Issue 155, March 2018
As I said in a promotion for May’s Australian Energy Week, writes Keith Orchison, the sense that 2018 is a make-or-break year for energy policy and energy markets is palpable on the east coast at present, bearing 2022 in mind. So is the sense that energy suppliers are under rising reputational pressure. What the community thinks about energy issues will be on display this month – the Tasmanian election is on 3 March and the South Australian poll on 17 March, the same day as the by-election in the federal seat of Batman – in States where electricity costs, security of supply and greater use of renewables are key parts of the campaigning. Most importantly for electricity suppliers and consumers, the ACCC will produce its report on energy affordability in mid-2018. Meanwhile the Energy Security Board is ploughing on with its efforts to create a “national energy guarantee” acceptable to CoAG members.
Whatever else the “national energy guarantee” discussion paper achieves, it should bring home the fact that there is no quick fix to the problems plaguing the NEM.
The recently-released Energy Security Board paper canvasses a process that will require the CoAG Energy Council to make a final decision on NEG design in the second half of this year – to be followed by legislation and the drafting of market rules.
The proposal seeks a reliability requirement to commence next year and an emissions requirement to be implemented in 2020. Clearly even this timeline depends on wrangling within CoAG.
Exemplifying the challenge for policymakers, lawyers Corrs Chambers Westgarth, commenting on the discussion paper, say “given that affordability is a key driver underpinning the NEG, the Energy Security Board will need to take care that (it) is not unduly complex or lead to high compliance costs.”
They add: “To the extent that electricity prices fall, the ESB should ensure that retailers pass on all cost savings to consumers. Should costs rise, who ought to bear those costs?”
“The design of the framework to deliver reliability in the NEM has been a deliberate one. Market-based solutions provide incentives to be innovative, benefiting consumers. This is because competitive pressures drive more cost-effective and efficient investment, operational and consumption decisions. Centrally-planned or mandated solutions can provide higher certainty of having a reliable supply of energy, but, compared to a well-functioning market, are unlikely to deliver an efficient level of reliability at efficient cost. Unlike market participants, central planners do not have the same financial incentives to make efficient decisions and do not have to bear the risk of poor decisions, so their incentives are often to over-invest” – the Australian Energy Market Commission in its reliability review discussion paper.
Consultant Hugh Saddler says it is now “almost certain” that the 2020 renewable energy target of 33,000 gigawatt hours will be met.
“Therefore, in the absence of a completely unexpected surge in (NEM) electricity consumption, carbon emissions and emissions intensity (for the sector) can be expected to continue their steady fall until 2021,” he writes in reviewing energy data for the year to January 2018. “Even so, the Australian electricity generation system will remain one of the most coal dependent and emissions intensive amongst major developed countries.”
Saddler argues that “reaching an agreed national post-2021 policy framework for Australia’s electricity system is a most urgent task.”
Analysts EnergyQuest declare that the upstream petroleum industry is now displaying an “extraordinary capacity” to cut costs, bringing about a revival for drilling in central Australia’s Cooper Basin and in Queensland.
“The more wells the better supply,” says EnergyQuest CEO Graeme Bethune – and, he adds, Santos is now “working on an innovative commercial arrangement to return the Cooper Basin to its historic role of supplying domestic gas rather than trying to feed LNG trains.”
Nonetheless, the firm warns, it is too soon for east coast nervousness about gas supply to be eased. “Is there likely to be a domestic gas shortage in 2018,” it asks. “Despite the flurry of activity in recent months, the outlook remains tight.”
EnergyQuest notes that, in some respects, the east coast gas market is “unraveling, with individual States determined to continue their own policies, as is also the case in electricity.” Markets cannot work efficiently, it adds, if there are major impediments to supply and anti-development campaigns spreading misleading information.
The analysts also report that, for the 12 months to September last year, use of gas for power generation shot up 39 per cent, increasing all NEM States except Queensland – where use of gas by power stations is now at its lowest level for 10 years and use of black coal in the State’s generation is 14.8 per cent higher than in 2015.
Most of the growth in gas for electricity generation has occurred in South Australia and Victoria following the closure of brown coal-fuelled plants.
Rod Sims, chairman of the Australian Competition & Consumer Commission, says it is “staggering” that this country has shifted in a few years from having some of the lowest electricity prices in the world to having some of the highest.
Featuring in an ABC television commentary on power bills near the end of February, Sims said that 10 years ago governments loosened regulation of networks and the monopoly services took advantage of this.
Sims told the ABC he thinks that, if prices keep going up at present rates “a dreadful problem will get worse.” He said it would be “really intolerable” if this trend continues.
The commission lists energy issues among it priorities for 2018. Sims told the Committee for the Economic Development of Australia before the TV interview that this country “faces an energy affordability crisis.”
He said: “This has up-ended one of Australia’s core sources of competitive advantage and caused significant consumer harm.”
Armed with the “clear findings” on the causes of the problem from last year’s inquiries in to power retailing and wholesale gas prices, the ACCC aims to make recommendations in 2018 to improve electricity affordability across the NEM, Sims said. “We are solely focused on affordability. We are well aware Australia needs solutions.”
The commission’s proposals for reform will be in a final report to the federal government in June.
Just what is the impact on NEM household hip pockets of being unable to find the lowest-cost retailer? CHOICE claims it is $400 per home on average and that this amounts to $1.2 billion a year, saying its research shows that 43 per cent of accountholders find dealing with power retailer offers too complicated. The problem, it asserts, is “not least because of flim-flam marketing tactics.”
The government-owned energy sector in Queensland delivered a 45 per cent increase in profits for State Treasury in 2016-17 compared with the previous financial year, rising from $1.3 billion to $1.9 billion.
Total income for the sector in 2016-17 was 21 per cent higher than in the 2015-16 financial year, rising from $9.06 billion to $10.9 billion.
The Queensland auditor-general, Brendan Worrall, says the rise was primarily due to the increased profitability of generators CS Energy and Stanwell – with their revenue rising $1.2 billion versus higher expenses of $614 million, delivering a $511 million increase in profits. The pair benefited not only from higher wholesale prices in the NEM but a 24 per cent increase in their power production. As a result the pair’s income rose to $4.28 billion against $2.69 billion in 2015-16.
Energy Queensland – in to which the government has folded network businesses Energex and Ergon – returned a $61 million lower profit in 2016-17, totaling $881 million, as a result of higher borrowings and transmission charges.
In a letter to the auditor-general, Deputy Premier and Treasurer Jackie Trad says steps taken to reduce wholesale power prices have seen them fall (for Queensland forward contract prices) by 18 per cent. She notes a typical household power bill in the State will rise by 3.3 per cent in 2017-18.
Energy Minister Anthony Lynham adds in media comment that this is the lowest current increase in retail bills for any mainland State, pointing out the others have seen rises of between nine and 20 per cent. He says average Queensland household prices will be capped at the inflation rate for the next two years.
The LNP opposition leader, Deb Frecklington, has reacted to the audit by accusing a “money-hungry” Palaszczuk government of using record wholesale power prices to “bankroll higher dividends” from the energy sector.
At a time when household use of rooftop solar PVs is rising steadily, the promoters of the technology will be among those waiting warily for the ACCC energy affordability report in June.
Back in June, the ACCC chairman, Rod Sims, told the National Press Club that “some stunningly generous green schemes” are among the power pricing issues. “For example,” he said, “consumers in some States are paid many times the cost of energy not only on the electricity they send back to the grid but also, amazingly, on the electricity they consume themselves.”
He added: “The cost of green schemes is not transparent; it is smeared over all electricity consumers, often inequitably.”
Meanwhile, the South Australian government, in a fight for life at the March State poll, has offered householders loans of $10,000 with no interest to install solar panels and batteries. Premier Jay Weatherill has called the 17 March poll a “referendum on renewables.”
Nationally, it is reported that January was a bumper month for installation of PV panels, sparked by hot weather and the power bill rises – 111 megawatts of new panels were bought, a 69 per cent increase on January 2017.
Australia’s international attraction for the solar industry has been underlined by German manufacturer Sonnen, the largest producer of storage systems, announcing it plans to build a plant to make 10,000 batteries a year in South Australia. “We believe Australia will be the world’s biggest market for storage over the next five years, overtaking Germany” the company told Reuters.
Data published by analysts EnergyQuest demonstrate that fossil fuels continue to dominate electricity supply in eastern Australia.
Looking at production for the 12 months to September 2017, EnergyQuest reports that coal’s contribution in the NEM slid to 74 per cent compared with 76 per cent in the previous period – reflecting brown coal plant closures – while gas-fuelled generation rose to 10 per cent.
The analysis shows NEM-wide production (including estimates of rooftop solar PV output) were slightly lower in the year to September 2017 – 201,355 GWh versus 201,775 GWh in the earlier period. The combined coal and gas generation was 167,768 GWh in 2016-17.
Renewable energy shares in 2016-17 were 7 per cent for hydro power, 6 per cent for wind power and 3 per cent for rooftop PVs. The total output also includes 520 GWh for solar farms.
Federal Environment & Energy Minister Josh Frydenberg has derided the new South Australian renewable energy target – set at 75 per cent by 2025 by Premier Jay Weatherill as he contests a tight State election – as “complete madness” and a further threat to reliability and affordability.
Frydenberg says SA already has the highest electricity prices and least stable electricity system in Australia.
Weatherill contends the new target will lower prices by sending a signal to investors to build more generation in the State. However, he has conceded to media that his government has not done economic modeling on the proposal.
Labor’s federal energy spokesman, Mark Butler, says the party nationally remains committed to pursuing a 50 per cent RET for 2030.
Analysts EnergyQuest report that in the 12 months to September last year generation in South Australia was 6,200 gigawatt hours from gas turbines and 4,756 GWh from wind farms.
Meanwhile Kevin Moriarty, chairman of energy storage company 1414 Degrees, has told SA media that, as the State continues to build renewable energy supply, it the will need “hundreds of millions of dollars of investment in storage to ensure the supply system isn’t vulnerable at times when the sun doesn’t shine or the wind doesn’t blow.”
The upstream petroleum industry has shown support for the “national energy guarantee” as the Energy Security Board pursues its consultation process ahead of a CoAG Energy Council discussion in April.
Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, says that, at its simplest, the NEG “aims to deliver progressively cleaner, dispatchable energy without the pitfalls of governments picking technology winners.”
The Australian Energy Council sees importance in the proposed NEG’s de minimus approach, retaining the existing market design and contracting arrangements. “The current market design is not the problem,” says CEO Matthew Warren. “The International Energy Agency has found that the NEM remains an effective platform to deliver transformation providing there is further reform of policies and market rules.
In a submission to the Australian Energy Market Commission’s current power market reliability review, Major Energy Users Inc says that a more than doubling of wholesale electricity prices in the past two years despite 90 per cent of generation from low-cost sources such as coal, hydro and wind raises a concern that “there is something about the NEM and its structure that needs to be addressed.”
The mix of generation has changed little in two years, MEA adds, with the only significant development being the “massive increase”
in the price of gas for domestic consumption. But, it says, as gas generation represents only 10 per cent of power supply, a doubling of the gas price should not lead to the current wholesale power situation.
The fact that market prices are well above the cost of power production, the association says, supports the view that the NEM is not competitive – and it is “very concerning” that AEMC does not focus on this issue in its interim report.
“Inherent in the report is that the market structure is fit for purpose and only some relatively minor changes might be required to provide increased reliability or prevent the loss of any reliability. The MEA finds this rather self-serving. AEMC should be examining the current market structure to see if it will still be appropriate (when) generation is more diversified and probably reflects greater intermittency.”
Bill Shorten may consider power renationalization worthy of consideration, but the Turnbull government is actually doing it and “the results are going to be catastrophic,” economist Danny Price of Frontier Economics told a conference in Adelaide in February.
According to Price, the federal government, rather than rectifying NEM problems, is engaged in “nationalization by stealth” and “doing irreparable harm” to the market.
He asserts the federal government has “lost its social licence to have any say in the NEM.”
He also accuses the Australian Energy Market Operator of “an audacious public grab for power.” He says: “On the back of advice from Alan Finkel, the (Turnbull) government has created an environment where there is a blurring of roles and responsibilities (in the NEM) and created opportunities for AEMO to empire build.”
Price adds: “AEMO is trying to take us back to the dark old days of the 1970s and 1980s when centralized power authorities told people what they could or could not invest in.”
In his view, the States do not need the federal government to have a NEM and they should “ditch” it and develop an alternate market (“NEM 2.0”) with a proper carbon pricing scheme. “The emissions intensity scheme has the widest support.”
Price argues for the industry-participant-run market operator to be abolished and replaced by a statutory authority “focused on operating the system in a secure state” and for ‘restoring the accountability of the Australian Energy Regulator for setting economically-efficient network prices.”
He declares that, if NEM 2.0 is not pursued as a matter of urgency, “the country will suffer an ever-deteriorating electricity system increasingly characterized by inefficient, Balkanized, State-based power systems.”
There is no indication that federal Labor is moved by the International Energy Agency’s support for carbon capture and storage in its new review of Australia’s energy scene, calling the technology an important mechanism to deliver long-term global climate goals.
Federal Environment & Energy Minister Josh Frydenberg has told Parliament in Canberra that he welcomes the IEA supporting change to the mandate of the Clean Energy Finance Corporation to allow more investment in CCS – “but unfortunately Labor is standing in our way.”
When the Turnbull government proposed the CEFC legislation amendment last year, Labor’s Mark Butler dismissed it as a “stunt,” noting Labor had introduced a $1.7 billion CCS research support program in 2011 and the Abbott government had axed the program in 2014.
The Greens are also vehemently opposed to the change.
While the political debate goes on, the Turnbull and Victorian Labor governments are spending $150 million on a geological survey in the offshore Gippsland basin in search of storage opportunities. Victoria’s Resources Minister, Tim Pallas, says the project has the potential to play a major role in reducing the State’s carbon emissions.
IEA executive director Fatih Birol, visiting Australia to release the report, says there is “huge” international potential for CCS and points out the Trump administration is pushing through “landmark” tax credits for the technology in the US.
The Minerals Council says the Australian coal industry has spent $300 million on pursuing low emission technology opportunities and plans to spend a similar amount in the next 10 years.
In the US, there has been research sector support for the proposed tax credits, notably because they could make a difference in cutting emissions from the industrial sector. The measure provides $US50 for every tonne of CO2 sequestered and $US35 for every tonne kept from the atmosphere in other ways.
A senior AGL Energy manager says the company’s 2,210 megawatt Loy Yang A power station in Victoria’s Latrobe Valley will not be considering carbon capture and storage.
Steve Rieniets, general manager of the power station, told a community discussion the company organized in the Valley that CCS is not an economically viable option for Loy Yang “at the moment.” He added: “Unless something changes in the technology, the answer is no.”
Rieniets said the company plan was to run Loy Yang A to 2048. “However, 30 years is a long time and you only have to look back on the past 30 years and all the changes in that time. Community expectations and government regulations change very quickly.” He said AGL would continue to invest substantially to maintain Loy Yang A with the aim of lowering its carbon emissions and increasing its reliability.
Separately, AGL has announced that it is sending its spare Loy Yang generator (weighing 255 tonnes) to Germany for refurbishment. The unit is scheduled for return in November.
A crossbench committee of the House of Representatives wants Environment & Energy Minister Josh Frydenberg to pursue an audit of large manufacturing companies to see if they can do more with energy efficiency and demand management both to save costs and to reduce pressure for new generation capacity and transmission augmentation.
The committee on energy and environment, chaired by Nationals MP Andrew Broad and including Liberal, Labor and Greens members, released a report in February on modernizing the electricity grid.
Australia’s energy networks despatched a rescue team to cyclone-ravaged Tonga in the last week of February.
Energy Networks Australia CEO Andrew Dillon says Cyclone Gita has devastated Tongan power infrastructure, leaving everything from homes to the capital’s hospital and water supply without power. More than a third of the high voltage system has been damaged. “Without external assistance it would take months to reinstate the network.”
There’s an element of Groundhog Day – the Bill Murray version in which a grumpy middle-aged person must relive the same day over and over, a temporal locked groove – about our energy debate.
The thought comes to mind as, on the heels of the Greens calling for electricity re-nationalization, I see the Australian Workers Union back demanding restrictions on gas exports and, well you name it – there are more than a few other examples of the groundhog syndrome, including federal Labor determinedly not talking about the costs of its inflated RET plan.
Despite it all, of course, we consumers go on consuming energy, grumbling about its costs and freaking out that the power grid can’t provide what we need all the time, regardless of weather, while telling opinion polls that we much prefer renewable energy and don’t like network charges.
The “death to coal” brigade go on blowing their trumpets even as the Energy Transition Hub (led by the University of Melbourne and the ANU) starts publishing an interesting project to report on NEM supply – which for the first week of February showed that black coal generation provided 2,254 gigawatt hours (56 per cent of the market’s needs) and brown coal plants 707 GWh (18 per cent) versus 394 GWh for wind power and large and small solar PVs, 470 GWh for gas plants and 248 GWh for hydro systems.
Then in the wake of a report of the House of Representatives’ standing committee on environment and energy, we get the inevitable “news” story quoting people who think market-wide use of smart meters is a devilish plot to impose higher bills on people who can’t afford them.
No wonder the Energy Networks Australia’s Andrew Dillon hit Twitter in response: “Can we please stop the ‘stop the future’ campaign? Yes, we need to manage vulnerable customers and there is an easy way to do that – make new and fairer pricing structures opt out, not mandatory.” How long has this argument being going on now?
The example par excellence is the carry-on over the safety of fracking. Just how many inquiries does this country need to persuade governments that, with good quality regulation, the associated risks can be eliminated or managed?
The Australian Petroleum Production & Exploration Association recently expressed the view that the governments in Victoria and New South Wales in particular “should squirm” when they note that the former has the most expensive wholesale gas on the east coast and the latter is now almost entirely dependent on interstate supply, mostly coal seam gas from Queensland. If so, they do a darned good job hiding it.
As APPEA says, the political gestures of bans and moratoriums may feel good to these governments but their consumers are literally paying the price.
In February we saw the International Energy Agency, via its review of Australia energy policy, make it clear that one of our highest priorities in pursuing secure and affordable domestic energy should be to remove bans on unconventional gas projects. The media gave this scant attention despite finding every other opportunity to make a fuss over high prices.
Keith Orchison
28 February 2018