Issue 105, January 2014
This newsletter began publication in January 2005 – a great deal has happened in the energy supply space since then. For one thing, the opening issue covered the New South Wales energy green paper published by Bob Carr. Eight years later the State has had five premiers but still does not have an energy blueprint! So welcome to another new year, one in which governments, federal and State, will need to make momentous decisions, a number of them to make up for wrong turnings taken during the past decade.
The key four-letter word the energy supply industry wants to impose in the thoughts of policymakers and regulators for 2014 is “risk” – even more than this was the case in 2013 and 2012.
In an environment dominated by ongoing demand weakness, a manufacturing malaise, a continuing domestic gas price imbroglio, carbon policy disarray and an uncertain regulatory scene, industry investors are decidedly jittery.
Businesses along the supply chain and their lobby groups are concerned to ensure that politicians in particular, under strong pressure from consumers over ongoing price rises, understand that their interventions – and in some instances their unwillingness to pursue change – may exacerbate the problems already being experienced.
The past year has seen electricity demand remain subdued – as a result in particular of lower manufacturing consumption, consumer responses to high prices and energy efficiency programs – and the east coast wholesale market markedly over-supplied.
Demand in the “NEM” in 2012-13 was almost eight terawatt hours below the peak year of 2008-09 and the decline continues.
Australian National University researcher Hugh Saddler says that, if power consumption had continued to grow from 2005 onwards at the same rate as it did in the previous 20 years, electricity in financial year 2013 would have been about 37 TWh higher than it actually was. This is the output of about 5,000 megawatts of baseload generation.
The new year carries the threat of more capacity being forced in to the market under the renewable energy target at a time of expected ownership change for significant New South Wales assets and it is very unclear which conventional generation businesses will act first to further rein in supply.
Renewables investors may be the most anxious of all about risk as the Abbott government keeps throwing out hints it is going to curb the RET; the Climate Institute claims this will dampen investment confidence in clean energy projects and the market as a whole.
The Clean Energy Council says that $18 billion in outlays is being considered to meet the current RET requirements, describing the program as “a low-cost policy that is working a little too effectively for the tastes of some players in the electricity industry.”
Meanwhile all and sundry wait to see if there will be a re-run of the Western Australian Senate election with the media flagging that the Coalition is in trouble in the West and the second poll may worsen its situation in the federal upper house from 1 July.
The Australian Energy Regulator says declining electricity demand in eastern Australia, leading to a surplus of generation capacity, will delay the need for investment in new power plants for up to a decade.
At the same time, the regulator says, weaker energy demand has caused the deferral of a number of planned network developments that had already passed its cost/benefit analysis.
In its “State of the energy market” annual review, published just before Christmas, the AER notes that 2,300 megawatts of plant was retired or placed periodically offline in 2013.
Some plant, it says, is running only over summer. Other owners are rotating plant through the year.
The AER adds: “The energy market landscape has shifted considerably over the past 12-18 months. A trend of rising demand, which exerted upward pressure on wholesale and network costs for several years, has now reversed.”
In another retort to the accusations of “gold-plating” against network businesses, the regulator sums up the cause of multi-billion dollar investments like this: “Regulatory allowances to network businesses rose to fund investment to replace ageing assets, meet stricter reliability and bushfire (safety) standards and respond to forecasts at the time of rising peak demand. Additionally, instability in global financial markets exerted upward pressure on the costs of funding investment.”
The AER also points out that the regulatory appeals process enabled electricity and gas networks to win Australian Competition Tribunal cases that added $3.3 billion to energy retail charges between June 2008 and June 2013.
(This is an example of how aggregate numbers can create lurid community images: $3.3 billion is an enormous sum to ordinary Australians and it still seems large when brought down to $55 million per month. However, divided by nine million customers, it is just over $6 per month per account – the cost of a hamburger and fries – or 20 cents per day. In aggregate, it remains a substantial sum to withdraw from public spending power and an obvious revenue benefit for networks but its impact on typical household budgets is tiny.)
The Energy Networks Association has called out the nation’s energy regulators for “unrealistically” assuming that risk for the sector is falling “at a time when every commentator is discussing the massive upheaval in demand trends, customer energy use and technology.”
ENA is reacting to what it declares to be “inconsistent” decisions by the regulators “that run the risk of undermining investment certainty for the networks sector.”
ENA chief executive John Bradley says the Australian Energy Regulator and Western Australia’s Economic Regulation Authority have adopted conflicting approaches under the same national rules to estimating rates of return for energy infrastructure and assessing the cost of equity and debt capital.
He says the new AER guidelines cut the current risk premium, “effectively suggesting that the investment risk profile for the sector is lower than it was five years ago.”
Bradley adds: “This is clearly out of step with every other examination of the sector (that) suggests new technology, new markets and shifting demand are changing the natural risk profile of these businesses. Customers do not benefit in the long term from regulators artificially lowering rates of return, given that the networks compete for capital in global markets.”
Australia is increasingly looking overseas to fund investment in long-life infrastructure, he says.
Meanwhile the lobby group for large industrial energy consumers, the Energy Users Association of Australia, says it is “dismayed” by the new guideline on allowed rates of return for regulated electricity and gas network service providers.
EUAA chief executive Phil Barresi says the outcome “falls well short of the changes needed to ensure that networks act in the interests of their customers.”
According to Barresi, “network assets are increasingly being under-utilised (while) the financial pain of past asset augmentation decisions based on flawed forecasting is still being felt by all users.”
He says the Australian Energy Regulator’s year-long project to revise network regulation is to be commended for engaging with energy users, but its decisions on most parameters, including incentives and allowed rates of return, “continues to favor service providers at users’ expense.”
Barresi adds: “Financial markets are telling us that the regulated network businesses are continuing to be valued at a substantial premium to the underlying regulated assets – in other words, investors believe that the industry will continue to deliver very substantial profits as it has done in the past.”
Consumers, he says, “should not have to stump up the cash for failed investment decisions.” The EUAA will continue to battle for a regulatory formula that is “well balanced and respectful of the cost pressures placed on users.”
Tasmanian residential and small business power customers choosing not to chase a market contract have had their prices reduced 5.22 per cent from New Year’s Day.
This is the first time in 10 years that power bills will be lower in the first half of the calendar year compared with the previous period.
Power issues have been controversial in the island State in the past year as the Giddings Labor government has struggled with reform, which is now stalled, and come under fire for the large price increases of recent years.
The government had intended to sell the customer base of Aurora Energy, but this move is now in cold storage.
The Tasmanian retail market was supposed to be opened to competition from 1 January but this has now been delayed until July.
With the State election expected in late March, the government asked the Tasmanian Economic Regulator to approve a price reduction and its wish has been granted.
Premier Lara Giddings says the decision will cut household power bills by $140 a year and deliver decreases up to $900 a year to small business.
Households in the State typically have higher electricity consumption (and therefore bills) than on the mainland because the climate creates greater heating needs and few consumers have access to natural gas.
Also, as an obvious political ploy, Giddings announced in November that the State – which is linked to Victoria’s brown coal generation via the Basslink subsea connector – will aim to have 100 per cent renewable energy by 2020.
Giddings argues that Tasmania has enough renewable energy resources – wind and biomass in the short term, geothermal power later and wave and tidal power in the long term) to create a situation where it can export surplus generation to the mainland.
Hydro-electric power currently meets 80 per cent of State electricity needs, but the system is vulnerable to extreme drought conditions.
The announcement came three months after the Giddings government slashed rooftop solar PV feed-in tariffs from 27.7 cents per kilowatt hour to eight cents.
The Energy Retailers Association, representing businesses supplying electricity and gas to almost 10 million customers, goes in to 2014 renewing its call for a national approach to energy policy and regulation rather than individual, State-based initiatives.
CEO Cameron O’Reilly says legislative and regulatory inconsistencies across State borders are increasing administrative and compliance costs for energy retailers.
In a submission to the Queensland 30-year electricity strategy process, the association calls on the Newman government to take a lead role in pursuing regulatory harmonisation across the east coast’s national electricity market.
There has been some progress in energy markets reform in 2013, but there is much more to do make them open, competitive and efficient, the Energy Supply Association says in a year-end review. Progress over two decades of reform has been “disjointed,” it adds.
ESAA calls on governments around the country to push through programs to deliver better prices and services for energy customers.
Issued as the 15th anniversary was being noted of the east coast’s wholesale electricity market – which commenced operation on 15 December 1998 – the review’s signal feature is the relatively poor rating for the two regions (New South Wales and Queensland) that contain half the nation’s customers.
ESAA describes NSW as a “mid-range performer” on the most of the criteria it uses in its annual performance scorecard. The State lags well behind Victoria and South Australia, but substantially ahead of Queensland, which is the worst performer of the five States on the eastern seaboard. Western Australia is rated the poorest performer of all States.
The association notes that the O’Farrell government, elected in March 2011 after a decade and a half of Labor rule in NSW, has reformed electricity reliability standards, adopted the national energy consumer framework and pursued the sale of generation assets left over from the much-criticised ALP “gentrader” privatisation process.
ESAA says deregulation of the State’s retail market is the big opportunity for advancing NSW’s performance in 2014. It also urges the State government to develop a sound framework for the roll-out of smart meters and to “unlock taxpayer value” by privatising network businesses.
Meanwhile NSW Treasurer Mike Baird has started a sales process for its two remaining generation assets – after the sale of Macquarie Generation, currently under way – and set 4 February as a deadline for expressions of interest in Delta Electricity’s Vales Point and Colongra power stations on the State’s Central Coast.
Vale Point is a coal-fired baseload plant with 1,320 megawatts of capacity while Colongra is a 667 MW gas-fired peaking plant.
New NSW Resources & Energy Minister Anthony Roberts, replacing Chris Hartcher, who resigned, claims that electricity prices in the State have “turned the corner, predicting that they will “flatten in 2014-15 and decrease in 2015-16.”
Roberts is urging customers to shop around if they are not satisfied with their current deals.
All customers have been able to choose their own retailer since 2002 but 40 per cent still cling to the regulated tariff arrangements.
Roberts has also welcomed a decision by the State regulator, the Independent Pricing & Regulatory Tribunal, to place a cap on the fee electricity retailers can charge customers who want to leave a contract early.
Roberts says some retailers have been charging termination fees up to $270, but from March this will be limited to $130 in the first 12 months of a contract and $45 thereafter.
Retailers will be allowed to recover any upfront benefits provided to customers signing contracts, such as a rebate on the first bill.
The first meeting of the CoAG Standing Council on Energy & Resources under the aegis of the new Abbott government has unanimously voted to urge separation of the Australian Energy regulator from the Australian Competition & Consumer Commission, a move both bodies vehemently oppose.
NSW Resources & Energy Minister Anthony Roberts says the O’Farrell government has been pushing this step and was baulked by the Gillard federal government. He claims that separating the AER from the ACCC will strengthen the energy regulator’s powers and make it more effective.
The Australian Petroleum production & Exploration Association has accused commentators of “grabbing the wrong end of the pineapple” in negatively assessing the impact of local LNG projects on greenhouse gas emissions.
APPEA chief executive David Byers says, “LNG is not the greenhouse bad boy.”
To focus on projects’ emissions in Australia is to ignore the larger picture, he argues: Australian LNG plays a major role in helping Asian economies to “grow in a relatively cleaner way.”
Byers says: “The overall story is that greater use of natural gas in Australia and in the region is overwhelmingly a good news story for the national economy and for global greenhouse responses.”
The Energy Networks Association says a new CSIRO report on the transformation of the electricity supply system between now and 2050 – published as “Change and Choice: the Future Grid Forum’s analysis of potential electricity pathways” – highlights more opportunities than threats for network services.
ENA, which participated in the project, says the mega-shifts in technology and consumer choices modelled in the review are “uncertain in their nature and timing” but all scenarios require network investment of at least $300 billion (three times the current asset base) by mid-century even where high levels of embedded generation and some customer disconnection are envisaged.
Using the opportunity to highlight its core message about investment risk, the association says that, to achieve least-cost outcomes for consumers, “it’s critical such investment occur in an environment which minimises regulatory risk to investors in long-life infrastructure.”
ENA chief executive John Bradley asserts that “network businesses are (already) embracing dynamic change” and says “many of the trends in the CSIRO report are extensions of the current innovation in demand-side management, advanced metering and embedded generation enabled by Australian network businesses.”
Grattan Institute energy project director Tony Wood says the electricity supply sector faces “a very, very unusual and difficult problem which no-one ever anticipated.”
Publishing a new institute report – “Shock to the system: dealing with falling electricity demand” – Wood argues that power transmission and distribution businesses “face some unprecedented challenges and the answers are neither obvious nor painless.”
He claims “a history of poor regulation” is going to make life more difficult for what are supposed to be low-risk, low-return monopoly businesses.
Wood accuses the Australian Energy Regulator of allowing networks to earn profits higher than can be justified by the risks they face and some State governments of allowing their taxpayer-owned businesses to spend too much on infrastructure.
In an environment of falling demand, he says, pricing “could spiral out of control” as costs are spread over a smaller number of customers.
Options available to deal with the situation, according to the Grattan Institute, range from networks taking on more of the risk of falling power consumption to changing tariffs to account for peak demand to forcing a write-down of over-valued assets.
The Energy Network Association has reacted angrily to the concept of retrospective write-downs, calling the proposal “reckless.”
It says the call for write-downs is “irresponsible” for a sector that relies on capital markets to finance $100 billion in investment “supporting Australia’s economy and quality of life.”
It argues that analysis by the Australian Energy Market Commission has shown that the national electricity rules do not incentivise networks to spend more than their capex allowances and that there is no evidence of over-forecasting by the service providers.
In a submission in December to Queensland’s 30-year electricity strategy inquiry, major energy retailer AGL Energy warns that governments must not pre-emptively regulate on the expectation of particular market outcomes or of particular products or services being delivered.
The company defines the role of government as “to create the economic conditions in which efficient market outcomes are incentivised through competition, minimal intervention and the operation of genuine market forces.”
AGL says there is an increasing recognition by east coast jurisdictions of the need t allow market forces to operate more freely but there is ‘an inherent tension’ between this and the requirement for an essential service to provide customers with service protection.
Achievement of an appropriate balance, it says, can set a path towards optimising economic efficiency, minimising customer costs and ensuring that innovation and dynamic product development is pursued.
This is the opening paragraph of the energy white paper written in 1988, a quarter century ago: “Energy is fundamental to our living standards and to the conduct of economic activity. Its costs are a significant factor in the costs of almost all goods and services traded in our domestic and international markets. Satisfactory energy supplies are fundamental to achieving our national objectives of economic growth and security, bearing in mind that, if energy supplies are inadequate or supplied inefficiently, they will represent a serious constraint on economic growth and on community living standards. Effective energy supply, including delivery to final consumers, usually requires substantial investment, the nature and scale of which can contribute a major demand on the community’s capital resources. Such capital must be invested as efficiently as possible.”
What could Ian Macfarlane and the Abbott government change in this statement 25 years later?
It is as valid now as it was then, except in one critical respect: the “Energy 2000” white paper eschewed any significant discussion of greenhouse gas emissions, even though the 100 participants in its development had talked at length about the topic, then just emerging in international debate.
The reason is that the Hawke government lost its bottle at the last minute and yanked an entire chapter dealing with the issue from the “Energy 2000” book.
As a result, instead of giving Australia a head start in considering carbon abatement, Hawke and his cabinet bequeathed the country a quarter century’s fuss and muddle and a contentious political issue that hangs over national debate as we move towards the end of the second decade of the 21st century.
The moral of this story is that the sins of governments are often not buried with them but live on to bedevil their successors and the community in to the distant future.
Another stand-out point about the 1988 white paper is that it contains just a single paragraph about coal seam gas (and this dealing with the Sydney Basin and the difficulty of draining methane from its coal seams) and not a syllable about its potential as the basis for east coast LNG exports or power generation – a reminder to us today not to get cocky about predictions about future technological developments.
One of the critical factors in preparing the new energy white paper, due to be published next September after a green paper is put out in May, is to set a sensible time horizon: my broad preference is for the Abbott government to follow the example of the Newman regime, which is working on production of a 30-year electricity strategy with five-year short-term sub-horizons.
More narrowly, I’d like see the new white paper focus on 2030 and what needs to be done in the interim to achieve the chosen goals for this time frame, allowing for reviews in, say, 2019 and 2024.
The most important aspect of the original energy white paper process, which Gareth Evans got under way in 1985, followed up with 10 discussion papers in 1986 plus a three-day conference in Canberra in September that year as well as extensive talks with State governments, is that it sought to produce an holistic document.
One of the biggest problems with the energy white paper the Gillard government released in December 2012 is that a whole slew of issues had been hijacked by other areas of that administration and it was impossible to produce a comprehensive, prioritized action plan to attain goals at minimised costs – while the biggest single problem of the time, runaway electricity prices, was dictated by the regulatory arrangements approved years earlier by federal, State and Territory governments.
My biggest concern with what is now under way is that, in this regard, it is déjà vu all over again.
For example, one of the major factors affecting the east coast wholesale market is the future of the renewable energy target – and this is being handled in a different part of government.
Transformative policy initiatives in any area, but especially energy supply, take years of careful planning to implement.
When they are adopted one at a time without the benefit of an over-arching design, and, importantly, without a comprehensive and believable assessment of cost, they are worse than risky; they are dangerous.
The Hawke government came to the conclusion in 1988 that “a suitably structured consultative body” was needed to monitor energy policy priorities and to propose revisions in a timely fashion.
The Australian Energy Market Commission, which the body politic took a further 17 years to establish, goes part of the way to addressing this need, but not all the way – and its views at the day’s end need to be validated by the Council of Australian Governments.
All this said, we are where we are with energy policy in 2014 and it is hard to find anyone (except perhaps federal Labor, still in denial after a crushing defeat) who thinks that where we are is even half way to satisfactory.
The year ahead is one of the most important since the 1980s for consideration of policies and, right now, it is pretty hard to be confident about the outcomes.
Keith Orchison
1 January 2014
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