Coolibah Commentary

Issue 160 August 2018

After a month in which reports from the Australian Competition & Consumer Commission and the Australian Energy Market Operator have made large waves in the national electricity debate, we now reach a point where the CoAG Energy Council is called on to be decisive, having received the final design of the “national energy guarantee” on 24 July. Some see the 10 August CoAG meeting as make-or-break for the “guarantee” – but this assumes the negotiations between governments won’t roll on if the discussion is inconclusive. Certainly, the competition between the mainstream parties over a national carbon emissions abatement target will continue right up to the next federal election at least. Less in current focus but also potent for the future of the NEG is whether or not the Turnbull government can pass enabling legislation in the Senate. As well, the issues with electricity retailing raised in the ACCC report are certain to require months of further inter-action between consumers, suppliers, regulators and policymakers with questions being raised about the amount of additional market intervention the commission is proposing. Looming over all this is the enduring pessimism of the industrial sector about it outlook for price relief in the near future and ongoing fretting about gas prices in eastern Australia.

Week in the NEM

The OpenNEM widget provides this profile of east coast generation from 22 to 29 July – illustrating the ongoing dominance of coal in the market:

Leaving aside an estimated 124.1 gigawatt hours of rooftop solar, the NEM saw almost 3,914 GWh of generation – of which 2,855 GWh was produced by black and brown coal plants, 72.9 per cent of the grid supply.

The balance of supply was mostly provided by 430 GWh of hydro power, 328 GWh of wind power and 262 GWh from gas plants, with utility-scale solar contributing 26.5 GWh and biomass 9.4 GWh.

Fundamental change

The Australian Energy Market Operator has settled on four elements of “fundamental change” for the NEM in its much-debated integrated systems plan published in mid-July.

Grid demand, AEMO says, is flattening due to the growth of rooftop PVs and increasing use of local storage as well as greater energy efficiency.

Over the next 20 years, the operator asserts, a substantial percentage of the market’s coal generation will approach the end of its technical life and “likely be retired,” highlighting the importance of mitigating premature retirement for resources currently providing essential, low-cost energy and system support services.

“The investment profile and capabilities of various supply sources have changed and are projected to continue to change radically,” it adds.

And, as costs of new renewable plant continue to fall and technology advances, it sees storage, flexible gas-powered generation and distributed energy resources “emerging as core components in a low-cost and reliable energy future.”

AEMO’s report includes a call for “immediate investment, with completion as soon as possible” of increased power transfer capacity between New South Wales, Queensland and Victoria, reduced transmission congestion for renewable energy developments in regional Victoria and steps to improve grid system strength in South Australia.

Quotes of the month

“The endless examination of Australia’s energy market sends a message of disarray to investors. The ACCC report has reinforced this. It’s a disgrace. It’s a political document. I don’t think it is going to lead to lower prices. It’s just going to lead to more intervention and a further retreat by investors from the market, the retail sector and networks” – Danny Price, Frontier Economics.

“While important steps have been taken recently, restoring electricity affordability will require wide-ranging and comprehensive action. We believe our changes can and will, if adopted, have a powerful and tangible impact on electricity affordability; this will reduce economic inequality and enhance our national welfare” – Rod Sims, chairman of the ACCC.

“This review is the most thorough assessment of the electricity market in a very long time and provides the evidence base for reform to improve energy affordability. The report sheds new light on why prices are increasing, identifying significant issues around network costs, concentration and structure, and the way retailers are presenting offers and engaging with consumers” – Lynne Gallagher, acting CEO, Energy Consumers Australia.

“We note that the report echoes the conclusions of the Australian Energy Market Commission annual review of retail energy competition, which revealed growing consumer dissatisfaction resulting from rising energy bills and confusion over discounting and how energy is sold. It is now well-accepted by industry, government and regulators that reforms to improve transparency are necessary” – Sarah McNamara, new CEO, Australian Energy Council.

“There’s no point in calling for another inquiry before you’ve read the report of the last one” – federal Environment & Energy Minister Josh Frydenberg, reacting to ongoing agitation for a royal commission on energy pricing.


“Definitely one to watch” is how lawyers Gilbert + Tobin have described the Australian Energy Market Commission’s announced intention to publish a “directions paper” in August on how the NEM regulatory arrangements can be changed to better align and co-ordinate investments in new generation and transmission.

The commission comments that “while we have a reliable amount of power supply (now), it is becoming harder to keep (it) stable.”

It says the future grid will have “significantly more multi-directional energy flows” and it points to proposals to add 45,000 megawatts of new capacity to the east coast system.

Ultimate test

The Australian Aluminium Council says the ultimate test of national energy policy is achieving a return to internationally competitive costs, especially for electricity.

In a submission to the Energy Security Board, council executive director Miles Prosser says delivering material improvements in power pricing will require more than the “national energy guarantee.” It will also require real improvements in the quantity and diversity of domestic gas supply and measures to reduce the level and impact of market power wielded, he argues, by a small number of integrated generators and retailers in the NEM.

“Even with the NEG,” Prosser adds, “prices may not fall to the level needed for electricity-dependent industry to be internationally competitive and further action may be needed.”

Like others making submissions on the NEG, the council is concerned about the time being made available for development of the measure. Prosser says time constraints, and the fact that the process is isolated from work on other potential steps, such as day-ahead markets, “creates a high likelihood of unintended consequences and costs.” Achieving inter-government agreement on the emissions intensity target, he suggests, is necessary to provide policy certainty for investors.

‘Bad to worse’

A new commentary published by the Australian Industry Group exudes pessimism about the outlook on energy prices for its 60,000 member companies, who employ a million people.

“The ongoing energy crisis, while improving, can be said to have gone from bad to worse,” says Innes Willox, AiG’s chief executive. “Price improvements since 2017 have been strictly relative. (They) are set to remain well above their historic average, sapping the competitiveness of many industries (as well as) putting households under pressure.”

The association says 65 per cent of businesses have had energy price increases in the past year versus eight per cent who have had bill decreases. Seventy-one per cent of its members surveyed expect price increases in 2018.

It estimates that electricity and gas price rises now in train will add $8.4 billion a year to business costs, including $3.9 billion to be paid by energy-intensive manufacturers. “Companies in primary metals manufacturing, refining, basic chemicals and non-metallic mineral products (including building products) are particularly exposed to a double hit to their profitability from steep electricity and gas price increases.”

Willox says the report AiG has produced suggests “a bleak future” for gas users. “Supply costs are high and exports have permanently transformed the market.” He adds that “the possibility gas-intensive industries will leave eastern Australia represents a major failure of policy many years in the making.”

With electricity, Willox says, the AiG report identifies “several big barriers” to be overcome” in further improvements of supply and price.

Many interventions

The 398-page report in to retail electricity prices delivered to the federal government in mid-July by the Australian Competition & Consumer Commission is remarkable for the many market interventions it proposes.

Perhaps the most important are a proposal that the Australian Energy Regulator be given power to fix a default retail price as a fallback position for household consumers not wanting to wrestle with the many contracts offers on the east coast – and the call for State governments to write down the asset base of publicly-owned networks, with the NSW government urged to hand back (through a rebate) an amount equivalent to the over-valuation of its privatized networks.

The commission is also urging the immediate roll-out of smart meters in regions of the NEM still without the technology and calling for the introduction of cost-reflective network charges.

The change that has received the most political, activist and media attention is the proposal that the federal government introduce a program of low, fixed-price offtake agreements for the later years of new generation projects, an idea immediately leapt on as a prop for new coal power developments.

The ACCC also wants restrictions imposed to prevent any company owning or controlling more than 20 per cent of generation capacity in any region of the NEM or the market as a whole.

Considering the report, lawyers Gilbert + Tobin comment that it “reveals a strong concern about inequality of outcomes, (appearing) primarily motivated by equity concerns (rather than) any analysis of economic efficiency.”

Gilbert + Tobin add that the report “fails to demonstrate that (market share) concentration or bidding behavior are causing increases in wholesale pricing,” adding “to the contrary, the ACCC acknowledges that (the increases) are due to well-known dynamics such as a shift in the generation mix across the NEM over five years.”

The lawyers say 23 of the 56 recommendations made by the ACCC would result in more powers being given to it or the AER. “We have previously been critical of the multiple, overlapping and fragmented regulatory bodies that operate in the energy sector. If accepted, elements of the report would make this worse.”

Solar storm

Whatever other plaudits the ACCC might get for its electricity report, its comments have raised the hackles of the solar power lobby. The commission has called for the federal small-scale renewable energy scheme, through which households can get a rebate on capital costs, to be wound down and abolished by 2021 following “dramatic” reductions in PV installation costs. Under current arrangements, the SRES should be phased out by 2030.

The ACCC also points a finger at the solar feed-in tariffs that have been a controversial aspect on the energy debate for the past decade.

The report recommends that the FiT subsidies no longer fall to the account of retailers (who pass them on to non-PV consumers) but that they be funded out of State budgets. The solar sector is complaining that States are likely to simply end the schemes.

The Grattan Institute sums up the report on this issue: “The ACCC has concluded that offering subsidies for household solar was well-intentioned but ultimately misguided. Solar schemes were too generous, unfairly disadvantaged lower-income households and failed to adjust to changing economics.” The institute’s Lucy Percival adds: “It was like designing a car with an accelerator but no brakes.”

The Australian Council of Social Services says it “strongly welcomes” the move to have governments pay for solar schemes rather than have the costs smeared across household bills.

However, the Clean Energy Council declares “prematurely” ending support for rooftop PVs is a bad idea because the technology is “one of the few ways households and businesses are able to reduce power bills.”

Boom then what?

“The boom in large-scale solar PV in Queensland has only just started and already we are seeing instances of daytime negative (wholesale) pricing,” says GlobalROAM director Paul McArdle.

Queensland has 116 megawatts of large-scale solar power on line at present and more than 1,400 MW of developments building or committed to construction – some analysts say the situation raises questions about the long-term profitability of the State’s fossil-fuelled plants and sends a new shadow over security of supply.

“As more solar comes on-stream, it will have a real (market) impact,” says McArdle, who has dubbed the situation a “solarcoaster” that will ramp up speed in the next 12 to 24 months.

Gas imbroglio

While July’s main energy debate focus was on electricity, gas sector consumers and market analysts continue to express concern about the east coast situation.

Analysts Wood Mackenzie have told media that east coast industry should think again about prospects for gas price pressures easing. Nicholas Browne, the firm’s director for Asia-Pacific gas, predicts strong Asian LNG demand will flow through to east coast charges, adding to the problems Australian petrochemical and fertilizer companies have in competing in the international market.

Mark Samter, now of MST Marquee and formerly of Credit Suisse, has told media that attempts to prevent domestic gas prices reaching international levels are “already lost” and importing LNG to south-eastern Australia “is the only way to avoid a much worse fate.” Even so, he adds, some industrial gas consumers face being put out of business.

There are now four LNG importing developments under consideration for the region.

Federal Resources Minister Matt Canavan concedes east coast prices are likely to rise further if new resources are not brought to market to offset declines in existing production areas. He says “while supplies from offshore south-east Australia are expected to remain close to current levels for the next one to four years, they are expected to decline over the next five to 10 years.”

Canavan also acknowledges that “gas prices of $10 are a great threat to jobs and manufacturing.” He adds “prices of $8 are also a threat,” emphasizing the need for Victoria and other State governments to list restrictions on exploration and development of onshore resources.

Victoria’s continuing ban on gas development, he says, “is threatening thousands of jobs in the manufacturing sector.”

The federal government intends to review its domestic gas security mechanism – introduced in 2017 in response to concern about the state of the market – during 2019 but Canavan points out that export controls can’t force prices below the costs of production and transport.

The Australian Competition & Consumer Commission is in the throes of finalizing a report on east coast gas supply.

For & against coal

The integrated system planning report from AEMO has served to rev up the argument about the role of coal in Australian power generation even as green activists point to 2040 modeling in the study indicating that east coast generation could be dominated by variable renewable energy and storage.

Greens MP Adam Bandt declares the report “confirms the demise of coal,” adding “AEMO has shown that the future is cheap, clean renewable energy.”

The activist Environment Victoria lobby group argues it is “ridiculous” to suggest Australia should burn coal for as long as possible. “(This) totally fails Australia when it comes to climate change.”

Central to the debate is AEMO modeling pointing to most of today’s coal generation still operating in 2030. By 2040 it expects a large number of coal plants to have reached the end of their working lives and does not expect new ones to replace them.

AEMO comments: “To support an orderly (NEM) transition, (our) analysis demonstrates that, based on projected cost, the least-cost transition plan is to retain existing resources for as long as they can be economically relied on.”

One of the country’s largest power users, BHP, says its own modeling demonstrates that coal will still account for more than half of generation output in 2030.

The Grattan Institute’s Tony Wood says the AEMO analysis is “impartial” – “this is not pro-coal or anti-coal; it doesn’t support closing coal plant as early as environmentalists would like (and) says they should close down when they should close down.”

EnergyAustralia executive Mark Collette says the report highlights the market challenges for large penetration of renewables and the important role for synchronous energy, including coal power. “The plan shows coal has a pivotal role providing high levels of generation when wind is low and the sun isn’t shining while reducing output during peak times for renewables,” he adds.

Federal Environment & Energy Minister Josh Frydenberg hails the AEMO study as “an important step towards ensuring our energy position is based on engineering and economics rather than ideology.”

Reality check

The Minerals Council of Australia has greeted the ACCC proposal that government underwrite long-term NEM contracts to secure private investment in low-cost power contracts as “a welcome reality check.”

New CEO Tania Constable says the commission has recognized the impact on wholesale energy prices arising from the closure of older and larger generation assets. “Secure power supply agreements will enhance the opportunity for the private sector financing of new coal or gas plant capable of delivering least-cost power 24/7.”

She notes that about 8,000 megawatts of baseload coal and gas capacity – representing 27 per cent of baseload generation – is likely to retire between now and 2030.

Meanwhile the MCA has recommended in a submission to the Energy Security Board consultations on the “national energy guarantee” that the 26 to 28 per cent carbon emissions abatement target be embedded in federal legislation to provide certainty for companies looking to invest in lowest-cost dispatchable generation.

The association has also suggested that the ESB undertake a modeling exercise to benchmark wholesale electricity prices based on the long-run marginal cost of a portfolio of power generation technologies in Australia and comparable countries.

Pursuing perfection

The Australian operations of international power company ENGIE is warning again the pursuit of perfection in framing the “national energy guarantee.”

In a submission to the Energy Security Board, ENGIE says there are elements of the NEG which “may seem desirable or even eloquent on paper” but which are “likely to detract from the primary purpose” of the scheme. It calls on the ESB to adopt a principle that only essential elements will be included in the measure, leaving scope for others to be pursued later should they be proven to be necessary.

ENGIE also warns that the NEG’s compliance burden is likely to be excessive if the designers don’t rely on incentives rather than regulatory prescriptions and restrictions. “In our view, there is an attempt (being made) to anticipate every possible scenario or stakeholder complaint no matter how unlikely or unjustified through additional compliance obligations, enforcement or penalties.”

In framing penalties, the company adds, the ESB needs “to consider the treatment of non-compliance in circumstances where forecasts are incorrect and an obligation unduly triggered.”

A similar concern has been expressed to the ESB by AGL Energy. In its latest submission, it says: “Care needs to be taken not to attempt to resolve all of Australia’s energy market concerns through the proposed (NEG) architecture. The guarantee is primarily a mechanism to provide certainty on investment during a period of transition to lower emissions generation sources, with an associated safeguard to ensure system reliability; its design therefore should focus on these two imperatives.”

Market shift

The two main retail players in the South-East Queensland electricity market have lost five per cent of their share in a year, according to a study by Deloitte carried out for Alinta Energy.

The report says that the combined market share of the pair has dropped from 78 per cent in 2017 to 73 per cent this year. There are currently 18 retailers vying for small business and household customers in SEQ. Switching suppliers in the State as a whole, Deloitte adds, has doubled in the recent past – from 10 per cent a year to 20 per cent, which is similar to the rate in NSW and South Australia but below that in Victoria, the highest in the NEM.

Alinta Energy says that its entry in to the SEQ market last August has seen other retailers respond by almost doubling their discounts for small customers. The company says its latest power plan offers these customers savings up to $365 annually.

Last word

Would it be unreasonable to scrawl on certain walls in Canberra and other capitals “It’s the C&I, stupid”?

The vast bulk of media coverage, and of political debate, focuses on residential customers, there is some attention paid to small businesses, but, so far as electricity is concerned, commerce and industry still does not get the attention in this running row that it should when its importance to the economy is taken in to account – and its importance to employment, direct and indirect, in Australia. The business newspapers cover the issue but the mass media pay it scant attention.

As the Australian Competition & Consumer Commission points out in its new electricity report, large industry accounts for 34 per cent of total power consumption in the NEM – and really large industry, including aluminium production, accounts for half of that. The commercial sector – which includes financial services, commercial buildings, construction and retail services as well as public services (like hospitals) and agriculture – uses another 26 per cent.

In round terms, then, C&I involves some 120,000 gigawatt hours a year of NEM electricity supply versus 48,000 GWh for the residential sector. (The balance of around 30,000 GWh includes small business – customers consuming less than 100 megawatt hours a year.)

The economic issue for the C&I mob lies in the fact that wholesale NEM prices have shot up for its members, in some cases, says the ACCC, doubling or tripling.

Of course, C&I customers pay much less per unit of power than the two other sectors – 15.7 cents per kilowatt hour versus 29.6c for households and 26.5c for small and medium businesses – but only the economically illiterate will not understand why this is so.

Contained in the ACCC report is the core reason why C&I customers are so darned unhappy with their power lot. Looking at the sector’s cost stack, the commission points out that, between 2007-08 and 2017-18, its network charges have risen 57 per cent and wholesale prices 45 per cent, the two items accounting for 56 per cent of their electricity bills. It is also worth noting that the cost of environmental schemes in these bills has risen five-fold in 10 years and now accounts for 9.5 per cent of the total charge.

How all this adds up is starkly illustrated by the case of BHP, one of Australia’s largest electricity customers. The company says that its bill for power supplied in the NEM in 2017-18 was around $300 million – 60 per cent higher than three years earlier.

This serves to reinforce the point being made to the Energy Security Board by the Australian Aluminium Council ahead of the CoAG discussions on the “guarantee” – the ultimate test for the efforts to amend and improve energy policy, especially for electricity, is whether policymakers and their advisers can return this country to international competitiveness for its energy-intensive trading enterprises.

Just over a decade ago (2007), Australia had the fifth cheapest power prices in a basket of 30 substantial trading countries. This has been frittered away and Australia, according to the International Energy Agency, had fallen to 11 out of this on this ladder. France, Chile and South Korea, for example, now have lower cost electricity than we do.

Meanwhile, of course, many in the C&I sector are just as exercised about gas prices on the east coast as they are about electricity

When it comes to rating a country’s global competitiveness, energy costs and security of supply are obviously not the only factors, but they are important ones.

The “energy crisis” threat to Australian C&I is coming to a head and it is not clear that current policy and regulatory activity will alleviate it sufficiently to prevent a serious blow to the interests of all Australians.

Keith Orchison 29 July 2018