Issue 163, November 2018
In the wake of the disastrous Wentworth by-election it has become clear that the energy sector is a strong focus for political lifesaving as the Coalition searches of vote-boosting gains. It’s true that the big issue for the government appears to be not whether it will lose the next election, but how big the defeat will be -- but it obviously intends to go down fighting, not least via power bills. Labor, having been swept from office in 2013 on the basis they could not manage themselves and with the carbon tax as a handy weapon for Tony Abbott, now seem to be on the brink of a return because – three prime ministers later – both the Liberals and the Nationals are increasingly perceived as a rabble and because, among other things, the Coalition has not been able to resolve the tripod issues of energy reliability and affordability and carbon abatement policy. For energy companies, now simultaneously trying to cope with strong pressure from the incumbents and strategizing for an expected Labor victory, a joker in the political pack may well be whether voters, sick of the goings-on in Canberra, decide to opt in the election for more independent and minor party MPs, raising fresh uncertainties for investors. The outcome of the November State poll in Victoria will be indicative.
The fevered political atmosphere enveloping regulation of electricity supply has seen Energy Networks Australia hit back swiftly at a rural lobby group, National Irrigators’ Council, over a claim that grid owners’ profits are “$2.6 billion higher than they should be.”
ENA chief executive Andrew Dillon says the claim “misrepresents the facts” and profits reflect efficiencies made in the networks’ operations not money out of consumers’ pockets.
“If a business is able to make savings by reducing operating costs (allowed by the regulator), of course they will make more profit than forecast,” he says, ”and the regulator will return those profits to customers in the next five-year (determination) period by setting lower benchmarks – which means lower network prices.”
The worst thing that could happen, Dillon adds, is for reaction to “this type of fact-twisting” to lead to rate-of-return regulation, ”which has been tried and comprehensively failed overseas.”
Reacting to the latest federal government moves, Energy Consumers Australia says suppliers have “a huge trust deficit” to overcome and rebuilding trust “must come from the top.”
CEO Rosemary Sinclair says consumers have had to work too hard to get the benefits of a competitive market. “The confusopoly of offers and discounts has not helped them at all.”
The latest Essential Report poll, published in the last week of October, finds that six out of 10 respondents opted for tackling Australians’ cost of living as the most important issue for federal government attention. One in five included supporting renewable energy in their top three items for attention while 37 per cent listed improving the health system, 29 per cent housing affordability and 27 per cent job creation.
Just 21 per cent of respondents who said they would vote for Labor at the next federal election included boosting renewables (a major part of the part platform) in their top three options.
Answering another question, 56 per cent of respondents (the same as in September last year) said Australia is not doing enough to address climate change.
Thirty-eight per cent of respondents said they would give their primary vote at the next election to the Liberal or National parties versus 37 per cent for Labor and 10 per cent for the Greens.
The Australian Institute of Company Directors’ latest canvass of membership views shows that half of those polled see energy policy leading the top five issues for short-term government attention.
For the long term, 39 per cent of respondents nominate climate change and 35 per cent energy policy. Half of them rate renewable energy as the top area of importance for infrastructure investment.
Meanwhile, polling company Roy Morgan reported at the end of October that a new survey of customer satisfaction shows 60.9 per cent positive response from household electricity users compared with 61.7 per cent in the previous 12 months and 73.5 per cent in 2009.
“Australians right across the board should be furious with federal and State governments that we do not have a coherent energy policy” – ERM Power CEO Jon Stretch. ”Our policymakers are more influenced by the media and electoral cycles than they are about taking a long-term approach to Australia’s energy future.”
“Years of policy paralysis interspersed with intense bursts of market intervention have not led to good outcomes. The stakes are simply too important to play politics” – EnergyAustralia CEO Catherine Tanna. “Calls for stability are becoming background noise, too easily brushed aside in a populist debate. Politics is making it very hard for good politicians to do the right thing.”
“Energy has dominated the national agenda and media headlines all year but we are no closer to having a co-ordinated view on the way forward” – Frank Calabria, Origin Energy CEO.
“As a nation, we accept a system in which the best outcome is compromised routinely in favor of what can be shoehorned in to our federal structure” – George Williams, dean of law, University of New South Wales. “The answer could be a royal commission in to the federation.”
“There is increasing risk within the NEM because the lack of a good mechanism means the firming generation needed is not being built as quickly as renewable generation is being built” – AGL Energy acting CEO Brett Redman.
“Electricity suppliers only have themselves to blame for government intervention and heavy-handed regulation” – Rod Sims, chairman of the Australian Competition & Consumer Commission (a role to which he has just been re-appointed until 2022).
“Energy companies may not be perfect but yelling at them isn’t a great substitute for having a coherent energy policy” – Chris Richardson of Deloitte Access Economics.
The Australian Industry Group, representing C&I customers who use a large part of the 60 per cent of power demand by the sector, has warned that the new attempt to reset energy policy by the Morrison government contains “hits and misses.”
CEO Innes Willox says “an otherwise thriving manufacturing sector is challenged by sustained high electricity and wholesale gas prices that are once again marching upwards.”
Willox welcomes federal re-endorsement of the reliability obligation elements of the “national energy guarantee” and says the rule, when finalized, must promote NEM generation competition without undermining “innovation the energy system badly needs.”
However, he warns, the absence of a long-term carbon emissions policy will “significantly undermine” investment in new power supply assets and re-investment in existing generation, “investment that can moderate prices and sustain reliability.”
The group seeks to focus attention on the key role gas supply continues to play in electricity generation. Willox says: “The price of gas is effectively setting the price of electricity today – and oil-linked export parity is sending gas prices soaring again.” He adds: “Measures to moderate gas prices are not part of the latest (federal government) package and there is no explicit effort to break the link between gas and electricity prices.”
The group is reacting poorly to the Morrison government’s “big stick” threats about breaking up big power companies. “Forced divestiture would set a dangerous precedent for the whole economy,” Willox declares. “Legislating to allow the Treasurer of the day to forcibly break up private business would be an extreme step.”
The Business Council is also decrying the divestment threat – which Labor says it will not support. The BCA says “ad hoc intervention such as underwriting generation investment or forcing divestment is sending a message that investing in Australia comes with considerable risks.”
Federal Treasurer Josh Frydenberg says the proposed divestment powers would only be applicable to the energy sector.
AGL Energy scurried at the end of October to correct an impression that it planned to close Loy Yang A power station 10 years ahead of the previously declared intention of 2048.
An analysts’ briefing reported by a newspaper quoted a senior manager as saying 2038 closure was now the company’s goal, news seized on by the environmental movement, but this was quickly corrected. Steve Rieniets, LY general manager, says $900 million is being spent on the power station between 2016 and 2021 and 2048 is still the planning horizon.
“We know that there is a desperate need (in the NEM) for more firming capacity, more storage, more dispatchable power that can be very flexible, “ federal Energy Minister Angus Taylor told October’s national energy summit conference staged by the Australian Financial Review.
Taylor said the government is working through the business case for the “Snowy 2.0” project, with a final investment decision expected in December. The mooted development, he told The Australian newspaper, “offers a unique mix of firming and storage opportunities for the NEM.”
Subsequently, in a media conference at the month’s end, Taylor and Prime Minister Morrison, who are searching for a replacement for the abandoned “national energy guarantee,” floated an attempt to fast-track a set of mechanisms to attract new generation investment, including, they said, providing a NEM floor price, offering contracts for difference, “cap and floor” contracts and/or government loans. Morrison told journalists the measures would be technology neutral. “We don’t take positions on fuels,” he said.
Labor’s energy spokesman, Mark Butler, told the AFR conference the Snowy development “only stacks up with more renewables coming in to the system.” And, he reacted to the end-October government announcement by warning investors Labor strongly opposed support for any new coal generation.
Meanwhile the Nationals’ Barnaby Joyce, who is seen in the media as pursuing a return to the role of deputy prime minister, has said that the $4.5 billion Snowy project should be scrapped in favor of construction of new coal-fired power stations.
For the amount of money likely to be involved, he said, “it will be possible to build at least one new coal-fired electricity plant and more modest pumped hydro elsewhere.”
Energy Minister Angus Taylor claims summer will be “challenging” in the NEM.
“We know,” he told ABC TV’s 7.30 Report “there’s almost 400 megawatts short in Victoria which needs to be made up to avoid any load-shedding – which is blackouts.”
He said the Australian Energy Market Operator “is working hard now to find almost 400 MW of generation or demand management.”
Subsequently the operator’s CEO, Audrey Zibelman, told a CoAG Energy Council meeting there will be “a strong plan” in place for the 2018-19 summer, with a report on preparations to be published in mid-November.
The ministerial meeting directed the Energy Security Board to stop work on the “national energy guarantee” and to pursue amendments to the national electricity law to advance a “retailer reliability obligation.” The purpose of the “obligation” would be to require retailers, “if the right investment does not come forward to address forecast supply shortfalls,” to demonstrate they can meet their share of peak demand.
The ministerial council will meet again in December.
The Morrison government, under serious political pressure in the wake of losing the Wentworth by-election, is trying to push ahead with introduction of a power bill “default market offer” for residential and small business power customers on the east coast, an initiative described by the consumers’ lobby as “a safety net price”.
However, the messiness of the process underscores the Coalition’s sense that time is not on its side. Virtually every day at the end of October brought fresh evidence in the media of how difficult pursuing this effort quickly is turning out to be.
Treasurer Josh Frydenberg and Energy Minister Angus Taylor have told the Australian Energy Regulator the government wants “a swift introduction” of the measure to replace the controversial “standing offer” now provided by retailers.
They want the regulator to commence work immediately on a mechanism for determining “default” prices in each NEM franchise area, saying they would prefer to legislate for it with the States and Territories but will go it alone if they have to.
The federal government is also harassing major retailers to announce price cuts from 1 January although the proposed new default price will not come in to effect until 1 July.
The actual value of the cuts being pursued seems well below the initial government claims and it has now been forced to concede they can only apply in New South Wales, Queensland and South Australia on the east coast because Victoria and Tasmania retain control of their retail markets. However, the Andrews government, en route to the Victorian polls, has promised, if re-elected, to follow the same approach.
The Australian Energy Council, representing gentailers, says annual savings for some householders under the federal plan would be between $105 and $165 on Australian Competition & Consumer Commission modeling rather the up to $832 per year used to illustrate the step’s impact by Prime Minister Scott Morrison (who says his aim is “to get big energy companies under control”). The lobby group says a majority of east coast households have already switched to a retailer “market offer” and won’t benefit from the planned changes.
Earlier, the AEC had tried to push back against the concept by citing a new report by the NSW Independent Pricing & Regulatory Tribunal.
The council said the IPART report supports the view that competition should be left to deliver the best outcome for consumers under a stable and predictable market framework. “It provides a note of caution in seeking to rush to introduce a default electricity price.”
The lobby group issued a warning at the end of October that “the race between Canberra and Spring Street (home of the Victorian parliament) to re-regulate energy prices will be to customers’ detriment and will “undermine retail competition and investment in generation.”
The Clean Energy Council says the Morrison government’s new policy steps, including the prospect of it underwriting new generation, is making its wind and solar power membership, who have invested $15 billion in the past 12 months to take advantage of the renewable energy target, increasingly anxious.
The lobby groups says that, “while new (renewable) investment no longer requires subsidy, (the sector) does need political certainty and stability to attract the ongoing capital investment necessary to replace coal generation and secure reliable and affordable supply.”
Resources Minister Matt Canavan has committed the federal government to not imposing controls on Australian gas exports in 2019.
“Definitely not,” he told Reuters news agency in an interview in Tokyo in late October. “Next year is not going to be a (domestic supply) shortfall year.”
He said that, provided LNG producers on the east coast meet their recently-updated commitments to the government to plug any market gaps that emerge, “there will be no need to use the controls.”
The ACCC has changed its tune on the controversial issue of reserving Australian gas resources for domestic use.
After years of siding with the supply sector against a reservation policy, the commission chairman, Rod Sims, now says “if there is more gas found, then making sure it flows to domestic uses would make a lot of sense.”
Sims told ABC TV’s The Business program that, particularly in southern Australia, “a lot of manufacturing” is paying up to $4 per gigajoule “than they really should be if we had more supply.” He said “the only way to get prices down is to get more gas down south.”
Federal Resources Minister Matt Canavan has responded that the government’s policy to restrict exports of domestic needs are not met is “reservation in all but name” and, he says, “in any case an official reservation policy is beyond federal control – onshore gas is a matter for the States and Territories.”
Incitec Pivot CEO Jeanne Johns says Australia is the exception to a worldwide rule in not prioritizing the gas needs of its domestic industry over exports.
Energy Security Board chair Kerry Schott has given the thumbs up to States “doing their own thing” with ambitious renewable energy targets. “The electricity market can accommodate that,” she told a Committee for the Economic Development of Australia forum.
Schott said Australia “has tried practically every emissions policy ever dreamt up” without being able to get them to work at federal level” and the State efforts are “a really important foundation for us to build on.”
She noted a current pipeline of 12,000 megawatts of renewable capacity and said that, while this is good for emissions reduction, it is not necessarily good for grid stability and the NEM needs “a policy to ensure we have dispatchable power.”
None of the three most populous States have more than 14 per cent renewables in their electricity mix according to a new report from the Climate Council.
The estimates, which include hydro power, find Victoria had 13.6 per cent renewable energy in its 2017 power production with New South Wales at 12.6 per cent and Queensland at 7.1 per cent. These three States account for some 85 per cent of NEM generation and are home to 850,000 business accountholders, 7.5 million households and 19.6 million Australians.
Tasmania, where most generation is hydro-electric, had 87.4 per cent renewables and South Australia 43.4 per cent.
The report says SA currently has 1,831 megawatts of wind and solar power followed by NSW with 1,759 MW and Victoria with 1,634 MW. Queensland has 377 MW of wind and solar.
Australians reliant on media coverage of energy issues may be surprised, if not shocked, to learn that wind and solar power are nowhere near the nation’s lead suppliers of renewables.
Data published by the federal Department of Environment & Energy shows that, for 2016-17 (the latest official statistics available), in terms of overall energy consumption, the lead is held by biomass with 205.4 petajoules (54.2 per cent) while hydro (58.6 PJ), wind (45.3PJ) and all forms of solar power (44.8 PJ) contribute 39.4 per cent. The balance is made up of biogas (four per cent) and biofuels (1.9 per cent).
One recommendation by the Australian Competition & Consumer Commission in its package of measures to depress power prices will not be undertaken by the Morrison government: Energy Minister Angus Taylor says that there is “no plan” to change the small-scale renewable energy scheme that underpins residential and small business take-up of rooftop solar power.
“The SRES and the RET are around to 2030,” Taylor promised in a newspaper interview.
The ACCC recommended that the SRES be abolished in 2021.
It is currently estimated that 7,500 MW of rooftop capacity has been installed across Australia – with 1,000 MW being taken up so far in 2018. The Clean Energy Council says PV investors have spent $10 billion on installations in the past five years.
The Australian Energy Council, representing gentailers, has seized on a new Australian Energy Market Commission report to knock back assertions that NEM participants are gaming the market through generation rebidding and making hundreds of millions of dollars in the process.
The AMEC report was required by then Energy Minister Josh Frydenberg in mid-2018 in reaction to a think tank assertion (which drew media attention) that generators were creating an artificial scarcity of supply, gaining $825 million in late bidding in 2016 and 2017.
In October AMEC reported that there is not an issue with the rebidding provisions of the NEM – and that $214 million of the calculated $243 million rebidding effect in 2017 was attributable to actions by the government-owned generators in Queensland, mostly in last year’s summer heatwave in the State.
The commission found that the cost of “price events” caused by rebidding represented one per cent of the overall cost of energy in the NEM last year – and was unlikely to be passed through to consumers because of retailer hedge contracts.
“There is clearly no evidence of widespread misuse of the NEM’s bidding provisions to push up prices,” the AEC declares.
EnergyAustralia CEO Catherine Tanna has set out the gentailers’ ambitions for policy in an address to the Financial Review energy summit.
Today, she said, Australia gets around 70 per cent of electricity from coal-fired generation. “We want that, eventually, to be zero per cent.”
Generation nationally, she added, produces some 430 million tonnes of carbon dioxide equivalent annually. “We also want that, eventually, to be zero.”
She pointed to the Australian Energy Market Operator’s forecast that it will cost between $8 billion and $27 billion to replace retiring generation over two decades. “So the challenge,” she said, “is to cut millions of tonnes of carbon emissions, to make energy affordable while investing billions of dollars and to keep the lights on as the equivalent of 14 Hazelwood power stations are withdrawn from the energy system.”
Tanna said the east coast power market today has “all the existing and planned capacity the system needs.” The NEM has around 50,000 MW of installed capacity versus average demand of 22,000 MW. “Yet more than 37,000 MW of renewable generation is proposed beyond the 11,300 MW already built or committed.”
She declared the task for the next decade is not building more generation “but getting it all to work seamlessly – what we lack is a framework to guide emissions reductions and to make the grid stable.”
Tanna offered five points as “the key to getting energy back on track.” Drop the “big stick” rhetoric. Commit to a truly national energy framework – “federal and State governments on the same page.” Provide the right signals for industry to build the needed energy assets. Lift the State government bans and go-slows on gas development. And “trust the experts to do their jobs.”
In 2004, Origin Energy CEO Frank Calabria pointed out to the Financial Review summit, Australia ranked fourth among OECD countries for lowest energy prices – in 2018 the three biggest supply States and South Australia ranked alongside Germany, Denmark, Spain and Portugal as economies with the highest energy costs.
“Can we get to competitive costs again?” he asked conference attendees. “While I acknowledge the (federal) government’s message to industry to get on with it and stop waiting for policy certainty, this doesn’t negate the need for co-ordinated policy to guide the major transition now under way.”
Calabria said the NEM doesn’t have a policy promoting existing firm generation staying in the market or new investment in such capacity.
The ghost of the 2016 State-wide power blackout continues to haunt South Australia’s energy debate.
The former Labor government’s rush to obtain diesel generation ahead of the 2016-17 summer (and the State election it subsequently lost) will come at a cost of $610 million over their lives, including maintenance and operation, according to an independent report to the Marshall Coalition administration. Taking in to account the “world’s biggest battery” built by Tesla, the Labor outlay is now $815 million versus its claim at the time of $550 million.
The Coalition government will need to find $227 million in November to buy the diesel generators under a contract signed by its predecessors, a deal Energy Minister Dan van Holst Pellekaan describes as “an expensive election stunt.” It has announced it plans to find private sector operators for the units, a move attacked by the Labor opposition.
The Australian Energy Regulator has launched a study in to how much consumers value a reliable electricity supply.
AER chair Paula Conboy says determining this will help avoid expensive overbuilds of the supply system where they are not required while ensuring there is reliable power when and where consumers want it most.
“We know affordability and reliability are key issues for households and businesses,” she says, “and VCR will provide a critical input to help balance these requirements.”
Having done my share of appearing before parliamentary committees over 25 years (albeit a long time ago when I managed industry associations), I am well aware of how exasperating the experience can be for both those giving evidence and for MPs whose capacity to understand complex energy issues can be limited. (Read any Hansard about Senate committee meeting relating to electricity for an illustration of the point.)
So I smiled wryly in mid-October when reading a rather typically sniping Sydney Morning Herald report about the Independent Pricing & Regulatory Tribunal talking to a New South Wales parliamentary committee about power prices.
“It’s like you’re on another planet,” the IPART people were reported as being told by a Labor MP.
At issue was the level of change in these prices for householders and small businesses in the State – and how such change can be measured differently depending on time frames.
I won’t take up time and space dealing with the noise at the hearing that was grist to the Herald’s mill. Rather, here is what I notice IPART saying in its report:
First competition is at work in the NSW market despite the “big three” holding such a substantial share. “There is evidence of rivalry between (24) energy retailers who are offering a large range of prices and a growing range of products and services.”
Second, the outlook for 2018-19 bills compared with 2017-18 is “steady” and continues to reflect the underlying costs of supply.
(With respect to which IPART points out: “Since 2013-14, network costs for electricity retailers – which make up around 40 per cent of the average bill – have fallen by around 23 per cent. However, these cost reductions have been offset by significantly higher wholesale costs in 2016 and 2017. These costs rose due to increasing gas costs and a reduction in the supply of wholesale electricity following the closure of Hazelwood power station.” IPART says these costs for retailers shot up 30 per cent last year as generation market prices per megawatt hour more than doubled.)
Third, mass market prices have risen “significantly” over the longer term and the bulk of such increases happened when end-user bills were still regulated.
Fourth, when you take inflation in to account, you get different results.
Fifth, there is the somewhat messy business of how charges are made up.
Substantial falls in wholesale prices expected in 2018-19 decrease the cost of supply by about nine per cent.
However, “green costs,” which make up about $1 in $20 of an overall bill, are expected to be 50 per cent higher in 2018-19 – because of the large increase in solar PV installations in 2016-17, which feed in to retailers’ costs because they are required they are required to buy small-scale renewable energy certificates.
IPART notes that average bills for mass market customers have fallen in “real” terms – that is, adjusted for inflation – since deregulation but the most expensive offers from retailers are now around 15 to 17 per cent higher than they were in mid-2014. This, needless to say, is where your common or garden consumer (or MP) starts to feel just a little irritable even though a large number of NSW users (perhaps two thirds on IPART’s reckoning) are not feeling this pinch.
The tribunal makes the point that the most effective way of limiting energy price increases in the future is to provide conditions encouraging new investment in the wholesale market to increase supply and replace existing generation, as they reach the end of their asset lives. “This means providing a stable and predictable investment environment.”
Another non-trivial aspect of IPART’s advice is this: “One retailer reported that the cost to service customers resulting from regulatory intervention is increasing more than the cost to acquire customers.”
One last thing, the average retail price of electricity in the NEM as a whole over 10 years to 2017-18 for households rose 51 per cent in inflation-adjusted terms – but the average bill rose 35 per cent, reflecting lower consumption (partly efficiency, partly PVs). The former gets publicity (although nowhere near as much as the nominal outcome, a doubling) but not the latter.
The point about all this is that the picture (and not just in NSW) is not black and white and politicians really are best advised to rely on expert advice rather than going along on the populist ride – or perhaps, to put it another way, to come down to Earth.
Just don’t hold your breath waiting for this to happen any time soon.
Keith Orchison
29 October 2018