Issue 107, March 2014
If January was jumpy, February was fractious in the national energy debate with the row over the RET reaching another level as the federal government launches a review against the backdrop of the energy white paper, writes Keith Orchison. The Department of Energy is now poring over 260 submissions as it prepares a green paper for May. Meanwhile the coal seam gas imbroglio deepens.
A leading energy analyst, Jim Snow of consultants Oakley Greenwood, says the forecasting of energy demand in Australia “lacks credibility and a robust methodology – to the detriment of sound investment decisions.”
In a paper published by the Energy Policy Institute, Snow says forecasting techniques have proved “very unreliable” and “urgently need change.”
Snow argues that the consequences of sharply rising energy costs were predictable, although many in the supply sector believed that demand was inelastic and the decline since 2009 has come as a shock to them.
“The consequences of price rises are now playing out in what may become a classic case study in economics,” he says, “(involving) demand destruction, loss of industry competitiveness and rising energy poverty in the residential sector.”
Many of the market consequences today come from policy decisions, not from efficient resource allocation, he adds, and the full impacts of what may seemed to have been reasonable steps at the time are now coming to light. They will become more visible over the next 3-5 years and “will be unpalatable.”
“The question is (whether) the impacts of policy decisions (are) worth the pain of restructuring?” he says. “Do we even understand the consequences?”
The Australian Energy Regulator says the energy white paper review is timely because of the major transformation underway in the electricity sector.
In its submission, AER chairman Andrew Reeves says the power sector, after undergoing a number of transformations over two decades, is now “on the cusp of a further fundamental shift in the way electricity is produced and consumed.”
Reeves says: “We have seen rapid growth in the penetration of air-conditioning units, increasing demand at peak times and driving up the need for network investments.”
At the same time, he points out, more than a million households have installed rooftop solar PV, reducing demand for network services “even though, in most instances, networks can deliver power to these customers more cheaply than it can be produced from solar generation.”
The problems thus created, he adds, will be compounded as customers invest in smart appliances and battery storage, which can substantially shift the amount of electricity customers withdraw from , or inject in to, networks from one moment to the next.
Customers, he says, must face the efficient costs that are relevant to their decisions. This requires reform to network pricing and other steps.
Reeves comments that, from a paradigm of one-way delivery of power to the location of customers, a shift is on towards the industry providing a platform for the trade of electricity by all customers, large and small.
This creates even greater urgency for establishment of a cost-reflective system of pricing and for regulation that encourages and rewards efficient innovation.
The white paper, Reeves says, offers the opportunity to set the course for the electricity industry for the next 10 to 15 years.
Management consultants Energetics are telling the federal government in their energy white paper submission that the potential use of battery storage must not be ignored in forward planning.
It wants the white paper to initiate a national debate on the role of batteries in the electricity market.
The company says the coupling of batteries with solar PV systems in households will magnify both the positive and negative impacts of the rooftop arrays on distribution networks.
Energetics notes that the global trend towards winding back solar feed-in tariffs will make it less desirable for households to export power and push consumers towards batteries to allow them to get maximum value from their PV panels.
The transition from a strongly growing “NEM” to one with more subdued consumption is being exacerbated by current policy settings which incentivise the market entry of subsidised energy and further undermine stability, Origin Energy has told the federal government.
The company’s energy white paper submission says the increasing entry of wind power is starting to have a destabilising effect on the “NEM” by suppressing the wholesale pool price.
Some “NEM” participants are flagging support for a capacity market to allow generators to receive payment for making their plant available to supplement the spot market, adds Origin.
“Transiting to such a market is not without its complexities,” the company says, “and the immediate focus should be on remedying current issues that are plaguing the market. The RET review is a crucial step in this process.”
It calls for the RET to be realigned to make the scheme more sustainable and cost effective.
Another of the “big three” retailers, EnergyAustralia, says the RET in its present shape is “inflexible, unsustainable and unlikely to be delivered.”
When the target is not reached (in 2020), EnergyAustralia adds, customers will “start paying a tax” on renewable power that is not being delivered.
The best outcome, it argues, is a recalibrated target that transitions away from subsidy-driven investment towards a long-term, sustainable, market-based approach while existing investment is protected.
EnergyAustralia says the white paper should establish principles to enable energy, climate, environmental and renewable policies to interact, that no further increases in the RET are delivered without mechanisms to support the exit of existing generation in order to balance the “NEM” generation mix.
The Australian Chamber of Commerce & Industry, which claims to represent 300,000 businesses, has called on the federal government to use the energy white paper to analyse the sustained decline in energy demand and to address how this “fundamental shift” will affect policy and regulatory settings, given that they were put in place during a period of sustained growth.
ACCI asks how likely is it that the decline will be sustained in the long term – and, if there is continuing excess generation capacity, how will this affect the market and prices?
It also thinks the white paper should examine how retailers will be affected by declining or sluggish growth for a considerable period?
The chamber adds: “What are the consequences for network regulation, especially given the importance of accurate demand forecasts for regulated revenue allowances and given that networks are provided with maximum allowable revenues for the duraction of the regulatory period regardless of actual demand?”
ACCI says it is opposed to the proposition of changes to tariff structures “to allow networks to collect more revenue from fixed charges” because this will penalise grid-connected consumers, including small businesses, and “may well contribute to more customers leaving the grid.”
In its submission, the chamber says it has “some serious concerns” about how Australia will maintain a competitive advantage in energy, which, it says, is”an important strategic economic and business goal.”
It says electricity and gas prices for business have increased by 60 and 44 per cent respectively since September 2009 while overall input costs have risen by only 11 per cent. It fears that gas prices on the east coast “may triple or quadruple.”
Electricity price increases, the chamber adds, are “overwhelmingly” due to three causes: network price rises, the carbon tax and other “green” subsidies. Some of the impacts of past regulatory decisions will continue to be felt until 2023-24.
It says business is laboring under the weight of cost pressures on a number of fronts, including energy supply, and pursuit of reforms for electricity and gas supply is “fundamental and urgent.”
However, ACCI does not support a move to reservation of gas, urged by some of the largest manufacturers, saying that it is “likely to be ineffective or even counter-productive.” It prefers to see gas supply stimulated and gas markets made more transparent, open and competitive.
The chamber also wants to see the renewable energy target abolished or at least wound back “significantly.” It also calls for a debate on the use of nuclear power in Australia.
The New South Wales Business Chamber says that, given the changing dynamics of the market, rising gas prices are “somewhat inevitable,” but government should not allow this cost pressure to be exacerbated by supply shortages. In a submission to the energy white paper process, the chamber, which represents 30,000 State businesses, calls for “urgent action” to ensure that gas shortages do not eventuate in NSW, noting that limitation in fuel availability may start around 2016.
The primary solution, the chamber says, is “to unlock gas production in NSW to provide users with additional sources of supply.”
Australian dairy farmers are now spending between $20 and $100 a day to on electricity and their costs have risen between 33 and 100 per cent since 2010.
Really large dairy farms, with herds of more than 600 cows, are now paying between $75 and $300 a day, an increase of 50 to 100 per cent in under four years.
Meanwhile, the Australian Dairy Industry Council says in an energy white paper submission, both farmers and the processing companies handling their products continue to be stressed by unreliability of power supply in regional areas, imposing substantial further costs.
Agriculture, it reminds the Abbott government, is supposed to be one of its “five pillars of national growth.”
The lack of capacity in the electricity network in some regional areas is restricting the dairy processing industry’s potential for growth, the council adds. It wants to see the same reliability and capacity of power supply in regional areas as urban Australia enjoys “without a price premium on the service.”
The industry also wants more bill transparency. The council says most bills reaching dairy farmers combine all electricity charges in to a single tariff. It accuses power companies of “obfuscating the extent to which repealing carbon taxes may lower energy costs.”
The council also wants dairy farmers to be better consulted in discussions between government and gas suppliers on regulation of unconventional gas developments in rural areas.
Lobbyists for Australia’s $2 billion cotton export industry say that a power price rise of up to 300 per cent over five years for irrigators is jeopardising the profitability and competitiveness of businesses employing 8,000 people.
More than 80 per cent of Australian cotton is irrigated, says Cotton Australia, and growers are highly exposed to power costs.
If water-related costs force farmers to shift to dry land methods, the association argues, the yield per hectare for farmers would halve.
Cotton Australia says its members should have access to the electricity tariffs paid by “food and fibre” farmers and network-demand based tariffs for irrigators should be restructured
The Energy Supply Association is using its energy white paper submission to advocate a long-term electricity tariff restructuring to reflect the underlying cost drivers of supply.
The association is calling for an approach that “empowers consumers and ensures equitable and efficient allocation of costs representative of the whole supply chain” in order to deliver equitable outcomes between customers with different demand patterns.
It says that a new tariff structure is needed “to reflect the true cost drivers of the system” and that this implies accounting for not only how much energy is consumed from the grid but also the time and the rate at which it is consumed.
ESAA says the industry needs to be allowed to develop tariffs appropriate to the characteristics of different parts of the system “and should not be constrained by overly-prescriptive regulation.”
In a gradual transition to moree flexible pricing arrangements, ESAA argues, all customers should be moved on to cost-reflective tariffs as soon as possible, customers who are imposing the largest distortions should not be able to choose to stay on existing tariffs, changes should be revenue neutral and disadvantaged customers should receive direct assistance from government rather than be offered special tariffs.
The association also points out that, while time-of-use tariffs are “a step in the right direction,” they are not necessarily fully cost-reflective and “may only be an interim solution.”
Over the long term, it says, tariffs based on capacity rather than consumption are likely to be more efficient.
“Ultimately,” it adds, “the approach may differ in different parts of the country, depending on variations in climate and availability of alternative energy sources such as reticulated gas.”
The Energy Networks Association, meanwhile, is telling the federal government that the white paper needs to embrace a five-step approach to achieving better outcomes for customers.
First, says ENA, the current regulatory reform program must be delivered without yet more policy reviews.
Second, it wants the role of the CoAG energy ministers’ committee – the Standing Council on Energy & Resources – enhanced through more frequent meetings, more engagement with suppliers and consumers and publication of “a regular reform roadmap.”
Third, it joins other voices in pressing for a genuinely national economic regulator for electricity and gas networks.
Fourth, it seeks implementation of three key reform steps: an integrated roadmap for tariff reform, acceleration of demand-side participation arrangements and a nation-wide merans of measuring the value of service reliability for customers.
Finally, ENA wants government agreement to remove unnecessary barriers to new gas supply, greater transparency in the gas market and steps to ensure that schemes designed to reduce emissions are fuel neutral.
The association points out that, at present, only one of the measures needed to bring about network tariff reform, as recommended by the Australian Energy Market Commission “Power of Choice” review, is actually being progressed.
It wants SCER to adopt a five-step approach to achieve a transition to cost-reflective retail pricing that includes removal of the restrictions on the roll-out of advanced meters by networks on an economic basis.
Another step, it says, would be a joint customer information and education approach by governments, retailers and networks.
It also urges implementation of deregulation of retail prices across all jurisdictions and a review of customer hardship programs.
ENA reminds the federal government that modelling has estimated up to $11.8 billion in infrastructure spending can be saved by achieving a reduction in east coast peak power demand – equal to as much as nine per cent of forecast capital outlays on networks and generation.
The Australian Industry Group says the current rise in gas prices across eastern Australia is the most urgent energy issue confronting the country, “with huge implications for the energy sector and for energy users, particularly trade-exposed industry.”
AiG says the energy white paper needs to recognise that higher gas prices will impact the power generation mix, close off some opportunities for greenhouse gas emissions reduction and raise the importance of energy efficiency while altering the options available.
A major trade union has criticised the Rudd/Gillard Labor governments for their stance on carbon capture and storage and urged the present Coalition government to do much more to encourage introduction of the technology.
In a submission to the energy white paper, the Construction, Forestry, Mining & Energy Union says “it is extremely disappointing that the previous government wound back its commitment to developing CCS projects and that the current government shows little interest in the area.”
The CFMEU also complains of a lack of commitment from electricity generators and the coal mining sector. Progress on developing CCS, it says, is “very disappointing.”
The union adds that the situation is particularly troubling because most heavy industry ultimately will need CCS to reduce emissions by large amounts.
“Even if power generation became near-zero emission through the deployment of renewables (still a high-cost option), there would still be a need to reduce emissions from heavy industry from CCS,” it says.
The union urges the federal government to develop and implement concrete plans, as part of a global effort, to increase deployment of CCS in Australia.
The Centre for Energy & Environmental Markets at the University of New South Wales says the single largest barrier to investment in the energy sector in Australia is regulatory uncertainty.
CEEM uses the point to mount a vigorous argument in favor of renewable energy. Ongoing uncertainty about the RET is undermining investor confidence, it says.
“In order to invest in long-lived electricity infrastructure, investors need confidence in a stable, future-focussed environment that will produce positive returns over the long term.”
Current market distortions, CEEM says, include the asymmetry in decision-making between supply and demand-side options that result in energy efficiency opportunities being neglected. “Present renewable energy subsidies, hence distortions, are modest by comparison.”
The centre agrees that affordability should certainly be a key energy policy objective, but says that policy and regulatory arrangements that distort electricity prices by keeping them below their economically efficient price (which should include environmental externalities) “will adversely impact overall societal welfare.”
Looking at the provision of lower-emitting energy supply, CEEM comments that there seem to be four key options – gas-fired generation, carbon capture and storage, nuclear power and renewable energy.
The centre says governments should be cautious about embarking on wide-scale support for development of more gas-fired generation because of uncertainty over prices. “Investment in long-lived gas-fired generation,” it adds, “commits Australians to paying the potentially very high pass-through of these costs in electricity prices.”
It claims that, by contrast, renewable generation has the potential to remove the threat of volatile and uncertain prices and offers “a low-risk, mature and reasonably cost-effective way to reduce the emissions intensity of electricity supply.”
CEEM welcomes the inclusion of nuclear power in the Department of Industry issues paper. However, it argues that the cost of introducing nuclear energy in to Australia disadvantages the technology in competition with renewables.
CEEM also dismisses CCS because “it seems increasingly unlikely that it will be able to contribute major emission reductions in the electricity sector over the next one to two decades.”
The centre argues that, if the Abbott government succeeds in removing the carbon price, the RET will need to be expanded. It says the shortfall charge will need to be increased to deter companies from paying the penalty rather than investing in new generation and the period covered by the scheme (which stops growing in 2020 and ends in 2030) will need to be extended.
Australia, it says, should maintain a consistent pace of renewable generation development, avoiding boom and bust cycles.
The federal government has a mammoth task on its hands in addressing national energy policy this year and would inspire more confidence in its capacity to successfully undertake the challenge if the overall process was not so messy.
The very large problem with the previous government’s energy policy approach was its insistence on playing politics with the issue and on hobbling the energy white paper process it pursued with a range of diversions down poorly explored routes with the Greens, of all people, as its pathfinder.
Sans the Greens, how does this government’s approach really differ?
Harsh? Perhaps, but I am not the only one feeling uneasy about the process.
Reading the 260 submissions up on the Department of Industry website at the start of March, I am again struck by the breadth and depth of knowledge and understanding available to the government in this task and by the different ways that energy issues impact on users and the community.
Hopefully, the government’s advisors are doing more than shaping the forthcoming green paper (due out in May) to fit the opinions of the Coalition as it came to office but they are immediately hampered by the RET review, just launched, taking place elsewhere in the system and by the very small time space in which they are working.
They are also working in a political vacuum with respect to carbon pricing.
The bureaucrats will also have their output seized in draft by the Prime Minister’s office and shaped to fit his agenda, or at least a view among his advisors of his agenda, Abbott having a great many other important issues also requiring his attention.
All new federal governments struggle to find their feet.
The water in which they have to swim is always murkier than they anticipated and the rips are unpredictable and often vicious.
Perhaps time will enable us to see the present government’s efforts in a kinder light but they do not seem right now to be making their self-imposed energy endeavours easy for themselves.
With the benefit of hindsight, it is possible to say that the previous regime, apart from its wilful self harm through pursuit of populist, green schemes, was caught in a particularly difficult rip in the form of electricity price rises.
It made things much harder for itself by piling additional (green) costs on the regulated increases in network charges and seemed, at least initially, oblivious that it was doing so.
It also imposed the RET on the NEM without apparent consideration of the impact of high prices on consumer demand.
A big risk for the present government is that it will be caught in a similar situation with gas prices, with these spikes coming on top of the now globally high power costs and with the long-term decline of important parts of manufacturing now in full view.
Ground zero is New South Wales, the biggest regional economy, with not only large gas price spikes now arriving, starting at 20 per cent for the financial year ahead, but also the potential for actual physical shortfalls of supply growing more obvious.
NSW needs 137 petajoules of gas a year, about half of it for industrial consumption, and it has abundant supplies of coal seam methane under the ground.
But gas at present available to it from the Cooper Basin is almost certainly going to flow to Queensland for the LNG trains as current contracts roll off. This will leave the State with one source of supply, Victoria, and insufficient pipeline capacity to meet winter peak demand.
The core issue is timely development of new projects with the concurrence of affected rural communities – the “Lock the Gate” forces are ideologically incapable of any form of compromise – and the past and present State governments have proved inadequate in overseeing this step.
What makes this situation worse for the Abbott government is that the O’Farrell administration, which has not impressed in its management of the gas issue since 2011, is also from the Coalition stables and has created a political problem for itself by delaying tough decisions until the run-up to the next State election (to be held in March 2015).
This is not really an energy white paper issue – it is much too urgent – but the problem colors the paper’s preparation and symbolises the extra-ordinary inability of one of the world’s best-resourced energy nations to adequately manage its own affairs.
A number of items in this newsletter throw up other issues that require a white paper that is a circuit-breaker for national energy planning, policies and programs.
Whether the Abbott government can deliver such a strategy is an open question.
Keith Orchison
1 March 2014
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