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Coolibah Commentary

Issue 128 December 2015

Are we there yet?

Merely to pose the question underscores what a frustrating year this has been for stakeholders in the energy sector – and how much hard work lies ahead for governments, supply businesses, their lobby groups, regulators and spokespeople for consumers in 2016, writes Keith Orchison.

In this final edition of Coolibah Commentary for 2015 – a publication that has now been appearing for 10 years – I am departing from the normal structure to canvass some of the key issues, most of which have at best been part-addressed in the corridors of government the past 12 months, a period that has been marked by a surprise change of government in a key east coast regional market (Queensland) and a change of prime minister for the fifth time in less than 100 months.

(Those who think the rapid rotation of PMs astonishing perhaps need reminding that, between the drowning of Harold Holt this month 48 years ago and ascendancy of Malcolm Fraser in November 1975, we also had five – if you include “Black Jack” McEwen. That occurrence did very little for policy stability, too. And, it is also worth mentioning, one of the major political features of that turbulent time was the determination of Gough Whitlam’s energy minister to frustrate the exporting of gas as LNG from offshore Western Australia.)

Coming back to the question – “Are we there yet?” – raises the major point that this is a nation, with respect to energy, that has some considerable difficulty in agreeing where there is.

One of the reasons for this is illustrated by an answer in the Essential Report poll published on 1 December. To the question “Who do you trust most to address climate change,” the response was 21 per cent the Liberals, 18 per cent Labor, 30 per cent the Greens (who could only possibly have a role in government as a minor partner for Labor) and, leading the pack, “Don’t know” with 32 per cent.

When you consider that we have been engaged in a strident debate on this issue, which is vital to how we formulate energy policy, for almost a quarter century, this is a startling answer.

In an environment where technological innovation is critical to addressing most energy issues and all climate policy questions, it is no less illuminating to find that, in a November  Essential Report poll, only 56 per cent of respondents believed technological change is making Australians’ lives better – 22 per cent thought it is making things worse and 18 per cent felt it makes no difference. (Four per cent said “don’t know.”)

As a further illustration, how is it possible to make a major decision on pursuing zero carbon power production in a situation (yet another Essential Report poll) where 40 per cent of Australians favor the development of nuclear generation and 40 per cent oppose it, with most federal politicians seeming literally too scared to take a leadership stance on the issue?

How is it possible to communicate effectively and for the long term, which is critical to investment decisions, in such an environment?

Our political arena is dominated by the fact that, unlike other democracies, we insist on all eligible Australians going to the polls, making public energy policy illiteracy, despite the many millions of words expended on the topic, an important roadblock to implementing an effective approach to both market issues and climate policy.

What really matters?

To steal a phrase from the Grattan Institute, amusingly labeled “left wing” in a newspaper with a big circulation, our national energy debate is a “dog’s breakfast” because of the inability of stakeholders and the community at large to agree on the big, over-riding directions that can then dictate the wider range of implementing actions.

The institute suggests that how Australia manages its part in this global challenge has “major implications” for this country.

“Will we remain an energy export super-power?” it asks. “How will we meet our abatement targets? Can we maintain a reliable and affordable domestic energy supply?”

Properly appreciating the international context in which Australian decisions need to be made is a critical issue.

In trying to influence the 170 governments gathered in Paris as this newsletter is being written for the 21st United Nations summit on climate policy, the International Energy Agency, which is a service organization for the 30 members of the OECD, has sought through the latter half of 2015 to present a series of “energy outlook” papers that address what nations are doing, what their current governments say they intend to do in the next 15 years and what they really ought to do to put the planet on track to limit global warming over the rest of this century.

With respect to energy exports, the IEA scenarios – they are not predictions – include one that could be described as “business as usual” where global demand (mainly driven up in Asia, our trading bailiwick) sees coal requirements rise 43 per cent between now and 2040 while gas consumption soars 60 per cent.

Another, extrapolating the “pledges” nations have taken to Paris, sees coal demand slowing to a growth of 12 per cent while gas requirements go up 46 per cent.

One can speculate – and the IEA and others do – about a different path needed to reduce global warming to the holy grail of two degrees, but there will not be a commitment to this (except in rhetoric) coming out of the Paris meeting. Instead, we can expect significant reviews of global targets to occur in 2020, 2025 and 2030 (five local federal elections from now).

Any effort to achieve a resilient approach at this juncture is bedeviled just by the 2016 federal election where energy and abatement policies will be political playthings (with federal Labor getting in early with promises that conservative critics are labeling unrealistic and expensive and the Greens are calling insufficiently radical). In this environment, uncertainty will not lessen for energy investors in 2016 – it will be ratcheted higher.

Whatever lies ahead, Australia needs to have a robust policy framework that deals with the real world as well as the prospect of stronger targets over a period (the next 15 years) that is less than the life span of energy projects being constructed now.

In the year now ending, the Coalition’s energy white paper has been widely seen as a failure in addressing integration of the energy market and abatement policies.

We end 2015 with no sign of relief for a capacity-choked east coast market, no certainty that the extra 5,000 megawatts of mainly wind power needing to be built to fulfill the revised renewable energy target will be pursued efficiently and issues like power network tariff reform hanging in mid-air.

The integration argument is not just a case raised by vested interests – the “big polluters” as they were dubbed in 2010 to 2013 when Labor, in a loose coalition with the Greens, cavorted down a federal path to political destruction – but by independent entities such as the Australian Energy Market Commission.

In comments in late November, the AEMC stressed that policy integration is “critically important” because environmental policy developed externally to the energy market, as it has been to a large extent for years, influences how effectively the market operates, including movements in wholesale and retail prices with outcomes for consumers.

Interestingly, the CoAG ministerial Energy Council, meeting in Canberra on 4 December, agreed to “a national co-operative effort to better integrate energy and climate policy, with a clear focus on ensuring that (mass market) consumers and industry have access to low-cost, reliable energy as Australia moves towards a lower-emissions economy.”

Equally interesting is that the Energy Council communiqué more-or-less coincided with publication of an interim report by CSIRO and the Energy Networks Association on their joint effort to write an “Electricity Networks Transformation Roadmap” in which one of the scenarios modeled has Australia by mid-century being wholly reliant on renewable power – 73 per cent of it coming from wind farms and other utility-scale projects and 27 per cent from rooftop solar PV.
This is a scenario where network-related capital outlays add up to $1,140 billion by mid-century, with some $469 billion being spent by consumers on rooftop arrays, energy storage and the like – to which one would need to add somewhere between $350 billion and another half trillion dollars on generation investment and related factors like land acquisition.

Really evaluating this route, including the true cost of security of supply on the east coast, and comparing the outlay with what  might be involved in having a more catholic mix that includes nuclear power and high efficiency, low emissions fossil fuel generation would be salutary for all stakeholders but especially for policymakers and investors (including investors in manufacturing and mining).

What would need to be spent on R&D to drive technology cost reductions in a big dash to renewables would need to be included in any such study.


All about consumers

A major meme for domestic energy supply in the middle of the century’s second decade is that “it is all about consumers,” which begs a question: when has it ever not been about consumers in providing electricity in particular?

The issue is rather that, so long as power was relatively cheap and delivery wholly one-way traffic, in an environment where the national interest was dictated by ensuring supply could meet demand (eg as a manufacturing sector developed), consumers took what they were given.

The situation started to change in the past decade in three ways.

One was the angry debate over how to address Australia’s share of limiting global warming perceived as dangerous in a country heavily reliant on fossil fuels for domestic supply and export revenue.

Another was the alliance between some communities and radical environmentalists to thwart gas development.

The third was power users initially becoming electorally mutinous over poor quality supply as a result of insufficient investment in networks because of government stifling capex to keep prices down – then becoming more mutinous after spooked governments allowed the biggest capital expenditure on “poles and wires” in Australian history, leading to very large spikes in end-user bills, a situation exacerbated by the concurrent imposition of a carbon tax, a renewable energy target and feed-in tariffs for solar power.

All of which has led in recent years to still more spooked politicians reacting by turning regulation against network revenue, abandoning the carbon tax, reducing the RET and reversing the FiTs, but the consumer horse has bolted – not only because new technology is enabling the mass market to reduce its consumption of grid-connected power but because it is now infra dig to shut consumer representatives out of policy and regulatory discussion.

Supplier consumer focus, so far as the mass market was concerned, for several decades boiled down to “we know where you live” – now it is being represented at every opportunity as putting community interests first.

The extent to which the latter aspect is true is open to challenge.

How many mass market members feel empowered by the present situation? How many are prepared to trust policymakers to deliver significant change (tariff reform, retail deregulation, rolling out smart meters) without there being winners and losers as past arrangements are undone?

One of the best jokes from the “Yes Prime Minister” TV sit-com was Jim Hacker declaiming “I am the people’s leader; I must follow them.”

With the memorable exception of New South Wales Premier Mike Baird taking network privatization to the electorate this year and winning through in the face of a major scare campaign (and in the past month delivering the first tranche of his promise: a net $7 billion funds injection for State infrastructure building from the 99-year lease of TransGrid), there has been precious little bold leadership on display in the energy arena – whether in resolving issues related to domestic gas supply in south-east Australia or in electricity reform.

How this will change (for the better) in the rest of this decade is an open question.

Cost and trust

The debate about the cost of electricity has run fairly far off the rails in Australia in the past 2-3 years, helped along by a degree of hysteria from a beleaguered Prime Minister Gillard, a series of politically self-serving inquiries, a hefty assault by a manufacturing sector under stress from a range of issues and a tendency by the nation’s mass media to beat up the issue for all it’s worth.
During November the Energy Supply Association took the interesting step of challenging the portrayal of electricity bills as being among the nation’s biggest concerns – on the grounds that it is debatable whether users really understand the bills and where power costs fit in their budgets. Driving this move is suppliers’ own concern that community lack of trust of energy providers will undermine their willingness to accept reform.

The ESAA commentary, published on its website, was sparked by a CHOICE consumer attitude report that indicated electricity bills were among the biggest concerns of people polled and that energy companies were among their least trusted service providers.

While ESAA did not raise this point, the CHOICE poll also jibes with another piece of public opinion research undertaken for the Australian Energy Market Commission. In this, respondents were required to be people who actually paid the electricity bill.

This poll found that two-thirds of NEM residential and small business respondents were satisfied with their supply company, a similar ratio gave good marks for quality of service and that roughly half of them thought they were getting good value for their money with another 35 per cent viewing the value as “fair.”

The CHOICE poll, however, found that 81 per cent of its respondents were very or quite concerned about power bills versus 78 per cent feeling this way about food and groceries, 73 per cent about health or medical costs and 56 per cent about mortgage or rent payments.

Part of ESAA’s reaction points to Australian Bureau of Statistics data for mid-2015 showing that electricity and gas costs together amount to 2.5 per cent of average total household expenditure versus three per cent for alcohol and cigarettes, 9.9 per cent on “recreation and culture,” 6.6 per cent on restaurants, cafes and hotels, almost 10 per cent on food, 21 per cent on rent and other dwelling services and five per cent on the operation of vehicles.

ESAA observes that one of the community problems in reacting to energy bills is that they don’t get paid weekly.  (If they were, householders in New South Wales, for example, would currently be paying about $32 a week on average.)

“If Australians paid their grocery bill only once every three months, it would grow enormously in importance,” the association comments. “And most Australians don’t know how big their energy bills will be until they turn up – which increases concern about them.”

ESAA adds that, despite the high level of alarm about power bills expressed in the CHOICE poll, only 36 per cent of consumers said they would be cutting back on their energy usage.

There is probably a PhD (by a psychologist, not an economist) waiting to be written on how the public has reacted since 2010 to the rise of electricity bills and how the interventions of various stakeholders have fuelled the reported angst.

For energy suppliers, the reality is that politicians, who ultimately decide the conditions under which electricity companies operate, are manifestly influenced by what appears in CHOICE and other media and it is having a material effect on the positions they adopt.

Chronic over-supply

A little over a year ago, Ian Macfarlane, as the Liberal Industry Minister in the Abbott government, told media that the east coast wholesale electricity market had 9,000 megawatts more capacity than it needed.

Macfarlane, dropped from federal cabinet when Malcolm Turnbull ousted Abbott (and now a National in a shock move to end the political year), said in May 2015 when still Industry Minister and when the renewable energy target row was being resolved, that even cutting the measure back to 33,000 gigawatt hours would see NEM over-capacity rise to 25 per cent in 2020 compared with 15 per cent now.

Past reviews by the Australian Energy Market Operator have reckoned that no new generation is required in the NEM until 2023-24, suggesting that up to 8,950 MW could be removed from the east coast system without imperiling supply. By 2023-24, AEMO suggested over-supply could reach 12,000 MW.

In July this year, the Energy Supply Association, reacting to the revision of the RET, opined: “The real unanswered question is how we finance new generation of any type. The sector remains unbankable for all technologies because of ongoing policy uncertainty, weak demand and chronic oversupply.”

In November, the situation (and concern about the ongoing production from old, emissions-intensive plant) led Australian National University academics to propose a cure that would involve the older Latrobe Valley brown coal businesses submitting bids for “how much money they would need to shut straight away.”

The ANU suggestion is that the cost of the winning bid should be spread across all other fossil-fuelled generation in proportion to their emissions.

The remaining generators, it is argued, would then benefit from rising wholesale market prices and the prospect of running their plant closer to capacity – while the federal government would get a  boost to its efforts to cut carbon emissions.

Based on a one-off payment of $400 million to $1 billion for closure, the ANU academics say, the flow-on effect to retail prices for consumers would be “somewhere between one and two per cent.”

Whatever the solution finally pursued, it is obvious that waiting for  large coal-fired plants to reach the end of their working lives (eg the AGL Energy-owned Liddell power station in 2022, at which point the company says it will close) will not address the problem in a timeframe acceptable to generation stakeholders.

During 2015, Hong Kong-based CLP Power, owner of EnergyAustralia, called for action to “solve chronic oversupply” in the NEM – it said there should be an “industry-led, government-supported” solution – but the political response to date has been to leave the situation to the market. Suggestions that the federal government could introduce national generation emissions standards (echoing the Obama move in the US) have attracted no reaction.

How this issue can be resolved remains an open question, but it is unlikely that an effective outcome will be achieved through policymakers shutting their eyes and hoping it will go away.


Last word

As a lobbyist (for the upstream petroleum industry and then the electricity supply industry) and as a commentator on energy issues (since my retirement from lobbying in 2004), I have been engaged with Australia’s policy strategy for both for both power and gas supply and carbon abatement for 34 years and in all this time the central equation has not changed: national economic prosperity dictates that improved environmental outcomes must be achieved at the lowest possible cost to the community.

Unfortunately, the propensity for politicians to try to pick winners and to drive energy market intervention to benefit themselves in the eyes of voters has meant that this dictum is often breached.

As one of those who participated in the first energy white paper process – “Energy 2000” in the 1980s – and who observed at first hand the understanding of all stakeholders, including government ministers, that durable, least-cost, environmentally effective and equitable outcomes must be pursued, it is not much fun to contemplate what 30 years have delivered.

Perhaps the greatest failing of the three decades is one that was foreseen in the “Energy 2000” deliberations: the risk of duplication of effort by jurisdictions resulting in overlapping and costly measures that are economically inefficient and deliver little or no extra environmental benefits.

The ideal in the 1980s was State and Territory support for a co-ordinated national response to climate change. In the 1990s this was expanded to an agreement for co-ordinated management of competitive (and where monopolies, commonly regulated) energy markets.

In neither case in 2015 is the outcome satisfactory.

The 4 December CoAG Energy Council meeting communiqué commitment to “a national, co-operative effort to better integrate energy and climate policy, with a clear focus on ensuring access to low-cost, reliable energy as Australia moves towards a lower-emissions economy” is both a recognition of manifest failings to date and a welcome pledge to try to do better.

As a first step, ministers have asked the council’s bureaucracy to prepare advice to allow it to “better understand the potential impact of carbon policies on the energy sector to facilitate better integration.”

One would have liked to see the inclusion of a further word – “quickly.”

This advice should be prepared with considerable haste because we need to have it available in a federal election year where it is already obvious that more political shenanigans lie ahead of the type that brought us to where we are today.

The Business Council in a recent statement has offered four pillars for Australia’s energy future. These are: (1) maximizing our comparative advantage in energy through efficient markets, (2) driving growth in our energy resource development and exports, (3) delivering reliable, efficient and competitively-price energy to households and businesses, and (4) pursuing best practice environmental standards and managing carbon emissions in line with global efforts and at least cost.

These goals might not suit the radicals in our midst but surely they are resolutions for 2016 and beyond that can be adopted and pursued.

Keith Orchison
8 December 2015


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