Coolibah Commentary

Issue 176, December 2019

This issue marks 15 years of publishing the Coolibah newsletter – and not one of the monthly editions hasn’t dealt with concerns about policymaking at State and federal level and concerns about the functioning of the east coast market. Not a happy record. Unfortunately, it seems we are heading in to 2020 with every likelihood of more of the same for the new year. Certainly, the top end of the commerce and industry sector is unimpressed with the main outcome of the long-delayed CoAG Energy Council meeting in Perth in late November, setting the scene for a row with politicians over the pursuit of greater NEM reliability at the cost of consumers. Others see it as a plus that the latest ministerial meeting didn’t end up in verbal fisticuffs, as the previous one a year ago did – and that ministers have agreed to more frequent meetings, starting in March next year. Meanwhile State governments are reported to be strongly pursuing the opportunity of individual deals with the federal government – and in Western Australia the government is wrestling with the impact of large-scale investment in rooftop solar power on the operating of the south-west grid.


“We are in grave danger of over-reacting to short-term reliability concerns” – media statement ahead of CoAG meeting by Business Council and six other bodies.

“ When it comes to ensuring the reliability of Australia’s energy system, we are well and truly out of time” – Victoria’Energy Minister, Lily D’Ambrosio.

“It is time for cool heads, collaboration and open, honest engagement with all stakeholders on understanding the long-term hip pocket impact on consumers as we consider options for change” – Australian Energy Market Commission chairman John Pierce.

“Governments feel compelled to act when things go wrong or look bad” – the Grattan Institute.

“The decision made today to focus on reliability standards is all about maintaining balance in the system” – federal Energy Minister Angus Taylor after the CoAG meeting in Perth.

“We are at a critical juncture in the history of Australia’s eastern energy markets” – Ross Lambie, chief economist, Australian Chamber of Commerce & Industry.

“The public is suspicious of government decisionmaking. Winning back trust requires capturing the full facts about a problem, weighing up alternative solutions and seeking public input on the best way forward” – Percy Allan, former Secretary of NSW Treasury.

Reliability ruckus
The Council of Australian Governments energy ministers have decided to bring on a fast-tracked review by the Energy Security Board of the NEM electricity reliability standard – reporting at the next meeting in March on “immediate measures” to ensure the standard is “fit for purpose” – and leading stakeholders are not happy.

The Australian Industry Group, representing some 60,000 businesses, declares that governments are “at risk of sidelining affordability and emissions in their focus on reliability at any cost.”

AiG chief executive Innes Willox says “reliability is a good thing but it can cost a lot.” The reliability standard was reviewed only last year, he adds, and “balances our needs to incentivize only as much as we are willing to pay for.”

If a rushed change is pursued, he warns, “ministers should be aware that, if they wind up signing a blank cheque for reliability, they will condemn Australians to paying through the nose for surplus generators and transmission lines that will sit idle most of the time.”

Willox’s comments follow AiG and five other bodies, including the Business Council and the Australian Energy Council, telling CoAG ministers ahead of the 22 November meeting in Perth (the first this year) that they must recognize costs “increase exponentially” in striving for “an unobtainable goal of 100 per cent reliability.”

The Australian Energy Market Commission reliability panel last year endorsed a standard to apply from 2020 to 2024 and is due to pursue another review in 2021.

The joint stakeholders’ statement urged CoAG Energy Council not to “sideline a well-considered process” and embark on “a separate, fast-tracked review that rushes in to rigid and costly new standards” as an over-reaction to short-term concerns.

“Importantly,” the statement said, “energy suppliers, energy users, the market operator and governments have already taken action to reduce the risks faced in the coming summer.”

It added that “further hasty steps” will have “negligible impact” over the summer but “can undermine our efforts to manage the continuing transition” in the east coast electricity system.

“If I was using a word to describe the grid, it would be fragile,” new Australian Aluminium Council CEO Marghanita Johnson has told journalists, responding to questions about the summer state of the NEM.

“I have real concerns about whether or not we will still have four smelters to talk about prices in six months,” she added.

Australia has four large smelters – at Portland in Victoria (which lost power to potlines for hours in November after an interconnector failure), Tomago in New South Wales, Boyne in Queensland and Bells Bay in Tasmania.

Who pays?
The Public Interest Advocacy Centre is posing the question of who will pay for governments ensuring greater power supply reliability and security.

PIAC energy policy leader Craig Memery says: “We highlight the importance of fairly sharing the cost of any new investment. Costs recovered from consumers should be no more than they are willing to pay for reliability – and costs above this to achieve broader social objectives should be recovered from (government) budget revenue.”

‘It’s our win’
The Victorian government is boasting it “secured a win” at the Perth CoAG meeting, enabling “reliability to be put under the microscope and outdated rules addressed at the highest levels.”

State Energy Minister Lily D’Ambrosio rushed out a statement after the meeting to claim Victoria “led the Commonwealth and other States” in setting up the hasty review of the reliability standard that has to be delivered before next Easter. (“Our push for more frequent meetings also succeeded,” says D’Ambrosio.)

She also declares that “all ministers” are “eager” to see the Australian Energy Market Operator’s proposed integrated system plan “actioned quickly.” She says the ESB, now burdened with the reliability review, is also required to “help fast-track the ESP” to enable discussion at the March meeting.

D’Ambrosio says this is the next step in pursuing “priority transmission projects” – with the Victorian government pursuing the so-called Keranglink to “open up renewable projects” in the State’s north-west and “provide a vital highway between Victoria and New South Wales.”

In a commentary on the reliability standard review CoAG has added to the Energy Security Board’s burdens, the Grattan Institute’s Tony Wood says that AEMO has become increasingly concerned the current measure is no longer fit for purpose and is dissatisfied with the AEMC view that, while some increasing flexibility is justified, the existing standard remains appropriate.

However, he points out, research indicates more consumers are concerned about price than reliability and large consumers do not support a higher standard.

“No-one should forget that households in NSW and Queensland are still paying for a decade-long, $6 billion over-investment on distribution networks that achieved only very small improvements in reliability,” Wood says. “On the other hand, voters see governments as being ultimately responsible for a reliable, affordable and low emissions electricity supply.”

He opines that “on balance, the review should proceed if only to crystallize the debate and clear the air.”  It is critical, he adds, that the review be dispassionate and based on the underlying principled of balancing benefits and costs in the long-term interests of consumers.

“Ultimately (it is) a political decision.”

East coast electricity distribution businesses have put some downward pressure on consumers cost trends by achieving their third year in a row of productivity gains.

In a new report, the Australian Energy Regulator attributes a one per cent gain in 2017-18 largely to reductions in distributors’ operating outlays.  It also reports a 2.2 per cent gain by NEM transmission businesses.

AER says four businesses – CitiPower, Powercor and United Energy in Victoria and the South Australian utility – have consistently been the most efficient distributors in the NEM.

Network charges represent between 40 per cent and half of end-user bills.     

Going up
The Essential Services Commission in Melbourne says electricity bills in Victoria for households on default tariffs will rise from the current $1,400 annually to $1,500 from January 2020.

The ESC says small businesses on a flat tariff standing offer will see their annual charge go up from around $5,900 at present to $6,400 in the new year.

The commission attributes the prices rises to higher Victorian wholesale electricity costs and network charges, noting that “market expectations for wholesale prices in 2020 have increased significantly.”

More than 120,000 households and 43,000 small businesses are on the regulated default offer. The Australian Energy Council comments that “it is important to remember most Victorians are on competitive deals so this decision will not impact their bills.” Energy retailers will announce their prices for deregulated customers on 1 January.

Commission chair Kate Symons says that the ESC view of wholesale costs is driven by expectations of a hot summer in Victoria, the perceived risks of generation outages and the impact of drought on the availability of hydro-electric power.

The latest annual Mitsubishi Electric “home trends” opinion survey in Australia finds that 96 per cent of respondents are worried about energy bills but only 15 per cent have pursued making their homes extremely energy efficient – and one in five admit to leaving their air conditioning operating in hot weather when they are not home or running the units with windows open.

More shopping
The Australian Energy Regulator says more mass market consumers in the east coast market are shopping around for better power and gas deals.

In its 2018-19 annual retail markets report, released at the end of November, the AER notes that 75 per cent of residential electricity customers and 85 per cent of household gas customers are now on market contracts.

There are now 6.47 million residential customers in the NEM and 4.2 million of them have contracts with three retailers: Origin Energy, AGL and Energy Australia.

The regulator also reports that the proportion of residential and small business customers in debt to electricity providers decreased in 2018-19 – but the average debt increased “significantly.”

‘First time’
In a review of the year in energy policy delivered to a conference in mid-November, federal Energy Minister Angus Taylor has claimed “a turn in price,”
“It’s too early to declare victory but we are seeing very promising results,” he told the forum. “The recent CPI figures show that for the first time in recorded history we’ve had three consecutive quarters of wholesale electricity price reductions. Gas prices have also fallen.”

He pointed to prices in the wholesale power futures market for the fourth quarter of 2021 that “are well within our $70 per megawatt hour price range and up to $20 cheaper than in in fourth quarter 2020.”

Taylor said there were strong falls in wholesale power prices in South Australia and Queensland, “a mixed result” in NSW and “serious concerns” for Victoria.

“Victoria’s wholesale price has been consistently worse in 2019 compared with 2018 for every month of this financial year. The reason is clear: Victoria has a lack of reliable generation. Sadly, (it) has gone from a very strong position to a very weak one, with the closure of Hazelwood, no replacement investment in dispatchable generation and a moratorium on gas hampering the ability of new gas generators coming in to the market.”

He told the conference that 2020 “will be the year that locks in turning the tide on price and reliability in to the energy sector for the next decade and establishes a market and a pipeline of investments that will carry through to 2030.”

Move on
In a newspaper interview, Kerry Schott, chair of the Energy Security Board, has urged industry and State and Territory governments to adapt to the federal policy platform as a practical way to transition the NEM to renewable energy.

“It is time to move on,” Schott told The Australian on the eve of the CoAG Energy Council meeting in Perth.

Early in November, speaking at an energy futures event in Brisbane, Schott the right solution to achieving a reliable, affordable and sustainable energy mix “cannot be one-dimensional.”

For example, she told the forum, gas plants are, and will be for the next 20-30 years, “absolutely critical” in backing up intermittent power supply from variable renewables.

Later in November, in a talk to another conference, Schott declared: “We are now in a world where (electricity) demand is basically following supply – so the whole way in which the world works has been turned on its head.”

She added that, in the market transition now under way, “for every megawatt of demand that you respond to, you should get rewarded in the same way the supply side gets rewarded.”

Meanwhile the NSW government has announced its own strategy to pursue reliable and affordable electricity, aiming to attract $8 billion in energy investment.

“We are the first State in Australia with an electricity strategy,” claims Energy Minister Matt Kean, who says it will include Australia’s first co-ordinated renewable energy zone (in Central West NSW) to be home to 3,000 megawatts of capacity.

The State government says it has more than 100 private sector proposals to build 17,700 MW of renewable generation in NSW at a cost of $23 billion – including the Snowy 2.0 proposal.

The Australian Energy Market Commission says that a “two-sided electricity market” is almost certain to become a key feature of the NEM.

Speaking at a conference, acting AEMC chief executive Suzanne Falvi said: “Twenty years ago consumers had a lot less dynamic load.” 

The NEM was set up to enable supply to be altered in response to forecasts of expected demand, she added. “Now, a two-sided market allows for more (consumer) participation, putting downward pressure on wholesale prices (and) retailers have to rethink how they do business.”


‘We have what you need’
Tasmania’s Energy Minister, Guy Barnett, says the island State has “what the rest of the country needs” with its Battery of the Nation interconnector project.

Writing in a trade magazine in November, Barnett warns that “injecting lots of sun and wind power in to the market without a storage system like BOTN will create huge volatility, potentially making the market unstable and adversely impacting prices.”

Barnett says the State is “already punching above its weight” in generating low-cost, reliable renewable energy, producing a quarter of Australia’s renewables total while consuming just two per cent of national electricity. “This played a vital role in reaching the large-scale RET early.”

The State’s hydro system can produce 34 per cent more power than previously thought, according to new analysis, he adds. But the current Basslink interconnector is inadequate to supply the mainland. Building the 1,500 MW Marinus link (at a cost of $3,2 billion) will enable Tasmania to deliver 45 million tonnes of national carbon emissions reduction, he says.

Meanwhile renewables company Epuron says that uncertainty about when the second undersea cable will be built is delaying plans to develop new wind and solar farms in Tasmania. Present studies indicate the Marinus link could be operational in 2027-28.

‘Steady transition’
Queensland Energy Minister Anthony Lynham says the State is making “a steady transition” towards the Labor government’s goal of 50 per cent of electricity being generated from renewables by 2030.

Lynham, reacting to criticism from green lobbyists that a transition is being pursued too slowly, asserts Queensland “is on track to reach 21 per cent from renewable sources by 2020.”  The claim includes estimated use of rooftop solar power.

Lynham says 2,600 megawatts of large-scale renewables capacity has become operational, is under construction or has been committed to development in Queensland since December 2016. He adds that 90 projects are “in earlier stages of development.”

He also points to ongoing investment in rooftop solar power: the State now has 520,000 homes with PVs, adding up to more than 2,000 MW of capacity.

Meanwhile the State Auditor-General, Brendan Worrall, in a report on Queensland’s publicly-owned energy businesses, has said it is unclear how a shift from predominately coal-generated electricity to renewables will be managed because of “uncertainty about a national policy that will support an orderly transition while ensuring security of the power system, reliability of supply and affordability for consumers.”

Commenting on the report, Lynham complains that federal policy “wafts around.” He says: “The federal government has made things much more difficult.”

‘Not shying away’
The West Australian Energy Minister, Bill Johnston, has told journalists the Labor government “is not shying away from the seriousness” of the south-west integrated system problems caused by large-scale take-up of rooftop solar power.

The major government focus going in to 2020 will be on better integration of solar and wind power in to the SWIS, he says, as observers assert that the grid has become “an international laboratory experiment” in the uptake of PVs and the Australian Energy Market Operator acknowledges that the islanded nature of the system makes it particularly exposed to the technical challenges of intermittent generation.

Role of coal
Coal-fired power stations contributed 119,712 gigawatt hours – or 61.8 per cent – of electricity sent to the NEM grid in 12 months to the end of November.

The Open NEM widget shows all forms of large generation provided 193,432 GWh to the grid in this period – with wind farms contributing 16,397 GWh and solar farms 4,560 GWh, a 10.8 per cent share for variable renewables.
Hydro power provided 13,816 GWh (with 8,754 GWh produced in Tasmania) and gas units 18,623 GWh.

The estimated use of rooftop solar power for the period was 10,236 GWh.

The coal contribution breaks down to 106,708 GWh from black coal plants in New South Wales and Queensland and 33,004 GWh from brown coal power stations in Victoria.

However, the Australian Energy Market Operator, in its third quarter 2019 report, says that brown coal generation in these three months declined to its lowest level since the start of the NEM due to a high number of planned and unplanned plant outages in Victoria – five planned and 14 unplanned.

AEMO says that these outages, coupled with ongoing water conservation by drought-affected hydro power operations and the latest Basslink breakdown, led to Victoria having its fifth-highest quarterly electricity spot price on record.

Meanwhile the federal government’s latest greenhouse gas counting shows that emissions from electricity supply fell by 2.1 million tonnes (or 1.2 per cent) in the financial year to 30 June. Power sector emissions are now 15 per cent below what they were in the 2008-09 year when they peaked. The sector contributed 33.8 per cent of national emissions in 2018-19 – down from 38.8 per cent at the peak.

‘Very positive’
Australia’s upstream petroleum industry finds a lot to like in the 2019 edition of the International Energy Agency’s World Energy Outlook.

While most media have focused in sombre (or strident) tones to the IEA’s commentary on the difficulties of pursuing climate change goals, the Australian Petroleum Production & Exploration Association is highlighting the agency’s view that global demand for gas will increase over the next 20 years, with the fuel becoming the world’s second-largest source of energy after oil.

APPEA chief executive Andrew McConville points to LNG overtaking pipeline gas as the main form of long-distance trading and says “this is very positive for Australia and will see a continued stream of high-paying jobs, export dollars and revenue for governments (here) for decades.”

But the local LNG industry will face strong competition in international markets and McConville says its it is vital for Australia to provide sensible policy settings, including maintaining a stable and competitive tax regime, resisting calls for market intervention and reducing regulatory red tape.

‘It’s too high’
Alberto Calderon, chief executive of Australia’s biggest manufacturer of explosives and fertilizer, says the company has factored continuing high gas prices in to its fiscal 2020 outlook and he is calling for no increase in LNG exports until domestic charges fall.

Calderon says it is “ridiculous” that east coast gas prices for large users are around the $11 per gigajoule mark. “It’s too high. How can we have the highest domestic exports in the world and these high prices?”

Hydrogen conundrum
The CoAG Energy Council at its Perth meeting unanimously adopted a national hydrogen strategy – creating, says Australia’s chief scientist, Alan Finkel, the foundation for making this country a leading player in a growing global market.

“Australia is well placed to make hydrogen its next big export,” says Finkel, who chaired the group that drafted the strategy. “We have the natural resources needed to produce it, a track record in building large-scale energy industries and a reputation as a proven partner to Asia’s biggest energy importers.”

He argues Australian energy companies and investors are ready to activate a hydrogen supply industry. “The challenge is to develop the early demand that will lower costs for producers.”

The other side of the coin is presented by consultants Deloitte. Partner John O’Brien and Shari Boyd, director of its energy advisory business, say that, unlike the LNG industry to which hydrogen is often compared, there is no significant or current global demand for the fuel, some technical solutions are yet to be fully proved and “the economics of clean or green hydrogen are not forecast to be competitive in the near term.”

O’Brien and Boyd suggest the real potential for the hydrogen market is a decade away unless there is a technology step change or a move to rapid global decarbonization.

They add: “The conundrum of hydrogen is how to make sure that, when and if the demand eventuates, Australia is in a privileged position to secure an unfair share of global demand.”

An update of Gas Vision 2050 produced by Energy Networks Australia and the Australian Pipelines & Gas Association reports that more than $180 million in funding has been committed nationally for hydrogen infrastructure projects.

Meanwhile new analysis by Wood Mackenzie, released in November at the firm’s forum on Asia’s energy transition in Singapore, claims that production of “green hydrogen” – driven by solar electrolysis – can reach cost parity in Australia, as well as Germany and Japan, by 2030.

Globally, Wood Mackenzie, estimates $US365 million is now invested in “green hydrogen” development and it says $US3.5 billion worth of projects are “currently in the pipeline.”

Role for coal,too
The mining industry has hailed the CoAG hydrogen strategy decision as potentially providing a vital role for coal with carbon capture, utilization and storage.

Coal21 chief executive Mark McCallum says: “CCUS technology already in use around the world today can support the use of Australia’s significant coal resources to produce clean and affordable hydrogen at scale after gasification. Current cost estimates indicate that using coal with CO2 removed produces hydrogen up to 13 times cheaper than (that) produced by curtailed renewable energy sources – and up to three times cheaper than grid electricity.”
McCallum adds: “Large-scale hydrogen production from coal will be possible within the next few years at Australia’s first commercial-scale CCUS hub in Queensland.”

He says Coal21 is also supporting the Latrobe Valley project using brown coal “which is leading the way in the development of new hydrogen technologies.”

Coal21 is a $550 million low emissions technology fund established by the Australian black coal industry.



Last word
Every day the media in their multiple forms bring us fresh wrangling about energy supply, veering from side to side between angst about reliability and affordability, paeans about new technology and endless (and often hyperbolic) outpourings about carbon emissions and the end of the world as we know it.

In this respect 2019 has been more of the same (and November particularly so) both locally and internationally.

The International Energy Agency, not surprisingly, grabbed most attention in November (including brickbats from the usual suspects in the radical green corner) with its latest World Energy Outlook – with one overseas commentator wrestling with whether these annual agency reports reflect policy and investment trends or shape them – and commentators reading widely differing climate changes messages in what the IEA keeps reminding them is a set of scenarios not a forecast.

The role of journalists here and overseas in how the changes in energy supply, notably in the context of tackling climate change, are being perceived in the community is an important facet in this situation.

Chris Mitchell, former editor-in-chief of The Australian, made some points in an op-ed in November that go to the core of this aspect. “How,” he asked, “do voters learn the truth of an issue if media won’t report news that does not fit their narrative?” He also argued that “driven by the hunt for digital clicks, the media is more focused on opinion that reinforces the views of its audience segment than on reporting what is actually happening.”
To which the American commentator Michael Schellenberger, in an opinion piece in Forbes magazine, has added the view that “journalists and activists alike have an obligation to describe environmental problems honestly and accurately, even if they fear doing so will reduce their news value or salience with the public.”

The points Mitchell and Schellenberger are making can be readily picked up in how various media entities (including websites focusing just on energy and climate change) have been tackling the IEA report and other recent publications.

Rather than nitpick this stuff, I think there is value in highlighting key aspects of such material to establish grounds for moving on from where things are today both in terms of local challenges (for example, the NEM transition) and the major over-arching ones (notably pursuing genuine progress on the climate front).

Unfortunately hardly anyone in the mainstream media is making a real fist of this here and elsewhere.

What is important about the IEA paper (which runs to 807 pages) is the work it has put in to modeling scenarios for energy demand and supply based on announced government policies and plans and on ways of addressing agreed climate goals – setting them against the trend lines for the next two decades if things go on as they are at present.

Inevitably, journalists trying to condense a document this size in to 600 to 1,000 words for a newspaper or magazine – or, worse still, in to soundbites for radio or television – are going to go for some shorthand version that fits with their own perspectives or what will work as “clickbait.”

As it happens, the IEA has provided a salient soundbite itself – in a caption to a single illustration seeking to convey “there are no single or simple solutions to reach sustainable energy goals.”  The agency says: “A host of policies and technologies will be needed across every sector to keep climate targets within reach and further technology innovation will be essential to aid pursuit of 1.5 degrees centigrade stabilization.”

This bowls the one-tune activists, the catastrophists and the ardent corporate pursuers of the technology they see making them rich (or richer) middle stump. And it requires our policymakers (those in government or striving to assume government as opposed to the parliamentary fringe-dwellers) to park the rhetoric that will win them a headline or a tweet following and to come to terms with what will have a real chance of working economy-wide in their jurisdictions.

The issue is not, as one power sector trade magazine has put it, that the IEA report “paints a bleak picture for the global energy future” – but that it requires close attention to the fact that (as you will find AEMC chairman John Pierce quoted at the start of this newsletter as saying) “it is time for cool heads, collaboration and open, honest engagement with all stakeholders on understanding the long-term hip pocket impact on consumers as we consider options for change.” 

This doesn’t just apply to the NEM (his focus) but to Australia as a whole and to other national governments and, eventually, to the UN, now engaged in another “summit.”

For the local scene, as Robert Pritchard (of the Energy Policy Institute) told an audience in the US in November, “Australia is in a policy mess: facing decarbonization without an agreed plan.”   He added: “There are too many cooks, too many recipes, obvious lack of a national vision and obvious need for better governance.”

He is dead right – but it is not enough for a plan to be agreed (just look at Die Energiewende in Germany where all concerned are now tying themselves in knots trying to resolve the problems created by simultaneously making a mad dash for variable renewables while killing off nuclear and coal generation).

Strategies have to be genuinely workable over the longer term across a range of criteria.

Which highlights the importance of the IEA snapshot quoted above because emphatically there is no one suit that will fit all.

Keith Orchison
1 December 2019