Issue 213, January 2023
Who could have predicted back in late May that it would take the new Labor government less than seven months to drop itself down a 12.192 metre hole on energy policy? Especially when in some other areas it appears to have its feet on the ground? The fact is, however, that the government enters 2023 with its election power price cut promise blown to bits, its relationship with the gas supply business seemingly in tatters and public confidence in the direction of energy policy at least in doubt despite a flurry of legislation over the course of the first half of this financial year. The list of critics is lengthening and growing ever more noisy. To quote a Credit Suisse’s energy analyst in mid-December, “this is the most anti-business and anti-market policy in recent memory,” warning that Australia should “brace for Bowen blackouts” if and when new laws bring domestic gas shortages on the east coast. As well, Simon Benson, The Australian newspaper’s political columnist and a political historian, comments: “While the sector would have probably accepted a temporary price cap, and moved on, the mandatory code of conduct with a permanent ‘reasonable price’ mechanism has sent the energy and mining CEOs in to meltdown.” The other side of this coin is that the past year’s goings-on in the energy markets are also having an impact on the “social licence” of supplier businesses and this will encourage those determined on a new path to capture consumer support. Not for the first time this century the health of Australian energy policy comes down to politics and the market uncertainty they create.
“Blaming markets for high energy prices is like blaming your watch for being late or a thermometer for being cold. Energy markets are an instrument, not a villain” – Matthew Warren in an op-ed in the Australian Financial Review.
“It’s certainly a very complex space in energy at the moment” – Clare Savage, Australian Energy Regulator chair.
“The new legislation may not lower electricity prices in 2023, but it could help reduce the increase from next financial year” – Savage, speaking to media of “an increase that’s much lower than what we’d originally feared.”
“After the nation emerges from summer, despite the mad pre-Christmas dash on energy, prices will continue to rise, just by not as much as they otherwise would” – Australian Financial Review political editor Phil Coorey.
“On one level this is very complicated (with) a lot of complicated policy parts but at another level it’s very simple, we can't let these power prices just flow through to the Australian people,” federal Energy Minister Chris Bowen.
"There were businesses and industries saying to us very clearly that they would have a lot of difficulty surviving next year in the face of gas prices and electricity prices being what they were" – Bowen.
“Most major businesses have already locked in their 2023 power contracts and will be paying higher prices for at least another year” – Liza Zembrodt, Schneider Electric.
“Incoherent” – economist Judith Sloan on the energy measures passed in federal Parliament in December. “They were a response to a demand posed in panic: don’t just stand there, do something.”
“We are about to repeat the policy mistakes of the 1970s when price caps seemed like a seductively simple remedy” – Sloan.
“Labor’s shock decision to fix gas prices permanently may break the gas market as we know it. It amounts to a market redesign on the fly, shifting power away from market forces towards increasing government control” – Saul Kavonic, Credit Suisse analyst.
“The reason industry has responded so strongly is because it can see the policy will cause a much bigger crisis and energy rationing down the line, and it doesn’t want to be held responsible for that” – Kavonic.
“They have basically nationalised the gas market, but expect private entities to keep putting their capital into it” – MST Marquee analyst Mark Samter.
“The main policy game in energy is about how to get to a sustainably better place, not how to bring the price down of the current market” – Mark Collette, managing director, Energy Australia.
“Excluding gas and coal from the new (NEM) capacity mechanism will limit its ability to drive stability, certainty and reliability” – Business Council CEO Jennifer Westacott.
“More (gas) supply is the key to lowering price and ensuring adequate long-term energy security” – Meg O’Neill, Woodside Energy CEO.
“We believe the best way to put downward pressure on gas prices is to take immediate steps to encourage investment in new sources of supply near southern markets where traditional gas fields are in decline and most gas demand exists” – Frank Calabria, CEO, Origin Energy.
In a year-end assessment, Fitch Ratings has warned that the price caps on domestic sales of gas and coal used for electricity production “highlight that energy companies in Australia face mounting political risks that could influence investor perceptions of the sector and capex plans over the long term.”
It adds: “Firms in the sector, as in other parts of the world, also face political risks associated with official efforts to promote the transition to renewable energy sources.”
And it says: “It remains unclear how the (legislative) package will affect power and gas market dynamics but we expect its impact to be temporary.”
Parsing the year-end commentaries from the Reserve Bank, Ross Gittins, economics editor of the Sydney Morning Herald, has highlighted the role of energy as a key factor in recurring supply shocks facing Australia.
Gittins points out that “the transition from fossil fuels to renewables involves junking our investment in coal mines, gas plants and power stations, and new investment in solar farms, wind farms, batteries and rooftop solar, as well as extensively rejigging the electricity network.”
It’s not just that the required new capital investment will be huge, he writes, but that the transition from the old system to the new won’t happen without disruptions.
“So,” he opines, “energy prices will be higher (to pay for the new capital investment) and more volatile when fossil fuel supply stops before renewables supply is ready to fill the gap.”
Getting the NEM 82 per cent powered by renewables by 2030 – the federal government’s target – will require 15,000 more skilled workers by 2025 amid an infrastructure boom and a national skills shortage, with Australian unemployment rates at the lowest level in decades, according to research undertaken by the Institute for Sustainable Futures.
Writing for The Conversation website in mid-December, a trio of ISF researchers at Sydney’s University of Technology point to the market target needing the installation of “dozens of large wind turbines every month and tens of thousands of solar panels every day” over the rest of the decade.
They estimate there are 41,000 skilled workers in the Australian electricity sector at present, including 12,000 in coal and gas-fired power stations.
Using the energy market operator’s “pathway to a clean energy future,” the ISF researchers say 15,000 more workers “must be ready and able to build and operate renewables and storage, or build transmission lines, by 2025”. They add: “The problem is, these workers don’t exist at present.”
They argue that “workforce planning should be brought into overall energy system planning, to help reduce the employment boom-bust cycle.”
Federal Energy Minister Chris Bowen has acknowledged that Australia is in “a global race” on new transmission developments.
“Everyone in the world is doing this, too,” he told journalists. “There’s always going to be challenges particularly around supply chains (and) labor shortages. That’s why careful planning (and) prudent management is so important to really minimise the risks of those challenges.”
He says the deals the federal government is making with the States to support projects via the “Rewiring the Nation” program will give developers “the certainty they need to get on with the job.”
The first offshore wind farm activity sanctioned in eastern Australia will need 3,000 workers for 15 years of construction.
The federal government has approved a 15,000 square kilometre area running from Lakes Entrance in Victoria to Wilsons Promontory for development – with up to five farms of 10,000 megawatts being considered by investors, led by the 2,200 MW Star of the South project, now awarded major project status.
However, the Victorian government target is more modest: aiming at 4,000 MW of offshore capacity by 2035.
The Gippsland area sought by developers was substantially larger than now approved and has been cut back in the face of environmental and fishing industry concerns as well as visual impact objections – but conservation groups and local municipalities are still unsatisfied. The impact of noise on whales, dolphins and seals is one issue still being raised.
Energy Minister Chris Bowen declares: “Australia’s new offshore wind industry will start in Gippsland.”
Star of the South is expected to take between six and 10 years to complete, with 200 turbines to be installed, allowing it to generate about 10,000 gigawatt hours a year.
New South Wales Treasurer Matt Kean says the State will need to fill 13,000 jobs in electricity projects to realize its new ambition of reducing emissions 70 per cent by 2035 – a big increase from the past target of 50 per cent by 2030.
Part of the carbon program Kean is announcing with the State election looming (it will be held on March 25) is to make the Illawarra region a “renewable energy and clean manufacturing powerhouse.”
Kean released a draft declaration of a renewable energy zone for the area at Christmas, claiming expressions of interest total 17,000 megawatts of power capacity that would cost $43 billion to develop.
Earlier, in a media conference, Kean asserted that NSW is “leading the nation when it comes to rolling out renewable energy.”
The newly-re-elected Victorian government has hit the ground running with plans and promises to have the State “achieve nation-leading targets of 95 per cent renewable energy by 2035 and net zero by 2045.”
Premier Dan Andrews proclaims: “Since Victoria’s energy was privatised, we’ve experienced a chronic shortage of workers in trades. Our (recreated) State Electricity Commission will help find and train the next generation of tradespeople: maintenance workers, electricians – also welders, painters and mechanics. Highly-qualified, highly-paid workers – working not for profit, but for people.”
He says Labor will spend $424 million in its new term on an energy package to help existing members of the sector’s workforce upskill and to attract apprentices and trainees in to the industry.
He adds: “The SECV will help deliver the Labor government’s nation-leading renewable energy and emissions targets – hitting 95 per cent renewable energy by 2035 and net zero by 2045, creating 59,000 jobs by 2035 and increasing gross State product by about $9.5 billion.”
The federal Labor and New South Wales Coalition governments have joined forces to deliver $7.8 billion of taxpayers’ funds – including $4.7 billion from the national accounts – towards supporting interstate transmission projects and NSW’s renewable energy zones.
The money will be outlayed on speeding up transmission development, including HumeLink needed to deliver electricity to the NEM from the Snowy 2.0 project.
Ted O’Brien, the federal opposition’s energy spokesman, is warning that
the massive roll-out of wind and solar farms plus transmission under the east coast “transition” means a significant issue is brewing in regional Australia: the lack of a social licence for renewables development.
O’Brien says: “I’ve visited home owners who will no longer overlook picturesque rolling hills, but industrial-scale solar farms. I’ve met residents decrying poor consultation and unfair compensation for transmission lines that will carpet their properties. I have heard complaints about toxic, discarded solar panels, batteries and even wind turbine blades, with no waste management solution in sight.
“I’ve also spoken with farmers worried about the sheer scale of agricultural land to be locked away.”
He declares that the federal government “fails to understand that a social licence is required for projects which have a material impact on local communities, their residents’ properties, or way of life.”
Low-income customers are struggling still more in the energy price environment, says Energy Consumers Australia.
In a new commentary on the marketplace, the lobby group highlights that households in the lowest income bracket are outlaying 12 per cent of disposable earnings on energy – compared with those with $150,000 annual income spending 1.9 per cent.
ECA claims that “the divide is getting worse.” CEO Lynne Gallagher says the situation is “quite stark” for consumers on middle and low incomes and confidence in the energy market system continues to fall “rapidly.”
The St Vincent de Paul charity, in a separate report, asserts the electricity market “has been set back more than a decade,” with falling competition among providers.
Policy and research manager Gavin Dufty says government steps needing consideration include shifting the costs of schemes to drive the uptake of renewable energy from consumers to taxpayers. “Lots of households will never get access to solar,” Dufty adds, “but they shouldn’t get left behind in the energy transition.”
Media coverage of the gas imbroglio now enveloping the Albanese government and suppliers has been missing a significant focus of the producers’ complaints – apart from the main one that it has taken “unprecedented powers to intervene in the market.”
The concern was summed up by Woodside Energy in its reaction to the government’s moves, now legislated. “A policy of such significance, proposed without any meaningful consultation with industry, creates an environment of uncertainty that will result in investment activity dropping across energy markets. This will make solving the underlying structural problems in the energy market harder, not easier,” the company declared.
The Australian Petroleum Production & Exploration Association has accused the government of “taking a sledgehammer” to the industry, warning that the policy will “reduce supply and increase demand” and complaining that “the permanent regulation of gas prices through a mandatory code of conduct was done without consultation and was rammed through parliament in a matter of hours”.
APPEA argues that the government has legislated itself “command and control of the market” while failing to address the underlying causes of higher domestic gas prices – declining supply and increasing demand for gas for power generation.
APPEA points to modelling by analysts ACIL Allen that warns “price caps will encourage additional consumption in the short term that could put significant strain on gas supplies”.
Resources Minister Madeleine King has urged the gas industry to negotiate with the government over its intervention plans and has accused some key exporters of thumbing their noses at the heads of agreement she signed in September by continuing to demand “exorbitant” prices.
Describing the industry’s outrage at Labor’s decision as “predictable,” King indicated producers had all the warning they needed about its “intentions to hit hard”. She also emphasized that the government is “committed to reviewing (the new code) after a year.”
The industry stance has been attacked by the Australasian Centre for Corporate Responsibility, which asserts that “APPEA is badly misreading the mood of the Australian people, who want prices to come down and, crucially, want action on climate.”
A report by consultancy EnergyQuest, commissioned by APPEA and written before the cap was imposed, warns that Labor’s measures “could harm long-term security of supply by decreasing the incentive for exploration in Australia as investors were more likely to choose markets with higher prices”.
EnergyQuest argues that a gas cap in Australia “risks capital flight to countries that offer a faster and higher return on investment.”
It adds: “The long-term net effect of a price cap is to increase demand with lower prices and decrease supply with lower economic returns – the opposite of what is required.”
Richard Cottee, who helped pioneer development of the Queensland gas fields, has labelled the Albanese government’s reasonable price provision in December’s controversial legislation “a gigantic own goal.”
In an interview with the Australian Financial Review before Christmas, Cottee, who now chairs two energy businesses, said the provision “is $12 a gigajoule today, but how is the industry to know it will not be $10 next year?”
Meanwhile, Samantha McCulloch, CEO of the Australian Petroleum Production & Exploration Association, has declared the legislation to be “reckless,” calling it a far-reaching and unprecedented intervention in the gas market. She says it has “severely threatened” investor confidence.
McCulloch told journalists: “This is an industry which has invested $400 billion in the Australian economy over the past decade and what we’re seeing now is a government changing the rules of the game with alarming frequency.”
The new round of confrontation between federal Labor and the resources sector – another version of a problem that dates back to the Whitlam era – has been harshly assessed by leading political commentator Paul Kelly of The Australian newspaper.
“Federal Labor seems chronically uncomfortable with an extractive industry that enjoys hefty profits, faces competing environmental and Indigenous interests, has significant foreign ownership, possesses a global reach, is basic to the nation’s comparative advantage and now occupies the frontline in Labor’s headlong transition to renewable energy,” he wrote in late December.
Snapshots of South Australian power supply for small periods are now constants in media coverage of the NEM, promoting the role of variable renewables.
The OpenNEM website for four weeks from mid-November to mid-December shows that wind power was the leading source of supply to the State’s grid: delivering 589 gigawatt hours (or 71.4 per cent), followed by gas-fired units (153 GWh), large-scale solar power (74 GWh) and imports from Victoria (72 GWh).
The State also exported 95 GWh to Victoria, mostly excess wind production.
Estimated use of rooftop solar power in this period was 306 GWh.
The Australian Energy Market Operator says Western Australia is facing a “tight balance” between domestic gas supply and demand for most of the rest of this decade after a long period of the fuel being the bedrock of the State’s economy.
An AEMO report, released in December, forecasts that, for the years 2023-29, demand could be five per cent higher than supply.
From 2030 on, it adds, the situation is likely to move in to a larger deficit driven by State-owned Synergy’s planned coal generation retirements, increasing the need for gas-fired electricity supply, and a decline in production from existing gas fields.
The tight gas balance has implications for the McGowan State government’s ambitions to see a large new urea project and a hydrogen export plant developed this decade.
AEMO notes that there are big volumes of offshore and onshore undeveloped gas that could supply the WA domestic market during the outlook period, but these resources, it says, are currently too speculative to include in potential supply forecasts.
The operator also says that fuel demand for gas generation of electricity in the south-west integrated power system can be expected to grow at an average annual rate of 10 per cent, from 127 terajoules day in 2023 to 304 TJ/day in 2032.
“Renewables,” it adds, “are projected to only partly replace SWIS coal plant retirements and gas generation is forecast to be required for baseload power and system security.”
The operator’s outlook modelling also depends in part on WA iron ore producers reducing their need for gas by a third over the next 10 years – in a contribution to carbon emissions reductions – while increasing their minerals supply to the global market.
In November gas generation in the SWIS system was 36 per cent of the power supply mix for the grid (up from 27 per cent in the same period of 2022) and coal-fired generation fell back to 20 per cent (versus 28 per cent in 2022).
In a year-end paper from the Energy Policy Institute of Australia, Robert Pritchard, its executive director, suggests consideration should be given in the argument over removing nuclear power prohibition legislation to an alternative step: the prohibitions could be tailored to apply to individual Australian States by leaving it to each State to regulate nuclear installations within its own borders.
Pritchard also writes that “over the next decade, Australia could regain some lost ground by completely lifting the nuclear ban and allowing nuclear energy innovation to flourish under appropriate regulation.”
Australia, he says, should capitalise on its small but world-class nuclear research base at Lucas Heights in Sydney.
“A strategic initiative for any State or territory,” he adds, “would be to sponsor the development of a model town, or hub, for energy innovation and economic development.
“A hub could be anchored to safe, complementary, zero-emissions technologies, including the latest nuclear technology. A nuclear innovation hub should be connected to the transmission grid to enhance system optimisation at least cost.”
Pritchard suggests the potential hubs for nuclear innovation and development should be identified through community engagement with federal and State government and trade union support.
The Senate is presently considering a minority members’ bill to remove the prohibitions on nuclear installations. The bill is not supported by the Albanese government but has been referred to a Senate committee for a report in early 2023.
There is, of course, a possibility that those of my ilk are wrong and the green politgical horde, led here now by Anthony Albanese and Chris Bowen as well as State governments across the spectrum, will transport the nation on to sunlit uplands where wind power, solar, battery storage and hydrogen reign affordably supreme in the electricity market by the middle of the next decade and grateful consumers bless their perspicacity and dedication.
On the other hand, the transitioneers may well be dead wrong, especially on affordability and possibly also on supply system security.
This issue goes beyond the ruckus over the federal government’s Christmas push to appear to have addressed current uncomfortable power prices and its bid to paper over its undeliverable promise to cut them below where they were before the May election by 2025.
As I recorded in the December issue of the newsletter, major international energy companies are emphasizing the requirement for governments here and overseas is to deliver secure and affordable energy as well as cleaner (in terms of carbon emissions) energy.
Providing two out of three won’t wash over time with consumers and the economy.
An indication of just how hard markers voters can be came in a readership poll published by the Australian Financial Review late in 2022.
Asked to nominate the most effective ministers in the new federal government to date, 40 per cent of respondents picked Foreign Minister Penny Wong with 24 per cent going for Albanese and just seven per cent Treasurer Jim Chalmers. The survey’s wooden spoon went to Chris Bowen, with two per cent of those polled finding him effective and 11 per cent opting for him as the least effective minister in the government.
As Bowen’s big battery announcement for the NEM in mid-December demonstrates, faced with the security challenge of the “trilemma,” politicians will throw more and more effort, and taxpayers’ money, in to battery storage as well as very large outlays on high voltage transmission. But users will judge them by the security and affordability experience.
Gary Johns, who served as a federal minister in the Keating government, wrote in The Spectator magazine last month that the “entire interconnected high-voltage transmission system in the National Energy Market is valued by the regulator at $20 billion” and the ‘Rewiring the Nation’ plan will pour $20 billion of taxpayer money into the transmission system to leverage $40 billion of private capital.”
Johns added: “In an unrealistic few years, $60 billion invested would replace a system that still has 40 and 50-year asset lives that has taken decades to build.”
He went on to speculate that “to re-engineer the system for vast two-way flows, controls and protection and to accommodate mass-market EV charging loads may well add another $80 billion.”
Whatever the eventual outlays, transmission along with distribution is, and will remain, the major part of the power bills we all pay – wholesale generation costs, focus of all the present fuss, are a third of the bill – and total system costs are not a topic the promoters of the clean, green “transition” want to discuss or are prepared, when in power, to have modelled by independent experts.
As this newsletter reported in October (alone so far as I can tell), a paper written by David Carland for the Energy Policy Institute of Australia has warned of a “significant underestimation of the cost of integrating, or firming, VRE technologies to achieve a reliable system.”
Carland and EPIA have proposed an “urgent, in-depth review” of the CSIRO “GenCost” modelling on which Albanese, Bowen and the analysts on whom they rely – as well as the NEM operator – have been basing assertions about the “transition” costs.
It isn’t going to happen but it should. (And let’s be clear: the past Coalition government and Scott Morrison and Angus Taylor should have done this long ago; it’s a failure of process in Canberra across both sides.)
If Carland is right that “the cost of Australia moving to a predominantly renewables power system has been materially underestimated,” then there is a very nasty surprise awaiting consumers down the road.
Given that it has been flagged in a serious way, failure by government (State and federal) to pursue the proposed independent, authoritative review may come in time to be seen as a dereliction of duty.
Failure of the mainstream media to take up expert warnings about over-optimistic modelling – such as provided in the EPIA/Carland paper – may be a factor.
Keith Orchison
26 December 2020