Issue 134, June 2016
A fevered financial year draws to a close, writes Keith Orchison, as we wait for voters to decide who will govern Australia for most of the rest of the decade – with energy/carbon issues on the poll agenda for the competing parties for the fourth election in a row and about half the community unsure who to trust on abatement.
The “Essential Report” poll at May’s end finds ongoing confusion among Australians about who will handle climate change policy best.
Despite months of high volume political and commentariat fuss about carbon abatement, respondents, asked who they trusted to address climate change, split 33 per cent for Labor, 22 per cent for the Coalition and 45 per cent “don’t know.”
Earlier in the month, “Essential Report” asked those they polled to rate the ALP’s policy (reducing emissions more strongly than the Coalition by 2030 and on re-introducing an emissions trading scheme). The result was 57 per cent approval versus 21 per cent disapproval and 22 per cent “don’t know.”
Looking at the situation, Australian Energy Council CEO Matthew Warren says: “We can’t keep doing this. (We need) bipartisan policy, not an ideological divide.”
The Coalition says that, if re-elected, it will commission CSIRO to produce a “low emissions technology future roadmap” to help Australia reduce carbon emissions from stationery energy and transport sectors.
Environment Minister Greg Hunt identifies renewable energy, smart grids, carbon capture and storage, electric vehicles and energy efficiency as areas of special government interest.
Speaking at a conference in Adelaide, Resources & Energy Minister Josh Frydenberg said it was important to understand that countries each pursued the low-carbon transformation from different starting points and in different circumstances. “Simplistic comparisons with other countries are ill-informed and risk the adoption of misguided policies that jeopardize our own energy security.”
Frydenberg said the Coalition aimed to have CSIRO deliver the new roadmap by the end of 2016.
The Australian Energy Council has welcomed the roadmap proposal. CEO Matthew Warren says: “We cannot look to the rest of the world for answers.”
According to Warren, said the local energy industry is increasingly concerned about the risks that arise when simply displacing firm, high emissions generation with intermittent, low emissions technologies like solar and wind.
“It’s not a like-for-like transformation,” he says. “To retain confidence in the decarbonisation of the grid we must retain high levels of reliability at the lowest possible cost. The technical requirements of a changing energy mix will only grow as we put more solar on rooftops and build more wind farms.”
Australia’s largest electricity distribution business has told household consumers – it provides a service to about one in eight on the east coast – how to cut their bills by hundreds of dollars a year.
Ausgrid advises: “Don’t sweat the small stuff. Focus on appliances that cool and heat because they account for three-quarters of average household energy use.”
It says shaving two minutes off each family shower can save $100 a year – and washing clothes in cold water $80. Adjusting reverse-cycle air conditioners to lower in winter and higher in summer can save 10 per cent for every degree. Junking the family’s old second fridge can save $250.
The Fair Work Commission has forced the cancellation of an Electrical Trades Union plan to take strike action in regional New South Wales.
Government-owned Essential Energy successfully sought a court ban on the union’s planned five-day strike because it would affect public safety and network reliability.
The DB and the union are in dispute over Essential’s workforce redundancy plans following the Australian Energy Regulator’s decision to require substantial cuts in operational expenditure.
Meanwhile the impasse continues over NSW network charges following the Australian Competition Tribunal decision to set aside the initial regulatory rulings affecting the State’s three DBs and the AER then filing a challenge in the Federal Court.
The AER has allowed a 1.5 per cent increase (at a cost of $35 annually for an average household) in NSW network charges from 1 July until the court’s judgement is delivered.
The upstream petroleum industry, which is holding its annual conference in Brisbane in the early days of June, is hailing the South Australian nuclear royal commission final report as carrying “a clear endorsement for natural gas.”
Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, says the report finds that, in the absence of a local commercially viable place for nuclear power, there should be a growing role for renewables and natural gas in partnership.
He notes that modelling for the commission indicates gas-fired generation plays a significant role in providing reliable power supply under all future low-carbon scenarios. Under a strong carbon price scenario, it would deliver more than 30 per cent of power production in the east coast market by 2050.
The report, he adds, reinforces a finding by the Australian Council of Learned Academies that using gas to provide more baseload and peak electricity supply, in combination with renewable energy, would slash the power sector’s emissions by up to 50 per cent.
The Australian Petroleum Production & Exploration Association is heralding a report from the International Gas Union claiming that domestic wholesale prices here were less than half the average in the Asia-Pacific last year.
The IGU reports that the Australian wholesale price averaged $4 per million British thermal units (BTU) compared with above or just below $10 in China, Japan and South Korea as well as being lower than the costs in Indonesia and Malaysia, two regional LNG export competitors.
Globally, according to the IGU review, Australian prices rank 30th among 54 countries surveyed.
APPEA chief executive Malcolm Roberts says that, contrary to claims, Australian users are not paying prices above those in Japan and other LNG-importing countries in the Asia-Pacific.
“Our prices are middle of the pack, a position they have held for many years.”
The Energy Networks Association has welcomed the regulator’s decision to cut grid charges in South Australia and the ACT.
ENA chief executive John Bradley says the Australian Energy Regulator’s decisions are “good news for customers and good news for the environment.”
The AER’s decisions cover five years to 2021 and mean a decrease in the network component of a SA household bill of $144 annually – and $79 for Territory residential customers.
Small businesses will benefit by $750 a year in South Australia and $338 in the ACT. This assumes other elements of the bills remain as they are today.
The regulator says Australian Gas Networks in South Australia will receive $142.8 million (12.7 per cent) less in 2016-21 than it did in 2011-16.
The Institute for Energy Economics & Financial Analysis has published a new report asserting that the east coast electricity market is “fundamentally out of balance” and calling for implementation of policies to promote the phase-out of ageing coal plant faster and more predictably.
Timothy King, author of the study, says putting off reform increases the risks of poor outcomes.
“The key risk,” he adds, “is not only that market imbalances will persist, particularly in Victoria and New South Wales, but (that they) will further deteriorate over the long term.”
The IEEFA estimates that the NEM has 7,600 megawatts of excess capacity (16 per cent).
King says that a significant barrier to this plant being shuttered is site rehabilitation costs, suggesting that the Latrobe Valley bill alone will range between $500 million and $1 billion.
“These costs in general far exceed the cumulative value of company provisions and government bonds – which begs the question of who will pay the final cost?”
Meanwhile, AGL Energy CEO Andy Vesey has told a Sydney lunch sponsored by “The Australian Financial Review” and J.P. Morgan that the balance of supply and demand in the NEM is “very fragile” with excess capacity driving down the wholesale price of power just as investments need to be made in cleaner technologies and in capacity to back up intermittent renewables.
At the end of May there was media speculation, fuelled by trade union concerns in the Latrobe Valley, that French business Engie is considering closing Victoria’s 1,600 megawatt Hazelwood power station.
The Victorian government responded that it “has been assured there are no immediate plans to shut down or sell off Hazelwood,” which employees 550 people and 300 contractors.
Hazelwood is a 72:28 per cent joint venture between Engie and Japan’s Mitsui.
The Climate Institute said the speculation about Hazelwood highlights the risks of not having a predictable and orderly plan to replace old, coal-fired power over 20 years.
In a presentation to the annual Macquarie Australia conference, AGL Energy says the decline in east coast residential demand has stabilized and this is helping to leave the wholesale market over-supplied.
The company says the NEM generation fleet “needs to be refreshed” and this could be facilitated by regulations relating to plant age or emissions intensity or by the so-called “Jotzo plan” for government to establish a closure auction process.
AGL says it will “pragmatically support” action for permanent change in NEM capacity.
In the latest move in the long-running renewable energy target saga, the Clean Energy Regulator says the revised RET can be met for 2020 provided about 20 projects, totalling 3,000 megawatts capacity, get financial commitment by the end of the year.
The CER says “more than enough” approved projects are available to meet the 33,000 gigawatt hour annual target for the decade’s end but the obstacle this year has been financial uncertainty following years of political debate on the scheme.
The regulator adds that 6,000 MW of extra capacity need to be commissioned between now and 2020 to meet the target and this can be met via 25 per cent solar power and 75 per cent wind energy.
The South Australian nuclear royal commission has urged national policymakers to ensure that decarbonisation of the electricity sector is delivered at the lowest possible cost.
Commissioner Kevin Scarce says: “There is a substantial challenge in meeting the three requirements of low carbon, high reliability and low cost.
“No single option for electricity generation currently commercially available in Australia meets all three criteria because of the intermittency of renewables, the emissions intensity o fossil fuels and the high capital costs of developing nuclear power.”
Interventions to date to drive the take-up of renewables, he adds, while reducing the emissions intensity of the electricity sector, have had impacts that include contributing to increased price volatility in the NEM and risks to power system stability while reducing the profitability of baseload generation and thereby discouraging new entry.
The likely impacts of further intervention on the market as a whole “must be fully understood before implementation.”
Identifying the combination of technologies that will optimally make up the future generation mix, Scarce says, “requires analysis of the future costs of the whole system – generation, transmission and distribution.”
More sophisticated analysis than is currently available and than has been advanced to him in various submissions based solely on costs per unit of energy generated, he adds. “LCOE has limits as a tool for making decisions about the relative viability of different generators.”
He suggests further study is needed to establish whether there will be sufficient returns in the electricity market to drive the commercial deployment of developing “desirable, low-carbon technologies by the private sector,” noting that many of them have substantial upfront capital costs, “making viability highly susceptible to the cost of finance.”
The Australian Petroleum Production & Exploration Association says the national bill for importing oil has reached $34 billion and there is a clear economic case for trying to find local new sources of the fuel.
The cost has to be seen in the context of a widening national trade deficit, which rose to $3.41 billion in February – and of oil accounting for 38 per cent of total national energy consumption.
APPEA has used a Senate committee inquiry in to oil or gas production in the Great Australian Bight – cut off for the moment by the proroguing of federal Parliament for the election – to highlight that 80 per cent of the oil Australia uses today is imported and we have “less than 10 years of proven domestic crude oil reserves left.”
The association argues that targeting undersea exploration in the Great Australian Bight could deliver “the new oil province that boosts our energy security for decades to come.” If current plans for the Bight are approved, it says, more than $1 billion will be spent on exploration work.
It points to the major oil and gas fields under Bass Strait off Victoria that, it says, have contributed $200 billion to Australian GDP over four decades.
“With proper regulatory oversight,” it says, “there is no reason a safe, sustainable offshore petroleum industry should not be possible for South Australia as has been the case in Victoria and Western Australia for several decades.
Bad weather in May has pushed out the horizon for the Basslink cable to return to operation to the end of June at least.
However, the bad weather keeping the repair vessel in port has provided much-need rain in the State, sending Hydro Tasmania’s dam storage levels to almost 22 per cent and enabling the stand-by diesel generators imported to support power supply to be kept switched off.
Meanwhile the federal election sees the concept of a 300-turbine wind farm, costing $1.6 billion to construct, on uninhabited Robbins Island in Tasmania’s north-west continuing to be talked up – contingent on a second, billion dollar Basslink being built.
In a website paper looking at east coast interconnection, the Australian Energy Council reports that South Australia imported 16.7 per cent of its electricity needs from Victoria in 2015 and comments that, with the closure of the Northern power station, the link could become more vital to meeting SA’s requirements – a view contrasting with the frequent assertions in May that South Australia is “now coal-free.”
Tom Koutsantonis, SA Treasurer and Energy Minister, has marked Northern’s closure by saying he “isn’t concerned about baseload power (in the State) because the interconnect with Victoria provides capacity that far exceeds what the Port Augusta power station could provide.”
Average South Australian system energy requirements have been 1,400 megawatts in the past two years, with peak demand in heatwaves reaching 2,900 MW.
The West Australian government is allowing for capital outlays of almost $3 billion on electricity infrastructure over the next four years.
In the State budget delivered in mid-May, the government says the biggest spending will be on Western Power infrastructure -- $1.7 billion to “ensure safety and reliability” and $763 million to meet “customer-driven works.”
The Coalition government, which faces the polls in 2017, says it is considering the privatization of Western Power and also of the Horizon Energy grid assets in the State’s north.
The WA Labor opposition, echoing the stance the party took in New South Wales (where it lost the 2015 election and failed to stop grid sales) and in Queensland (where it won), has labelled the privatization plan “disastrous” and “a sneaky sale of essential services.”
Analysts suggest that Western Power could be sold for between $3.5 billion and $7.9 billion while taking $7.2 billion off the State’s public debt – which now stands at $30 billion.
In a commentary on energy policy, Engineers Australia has observed “Electricity generation has become characterized by falling demand and old technology. Within a decade many (existing) plants will be approaching the end of their commercial lives and the question will no longer be whether they need replacing but what they should be replaced with – existing policy is silent on this matter.”
The organization argues that a fresh approach is essential, beginning with the recognition that change is unavoidable due to the status of today’s plants and because the commitment Australia made at the climate change summit in Paris in December can’t be met from where we are today.
If you accept, as I do, that these statements are valid, the big questions are not whether change should occur but how it should be effected, over what time and how the costs should be shared among stakeholders.
Standing back and looking at the whole picture, it is hard to argue with the view that we have now been on the energy policy roller-coaster in Australia for a long time and we have made inadequate progress – but this is not a reason for rushing headlong into a rapid transition for ideological reasons.
If you really want to take a helicopter view of our policy development, you need to go back 30 years – to 1986 when the Hawke government initiated the “Energy 2000” process, Australia’s first energy white paper and still, I’d argue, the most comprehensive process. Unfortunately, when it was published in 1988, the Labor government lost its nerve at the last moment and took out the entire chapter dealing with greenhouse gas emissions.
It would be another 16 years before a federal government tackled overall energy strategy again – in the form of the Howard government’s “Securing Australia’s Energy Future” paper published in June 2004 – and this was followed before the government fell in 2007 by substantial inquiries in to nuclear policy and emissions trading. But it is hard to present this activity today as doing much to change the landscape.
Coming forward another seven years, the Gillard government delivered a new energy white paper in late 2012 – I served on its reference committee at the request of Martin Ferguson – but the hard work that went in to this exercise was undermined by the dysfunctional nature of that administration and was then overtaken (and substantially repeated) by the Abbott Government in 2014, an exercise memorably (and I think accurately) dismissed by the Energy Policy Institute of Australia as “a timid document replete with unresolved issues” that “diminished investor confidence more than it bolstered it.”
In mid-2016 it is undeniable that, as a country, we are nowhere near producing a durable plan for our journey to a low-carbon society in an affordable way – and it is remarkable that promoters of a charge towards 100 per cent renewables or the “death of fossil fuels” can do so without discussing the total system cost of such a transformation and its implications for business, a point made impressively by last month’s report from South Australian royal commissioner Kevin Scarce.
To quote EPIA again, so far we have done nowhere near enough, in an ever-more complex and uncertain era, to diminish investor doubts about the capacity of governments (federal, State and territory) to find the right path.
My personal confidence that we have mainstream political parties capable of navigating us on to this path is at its lowest ebb in 30 years – and I have been witness to some stand-out policy pratfalls over that period.
The debate currently taking place in the federal arena during the election campaign is doing nothing to alleviate this concern.
To quote Commissioner Scarce, “A future national electricity supply system must be designed to be low-carbon and highly reliable at the lowest possible cost,” a trilemma that neither the Labor Party nor the Coalition (let alone the Greens with their desire to win a small but crucial position in another hung Parliament) seem close to addressing.
Scarce urges the mainstream policymakers to “promote and collaborate on the development of a comprehensive policy that enables all technologies to contribute” to resolving the “trilemma.”
It’s a perspective supported by the Grattan Institute, which, in a recent commentary, declared: “A major challenge for governments is to maintain an energy policy framework that supports the ongoing delivery of affordable and reliable electricity while achieving a transition to a near – zero emissions sector over several decades.”
Of course, this issue is not only about electricity supply; the body politic has not done a good job of addressing secure domestic gas supply either – an issue for the east coast tackled commendably in a new review by the Australian Competition & Consumer Commission, whose suggestions are in limbo while politicians mud-wrestle in their latest “game of thrones.”
As the Plastics & Chemicals Industry Association has said in a recent statement on the ACCC report, a commentary almost entirely ignored by the media despite the sector’s critical importance to the economy, gas is not just about energy; it is also a feedstock. The chemistry industry alone uses 10 per cent of all domestic gas consumption to create materials and products, not least in making fertilizers.
Populism (and a resurgence recently of protectionism in the unions-dominated Labor Party) plus a seemingly irresistible urge to pick (and then subsidize) winners are dragging us well away from a viable path on which to tackle the “trilemma” with respect to both gas and electricity.
The situation is being made worse by the surge in anti-business sentiment of the past year, something heavily on display in the election campaign.
Widespread energy illiteracy is a further ingredient.
However bad the situation appears right now – and it does seem pretty dire – the need for business leadership to help politicians to do a far better job should not be overlooked.
If the business sector cannot reach a consensus on attacking the “trilemma” and can’t communicate this to both the community and politicians, we have little chance of dragging ourselves on to high ground.
Keith Orchison
1 June 2016
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