Issue 114 October 2014
Welcome to the first issue of the last quarter of 2014, a year that promised a lot in energy policy and has delivered much less than most stakeholders desired, writes Keith Orchison. This newsletter canvasses the current high-level issues under discussion for both electricity and gas.
Stakeholders are scratching their heads over just what game plan for gas supply is being pursued by the Baird government in New South Wales.
In an environment where the State government and suppliers, major users and the federal government can’t even agrees on when NSW faces a winter shortfall – the former says 2018 and the rest say 2016 – and the Abbott government has used the energy green paper, belatedly launched in mid-September, to warn again against planning and regulatory barriers leading to “near-term” east coast shortages and rising prices, the Australian Petroleum Production & Exploration Association says it is “extra-ordinary” for Baird’s administration to extend its freeze on coal seam gas exploration.
With the federal government specifically flagging the urgent need for an uplift in east coast gas development, a call backed by manufacturers and producers, the Baird administration, says APPEA, is “sending a strong message” that it is making policy decisions “independent of scientific consideration.”
Federal Industry Minister Ian Macfarlane says it is “imperative” NSW get a move on with development of gas supply within its borders. “The window in which NSW can do this is closing quickly. The longer NSW waits to advance its local gas industry, the more reliant the State will be on higher-priced gas from other States for a long period of time.”
Macfarlane says NSW “faces a gas supply crunch” in 2016-17.
He added that NSW is “staring at a $10 per gigajoule future,” double present long-term contract gas prices.
NSW Energy Minister Anthony Roberts, who has extended the freeze on CSG licenses until next September, well after the March State election, is being accused of “double standards” because he has also just opened uranium reserves to investment.
Santos Limited executive James Baulderstone, whose role includes overseeing the proposed Pilliga CSG development near Narrabri that could deliver half the State’s gas needs, is warning that there could be “traumatic consequences” for the NSW economy and jobs if new supplies are not available before 2016-17.
The Baird government sent a senior public servant to the Eastern Australia’s Energy Market Outlook conference in Sydney in late September to outline its perspective.
Deputy Secretary Kylie Hargreaves of the State Trade & Investment Department acknowledged that a “strong NSW gas industry will guarantee lower energy prices and a high standard of living,” saying that, without sufficient supply, “everyone will rely on electricity, forcing increased demand, upgraded infrastructure and higher energy costs.”
Noting that the Australian Energy Market Operator has forecast “a potential gas shortfall of up to 30 days” in 2018 unless supply is increased, Hargreaves said the Narrabri and Gloucester (AGL Energy) CSG projects plus supply from the Moomba pipeline from South Australia “may reduce the forecast shortfall.”
Only days before Roberts’ “freeze” announcement, she said the government aimed to encourage exploration and development of local gas resources while achieving a balance between community, economic and environmental needs.
Hargreaves also noted that the State government is looking at options, along with the Northern Territory government, for a pipeline from the NT to the east coast.
Richard Cottee, CEO of Central Petroleum and a key figure in the development of the CSG industry in Queensland, says the Territory has resources of “trillions of cubic feet” and that the mooted gas pipeline could “transform the NT industry.”
He says the pipeline could be built for about $1 billion.
The Productivity Commission has embarked on an examination of “policy issues in the gas exploration, production and transmission sectors that are important to the efficient functioning of the gas market.”
It plans to release a research paper in March next year.
The review will focus in particular on the implications of linkage to global markets for gas market participants, the effects of economic regulation on use and investment in pipelines and the potential costs and benefits of policies that affect the timing and location of gas exploration and production.
Prospects of an agreement on the renewable energy target between the Abbott government and the federal opposition led by Bill Shorten remain up in the air at the end of September.
The government’s decision on its reaction to the Warburton panel’s review of the measure is expected in October.
Industry Minister Ian Macfarlane has written to opposition environment spokesman Mark Butler seeking to open talks on the RET, but Shorten’s public comments so far have tended to the rhetorical rather than a resolution of the debate.
“Labor is not for turning” on the issue, Shorten told a political rally in Sydney.
While the politicians wrangle, AGL Energy chairman Jeremy Maycock has declared the RET status quo “unsustainable” and urged policymakers to consider “how the RET becomes ‘transitional’ rather than ‘additional’ policy.”
Maycock suggests a new approach could see an incentive for taking a unit of high-emitting generation from the market for each unit of renewable energy added.
“Perhaps (policy) could utilize a similar but reverse RET-style obligation on (retailers) to contract with generators to facilitate permanent closure,” he says.
Meanwhile South Australian Premier Jay Weatherill has announced that his State will target 50 per cent renewable energy by 2025 if the federal RET remains unchanged.
Weatherill claims the State has achieved a 33 per cent target six years ahead of its 2020 goal. He believes the new aim will deliver $10 billion in SA investment by 2025, claiming $4.5 billion has been spent to date.
The Energy Supply Association says that emissions from power generation have fallen to the lowest point this century.
ESAA, reacting to the new quarterly update of the National Greenhouse Gas Inventory, notes that emissions dropped by 3.9 per cent in the year to March 2014 compared with the same period 12 months earlier.
The association says the main driver of the fall is the decline in demand for electricity, which has been falling at 2.5 per cent a year since consumption peaked in 2008.
“This fall is due to lower demand from industrial facilities, improved energy efficiency and reduced household consumption as a result of rising prices.”
ESAA points out that the closure of the Point Henry smelter in Victoria in August will add to falling demand. The smelter consumed about 1.6 per cent of electricity used on the east coast.
ESAA chief executive Matthew Warren says that, if emissions from generation continue their present trend, the electricity sector’s contribution will be more than five per cent below 2000 levels by 2015-16.
“There is every possibility,” he adds, “that emissions from the electricity sector peaked in 2008 and will never return to these levels again.”
The Energy Networks Association has launched a campaign against continuing subsidies under the federal Small Scale Renewable Energy Scheme on the grounds that they are “distortionary” and impair the ability of gas to compete as a “fuel of choice” for consumers.
ENA chief executive John Bradley says recent debate about the RET has focused on impacts on electricity users or the renewables sector “but there is a hidden cost for gas consumers.”
Using modelling by Core Research Group, Bradley claims that the SRES subsidizes solar hot water systems by up to 30 per cent based on carbon abatement with gas systems receiving no recognition for the reductions they deliver.
“Gas hot water appliances can achieve abatement equal to or greater than appliances subsidized by the SRES,” Bradley says, “but they look comparatively more expensive to consumers.”
He adds that the measure contributes to pushing up retail gas prices by reducing the volume of the fuel consumed and causing network costs per customer to be higher.
According to the Core Research modelling, even where east coast wholesale prices double, residential and commercial gas customers will still pay less in 2034 if the solar subsidy is eliminated.
Bradley says the solar industry clearly has a big future in Australia but it should “stand on its own feet.”
It is “absurd,” he argues, for a proven technology to continue to be subsidized, calling on the federal government to either abolish the SRES or to make it technology neutral, treating all appliances equally on the basis of emissions abatement.
The draft report of the Harper panel examining Australian competition policy says there has been “significant reform” in electricity and gas but it has not been finalized and benefits have yet to be fully realized.
Competition reform in both areas has slowed, adds the panel.
For example, the delay in applying the national energy retail law by Victoria and Queensland without major derogations undermines the benefits of having a country-wide measure.
Continuing State regulation of energy bills also “perpetuates the distortion” of price signals and compromises timely investment in infrastructure.
The Harper panel supports the inclusion of Western Australia and the Northern Territory in the national electricity market, arguing that no physical connection is required for this to happen.
The draft report also strongly supports a detailed review of competition in the gas sector and wants the federal government to commit to doing so in the forthcoming energy white paper.
The panel says it sees significant benefit, as well, in a national framework being established for electricity reliability standards, pointing to the link between jurisdictional standards and recent high price increases.
However, it rejects arguments that privatization and the application of competition policy are causes of east coast power bills rising, noting that the main driver of upward pressure on retail costs has been network prices – and these largely reflect the need to upgrade and replace infrastructure.
Rather than contributing to price increases, the paper adds, competition has facilitated the opportunity in retail markets for better consumer access to lower-cost contracts. Finalization of competition reform can be expected to further mitigate future prices rises.
Published four months later than originally planned and lacking a decisive view on the future of renewable energy policy, the federal government’s green paper appears to have generated little excitement, even among its environmental critics, who, as September ended, were still taking to the streets to chant for retention of the present RET.
The Grattan Institute’s Tony Wood says the paper “provides more clear direction and coverage” than the white paper published by Labor at the end of 2012, but he criticizes it for being “tentative” about electricity market reform and “frustratingly silent” on climate change policy.
“Only one score is possible for the paper on climate change: failed to answer the question,” asserts Wood, who argues that the policy landscape is “littered with the poor outcomes of badly-designed and implemented policies and programs that confuse climate change, technology development and technology deployment in their objectives.”
Predictably, environmental groups have deplored the publication as “a replay of last century’s energy options,” with the Australian Conservation Foundation complaining that the Abbott government is interested only in “positioning Australia as little more than a quarry.”
Veteran Canberra political commentator Laura Tingle of the “Australian Financial Review” argues that, regardless of Australia’s international position as an energy supplier, domestic arrangements are “in a state of disarray” and the green paper does too little to show how they can be improved.
The Energy Supply Association, on the other hand, says the green paper highlights a number of important challenges faced by the energy supply industry and its stakeholders.
It urges the federal government to use the report as a springboard for addressing crucial electricity and gas market reforms.
ESAA chief executive Matthew Warren says the challenges include retail deregulation, better electricity pricing, shifting demand trends, privatization, new technologies, a framework for reliability standards and supporting greater gas supply and gas market development.
Warren points out that these issues have been on the national policy radar since the 2012 energy white paper and this underscores the complexity of the challenge involved, especially when the States and Territories are also involved in outcome delivery.
The Australian Industry Group comments that the green paper throws up a lot of work for all governments and it urges them to get going immediately to deliver reliable and affordable energy.
Vital reform of the gas market will only occur if the State governments are on board, AiG adds. “Blanket bans and moratoriums that are stifling unconventional gas production should be replaced by credible regulation.”
The Australian Chamber of Commerce & Industry sees the green paper’s focus on market reforms and greater private sector engagement in electricity supply as “positive.”
It points out that 74 per cent of electricity network assets and a third of generation are still government-owned on the east coast.
The Business Council says Australia has had years of missteps on energy policy resulting in prices being driven up.
“There is confusion between energy and climate policies,” it argues, “as well as inaction and a lack of political leadership in bringing on more gas supplies, especially on the east coast.”
The BCA wants a complete rethink of planning and approval processes affecting energy activity and calls on governments to “close the door on ad hoc, incoherent approaches that hurt national competitiveness.”
The Minerals Council says that the green paper is “an unambiguous endorsement” of the future for Australian coal and uranium, “defying the fictions of activists to re-affirm that they will be a mainstay of the global energy mix for decades to come.”
The Abbott government has set 4 November as the deadline for submissions to it on the green paper and is looking to publish a white paper in the first half of next year.
It is simultaneously working on the RET review, awaiting the Harper panel report on competition policy and launching a review of Australia’s national target for carbon emissions reductions.
The Energy Networks Association has welcomed the federal government’s green paper as adding to the momentum for electricity tariff reform, leading to fundamental changes in the way power is used and costed.
The association says current tariff structures result in unfair cross-subsidies between consumers of up to $700 a year for air-conditioning users and $120 a year for households that have installed solar power.
The Council of Australian Governments’ Energy Council is expected to consider tariff reform further when it meets in December and ENA says the green paper rightly recognizes that both tariff reform and efficient use of smart meters are needed to deliver better outcomes for consumers.
United Energy chief executive Hugh Gleeson told the energy market outlook conference in Sydney that governments must not delay pursuit of tariff reform, arguing that the “free ride” given many consumers, who don’t pay their full share of the costs of investment in networks, will drive further inefficient infrastructure spending.
Gleeson called on governments to implement reform in three to five years rather than up to 10 years as currently contemplated.
In a speech in Melbourne in which he launched the green paper, Industry Minister Ian Macfarlane provided a snapshot of Australia’s energy business.
Coal still accounts for the majority of overseas energy sales, he said, bringing in $40 billion in revenue in 2013-14 – while uranium earned another $500 million and LNG trade reached $16.4 billion.
Substantial growth can be expected in LNG exports when the Gladstone trains are commissioned, he pointed out, and uranium revenue will rise when exports to India start under the recently-formalized agreement.
Domestically, said Macfarlane, energy industries account for nearly seven per cent of the national economy, led by oil and gas extraction, which makes up $32.7 billion in gross value added, and by coal, which contributes $30.9 billion.
Australian households and businesses have become “increasingly energy savvy,” he added, noting that the green paper has been prepared in an environment where consumers are better informed and more engaged than ever before.
For larger businesses, he said, every dollar invested in energy efficiency upgrades and practices over the past five years has delivered almost $4 in cost savings.
Macfarlane said the green paper has four key themes: (1) attracting investment, (2) placing downward pressure on electricity prices, (3) promoting gas supply and domestic market development, and (4) providing diverse energy options and making the best use of Australia’s energy resources.
Meanwhile the Bureau of Resources & Energy Economics, in a new review, projects that coal will add $53 billion to national income in 2018-19. It argues that coal will remain a primary source of electricity generation worldwide and fossil fuels will be the “engine of growth” in continuing Asian development.
While the green paper is “agnostic” on electricity technology, according to Ian Macfarlane, the federal government has no intention of leading a new debate on nuclear energy.
“It has always been the case,” Macfarlane says, “that, in order for nuclear power to be considered a viable domestic energy source, it must have bipartisan political support and widespread community acceptance.”
“While the framework of the green paper is very clearly about maximizing our natural resources – and uranium is a resource we have in abundance – the fact remains that community acceptance for nuclear power has been undermined by the Fukushima incident.”
Prior to Fukushima, Macfarlane says, support for nuclear energy use in Australia ran at about 50 per cent. “Now,” he argues, “While I haven’t seen any comprehensive polling, I suspect this sentiment has been eroded.”
In a radio interview, he added: “We are blessed in Australia with a broad set of energy resources, not only in terms of coal and gas but also renewable energy – and renewable energy will grow as part of the energy mix. So there is no need to have a debate in regard to nuclear energy in Australia; we should focus on the opportunities nuclear energy presents in other countries and build our uranium industry to take advantage of this.”
Buried towards the back of the 94-page energy green paper are two pages on the timeline of reform activity in the electricity and gas sectors stretching back to 1992.
They serve to remind stakeholders that we are beyond the 20th anniversary of these endeavors and are a long way from completing the job.
So did we set the bar too high in 1994 when the Council of Australian Governments embraced the Hilmer report and launched us on this road?
Surely not, but the state we are now in does not allow for a large amount of self-congratulation.
What we set out to do in the case of electricity supply is encapsulated in the National Electricity Objective, legislated in 1996.
It commits all Australian jurisdictions to “promote efficient investment in, and efficient operation and use of, electricity services for the long-term interests of consumers with respect to price, quality, safety, reliability and security of supply.”
As the Harper panel on Australian competition policy – the “son of Hilmer” inquiry – says in its draft report, just released, the reforms have not been finalized and the benefits have yet to be fully recognized.
Certainly, the Harper report qualifies this by stating that there has been “significant progress.”
It declares energy reform “a success” even though reform has “slowed.”
It also calls on the jurisdictions to finalize the reform agenda.
Skip from here to the maelstrom that is the public debate on energy today and it is hard not to feel that Harper and his panel are being a shade too polite – while the green paper, delayed in publication by four months ahead of a white paper that now won’t emerge until sometime in 2015, does not crackle with a Kennedy-esque intent of getting the job done.
The best description of what should be pursued can be found in one of the submissions to the green paper process by the Australian Nuclear Science & Technology Organisation.
“Australia,” ANSTO states, “needs an adequate, reliable and affordable supply of energy that addresses environmental impact and public health and safety concerns in order to support the functioning of the economy and social development. Decisions should be made on the basis of technological, economic and environmental evidence from the perspective of technological neutrality.”
Look around; how far we are from living up to that recipe in an area that is widely acknowledged as being fundamentally important to the way we live and work.
It is not that the community or the body politic, and especially those elected to govern, do not understand what is required to achieve our ambitions.
The New South Wales government, a model of how not to manage an issue in its dealings with the State’s gas needs, nonetheless can be quite clear on what should be done.
This is what its representative said at the Eastern Australia’s Energy Market Outlook conference in Sydney in late September: “We will respond to gas supply pressures by encouraging exploration and development, encouraging market transparency, encouraging energy efficiency and balancing community, economic and environmental needs.”
Understanding this, how can the government be making such a dog’s breakfast of this energy task, leaving its economy and its community at serious risk of harm?
The story is repeated to various degrees in other energy activities and begs the question “What ails our policymakers?”
One of the major products of the Hilmer review and consequent CoAG decision-making is the “NEM” – the east coast electricity market.
This is how the Grattan Institute’s Tony Wood summed up the state of the “NEM” at the energy outlook conference:
The wholesale market is grossly over-supplied with no relief in sight.
The very existence of regulated networks is threatened by falling consumption, an outdated pricing structure and the potential for disconnections.
The retail energy market remains largely distrusted and/or ignored with outdated models.
Governance of the market operates in silos with insufficient overall focus on delivered outcomes.
The issue with all of this is not that the problems are not understood. They are. The green paper articulates them in a rather bureaucratic fashion. The issue is timely, efficient resolution.
Wood, in his EAEMO talk, diagnoses a number of critical steps.
First, he says, there is no credible pricing of the climate change externality. His remedy: get off the RET bandwagon and work seriously to find a bipartisan approach to abatement policy.
Second, he says, governments need to overcome externally-imposed and disconnected policies by working down from market-driven outcomes to complementary policies rather than retrofitting.
Third, policymakers must engage now with the question of the over-supplied energy-only market.
Fourth, in the networks sector, he argues for a ramp-up of focus on outcomes in terms of risk and return, for privatization of remaining assets, for tariff reform so customers pay for what they want and for a significant improvement in demand forecasting.
Fifth, in terms of governance, he argues for a recommitment to competitive markets and reform, for the removal of government conflict of interest by asset sales and, perhaps most importantly, for the CoAG Energy Council to develop a new process to focus on clear priorities and outcome delivery.
Broadly, I think he is right.
Keith Orchison
1 October 2014
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