, this is stuff that should be top of mind, not shuffled in to the background by demonstrators’ one-liners and political efforts to press the right vote-catching buttons in marginal seats.
There is another important aspect of this that also shouldn’t be shuffled in to the background. At the EPIA webinar, it was well put by Adi Paterson, the former CEO of the Australian Nuclear Science & Technology Organisation.
Australia is going to have a hard time getting anywhere near the overall technology roadmap ambition if we leave nuclear energy off the table, he declared. “Some of the best bets we could place are on nuclear,” he argued. The non-discussion of nuclear here is “almost embarrassing” given what is happening elsewhere in the world.
Interestingly, in the light of the current carry-on by parts of the National Party on investment in new coal generation, Paterson makes the additional point that there is a “compelling narrative” for rural and regional Australia around use of small modular and micro reactors as a clean and efficient way of dealing with constrained energy supply.
With respect to the east coast power grid (the NEM), he made another point that resonates with me. In planning the way ahead, we need far more focus on system modeling and on the grid implications of what he termed “dilute sources.”
He told the webinar audience: “I think AEMO should stop financial modeling and start some physics and engineering modeling of what the grid is going to look like in the future. You can’t do it in a spreadsheet. You have to do it with real engineers.”
You can find a transcript of the EPIA webinar proceedings on the institute’s website (energypolicyinstitute.com.au); it formed part of my summer holidays reading and there is a lot there that should be forming part of our national debate as we shuffle towards a net-zero position.
From where I am sitting, it is quite a worry that the thoughts of King, Paterson and others seem to be getting no traction in the public forums where it matters.
Keith Orchison
29 January 2021