Issue 156, April 2018
The CoAG Energy Council meeting in Melbourne on 20 April, following the March South Australian change of government, could be of critical importance in shaping the national energy debate for the rest of this year and right up to the next federal election, writes Keith Orchison. Josh Frydenberg is adamant that the power system “can’t be left to the whim of the weather” and that his government’s “national energy guarantee” will light the way forward to a more affordable and reliable supply future. However, numerous stakeholders still have qualms about the proposed measure and the April CoAG meeting may be only a stepping stone in a drawn-out process. Submissions to the Energy Security Board in recent weeks contain a fair amount of fear that the mooted cure for what ails the NEM may turn out to be worse than the disease. Even a great optimist would be hard-pressed to claim that an Energy Council agreement this month to press forward with design of the NEG will herald the beginning of the end of the saga. And this task is not the only current work impacting on the operation of the NEM.
Just a month before he was swept from office in the State poll, Tom Koutsantonis, in his capacity as South Australian Treasurer and Energy Minister, wrote a letter to Kerry Schott, chair of the Energy Security Board, setting out “significant concerns” with the “national energy guarantee.” It would not be too fanciful to see in this the embryo of the case Labor will take to the next federal election.
The NEG as devised, Koutsantonis wrote, “represents a third-best solution” to the vexed issue of integrating carbon emissions abatement and energy policy. “To support the fiction that there is no price on carbon, the NEG seeks to utilize existing financial contracts in the market. While there may not be an explicit price on carbon, even the inadequate emissions targets proposed will impose a shadow price.”
A mechanism, he declared, that does not transparently price carbon is unlikely to be as efficient as one that does.
In fact, Koutsantonis told Schott, forcing financial contracts to address both emissions and reliability obligations risks undermining trade in contracts because market liquidity is dependent on every megawatt hour of supply being mutually interchangeable and of identical value.
He also asserted that the NEG consultation paper “in effect adopts a capacity market model and yet fails to acknowledge any of the associated costs and risks despite this perhaps being the most debated issue in energy market design.”
Koutsantonis argued that the paper “gives very little consideration to market power issues” despite the ESB itself having previously highlighted this as a major NEM challenge. He claimed the NEG may also act to increase the incentives for market participants to vertically integrate.
The measure as it stands, he added, represents “the most significant change to the core NEM design since its inception” and requires a “more robust and rigorous” assessment than it is getting.
The Australian Competition & Consumer Commission has fired a warning shot across the bows of the federal government’s energy flagship, warning the Energy Security Board that its own June review of electricity markets will highlight NEM competition concerns.
In a letter to ESB chair Kerry Schott, ACCC chairman Rod Sims says “there seems to be sufficient concerns among market participants about contracting and liquidity issues to justify a cautious approach to policy changes that will affect these aspects of the NEM.” Work on the NEG, he warns, “should not exacerbate existing issues or create new issues in the contract market.” Competition in this market, he adds, is “critical to the long-term affordability of electricity.”
Jon Stretch, chief executive of ERM Power, one of 10 retailers banded together to issue a statement of concern about unintended consequences of the “national energy guarantee,” said: “I implore the Energy Security Board and politicians to put competition matters at the centre of NEG policy development. Competition cannot be left as an afterthought to become the subject of eleventh-hour compromise.”
A new report by the Grattan Institute asserts that past New South Wales and Queensland governments allowed a massive over-expenditure on electricity networks and calls on current ones to take action to compensate consumers for the continuing power bill costs.
The report argues that most of a $20 billion outlay from 2005 the institute claims to be unnecessary was sanctioned by NSW and Queensland governments, at the time both run by Labor, and was not needed to cover growth in population and consumption or peak demand. It says there is little evidence of a similar problem in Victoria and South Australia.
“The main causes of over-investment,” it adds, “were regulatory incentives, public ownership and excessive reliability standards.”
Energy Networks Australia has responded by saying the Grattan report is “based on assumptions that are challengeable” and warning that “arbitrary interventions” will make networks riskier investments and impair their capacity to contribute to the energy transition.
CEO Andrew Dillon says forcing a broad write-down of all network asset values will be detrimental to customers because it will increase regulatory risks and financing costs.
The Grattan Institute says the current NSW Coalition government should write down the asset value of the still-publicly owned Essential Energy by $3.3 billion and the Queensland Labor government should write down the values of Energex, Ergon Energy and Powerlink by $7.3 billion. The Tasmanian government-owned networks should also face an impairment of $760 million.
In the case of networks privatized by the Baird government in NSW – Ausgrid, Endeavour and Transgrid – the institute argues that the Berejiklian government should use up to $7.9 billion of the sales value to compensate consumers.
Grattan’s Tony Wood, lead author of the report, says: “Unless State governments fix the mistakes of the past, consumers will continue to pay for assets for decades to come that are neither used nor useful.”
He concedes the situation is “a nasty problem” and says that, if governments decide that resolving the situation is “all too hard,” they should acknowledge that high electricity prices are paying for other public infrastructure
He also calls for full privatization of networks “because the evidence shows that privatized electricity businesses deliver lower prices for consumers without compromising reliability or safety.”
Wood urges a shift to cost-reflective tariffs so consumers can act to reduce use when demand is high. “Network costs will fall if customers reduce their consumption at critical peak periods.”
In a submission to the Energy Security Board, the Australian Council of Trade Unions says using the “national energy guarantee” to place emissions requirements on electricity retailers will further entrench the NEM dominance of large gentailers and drive up consumer costs. This, it declares, is a view “supported by a wide range of industry participants and stakeholders.”
The ACTU adds: “Given the volley of concerns raised, we (have) no confidence in the wholesale prices modeling provided thus far by the ESB that indicates (they) will decline. It is the only modeling to date that indicates prices will decline; all other analysis and respected opinion predicts price increases for consumers.”
The Australian Council of Social Services says its is deeply concerned that the “very high profile” energy market reform processes following the Finkel report and the Energy Security Board work on the “national energy guarantee” are not being accompanied by a parallel process to address the size of energy bills and the capacity of consumers to pay them.
In its submission to the ESB on the NEG, the council claims current action will not be adequate to alleviate energy stress “facing more than three million people living in poverty and experiencing disadvantage.”
ACOSS argues that the NEG may put downward pressure on wholesale electricity prices, “but (this) will not be done in an equitable way.” It says there is a risk the measure will concentrate the electricity market and drive up costs through the administrative burden it creates.
It adds that the NEG is “an untested method to reduce emissions and address reliability – we lack any domestic or international examples to learn from, to use as benchmarks or to demonstrate the effectiveness of this approach.”
The submission to the Energy Security Board from the Australian Energy Council (lobbying body for 21 generators, retailers and downstream gas businesses) underscores the difficulty the supply industry is encountering in welcoming the certainty that may be offered by the “national energy guarantee” after years of policy struggles and in dealing with the potential market issues it poses.
The AEC welcomes the effort to provide “stable, national and technology-neutral carbon policy” although the proposed NEG structure, it says, is “not the expected or the first choice of many of our members.”
It adds: “our members hold a range of views about whether the existing market design, with its very limited role for the market operator in investment decisions, is the best one to carry the industry through the major transformation under way.”
The AEC “urges caution in rushing in to major change with hurried implementation time frames.” It says: “The reliability mechanisms of electricity markets are very complex (and) deserve careful and thorough consideration before embarking on major change.”
Meanwhile Energy Networks Australia, which represents companies engaged in power transmission and distribution as well as gas distribution, supports the NEG as a means of delivering policy certainty “that is so badly needed” but joins the chorus warning of problems arising if the measure impacts on supply competition. It is important, it says, for the NEG to facilitate, rather than preclude, market options such as new network investment where this can deliver cheaper electricity to consumers.
One of the nation’s largest power companies, EnergyAustralia, with 2.6 million household and business customers in the NEM, says it supports the intent of the “national energy guarantee” – integrating emissions and reliability in to contract and investment decisions” – but warns “the devil is in the detail of achieving these symbiotic objectives as simply, efficiently and expeditiously as possible.”
EnergyAustralia says the key NEG design issue is the intersection between the physical and financial energy markets.
It argues that, beyond a safety net, it does not believe a case for reliability measures has been made sufficiently clearly to justify driving additional supply and cost in to the NEM.
Another leading supply player, ENGIE Australia, has told the ESB that a broader discussion is required if there is a fundamental belief that the NEM is no long acceptable during the energy transition – either as a market mechanism or because it lacks community and political support. “The NEG,” it says, “should not create a process of fundamental market redesign by stealth or accident.”
ENGIE adds that a wholesale change, whether towards a capacity market or something else, “requires a broad and integrated review of policy expectations, what best meets consumers’ needs and market sustainability.”
In its submission, AGL Energy says: “In our view there may not be a compelling need to make significant structural changes to the existing operation of the NEM to drive better reliability outcomes.” It adds: “The best way of reducing wholesale prices over time is by increasing supply through policy certainty on emissions reductions, which may necessitate further refinement of existing market settings.”
The Business Council submission to the Energy Security Board on the “national energy guarantee” includes a challenge to State governments wanting to go it alone with renewables programs.
The BCA, which supports a single, annual electricity emissions target to apply to all NEM jurisdictions, says States pursuing their own renewables targets should provide a statement of any additional costs this will impose on consumers “and identify the implications that will arise in relation to system reliability before retailers are required to meet more onerous reliability obligations.”
The Business Council also calls for a minimalist approach under the NEG to market intervention. It argues that “the costs associated with an intrusive, complex and burdensome mechanism are likely to be significant.” This said, the BCA declares the NEG “provides a credible pathway forward” that can “put an end to the political impasse and policy paralysis and be a circuit-breaker for the stale energy and climate change debate.”
Engineers Australia has called for clarity on how other energy-related reviews currently underway will line up with the “national energy guarantee.”
The organization points to the current work of the Australian Energy Market Commission on assessing market inertia mechanisms, the ongoing Australian Energy Market Operator’s consultation on integrated system planning and the AEMC’s work on demand response in the whole market.
The initial impression, it says, is that they are possibly being treated in isolation with no over-arching framework for how they will interact with each other and the “guarantee.”
Engineers Australia also raises a question over a “disjoint” in the approach being pursued via the NEG and augmentation of high voltage transmission between NEM regions. The NEG, it points out, is based on non-regulated market entities responding to reliability gap triggers while interconnectors are regulated assets built to a different set of rules – and new links have a far greater lead time than most generation developments.
Overall, Engineers Australia adds, policymakers should use caution in implementing the NEG because it will add further complexity to operation of the NEM. “There is always a risk that, by adding too much complexity to this policy, it could add further costs (for) those operating in the NEM or those who will have new obligations.”
Remember, it urges, to consult the technical experts who make the system work, the engineers – who are key stakeholders in this process.
The Energy Users Association, representing major corporate consumers, makes a salutary point in its submission to the Energy Security Board – this process is significantly influenced by politics.
EUAA says what is proposed for the “national energy guarantee” is “far from perfect – but we recognize that many policy options that would deliver more efficient, market-based solutions have been taken off the table.”
Whatever the final design of the NEG, it argues, the measure must achieve bipartisan support. The absence of this and “the overtly political debate of the past decade” have been the single greatest contributor to investment risk and higher consumer costs.
“If the political environment continues to be a minefield for investors,” the association says, “no amount of well-designed policy will be enough to reduce risk to a point where energy costs return to economically viable levels.”
Meanwhile Major Energy Users Inc complains that no time is being allowed for other solutions to NEM problems to be assessed to identify if they will deliver higher consumer savings. Not investigating these potential solutions, MUA argues, is “entirely contrary to the expectations of the national electricity objectives, the NEM rules and the Hilmer reforms that led to the creation of the market.”
The NEG, the association declares, “seems almost to be a solution in search of a problem.” Despite assertions that increased reliability is required, it says, it has not been demonstrated that any future shortfall in this regard cannot be managed by tools already existing under NEM rules.
“What is concerning is that the NEG has the potential to further increase costs but not lead to increased reliability because current levels are already better than the standard.”
Shell Australia says it is concerned that the “national energy guarantee” has the potential to result in an “unprecedented level of government and regulatory intervention” in the domestic energy mark, especially the hedge market.
It acknowledges that the NEG could (its emphasis) provide “the building blocks” for a long-term policy response but warns that it is “critically important” to ensure the benefits and costs of intervention are carefully considered.
The Australian Securities Exchange has told the Energy Security Board that forward price signals in the NEM are “fundamental” to supply investment decisions and the transfer of risk in the market. Any failure to recognize this will likely lead to higher consumer prices and put investment at risk, it says in a “beware of unintended consequences” comment.
Emissions and reliability obligations on market players should be managed separately in a different contracts market rather than being attached to existing financial arrangements, the ASX adds.
The exchange says it currently has $9.64 billion of energy contracts on its platforms.
Tesla says its experience with the Hornsdale storage battery highlights that current NEM rules and standards prevent fast-responding technologies capturing the full value they deliver to the market.
“Creating an optimal mix of generation in the market requires that all technologies enter on a level playing field and are appropriately rewarded for their performance and contribution.”
It claims that 30 to 40 per cent of Hornsdale’s services to frequency markets have gone unpaid because “existing AEMO technical specifications are based on fossil fuel assets.”
The jockeying between the Turnbull government and AGL Energy over the future of Liddell power station in the NSW Hunter Valley rolls on – with Environment & Energy Minister Josh Frydenberg seizing on a report by the Australian Energy Market Operator as vindication for concern.
Frydenberg says the only company commitment at this stage to replacing Liddell capacity by 2022 is to upgrade neighboring Bayswater power station by 100 megawatts. Without implementation of the full plan AGL outlined after Malcolm Turnbull confronted it on the closure last year, Frydenberg says, AEMO’s analysis forecasts an 850 MW shortfall in dispatchable generation and a high risk of load-shedding being required. This is an “unacceptable situation” and not – a jibe at Bill Shorten – “an issue down the track.”
Frydenberg wants AGL to commit to building the rest of the replacement capacity it has proposed – having declined to sell Liddell to another operator willing to keep it open – “as soon as possible.” He criticized the company for avoiding discussing the cost to the power market of increased volatility without adequate replacement for the plant.
AGL Energy says its analysis of the NSW situation shows that the State will be 865 megawatts overweight in baseload capacity in 2022 and 1,102 MW underweight in intermediate plant as well as 786 MW underweight in peaking plant without taking in to account access to interstate supply. The State is presently served by 10,160 MW of coal, 567 MW of intermediate gas plant and 4,236 MW of quick start gas turbines and hydro – with 2,000 MW of variable renewables in operation or under construction. AGL points out that AEMO forecasts NSW’s power demand in 2022 will be just under 66,000 GWh compared with almost 68,000 GWh in 2017.
In its report, the market operator says that, while there is a “significant level” of new, intermittent renewable capacity coming on line “over the next few years,” more dispatchable power is required in NSW because there is insufficient interconnector capacity to meet the State’s potential needs during extreme weather peak periods.
In its entirety, the AGL three-stage replacement plan would deliver sufficient resources to plug the 850 MW gap, the operator has told the minister in a letter.
Meanwhile EnergyAustralia has chimed in to the debate, telling media that two gas-fired developments – of more 1,000 MW at Tallawarra near Wollongong and Marulan near Goulburn – it has in “advanced” planning could be part of the NSW shortfall solution.
The Independent Pricing & Regulatory Tribunal in New South Wales in considering paring back the State’s benchmark feed-in tariff, citing a fall in wholesale power prices from 11 to eight cents per kilowatt hour.
IPART will hold a public forum on the issue next month and deliver its verdict in June. Its chairman, Peter Boxall, says that, for most NSW consumers who have installed solar PVs, feed-in tariffs have less of an impact on their bills than retail prices because they still need to buy power at night or when the sun is not shining.
The tribunal says about 10 per cent of the State’s households and small businesses now have rooftop solar.
Here’s a number that isn’t being thrown at us in the welter of information and assertion regarding the irresistible ascension of wind and solar power that constitutes much of today’s east coast energy debate: taking in to account announced retirements and plants reaching a 50-year working life, there will still be almost 20,000 megawatts of coal-fired generation in the NEM in 2030.
Leaving aside the two Loy Yang plants and Yallourn, this is capacity concentrated in the two largest power demand areas, New South Wales and Queensland, home to two-thirds of NEM supply.
Absent significant political intervention, the only two coal-burners to close in this period (12 years) would be Liddell and Vales Point in NSW.
What this boils down to it is that, despite political moves (eg the Palaszczuk government’s renewables plan for Queensland), fossil-fuelled generation (including gas power) will continue to dominate the power scene in the largest segment of the east coast market. Let’s call it the eastern NEM.
Most of the edgy stuff is focused, therefore, is the southern NEM (South Australia, Victoria and Tasmania) where politics and events have conspired to create disruptions and anxiety.
This picture can be drawn from the latest publication issued by the Australian Energy Market Operator, which is being greeted with “blackout” headlines on the one hand in the mainstream media and the usual reactions of green boosters.
The salient point, I believe, in considering the latest AEMO material should be to focus on 2030, not 2050.
As I don’t tire of arguing, trying to lock in generation requirements looking out 32 years from here is a nonsense and one only has to go back and stand in 1986, peering towards 2018, to appreciate why.
If this was a power supply managed by engineers, of course, things might be different – but it isn’t and politics dominates the scene.
Federally alone, we face about five elections between now and 2030. Which of us would care to put our hard-earned on who will govern Australia over this period and in what direction or even on what scene-changing power technology developments we may see? Just go back to as recently as 2006 and see how far you might have predicted today’s situation……….
The market operator opines that forecasting for only 20 years is not just complex because of the transformation of the supply mix and growth in “consumer technologies” (ie rooftop solar and batteries) but also because of climate change and local weather impacts. True – but it is hardly sensible to gloss over the politics of energy, which has been the biggest impact by far since 2007 on the NEM being in the state it is today.
With this by way of context, there are a number of points in the new AEMO document that are quite interesting (at least to me).
One is exactly what has happened to capacity in the market in the past 10 years: 5,199 MW of baseload generation has been retired and replaced with 2,895 MW of gas-powered generation, 2,965 MW of wind farms, 265 MW of grid-scale solar and 277 MW from other sources, including diesel.
As of December, 3,700 MW of intermittent generation projects have been committed by investors versus just 90 MW of dispatchable capacity. Expand this to include proposed projects and there are some 29,400 MW of wind and solar developments under consideration versus 3,450 MW of gas-burning capacity.
Another point is that AEMO is concerned, if proposals for resources, the market and regulation (for reliable and secure operations) continue to be considered separately, the NEM could end up with “sub-optimal” outcomes and, therefore, higher consumer costs.
It also observes that a high penetration of variable renewable energy in the NEM “increases volatility to a point where it starts denting market efficiency considerably” and that investment to achieve the necessary flexibility can only be pursued if the market design has instruments to value this asset.
There is, it says, an urgent need for “more rigorous” investigation of the reliability framework needed in a NEM with a high VRE share. You don’t hear the green boosters conceding this in their optimistic views of a market dominated by wind and solar power.
A third point is that the market operator does not believe the current or future market provides appropriate incentives for new, dispatchable gas plant.
Included in the paper is another pitch for AEMO’s push for a strategic generation reserve able to respond quickly when needed (ie in a market increasingly at the whim of weather with less coal plant or similar capacity, which, I point out, could include nuclear energy in a more sensible political environment). A big question here is what the cost of such a reserve will be to customers (not something the boosters factor in to their assertions of the growing cheapness of wind and solar).
Finally – and I should acknowledge I am cherry-picking from a 62-page document that covers a lot of ground – AEMO notes that the past decade has delivered us is community confidence in the electricity market lying at an all-time low (polling says only one in five consumers think energy markets are now working in their interest) when our concerns about “market outcomes” – read “cost” – and reliability (which, of course, for lay people also encompasses satisfactory network service) is at an all-time high. That this translates in to political fall-out is hardly rocket science.
What comes through to me in reading the new AEMO document is reinforcement (not for the first time, by any means) of how policymakers and their fellow-travellers in energy regulation are struggling to keep pace with both technology transformation and the confusion/fear/irritation of consumers on whom the market burden ultimately falls.
More than a few of us would like to think this debate is winding towards a close but, in fact, it has only just begun – and commentaries like the latest one from AEMO serve to underscore this.
31 March 2018