Issue 129 January 2016
Welcome to the first issue of the newsletter for a busy 2016, writes Keith Orchison. This is a year when politics, via the federal election, will again intrude heavily on energy policymaking but also one where the ACCC gas report will be an early harbinger of change and the impending Australian Competition Tribunal decisions a key to network charges over the rest of the decade – with two more New South Wales privatization steps to come.
The year now ended was notable for much focus on the more distant future, even mid-century, but real life always intrudes – and decisions to be made much sooner, notably about generation capacity in the NEM and about network charges, will be more than a little important to the bulk of Australian energy consumers living on the east coast.
In the case of network charges, the complexity of the challenges to the Australian Energy Regulator decisions on revenue raising by the New South Wales and ACT distribution businesses has seen a verdict delayed again. Most recently expected before Christmas, the tribunal decision may not now be handed down until February, placing a question mark over the timing of the Baird government’s privatization of Ausgrid, the next cab off the rank in its power sale.
For generation, an important and unclear factor is how much renewables development (mostly wind power) will get under way in 2016 to help deliver the intended 33,000 gigawatt hours of RET production by 2020.
At the end of 2015 there were 18 projects awaiting final development decisions with a planned capacity of 3,747 megawatts and a construction budget of $5.5 billion, half of them wind farms. Seven were solar plants and two were small hydro-electric systems. The bulk of the mooted capacity (2,044 MW) is actually in three solar projects in Queensland.
Most of the power sector assumes that wind energy will provide the vast majority of renewables output that is needed to reach the 2020 RET – and this implies construction of 5,000 to 6,000 MW of wind capacity in four years.
Under the amending Coalition legislation passed by federal parliament last year the RET will flatline through the ‘Twenties at 33,000 GWh – but the Labor Opposition is promising to increase the target to 50,000 GWh by 2030 if it wins office at this year’s election, an unlikely eventuality on the basis of opinion polling at the end of 2015.
A review issued just before Christmas by the federal Department of the Environment predicts that national carbon emissions from electricity generation will be almost static over the rest of the decade.
The inventory forecasts that, while national emissions overall will rise by 33 million tonnes between 2014-15 and 2019-20, the power sector share will go up one million tonnes (from 186 Mt to 187 Mt) despite the required increase in renewable generation.
By comparison, the transport sector share will rise by 10 Mt (to 103 Mt of which road vehicles will contribute 85 Mt).
Direct combustion of fossil fuels will rise by 18 Mt, mainly as a result of the new LNG developments becoming fully operational. By the decade’s end, Australia will be exporting 76 Mt of LNG.
The electricity sector accounts for 32 per cent of overall emissions.
The department expects the share of coal-burning plant in electricity production will decline from 69 per cent now to 60 per cent in 2019-20. In this scenario, gas plant’s share will be 14 per cent.
Meanwhile the Grattan Institute, in a new working paper on Australia’s climate policy options, proposes that the current suite of policies will need “a substantial overhaul” to meet the 2030 abatement target the Coalition federal government took to the UN Paris summit.
The institute declares that “debate will need to move on from the current impasse towards a credible, low-cost set of policies that will substantially reduce emissions.”
The outcome of the UN climate change summit in Paris is seen in some quarters in Australia and overseas as re-igniting the prospects of greater use of nuclear power after a decade of pushback against the industry in the wake of the Fukushima incident, led by Germany with its controversial energiewende program.
The Minerals Council of Australia sees the Paris agreement as
supporting the “rapid growth of new generation nuclear power in East and South Asia, providing strong demand for (our) uranium exports.”
It says China expects to increase nuclear power by a compound nine per cent a year to 2030 while India plans to treble its capacity over the next five to seven years.
The International Energy Agency, in analysis published ahead of the summit scanning pledges taken to Paris by world governments, sees nuclear energy as retaining a 12 per cent share of power production globally between 2020 and 2040 as output rises by nearly 50 per cent.
In this scenario, nuclear and hydro power would together meet 28 per cent of electricity output in 2040 – compared with 30 per cent for coal, 23 per cent for gas and 18 per cent for bio-energy, wind and solar power.
The IEA has offered an alternative scenario, designed to help create a path to meet the need to limit global warming to two degrees at the century’s end, which sees the nuclear contribution rise to 18 per cent in 2040 while coal’s contribution sinks to 12 per cent and gas to 16 per cent with hydro providing 20 per cent and other renewables 32 per cent.
Promoters of nuclear energy have seized on an IEA throw-away line that the average reactor generator has an annual output equal to 4,000 wind turbines.
Turnover downturn
The Australian Energy Regulator, in its annual market review, reports that turnover in the east coast generation system was 24 per cent lower in 2014-15 than it was in 2013-14 despite production being unchanged at 194 terawatts.
NEM turnover was $8.2 billion for 2014-15.
The regulator points to average wholesale power prices falling 42 per cent in Victoria, 38 per cent in South Australia, 32 per cent in New South Wales and 12 per cent in Tasmania.
Queensland was the only NEM region to record a 2014-15 price upturn, producing the highest prices in the east coast market ($61 per megawatt hour on average) for the first time in a decade.
One of the factors influencing the situation, the AER notes, was the removal of carbon costs, giving encouragement to baseload (mainly coal) producers to bid more capacity at lower prices. Another was continuing weak demand, partly because of household self-generation, and ongoing over-capacity.
However, it adds, electricity demand steadied in 2014-15 after five years of decline, averaging a fall of 1.7 per cent annually.
It also points out that the Australian Energy Market Operator is forecasting an annual rise in demand of 2.1 per cent from now to 2018 as residential and commercial consumption goes up due to the population growing and retail prices easing.
The AER report also records maximum 2014-15 demand peaks for the NEM well below record levels – a winter maximum of 30,201 MW (versus 34,422 MW in 2008) and a summer peak of 29,472 MW (versus 35,551 MW in summer 2009).
Peak demand in NSW, Victoria and SA was 20 per cent below the historical highs of 2009 – but Queensland set a new record on 5 March last year when Brisbane experienced its seventh successive day of temperatures above 30 degrees.
Total installed capacity in the NEM stands at 47,641 MW.
Across the east coast electricity market, wind farms accounted for 6.6 per cent of generation capacity in 2014-15 and produced 4.9 per cent of power output, according to the Australian Energy Regulator.
The annual AER market review records that wind generation accounted for 14 per cent of all NEM production on 10 May last year when turbines were able to operate at 89 per cent of their capacity. However, the regulator says, wind power tends to be lower at times of market maximum demand. In South Australia, where it has 20 per cent of capacity, wind typically contributes 10 per cent of summer peaks.
It is back to the future time in the West as once again the structure and ownership of the State’s electricity assets in its south-west integrated grid system is being debated against a backdrop of government financial stress.
This is a debate that has been rolling on in the West since the late 1990s and it is being pushed back to the media front pages by a combination of serious State debt issues post the mining boom and warnings that the advent of disruptive technology could result in the power assets it owns having decreasing value over time.
The WA Chamber of Commerce & Industry is urging the embattled Barnett government to sell both Western Power (distribution and transmission) and Synergy (generation and retail), pointing to the financial benefits demonstrated by current power privatization in New South Wales.
Consultants ACIL Allen Consulting urge the State government to be “bold” and to aim to use privatization to promote electricity competition and deliver better consumer outcomes as well as to address its “crisis” debt problems. It proposes reforming market rules and breaking up Synergy in to several “gentailers.”
Analysts claim Western Power’s distribution assets could be sold for $3 billion and its transmission system for $7 billion.
Premier Colin Barnett retorts that, if the State was to retain any single asset, it would be Western Power, “a natural monopoly” that is essential to the promotion of development.
Amid a welter of media coverage of where Australian energy consumption could or should head in future years, the federal government reports that in 2013-14 (the latest official data), fossil fuels dominated overall use – with oil accounting for 38.4 per cent of consumption, coal 31.7 per cent and gas 24 per cent. The renewables share was 5.9 per cent. However, the government review points out that falling requirements for coal in iron and steel manufacture and in power generation has seen the fuels’ (black and brown coal) share fall to its lowest level since the 1970s. Most of the renewables contribution is from biomass and hydro-electric generation.
Until events in Paris at the year-end leapt to worldwide media prominence, possibly the biggest energy story of 2015 was the sudden emergence of electricity storage as a commercial prospect, much-hyped as a “game-changer.”
In its new energy technology report, the Energy Supply Association records analyst anticipation that the storage market in Australia will reach 244 megawatts in 2020, up from just under six megawatts in 2014 – with claims that 2016 will see the residential storage market leading the way with 44 MW installed in 12 months and the commercial sector adding 23 MW.
Meanwhile, a study undertaken by CSIRO and the Clean Energy Council shows that there is a lack of knowledge on energy storage technologies among household and small business consumers – and therefore an issue on how to care for them and operate them in a safe manner.
For example, there is currently no consensus on how best to extinguish a lithium battery fire. Standards for battery storage connection to the grid are “incomplete.”
ESAA comments that “a lot of work is needed to ensure risks are minimized as the storage sector grows.”
The Energy Supply Association has seized on a new report by the Independent Pricing & Regulatory Tribunal in NSW to further sing the praises of electricity retail competition.
ESAA says deregulation is now benefitting 15 million electricity consumers in South Australia, Victoria and NSW.
The association points to IPART’s finding that retail competition is “working effectively” for residential and small business customers in NSW – it was introduced in July 2014 – and that power prices paid by most customers have declined.
IPART was appointed “market monitor” by the Coalition State government as competition was launched in NSW and its report says that a detail review of retail prices and retailer profit margins is unnecessary.
The regulator notes that, while the NSW market is still highly concentrated among the “big three” retailers (AGL Energy, Origin Energy and EnergyAustralia), smaller players are gradually increasing their shares. Four new retailers entered the market in 2014-15. The “big three” combined market share has fallen from 83 per cent of small customers in 2011 to 67.8 per cent. However, the trio still hold almost 83 per cent of the residential market.
IPART finds that there is “a high level of awareness” of opportunities to choose suppliers among residential and small business users in NSW. A third have looked at options in the past year and a quarter have opted to swap supplier.
The IPART retail deregulation study reinforces the disconnect between what people who pay power bills think about supply and what opinion polls and media reports assert.
The regulator points to the Australian Energy Market Commission’s latest review for the CoAG Energy Council. It shows that 74 per cent of residential customers and 61 per cent of small business customers responded that they are very or somewhat satisfied with their current retailer.
Sixty-five per cent of householders and 45 per cent of small businesses polled for the AEMC rated the overall quality of customer service they receive as “very high.”
Fifty-six per cent of householders and 32 per cent of small businesses rated the overall value for money provided by electricity retailers “quite highly.”
IPART adds that 78 per cent of residential customers and 82 per cent of small businesses who switched supplier or plan declared they were “happy with the decision to switch.”
The Energy Supply Association expects power network costs to fall by about five per cent over the next three years in many east coast jurisdictions as a result of revenue determinations by the Australian Energy Regulator – and says this will have “a significant impact” on typical household charges – but it also expects wholesale electricity charges to rise from historically low levels as consumption starts to increase again and there are generation plant retirements.
The Energy Supply Association says monthly installations of solar power in Australia have “flattened out” with the monthly average tracking 60 megawatts since last April, down from 70 MW in 2014.
“Australia is creeping up to 1.5 million solar PV installations,” ESAA adds. Estimated total capacity was 4,639 megawatts late in 2015 and the association expects the 5,000 MW mark to be attained in the second quarter of this year.
ESAA reports that the solar penetration rate in Australia is almost 16 per cent.
It also says that the average size of systems being installed is “still pushing upwards,” being more than 5 kilowatts over the past six months.
Analyzing data collected, ESAA asserts that there does not appear to be a correlation between the income level of a postcode and penetration rates – but “it is clear that the lowest quintile of households is installing the least amount of solar and therefore paying the most in cross-subsidies, a concern from an equity perspective.”
The existing State-based regulatory system is largely ill-equipped to respond effectively to the variety of issues and concerns that onshore unconventional gas development raises, says Samantha Hepburn, a law professor at Deakin University.
Writing in the December issue of Focus, the Australian Academy of Technology & Engineering magazine, Hepburn calls for regulatory reform to recognize the “distinct challenges” involved, including “the fact that unconventional developments typically extend over broad areas and require a greater concentration of infrastructure to make production economically viable.”
She adds that, “to ensure a robust, risk-managed progression of onshore unconventional gas, strong regulatory and policy initiatives that reflect the spectrum of social, economic and environmental impacts are vital at State levels.”
In the same Focus issue, Craig Simmons, a leading Australian groundwater scientist, argues that “we need a much greater effort to quantify the likelihood of ‘something bad’ happening due to fracking or coal seam gas extraction – and over what time and spatial scales it may occur.”
Simmons adds that “there appears to be an emerging technical and scientific view that, based on evidence to date, unconventional gas production is safe provided it is subject to very tight regulation and compliance.”
Enhancing the quality of science is essential to underpinning robust management, decision-making and regulation in CSG activity, he says.
The Australian Petroleum Production & Exploration Association has renewed promotion of gas for power generation in its new set of climate change policy principles.
APPEA uses work by the Australian Council of Learned Academies to argue for greater use of gas as a baseload power source and to support renewable energy. For example, it says, a gas-for-generation approach could cut electricity-related emissions by between 27 and 52 per cent from its level of 197 million tonnes annually in 2012.
Meanwhile the Australian Energy Market Operator, in its new annual gas market forecast, says that use of the fuel for power generation is expected to continue to fall before beginning a long-term recovery as shuttered coal-burning plant is replaced.
AEMO forecasts that generators’ gas consumption will fall from 175 petajoules in 2015 and 220 PJ in 2014 to under 70 PJ by the decade’s end and then nearly triple through to 2035.
It’s hard to have a dispassionate conversation about future electricity generation development on the east coast, home to 90 per cent of national power production.
This applies to even professionals among stakeholders, most of whom seem to have strong feelings too.
In the broader community, much, but not all, of the response is essentially kneejerk.
For example, earlier this year, an Essential Poll found that 65 per cent of respondents approved of Bill Shorten’s soundbite policy of pursuing 50 per cent renewable generation by 2030 even though 51 per cent expected such a move to result in higher power costs (when on other occasions such polls have thrown up 70 per cent of respondents supposedly very worried by their power bills).
There was another in 2015 in the Essential polling series in which respondents (50 per cent of them) thought less emphasis should be placed on coal generation here – while 55 per cent thought there should be more emphasis on hydro power.
Where, one wonders, would they expect to see a new big hydro project built?
A more measured reflection might be found in another Essential poll that recorded support for nuclear generation here at 40 per cent and opposition at the same level.
(You might be surprised to hear that 12 per cent of those reacting positively said they support the Greens and 42 per cent Labor. Interestingly the “strongly opposed” segment amounted to 18 per cent.)
This is all very well, but, in the world of investors and policy advisers, there is no less disagreement on what could or should come next in building generation.
To state the obvious, we know what actually comes next: if the 33,000 gigawatt hour RET is to be met, some 5,000 megawatt of renewables, almost all wind farms, need to be constructed by 2020.
Will they be?
There are differing views because of the state of the east coast wholesale power market (the NEM) and concern that its current over-supply may make no form of development bankable.
There are strong views, of course, in certain quarters about making NEM room by forcing out black and brown coal plants.
Some of these are going of the owners’ volition – the Alinta duo in South Australia, EnergyAustralia’s Wallerawang in New South Wales and, promised by AGL Energy, Liddell in the Hunter Valley in 2022.
The Greens naturally want all this accelerated.
Without a clue or a care about the real costs involved, they are calling for 90 per cent renewables by 2030 and the closure of Yallourn, Hazelwood and Loy Yang B in Victoria and the Queensland and NSW black coal plants seriatim over 10-12 years.
Leaving aside Green fantasies, any realistic consideration of the efficiency and resilience of the NEM has to take in to account what should come after the (generally agreed) closure of some 8,000 MW of old, emissions-intensive plant across the rest of this decade and just beyond for market reasons.
There is a 362-page report (Australian Power Generation) now published by a coalition of the CO2CRC, CSIRO, ARENA and the federal Department of Industry in consultation with more than 45 stakeholders reinforcing the view that a future mix of generation should be diverse because “no single source is able to reliably and cleanly supply all our needs 24 hours a day.”
The report, which will be an important input to the federal government’s Australian energy technology assessment in 2016, highlights that new large-scale generation will all cost more than the current mix.
Tania Constable, the CO2CRC chief executive and chair of the Australian Power Generation project, makes the point that carbon capture and storage technologies need to be part of consideration of fossil fuelled generation in the run-up to 2030. (So does the International Energy Agency in its global scan of what may happen in power production to 2030 and 2040.)
The new report underscores the lack of wisdom in politicians leaping to promote their hobby horses – or in the case of Labor pursuing a lifebelt for next year’s election to hold off the Greens on one side and make at least some inroads in to the Coalition’s current large House of Representatives majority.
The three regions that especially matter with respect to new development are NSW, Queensland (both dominated by black coal generation) and Victoria (brown coal).
The first two currently have more than 19,000 MW of black coal capacity and Victoria 6,825 MW of brown coal plant out of a NEM fleet totaling almost 48,000 MW where the next largest segment is gas generation with some 11,000 MW followed by hydro (7,300 MW) and wind 2,300 MW.
The factors that impact on what will be built next, where and when are many and varied (leaving aside the forced use of wind by the RET).
Probably the most controversial aspect is whether black coal generation (using high efficiency, low emissions technology and CCS) can be part of the new mix because of political and radical environmental antagonism.
Perhaps the most likely place for this to happen is Queensland, either through brownfield projects or new developments on top of its considerable coal resources but how this could happen requires a great deal more attention.
What matters most right now, I’d suggest, is politicians (i.e. those who actually have their hands on the levers of government) not leaping in to close off prospects as well as remembering the needs of energy R&D in the new spurt of enthusiasm for innovation.
Keith Orchison
1 January 2016
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