Issue 211, November 2022
Developments on the home energy front in October really underscored the messed-up state of policies and the market places despite the rhetoric of politicians in government. Grandiose declarations vied for media attention with grim warnings about consumer costs, not least in the latest federal Budget. Stand by for more of the same flourishes and alarms at and around the November CoP meeting on global climate policy as the northern hemisphere heads in to a winter of discomfort and discontent. An Australian newspaper headline in mid-October perhaps summed things up: “A white-knuckle ride to net zero,” pointing out that, here, government announcements, corporate concern among suppliers and consumer angst, not least among manufacturers, are bringing home that the “transition” is not an ambition on a distant horizon but increasingly the source of current challenges. This was reinforced post-Budget by the Prime Minister saying “strong consideration” is being given to market intervention to deal with energy prices while also asserting that the long-term solution to the issue is “getting more renewables in to the market.”
“(There is) a clear divide between the optimists and pessimists on whether Australia can deliver the clean energy revolution without the lights going out and rapidly escalating energy bills crippling businesses and households” – Australian Financial Review journalist Mark Ludlow.
“There is a growing sense of urgency for more clarity about energy transition policy” – EnergyAustralia managing director Mark Collette.
“Australia needs to build two to three times as much electricity infrastructure as it built in the last three decades over the course of just seven years” – Collette.
“We have a huge amount of work to do to seize (the climate change action) opportunities. We have 86 months to 2030 – that’s not long for this massive transformation” – federal Energy Minister Chris Bowen.
“We need to focus on how thermal generation can work alongside batteries, gas, hydro, hydrogen and other emerging technologies to keep prices down, keep the lights on and decarbonise the economy as we move ever closer to the net-zero grid” – Anna Collyer, chair, Australian Energy Market Commission and Energy Security Board.
“In the midst of an energy crisis, why wouldn’t we consider all technologies?” – federal Opposition energy spokesman Ted O’Brien, reacting to the Prime Minister mocking his call for a “national conversation” on opening Australia to new nuclear technology.
“The market is really in trouble” – Alinta Energy CEO Jeff Dimery, warning retail power prices could jump by up to 35 per cent in 2023, adding he didn’t see how prices wouldn’t be higher through the “transition,” given the level of network investment required.
"Changes in wholesale costs will depend on the timing and impact of (NEM) coal plant closures, international coal prices, new renewables coming online [and] additional long-term storage and transmission investment," the Australian Energy Regulator warns in its new market review. “Higher network costs are forecast to put upward pressure on retail prices in all jurisdictions."
“The very same people in politics, led by the Greens, who want gas extinguished from the energy mix are simultaneously demanding the tax windfalls from (gas company) profits be used to fund their ever-growing demands for long-term structural spending on social services” – AFR political editor Phillip Coorey.
Energy analysts Rystad Energy declare that one of the “big themes” for Australia in 2022 is intentions to accelerate the departure of coal-fired generation from the east coast power market.
In a LinkedIn post, renewable energy analyst David Dixon argues that announcements by State governments as well as by major gentailers Origin Energy and AGL mean that only 3,100 megawatts of the NEM’s coal-fired capacity will be operational in 2036.
According to market operator data, 18,260 MW of coal generation was available in the east coast system at the end of the first quarter of this year.
While the mooted exit of coal generation is a popular/populist topic, others would point to another 2022 “big theme,” that of energy cost – with late October’s federal budget reinforcing gentailer warnings on consumer prices. The Treasury papers foreshadow increases in power prices in 2023-24 on top of this year’s spikes.
And Treasurer Jim Chalmers has raised the “big stick” line of the Gillard government years by warning in his Budget address that the price situation will force consideration of a “broader suite of regulatory intervention” with more funds allocated for the Australian Energy Regulator.
This has drawn a warning from Santos CEO Kevin Gallagher, who told journalists after the budget that government intervention and price controls will scare off investors and lead Australia in the wrong direction, towards subsidies and unsustainable debt.
The Australian Energy Regulator is warning that the number of east coast households struggling to cope with power bills is going to be bigger towards mid-decade.
AER chair Clare Savage says she expects NEM energy debt to rise and a greater number of customers to be experiencing difficulty paying off their debts to retailers.
A new report by the regulator says there are more than 76,000 customers on electricity hardship programs and the average debt on entering them is almost $1,700. The report also finds that 2.7 per cent of residential customers, or 170,547 households, had their electricity bills unpaid after 90 days when the survey was taken earlier this year.
Savage says that she is concerned low-income customers will bear higher costs as the “transition” to net zero emissions accelerates in the market. “Around a third of Australians rent their homes and are more likely to live in houses with poor energy efficiency.”
Government support is needed in the sector to enable such users to keep their bills down, she says. “There is a need to think about how we do more to protect low-income consumers. This is an essential service, living without energy is not an option. So, we need to think about ways to better protect them.”
Lynne Gallagher, CEO of Energy Consumers Australia, says the “same old system” for helping households and small businesses will not be sufficient in years ahead.
“When we’re looking at the kind of price outlook for both gas and electricity, when we are thinking about $37 billion of investment that is going to be made in transmission and replacement of assets in the distribution network, and we think about all the firming and storage that has to be built, we’re going to be facing higher prices for a while,” she said in a newspaper interview.
“We need people to be using less when they can, we need them to be using it when it’s cheap and our housing stock is not ready.”
Gallagher is calling for governments to provide leadership in making houses, especially rented homes, “which are generally the least efficient and have the highest bills,” more energy efficient.
The decision by Victoria’s Labor government, which is facing an election on the last Saturday of November, to renationalize part of the State power system – through disinterring the State Electricity Commission – has been attacked by the lobby group for major energy suppliers.
Sarah McNamara, CEO of the Australian Energy Council, has declared the move “a retrograde step,” warning that growing interventions in power supply by governments are “crowding out” private companies and destabilizing their operations in the east coast market.
Steps like relaunching the SECV, abandoned by the Kennett government in the late 1990s in a major step to bring investors in to the newly-created NEM, “will punish company shareholders who have invested in the transition in good faith,” she says.
Green lobbyists, on the other hand, are pleased by the Andrews government plan. The Clean Energy Council says the announcement is sending a strong message to investors that the Victorian government is “determined to deploy large amounts of new renewable energy generation and manage the phase-out of coal-fired generation”.
Grattan Institute energy program director Tony Wood says governments’ interventions in the NEM are going to grow. The Victorian move is a next step in a recent sequence of governments’ actions, he adds – “who knows where it is going to end up?”
In a newspaper commentary, Wood declares “the model of a NEM supported by clear, stable policy with strong and consistent regulation has broken.”
It has been compromised, he adds, by “consistent failure of governments and industry to agree on the definition of the problem, let alone on the solution options.”
Andrews’ announcement includes a decision that Loy Yang B power station will close in 2035, a decade earlier than planned by its owners, Alinta Energy, who are “shocked” by the step.
In an editorial, the Australian Financial Review has attacked the “populist intervention” by the Andrews government as “contributing to the unravelling of the National Electricity Market, one of the signature microeconomic reforms of the 1990s that aimed to harness the market and private capital to invest across east and central state borders to deliver power at lowest cost,” pointing also to the decision earlier by Queensland’s Labor government to “fund half of a $62 billion power investment based on pumped hydro and shut its publicly-owned coal-fired power by 2035.”
The paper adds: “The Andrews’ plan will not only drive out coal and gas, it will likely drive out private sector investment in renewables, with the sector reluctant to compete against not just a new State-owned gorilla but also State-favored industry super funds.”
Building sufficient solar and wind energy for the “transition” of the NEM is not a bottleneck in the pursuit of net zero, according to the Grattan Institute. The major stumbling block, it says, is adding adequate transmission. “The grid isn’t fit for purpose.”
In a commentary for The Conversation website, energy program director Tony Wood says “building the unsexy but crucial part” for pursuing clean energy lies in transmission and storage – the costs of which “will tend to offset the low cost of renewable generation.”
Wood adds that rural communities “are almost guaranteed to push back against large new power lines.”
According to the Australian Energy Market Operator, more than 10,000 kilometres of new lines need to be constructed on the east coast to deliver the 2050 decarbonization target for power supply.
A Victorian advocacy group, the Energy Grid Alliance, says the core of the problem faced by transmission developers is that rural communities “know the regulatory process is flawed and the framework isn’t right.” The organisation says current practice “focusses on finding the lowest cost corridors for transmission lines, failing to take in to account environmental and socio-economic impacts from the outset.”
It argues “regulators (need to) factor in social, economic, emission and environmental impacts – rather than solely focusing on net benefits and least-cost to all those who produce, consume and transport electricity.”
The Andrews government has followed up its surprise decision to bring back the SECV by announcing that it has major plans for engagement with offshore wind farm development.
Premier Daniel Andrews says that, after the State election, he will set up an Offshore Wind Energy Victoria agency, work to redevelop the port of Hastings as a manufacturing hub for the technology and build transmission points for farms on the Gippsland coast and at Portland. Developers “will be forced to connect underground to these points.”
The government also intends to establish another agency, VicGrid, in its environment department “to lead the development of offshore wind transmission infrastructure.”
The focus will be on up to 2,500 megawatts of wind turbines being proposed off the Gippsland coast and at sea near Portland by 2032. Longer-term, the government aims to facilitate up to 9,000 megawatts of wind capacity off the Victorian coast by the 2040s.
Reaction to a big deal on electricity infrastructure between the federal, Victorian and Tasmanian governments in mid-October epitomises the ongoing fractured state of the energy debate.
After years of to-ing and fro-ing, the trio announced agreement on financing the second transmission line across Bass Strait, Marinus Link, budgetted to cost $3.8 billion, with the governments jointly contributing 20 per cent of the outlay. The balance will be a concessional loan from the Albanese government’s Rewiring the Nation program via the Clean Energy Finance Corporation. A final investment decision on the project won’t be made until 2024. It is then scheduled to be completed by 2031.
The development will involve two 750 megawatt cables between northern Tasmania and the Latrobe Valley in Victoria.
Federal Energy Minister Chris Bowen declared: “This is the biggest announcement of Commonwealth investment in energy generation and transmission since the original Snowy Mountain scheme back in the 1940s.” In a joint statement, the federal and Tasmanian governments added that the link will enable development of “one of the world’s best wind energy resources” in the State’s north-west.
The Clean Energy Council said Marinus is “a crucial piece of the jigsaw” to deliver a lower cost, more reliable clean power system.
However former federal Greens leader Christine Milne attacked the project as “an economic and ecological disaster” that needs to be propped up by governments and will “plunge Tasmania in to debt for virtually no benefit to Tasmanians.”
Meanwhile, the Australian Industry Group both welcomed aspects of the Marinus project and complained that “what remains unsolved, by any level of government, is the immediate crisis of energy affordability.”
AiG said: “While these announcements will help shore up the security and affordability of the energy system of the 2030s, they do not change the dire situation confronting energy users right now.”
One of the certainties of Australia’s long-running row over energy and the environment is that, when headlines are not being grabbed by activists demanding an end to gas production they are featuring large businesses, politicians and trade union demanding the federal government intervene to ensure stability of domestic supply and lower prices for large users and/or impose higher taxes on LNG exporters, who are playing a critical role in meeting global needs in the wake of the Ukraine war.
October featured both ends of the spectrum and many points in between, with federal Industry Minister Ed Husic declaiming that the gas industry “must decide whether it is on team Australia or team greed,” blaming the industry for selling their product overseas at “phenomenal prices” and adding pressure to domestic manufacturers and households.
At the same time, federal Resources Minister Madeleine King was declaring Australian gas was essential in the global efforts to transition to a net zero world. “Natural gas and storage technologies are key to supporting the security and reliability of our electricity grid by firming up the increasing share of renewable generation in the national electricity market,” she adds.
King says she does not need to pull the so-called "gas trigger" and restrict exports after producers agreed to provide additional supplies to avoid a shortfall on the east coast next year. Meanwhile her government is under trade union pressure to insert a “price trigger” in the agreement, forcing producers to divert more supply to the southern market when a price point is reached.
The Energy Users Association of Australia says “ensuring sufficient gas supply has never really been in question – but the elephant in the room has been, and will continue to be, price.”
EUAA chief executive Andrew Richards told journalists in late October that “it is going to be quite hard to see some of the energy-intensive businesses surviving” in Victoria when faced with high gas bills and the cost of the State government’s plan to transition to 95 per cent renewables locally within 10 years.
He added; “Government is pushing this narrative that bills will go down over the next five years but it is not realistic. We need to know who pays (for the net zero transition) and how much it’s going to cost.”
The Australian Industry Group says east coast industry faces “back-breaking prices for the foreseeable future.” CEO Innes Willox argues that “as they roll off existing gas contracts, Australian manufacturers of bricks, chemicals, plastics, paper, aluminium, steel, fertilizers, cosmetics, gloves and masks will increasingly face crippling energy bills they will have to pass onto consumers.”
Ben Eade, CEO of Manufacturers Australia, says “If we are serious about solving this east coast gas problem, we are going to have to see further intervention and particularly intervention that addresses price.”
The Australian Petroleum Production & Exploration Association, arguing that more regulatory intervention won’t deliver more gas, points out that corporate income tax, petroleum resource rent tax, State royalties and excise payments paid by the LNG sector will hit $13.8 billion in 2022-23, up from $4.8 billion last financial year.
“Ongoing interventions put Australia’s reputation as a secure, stable and reliable supplier of LNG at risk and sends worrying signals to both domestic and international investors and major trading partners,” APPEA says.
The West Australian government is giving its electricity gentailer Synergy permission to import coal from Indonesia after the company shut down Collie power station because of a local shortage of supply – brought about by the only mine in the State being forced in to receivership by lenders.
Synergy and the government earlier announced plans to close Collie in 2027 and WA’s other coal-burning generator, Muja, in 2029 – but the mine problems suddenly raised the prospect of more power shortages this summer during peak demand periods. Last December some 107,000 homes in the south-west system were without electricity from Christmas eve for three days during a record heatwave.
The government has also decided to idle Collie power station for three months to January to conserve fuel until the hottest months of the summer.
October’s deluge of declarations, demands and policy developments was hard enough for people deeply immersed in the energy business to handle; it surely washed over the community at large except for the bits that made it to the TV news and the more emotive language, of which there was a fair bit.
Relatively few in the community are readers of the Australian Financial Review, which some claim to being the premier national media overseer of news and analysis about energy issues and politics – and which filled its boots in October with contributions to its annual conference in Sydney on climate and energy.
The paper’s editor-in-chief, Michael Stutchbury, commented in his weekly email to subscribers that the conference highlighted “Australia’s new reality – the accelerating decarbonisation of the nation’s fossil-fuel-based prosperity is colliding with a global energy crisis.”
This led he and his editors to headline an eight-page wrap-up of the conference papers and discussions “A rough ride to clean power.” In Stutchbury’s view, the “transition” now means: faster shutdowns of the coal-fired electricity generators that helped build modern Australia; a massive investment wave in renewable generation and transmission; a recurring risk of electricity grid blackouts; and higher, rather than lower, power costs. He rightly added that the big news out of the AFR event was the warning from Jeff Dimery (CEO of Alinta Energy) that next year will see at least a 35 per cent jump in retail electricity prices on the back of the current record high wholesale prices in the NEM.
As he points out, this was not disputed by the CEOs of other big gentailer companies present – and it will come on top of a rise of 18 per cent in household tariffs imposed on 1 July this year.
This forecast came as a media surprise on the day, but it was underpinned within a fortnight by the federal Budget’s energy outlook
Dimery’s prediction followed the Australian Energy Regulator’s “State of the Energy Market” report, which also foreshadowed higher retail power bills “in coming years,” underlining the aspect that hardly draws any media attention in talking about “Powering the Nation” stuff. "High inflation outcomes will flow through to network costs, and we are seeing evidence of increasing interest rates that may translate to higher required costs for network capital-raising. In combination, they will pose continued pressures on electricity prices,” said the regulator.
Federal Treasurer Jim Chalmers admitted at the conference that “electricity prices are going up much faster than we would like to see” – which may be the lead candidate for the political understatement of the year. At least so far.
What has been not sinking in – whether in the popular media or political debate – (although the Budget reporting may change this) is that the policies and government announcements about huge capital outlays on energy infrastructure, especially variable renewables and transmission, cannot possibly lead to actual realization of the promises people like Prime Minister Albanese and State leaders have been making of lower energy bills down this decade and in to the next.
An unusually cautionary review of the situation by the ABC in mid-October – unusual because the commission vies with The Guardian newspaper as the chief media booster of clean and green power – followed up Dimery’s talk and warned that “renewable energy will provide cheaper electricity bills in the long-run, but the up-front costs involved in transitioning the network to renewables will be large and, since things have been left so late, the disorderly nature of the transition will likely make it more expensive than it would have been if the transition had been planned.”
What this doesn’t say is that the total system costs of a VRE-heavy NEM, when subject to proper professional evaluation, mean ongoing wallet pain for consumers.
As Stutchbury declares, the reality of Australia’s low carbon transition is higher, not lower, energy prices – at least, I’d add, in its present form, with the demonization of gas and the ongoing (and, in my view, essentially mindless) refusal to make it possible for new nuclear technology to be at least open to consideration for future power investment.
And, as one of Stutchbury’s reporters observed in the paper, the AFR’s conference “exposed a clear divide between the optimists and the pessimists on whether Australia can deliver this clean energy revolution without the lights going out and rapidly escalating energy bills crippling business and households.”
The reporter added: “Australia needs to expand grid-scale wind and solar from 16 gigawatts now to 44 gigawatts by 2030. Storage capacity in the form of batteries, pumped hydro, and virtual power plants needs to increase from 2 gigawatts to 15 gigawatts by the end of the decade. On top of this is the requirement to ensure there is enough firming capacity – that is energy that can be used to keep the lights on when the wind is not blowing and the sun is not shining.”
Or, I point out, some clear-eyed attention can be given to a “Plan B” if all this can’t be delivered on time and without worrisome cost impacts – a plan that the chair of the Energy Security Board astoundingly declared at the AFR conference does not exist and, by the sound of things, has not been given any (or more than cursory) thought.
Yikes.
Keith Orchison
26 October 2022