Issue 125, September 2015
Welcome to the ninth issue of the newsletter in a turbulent 2015, writes Keith Orchison, as the Eastern Australia’s Energy Market Outlook conference in mid-September offers an opportunity to dissect and discuss the key issues that have made this year one of the most volatile for energy investors in the past two decades.
One of Australia’s leading media economic commentators, Eureka Report’s Alan Kohler, has accused the current federal government of a competence deficit as the focus intensifies on the lack of business confidence.
Writing to Eureka Report subscribers, Kohler argues that “the current Prime Minister and his office are inexperienced and lacking in confidence.” They don’t understand, he adds, that “if you focus on good policies and careful leadership, re-election will take care of itself.”
He says “they are constantly focused on gaining political points” and policy ideas and implementation “are taking a back seat.”
Kohler’s comments come as the panel chaired by Michael Vertigan is preparing to deliver its final report on energy market governance to the CoAG ministerial Energy Council. In its draft report, the panel noted that many interested parties had pointed to “a strategic policy deficit” in the energy sector.
Kohler says that Australia has now had two unpopular governments in five years – led by Julia Gillard and Tony Abbott. “Confidence in government has been declining since 2009,” he declares.
The comments also come as a leading energy commentator, Grattan Institute’s Tony Wood, accuses both the Coalition and Labor of announcing positions on carbon emissions reduction targets “with no credible policy to reach (them).”
Wood denounces the climate change debate as “one of the most abrasive and destructive in our politics over the past decade.”
Meanwhile the Energy Supply Association, speaking for the majority of electricity and gas investors, has called for a “comprehensive policy review” to establish “an efficient, effective, durable process” for meeting the federal government’s target, announced in August, of a 26 per cent cut in emissions by 2030.
The target, says ESAA chief executive Matthew Warren, is “a credible starting point” that needs to be backed by “a credible policy platform.”
The decision, Warren adds, is significant because it requires “a material increase” in abatement over the next decade. This, he argues, “requires a rethink about policy measures.”
ESAA asserts that Australia’s power generation industry “has been left virtually unbankable” by prolonged uncertainty about emissions reduction strategy.
The Energy Networks Association adds a call for Australia “to get its house in order” on energy and carbon policy.
ENA chief executive John Bradley says the cost to energy consumers of meeting or exceeding the new post-2020 target will be high “if policy frameworks are not fixed.”
Bradley says Australia urgently needs electricity tariff structures that “are efficient and avoid cross-subsidies while supporting an increase (of as much as) 600 per cent in solar PV capacity by 2034.”
The association has called on the Council of Australian Governments and its ministerial Energy Council to pursue “urgent progress” in electricity tariff reform and more co-ordinated carbon policies.
As well, the Minerals Council of Australia, in a submission to a new Victorian government review of its Climate Change Act (passed in 2010) has warned that attempts to produce emissions reductions in one State without reference to broader, nation-wide approaches “makes it inevitable that the abatement will come at much higher cost.”
The MCA points to a 2007 Productivity Commission report that denounced climate change policy in Australia as “a disjointed patchwork of measures across sectors and jurisdictions.”
Almost a decade later, the association declares, “one could argue that this is still the case.”
To which the Grattan Institute has added, in another submission to the Victorian review, that, while the State could play a lead role in influencing federal government strategy on an abatement target, “any policy to support climate change mitigation, greater adoption of renewable energy, efficiency or de-investment in coal-fired power generation will add costs for Victorians and may reduce costs for other Australians, forcing Victorians to shoulder an undue proportion of the load.”
The institute notes that the national policy environment is “highly uncertain and evolving.”
The Business Council says Australians must come to terms with the fact that “much of the low-hanging fruit has been picked in the emissions reduction challenge” and that next steps beyond 2020 “will require significant changes in industry activity and investment (as well as) community behavior.”
Policies to implement the post-2020 target announced by the federal government in August must be durable and “avoid economic shocks and substantial costs,” the BCA argues. “Hasty policy or ruling options out now will just increase the risks that there will be costly reversals over coming years, undermining business and community confidence.”
The peak council warns that “Australia cannot afford a repeat of the policy flux of the past 15 years.”
It says movement to a lower-emissions economy requires substantial investment, much of it with long pay-back periods.
The Energy Networks Association has attacked the Melbourne Energy Institute for claiming that higher wholesale prices and more cost-competitive reverse cycle air conditioning will cause Australia gas demand to collapse.
The association says the institute’s prediction that gas demand will halve in the next 10 years is “wildly premature.”
ENA chief executive John Bradley argues that, although wholesale gas prices are increasing, they are 20 to 25 per cent of an average residential bill and are being offset by falling network charges.
He points to a 34 per cent reduction in New South Wales gas network charges – which, he says, will deliver $118 cut in the typical household bill in the State.
The MEI report asserts that the forecast decline in gas demand will result in currently available reserves stretching out for “an additional decade.” It argues that, because of the wide availability of efficient electrical appliances, “there is no longer any economic need to connect new Australian homes and suburbs to gas.”
Bradley retorts that the paper is “not balanced” and has been sponsored by opponents of coal seam gas development.
He adds that, in promoting increased use of air-conditioning, the MEI paper fails to take in to account the impact in NSW on peak power demand, a major driver of electricity network charges.
“Without natural gas for heating, NSW peak demand for electricity in winter could be up to 20 per cent higher,” he says.
The Grattan Institute estimates that average household electricity bills fell by $120 in the financial year that ended on 30 June.
The institute’s energy director, Tony Wood, told the ABC Fact Check program that reductions in electricity prices – a controversial issue in the wake of federal government claims about the impact of the cancellation of the carbon tax legislation – vary widely across Australia due to variations in both consumption and the carbon intensity of supply.”
The Australian Competition & Consumer Commission has calculated annual householder savings on electricity bills after the removal of the carbon tax as lying between $100 and $200.
The debate over savings was triggered by Treasurer Joe Hockey claiming his department’s modelling showed a saving in electricity prices of $550 a year – but what the Treasury work actually demonstrates is an overall household saving of $550, including an average $172 for electricity users and $53 for gas consumers.
The implications of east coast power plant closure are weighing on the minds at the Australian Energy Market Operator.
In its new “Electricity Statement of Opportunities,” released in mid-August, AEMO notes that the electricity industry plans to shutter 4,810 megawatts of capacity on the east coast over 10 years.
The bulk of the withdrawn capacity (3,275 MW) is coal-burning.
The market operator says that, under a medium demand scenario, loss of this level of capacity has reliability implications for New South Wales, Victoria and South Australia over the decade as they come to rely more on importing power from each other and further afield.
The review notes 2,315 MW of capacity withdrawal announced in NSW in the past year in addition to an earlier indication of another 1,000 MW – while 1,505 MW of SA generation is to shut, placing greater State reliance on imports from Victoria. A project is under way to expand energy flows on the high voltage interconnector between SA and Victoria.
Current installed capacity in the NEM totals 51,363 MW – of which 56 per cent is coal-fired, 24 per cent gas-fuelled and 16 per cent hydro-electric.
AEMO says that it is also tracking propositions to add 21,689 megawatts of capacity to the NEM, including more than 12,000 MW of wind farm developments. None of this capacity is committed.
“Investment could and would need to occur to meet localized consumption growth pockets or to manage intermittent generation,” adds CEO Matt Zema.
The CoAG ministerial Energy Council has agreed to develop a co-ordinated national approach to delivering on the Abbott government’s pledge to improve Australian energy productivity by 40 per cent by 2030.
Federal Industry & Science Minister Ian Macfarlane says the plan will seek to make consumer energy choices easier and to improve energy products and choices.
Macfarlane says the plan will address all sectors, including buildings, appliances, energy services, power generation and transport.
Meanwhile consultants Energetics point out that the federal government’s new carbon target (aimed at reducing emissions by 26 to 28 per cent below 2005 levels in 2030) requires emissions per unit of GDP to fall at a rate of 3.8 per cent a year.
In a growing economy (even one rising at a lower rate than in the past quarter century), it adds, “this is a considerable task.”
Energetics points out that critical comparison of the Australian target with the 40 per cent level to be pursued by the European Union does not take in to account that the local economy is set to expand more rapidly over the next 15 years than that of the EU.
Energetics reports that Australian productivity per unit of GDP fell by an average of 3.1 per cent a year from 1990 to 2014 at a time when the national economic measure was growing at between three and 3.25 per cent annually. Current projections for GDP growth to 2030 range between 2.5 and 2.8 per cent annually.
The Australian Competition & Consumer Commission inquiry in to east coast gas supply has been told that petroleum industry finding and development costs have risen six-fold in the past decade.
In a submission to the inquiry, which is due to report in April next year, Santos argues that rising domestic gas prices in recent years “do not appear to be caused by any lack of competition.”
The company says the cost of producing gas has been impacted greater geological extraction issues, more focus on “dry gas” (which has no associated liquid hydrocarbons to supplement revenue streams), more expensive labor and contracting services and the increased expenses associated with regulation and obtaining project regulatory approval.
In three years to 2013, Santos adds, total Australian finding and development costs averaged $4.16 per gigajoule, 2.7 times the average for 2004-07.
Santos asserts that eastern Australia’s gas supply, which will be a major focus of the Eastern Australia’s Energy Market Outlook conference to be held in Sydney in mid-September, is also “moving through a cycle similar to that seen in commodity markets when they are opened to overseas buyers.”
It points out that, prior to the LNG developments at Gladstone receiving development approval, east coast gas prices were low relative to global prices and conventional gas resources in the region were declining.
Moving gas supply to those who value it most, Santos adds, has driven petroleum industry investment and brought on more supply.
Meanwhile the Energy Users Association has argued to the ACCC that the east coast market is “simply uncompetitive, asserting that it has “no liquidity, knowledge asymmetry, a lack of publicly-available information and no transparent price discovery.”
Australia is 18th on a global list of national renewable electricity capacity, according to the US Energy Information Agency.
First is China with 480 gigawatts, followed by the US (200 GW), Brazil and Germany (each about 100 GW).
The agency puts Australia’s renewables capacity at 16.8 GW.
The Australian Capital Territory government claims that Canberra “will be powered entirely by renewable energy” by 2025.
Environment Minister Simon Corbell claims the ACT is “already well on its way to achieving 90 per cent renewables by 2020.” Using solar and wind power auctions, he asserts, the Territory will achieve a 60 per cent target in 2017 and 80 per cent by 2018.
The Territory household and business customers consume about 3,000 gigawatt hours of electricity a year.
The ACT’s next general election will be in October 2016.
Victoria’s Labor government says it intends to have “no less” than 20 per cent of the State’s electricity reply coming from renewables by 2020 – up from 12 per cent at present, which includes three per cent from hydro power.
The State is 84 per cent reliant on brown coal generation.
The Andrews government says it will spend $200 million of taxpayer funds to help build 50 new wind turbines in regional Victoria via power purchase agreements.
Now it is setting out to consult on how to achieve the target, which is being described by some as more an effort to cosy up to the voters leaning towards the Greens than a response to renewables investors, who are grappling with how to deliver enough capacity to meet the re-legislated 33,000 GWh national RET by 2020.
The Greens have promptly attacked the announcement as “locking in Tony Abbott’s policy” and for lacking a mechanism to close down coal-fired power stations.
The governments want to further develop a “roadmap” for its proposal and will “investigate how to take action independently when federal policy is failing” as well as look at the regulatory barriers “stifling renewable energy ” at State level, according to Energy & Resources Minister Lily D’Ambrosio.
The Andrews government says its ambition is to make Victoria “a global leader again” in renewable energy development – when it ever was would make for an interesting debate.
The Energy Policy Institute has told the South Australian royal commission in to the nuclear industry that there is potential in the State for decentralized deployment of small modular reactors.
In a submission, EPIA opines that an important factor in deciding whether SMRs will be economic developments will be the extent to which their use can avoid costly transmission grid upgrades.
The association adds that the energy policy issue of most long-standing contention in Australia is the “discriminatory” prohibition of the use of nuclear power and it argues that this is based “at least in part on yesterday’s understanding of nuclear technology.”
The energy industry, it says, has “suffered from excessive politicization among rival technology opponents and proponents. “It is essential this be reduced.”
IEPIA repeats its call for technology neutrality to be accepted as a fundamental national energy policy principle and says this should be accompanied by “modernized, transparent and trusted regulatory regimes.”
It proposes that the royal commission should recommend the State government pursue the federal government to remove the legislated ban on nuclear energy.
Looking at the UN summit of governments to consider global climate change policy (to be held in Paris at the end of November, with Foreign Minister Julie Bishop leading the Australian participants), the University of Queensland Energy Initiative, overseen by professor Chris Greig, has queried whether, even if an international agreement to decarbonize the energy sector can be reached, individual nations can deliver given current political settings.
In a new commentary, UQEI says the “road out of Paris” needs “massive behavioural change.” The challenge should not be oversimplified.
It asks whether governments will be prepared, even if not to accept, a situation where global greenhouse gas concentrations are going to be higher than the targeted 450 ppm?
Can they separate the means from the end, it adds? “The goal is to limit global warming to less than two degrees above pre-industrial levels, not to end the use of fossil fuels or achieve 100 per cent renewables.”
And can governments recognize and accept the role of transitional solutions, it asks? “For example, replacing low-efficiency coal-fired generation with natural gas or even high-efficiency coal plants, provided there is a robust and creditable plan for a future retrofit of carbon capture and storage.”
UQEI calls on Australian policymakers to “avoid setting grandiose targets many decades from now in the absence of near and midterm hard commitments.”
As for climate scientists, says professor Greig, those unskilled in in the technology and engineering of energy systems should be saying: “I don’t care which technology gets us there; in fact, give me all of them” – and they should not be “in the business of making bold predictions of the future efficiency of PVs and costs of batteries to render nuclear power and CCS irrelevant.”
Greig says today’s politicians and their advisors here and overseas, “muddled by a large dose of vested interest advocacy,” are looking for “simple soundbite solutions.” As a result, energy and climate policymaking in many industrialized nations is “plagued by spin and ruptured by partisan policies.”
The Energy Networks Association says Australia’s energy industry is going through “the most significant industry disruption since electrification” and its wants framers of regulation to move faster to catch up with change.
ENA chief executive John Bradley says an “explosion” of service and technology opportunities in the energy market requires a reshaping of regulation to unlock better prices and better service outcomes for consumers.
Bradley adds that a key challenge is to set regulation that avoids stifling incentives for innovative services while ensuring safe and reliable energy delivery. Regulation, he argues, must be sufficiently predictable to minimize infrastructure investment costs and also sufficiently flexible “to allow vibrant innovation.”
The association says it is seeking to “open a conversation” about how to deal with disruption and aiming to facilitate the debate by embarking on construction of a “roadmap” for network with CSIRO, a report to be delivered in final form in 2016.
Volatility comes at a cost, as anyone caught up in the vicissitudes of stock market investment can testify.
This is certainly true of energy policy volatility – if you wish to see the populist policymakers’ monument, look around you – and it is especially true of the operations of the electricity supply market both in providing reliable power with no quality glitches and in maintaining an efficient pattern of investment in terms of additions and subtractions of generation and transmission capacity.
The situation has reached the stage where, for example, the Energy Supply Association is warning that continuing mucking about with the RET could see the wholesale NEM reach “a tipping point” where it will “no longer function” and “we will be back to direct government investment.”
For today’s consumers, stop/start policy intervention is manifesting itself in price shocks and, for users with large requirements, it also presents a continuous problem in the form of undermining long-life business investments at planning stages.
There is a view in some quarters that it is fortunate Australia is so wealthy because we can get away with politicians making sub-optimal decisions about energy and carbon emissions management.
If this has ever been true, it is much less so today and the prospect is that these sub-optimal choices will be yet another straw on the back of an Australian economic camel that is finding the going increasingly hard.
As Chloe Munro, head of the Clean Energy Regulator, pointed out in a recent trade magazine interview, climate change policy and the operations of the energy market are intimately connected; they do not operate on parallel tracks in a separate universe.
You would never know this from watching media coverage of policy decisions and political promises, especially those being thrown around in recent weeks.
The comments by the University of Queensland Energy Initiative and its director, Chris Greig, reported in this newsletter are very much to the point in this context.
As Greig says, over-simplification of the carbon/energy approach is a critical issue; politicians are looking to “simple soundbite solutions” and their thinking is muddled by vested interest advocacy and poisoned by partisan, vote-seeking attitudes.
Despite the many pointing to this problem, politicians in the mainstream parties continue to play their games, plaguing the community with their spin and feeding off opinion polls obviously heavily influenced by the media coverage and the naïve idealism of so many in the community.
There are three special points that need to be driven home at every opportunity.
First, energy is critical to the economy – ie our jobs and standard of living – and mishandling policies affecting security of supply, power costs and trade competitiveness is dangerous.
Second, best practice environmental standards is not code for picking energy winners at the expense of consumers.
Third, regulation must be efficient and designed to support policy objectives not a weapon of attrition for use by activists and politicians on the make.
As UQ’s Greig says, the situation is not helped by the inability of so many climate scientists, unskilled in energy technology and energy system engineering, to separate means from objectives.
It is not just right but highly desirable for reputable scientists to give us their best advice on global warming; they exceed their brief when they become advocates against some energy technologies and for others – and politicians fail in their duty to the national interest when they allow themselves to be bullied in to pursuing policies that work against good energy outcomes for consumers.
Keith Orchison
1 September 2015
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