Issue 145, May 2017
This month’s upstream petroleum industry annual conference in Perth, writes Keith Orchison, will be a lightning rod for the corporate and political storms now intensifying around the Australian energy sector, with the role of gas, both for direct use and in power generation, a critical issue for future planning.
The federal government’s needs in the east coast gas debacle have been summed up by Resources Minister Matt Canavan: “All we want is jobs being secure and gas being at a reasonable, affordable price.”
The government, having failed to pull a rabbit out of the hat of high-profile meetings with gas suppliers, has opted for a stick and a carrot – use of customs regulations which it claims will enable Canavan to block east coast exports unless there are adequate supplies to meet the region’s needs plus talking up an intercontinental pipeline to bring gas from west to east.
Prime Minister Malcolm Turnbull says he is acting because 65,000 jobs are at stake in eastern Australia factories that are large gas users but how either of the steps will “ensure that the price of gas in Australia is at levels comparable to the international market,” the government’s aim as he told journalists, remains a very big question.
Resorting to regulation on gas exports is a “targeted, temporary measure of repair,” Turnbull asserts.
The Australian Petroleum Production & Exploration Association says the export controls are a short-term measure that risks exacerbating tight market conditions without “genuine reform.” It declares that any intervention creating sovereign risk is “alarming”
The pipeline ploy is already running in to interference from the West Australian government.
WA’s new Treasurer and Energy Minister, Ben Wyatt, is warning against federal policymakers “getting all starry-eyed” about a transcontinental gas pipeline to solve the south-eastern States crisis.
“A project of this nature hasn’t been viable for 40 years,” says Wyatt, “and there is no reason to think it is going to be viable tomorrow.”
Despite this, the new WA Premier has now opted to tell Canberra that his government will consider co-operating on the pipeline in return for a higher share of GST for his State.
The concept of a west/east pipeline to link north-west coast gas supplies with a hub at Moomba in South Australia, last pursued in an ill-fated effort by the Whitlam regime in the 1970s, is being given “serious consideration” by the Turnbull government as it wrestles with a situation in which east coast shortages of domestic supply, and resulting high prices, now threaten the future of some manufacturers.
The APPEA annual conference in Perth in mid-May, which will include a keynote address by the new WA Premier, will inevitably see a strong focus on the pipeline prospects as well as the broader issue – now described by ACCC chairman Rod Sims as a “worst-case scenario” – at the conference.
The problem is playing out against two strongly-held positions with which APPEA, in turn, vigorously disagrees – a campaign by the environmental movement for priority to be given to renewable energy rather than gas and calls by trade unions, manufacturers and the Labor Party for federal intervention in the LNG export trade to see more gas directed to domestic use.
The Climate Council, publishing a new polemic against greater use of gas, especially for power generation, argues that “more gas does not mean cheaper power.”
Fighting back, APPEA contends that “until we have large-scale, affordable and accessible storage, intermittent renewable energy must be supported by fast-response, reliable gas-fired generation.” The association CEO, Malcolm Roberts, says that “there is no doubt we are facing a tight east coast gas market but we must solve this by fixing the underlying causes rather than creating new problems.”
“Gas,” he adds, “has a critical role to play in a low-emissions future as both a replacement for coal and a partner for renewables.”
Woodside Petroleum CEO Peter Coleman says the “gas supply crunch” afflicting eastern Australia highlights the need for a national approach to energy security.
Coleman will be a keynote speaker at the annual APPEA Conference in Perth this month. He will argue that policymakers should prioritize “maintaining a stable fiscal regime that takes in to account both the high costs of developing Australia’s remote resources and the long-term benefit of facilitating their development.” Secure energy supply is crucial for the functioning of the economy, he says.
Meanwhile APPEA chief executive Malcolm Roberts says it is “bizarre” that there is a campaign, focused on the alleged failings of the petroleum resource rent tax, pushing to raise billions of dollars in new taxes from gas producers at a time when the national conversation is about finding ways to reduce rising gas prices.
Roberts accuses activists for new imposts of misleading the community by not highlighting that the PRRT is only one of the taxes faced by producers. In 2014-15, he says, the upstream petroleum industry, despite recording an aggregate net loss of $600 million, paid more than $5 billion in taxes.
The Australian Energy Market Commission says CoAG Energy Council policymakers must focus on three big things to successfully maximize the opportunities of the evolving marketplace in the long-term interests of consumers as a technology-driven transformation continues to accelerate.
In its short “approach paper” for a new “energy sector strategic priorities review” for energy ministers, the commission highlights (1) policy direction clarity, (2) a shared view of what needs to be done to achieve agreed goals, and (3) a shared commitment to achieving outcomes.
The commission’s report is due to go to the Energy Council in November ahead of a ministerial discussion on market priorities in December – a debate that will take place after the council has received the Finkel task force report.
The AEMC says the review will include “high-level analysis of major challenges, risks and opportunities” now facing the energy sector.
The Tasmanian Premier has seized on the federal government’s search for energy security measures that resonate with voters to promote the case for building Basslink 2.
Will Hodgman says the proposal, enthusiastically advocated by the Prime Minister, for Tasmania to become the eastern States’ “renewable energy battery” has strengthened the case for a second interconnector across Bass Strait (which has been on the State agenda since the failure of Basslink last year cut off the island from mainland electricity for six months).
“It’s now a chicken and egg situation,” says Hodgman where increasing Tasmanian power generation and storage capacity is only viable with augmented interconnection. He asserts that the developments can “catapult” Tasmania’s role in the NEM to “boundless limits.”
A report for the State government by John Tamblyn, former chairman of the Australian Energy Market Commission, on Basslink 2 declares that a $1.1 billion second cable could “deliver material benefits to the NEM and Tasmania” along with $3 billion worth of investment in hydro power generation, new wind farms and additional energy storage but he also urges the State government to be cautious in pursuit of its ambitions.
“The rapid transformation of the NEM and the ongoing policy review processes make the long-term investment climate for network infrastructure projects very uncertain at this time,” he warns. This is exacerbated by the length of Basslink 2’s economic life (40 years or more) at a time of fast-changing technology development and the long lead times for planning and construction of the link.
Tamblyn says a business case for Basslink 2 depends on the Australian Energy Market Operator finding it can produce “significant positive net NEM benefits” in tandem with extra interconnection on the mainland.
His study includes finding scope for development of up to 1,095 megawatts of new wind generation in the State with the extra interconnection.
He says a second interconnector and Basslink 1 together “could enhance the capability for water storages and hydro facilities to be used much like a large battery by flexibly sending out or absorbing power to and from the State to maximize its value to Tasmania and the rest of the NEM.”
Electricity market and power system security studies undertaken by researchers at the University of Queensland, together with reviews of NEM events by the Australian Energy Market Operator, “prove beyond reasonable doubt” that deteriorating system reliability and rising wholesale prices were predictable and are avoidable, says UQ professor Simon Bartlett.
He adds that there appears to be a “fatal flaw” in the NEM’s design: single interconnection to South Australia, Queensland and Tasmania. As soon as a segment of this interconnection is fully loaded, he says, wholesale prices “skyrocket” as competitive interstate supply bids are excluded.
Bartlett, a former power network senior executive, suggests a solution could be to “mesh the NEM” by forming a secure, interconnected loop between the mainland market regions.
“If done correctly,” he argues, “investment in nation-building interconnectors could secure electricity supplies, lower costs and enable a smooth transition” to a more sustainable power system.
The Australian Energy Council is challenging the much-repeated claim that the NEM is “broken.”
The association’s chief executive, Matthew Warren, says Australia’s “stop-start-stop-start-stop discussion” over implementing a carbon constraint for generation has “paralyzed investment and neutered the NEM’s price signalling function.” While carbon price risk is real, he adds, it cannot be monetized by new investors.
As well, he adds, the NEM and its operating rules have not been varied to accommodate the disruptive nature of intermittent generation, “a newer challenge laid bare by the South Australian experiment.”
Warren says: “Zero marginal cost intermittent generators of any type are indifferent to the NEM’s spot price signals. They run when they run and turn off when they can’t, not when the market needs them. In effect, they run outside the NEM’s current design.”
He argues that the energy policy debate now is how to retrofit efficient and workable adaptations to the NEM’s investment and operational roles – and says “the problem has been exacerbated by a decade of governments abrogating fundamental and decisive reform in favour of populist and more distorting measures.”
Warren says: “It is hard to lay blame for the resulting crisis at the feet of the NEM.” It is even harder to suggest, he adds, that it is somehow broken after a decade of multiple government interventions in its efficient operation.
“If stakeholders claim the NEM is broken, perhaps they should be required to elaborate which part (is) and what remedial action they recommend to return it to its central place in otherwise successful energy market reforms.”
Energy Networks Australia says it is now clear power system security requires better notice and regulation of generation exiting the east coast market.
CEO John Bradley says the system can no longer cope with notice of just five months, still less one month, of generation being shut down. “It is not only essential that alternative sources of generation are available to replace a retiring generator but (also) that alternative system security services can be made available if a synchronous generator is disconnecting from the NEM.”
ENA has spoken in favour of the rule proposal by the Australian Energy Market Commission to require transmission businesses to maintain minimum levels of inertia on the NEM grid. Bradley says high voltage network businesses are “ready to extend their current role supporting system security by using their own resources and through buying services from the market.
He adds that “it is important to also recognize that the potential for rapid change in system security” will impact on distribution grids, too.
“Some distribution networks are losing strength (because of) significant levels of embedded generation connections and they are also impacted by changes (affecting) transmission.”
The Australian Industry Group has told the federal government that it should be prepared to do more to boost national energy productivity.
In its submission on the May Budget, AiG says the substantial price rises under way for electricity and gas can be softened by good policy but are unlikely to be reversed. Greater efficiency and productivity in the use of energy will be needed to limit the extent to which higher prices translate to higher final costs.
AiG says the government’s existing national energy productivity plan aims to assist this, “but to date the measures have been exploratory or had only minor funding implications.”
The government, it argues, should be ready to significantly increase resources for the NEPP, including providing detailed information and advice to energy users, to better resource the implementation of existing standards and rating systems and to assist energy saving upgrades and retrofits, particularly where State efficiency schemes do not apply.
A $2 billion solar PV farm is being proposed for South-East Queensland, one of the most concentrated areas of power demand in the country, involving 800 megawatts of capacity to be constructed in stages and ultimately 4,000 MWh of energy storage.
The proponents, Solar Q, assert that, when fully developed, the farm will be the largest in Australia and capable of meeting 15 per cent of SEQ electricity needs.
Generation will involve three million solar panels spread across a 17 square kilometre site of cleared grazing land 30 km from Gympie and 170km from Brisbane.
Initial regulatory approval is being sought for a 350 MW development to be expanded to 800 MW over four years.
Currently Australia’s largest solar farm has a capacity of 150 MW.
Solar Q hopes to begin construction of the Gympie project towards the end of this year.
The Minerals Council of Australia wants the federal government to explore pursuit of an “Asian clean energy initiative.”
In a submission to the foreign affairs white paper process now under way, the association says the initiative could enhance energy security and economic development in Asia while achieving substantial reductions in greenhouse gas emissions.
MCA wants the initiative built around high efficiency, low emissions (HELE) coal-fired power plants.
“There is an unmistakable coincidence of interests between suppliers of high energy, high quality coal best suited to these plants (Australia), providers of new super-efficient generation technologies (Japan and China) and energy hungry developing nations in South and South-East Asia,” it declares.
There are 725 HELE units in place today in Asia alone, MCA points out, with another 1,100 planned or under construction.
“Since 2007, the deployment of HELE technologies in China alone has produced annual emissions reductions of 450 million tonnes of carbon dioxide. These technologies apply to both black and brown coal.”
But there are obstacles to adoption of HELE technologies, it adds,
including cost differentials between ultra-supercritical power plants and less efficient, higher emission subcritical plants. “There
is a need for an international mechanism to be established to support both the technical and financial requirements for countries to accelerate the construction of such projects.”
The new West Australian government finds itself wrestling with an old problem – one of Labor’s own making.
State Treasurer and Energy Minister Ben Wyatt is already publicly discussing the need to introduce cost-reflective pricing for domestic power users. As a result of decisions taken by Labor regime almost two decades ago, south-west WA consumers are subsidized – and the gap is filled by State taxpayers.
The current difficulty is that even increasing the bills seven per cent annually for three years would not be sufficient to reach cost reflectivity – but the subsidy now stands at $348 million a year. And the State has a severe budget deficit problem.
One of the most important aspects of the long-running turmoil in Australia over domestic energy supply is the loss of public trust – in both the suppliers and the policymakers.
This is exacerbated by the parallel loss of faith of energy investors in the ability of politicians to devise and implement policies that can be trusted to last for the economic life of their projects.
The mood is captured by the Energy Policy Institute of Australia in a late submission to the Finkel task force.
Policymakers, says the EPIA, have “trapped themselves in to promising simultaneous delivery of less costly electricity, more secure supply and lower emissions.”
By now, the institute adds “it should be apparent to everyone that politics and delivery in a competitive market of reliable, affordable electricity with a lower environmental footprint do not mix. Investor, supplier and business confidence in the capability of the political system to solve the problem has been irreparably damaged.”
In any situation where they are under the pump, politicians will always seek scapegoats to avoid wearing blame – when they are not leaping on ideas to deflect the wrath of consumers (aka voters).
Both ruses are strongly in evidence in the energy debate at the moment, not least at a federal level where the Prime Minister, embattled on many fronts and bedeviled by the opinion polls, is simultaneously talking up solutions – eg the west/east gas pipeline and the converting of Tasmania’s power system in to a “battery” for the south-east mainland – and launching inquiries (the Finkel task force, soon to report, and yet another Australian Competition & Consumer Commission inquiry in to gas supply).
He is far from alone, of course.
The South Australian government (feverishly active and noisy because it is under fire over recent unfortunate events and faced with an election next year), the New South Wales government (calling its own version of the Finkel inquiry, knowing that years of ineptitude in managing new gas development are coming back to bite it in the near future in the form of winter supply shortfalls and already in prices State manufacturers can’t afford to pay), the Queensland government holding review after review to paper over the consequences of populist renewables promises at the last State election, the Victorian government (dodging and weaving as Hazelwood power station closes and concerns rise about the State’s power reliability while its factories also face onerous gas bills) and the leader of the federal Labor Party (who has made a cottage industry out of feeding voters rubbery promises packaged with climate change green tape) are other examples.
The community, confronted with more expensive bills and increasingly uneasy about the job implications of the energy crisis, is mightily unimpressed with mainstream politics, as opinion polls continue to demonstrate – and, sooled on by the media, consumers are only too ready to include energy suppliers in their web of ire.
As one commentator, Robert Barr, president of the Electric Energy Society of Australia, has observed, all indications are that we are heading in eastern Australia for an energy crunch – either a cost crunch or a combined cost/reliability crunch. His further comment that “governments of all persuasions seem to have lost control of their energy policies and do not know how to move forward in a logical and coherent way” resonates, too.
“Shallow promises of low cost, reliable and clean electricity are wearing very thin,” Barr adds, asserting that “the fundamental problem is that electricity customer expectations have been raised to such high levels that they cannot be satisfied.”
There is no better testimony to the complexity of this situation, especially for electricity supply but also for gas, than the 360 submissions to the Finkel task force.
What this review will report remains to be seen – it is committed to doing so by mid-year – and what the scrabbling, squabbling body politic, not to mention the many and varied non-political vested interests, will make of it is a big question.
The EPIA’s solution to the over-arching problem is to suggest a major new direction.
The institute’s new submission says: “Governance is absolutely critical. Politics is the core of the problem and must be taken out of the equation. The inescapable solution is to immediately establish a national energy commission and to give it a mandate to pursue a national energy vision and all related policy priorities (which must not change from election to election).”
EPIA also wants to see a chief planner appointed as part of the NEC approach “with the appropriate mandate, powers and resources to guide the implementation of the vision” to undertake long-term planning functions, including interaction of the power and gas systems. “If there is any delay in establishing the NEC,” it adds, the CoAG Energy Council should appoint an interim chief planner.
Given the complete exasperation of energy stakeholders with the pig’s breakfast situation that now exists, I can well appreciate (and empathize with) the EPIA’s proposal to slash through the Gordian Knot of energy strategy management – I just have great difficulty in seeing the body politic going along with what it proposes.
Which leaves us where as we shamble in to a new financial year?
Keith Orchison
1 May 2017
Subscribe to Coolibah Commentary by email
| to top of page |