Issue 96, April 2013

Welcome to the fourth issue for this year, writes Keith Orchison, as some of the Coalition plans for energy policy when it wins government become clearer and the issue of power prices moves again towards centre stage.

No joke

It was issued on April Fool’s Day but the new Fitch Ratings review of the credit health of Australia’s power businesses will bring no smiles: “increased policy uncertainty” is the agency’s focus as it highlights the “difficult” operating environment the industry faces in 2013.

The Fitch comments appear as management consultants KPMG have been warning (see “Last word” in this issue) of the dangers of scaring away investors in a new publication “Australia’s Energy Financing Challenge.”

KPMG say that “the possibility of an investment shortfall is real.”

While they think utilities will continue to remain well-placed to manage medium-term funding requirements, Fitch Ratings say that Australian utilities are exposed to increasing government and regulatory interventions relating to wholesale and retail electricity prices, capex and environmental policies and they highlight the uncertainty surrounding the continuity of emissions abatement policy at a time when political analysts are suggesting a Coalition federal government may need a double dissolution election as late as early 2015 to resolve the issue.

Fitch’s new commentary warns that the proposed changes to network regulation rules could result in more prescriptive and less predictable outcomes for the “wires” businesses.

“We expect these rules to suppress network capex growth,” they add, “and result in lower invested capital returns. These changes could be important for the long-term credit quality and value of these businesses.”

However, the agency also notes that reduced leverage across most large network businesses in the past few years puts them in a more comfortable position to manage the changes.

Fitch Ratings point out that utilities are also faced with significant and unpredictable changes in electricity consumption, creating uncertainty for their future earnings. “Fitch expects their credit profiles will remain exposed to low wholesale prices, wholesale price volatility and unfavourable weather conditions.”


RET in air again

Coalition resources and energy spokesman, Ian Macfarlane, has upset some and heartened others by announcing that an Abbott government will set up another review of the renewable energy target in 2014 and that the current 41,000 gigawatt hour goal by 2020 is again in question.

Macfarlane told the “Energy State of the Nation” forum in Sydney that the agreement between the Coalition and the Labor government that created the present RET legislation required two-year reviews and that the 2012 inquiry would be followed by one next year – a step resisted by the environmental movement, which wants the next review to be in 2016.

He alarmed the greens still further by saying that a 30 per cent outcome for the RET is “simply not sustainable.”

Macfarlane’s statement came as the environmental had barely stopped applauding Climate Change Minister Greg Combet for finally ratifying the Climate Change Authority recommendations (made in mid-December) that the large-scale segment of the RET should be retained at 41,000 GWh – a level initially set before the decline in electricity demand set in.

Combet said any move to cut the RET back to a true 20 per cent would add 119 million tonnes of carbon dioxide to Australia’s emissions in aggregate by 2030 and would create investment uncertainty.

In a joint statement, Macfarlane and the Coalition’s environment spokesman, Greg Hunt, said an Abbott government will “consult comprehensively with industry” in a “full and open discussion” about the measure.

Earlier, greens had reacted sharply to a speech by Origin Energy chief executive Grant King to a Committee for the Economic Development of Australia lunch in Sydney in which he decried the CCA’s failure to fully cost the RET.

“Consumers and investors remain in the dark,” he said, “ because the CCA completely skipped the opportunity” and he called for the 2014 review to “make a decent effort to tell the community what these schemes are actually costing on a fully-costed basis.”

Looking at green schemes more broadly, King said Australians are “entitled to question whether we have the right selection of policies and whether customers are being given a true picture of how their costs affect the final power bill.”

Also buying in to the debate again was EnergyAustralia with senior executive Mark Collette telling a conference in Sydney that pursuing a RET level that was in effect 27 per cent would impose a $25 billion extra cost on consumers by 2030.

“If we do have policies that were originally intended to deliver a 20 per cent target and are now overshooting (it), we have to question whether this is the best way to minimise user price pressures?” he said.

Earlier, in a media statement, EnergyAustralia’s managing director, Richard McIndoe, reacted to Combet’s announcement by calling on policymakers to “strike the right balance” between driving more renewables investment and keep down consumer costs at a time of “dramatically falling demand and rapidly rising prices.”

Mcindoe said he is concerned about the practicality of the present policy, given that it requires more than 2,500 wind turbines to be installed in seven years. “Under the current RET design, falling short of this level of development will result in customers paying a financial penalty while no new capacity is actually being built.”

The Clean Energy Council welcomed Combet’s decision and said it will lead to a further $18 billion being invested to meet the target.

The CEC estimates that the RET program, since introduced by the Howard government in 2000-01 and later enlarged by the Rudd government, had drawn $10 billion in to large-scale development (wind farms) and another $8 billion in to small-scale investment (mostly household solar PV arrays).

Combet himself claimed that the Labor government had seen $5 billion invested in 2,000 megawatts of large-scale projects since it changed the legislation after coming to office in 2007.

Combet has also committed the Gillard government to scheduling the next RET review for 2016, but this will require amending legislation.

No to sell-off

The nervousness of east coast Coalition governments over proposals to privatise the New South Wales and Queensland publicly-owned electricity network businesses will not be allayed by a Nielsen opinion poll at the end of March, commissioned by Fairfax media.

According to reports, barely a quarter of the Liberal and National party voters polled in NSW favour privatisation with 70 per cent against it while 83 per cent of Labor voters are opposed to the sales.

The poll outcome mirrors another in Queensland, which reported that 66.9 per cent of people interviewed by telephone opposed asset sales in the State.

The Newman government says it will release the full report of a committee of audit chaired by former Federal Treasurer Peter Costello next month.

The executive summary of the audit recommends selling all the Queensland government-owned electricity assets, estimating their value at $25 billion to $30 billion.

The government has indicated several times that it would not take this step without seeking a mandate for it at the next State election (due in 2015).

The O’Farrell government, which is in the process of selling the remaining NSW generation assets, has also indicated that it would not move on sale of network businesses until after the March 2015 State election.

At the start of April O’Farrell dismissed a new anti-privatisation push in NSW by trade unions as “a scare campaign,” saying the commitment to seek a mandate before selling networks has not changed.

Meanwhile EnergyAustralia has spoken out in favor of privatisation of the Queensland electricity businesses.

MD Richard McIndoe has welcomed the Costello committee recommendation and pointed to the “significant benefits” of privatisation to customers in Victoria and South Australia.

“A privatised industry will help deliver more innovative energy solutions for customers in Queensland,” he says. “Governments have a crucial role in setting policy for the energy sector but this at odds with the roles of retailer and asset owner.”

McIndoe says EnergyAustralia will welcome an opportunity to become more involved in the Queensland energy sector.

Green tape blues

The resources and energy sector is taking advantage of a Productivity Commission review of major project environmental assessment processes to vent its frustration at the “politicisation” of oversight.

AGL Energy, which encounters the travails of green tape as a developer of gas and wind generation as well as coal seam methane projects, is calling for “essential and immediate reform” of development assessment and approvals, accusing policymakers of taking a short-term approach to the area and not paying appropriate regard to the impacts on projects.

AGL takes aim at the two kilometre setback proposals being pursued in Victoria (for wind farms) and in NSW (coal seam gas developments).

Attempts to appease community groups should not, it says, be the basis for significant policy changes in the absence of robust, verifiable evidence to support local concerns.

“If all forms of new energy production are prohibited,” the company adds, “it will be impossible to have a secure domestic energy supply.”

In the case of the intervention by federal Environment Minister Tony Burke in the coal seam gas approval process through imposing new requirements for impacts on groundwater supplies, AGL points out that his move is a direct contradiction of earlier statements by his government that this would be inappropriate.

Burke, says AGL, has offered no evidence or scientific rationale to support this step – and it is unnecessary and duplicative anyway because such environmental considerations form part of the State government approvals process.

The company warns that a substantial reduction is gas exploration “will have a dramatic impact on Australia’s energy security” as gas shortages are likely to occur on the east coast as current production facilities start exporting their product when their current long-term domestic contracts expire.

In the same vein, AGL argues that unnecessary and inefficient approvals processes for wind farms may lead to a reduction in their development or at least their cost effectiveness – and this, in turn, could add to consumer costs as electricity retailers struggle to meet RET obligations.

In another submission to the Productivity Commission, Ian Woodward, Hobart-based principal environmental scientist of consultants Pitt & Sherry, warns that investors are rapidly losing faith in governments’ ability to deal with project proposals “in a robust and confident manner.”

Environmental approvals for projects should not be about whether developments can go ahead, Woodward argues, but about how they proceed.

He says that environmental; approval processes are becoming a surrogate for “what really are social (often political and philosophical) or planning (often amenity) objections.”

Woodward adds that, in these situations, the technical facts don’t really matter.

“People make up their minds using emotional gut-feel, consistent with their peer group, fuelled by a confirmation bias which ignores technical information and sticks to pre-conceived views.”

Statutory approval processes, he says, are designed to remove emotion from decision-making and rely on systematic, reasoned and rational assessments. “However, once the emotional debate about a proposed development has reached a critical mass, fear campaigns and gut-feel opposition to developments grow unabated with virtually complete disregard for the process.”

The situation, he says, can become worse in recent times because of the growth of social media campaigns against projects. “Social media don’t always lead to a more informed debate but often to louder protests, which do not translate in to better decisionmaking.” 

The outcome, Woodward argues, is that developers are becoming bound up in more and more green tape – “which is more of a consequence of appeasing opponents than of protecting the environment.”

He recommends consideration of a staged approval process which would allow developers to focus their initial efforts on go-no-go issues, with more detailed examination of other matters once a project is through the development acceptability gate.

Woodward says the present situation is “out of synch with the business investment cycle” and it is no surprise that developers are becoming increasingly frustrated.

Metgasco walks

Coal seam gas developer Metgasco decided in mid-March to suspend its efforts to provide a new resource for NSW until the State’s regulations affecting the sector are “firmly established and tested.”

Faced with another six months or more of regulatory delay – following an 18-month State government review which produced a rules regime Premier Barry O’Farrell hailed as the toughest in Australia, if not the world, and then an out-of-the-blue decision to impose no-go-zones – the company decided not to proceed for the present with further exploration and development work on its Clarence Moreton Basin holdings in the Northern Rivers area.

Metgasco managing director Peter Henderson says the company has spent $100 million over 10 years in the licence area and identified a CSG resource equal to about 20 years of current NSW gas consumption. These are the largest uncontracted gas reserves on the east coast.

Henderson says Metgasco expects NSW gas supplies to “tighten severely” over the next few years and consumer industries to face gas shortages and greatly increased prices.

Reacting to the decision, the Australian Petroleum Production & Exploration Association said it had been warning for months about “ad hoc and politically-motivated regulation” of the energy sector.

APPEA says that the Queensland CSG industry now employs 27,524 people and has added 8,000 jobs since June last year while the NSW industry, trapped in “limbo” for the past two years, employed 326 people and had added six jobs in the same time frame.

Under the present conditions, APPEA adds, jobs, royalties and regional development that NSW could have will be going elsewhere.

Meanwhile explorer Planet Gas describes NSW as “a high risk jurisdiction” in its new annual report.

Price shock saga

April is expected to see a range of developments in the national saga over electricity prices.

In Queensland, consumers are waiting on the Newman government to announce how it will try to alleviate the proposal by the State’s pricing regulator to increase household and small business costs by between 15 and 21 per cent from July. Premier Campbell Newman and ministers have hinted that the government will consider further subsidies.

In New South Wales, the Independent Pricing & Regulatory Tribunal is due to release its draft determinations of electricity and gas prices for regulated customers.

And in Canberra, the Productivity Commission is scheduled to release its final report on electricity networks – the draft report published late last year was the basis for Prime Minister Julia Gillard promising Australian households a price cut of $250 a year from 2014 even though the review actually suggests a savings range between $100 and $250, dependent on the roll-out of smart meters on the east coast and the adoption of time-of-use tariffs.

Meanwhile the Australian Energy Market Commission has released its latest report to federal, State and Territory energy ministers on power price trends – in which it claims that increases in network charges, the major component of the past four years’ price shocks, will “moderate significantly” from July until mid-2015.

The AEMC expects the national average increase in household power bills to be only three per cent annually for the next two years after a rise of 14 per cent in the current financial year.

It expects overall wholesale power prices to remain flat and retail costs to flatten as well.

As well, the AEMC expects the growth of State and federal green scheme costs to slow this year, pointing out that the Gillard government carbon price has already been factored in to wholesale energy costs.

The commission believes the average rise in end-user prices will be less than a cent per kilowatt hour nationally in 2014 and 2015 financial years after reaching 3.7 cents this year. 

However, it is careful to point out that final prices will be impacted by the approaches taken by jurisdictional price-setting regulators.

It comments: “Electricity prices are complex. The factors driving them can change. Actual outcomes may differ (from its report) because of a range of uncertainties.”

Factors it lists include the entry and exit of generators from the market, changes in consumption and peak demand, changes to retail price regulation, the finalisation of network regulatory determinations and developments such as the recent South Australian decision to remove price regulation.

Hardship hassles

Just how far Australian governments have fallen down on the job of helping household customers struggling to pay their energy bills has been highlighted by a report produced by consultants Deloitte.

The Energy Supply Association, which commissioned the study on how energy concessions and hardship policy can be improved, says Deloitte have identified young families, first home buyers, low income singles and regional consumers not connected to a grid as classes of vulnerable customers overlooked by most assistance schemes around the country.

ESAA chief executive Matthew Warren says it is time State governments reviewed the eligibility criteria to target those really in need.

As an example of poor practice, the report cites the “anomalous” concessions program in Queensland where those under 60 with a health care card do not qualify for help when they experience trouble paying their bills while all retired Queenslander over 65 automatically get a concession.

Warren says assistance needs careful targetting. “Otherwise you get a very expensive scheme with the perverse result of struggling families subsidising the power bills of the rich through their taxes.”

Deloitte finds that Australia actually has no operational definition of “vulnerable” energy customers so it has made one up: those who are at risk of experiencing genuine financial stress due to moderate increases in their energy bills. 

“Financial stress,” the consultants point out, is the general term used to describe the circumstances of people who are unable to meet their basic cost of living expenses.

They find that Victoria offers the most comprehensive suite of specific benefits, including targetting vulnerable groups who require help for a particular reason, for example they need air-conditioning for the operation of medical equipment.

Beyond Victoria, Deloitte say, jurisdictions should adopt providing concessions as a percentage of power bills rather than a lump sum. Warren says this form of funding better helps customers to pay the bigger bills they get in summer and winter.

Deloitte sum up the causes of substantial increases in electricity prices as resulting from network capital outlays to meet peak demand, environmental policies (including the carbon tax and the RET) as well as the cyclical need to replace assets. 

Higher network capex has coincided with a slump in energy sales, resulting in higher fixed energy costs per user, they add, and the increase in average house size as well as a rise in use of low-cost, imported electrical appliances are additional factors.

They point out that low income customers have a lessened ability to invest in energy efficiency measures to counter rising costs.

Cooking with gas

It says something about the vibrant state of Australia’s upstream petroleum industry, despite numerous concerns with policy issues affecting both exploration and production, that some 3,500 people are expected to attend the Australian Petroleum Production & Exploration Association conference in Brisbane at the end of May.

This will be about a quarter more than the attendance record set at APPEA’s 50th conference in Brisbane in 2010 – and the 2013 event sold out its 180 exhibitions booths before Christmas last year.

Some of the world’s biggest players in oil and gas exploration and production will be among the exhibitors as well as scores of service companies for whom the Australian industry is a multi-billion dollar source of revenue – and one set to grow rapidly over the next decade as current projects are completed and if new ones are brought forward to serve strong domestic and export requirements for gas.

Not surprisingly, also, with a high-powered speaking slate and a unique networking opportunity, the conference attracts about two score journalists, ensuring that it stays in the headlines for the duration, in itself reinforcing the industry perception that the APPEA event is the place to see and be seen.

The star industry speaker at the 2013 Conference oversees what the Wall Street Journal describes as “a modern colossus” – an oil and gas company with assets in 44 countries.

Peter Voser, chief executive of Royal Dutch Shell plc, leads an executive team that makes some of the world’s biggest multi-billion dollar investments on projects that can take decades to pay off as the company continuously pursues the challenge of finding more oil and gas to replace what it pumps from the ground and sells.

He recently confirmed a Shell growth agenda that will see a capital spending program around the world of $US120 billion to $US130 billion between now and 2015.  “Shell is competitive and innovative,” he said in an investor update at the end of January. “We are delivering a strategy that others can’t easily repeat, with unique skills in technology and integration – and we have a worldwide set of opportunities for new investment.”

Shell has some 30 new projects under construction or at advanced planning stages, including developments in Australia. Voser says these are predicated on a global vision that sees energy demand remaining unchanged, driven by a rising world population and improving standards of living in developing countries.

In launching new Shell scenarios for the 21st Century at the end of February, Voser highlighted a challenge that will be strongly on the minds of the packed houses he and other APPEA conference speakers will address at the Brisbane Convention Centre.

“The scenarios highlight the need for business and government to find new ways to collaborate, fostering policies that promote the development and use of cleaner energy and improved energy efficiency,” he said, pointing out that global energy demand could double by mid-century.

Sharing the opening day stage with Voser will be Fatih Birol, chief economist and director of global energy economics of the Paris-based International Energy Agency. 

Birol has been described by Forbes magazine as one of the most powerful people in terms on influence on the world’s energy scene.

He is often called on to brief high-level political figures on energy issues — including briefings for President Barack Obama, among other leaders, on the implications of America’s boom in natural gas.

In its most recent commentary on the role of gas – as part of the publication of its new world energy outlook – the IEA says we are “living in extra-ordinary times for gas markets” although it points out that the outlook varies significantly for various regions and is accompanied by huge discrepancies in prices: from very low levels in the United States to prices four or five times higher in Europe, and six to eight times higher in the Asia-Pacific region.

Their presence in Brisbane underpins the fact that Australia is not in the antechamber of world petroleum these days.

It is on its way to becoming a superpower in the international gas trade, driven both by the huge resources located offshore the north-west and northern coasts and onshore in Queensland and by this country’s strategic position alongside the fastest-growing demands areas in Asia.

Last word

If federal politicians making Australia’s energy policy today or anticipating making it after the September election want to read one useful thing during the long parliamentary recess before Budget Day, then I recommend the commentary produced by KPMG for this year’s “Energy State of the Nation” forum in collaboration with the Energy Policy Institute.

Entitled “Australia’s Energy Financing Challenge,” the booklet has a straightforward message: we are at risk of being left behind in obtaining money to finance the massive energy investment on which we are relying for economic well-being unless policymakers make changes in the intersecting policy, market and financial areas.

The export component of this challenge is very well known but the domestic side is not small beer.

The energy white paper last year suggested that up to $82 billion would need to be found for generation investment between now and 2030 plus another $140 billion for electricity networks and for gas pipelines, production and associated works.

Even as the white paper was being published these estimates were starting to be considered over-stated, but this doesn’t matter.

What matters is that the funds that will be needed (to quote KPMG) “are more than substantial” and they will have to be pursued in a fiercely competitive global market for money.

A big part of the new borrowing landscape is that the traditional financiers of our energy infrastructure – governments and banks – are in a different mode today.

Governments are very wary of taking on new debt and Australian banks are no longer especially willing to provide the complete energy project financing packages (starting with project construction and continuing through infrastructure’s operating life).

What’s more energy developments are caught up in the rolling maul of the money game with roads, rail, urban public transport systems, airports and social infrastructure such as hospitals, altogether adding up at present to 160 projects seeking $1 trillion in funds.

The problem for the industry, KPMG points out, is that Australia has lost the advantage of stable energy policy that it held for decades and is now seen in a much more uncertain light because of the “drawn-out and vociferous debate” over carbon pricing, the minerals tax and associated issues.

“The extent to which this is deterring international and locally-based capital is not to be under-estimated,” KPMG warns.

Some financiers, it says, regard investment in new energy projects here as simply too risky these days.

This is a non-trivial issue.

The consultants’ Dr Tim Stone, who has been an energy policy advisor to British governments and is a director of the European Investment Bank, contributes a perspective to the KPMG paper that emphasizes clarity and consistency of policy is critical in attracting finance and policy needs to be developed with “whole-of-systems” thinking.

KPMG identifies key factors constraining capital inflows to energy development here (and therefore adding to the cost of capital) as uncertainty about the future of carbon policy and the approach to renewable generation, the structure of the electricity market, electricity regulation (especially as it affects retail pricing) and the myriad of other barriers and impediments being thrown up by various jurisdictions (and continuously canvassed in this and other issues of Coolibah Commentary).

The consultants quote one international investor as telling them: “It is not necessarily the (carbon) politics itself. It’s the uncertainty. We don’t know what the rules are. It doesn’t just affect generation. It affects perceptions of what might happen downstream.”

Another asked: “Why would you write a 15-year deal if you don’t know what the rules are going to be next year?”

The KPMG/EPIA commentary is filled with suggestions about how to improve this environment.

A handful seem to me especially important:

  1. Investors need reliable policy principles to be embraced that will survive electoral cycles.
  2. The starting point to achieve this is an independent appraisal of policies and a report on principles, goals, mechanisms and areas of difference between major parties.
  3. Agreement on mechanisms needs to be horizontal through the federal government and vertical between Canberra and the other jurisdictions.
  4. A long-term approach to carbon reduction must be produced.
  5. The power sector should be fully privatised and retail pricing deregulated.
  6. Political intervention should only address clear market failures and social objectives (such as addressing customer hardship) need to be managed through the welfare system, not the energy markets.
  7. There needs to be a well-considered focus on the use of technology (smart meters and smart grids), price signalling and consumer education to reduce peak demand and to give customers greater control over their electricity usage and expenditure.

Almost every politician one meets can recite the rhetoric of this – what they have singularly failed to do over the past decade is collectively walk the walk and, as the KPMG report makes clear, there literally is a price to be paid for this.

Confidence, say the consultants, is critical for those committing the money we need.

The greater their uncertainty, the higher the financing costs will be.

Where the uncertainty is too great, the finance may not come forward at all.

“The possibility of an investment shortfall is real.”

Keith Orchison

4 April 2014



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