Issue 139, November 2016
After a month in which electricity news was constantly on the front page of the media – not least because of the ongoing South Australian blackout saga, the launching of the Finkel review of transition issues, more promotion of QRET and the $16.2 billion sale of a majority share in Ausgrid – the future of the power sector is very much front and centre in politics. One way and another, the year ahead is shaping up to be significant for the industry – and that’s before one wonders what’s next for east coast gas supply.
A new report from PricewaterhouseCoopers argues that “the weight of evidence demonstrating the benefits from privatization for energy consumers is compelling.”
The commentary is published as the New South Wales government is digesting receipt for $16.2 billion for the long lease of a little more than half of Australia’s biggest distribution business, Ausgrid, and starting to progress part-privatization of Endeavour Energy – and while the 2017 Western Australian State election is gearing up for a large stoush over the issue.
PwC says the embattled Barnett government in Perth could look to raising $12 billion to $16 billion from selling Western Power and regional Horizon Power.
The consultants say: “The pace of change and disruption in the energy sector is significant – increased distributed generation
(for example residential solar panels), battery storage,
and electric vehicles will all influence the use of the grid going forward.
Electricity networks retained in government ownership face many more constraints in this evolution exposing the government to potential lower returns and greater risk, which would influence future network value.”
They add: “Networks will need to learn how best to play in this competitive market and provide ‘behind the meter’ value-added services, for example, energy demand management to consumers.”
PwC declare that, in this environment, the timing for privatization appears “optimal” to take advantage of the ability for private sector capital to target innovation to address technological and consumer challenges, and better enabling productivity improvements.
The consultants say that what is often forgotten in the angry debates about electricity network privatization is that almost every State and Territory has privatized gas distribution and transmission assets.
“This is a comparable example of a highly regulated industry where consumers are protected and prices are set by an independent economic regulator.”
Blaming recent gas prices rises on privatization is “disingenuous,” they add, “given that these increases are almost entirely attributable to gas exports and would have occurred regardless of ownership.”
The federal Department of Environment & Energy continues to maintain its estimate of the high cost of State renewable energy targets.
Minister Josh Frydenberg has been accused by the Queensland government of embarking on a scare campaign and his department was challenged in a Senate committee hearing in late October to justify the cost claim.
The department has now published a note saying that Victoria will need 13 terawatt hours of additional renewable energy production to meet the Andrews government target of 40 per cent by 2025 and Queensland will need 24 TWh for its goal of 50 per cent by 2030.
The numbers are based on Australian Energy Market Operator estimates of future electricity requirements.
The department says output at this level will need a capital outlay of $14 billion in Victoria and $27 billion in Queensland.
The Australian Industry Group warns that governments will “court disaster” if they collectively fail to respond effectively to the “challenge of intermittent renewable energy generation” with a comprehensive policy that includes better grid integration, energy storage and demand flexibility.
Speaking at the Re-powering NSW conference in Sydney, AiG chief executive Innes Willox has warned politicians that little of what they need to do “will be as easy and popular as announcing g big new renewables targets.”
Willox adds that the competitive advantage Australian industry had in electricity “looks gone for all money” because of rising wholesale prices and the cost of building new power plants here. He says there needs to be a debate about the cost efficiency of generation development in Australia.
Meanwhile the Australian Petroleum Production & Exploration Association is expressing the hope that the review of the national electricity market led by Chief Scientist Alan Finkel “will drag debate away from polarized positions to a fact-based discussion of how emissions from the energy sector can be cut without jeopardizing reliable, affordable supply.”
CEO Malcolm Roberts says “this could be the beginning of a long overdue realism in the debate about renewables.”
Bolstering the reliability of South Australia’s electricity supply without costing consumers more or imposing extra demands on State taxpayers is a “tall order,” says Richard Blandy, adjunct profess or economics in the Business School at the University of SA.
He comments that a plan to build a $750 million interconnector between the State and New South Wales is “sensible” but the cost will need to be recouped from ElectraNet customers, “presumably with a subsidy from the State government.” How soon the link could be in operation, he adds, “is anybody’s guess, but several years would be a reasonable expectation.”
For the “next year or so,” says Blandy, “SA households and businesses remain vulnerable to circumstances where demand for electricity exceeds supply.”
Meanwhile ElectraNet announced on 12 October, two weeks after the State-wide blackout, that full consumer access to transmission networks had been restored, using temporary towers to replace those blown down.
The panel set up by the CoAG Energy Council in the political storm that followed the South Australian blackout needs to have its preliminary report ready for a ministerial meeting on 9 December.
The panel, chaired by Australian chief scientist Alan Finkel, has been bolstered by the appointment of recently-retired Origin Energy chief financial officer Karen Moses, Clean Energy Regulator Chloe Munro, former Energex CEO Terry Effeney and New South Wales chief scientist Mary O’Kane.
The gist of its task is to produce a reform blueprint for east coast energy security, reliability and affordability while use of renewable energy is increased.
At the same time the Australian Energy Market Operator is working on a transmission development review taking in the impact of renewable energy targets and the abatement requirements of the national commitment to the UN to cut carbon emissions.
Meanwhile the SA Treasurer, Tom Koutsantonis, who is also Energy Minister, continues to complain that bans and moratoriums imposed by Victoria and NSW governments are exacerbating the shortage of gas in eastern Australia at a time when the State’s gas-fuelled generators need access to cheaper fuel.
In Queensland, State Natural Resources Minister Andrew Lynham has told a conference that gas-fired power is the “perfect co-existence model” for a system using greater variable renewable energy.
"If nature gives up, we've got to have something to switch on and gas is the ideal power source to do that," he said. "I just wish the other States would put their hands up and help a little bit, because it's us and South Australia, essentially, and the North-West Shelf.
"Gas is, no doubt, the fuel of the future and I laugh sometimes that when the gas industry first started up in Queensland, some of the conservation groups were promoting it as a clean, green fuel. Now, it's the devil. It's the devil reincarnated."
The federal government’s new Australian Energy Update report says that gas consumption has increased at a faster rate than any other fuel over the past decade.
In 2014-15, national energy production rose 3.8 per cent, supported by a 5.2 per increase in gas output, particularly coal seam gas. Domestic gas consumption rose by 1.3 per cent and now makes up almost a quarter of all energy use.
The fuel now accounts for 21 per cent of Australian electricity production underpinned by an 18 per cent rise in Queensland generation because of the needs of LNG export plants.
The Australian Petroleum Production & Exploration Association points out that gas now fuels more power supply than brown coal, nearly five times more than wind farms and nine times more than solar power.
The Energy Update report shows that power generation across Australia reached 252 terawatt hours in 2014-15, close to the peak of 254 TWh attained in 2010-11. Demand, it says, has been driven by commercial and residential needs in particular.
The 252 TWh figure captures all generation, including rooftop solar PV production, output from mining and manufacturing plants and off-grid activities. The latter accounted for 17 per cent of total generation, almost as much as the combined grid-connected output in South Australia, Tasmania and Western Australia.
The Australian Energy Regulator expects power bills for Queensland’s mass market – residential and small business customers – to fall slightly from this financial year to 2021-22.
The outlook is contained in the AER’s draft decision on revenue raising by government-owned transmission business Powerlink Queensland for five years from 2016-17.
The draft decision reduces Powerlink’s recovery of funds from consumers by $281 million a year on average over the review period. (Transmission charges account for less than 10 per cent of end-user bills.)
The regulator expects to see average residential power bills drop from $1,611 a year in 2016-17 to $1,571 in 2021-22 with small businesses using up to 20,000 kilowatt hours annually falling from $5,249 to $5,119.
Meanwhile the Australian Competition Tribunal has turned down an application by SA Power Networks to give it $250 million more revenue than the AER determined for five financial years to 2020. In its decision the regulator actually slashed the network’s revenue raising from $4.53 billion to $3.84 billion but SAPN’s appeal was for a lower restitution of income.
Distribution charges make up 38 per cent of South Australian residential power bills.
The Energy Networks Association says grid stakeholders overwhelmingly reject abolition of the limited merits review provision of regulation, “an important accountability measure.”
ENA says the majority of submissions to the CoAG Energy Council inquiry in to the provision, which has come under attack in the wake of the South Australia supply imbroglio, reject abolition of the appeal rights of networks and consumers.
Only four out of 35 submissions, including the Australian Energy Regulator, support abolition of a merits-based review and reliance on judicial reviews alone, ENA chief executive John Bradley points out.
Acknowledging the current process takes too long, Bradley says “it will be an alarming move to sack an independent tribunal which has identified material errors by the regulator and asked for them to be corrected.”
In its submission, the AER argues that the limited merits review regime has failed to meet the objectives set for it by CoAG, hasn’t met policymakers’ intentions and should be removed. “Judicial review,” says CEO Paula Conboy, “provides an appropriate accountability framework in ensuring that our decisions are lawful and that we have reasonably exercised our discretion.”
She says the regime, which was introduced in 2013, has “fostered a guarded, and at times adversarial, relationship” between the AER and service providers.
The Australian Pipelines & Gas Association says more than $10 billion has been spent since 2000 on transmission pipelines in western and eastern Australia – and $31.8 billion overall on engineering construction activity in the gas pipeline sector.
APGA says the transmission outlay has enabled the opening up of new reserves and new downstream markets via 4,000 kilometres of pipelines, promoting basin-on-basin competition and supporting an almost 50 per cent growth this century in gas supply.
In its submission to the ongoing CoAG review of gas pipeline regulation, the association declares findings of monopoly pricing by the Australian Competition & Consumer Commission are based on “highly selective” evidence.
“The ACCC’s case for establishing that, first, monopoly pricing exists and, second, that it is adversely impacting efficiency, is analytically flawed and not supported by the evidence.”
The largest gas infrastructure business, APA Group, argues that more regulation, as recommended by the ACCC, will be “a retrograde step that will take us back to the last century” where there was “next to zero flexibility and service innovation” in the sector.
Central to the pipeline industry’s argument against regulation reform is the view that the real east coast gas supply problem relates to onshore drilling moratoriums and other restrictions.
The Australian Energy Market Commission says greater integration of emissions reduction and energy policy is needed to maintain and enhance an efficient, safe, secure and reliable supply system that keeps prices as low as possible for consumers.
Releasing a commentary on its work program in 2015-16, the AEMC says effective integration will help contribute to regulatory certainty critical for all investors, including those developing renewable projects.
The commission declares: “A revolution is under way in the way electricity supply and demand interacts.” Change, it says, is accelerating in a “deeply-interconnected energy sector,” requiring it to take a “big picture approach” to its work program.
It adds: “While governments’ role is to determine required environmental outcomes, the mechanisms used to achieve them must be compatible with how markets operate.”
Wind energy’s low base in New South Wales provides strong scope for renewables growth in the State, Miles George, managing director of Infigen Energy, has told the Re-powering NSW conference in Sydney at the end of October. He sees the State as in a position to achieve the largest share of east coast renewables development over the next decade.
According to George, NSW has natural advantages for wind energy deployment with fair demand growth, good system capacity for new projects, a good resource and an improving planning system. The State’s central position in the NEM offers inter-regional trading opportunities, too.
George says that “substantially increased variable output generation is entirely manageable in the NEM and particularly in NSW.”
The Australian Energy Council has assailed the Victorian Labor government over its new tariff plan for rooftop solar power.
AEC chief executive Matthew Warren says the approach is “little more than a hotch potch of excuses to pay more to solar customers rather than drive the efficient use of this important technology.”
The higher tariffs, he adds, “only transfer cost from one group of energy consumers to another and do little to genuinely drive the transformation of the energy sector.”
Victorian Energy Minister Lily D’Ambrosio asserts that State consumers with PV installations “should be fairly compensated for the power they generate.” And the Clean Energy Council argues that the higher tariffs are “simply better recognition of the true value of solar power when it flows back in to the grid.”
The Victorian Coalition opposition, however, argues the new tariffs are “pretty much a new environment tax” – and the Greens oppose it because, they argue, it will enable retailers to take excess solar power for six cents (per kilowatt hour) and “sell it to your neighbors for 25 cents.”
Network providers can support customers at the grid edge in smarter ways, enabling savings to all customers and often a more reliable service for rural users, according to the Energy Networks Association.
Speaking at the Re-powering NSW conference in Sydney, association CEO John Bradley says consultants commissioned to undertake modelling for the “Electricity Transformation Roadmap” program have found that incentivising customers with onsite resources to stay grid connected could save all users more than $1 billion in charges between 2030 and 2050, equal to a four per cent cut in bills.
Bradley says the research highlights the need for new rules so that networks are not forced to connect customers to the grid at high cost. At the grid edge in the NEM, he adds, almost $700 million could be saved by providing 27,000 farm customers with stand-alone power systems using PVs and battery storage.
Tasmanian Gas Pipelines has told a task force set up in response to the long-running State energy crisis earlier this year that “it is reasonable to assume” that another Basslink cable fault is a credible scenario and, given long repair times, “it can also be concluded Basslink cannot always be relied on to provide energy security.”
Targeting substantially higher future Hydro Tasmania dam storage levels may seem a straightforward option to improve security, TGP adds, but it comes with a “significant opportunity cost in lost trading and an increased risk of dams spilling.”
Because of the configuration of the State grid, the company says, major new wind farms will face “significant barriers” to development, including requirements for substantial transmission augmentation.
A second Basslink, it says, will cost $1 billion, take 10 years to develop and build, including more onshore grid augmentation.
Given the issues, TGP argues, gas-fired generation, using the existing Tamar Valley CCGT plant, should be a core element of the energy mix and the preferred option for energy security.
The latest non-peer reviewed report released by The Australia Institute is flawed speculation that ignores local, independent scientific research into fugitive gas emissions, according to the Australian Petroleum Production & Exploration Association.
APPEA chief executive Malcolm Roberts says the gas industry has compelling environmental and economic reasons to minimise fugitive emissions. “The industry strives to reduce its environmental footprint. Fugitive gas is gas that could otherwise be sold.”
He asserts that the most recent field research by the CSIRO confirms that, for various reasons, fugitive emissions from Australian wells will be considerably lower than US emissions, contradicting the TAI report’s key assumption.
Roberts adds: “While critics seek to alarm people about fugitive emissions, it is essential not to lose sight of the broader issue. Natural gas is a cleaner fuel that is helping to reduce global greenhouse gas emissions. Australia’s liquefied natural gas exports are replacing fuels that have far higher emissions.”
Peter Lewis, director of the polling business Essential, claims the community is “not buying the panic about renewables” in the wake of the South Australia blackout.
Lewis says just 17 per cent of respondents to an Essential poll see the blackout as a result of too much reliance on renewable energy and 60 per cent believe the problem would have occurred regardless of how power is produced in the State.
He says only 16 per cent of poll respondents see renewables as a threat to Australia’s future electricity supply and 59 per cent support a federal Labor commitment to having half of national electricity supply coming from renewables by 2030.
As a statement of the bleeding obvious, it's a ripper (but a very necessary point to make). In its new year in review report the Australian Energy Market Commission says: "One thing is for certain, the energy sector is not static."
This needs to be read well past the "death of fossil fuels" rhetoric put forward by the green brigade with variable renewables as the panacea for all carbon ills. The AEMC adds: "There will be different challenges tomorrow and regulatory frameworks need to be adaptable in to the future."
To which it adds: "Above all, reliable secure energy at the best price for the consumer."
The other Clinton (Bill) famously had a slogan prominent at his campaign headquarters during his first run for US president: "It's the economy, stupid."
I'd very much like to see the AEMC’s “above all” quote plastered on the wall of each and every one of our government cabinet rooms and displayed whenever the CoAG Energy Council meets.
The "not being static" aspect needs careful attention because, unless you are ideologically bent, it should encompass fuel neutrality.
Looking at east coast future generation needs, would it make sense, for example, to consider inclusion of 50 megawatt small modular nuclear reactors in the mix -- which I am told can be installed for around $US255 million? My nuclear advocate informant points out the one he has in mind operates at 95 per cent capacity factor, self cools and would require minimal additional grid infrastructure.
Cue the high-efficiency, low-emissions coal advocates and those for gas generation -- but that's the point: let the politicians set the rules, eschew subsidies and allow investors to make decisions.
How far Alan Finkel and his fellow investigators appointed by the Energy Council to shine a light on the messy state of the power market are going to be willing to go remains to be seen, but I hope these AEMC thoughts influence their direction.
Mind you, there can be a bit too much focus on mass market consumers driving the direction of energy policy and regulation and not nearly enough on the issues for manufacturing and other large-scale employers.
Let's be clear: the right of the community as a whole to direct our national choices, by supporting political parties to represent their interests, should be paramount but only with respect, I argue, to the over-arching policies -- not via politicians picking technology winners to attract votes, thereby inevitably laying extra costs on consumers (75 per cent of whom are not residential customers) and/or taxpayers.
Coming back to the "above all" dictum: the prime directive is to deliver reliable, secure energy at the best price for consumers (consistent with pursuit of a lower-emissions electricity system).
Of course, the politicians have had this advice in front of them for months -- per kind favor of South Australian royal commissioner Kevin Scarce.
They had not given much impression of understanding what they have been told by Scarce until the wheels fell off the SA supply chain, so to speak, and one can only hope that Finkel & Co will now drive the message home in a fashion that can't be ignored.
In this context, the Australian Energy Council's reaction to the second installment of the Energy Market Operator's report on the SA blackout is right: "this is not about South Australia or wind farms; it's about how we make the transition to a new electricity system."
Going down the fuel neutrality route would not preclude variable renewables from the mix – a role for wind farms and solar power in a diverse system should be a given – but it would put an end to the current political games, which enmesh energy supply in an ever-growing tangle.
Keith Orchison
1 November 2016
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