Issue 153, January 2018
May I extend to all readers of this newsletter best wishes for 2018, writes Keith Orchison, and to our political leaders the strength of character to progress the transformation of Australian energy supply during the new year in the best interests of the economy and consumers via ensuring better electricity and gas certainty for investors. The past year was a big one for the energy debate on the east coast and opinions differ sharply among stakeholders about whether it aided or hindered resolution of the “crisis” declared by the Prime Minister. To quote Woodside’s Peter Coleman, national policy still seems to be “a work in progress.” Malcolm Turnbull’s government claims to be “addressing climate change” while “ensuring energy security and affordability.” The new year, especially through the Council of Australian Governments, is when this assertion is likely to be put to a stern test. State elections in South Australia (in March) and Victoria (in November) will also see energy issues high on the poll agendas with CoAG Energy Council holding an important meeting in April.
Alberto Calderon, CEO of Orica, the Australian-headquartered largest supplier of blasting systems and explosives in the world, expects the “considerable headwind” manufacturers here have been facing through rising energy costs to continue in 2018 and says the situation “can’t be considered normal.”
Contributing to The Australian’s canvass of national business leaders, Calderon says energy remains a core concern for business going in to the new year and acknowledges the problems will take time to resolve.
Another contributor, Shayne Elliott, CEO of ANZ Bank, tells The Australian that energy costs and the potential for supply disruptions are raised at almost every meeting he has with business customers. Australia, he adds, “has spent more than a decade grappling to find the right energy policy settings and has not made much progress across successive governments.”
Jean-Sebastien Jacques, Rio Tinto CEO, attributes the situation to “too much intervention by too many governments.” Tony Johnston, managing partner of consultants EY Oceania, adds that “it is clear the solution to our energy challenges isn’t more passing the buck between federal and State governments.”
Andrew Mackenzie, CEO of BHP Billiton, says there’s no question electricity prices and supply disruptions are hurting Australian businesses. The company spent $620 million on power in the past financial year and he says the annual bills for some of its local operations have doubled even as efforts to pursue energy efficiency have accelerated.
Catherine Tanna, CEO of EnergyAustralia, points to four State and federal elections over the next 18 months as a reason it won’t be easy for 2018 to see a long-term fix for energy policy.
“Governments intervened in energy markets more than a dozen times in 2017,” she adds. “Sometimes the changes they made did help customers but more often they made the problems harder to solve. We think the proposed national energy guarantee is a chance for good politicians to show they can do the right thing.”
The Australian Industry Group says the east coast gas crisis has “shifted down a gear” since early 2017 but the latest Australian Competition & Consumer Council report on the market “confirms our concerns that we are still far from affordable energy.”
AiG chief executive Innes Willox says the prospect of a gas supply crunch is receding. “We are (now) unlikely to see a shortage of supply leading to industry closures or a power generator shut down.”
In the aftermath of the Prime Minister’s deal with gas exporters, he adds, “retail prices have clearly fallen from the extra-ordinary highs of February but they remain two to three times their historical average (and) well above export parity.” However, the “new normal” will still be uncomfortably high for “Australia’s foundational industries.”
Willox says AiG is hopeful that, as new supply agreements are pursued, gas prices will fall further. “It should never again,” he declares, “be more expensive to buy gas in eastern Australia than it is in east Asian markets.”
Meanwhile the Energy Users Association says “don’t open the champagne yet.”
EUAA acknowledges the ACCC report shows “some progress” has been made, but “the gas crisis afflicting a majority of industrial and commercial users remains a significant issue requiring more reform.” CEO Andrew Richards argues the recent softening of prices reported by the commission “will just be a delay in the inevitable destruction of domestic demand if further structural reform is not undertaken.”
He adds a call for governments to lift moratoriums on new gas development and to put in place a “robust” planning and compliance framework “that treats landowners with respect, protects their natural resources and provides adequate compensation.”
James Fazzino, Manufacturing Australia chairman and former CEO of Incitec Pivot, says there is a long way to go to restore internationally competitive energy prices for business. “Limiting price increases won’t be good enough,” he adds.
Fazzino, who says his association members have been “confused and fed up with Australia’s energy debate for most of the past decade,” supports the Turnbull government’s “national energy guarantee” even though there are “lots of detail to work through.”
But, he declares, “there’s no point having a perfectly designed energy grid if customers can’t afford to use it.” Customers, he complains, “have had to fight their way in to the energy debate even though they should always have been at the centre of it.”
The Clean Energy Council is claiming 2017 as a “record year” because 50 large-scale renewable energy projects have been committed in it, involving $9.3 billion in proposed outlays on 4,670 megawatts of new capacity.
The CEC says the rooftop solar PV market has also experienced its best-ever year, with more than 1,000 MW of new small-scale capacity installed by households and businesses. It adds that total national rooftop solar capacity exceeded 6,000 MW in 2017.
The consultancy Green Energy Markets calculates that renewables projects now under construction or contracted to sell their output will be able to deliver 37,000 gigawatt hours a year from 2021. Add what the Victorian and Queensland governments intend to do with tenders for green power, they say, and production could be “a bit under 40,000 GWh” – and this does not include new large-scale rooftop PV installations.
The large-scale RET’s politically-controversial goal is 33,000 GWh in 2020.
Green Energy Markets adds that its database of what companies have said they wish to develop (not including projects under construction or contracted) now stands at 12,000 MW of wind farms (with 6,400 MW having planning approval) and 15,000 MW of solar farms (with 7,700 MW granted approval).
The analysts say this project “pipeline” could deliver another 72,000 GWh a year of renewable power and assert that, if all such development came to fruition, intermittent generation would hold 51 per cent of electricity supply Australia-wide in 2030.
The Snowy 2.0 project is “both technically and financially feasible” and Snowy Hydro’s directors are working towards a final investment decision in 2018.
Snowy managing director Paul Broad says pursuing Snowy 2.0 is a strategic business decision for the supplier currently owned by three governments (federal, Victoria and New South Wales) and there is an investment case that is “strong.”
Federal Environment & Energy Minister Josh Frydenberg has reacted to the Snowy statement by saying the project “will go ahead and Australians will be better for it.”
Snowy Hydro has withheld three parts of the feasibility report dealing with commercial projections, business modeling and detailed cost estimates, saying they are commercial-in-confidence – with federal Labor demanding they be released because, it says, the public has the right to know the “fundamentals of the project and its potential impact on household bills.”
Broad says: “Snowy Hydro already plays a critical role in keeping the lights on and Snowy 2.0 would supercharge our existing capabilities by adding 2,000 MW of dispatchable generation and 350,000 megawatt hours of large-scale storage.”
He adds that the feasibility study has thrown up a cost of $3.8 billion to $4.5 billion for the project and, if it is not built, the NEM will require storage batteries and gas peaking capacity that will cost twice as much. The estimate includes $2 billion for transmission augmentation.
Current thinking is that the project could see first power delivery late in 2024. On of its major risks is the need to pursue “significant” transmission development requiring timely acquisition of easements and regulatory approval.
The feasibility study includes this comment: “The notion that increasing (intermittent) renewables will result in long-term lower (NEM) prices has been shown to be false. The aging thermal generation fleet will either close or reduce its participation in the market with resulting step changes in price outcomes negatively impacting consumers and the economy more broadly.”
The Australian Energy Market Commission has launched a review of how to provide a reliable supply of energy to the east coast at the lowest cost and is seeking stakeholder input by early February before reporting on the issue to the CoAG Energy Council in mid-2018.
The AEMC published a 288-page interim report on NEM reliability in mid-December in which it comments that the energy system is “undergoing a revolution” and notes that current policy settings are “having a profound influence on investment, operational and consumption decisions.” The commission adds that submissions to its earlier issues paper show “stakeholders overwhelmingly recognize that the lack of a clear, consistent and integrated environmental and energy policy” is a key aspect affecting NEM reliability.
Energy Networks Australia CEO Andrew Dillon acknowledges that the community “wants answers as to why their bills continue to spike” – and asserts that the fastest productivity improvement rate by power networks in more than a decade will lead to lower costs.
Reacting to the Australian Energy Regulator’s new annual benchmarking report for the sector, Dillon says it shows network costs are falling in all NEM jurisdictions. “Networks have been contributing a smaller and smaller proportion of the total cost consumers pay over the past two years and the AER report forecasts revenues will continue to fall by 13.5 per cent.”
The regulator reports that industry-wide productivity by distribution networks improved by 2.7 per cent in 2016, primarily because of an eight per cent fall in operating expenditure and slower growth in capital spending.
Meanwhile the inaugural annual “health of the NEM” report by the Energy Security Board finds that the market “is not in the best of health” because electricity bills are not affordable, system reliability risks are increasing and future carbon emissions policy is uncertain.
The report says the NEM faces numerous challenges as it goes through its greatest change since its development in the 1990s.
Recent actions are leading to improvements, it adds, “but the NEM is not out of intensive care yet.”
The ESB says mass market retail electricity prices have risen 80 to 90 per cent in inflation-adjusted terms over a decade and “affordability is a major concern.” In some cases business bills have doubled “or even trebled” in the past two years.
The board notes that generation powered by sun and wind is increasing as a proportion of NEM capacity, forecasting that 5,318 megawatts of new plant will be delivered before 2020. But, it says, very few megawatts of power that can always be dispatched are being added in the NEM. “This really matters because when the sun is not shining and the wind is not blowing we still need power.”
The ESB warns that both reliability and system security are more at risk unless the generation mix between intermittent renewables and dispatchable power is better balanced.
The Australian Energy Market Operator, which has launched a new power grid study for delivery in mid-2018, says the NEM’s need for transmission development has switched from coping with load growth to serving a changing generation mix and the location of new supply. High voltage networks “must transform” to support large-scale development of non-synchronous generation in new areas.
AEMO adds that optimization of use of existing assets as power stations are retired and meshing this with new supply development requirements will be “vital” to achieving lower-cost solutions for market reliability. In the longer term, it says, increasing the capacity of high voltage interconnection between NEM regions could be “pivotal” to meeting energy targets.
“Planners,” a discussion paper says, “must prepare for and manage a rapid transformation (of the NEM), currently projected for the 2030s but which could occur earlier or later, as 10,000 megawatts of coal capacity is projected to retire.”
The market operator proposes to re-evaluate modeling it undertook in 2015-16 of possible new or upgraded interconnections over the next 20 years, including development of “least regret” projects.
South Australian Treasurer and Energy Minister Tom Koutsantonis, whose government goes to the polls in March, says State customers don’t have to wait five years for power price relief; they will see it over the next two years.
Koutsantonis says the latest AEMC analysis of power price trends “proves the State government’s energy plan is working.”
He points to householders being able to access savings up to $531 off their annual bills through a deal struck between the government and Origin Energy – and to renewable energy developments supported by its $150 million renewable technology fund. The construction of a solar thermal plant at Port Augusta and a grid-scale battery at Jamestown will add competition to the SA market, he adds, putting downward pressure on prices.
“We are also sourcing the electricity required to power our schools, hospitals and electrified rail until 2020 from SMIEC ZEN Energy, a new retailer with plans to invest $1 billion in SA renewable energy projects.”
“Right now consumers are on power price rollercoaster,” says John Pierce, chairman of the Australian Energy Market Commission, “and without investment in replacement dispatchable capacity, the rollercoaster will be repeated.”
Releasing the commission’s annual analysis of price trends, Pierce says wholesale electricity costs are the single biggest current driver of change in household bills, replacing network charges.
Sharp rises in these costs in 2017 following the closure of Hazelwood and Northern coal plants are expected to reverse over the next two years as some 4,000 megawatts of wind and solar generation enters the supply system. However, as the lower wholesale prices force further closures of coal generation, unless new dispatchable supply also comes on stream, there will be further rises and greater generation market volatility.
Australian Energy Council CEO Matthew Warren has welcomed the report because, he says, it “suggests we may have hit a price peak for electricity in eastern Australia.”
Increased renewable generation is good, he adds, “and a key part of the rebuild of the grid (but) we still need to push through policy reforms to ensure we make these changes sustainably and reliably so costs don’t spike again when the next round of older power stations exit the market.”
The federal government is calling on the NEM rule-maker, the Australian Energy Market Commission, to ban discounting on residential electricity contract offers that are more expensive than retailers’ standard rates.
Environment & Energy Minister Josh Frydenberg says his aim is to prevent retailers operating in a way that can confuse mass market customers. At present, he says, householders wanting to switch retailers are confronted by hundreds of potential deals that can be hard to compare because of differing discounts and off-peak rates on offer.
A study by Deloitte Access Economics, commissioned by Energy Networks Australia, claims that decarbonizing gas in achievable here by 2050 with the use of hydrogen, biogas and carbon capture and storage.
ENA’s chief executive, Andrew Dillon, says: “Our nation’s gas networks are a colossal system, delivering just as much energy as the electricity system and in some cases, such as Victoria, even more. There is significant potential across the country to apply transformational technologies to existing networks to build and maintain a highly reliable energy system.”
Dillon says biogas potential around Australia is substantial “and it’s a solution we can’t afford to ignore. Biogas is already commercial competitive, but it is mainly used in Australia (now) to produce electricity. Hydrogen production and storage could be a game changer as it becomes more cost efficient.”
Chief Scientist Alan Finkel welcomes the Deloitte analysis of the role of hydrogen made from electricity produced by solar and wind farms and says it could play a vital future role in Australia’s energy mix. “The ever-diminishing price of renewable electricity and the likelihood that the price of electrolysis systems will fall as manufacturing volumes increase suggests that the economic case for renewable hydrogen production and storage is sound. There is huge potential for renewable hydrogen to be used for industrial heating, space heating and cooking.”
Dillon says networks need governments to support the exploration of a broad range of options to encourage use of biogas and other renewable gases.
Few can argue with the notion that 2017 was a stormy year for Australian energy policy and for the east coast electricity market in particular. Not surprising then that the NEM itself is coming in for increasing scrutiny.
Running through all the recent debate has been a growing view that the market is “broken.”
All year, for example, the National Farmers Federation has been beating this drum and major business has been marching to a similar tune. Back in March BHP Billiton’s Mike Henry said it was “clear the rules governing the NEM are broken.”
There has been a rising choir of support for this view from parts of the body politic. South Australian Treasurer and Energy Minister Tom Koutsantonis has said repeatedly this year that “fundamentally the market is broken.” The then Queensland Energy Minister Mark Bailey said in July “we know that the NEM is broken – it’s not serving industry, consumers or governments.”
And Frontier Economics’ Danny Price, a prominent energy adviser to governments and politicians, has declared “it is time for the States to walk away from the NEM; it is not politically fixable.”
Not surprisingly, the commentariat has been picking up on this. The Australian’s Judith Sloan declares “the National Electricity Market is on its last legs; what started off as a good idea has descended into a joke, with State governments increasingly going it alone.” The ANU’s Hugh Saddler says that the market rules are “not agile and innovative enough” to keep up with change. To which RMIT University’s Alan Pears adds “The NEM has failed. Its very narrow economic objective was to provide low prices, reliable and safe energy and to act in the long-term interests of consumers. Many would score it zero out of three.”
Research economist John Quiggin dismisses the NEM as “a broken, malfunctioning, over-priced tangle.” He asserts “none of the objectives have been achieved – prices have risen drastically, investment has been chaotic and inadequate competition has resulted in large increases in retail margins.” In September Quiggin suggested that a starting point could be the creation of a single “Australian Energy Authority” that took over the work of the recently-established Energy Security Board as well as the roles of the AEMC, AEMO and the Australian Energy Regulator plus the energy-related functions of the ACCC and State regulators.
Not everyone sees the NEM in this light.
EnergyAustralia’s Mark Collette argues that the NEM is “challenged – severely challenged – but it is not broken.” Alan Finkel, introducing his panel report, one of the main features of the past year’s energy policy discussion, added “the NEM is not broken (but) it is at a critical turning point.”
And the Grattan Institute’s Tony Wood says “The survival of the NEM cannot be assumed, but we should not give up on the market. If (State) governments take matters fully in to their own hands, the results are likely to be painful (because) customers will pay more, supply could become even less reliable and Australia may not reduce emissions as promised.” Wood says the problem is “not the market as such” but rather that the NEM is being asked to deliver in an environment of circumstances very different to those existing when it was established.
All of this is playing out against the rising unrest among consumers (aka voters) that sight has been lost of their needs in the convoluted energy debate among experts, activists and sectoral lobbyists. How Them Outdoors feel about the current situation can be gleaned from Essential Report showing that 56 per cent of respondents to a recent weekly poll are “very concerned” about energy prices (versus 83 per cent feeling that way about food prices and 80 per cent about affordability of housing).
Opening the Australian Energy Market Commission’s strategic priorities forum in Melbourne back in September, the AEMC chairman John Pierce observed “the decisions that governments
make in the coming months could have fundamental consequences not just on the energy sector but for the wider economy for decades to come.” However, he said, there should be only one agenda for this issue: “a focus on the outcomes of the (energy market) transformation for consumers, large and small.”
Mulling over the events of 2017, it seems to me that the life raft to which the supply industry and much of the rest of business is clinging – the goal of bipartisan policy – may not be attainable. It’s also a bit of a straw in the wind that a leading political commentator can claim (in The Australian) as a plus for Turnbull & Co that at least “energy policy, while not finalised, hasn’t torn the government apart, as some predicted.”
Cconsidering the current state of Australian politics, is it possible that 2018 could be a re-run of 2017?
The Australian Financial Review invited us earlier in 2017 to consider that what we are witnessing (on the energy front) is a “slow-motion car crash.” If this assertion is directionally right, a sobering question after months of reports, reviews and rhetoric is “what’s changed?”
All of the above also begs the question of what will be the tipping point that produces sufficient pressure to drive politicians to a different approach to the east coast market?
By the second half of 2018, after the NEG negotiations have run their course, this point may be a lot sharper.
On the other hand, events may have driven another federal election by then………..
Keith Orchison
29 December 2017
