Issue 100, August 2013

Welcome to the centennial edition of Coolibah monthly newsletter, writes Keith Orchison, as we wait and wonder about a federal election, carbon policy stays up in the air and the debate about a future zero emissions Australian power industry rolls on – while the east coast gas issues remain unresolved.

Ducking debate

The Academy of Technological Sciences & Engineering has called for policymakers to stop hiding their heads in the sand about nuclear power for Australia.

ATSE president Alan Finkel, launching a two-day conference on the issue in Sydney at the end of July, said they have been ducking a debate for too long. Nuclear power, he added, offers Australia a “transformational opportunity” to pursue clean energy goals.

Finkel argues that a power supply mix that includes reactors to help Australia reduce its carbon emissions per kilowatt hour of electricity generated from a “very high” 850 grams now to as little as 200 grams over time.

“If we want to go down the nuclear road, we need to start planning,” he told 200 attendees at the ATSE forum in Sydney’s Powerhouse Museum, one of the city’s earlier power stations.

One of the participants, Stefaan Simons, director of the International Energy policy Institute of University College London, based on its Adelaide campus, says an east coast power system that is a mix of renewables and reactors can provide energy security for a carbon-constrained economy and up to 55,000 new jobs.

Simons is a sceptic about carbon capture and storage, which the coal industry sees as the key to its continuing role in power production in Australia over the long term. “Economically viable carbon capture is still a long way off,” he argues, “and it may only be viable for a limited number of sites.”

He believes building 10,000 to 25,000 megawatts of nuclear power could enable abatement of up to 75 per cent of Australia’s electricity-related carbon emissions. “The remainder could be avoided with renewable energy and demand reduction measures.”

Ron Cameron, an Australian who is head of the development division of the OECD Nuclear Energy Agency, told the ATSE forum that governments in a number of countries are paying insufficient attention to the longer-term costs for total electricity system of different technologies, not least renewables.

“The priority (policymakers) give the different pressures to provide secure, low carbon and affordable energy changes the economic choices available to them,” he added.

Ian Duncan, once general manager of the Olympic Dam uranium mine and a former chairman of the World Nuclear Association’s forerunner, told the ATSE forum that a critical early step to facilitate nuclear power in Australia is the development by 2016 of an inspectorate with regulatory control over the choice of technology, siting, construction and operation of reactors.

The fastest nuclear effort thereafter, he added, could see Australia’s first nuclear plant on-line by 2030 and perhaps 21 reactors in place by mid-century.

Michael Angwin, CEO of the Australian Uranium Association, said a dispassionate examination of the nuclear option would enable this country to move beyond the fear that has characterised the debate to date.

A key part of a plan to develop nuclear power, he said, is resolving the hurdles to orderly uranium mine development. “It currently takes seven to nine years to develop a uranium project here,” he added. “This is far too long. We don’t want governments to lower their sights when it comes to environmental assessment. We want them to raise the productivity of the process.”

Fighting back

“The Australian” newspaper reports that the upstream petroleum industry has launched a $5 million, two-month advertising campaign against ideological opposition to the coal seam gas industry.

The paper quotes Origin Energy CEO Grant King as saying: “activism has materially influenced public policy and resulted in more onerous and duplicative legislation which adds overall to industry costs.”

King adds: “My biggest concern is that there are a small group of people who have ideological opposition to what is happening and who don’t feel bound to the same level of facts that we do.”

He says: “I am not talking about people with genuine concerns but about those who just want to shut down the industry with no consideration of what this will means for jobs, government revenue and economic growth.”

Australian Petroleum Production & Exploration Association communications director Michael Bradley says the intent of the campaign is to send a message that opposing gas developments is not consequence-free.

Falling value

The Energy Supply Association says that the value of electricity supplied through the east coast market – the “NEM” – fell by 13 per cent between 2010-11 and 2011-12, a decrease of $936.6 million.

Total generation output fell by 1.9 per cent during 2011-12.

With average prices and demand falling consistently – a trend that has continued in 2012-13 – ESAA says the energy values dropped 40 per cent in three years.

A contributing factor to the fall in revenue is the decline in high-priced events in the “NEM.” During 2009-10 the market saw 175 periods where wholesale prices spiked above $300 per megawatt hour.  Mild weather conditions in 2011-12 resulted in only 19 such periods and in Victoria there were no half hour periods in which prices exceeded $300 – something that ESAA describes as “remarkable.”

The volume-weighted average spot price decreased in 2011-12 in all four mainland States, rising only in Tasmania. Apart from the island State, average spot prices were at their lowest since 2004-05, the year Tasmania joined the “NEM” through the commissioning of Basslink.

ESAA says this reflects both falling demand and increasing supply demanded by the Renewable Energy Target.

Looking ahead, the 2013 “Electricity Gas Australia” yearbook published by the association declares the future “uncertain.”

ESAA says the dynamics of the energy industry are changing rapidly.

“After a generation of almost uninterrupted electricity demand growth, the past five years have seen a levelling and then sustained falls in demand.

“It is entirely feasible to expect flat or further falls in demand for much of the remainder of the decade, if not longer.”

The association adds that the uncertainty around electricity demand is having a knock-on effect for gas.

Gas demand for power generation has been assumed to increase as a result of overall growing demand for electricity, with gas plants displacing coal generators as a result of carbon policies.

Now, says ESAA, “the role of gas in electricity generation has become less clear as expectations of power demand growth fall and as price forecasts for gas rise.”

While gas-fired power is still the most flexible generation source, it adds, the question now is whether gas will be used primarily for flexible power provision in coming decades rather than as (low-cost, low-emitting) baseload.

As a result long-term forecasts that saw power sector gas use reach nearly 800 petajoules a year by 2030 are now pitched at barely 300 PJ.

The yearbook forecasts for overall domestic gas demand, other than for LNG exports, have been drastically cut back.

Earlier forecasts were for demand to increase by an average 3.1 to 4.5 per cent. Now the forecasts, prepared for ESAA by consultants EnergyQuest, are seeing a rise of only 0.2 per cent per year out to 2031-32.

“This reduction,” says the association, “is principally due to reduced demand within the electricity generation and manufacturing”

Factory demand for gas was forecast only last year to reach 500 PJ annually by 2030. Now ESAA sees 2031-32 demand at just 222 PJ.

Declining load

The Energy Supply Association’s load forecast for the start of the next decade have been sharply revised down after a year in which the association’s members have been coming to terms with a consumption blip that has turned in to a trend.

Last year ESAA’s yearbook saw east coast generation production reaching almost 248 terawatt hours in 2020-21 – now the projection has been cut back to just under 220 TWh.

The sharpest reduction in the forecast is for north of the Murray.

Last year ESAA was still saying that New South Wales generation production would reach 87.7 TWh in 2020-21. Now it is forecasting only 76.9 TWh.

For Queensland, it is equally pessimistic. Last year ESAA expected generation sent out in the State to exceed 75.6 TWh in 2020-21 and now it is forecasting 64.2 TWh.

For Victoria, the third State of the trio dominating Australian electricity demand, the load forecast has been cut back from 55.7 TWh to 53.1 TWh.

The outlook is lower even for the stand-alone boom State of Western Australia. Last year ESAA foresaw WA generation reaching 25.3 TWh in 2020-21. Now it has cut this back to only 20.7 TWh, a reduction of 18 per cent versus a decline of 12.3 per cent for NSW.

Looking Australia-wide, the association sees generation reaching a record 242.3 TWh in 2020-21 but this is well down on the 276.5 TWh it was expected just last year.

ESAA is now also expecting peak loads to be well below its earlier estimates.

For NSW, it now anticipates 14,743 megawatts (previously 17,524 MW) in 2020-21. For Victoria it sees the peak at little more than 11,000 MW compared with 12,356 MW in last year’s projections. For Queensland, it now expects 11,155 MW versus almost 14,000 MW.

Carbon capers

Political manoeuvres over national carbon policy – the latest the decision to move Australia to an EU-linked emissions trading scheme a year earlier than the Gillard government planned, a step promptly decried by the Coalition – have senior energy industry figures warning about the implications for investment planning.

Origin Energy managing director Grant King said in late July there would be delays in investment decisions until there was more certainty on carbon policy.

“We invest for five to nine years, somewhere towards the end of the decade, even in to the early 2020s,” he said, warning that, while there was no prospect of east coast power shortages in the rest of this decade, policymakers should not be complacent about the effects of the current situation beyond 2020.

King caused media excitement by making the obvious point in an interview that, if the carbon price stayed around $6 per tonne, power generation investors logically would build coal plants.

Meanwhile, he said, the current configuration of the renewable energy target – to drive 41,000 gigawatt hours of consumption by 2020 rather than 20 per cent of demand – is “disincentivising people from investing in any other form of generation.”

(The Energy Supply Association says that wind farms now account for half of all new generation investment compared with 11 per cent in 2002-03. The Clean Energy Council says about 3,500 MW of new renewable energy capacity has been commissioned since 2001, costing a total of $18 billion and it claims that the current RET will result in another $18.5 billion in investment.)

King told the ABC’s “Inside Business” television program that “it will be very disappointing if, in five to 10 years’ time, consumers are complaining about generation costs that result from policy decisions made today.

Meanwhile, in an address to the Grattan Institute, Coalition environment spokesman Greg Hunt has said the Opposition is committed to the 2020 abatement target through its “Direct Action” plan by always selecting the lowest-cost emissions reductions.

“Rather than a highly volatile tax that doesn’t reduce emissions but does increase costs and will lead to $57 billion in foreign carbon credits needing to be purchased each year by 2050,” Hunt said, “we will focus on incentives.”

Solar sleeper

One of the issues flying under the political radar in Australia today is that, for the first time, we have a significant number of householders – now more than a million out of 9.2 million overall – who have a vested interest in their own electricity generation through use of rooftop solar photovoltaics.

This represents a sizeable block of voters and their views on a range of energy-related issues have yet to be tested.

Speaking at Clean Energy Week in Brisbane, David Green, CEO of the Clean Energy Council, posed the question: “How many of us will continue to take less and less power from today’s grid as more and more households switch to solar and we get better at using energy more efficiently.”

Green also asked whether more communities will demand the right to decide what sort of energy they receive in their neighbourhood?

The model of disengaged consumers, large, remote power plants and the high-cost networks that go with them is changing, he argued. “Instead we are beginning to see a more decentralised, demand-focussed market underpinned by clean and efficient generation.

“But changing the structure of the market is a challenging process which we have really only just begun.”

Insulation opportunity

A new commentary produced by the Clean Energy Council says that there are about a million Australian homes without any ceiling insulation and another two million with less insulation than is now required for new homes.

The council says there are more than five million homes with no wall insulation.

“If all these gaps were filled,” it claims, “Australian consumers could achieve more than $4 billion in energy savings.”

The CEC adds that “it’s become an accepted fact in the energy policy debate that no-one should ever mention the world ‘insulation’ following the huge media outcry over the federal government’s home insulation rebate scheme.”

By exiling insulation from the policy debate, it argues, “the community has foregone substantial levels of sustained local employment in manufacturing and associated sectors” in addition to energy cost savings.

The council says that State-based energy efficiency schemes still have an important role to play and should not be reduced or removed unless and until there is an effective national policy framework.

Meanwhile a report by Vivid Economics, jointly commissioned by the Climate Institute and General Electric, asserts that a one per cent improvement in Australian energy efficiency per year could make the economy $8 billion better off in 2020 and $26 billion better off in 2030.

The research claims that the manufacturing sector could save $1.7 billion a year in energy bills by reducing consumption 12 per cent and the mining industry could save $650 million with an 11 per cent energy efficiency gain.

The Climate Institute says economically viable energy efficiency could drive carbon emission reductions of 61 million tonnes by 2020, achieving 40 per cent of the bipartisan political target of greenhouse gases being five per cent below their 2000 levels.

The institute wants the State-based schemes replaced by “a nationally-consistent and robust energy savings initiative.”

It is also calling for energy pricing to more accurately reflect the costs of use, promoting time-of-use and critical peak electricity pricing and charges for pollution created by energy supply as well as “removal of fossil fuel subsidies.”

AiG gas angst

The Australian Industry Group has released a report calling on policymakers to address “the alarming rise in gas prices and the worsening squeeze on eastern Australian gas supply.”

The report – “Energy shock: the gas crunch is here” – says only a third of respondents to a survey of gas-using companies on the east coast could get multiple offers when seeking new gas contracts. It says 10 per cent could not get an offer at all and 26 per cent could find only one supplier willing to negotiate.
AiG adds that the survey found that the average cost of gas on offer was $5.12 a gigajoule – “a sizeable uplift from historic prices of $3 to $4.

Business seeking later or longer contracts, it says, were offered average prices of $8.72 per GJ.

The association says: “These rises are coming faster than many thought. By comparison, the carbon tax added around $1.20 per GJ to gas costs. In other words, the gas crunch will hit users four times harder than the carbon tax – and it comes without compensation, assistance or responsive policy.”

CEO Innes Willox says the AiG wants “a national interest test” introduced for new or significantly expanded LNG export capacity to provide an opportunity to assess economic consequences of future gas sales overseas.

However, he says, the association does not propose a gas reservation policy – which is strongly opposed by gas producers, the federal government and the Coalition – but sees a national interest test as helping to reform the gas market.

Willox adds: “The reality is that gas users face serious pressures and prices will likely never return to the low levels that underpinned many businesses’ international competitiveness over the past few decades.

“A near-term supply squeeze may be unavoidable but more can, and should, be done to ease the longer-term risks of restricted gas supply and even higher prices.”

Baird buoyant

It takes a lot to make a government finance minister smile in these times, but NSW Treasurer Mike Baird was happy to meet the media in late July to announce “the death of Labor’s 2010 botched electricity deal.”

Revealing that the State government had sold Delta Electricity’s Mt Piper and Wallerawang power stations to Energy Australia for $160 million, Baird said the agreement also removes taxpayer liabilities of almost $2 billion.

A month earlier, he had announced the sale of Eraring Energy for $50 million to Origin Energy, enabling the government to terminate a plan to construct the Cobra coal mine at a public cost of $1.5 billion.

The last Labor State government – crushingly defeated in March 2011 – had sold the power output of the Delta and Eraring plants to Energy Australia and Origin Energy under the much-derided “gentrader” arrangements that also saw the distribution networks’ retail arms privatised.

Baird told the media that an investigation by the NSW Auditor-General had found the “gentrader” assets were sold for less than half their book value, “a disastrous transaction,” the Treasurer declared.

Meanwhile Energy Australia managing director Richard McIndoe said the purchases of Mt Piper and Wallerwang would enable the company to operate the plants more flexibly while at the same time relieving it of high fixed costs it currently incurs under the “gentrader” arrangements.

Price wars

The Energy Supply Association reacted to Prime Minister Kevin Rudd’s identification of curbing energy prices as one of the key government tasks by asserting that, over the past two years, State and federal governments “have implemented a range of successful strategies” to address the situation.

While Rudd claims that power bills among the most expensive in the world, ESAA retorts that, average household prices, on government figures, “still sit within the lowest quartile of OECD nations.”

However the major energy users continue to dispute this claim and the analysis by the Bureau of Resources & Energy Economics behind it on the grounds that the study should not have included excise and sales taxes and didn’t use the latest data.

Support for the users’ argument came in July from the annual survey of industrial energy prices in 18 countries, of which Australia is one, by the US-based NUS Consulting Group.

The latest review has Australia in the fifth most expensive position (behind Italy, Germany, Spain and Britain) with the cheapest nations being in order Sweden, Canada, Finland, South Africa, Poland and the United States (all with prices under 9.4 US cents per kilowatt hour or 7.2 European cents.

The Australian cost is given as 13.38 US cents or 10.23 EU cents.

The most expensive nations by far on the ladder are Italy (20.56 US cents and Germany 18.80 US cents).

Australia has shot up the NUS ladder since 2010 when it was ranked 14th cheapest out of the 18 countries.

Last word

As we live out these days until a federal election – one of the most irritating poll campaigns in living memory – the only certainty about energy policy and the energy market is that they have never been more uncertain and that there is unlikely to be an early improvement in this situation.

There must be a price to pay for such uncertainty but who can say at this juncture what it will be?

Everything we do has consequences and so do the things we don’t do but, even when the consequences seem clear, as in the failure to create an accord for the production of coal seam gas in NSW to cover the huge supply gap emerging as current contracts roll off, the body politic seems quite unable to do its day job: establish efficient and effective legislation and regulation.

It may take an historian rather than an observer of current events to look at energy developments since the turn of the century and explain how they interplayed and what happened as a result.

Certainly, in the present highly charged environment, vested interest and polarised opinion are dominant in the debate.

To what extent fundamental change is taking place in the east coast market, or needs to take place, is a matter of opinion and too much of the media coverage deals with the clash of views rather than careful analysis of the context of developments. As well, perhaps as many as half the community no longer get most of their information from conventional media, relying on social media that are notoriously not devoted to careful consideration of issues.

It is logical to assume that Australia needs a mix of existing and new technologies to achieve both its energy goals and its environmental targets, but, in mid-2013, it is hard to see a clear path forward that is acceptable to contending stakeholders.

In a recent speech, federal Energy Minister Gary Gray said it is valuable for Australians to be aware of the whole range of opportunities available to us and also to understand the responsibilities we have as a nation.

This is true, but such rhetoric does not overcome the fundamental fact that Australians elect governments to govern and to be accountable for their performance.

Genuine leadership on energy policy, adequately tuned to the challenges we face, has been seldom in evidence over a decade and too many decisions have been characterised by good intentions but poor strategic thinking and even poorer program management – and then by a blame game to escape criticism for failures.

The Clean Energy Council, in a new paper, calls for stable, investment grade policies to enable the energy sector to deal with its range of challenges and for an end to chopping and changing in government approaches.

It is right to do so, but there is next door to no reason to expect that the current querulous exchanges between the political parties ahead of the federal election are a prelude to closing the certainty gap – and the continuing travails of internationally-exposed manufacturers, with the implications this has for future power demand, are an added and not small problem for energy suppliers.

At the end of a financial year that must count as one of the most ragged in Australia’s modern history, it is clear that key stakeholders must do much better to prevent this decade becoming a lost one for good energy management but it is hard right now to summon up faith that they will do so.

Keith Orchison
1 August 2013.

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