Issue 110, June 2014
Welcome to the last newsletter for the 2013-14 financial year, writes Keith Orchison, an issue that focuses on possible developments and challenges over the next 12 months as well as current issues, such as the ongoing saga of the renewable energy target review and the return of privatization of Snowy Hydro to the public debate.
In a move that will come as no surprise to anyone with an understanding of the complexity of the task, the Abbott government is delaying publication of the energy green paper from a mooted late May to late June.
The development raises questions about whether the eventual white paper can be ready by September, as initially proposed, given that the government intends to seek further submissions. More than 250 submissions were received to the issues paper published late in 2013.
September will be politically sensitive for the government because it is invited to participate in a “climate summit” hosted by UN Secretary-General Ban Ki-moon on the 23rd – an event he says requires national leaders to bring forward “bold announcements and actions” ahead of the next round of UN-sponsored climate policy negotiations in Paris in December.
In May, visiting celebrity economist Jeffrey Sachs, in Australia to launch a project involving the ANU and think tank ClimateWorks on mapping deep cuts to emissions, met Foreign Minister Julie Bishop and urged the government to see this country as “not a small player in stopping climate change.”
Meanwhile, as Australian stakeholders wait for the green paper and the outcome of the renewable energy target review, the Abbott government is being subjected to a barrage of criticism from those defending existing policies and programs or arguing for stronger and better co-ordinated action across the spectrum of energy issues.
Energy analyst Graeme Bethune says commercialization of Queensland coal seam gas resources for export is “very much like discovering another Broken Hill.”
Bethune, principal of consultants EnergyQuest, says Queensland’s LNG projects will produce 25 million tonnes annually at full capacity or 500 Mt over two decades.
“If we assume an export price of $12 per million BTU, this will deliver $300 billion.”
He points out that Broken Hill mineral resources, found in the 1880s, are one of the world’s great mineral discoveries and are estimated to have delivered revenue of $300 billion (at current commodity prices) over their history.
It’s lawyers at 20 paces as AGL Energy and the Australian Competition & Consumer Commission slug it out before the Competition Tribunal over the future ownership of Macquarie Generation.
The ACT is required to examine public benefits as well as the impacts on market competition of the purchase of the generator from the New South Wales government.
The ACCC, which lost a previous attempt to baulk AGL expansion when it bought Victoria’s Loy Yang Power, rejects the company’s pleadings to the tribunal that the takeover will benefit consumers by it improving MacGen’s capacity leading to a likely lowering of wholesale prices.
The company proposes to spend $345 million on top of the $1.5 billion purchase price on capital and maintenance outlays on the Liddell and Bayswater power stations in the Hunter Valley
The commission asserts that the deal could increase AGL’s market power, “creating the prospect of higher wholesale prices,” due to it raising barriers to entry and expansion by rival small energy retailers.
The ACCC claims that benefits from proposed improvements will mostly flow to the new owners and will be outweighed by negative effects on prices, service quality and consumer choice.
Commenting on the issue, lawyers Maddocks say market consolidation is a feature of the energy sector and approval of the deal will “effectively grant the three largest retailers in NSW a combined share of 70 to 80 per cent of electricity generation” in the State.
While this would seem an obvious lessening of market competition, the lawyers add, “Market share alone is not determinative of market power or a substantial lessening of competition.”
The tribunal has scheduled a hearing of up to 10 days starting on 2 June and will then have six months to make a finding.
Meanwhile AGL is reported to be also interested in buying the Delta Coastal operation from the Baird government if its MacGen purchase is blocked. Delta Coastal comprises a 668 megawatt gas-fired peaking plant at Colongra and a 1,320 MW coal-burning generator at Vales Point which consists of two units installed in 1978. The two plants together make up the tenth-largest participant in the east coast market, contributing about four per cent of NEM output.
The State government has said it hopes to receive bids for the Coastal operation exceeding $700 million and plans to invest what its gets in its infrastructure fund, Restart NSW.
The Newman government in Queensland has “flamed” its Coalition counterpart in New South Wales over its inability to progress coal seam gas developments.
Queensland Energy Minister Mark McArdle says the NSW government can provide its gas customers with price relief “but keeps putting roadblocks in the way of producers.”
McArdle says there is “significant potential” in NSW for gas production and the answer to bringing down costs for customers lie in increasing supply, ”something (the government) doesn’t seem to understand.”
He adds that NSW consumers are now paying for government “pandering to minority interest groups” and ignoring the important employment and economic benefits of a CSG industry operating under a strong regulatory regime.
The State government, now led by Premier Mike Baird, needs to “lift its game,” he says, arguing that his State, South Australia and Victoria are “carrying” NSW in gas supply.
His comments appear a reaction to NSW Energy Minister Anthony Roberts calling for disclosure of how much gas will be shipped overseas by the Gladstone LNG projects “to give us an idea of whether or not domestic needs can be met.”
McArdle says the NSW government should concentrate on “kickstarting” its own gas production. “It must understand we are no longer living in the 1990s. It’s 2014. It’s a world economy – and what they are doing is in effect stymieing the growth of the gas industry right across the eastern seaboard.
He says the NSW government needs to “start playing realistically” to help get demand and supply back in to alignment in eastern Australia.
David Byers, chief executive of the Australian Petroleum Production & Exploration Association, says the real issue for NSW is to “get on quickly and efficiently at setting the right conditions in place” for coal seam gas development within its borders. Just the proposed Santos project at Narrabri can supply 50 per cent of the State’s gas needs, he adds.
Santos itself, conducting a media tour of its controversial development area in north-west NSW, has suggested part of the community problem is that some people are “frightened of change.”
James Baulderstone, the company’s head of its eastern Australian division, says the CSG issue “in lots of ways has become a bit of a religion for some – and, once you become religious about something, to some degree the facts go out the window.”
He acknowledged to journalists on the tour that the emotion of opposition had caught his company by surprise and pointed out that 30 per cent of all gas consumed by NSW today came from coal seam operations, almost all from outside the State.
There is “enormous potential” for shale gas development in Queensland as well as coal seam gas production according to the Australian Petroleum Production & Exploration Association.
Paul Fennelly, APPEA chief operating officer, was reacting to claims by the State Labor opposition that moves to extract shale gas could impact adversely on agricultural land in south-west Queensland.
Fennelly points out that 685 wells in the South Australian part of the Cooper Basin have been fracture stimulated safely over four decades. “Multi-pad horizontal drilling ensures that the surface footprint of shale gas activities is minimized,” he adds, “so there is little impact on agricultural operations or the environment.”
He says the Australian Council of Learned Academies last year recognized the “great potential” of shale gas as an Australian energy option while also identifying challenges requiring careful management.
Fennelly says APPEA supports the Academy finding that robust regulation and best practice operations will be central to managing and mitigating any exploration and production risks.
Infrastructure consultants Pitt & Sherry say that east coast electricity demand, carbon emissions and wholesale prices all continued to fall during the 12 months to April 2014.
Compared with the year ending April 2013, the consultants say, total generation output dropped 4,400 gigawatt hours (or 2.4 per cent) and emissions fell 5.8 million tonnes (3.5 per cent).
The firm’s Hugh Saddler points out that electricity demand has been on a continuous declining trend for three years – and that the closure of the Point Henry smelter in Victoria this year will remove about 3,000 GWh of consumption from the market. When new wind generation, brought in to the mix via the RET, is taken in to account, he adds, annual demand for all other power plant will be between 5,000 and 6,000 GWh a year lower.
The upstream petroleum industry says the renewable energy target is “a costly and inefficient approach” to reducing carbon emissions.
In a submission to the panel reviewing the RET for the federal government, the Australian Petroleum Production & Exploration Association argues that the scheme is driving up the cost of abatement and inhibiting the natural gas sector’s capacity to reduce national emissions levels.
APPEA says the RET is forcing higher-cost renewable energy in to the electricity generation mix at the expense of lower-cost abatement available from gas generation and elsewhere in the economy.
It calls for assertions that new renewable generation is reducing power costs to be rejected, saying that its affect on wholesale prices is “transient” and any reduction is “significantly smaller” than the scheme’s direct costs.
Renewable energy generator Pacific Hydro is emphasizing its long-held view that the national energy law should be amended to include a clear reference to carbon emissions reduction as an objective.
In its submission to the RET review, the company says doing so will entrench the connection between policy goals for investment and other trends affecting the operation of the NEM.
Pacific Hydro raises the issue in the context of oversupply of capacity in the NEM and what it sees as barriers to exit for fossil-fuelled generation.
The company notes that there is thought to be “many thousands” of megawatts of over-supply in the NEM today, including plant that is “currently ghosting the market rather than exiting.” At the end of last year, it says, 2,470 MW of plant was mothballed or in seasonal storage.
“This situation,” it argues, “is a function of increasing renewable energy combined with lower demand. The main reason that the generators have not fully exited the market, or taken a long-term decision to do so, is ongoing policy uncertainty.”
It says: “A clear emissions reduction objective in the energy law would enable real choice to exit the market to be considered for fully decommissioned generation units or a whole plant.
“Without a clear direction, plant will continue to be kept on the shelf with consequential impacts on economic efficiency and productive use of capital.”
Pacific Hydro adds that there is a need for clarity about decommissioning plans for old generation and what costs are expected to be borne by governments and customers.
The Australian Industry Group, which represents 60,000 businesses with a million employees, is calling on the federal government to change the course of the renewable energy target but not to crash the policy.
In its submission to the RET review panel, AiG says neither deep cuts in the 2020 target nor abolishing it altogether will deliver overall benefits for energy users.
Chief executive Innes Willox says the RET in its current form “has swings and roundabouts for energy users.”
He contends that its costs are passed on to customers but its effect on the wholesale electricity market is of benefit to them.
AiG argues that energy-intensive and trade-exposed industries “have enormous difficulty in passing on costs and are often less able to benefit from wholesale price impacts of the RET.”
The lobby group wants the panel, chaired by manufacturer Dick Warburton, to “consider the practical deliverability” of the scheme’s existing target. “If there is a genuine risk of it being missed and penalties being incurred, it should be trimmed,” says Willox.
Management consultants PricewaterhouseCoopers contend that Australian electricity utilities in their current mode are outdated and struggling to meet the needs of consumers while maintaining acceptable returns for shareholders.
“It has been many decades since the need for innovation has been so acute in the energy sector,” they say.
In a new commentary on a “customer-led shift” for the electricity sector, PwC assert that “traditional, large-scale utilities are losing relevance” as users take greater control of their energy supply needs.
The consultants forecast that utilities are going to transform over the next 10 years in to service companies enabling energy solutions, requiring “major transformation” of their business and operating models.
As well, they say, governments and regulators will need to reshape energy and related services markets to keep pace.
PwC foresee a “battle for home services” involving business players, such as telcos and insurance companies, taking on traditional electricity suppliers.
They argue that “retail will turn in to a channel fight focused on reducing the cost to serve and on improving service and choice, posing major threats to utilities.”
The shift, they say, could see utility retail components being subsumed in to other large-scale retail engines such as data service providers and telcos. “There may be many more suppliers of energy, including third party brokers as we have seen in health insurance in recent years.”
Privatization of Snowy Hydro is back in the public debate with the Abbot government’s National Commission of Audit calling for its sale – and knees jerking in all the corners of opposition from the past.
The federal government owns 13 per cent of the business, with New South Wales having 58 per cent of shares and Victoria 29 per cent.
The O’Farrell government’s 2012 commission of audit for NSW also recommended privatization.
All jurisdictions would have to co-operate to effect the sale.
The nearest Snowy privatization has come to being realized was in 2006 – until the Howard government got cold feet in reaction to a loud public debate.
While the business is the third largest generator in the NEM by capacity (4,400 megawatts), it produces little more than two per cent of demand and is more of an insurance company for other participants in the volatile market, providing a large proportion of electricity price risk hedging contracts.
Because its main operations are in a national park, its hydro capacity can’t be expanded and it has invested in 620 MW of gas-fired peaking plant in Victoria to deal with the gap between what the market demands and it can supply.
It also owns a retailer, Red Energy, with a quarter million customers in Victoria, NSW and South Australia.
The business returned a profit of $280 million in the 2012-13 financial year.
The National Commission of Audit has recommended that a scoping study be undertaken to examine the benefits of a sale for the operation of the NEM and the implications for management of water resources.
SA Power Networks, which is working on its regulatory bid for 2015-20, says that, even though it is proposing substantial new investment, it anticipates an average of only about one per cent a year for South Australian end-user power bills for the rest of the decade.
“We forecast a softening of the future impact of network costs,” the network service company adds.
SA Power Networks says 18 months of consulting customers has found 88 per cent of them happy with reliability of supply but wanting the business to do more to reduce the impacts of extreme weather.
Customers, it claims, also recognize that it needs to step up its investment in replacing ageing assets for a grid that was mostly built in the 1950s and 1960s.
Chief executive Rob Stobbe says the business is confident it can deliver what customers want with a reduction of network charges of around fur per cent in 2015 and increases being limited to no more than the inflation rate for rest of the regulatory period.
SA Power Networks is proposing capital investment of about $2.9 billion over five years.
The Energy Supply Association has come out in defence of the Australia Renewable Energy Agency, which the Abbott government proposes to wind up and merge in to the Department of Industry, delivering a budget saving of $1.3 billion.
A total of $1 billion worth of projects will continue under the move but ARENA claims that 190 proposals, totaling $7.7 billion in funding bids, will be lost.
ARENA was set up in mid-2012 to support clean energy research and development.
ESAA chief executive Matthew Warren says the agency has made “a valuable contribution to the efficient transformation of the energy sector” and should be retained.
“ARENA has added real value by funding renewable energy projects early in the development curve, hastening the commercialization of new technology,” he adds. “There is a clear role for government support to bring technologies forward.
“Scrapping ARENA will only slow the transition process and make it more expensive.”
Meanwhile ARENA’s chairman, Greg Bourne, says the federal government’s “direct action” emissions plan is “doomed to fall at the first hurdle” because it could be gamed by industry and the amount of abatement able to be purchased under the reverse-auction scheme will be low.
Bourne argues that Australia is most likely to reach the national target of reducing emissions by five per cent of 2000 levels by the decade’s end through use of more energy-efficient appliances and buildings plus the decline of the manufacturing sector.
Government-owned Hydro Tasmania says the State’s “significant renewable energy projects” will only go ahead if the federal RET scheme is available to support them.
The business, the largest renewable energy generator in the country, producing some 9,000 gigawatt hours a year of conventional hydro power, says it has more than $2 billion worth of wind farm projects in consideration as well as development of a second high voltage transmission line to Victoria.
It points out that the RET has also provided key support for the refurbishment, modernizing and upgrading of its ageing hydropower assets, many of which are more than 50 years old. It has a $700 million program to continue refurbishing these assets over the next 10 years.
Hydro Tasmania says the RET is a “key part of our strategic and financial future” and has been an important driver of international investment in Australia – but it complains that the boom/bust nature of renewable policymaking “has been destructive to the industry.”
It calls for the scheme to be maintained and not opened up to other low-emission technologies such as gas. “A secure RET that increases steadily year or year can provide a driver for the transition of the electricity sector,” its submission argues.
Hydro Tasmania acknowledges that executing the required commercial arrangements to meet the current target of 41,000 GWh in 2020 “could pose a challenge” due to a combination of low consumer demand, low wholesale energy prices, a surplus of RET certificates and policy uncertainty.
It suggests that moving the target volume and its end date (2030 at present) could be appropriate but the aim of achieving at least 20 per cent of electricity supply in 2020 should be maintained.
In another submission, AGL Energy says there is a “material risk” that the present large-scale RET cannot be achieved. In the current environment, it says, new large-scale investments in renewable generation “cannot be justified” and it is “inconceivable” that the 41,000 GWh target can be reached in 2020.
Meanwhile Origin Energy managing direct Grant King has said in an investor presentation that bringing the RET back to deliver 20 per cent of renewable energy against actual predicted demand at the end of the decade would require capacity to deliver another 9,000 GWh by 2020,
King said total national demand at present is 230,000 GWh – of which the large-scale RET is meeting 15,000 GWh, conventional hydro power 15,000 GWh and the small-scale RET (solar) 7,000 GWh.
The Australian Petroleum Production & Exploration Association asks whether “we have reached a stage where our capacity to take hard public policy decisions is seriously diminished?”
In a newspaper commentary, APPEA chief executive David Byers says the federal budget, like energy policy, demands that the short term be put aside, that mainstream political leaders embrace the “sensible middle” and that they have “the backbone to see necessary policies through to the end.”
Coal seam gas development problems in New South Wales, he argues, emphasize the need for Australia as a whole to have a long-term energy plan.
“Achieving an energy plan,” Byers adds, “requires not just undertaking reviews and canvassing opinion. It also requires government decisions that can be carried through despite populist or fringe opposition – not put off in favor of the sugar hit of the next public opinion poll.”
Writing in the brochure of the Eastern Australia’s Energy Market Outlook conference, which I will be co-chairing in mid-September, Alinta Energy executive Michael Riches sums up the present NEM situation like this: “The challenges that face today’s energy market are immense. Falling demand, pressure on prices, policy uncertainty and market structure longevity create an environment where all participants need to come together to discuss and propose solutions to ensure a viable and effective energy market for the next 10 years and beyond.”
The Melbourne-based think tank, the Grattan Institute, meanwhile calls the situation like this: “Electricity demand is falling, yet prices are still rising. Traditional generators are in trouble and the future of renewable generation is highly uncertain. Gas prices are increasing sharply and flowing through to businesses and households – and uncertain on climate change policy completes a perfect storm for consumers and suppliers alike.”
As well, RMIT University’s Alan Pears, writing for “The Conversation,” observes that “Australia’s electricity industry is beginning to confront the kind of change that Telstra’s landline business has had to deal with. For a capital-intensive industry that has long-lived assets, this is very uncomfortable.”
Consultants International Energy Systems made an observation a year ago that is still valid today: “Little analytical work has been undertaken to fully understand the impacts, risks and budget effects of higher gas prices, which are fast approaching. Gas consumers collectively appear to be under-prepared for the flow-on effects of higher prices.”
There is no point in beating about the bush; as these and other views underline, the answer to the question “Just how serious is this situation?” is “Very serious indeed” but it is far from clear whether developments in the new financial year will provide a path to a better place.
Which brings me back to the point with which I opened – made by Alinta’s Riches: the need for stakeholders to come together to address viable and effective solutions.
This has also recently been canvassed by the Energy Policy Institute’s Robert Pritchard, in a newspaper op-ed emphasizing yet again the EPIA’s view that “governments collectively need to undertake a genuine process of stakeholder participation to arrive at a nationally-agreed energy vision with a 20-year to 30-year time horizon – and then rely on efficient markets to allocate resources and deliver optimal outcomes.”
As we move towards the 16th anniversary of the NEM in December, this stands out more and more as the big failing of energy policy process.
The NEM is the creation of the kind of stakeholder consultation and federal jurisdictional co-operation that Pritchard and EPIA advocate but the road has been downhill a lot of the time since then since, certainly since the middle of the past decade.
Pritchard cites research on stakeholder participation by social scientist Peta Ashworth, who charges policymakers with being slow to engage communities, leaving them today “confused and concerned” about energy and global warming policies.
Pritchard’s argument is that Australia needs to move beyond the shadow play of “co-operative federalism” to achieve an approach, with buy-in from nine governments, that will bring transparency and a shared sense of purpose to energy policy.
Inherent in this perspective is the thought that governments have a responsibility to enable investment and innovation in their jurisdictions, bringing benefits to their communities while safeguarding the environment
It’s hard, in this context, to dispute the view of the Australian Industry Group (in its RET review submission) that the over-arching business need is for energy supply to be affordable and secure and for carbon and energy policies together to be stable, predictable and credible, minimizing the potential for sovereign risk.
Unfortunately, this is not remotely what is going on at the moment in New South Wales.
There, and more generally on the national scene, in the words from Handel’s “Messiah, ”all we like sheep have gone astray; we have turned every one to his own way.”
The immediate prospects for us to reach a situation where governments eschew political gamesmanship over energy management in the long-term interest of their communities still seem less than brilliant.
Keith Orchison
1 June 2014
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