Issue 111, July 2014
Welcome to the first issue of this newsletter for the new financial year, writes Keith Orchison. In the 12 months ahead major decisions affecting Australian energy supply are on the cards and political debate about the sector will reach another level, not least as New South Wales and Queensland go to the polls with power privatization a key issue.
The two electricity distribution businesses that Premier Mike Baird is planning to half-privatize in New South Wales are seeking regulatory agreement to raising $17.5 billion in revenue from customers in the next five financial years, $3 billion more than they have been allowed to earn between 2009 and 2014.
Network charges account for roughly half the end-user power bills in NSW.
When the third NSW network business, which has been held out of the privatization process because of a rural backlash within the Coalition State government, is factored in, the trio’s bids to the Australian Energy Regulator for revenue targets for 2014-19 amount to $24.6 billion, $4 billion more than in the previous determination period.
The largest of the three, Ausgrid, is seeking a revenue approval of $12.2 billion. Endeavour Energy, which serves the western segment of Sydney and the Illawarra, seeks $5.3 billion and Essential Energy, the rural and regional service provider, aims for $7.1 billion.
Underpinning these proposals are requests for AER approval for a much-reduced capital works program in the State, falling $6 billion below the allowed capex of $15.6 billion in 2009-14.
For the next five years, Ausgrid seeks regulatory support to lay out $4.9 billion, Endeavour Energy $1.9 billion and Essential Energy $2.8 billion, a total capital spend of $9.6 billion.
However, the three distributors all want higher operations budgets. They are proposing opex of $7.9 billion for 2014-19 compared with $6.7 billion in 2009-14, with Ausgrid seeking $3.3 billion, Endeavour Energy $1.8 billion and Essential Energy $2.8 billion.
Ausgrid, which is Australia’s largest power network business, says it needs to replace and upgrade assets that at risk of failing with resulting supply and safety issues as well as potential environmental problems.
Although overall electricity consumption has been falling “marginally,” Ausgrid adds, it is called upon to provide more capacity in areas of metropolitan residential growth along rail corridors and business parks.
Essential Energy, which includes 95 per cent of NSW in its franchise area but only 815,000 customers, says it has to deal with demand growth in housing estates on the north and south coasts of the State.
Endeavour Energy, which delivers power to 2.2 million people living the 24,500 square kilometre area that includes the Greater West of Sydney, the Blue Mountains, the Southern Highlands and the Illawarra, points to the fast-growing economies of the north-west and south-west of the NSW capital. These areas are intended to become home to 500,000 people in areas equivalent to Wollongong or Canberra.
The electricity supply landscape is even more confused after Clive Palmer’s latest intervention, with American ex-politician and jet-setting activist Al Gore in tow, on the carbon tax and the renewable energy target.
While his intention to have the Palmer United Party senators, who took up their posts on 1 July, support abolition of the tax has been welcomed by businesses and decried by the Greens, his demand that the renewable energy target remain unchanged until 2016 is being challenged by industry and commerce.
As well, observers are concerned that Palmer’s opposition to the government’s “direct action” legislation, supporting its rejection by Labor and the Greens, will leave Australia with no measures to cap carbon emissions over the rest of the decade.
The Warburton panel review of the RET is expected to be delivered late this month or in August and the Abbott federal government needs to move to decide its position relatively soon in order to allow completion of the energy white paper by late this year, as promised.
AGL Energy managing director Michael Fraser has been one of the critics of Palmer’s call for decisions on the RET to be delayed. “We don’t see how companies will be able to invest due to the state of the electricity market,” he says.
EnergyAustralia chairman Graham Bradley says it is a “very good thing” that the carbon tax is now likely to be repealed swiftly, with PUP support, but the RET should be changed to deliver 20 per cent of consumption in 2020 not the present fixed level of 41,000 gigawatt hours (which may represent 27 per cent of demand on the basis of current forecasts of electricity use at the decade’s end).
The company says that meeting the existing target will require a large increase in investment that could drive up the costs of renewable energy.
Other analysts warn that an investment failure to meet the RET could trigger the measure’s penalty prices and impose substantial further costs on users.
The Australian Industry Group says the manoeuvring by the PUP raises a major question as to whether Australia’s five per cent abatement target for 2020 will be pursued.
Meanwhile Palmer, in demanding that the federal government legislate to ensure savings from the carbon tax axing are passed on to consumers, appears to fail to understand that pricing regulation is the realm of the States – or that the power sector has been working with the government and the Australian Competition & Consumer Commission for months to ensure that all carbon costs are removed from energy bills once the legislation is repealed.
The Energy Supply Association says the government has already granted “extensive extra powers” to the ACCC to ensure that consumers benefit from the repeal.
The association says about $11 million of carbon costs are included n Australian power bills every day, tracked through the supply system by a complex arrangement of trading and hedging contracts between power stations, banks, other third parties and retailers.
ESAA warns against the repeal process being further delayed to add more layers of compliance.
And in a speech in Melbourne at the end of June Prime Minister Tony Abbott qualified his much-quoted promise that repeal of the tax will save an average family $550 a year. While repeating this figure, he added that the move will cut electricity prices by about nine per cent – for a household pay $1,600 annually, this would represent a saving of $144.
After months of negotiation, the National Generators Forum has merged with the Energy Supply Association.
NGF was set up in late 2003 when the Electricity Supply Association was disaggregated and was joined up with the Australian Gas Association to form a new peak lobbying body.
ESAA chairman Ian Stirling says the new union reflects the “rapid evolution of the industry with continuing consolidation, transformation and privatization of the sector.”
NGF chairman Richard van Breda adds that the merger had been embraced by generators as the best way of meeting the broader challenges they now face as well as continuing to deal with technical and regulatory issues.
Matthew Warren will be CEO of the merged entity.
Queensland families will have future electricity prices stabilized and cost of living pressures eased via the Newman’s government’s 30-year strategy, claims Energy Minister Mark McArdle.
Launching the PowerQ report, McArdle said it will deliver a more cost-effective, consumer focused, resilient and better planned supply system.
Accusing Labor State governments of inept management over two decades, McArdle said power prices in Queensland had almost doubled because of a “reckless” spending approach to the supply failure problems at the turn of the century and “economically irresponsible interventions in the market.”
The resulting experience, McArdle asserted, shows that a failure to properly plan, manage and invest in electricity supply “will result in unacceptable quality-of-life stress” and reduced affordability for householders and business.
There is no quick fix for the current situation, he warned, but the government is “well on its way” to stabilizing prices, pointing to the removal of prescriptive network reliability standards which, he claimed, will save Queenslanders an aggregate $2 billion between 2015 and 2030.
Today, he added, the electricity sector is changing dramatically and will continue to transform over the next decade, altering the way power is produced, moved, bought and sold and used.
In the medium term, according to the PowerQ paper, “most electricity consumers will feel the benefits of true retail competition for the first time.”
The strategy’s release was hailed by the State’s Chamber of Commerce & Industry for “widely embracing” the key points small business had put to the Newman government.
The upstream petroleum industry continues to growl at the New South Wales government over its inability to resolve coal seam gas development at a time when retail prices are spiking sharply.
The State’s regulated gas customers will pay an extra 17.8 per cent on their bills on average from 1 July with flow-on effects for all 1.2 million customers from big industrial users to restaurants to householders.
The Australian Petroleum Production & Exploration Association says it has been warning the State government for two years that inadequate policy settings will result in higher east coast bills and a fall in NSW investment.
“Hope is not a strategy for securing NSW gas supply,” APPEA says. “Downward pressure cannot be placed on prices without expanding the gas industry in the State. NSW must get on with developing its gas resources, lifting a freeze on exploration and giving urgent consideration to projects that can increase supply.”
By contrast, the association says, Roma and Chinchilla in Queensland have a gas industry “in full swing, booming small businesses, high levels of employment and bustling communities.”
The State has an agricultural sector working side by side with the gas industry to “deliver enormous benefits to Queensland,” it adds.
In Roma, APPEA points out, average incomes are rising and unemployment is declining – while in the NSW Northern Rivers area unemployment hovers around 13 per cent.
Jemena, operators of a gas network for the 1.2 million residential and business customers in New South Wales, has put a proposal to the Australian Energy Regulator to reduce average service costs between July next year and mid-2020 even as it invests $22 million in upgrading its grid.
Jemena claims that, if the AER approves its plans, it can deliver a “real” – i.e. inflation adjusted – reduction in the distribution component of gas supply of 20 per cent over five years.
Distribution charges comprise half the final retail gas bill.
Jemena managing director Paul Adams says consumer consultation has thrown up strong user views that they need action to mitigate the current and future rises in wholesale gas prices in the State.
Jemena says gas markets are expected to undergo big changes over the next 15 years, putting upward pressure on prices. As the LNG developments come on stream, it says, east coast gas production costs can be expected to rise towards international levels.
In NSW, it adds, residential and business demand for gas will plateau as prices rise and industrial demand will drop as several large operations close.
Adams says productivity gains feeding cost reductions can be achieved if the business can spread its large fixed costs across a higher number of customers. To do this, it needs the AER retain incentives to increase gas penetration in NSW.
Adams argues continued investment in the “Natural Gas, the Natural Choice” marketing campaign, which encourages homes and businesses to connect to the network, is the key. Jemena is targeting attracting 150,000 new customers between 2015 and 2020.
Achieving this, the company says, “will lower our average costs and prices and largely offset the fall in gas demand as a result of rising retail prices.”
A typical residential gas bill in NSW for customers at the end of Jemena’s 25,000 kilometres of pipelines is expected to be $1,005 in 2014-15, of which production costs account for 20 per cent, transmission and distribution 55 per cent, retail charges 20 per cent and “green costs” five per cent.
The contribution of renewable energy to Australia’s electricity supply may be lower in calendar 2014 than last year – because conventional hydro-electric power is not expected to achieve the output it provided in 2013.
The Clean Energy Council’s annual report on renewables, just released, shows that hydro capacity, most of it constructed long before the federal renewable energy target was legislated or even conceived, delivered 55 per cent of green power produced in calendar 2013, most of it through Hydro Tasmania and Snowy Hydro, helped by repeated heavy rain and flooding between July and November.
Water levels at Hydro Tasmania’s Gordon dam, the largest generator, were at their highest since the late 1990s.
Seventeen per cent of renewable supply in 2013 came from wind farms and
11 per cent from household solar PV arrays with seven per cent delivered by bio-energy plants such as bagasse operations at sugar mills.
In the fifth year in a row in which power demand declined in Australia, hydro-electric systems delivered 19,243 gigawatt hours out of an overall total of 34,750 GWh from renewable sources.
The Clean Energy Council says 213,200 rooftop solar power systems were installed in 2013, a reduction of 38 per cent on 2012, bringing the total installations nation-wide to 1.25 million.
The CEC claims this means that about 3.1 million Australians are now living or working at a property with solar panels on its roof.
The investment in solar power in 2013 was $2.938 billion, a fall of $480 million on the previous year. While this was largely as a result of solar subsidies by State governments being wound back, the CEC points out, it also reflects lower costs for installation.
Policy uncertainty about the future of the RET is likely to impact 2014 investment, the council adds.
The CEC says that there were 1,639 wind turbines operating at the end of 2013, representing 3,240 MW of installed capacity. Wind power supplied four per cent of national electricity needs in 2013 versus 8.2 per cent drawn from hydro-electric operations and 1.62 per cent from solar installations.
The council’s chief executive, David Green, says 2013 was a year of steady growth for wind and solar power despite uncertainty about key policy settings. He argues that the industry is “poised to unlock tens of billions of dollars of investment” if the RET remains at its present level.
ABB Australia, the local wing of one of the world’s largest power and automation technology companies, says it expects to see steady growth in commercial photovoltaic installations as electricity prices continue to rise.
In its submission to the panel reviewing the renewable energy target, ABB says steps taken by both federal and State governments to rein in subsidies for household solar PV use and a significant reduction in feed-in tariffs “has created a bust” in the domestic installation sector.
It says domestic PV use is now growing at a “more modest” 50,000 homes per quarter, equal to 400 megawatts of capacity.
Commercial PV can be justified by more conventional financial payback calculations, it says, and it expects demand in this area to grow at between five and eight per cent annually.
The Australian Forest Products Association says this country lags behind other developed nations in its use of bioenergy despite having a high area of forest per capita.
AFPA is calling for the renewable energy target to be amended to allow up to 5,000 gigawatt hours of the 2020 target to be achieved using wood wastes.
The association says the lack of incentives for the use of forest biomass in electricity generation “creates a serious imbalance” in the renewable energy market, missing some of the lowest cost sources for emissions abatement and a baseload generation opportunity.
The Abbott government is committed (via an election promise) to reinstate native forest waste as an eligible RET source.
Meanwhile the Australian Sugar Milling Council, whose members have invested $300 million in RET-related generation using bagasse in the past five years and $600 million over the life of the measure, says that 24 sugar mills have contributed an aggregate 5.5 million tonnes of carbon dioxide abatement since 2001.
It says the industry has the ability to treble its power capacity if the RET is retained in its present form.
Peabody Energy Australia says the RET should be changed to incorporate technologies such as carbon capture and storage in pursuit of carbon abatement.
The major coal miner, which has 11 operations in Australia, says continuing consumption of the fuel and pursuit of lower greenhouse gas emissions are not mutually exclusive goals.
Adoption of CCS technologies could reduce Australia’s emissions 31 per cent by 2050, it argues.
As well, higher efficiency generation technologies, such as ultra-supercritical plants, emit almost 40 per cent less carbon dioxide than existing operations and, along with “BTU conversion” of coal in to a range of energy forms including liquid fuels and gas, “represent a critical opportunity to underpin Australia’s energy security.”
The aim of policy, Peabody adds, is to reduce emissions ”but renewable technologies simply are not capable of providing the desired reductions on their own while accommodating electricity demand projections at a price the community is able to pay.”
It proposes that the RET be renamed the Low Emissions Target scheme.
The Australian Competition & Consumer Commission, which says it is “disappointed” to lose its attempt to baulk the AGL Energy purchase of the 4,600 MW Macquarie Generation from the NSW government, is worried that the current trend in privatization is not putting sufficient emphasis on maximizing long-term economic efficiency.
The rejection of the regulator’s objections to the MacGen deal by the Australian Competition Tribunal has implications for future generation privatization, notably the Queensland government plans to sell CS Energy and Stanwell Corporation.
Meanwhile, ACCC chairman Rod Sims continues to argue that electricity companies have a strong commercial incentive to have all power market players vertically integrated.
He points out that the three largest retailers in NSW have now bought the three largest generation businesses and asserts this “permanent structural change” that will come at a price for consumers through less competition.
“Trading wholesale electricity through the spot market is a competitive process with low entry barriers,” he says. “If retailers can tie up most of the generation, then they can create a stable oligopoly with high entry barriers and so higher prices and better returns.
“Some degree of vertical integration, as we currently see in Victoria, for example, is beneficial, but beyond a certain point it is harmful to a competitive electricity market.”
With the MacGen privatization, adds Sims, the commission formed the view that the deal was “likely to result in a substantial lessening of competition when compared with a future where the State either held the assets or sold them to a purchaser other than AGL.”
In sanctioning the sale, the Competition Tribunal has set a condition that AGL make at least 500 megawatts of electricity hedge contracts available to smaller retailers in NSW annually for seven years. Sims says the ACCC remains concerned about whether this condition can be effectively enforced.
The commission asserts that generation privatization will only provide long-term benefits to consumers if a market structure is established to support competition. “This requires that sufficient competing players in numbers and size are active in the market.”
In its submission to the federal government’s “root and branch” review of competition law, chaired by Ian Harper, the ACCC argues that further reform could enhance the efficiency of energy markets.
It says: “Previous energy market reviews have highlighted the potential efficiency gains that could be realized by privatizing government-owned assets and deregulation. Other reforms may be required in the future to accommodate the significant technical change the sector is facing.”
Reacting to the ACCC’s views, EnergyAustralia’s departing managing director Richard McIndoe said the regulator is “overly concerned with the market concentration the (MacGen) deal will bring, ignoring the realities of operating in the NEM.”
In theory, we are now entering a financial year in which a myriad of policy and regulatory decisions will set the tone for the energy sectors for the rest of the decade and beyond.
In practice, things may not turn out so well because of the political environment.
At State levels, on the east coast, we will see important elections in the three major jurisdictions – Victoria, New South Wales and Queensland – before 30 June next year and betting on poll outcomes in the present environment is a mug’s game.
The prospect of a change of government in Victoria seems high and how far the NSW and Queensland Coalition governments, which sit on massive majorities, can be pegged back is an open question.
The possibility of a double dissolution federal election may now seem less likely but it is anyone’s guess how much the new Senate will try the patience of Prime Minister Tony Abbott.
To what extent this environment will impact on the work of the CoAG Energy Council also remains to be seen.
Against this background, what may the financial year deliver?
Repeal of the carbon tax now seems a strong possibility, although the machinations of Clive Palmer as well as other crossbench senators may yet deliver more surprises.
A change to the RET regime appears at present to be more problematical, but stakeholders will need to be patient as we move along a chain from the delivery of the Warburton panel review to the publication of the federal government’s green and then white energy papers and an eventual denouement in the Senate when and if changes are put forward.
While complete junking of the RET was never a real option, despite the scare tactics of the Greens and the various environmental lobby groups, a change to a true 20 per cent of consumption in 2020 seems a fair possibility.
The desire of some in business and elsewhere to see the RET replaced by a LET – a low-emissions target that is technology neutral – should not be discounted, but, even if the federal government takes up the idea, its chances in the Senate may be slim. But, then again, who can tell where Palmer and his PUPs will wander next?
As for the gas sector, the focus will remain on Victoria and NSW this financial year and neither looks a good bet for moves towards firm, long-lasting, pro-development policies.
Neither Coalition government in these two States has behaved with even a modicum of commonsense and the imminence of elections will not encourage a change of heart.
What promises Labor is prepared to make about future gas development for Victoria will emerge closer to November’s poll – this matters because it is now the favorite to win office – and the NSW government is only too obviously going to continue to duck and weave over coal seam gas until it is past the post at the end of next March.
A critical moment arises for the Baird government in January when it is supposed to make a decision about the Santos $1 billion proposal to develop the gas field under the Pillaga Scrub in northern NSW, a resource capable of meeting perhaps half the State’s gas needs.
In the carbon abatement arena, Tony Abbott will be especially challenged by his need to front the United Nations’ summit in New York in September at a time when his government’s energy policy will still be a work in progress – and the ink will be barely dry on it when the government has to appear at the “COP 20” climate change negotiations in Lima, Peru, in December, effectively the last stop on the road to the Paris convention at the end of 2015 that is supposed to create a new global approach to this issue.
The NSW and Queensland elections, as well, will deal with Coalition electricity asset privatization proposals and will engender a storm of antagonistic posturing from the unions, Labor and the Greens over most of the financial year.
The degree of uncertainty involved in all this is large indeed.
Surely no-one in Australia now needs to be lectured that politicians under pressure, and especially with respect to carbon abatement, frequently do the darndest things.
At the June Gas Export Outlook conference I co-chaired in Brisbane, a Japanese government official drew attention to his country’s energy strategy – which is “to establish a resilient, realistic and multi-layered supply structure where each energy source can exert its advantage and complement the drawbacks of others.”
Sadly, one can sum up the prospects of our State and federal governments taking up this sensible approach in two words – one is “fat” and the other is “chance.” However, cynicism should not allow us to cease pushing policymakers to set aside the knee-jerking of recent years in favor of a long-term strategy in the consumers’ interests.
It follows that the most important event of 2014-15 could be the energy white paper and a determined effort thereafter to win national consensus for its key elements – but this, in turn, depends on the federal government setting aside politicking in favor of a stance capable of winning at least mainstream support.
From where we stand, sit or lie today, this may seem pie in the sky territory, but, perhaps more than anything else in public life, we need to step over the dog’s breakfast politicians have made of energy policy in the past 6-8 years and regain the path of commonsense and stability.
The business and investment communities operate most effectively where there is policy stability and outcomes can be reasonably predicted. The greatest failing of the recent past has been a loss of confidence by stakeholders in the constancy of policy settings.
Is it possible that 2014-15 can be the year in which we see a significant change for the better? Anything is possible; to extend this to probable, in our present environment, would be a stretch.
Keith Orchison
1 July 2014
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