Issue 126, October 2015
Welcome to the tenth newsletter issue for 2015 after a month in which Australian political turbulence went in to overdrive, writes Keith Orchison, leaving us with not only a new Prime Minister but also a new federal Minister for Resources & Energy. Where do we go from here in addressing electricity, gas and carbon policy?
Greg Hunt, who survived the Malcolm Turnbull cabinet reshuffle as Environment Minister, says they share a “deep, strong passion for renewables.”
Part of the changed mechanism of government implemented by Turnbull sees the Clean Energy Finance Corporation and the Australian Renewable Energy Agency, both threatened with closure under the Abbott government, shifted to the Environment portfolio.
What’s this about?
Hunt says the move means a Turnbull government, which must go to the polls by late 2016, will pursue “the best possible mix of emissions reduction and renewable technologies.”
In a radio interview, he has denied that there ever was a “war on renewables” under the Abbott government.
He also emphasized that the new administration “is certainly not going to a carbon tax or emissions reduction scheme.”
Meanwhile new Resources & Energy Minister Josh Frydenberg has told media that renewable energy is “an absolutely critical part of the energy mix.”
He also said the South Australian royal commission, currently under way, is a good opportunity for Australia to “have a community discussion” about the role of nuclear energy.
Welcoming Frydenberg, the Energy Networks Association, which points out that its members provide electricity and gas to virtually every household and business in the country, says that the new minister has an important task in progressing reform. Evidence-based policy processes should guide him and his counterparts in the States and Territories, says CEO John Bradley.
To this, the Energy Supply Associations adds that energy reform has now been underway for two decades and encourages Frydenberg to take up the challenge of completing the task.
Josh Frydenberg has been quick to nominate “driving down power prices” as a priority for the new Turnbull administration.
The Resources & Energy Minister, who has replaced Ian Macfarlane in the portfolio (a role Macfarlane held in government and opposition since 2001), says all jurisdictions need to embrace a plan to “empower households and businesses” on managing consumption.
Frydenberg says the December meeting of the CoAG Energy Council, which he will chair, will “drive reforms to make it easier for households to choose an energy plan that suits how and when they use electricity.”
Australian energy intensity – defined as the ratio of primary energy consumption to gross domestic product – fell by four per cent in 2014-14, according to the latest national energy statistics, published by the Office of the Chief Economist in the Depart of Industry, Innovation & Science.
“Australians are using energy more productively,” says chief economist Mark Cully, “as prices rise, new technologies are adopted and the economy changes.”
The report shows actual energy consumption in 2013-14 fell by one per cent to 5,831 petajoules, with increased use in mining, transport and services sectors and falls in power generation, manufacturing and residential demand.
Oil remains the largest primary energy source, holding a 38 per cent share – followed by coal (32 per cent) and gas (24 percent). Renewables (mainly hydro-electric power) accounted for six per cent of the energy mix in 2013-14.
For electricity generation, coal continued to dominate supply (61 per cent) followed by gas (22 per cent) and water, wind and solar (15 per cent collectively).
The report shows that three States (New South Wales, including the ACT, Victoria and Queensland) account for almost 73 per cent of all Australian energy demand.
The Grattan Institute has called on Prime Minister Malcolm Turnbull to make dovetailing energy and climate change policies one of its highest priorities.
The institute’s energy policy director, Tony Wood, says there is currently “no tangible connection” between the policies, affecting billions of dollars of investment.
Wood argues that this year’s energy white paper developed by Tony Abbott and departing Industry Minister Ian Macfarlane “effectively ignored” the link.
“Unstable and unpredictable” climate policy changes “have contradicted the white paper’s commitment to stable and predictable policy settings to encourage investment in electricity generation.”
Australia is left at present, he asserts, with no bipartisan commitment on climate change, “no credible policy to achieve any realistic emissions target and a dog’s breakfast of proven, probable and possible policies.”
There is a global energy glut just about everywhere except Australia’s east coast (where users are still deeply concerned about the future of gas supply for the southern States), according to Adelaide-based consultants EnergyQuest.
While governments, notably in Victoria and New South Wales, continue to wrestle with resolving the affordable and secure gas question, the Northern Territory government is seeking to progress the North-East Gas Interconnector project, opening access to resources onshore and offshore claimed to be more than 230 trillion cubic feet.
Four bidders have been shortlisted to build and operate a pipeline of between 800 and 1,000 kilometres, probably linking Alice Springs and Moomba in the Cooper Basin.
A decision on a successful tender to the Northern Territory government is expected in October. Chief Minister Adam Giles has ruled out government funds being used to support the pipeline.
Central Petroleum managing director Richard Cottee, who is looking to a pipeline to bring the gas located in fields close to Alice Springs to the east coast, says there can be “huge economic benefit” in the project, likening it to the links that enabled development of the Cooper Basin gas resources.
East coast gas demand for domestic use is heading downwards to a lower plateau through the next decade even as overall supply requirements, driven by LNG export needs, are pushing towards sustained record peaks, a conference in Sydney has been told.
Speaking to the Eastern Australia’s Energy Market Outlook conference, Paul Balfe, executive director of consultants ACIL Allen, projected a domestic gas requirement declining from just on 600 petajoules a year at present to around 500 PJ by late this decade and on through the ‘Twenties.
The ACIL Allen outlook sees weak growth in east coast residential and commercial demand, with increasing population offsetting lower average household needs, industrial requirements declining and a sharp drop in the use of gas for power generation.
Residential and commercial use will put a floor of around 200 PJ a year under the east coast’s consumption, Balfe said.
Looking at the market’s environment, he said it is characterized by “demand destruction that is already happening” as well as “policy paralysis in New South Wales, Victoria and Tasmania.” In these States, “the anti-gas lobby is winning.”
In Queensland, on the other hand, driven by the demands of the LNG export sector, coal seam gas production exceeded 49 PJ in July and is moving to an annual output of 590 PJ, with 10 new production facilities coming on stream since mid-2014.
Kylie Hargreaves, deputy secretary of the NSW Department of Industry, told the EAEMO conference that demand in the State, which produces only five per cent of its gas needs, is now oriented to a 76.7 per cent share for industrial customers compared with 15.9 per cent for households and 6.4 per cent for commercials users.
Gas, she added, is vital in NSW as a key ingredient in industrial processes such as fertilizer and plastics manufacture, for the production of industrial products such as ammonia and as an intensive heat source for making glass, steel and bricks as well as for waste disposal by medical facilities.
The State government, she said, expected a 1.8 per cent decrease in gas consumption in NSW between 2014 and 2019 with the closure of large industrial complexes such as the Caltex Kurnell refinery and Alcoa’s Yennora rolling mills.
It expected a further 0.2 per annual decline in gas needs from 2019 to 2024.
Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, told the EAEMO conference that the biggest risk to a sustainable east coast gas market is regulatory failure.
“Further development of gas will only proceed in jurisdictions with sensible, efficient and balanced regulatory regimes,” he said.
He acknowledged that the east coast gas market is “undergoing a transformation that is painful for both producers and customers.”
The transition is complex, he added, and “creating difficulties” – “but the good news is that the market is evolving in to a more mature and competitive system.”
Roberts said there are no plans to further expand the Queensland LNG projects. “So, while eastern Australian gas prices will soon be irrevocably linked to Asian prices, Queensland’s LNG plants are not an insatiable funnel that can export infinite amounts of gas.”
Once the developments are running at full capacity, he argued, any further increase in gas production will be targeted at the domestic market.
“Given sensible regulation, local prices will (then) be sufficient incentive for exploration and development and further production will be sold locally. As production grows and infrastructure expands, industry costs will stabilize – and this will put downward pressure on (domestic) gas prices.”
Rod Sims, chairman of the Australian Competition & Consumer Commission, says many aspects of the east coast gas market are “opaque and complicated.”
He told the Eastern Australia’s Energy Market Outlook conference in Sydney in September that the market is dominated at nearly all points along the supply chain by large players: gas producers and processors, gas pipeline operators, gas aggregators and retailers.
Trading markets, he added, are immature and illiquid and dominated by confidential, bilateral contracts.
The ACCC is currently pursuing an east coast gas inquiry for the federal governments and Sims told EAEMO conference that, even at the halfway mark of the review, it is apparent that the Gladstone LNG projects have “upended” the market, probably permanently.
Users’ complaints about a dearth of offers for domestic supply of gas in recent years “are largely true,” he said.
Domestic contracts now tend to be for considerably shorter duration and at higher prices, with contracts have much less flexibility in terms of delivery conditions.
Sims noted that the scope, timing and changes in LNG demand will be “critical” for the domestic market. “Even relatively small swings in volumes have the potential to have comparatively major impacts on domestic users either through price or supply.”
The ACCC chairman said it is clear that “we are in an environment which is not merely in a transitory phase of adjustment but which is moving to a new dynamic.”
One of the key policy dilemmas for the east coast electricity system is whether or not there are barriers to exit for conventional power plants in the chronically over-supplied wholesale market and, if so, what can be done to remedy a situation brought about by political intervention to drive renewables investment?
The issue is of sufficient concern for the CoAG Energy Council to have required the Australian Energy Market Commission to undertake a special report. This was delivered mid-year and was publicly released by ministers in mid-September.
The AEMC’s conclusion is that “electricity businesses are coming and going in an orderly manner” in response to market signals.
The commission says that “there is nothing in the National Electricity Law or the (market) rules which might constitute a barrier to the ability of business to make efficient investment decisions.”
The report supports an Energy Council view, published in the December 2014 communiqué from its biennial meeting, that radical change to the NEM’s design would not be supported – nor would assistance to generation owners to exit the market.
The AEMC acknowledges that factors affecting generation exit decisions “can be complex” and vary according to the power technology type and how a generator is structured. They can also differ between geographical locations.
The point, the commission argues, is not whether the environment presents a barrier to exit for a particular generator but whether there is a barrier to efficient mothballing or permanent closure.
Recent evidence, the AEMC adds, points to generators not being deterred from exiting the NEM.
It says 2,000 megawatts of coal plant were closed or periodically taken offline in 2012 and 2013 and between 2011 to mid-2015 some 4,600 MW have been removed or publicly designated for closure.
It says that, “to the extent possible,” governments should take steps to reduce the uncertainty generators face over such issues as climate policy.
“The key driver is uncertainty,” the AEMC declares, noting that there can be difficulty in ascertaining the cost of exiting the market, for example in terms of site remediation governments will demand.
“On the whole,” it says, “the level of uncertainty involved in exit costs means it is difficult for policymakers to know what costs are faced by which generators on exit – and therefore what would be efficient” in terms of timing or order of plant removal from the market.
Governments, it adds, could ease confusion by continuing to stress that there will be no contracts for closure on offer and that the energy-only market will not be replaced by a contract market.
Submissions lodged with the Australian Competition Tribunal by the Australian Energy Regulator pose the question of who should bear the burden of inefficient investment – in the case of the three government-owned New South Wales distributors challenging the AER revenue determinations, should it be the customers or the investors (in this case, the taxpayers)?
The AER says the distributors’ submissions assume the regulator needs to ensure they are not exposed to financial stress that would impact on safety, security and reliability. It argues in return that the equity holder should “bear the burden of substantial inefficient costs.”
The AER is calling on the tribunal, a branch of the Federal Court, to reject the distributors’ application for its determinations to be overturned, arguing that the DBs cannot establish the revenue allowances are insufficient to recover efficient outlays.
The regulator rejects the networks’ claims that its decisions are designed to provide a short-term reduction in network charges at the cost of long-term prices.
The AER says its view is not premised on short-term consumer benefits but on the belief that it is not in the long-term interest of users to pay for inefficiency.
“Decisions leading to inefficient expenditure should be reflected in diminished returns to shareholders and not greater costs to customers.”
The regulator has told the tribunal that a “range of investigations” it undertook in making its determinations reveal the network businesses have been operating inefficiently.
Five years after ticking off Victoria’s Labor government for serious flaws in its vanguard smart metering programs, launched by the Bracks administration, the State’s Auditor-General has delivered another highly critical report on the roll-out.
The new audit finds that there will be a significant net cost to consumers over the life of the metering program, that only 80 per cent of the claimed benefits are likely to be achieved and that the new Andrews Labor government must both improve the transparency of the program and better educate consumers about electricity use behavior change.
The Bracks government mandated the roll-out of smart meters in 2006 to all households and small businesses. A 2011 cost-benefit analysis discovered a net cost to users of $319 million by 2028 and the new audit declares that this may be an under-estimate, saying the total bill for the program by the end of this year will be $2.239 billion.
The government department overseeing the program “does not monitor or know the exact cost,” says the Auditor-General.
Consumers pay through their power bills and, the agency adds, “they are entitled to clear and transparent reporting on costs, particularly as they had no choice in paying for the roll-out.”
The audit finds that about half of the predicted savings through network operational efficiency have been achieved under the program but only 2.5 per cent of the benefits expected in tariffs, products and demand management.
The Auditor-General says about a quarter of the total expected benefits of the roll-out rely on 75 per cent of Victorian households taking up flexible tariffs and changing consumption behavior. “On current rates of take-up, it is doubtful this will be achieved.”
The difficulties for governments in trying to pursue energy reform when they are also dominant market players through ownership of supply assets is again on display in Western Australia where the Barnett administration is coming under increasing criticism for the pace and scope of change in the islanded WA system.
The government, owner of the major supplier, Synergy, and the network operator, Western Power, promised six months ago to deliver reform to reduce power prices and increase competition, but it is resisting stakeholder pressure to break up the gentailer utility and privatize it.
The major change proposed by the State government is to move to full retail contestability from mid-2018. Meanwhile it is focused on Synergy cutting its costs.
The WA south-west grid is characterized by substantial generation over-capacity and a sharply rising take-up of solar power by residential customers. Eighteen per cent of households now have rooftop solar PVs.
Synergy’s latest annual report declares a net profit of $57 million, down from $122 million in 2013-14.
Chairman Lyndon Rowe says finding a clear view of the State’s energy sector “is not easy” and the utility’s number one priority is “confronting the hard issues and answering the questions that need to be answered” as technology change and shifting consumer behavior impacts on the traditional business model.
I really didn’t need the Eastern Australia’s Energy Market Outlook conference, which I co-chaired with Mike Swanston in Sydney in mid-September, to tell me that we are struggling to manage the multi-headed transition of the energy sector in to a new-ish world, but the event was a useful opportunity to refresh understanding of the issues and the differing perspectives of stakeholders.
That the conference was taking place while the Coalition federal government was upending itself simply served to highlight the febrile nature of politics for an industry that has always been a political football.
I said “new-ish” above because we need to be reminded that, while much is changing in the energy business, much also stays the same and it pays to maintain a perspective about this.
No matter what radicals and other fringe-dwellers may say, for example, Australian electricity supply and consumers are not en route to abandoning the power grid – but, on the other hand, as the Grattan Institute’s Tony Wood pointed out to EAEMO, we are now at a point where we need to ask whether we want markets to have a place in the power future and, if so, “why are things going the other way?”
Wood is right to lament the absence of a credible, long-term vision for Australian electricity supply and of policies that integrate energy and climate change.
Not a word that has been said in the aftermath of the parliamentary coup that despatched Tony Abbott indicates that Team Turnbull has got this major point squarely in view – and, frankly, the Bill Shorten-led federal Labor Party is as much a lost cause in this regard as it was under Julia Gillard and Kevin Rudd.
The “big energy policy deal,” as Wood put it to the conference, is not for politicians in government to keep succumbing to loud calls to “do something” – about prices and about environmental issues, for example – but to resist most of the noise and to focus on areas where political intervention can be effective.
He listed three for the EAEMO audience: re-invigorating the national energy reform agenda, protecting the primacy of markets and free trade, and developing a credible decarbonization response.
With the next federal election only 12 months away (or less), how confident can we be that these are priorities for the Turnbull government or Labor?
The short answer is “not very,” but the next few months will be our guide on this.
Scratching for some hopeful signs, one could seize on the fact Malcolm Turnbull is promising that, for the first time in a fair while, policy will be made at the federal Cabinet table rather than in the Prime Minister’s office or by small ministerial cabals or via “soundbite” solutions influenced by whatever appears to be popular with voters.
Nonetheless, the looming election and the looming Paris climate change summit are major temptations for populist politicians and will be played by radicals and those with vested green interests for all they are worth.
In my opinion (which, along with a gold coin, will buy you a fizzy drink), Turnbull is likely to opt for an early election – perhaps in February or March – and this, I think, would work better for future energy policymaking, providing three years to the end of the decade for some better thinking and acting.
We shall see.
Keith Orchison
28 September 2015
Subscribe to Coolibah Commentary by email
| to top of page |