Issue 123, July 2015
Welcome to the seventh issue of the newsletter for 2015, writes Keith Orchison, as attention turns increasingly to carbon abatement issues ahead of December’s UN meeting in Paris.
A new coalition of business lobbyists, trade unions, welfare lobbyists and peak environmental groups has acknowledged that Australian carbon abatement policy may create economic shocks that affect companies negatively and called for them to be “smoothed without negating incentives” in pursuing low or zero emissions.
Calling themselves the Australian Climate Roundtable, four peak business groups (the Australian Industry Group, the Business Council, the Aluminium Council and the Energy Supply Association), the ACTU, the Australian Council of Social Service and four environmental campaigners (WWF, the Conservation Foundation, the Investor Group on Climate Change and the Climate Institute) have declared they have found “considerable common ground” in addressing climate change policy after “extensive discussions.”
This is the first major attempt to bring together such diverse organizations in the “carbon wars” since the Howard government drove a similar exercise in the early years of the past decade and the new entity covers a broader canvas.
The ACF acknowledges this is “an unlikely alliance” but says it has been pursued because the issue of global warming is bigger than differences between the parties.
AiG chief executive Innes Willox says the coalition is pursuing an end to “frustration and disruption” caused by Australia’s “ever-changing” climate policy.
He adds that the group’s recognition that Australia needs to maintain competitiveness while reducing emissions over time is a “major advance.”
Media report that the roundtable members have been meeting secretly for more than a year to discuss an agreement.
ESAA chief executive Matthew Warren says the agreement is “born of collective frustration” after a decade of policy uncertainty.
He told media that a move to “some kind of emissions reduction scheme” is inevitable. “We have to be able to decarbonize the (energy) sector and that’s it,” he said. “It going to require reducing carbon intensity. Whether that’s a transition to gas will depend on prices.”
Warren adds that Australia may find itself in the unique position of providing coal-fired power to deliver a spinning reserve for renewables.
The coalition embraces a goal of Australia “eventually” reducing net greenhouse gas emissions to “zero or below,” defining this as including carbon sequestration and international emissions trading. Policies should “operate at least cost to the domestic economy while maximizing benefits,” the roundtable statement says.
“Climate change is affected by the total quantity of greenhouse gases in the atmosphere, not their point of origin,” the roundtable observes.
More than 50 environmental, charitable and farmer organizations published a letter to the Abbott government in mid-June calling for Australia to commit to a zero-carbon future by mid-century.
The government is due to announce a post-2020 abatement target this month that it will take to the UN climate change conference in Paris in December.
Modelling by consultants Energetics shows that doubling Australian energy productivity by 2030 would allow a 10 per cent reduction in national greenhouse gas emissions from 2010 levels.
Building on work undertaken by the Australian Alliance to Save Energy, Energetics says an energy productivity drive could deliver a 2.8 per cent increase in 2030 GDP, equivalent to an economic gain of almost $60 billion.
The Grattan Institute says Australia’s lack of direction on long-term energy policy is “keeping many chief executives awake at night.”
Speaking to the NEM Future Forum in Sydney, the institute’s Tony Wood said Australian climate change policy offers “consistent instability.” There has been an “overwhelming focus on 2020, but what next?”
Wood declared that developing credible climate change policy should be “top of the list” with strong attention to re-invigorating the national energy reform agenda to ensure lower power prices and to protecting “the primacy of markets and free trade.”
There could be a reduction in future electricity reliability standards, a study by consultants GHD, forming part of the Australian Infrastructure Audit, has suggested.
GHD’s report notes that reliability standards have been a prominent part of networks outlays over the past decade resulting in significant end-user power bill rises. This has led to a recent “considerable focus” on reviewing standards.
If reliability standards do decline, GHD says, this will reduce the maintenance liability of the electricity infrastructure sector, adding that establishment of a national approach to reliability could provide the path to a change.
On the other hand, it adds, outlays will be needed to improve network safety, notably in making infrastructure more resilient to the risk of bushfires.
The consultants’ report calls for closer attention to whether a rising number of power users will go “off grid,” pointing out this would increase costs for those still needing network services. “There is a risk of maintenance expenditure being deferred or cut back as a means of relieving cost pressures for those remaining on the grid.”
GHD records that network capital expenditure supervised by the Australian Energy Regulator rose “dramatically” from $4.3 billion a year in 2006-07 to a peak of $7.8 billion in 2012-13, falling back to $7.3 billion in 2013-14.
This growth was driven in part by the need to improve reliability and, in the case of the largest distributor, Ausgrid, resulted, the consultants say, in the average number of blackouts being cut 12 per cent in eight years with significant failures at major zone substations being reduced from eight to two.
Given that much of the electricity network was built 50 or more years ago, with a working life of 30-40 years, GHD adds, the need to replace aged assets “will continue to be a major driver of network costs for another decade.”
The consultants note that many network companies today are shifting focus from age-based asset assessment to condition-based scrutiny in order to extend the lives of older equipment
The GHD review for the Australian Infrastructure Audit finds that electricity distribution business operating costs rose by 8.43 per cent on average between 2006 and 2013. Transmission opex increases were still higher – averaging 9 per cent.
The challenge that Australia’s population growth will continue to pose for electricity networks is thrown up in one of Infrastructure Australia’s background papers for its audit.
The proportion of Australians living in capital cities is expected to grow, the paper notes, rising from 66 per cent recently to 69 per cent in 2031 and to more than 73 per cent by 2061. This translates in to an increase of 6.4 million people in the capitals over the next 16 years, “equivalent to a new Melbourne and Brisbane.”
The paper notes that a considerable increase in a number of cities outside the capitals is also expected – particularly Geelong, Bendigo, Ballarat, the Lower Hunter (including Newcastle), the Sunshine Coast and the Gold Coast.
Within cities, the paper says, the location of new development and population will be critical. “While the cost of providing infrastructure in ‘greenfield’ areas is substantial, the cost of retrofitting or augmenting infrastructure in established areas can also be high.”
The paper also notes that Australia has one of the highest population growth rates in the western world, rising almost 1.8 million between 2009 and 2014, twice the average for the OECD. At present rates, there will be just over 30 million people living here by 2031 – two million more than was estimated in 2008.
The Energy Supply Association has welcomed resolution of the long-running political row over the renewable energy target but declared the outcome “no miracle cure.”
ESAA says the new RET, legislated at the end of June by Federal Parliament, could be “a key first step towards an enduring bipartisan agreement on Australian energy policy.”
However, adds CEO Matthew Warren, major electricity market challenges remain.
Warren says that what investors really want is greater clarity for national emissions targets and agreement between the mainstream parties on how abatement will be delivered.
Warren re-iterates that investor confidence in the generation sector is “at an all-time low.” The revised RET, he points out, will continue to force generation in to a NEM characterized by weak demand and chronic over-supply. “Financing investment is likely to remain challenging.”
Meanwhile the association has labeled the interim report of a Senate committee looking at wind farm development as “unhelpful.”
Australia does not need a wind farm ombudsman, Warren says. “Governments should not be singling out any one type of energy technology for special treatment.
“Planning rules should be applied consistently to wind farms, solar parks, gas wells and gas-fired power stations. Governments should not be picking winners and losers via the planning processes.”
Warren adds: “If we want to continue to enjoy affordable, reliable energy supplies in Australia, we need to stop the trend of demonizing any particular energy technology. We need balanced planning laws, not vetoes of specific projects.
“We wouldn’t stop building roads because one family living near a freeway claimed it was too noisy.”
The first cab off the green investment rank following the RET amendments passing Federal Parliament is a $450 million wind farm to be constructed near Ararat in Victoria by a consortium led by General Electric.
The 240 megawatt project, which will have 75 turbines, has a power purchase agreement with the ACT government covering about 40 per cent of its energy production.
The development will provide 165 construction jobs and employ 13 people full-time when it is commissioned.
The loss of more than 400 jobs in regional South Australia as a result of the closure of the State’s two last-remaining coal-fired power stations shows that the transformation of the energy sector has a significant social and economic cost, the Energy Supply Association says.
Alinta Energy has announced that the Northern and Playford power stations at Port Augusta will be shuttered no later than March 2018 because of soft market demand and the rise of renewable generation in South Australia.
ESAA chief executive Matthew Warren says the transition to cleaner energy supply is also likely to cause “significant social dislocation” in the Latrobe and Hunter valleys.
Pat of the transition process, he argues, is to “find smart ways of supporting these important regions.”
Malcolm Roberts, new CEO of the Australian Petroleum Production & Exploration Association, says poorly-designed policies and regulation have the potential to make this country an uncompetitive destination for investment.
Roberts, who was chairman of the Queensland Competition Authority before taking up his new post in late June, says that prescriptive rules, vague and shifting regulatory objectives and duplication between agencies and jurisdictions are recurring problems for Australian businesses.
Governments, he adds, recognize in principle the need for minimum effective regulation to achieve policy goals at least cost – but they often react to real or perceived problems with new layers of regulation.
The priorities for reform, Roberts says, are to conduct regular, independent reviews of major regulation, to eliminate regulatory duplication and to create consistent, outcomes-focused rules.
Meanwhile APPEA has reacted sharply to an announcement by the Western Australian government that it will apply its domestic gas reservation policy to a floating LNG project.
The association says gas reservation in WA is a de facto tax on production and a subsidy for consumers.
It calls on the Coalition WA government to focus on reducing the cost and regulatory burden of LNG projects if it wants to attract further investment.
The Australian Pipelines & Gas Association says “the science is in – it’s time for New South Wales to secure its gas supply.”
The association was reacting to a NSW Coalition government reaction to a State parliamentary committee report that is the latest focus on the need to secure a gas supply for Australia’s largest regional economy.
APGA chief executive Cheryl Cartwright says the recommendations of the Legislative Assembly committee include expanding gas networks to regional NSW communities, encouragement of gas-fired generation and promotion of the benefits of the fuel.
The committee chairman, Andrew Gee, says in a foreword to the report that the State’s cities have enjoyed reticulated gas for years while many in regional NSW can only access the fuel through tanks or cylinders and it is “prohibitively expensive” for them. This just another version of the equity gap between urban and “Bush” communities in the State, he adds.
Cartwright says the NSW Chief Scientist’s found that the technical challenges and risks posed by coal seam gas development can be managed in a clear legislative framework.
Speaking at a conference in Melbourne, Australian Industry Group CEO Innes Willox asked if it would take a crisis for the NSW government to act to deal with what he sees as a looming shortage next winter and in 2017.
The New South Wales 2015 Budget papers forecast a 39 per cent reduction in government revenue from State-owned businesses due largely to the Australian Energy Regulator’s network determinations.
The Budget, delivered by new State Treasurer Gladys Berejiklian, says dividends and tax equivalent payments from government payments are expected to decrease annually by 17 per cent from 2016-17 to 2018-19 because of more stringent regulatory price settings.
The Budget papers show that actual government receipts from the electricity networks totalled $872 million from network dividends in 2013-14 and $567 million in tax equivalent payments.
These are expected to be $815 million and $462 million respectively in 2014-15, a fall of $200 million on the previous year’s income.
NSW Treasury estimates that network dividends for four years from 2015-16 to 2018-19 will total $937 million while their tax equivalent payments will total $252 million.
Anti-government propaganda in the March State election claimed that network asset privatization would deprive the State of $1.7 billion a year over this period – a total of $6.8 billion against the $1.189 billion the Treasury estimates will be the case.
The outcomes may change again, depending on the results of the appeals the NSW distribution businesses have launched in the Australian Competition Tribunal against the AER final determinations handed down in April.
The Australian Energy Regulator says there should be confidence that existing energy market governance arrangements are up to the task of identifying emerging issues and putting in place arrangements to promote efficient investment and innovation.
The AER has been targeted, along with other market institutions including the CoAG Energy Council and the Australian Energy Market Commission, for criticism by stakeholders making submissions to the still-running energy governance review being chaired by Michael Vertigan.
In its own submission, the AER asserts that present arrangements are “working well” and “have delivered outcomes in the long-term interests of energy consumers.” Fundamental changes are “not required,” chair Paula Conboy says.
The regulator claims that surveys it undertook last year show that “stakeholders have a growing confidence in us and our ability to make good decisions.”
The AER comments that the existing governance arrangements proved capable of addressing the weaknesses in network regulation that saw major rises in distribution revenue collection and sparked a political furore over the past five years.
It points to reforms now being implemented after the “Power of Choice” review that, it says, are designed to increase the responsiveness of the electricity demand side to evolving market and technological developments as well as changing consumer interests over the next 15-20 years.
Looking at the ministerial Energy Council’s role, the AER comments that it is “not straightforward to understand what its current key priorities are.”
Ministers are progressing a wide range of reforms, the regulator adds, but “it is not immediately obvious what the Energy Council’s key work streams are, how some work programs fit in to a broader strategic vision or how the programs are to be progressed.”
Responding to the views of the Harper review of competition policy that the AER’s network regulation and wholesale market functions should be transferred to a new access and pricing regulator while the ACCC takes on its retail market functions, the organization opposes the proposals, saying they do not reflect the integrated and changing nature of energy markets. An holistic view is more important than ever in a rapidly evolving marketplace, it says.
The Queensland Competition Authority has found itself back in the business of setting the State’s electricity prices after the Labor government decided to postpone deregulation of retail bills in the Energex franchise area after its surprise poll victory in January.
Overall, the QCA has decided, taking in to account the draft determinations for Ergon Energy and Energex for network charges, on a cut in bills that will give a typical householder a 0.5 per cent drop in their 2015-16 bill – or $7 a year.
New QCA chair Roy Green says a typical small business customer can expect a price cut of $73 for the year.
About 70 per cent of the Energex customers in the south-east corner of Queensland are already on market contracts which offer lower prices than the standard tariffs regulated by the QCA. The regulator’s advice to the rest: shop around.
The Western Australian government says it might put a proposal to privatize the State’s electricity network to voters at the 2017 election.
Treasurer Mike Nahan, acknowledging that the politics of privatization is “fraught with danger,” says the benefits outweigh potential costs.
Nahan made the comments at a forum in Sydney. Returning to Perth, he told local media that the Barnett government is not committed to selling Western Power.
The Labor opposition jumped on the difference, reminding WA voters that both Nahan and Premier Colin Barnett had previously ruled out privatization.
A Perth newspaper poll after Nahan’s comments were published threw up 92 per cent of respondents opposed to a sale.
Consumers aspiring to entirely disconnect from the electricity grid in the medium term will likely have to significantly modify their energy use behavior and/or accept substantial over-investment to cover both peak demand and reliability expectations for their site.
This does of cold water for the proponents of imminent departure of households en masse from network systems in Australia was delivered by CSIRO Energy Flagship in a presentation to a stakeholder consultation forum on storage technology held by the Australian Energy Market Commission in Sydney in mid-June.
A CSIRO report on storage will be published in July.
The presentation to the AEMC forum noted that there is limited experience with the benefits of mainstreaming of residential energy storage, including battery’s longevity and operational performance.
June saw two high-profile international publications appear with implications for Australian energy policy and this country’s approach to pursuing future carbon abatement.
One was a letter to Roman Catholic bishops from Pope Francis and the other a wide-ranging commentary by the International Energy Agency.
Both are principally targeted on the UN conference on climate change in Paris at the year’s end.
Each has received much media coverage here and overseas but ordinary members of the Australian community, who are important for local policymaking because the impressions they absorb are then reflected in their votes in a polarized electorate, will have not received much light about either except via media efforts to use them to bolster green arguments.
The Pope’s encyclical surprised some because it is a polemic against the free market as much as anything else. It is also an emotional critique of the pursuit of technological change without what he considers to be proper regard for the environment.
The letter’s urgings against fossil fuels are fully in accord with today’s green Marxism and markedly at odds with the IEA’s parallel attempt to influence the talks in Paris at the year’s end, both in examining what the world’s nations are actually offering in carbon abatement and what the agency thinks would be a better way.
As well, in castigating the “unruly” growth of cities, the Pope is pitching against an inexorable trend in Asia in particular towards far greater urban living requiring a significant upward trend in energy consumption and supply, a challenge frequently highlighted by the IEA.
In shorthand, the papal missive can be categorized as fervent but of little practical use while the value of the information contained in the IEA document has been somewhat lost on the community by media and green propagandists seizing on only some aspects and presenting them to suit their own purposes.
There’s no doubt that urban air pollution is a problem, as the Pope stresses -- one heavily related to power sector activity in China and other developing countries and also to transport use of oil in most large cities around the world, but most people want security of employment as well as a cleaner environment and that comes from industrial activity.
The Pope’s concern for the environment is no doubt genuine and in some respects admirable but the poverty-reducing engines of economic activity need to be fuelled and, well in to the 21st century, as witness the IEA document, this will require the continuing use of fossil fuels.
The singular failure of the papal letter is its inability to address the need to strike a balance between economic needs and climate concerns.
This is not a matter on which the Pope can, or does, claim infallibility.
The tone he has struck will be echoed by bishops and priests around the Catholic world – which does not include huge populations in China, India and the rest of Asia – and be boosted by green lobbyists for their own ideological ends, but it will not help resolve the issues to be debated in Paris.
The IEA document, at least, is a full-on attempt to do just this.
It deserves far more attention than the (very long) letter from Rome.
Keith Orchison
1 July 2015Subscribe to Coolibah Commentary by email
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