Coolibah Commentary

Issue 154, February 2018

The summer’s half over. So far so good, notwithstanding much alarmist noise from the cheap seats of the media and some political handbagging about reliable supply, writes Keith Orchison. With the holidays left behind, and assuming a hot February doesn’t bring any serious generation or transmission issues, attention must now turn to work on the “national energy guarantee” ahead of the CoAG Energy Council meeting – which will be in April after South Australian and Tasmanian elections in March. Top of mind for the politicians should be this warning from the ACCC chairman, Rod Sims, offered in a newspaper interview when most of the country was at the beach: “Energy affordability is Australia’s largest economic challenge. We have gone from energy costs being the best thing we had going for us to their being the worst.”

Can CoAG cope?

The assertion on Australia Day weekend by Colin Barnett, the former West Australian premier, that looming energy problems were never brought to the Council of Australian Governments leaders’ table during his tenure highlights growing frustration with “co-operative federalism” and with the lack of effective remedies to the current messy situation.

It came a few days after South Australian Premier Jay Weatherill said in a State leaders’ radio debate ahead of the SA election that the east coast power market is “broken” but his government saw sense in remaining in the NEM with the aim of using it to be a future exporter of renewable energy.

Barnett said CoAG leaders should be debating key issues before they emerge as genuine problems – which raises the question what he and other first ministers saw as the reason for eschewing a top-level energy debate through the turbulent years of this decade?

Barnett declared that, for an effective federation, CoAG leaders should deal with the big issues even when a solution was not necessarily a national one. He added that federal government attempts to encroach on States’ roles are leading to “a complete merger and confusion of responsibilities.”

Quote of month

In its pre-Budget submission to the federal government, the Minerals Council said: “The (east coast) market was created to promote efficient electricity services in the long-term interests of consumers, specifically with respect to price, quality, safety, reliability and security of supply. However, this objective has been undermined by poorly-designed energy policies at all levels of government.”

Falling satisfaction

Market research company Roy Morgan says customer satisfaction with electricity providers fell to 57.6 per cent in November last year – compared with 61.8 per cent in November 2016 and with 73.5 per cent when the survey began in 2009.

Roy Morgan says “it is likely the most recent decline is the result of continual negative news regarding energy shortages, blackouts reliability, price increases and general lack of confidence in the long-term the (federal) government is taking to tackle these issues.”

It adds that the decline appears to be increasing consumer supplier switching intentions and undermining customer loyalty and trust in major providers.

Roy Morgan says 1.2 million households are estimated to be considering changing retailer in the year ahead – up from around one million in early 2017. Only 5.1 per cent of households polled were “very satisfied” with their current supplier.

No plan

Prime Minister Malcolm Turnbull has accused Labor of “having no plan – no element of engineering or economics” in its promise to nearly double the amount of carbon emissions abatement Australia signed up to deliver as part of the Paris climate change agreement.

In a radio interview, Turnbull said: “If everyone lese turns up and says ‘we’ll do double,’ you’d think about it – but why would you do it unilaterally?”

Environment & Energy Minister Josh Frydenberg, in a newspaper op-ed, rejects suggestions Australia has a weak 2030 abatement target, declaring that, on a GDP intensity and a per capita basis, “it’s one of the highest in the G20 and involves a 50 per cent reduction.”

Frydenberg says the federal government’s challenge is to achieve multiple objectives simultaneously – “lower power prices, a stable grid, jobs growth, international competitiveness and a reduced carbon footprint.”

Right track?

Federal Labor has seized on discussion paper prepared by the Australian Energy Market Operator for its ongoing integrated system plan review to claim AEMO validates its own vision for the power sector and, says climate change spokesman Mark Butler, this should be “embarrassing” for the Prime Minister.

The AEMO document, soliciting submissions by early February for a mid-year report to the CoAG Energy Council, is claimed by Butler as “endorsement of a renewable energy future” and “showing Australia can successfully cut 52 per cent of (national) electricity emissions by 2030.”

Butler declares that “AEMO’s report makes clear the Liberals’ vision of more coal and strangled renewables investment isn’t shared by the very energy market experts the government relies on to provide advice.”

In an earlier newspaper op-ed, he asserted that: “Any sensible energy policy must do one central thing – support the modernization of our energy system.”

The edge Labor saw in the AEMO commentary was blunted late in January, however, when, reacting to a story in The Age headlined “Radical blueprint to slash emissions,” the operator’s managing director, Audrey Zibelman, hastened to assert that this “mischaracterizes” the paper.

AEMO, she said in a letter to The Age, is “not making any comments around policy” and the consultation is seeking to “develop a range of options that can be discussed under a range of possible futures, including one of high emissions reduction or alternatives.”

In a media statement just before Christmas, AEMO said “there is a pressing need for a nationally integrated strategic plan” to consider how the energy industry transformation will affect the need for infrastructure development “and how the technical requirements of the (NEM) will continue to be met efficiently.”

The paper says NEM planner must prepare for and manage the retirement of some 10,000 megawatts of coal generation “currently projected in the 2030s but which could occur earlier or later.”

Clear negative

The Australian Industry Group’s new National CEO Survey finds that expectations of high energy price rises are “a clear negative” for 2018, according to the association’s chief executive, Innes Willox, despite December marking the 15th consecutive month of overall expanding or stable conditions in the manufacturing sector.

Seventy-one per cent of the 269 executives polled expect energy bills to continue rising this year on top of higher bills in 2017.

Eighty-five per cent of manufacturers and 80 per cent of construction CEOs in the survey anticipate higher energy bills in 2018. Service business CEOs report an average energy price increase in 2017 of 9.4 per cent and 68 per cent of them expect higher bills in 2018.

Willox says the survey shows a generally more optimistic business outlook by CEOs compared with the past five years “but the single biggest caveat is a strong expectation of rising input costs, especially energy costs, which is denting an other positive (view of) sales and margins.” Policies to curb energy costs are “critical” to manufacturers coping with rising international competition. “The risk remains that surging energy prices might send some companies offshore.”

Although manufacturers report an increase in activity throughout 2017, this did not translate in to higher profits because margins were squeezed by input cost rises “largely relating to energy costs.”
The report adds that highly trade-exposed energy-intensive manufacturers expect on average to face a rise of 73 per cent in input costs this year compared with 51 per cent anticipating an increase in selling prices.

Solar shift

Federal Energy Minister Josh Frydenberg says one of the major shifts in the electricity market is the “huge increase” in investment in large-scale solar farms.

Heralding the latest review of new renewable energy projects by the Clean Energy Regulator, Frydenberg points to “firmly announced” developments of 4,924 megawatts worth more than $12 billion – of which 46 per cent are large-scale solar. He adds that 2018 should see some 2,600 MW of new VREs commence operating.

There were 4,417 MW of new projects being built in December.

The investment, Frydenberg says, means that enough projects will be developed to ensure that the Australia-wide 2020 renewable energy target of 33,000 gigawatt hours is met.

CER chairman David Parker says “solar is emerging as an important player in the energy mix, especially on long summer days.” As these projects emerge, he adds, they will make an increasing contribution to meeting peak electricity demand.

The Clean Energy Council claims that, as a result of the RET being met, the east coast’s average household bill is “set to fall” over the rest of the decade.

Meanwhile the war of words between Frydenberg and the Labor government in South Australia has continued in to 2018.

He argues SA has an over-reliance on wind power “which is not only causing reliability issues but wholesale price volatility as well,” pointing to the State producing only 6.5 per cent of its electricity needs during the mid-January heatwave from wind farms and relying on up to 31 per cent of supply from interstate over the Heywood interconnector.

Shop & save

The Queensland Competition Authority, in a new review of electricity prices in the State’s south-east, says householders can save up to $588 a year – and small businesses up to $1,072 – by trawling the retail marketplace for the best supply deals.

Queensland Energy Minister Anthony Lynham says the State government is “engaged in an all-out attack on electricity affordability,” pointing to a commitment from retailers to “pass on to consumers all the savings being made in the publicly-owned system.”

Basslink barney rolls on

The failure of the Basslink interconnector in late 2015 and the ensuing half-year’s loss of service continues to trigger wrangling over fault.

The transmission operators continue to defend an independent consultant’s verdict of “cause unknown” and to refute claims by Hydro Tasmania that operational stress disabled the link. This view is that the link failed through overheating caused by excessive dispatch of power to the mainland.

Basslink CEO Malcolm Eccles says the government-owned utility’s expert consultants did no testing of the cable or even similar HVDC ones elsewhere. “They used a theoretical model based on certain assumptions to come to a set of conclusions.”

Eccles argues that Basslink is designed to be operated at a continuous rating of 500 MW or at 630 MW for limited periods.

Court says no

The Federal Court has confirmed that SA Power Networks will have to operate until 2020 with $700 million less in revenue than it sought from the Australian Energy Regulator.

SA Power Networks initially lost an appeal against the AER determination in front of the Australian Competition Tribunal and then pursued the action in to the Federal Court, which ruled in mid-January against it.

The action has rolled on since October 2015 when the regulator initially decided that the network’s revenue allowance for 2015-2020 should be $3.84 billion rather than the $4.53 billion it sought.

The network’s charges represent about 30 per cent of the final bill for the SA mass market.

State Treasurer and Energy Minister Tom Koutsantonis calls the court decision “a huge win” for SA households and business, declaring that the network (which was privatized in 1999) “was attempting to do what all monopolies do – extracting as much money as possible from customers.”

AER chair Paula Conboy also labeled the court decision a win for consumers, saying it is “important at a time when energy affordability is a serious concern.”

SA Power Networks says it will not seek to further appeal the issue.

Great expectations

The dichotomy between community expectations of always having access to electricity and being charged as little as possible has been on display during Sydney’s hot and humid January.

The local tabloid media have flared up at 31,000 households being deprived of power supply in the Ausgrid and Endeavour Energy franchise areas on “the hottest day in 80 years,” the first Sunday of 2018.

Ausgrid got attacked for retorting that it would cost too much to supply “100 per cent of customers 100 per cent of the time” and Energy Minister Don Harwin for saying that outages “are par for the course with electricity networks throughout the world, especially on days of extreme heat.”

Ausgrid said equipment on its grid gets stressed at times of high load and high heat, especially on undergrounded cables. There were 42 outages across NSW on the day (presented by the media as when Sydney had “the hottest temperatures on Earth,” reaching 47 degrees in outer western suburbs) – and the network says just four were caused by overloading.
Endeavour Energy said its load for the day reached 3,399 MW, less than the 30 January 2017 peak of just over 4,000 MW. The total State load peaked at 12,319 MW.

On the attack

Green activists are using the heatwave season to seek to deflect criticism of wind and solar power intermittency by attacking the reliability of the southern States’ fleet of coal-fired generators – with the power station owners firing back that greater grid resilience requirements from the Australian Energy Market Operator saw them undertake the “heaviest-ever” pre-summer maintenance program.

The green barrage has been directed in particular at Loy Yang A (owned by AGL Energy) and Loy Yang B (recently acquired by Alinta Energy) in Victoria’s Latrobe Valley.

AGL has told media that problems at Loy Yang A rose in restarting a unit after a major overhaul, with management asserting that the brown coal power station is running as reliably (“if not more so”) than in previous years. The company says it plans to improve utilization of Loy Yang plant from a “good” 80 per cent to the “excellent” high 80s in the next two years.

Alinta say that, apart from the brief trip exciting activist attention, Loy Yang B was fully available for 95 per cent of the three-day Victorian heatwave in mid-January. It says the plant is “well-maintained and performs above international benchmark standards.”

Alinta CEO Jeff Dimery has told media that Loy Yang B “will be viable for the next three decades realistically.”

Origin Energy, owners of Eraring power station in the New South Wales Hunter Valley, say that, apart from a short outage exciting the activists, “this is probably our best summer to date in terms of delivering reliable supply in to the NEM.”

The conventional power sector rejects the green assertion that coal power stations have “become a major cause of unreliability” in the NEM. The Australian Energy Council comments that “although there are challenges, hydro, gas and coal-fired plants have performed during heatwave events and will continue to do so.”

Others point to the fact that, on one of the three heatwave days in mid-January, all the wind farms of the NEM could not muster much more than a 400 megawatt load at times compared with their more than 4,000 MW capacity. This was when NEM-wide load was pushing towards a 30,000 MW peak, of which some 20,000 MW was in SA, Victoria and NSW, home to most of the wind capacity.

Meanwhile the Minerals Council has promoted a poll of 1,300 Australians aged 18 and over by JWS Research that reports 68 per cent support for investment in high efficiency, low emissions (HELE) coal power stations.

Top dog – for a time

Australia is about to become the world’s largest exporter of natural gas, overtaking Qatar, but will then be superseded by the US.

The latest resources outlook from the chief economist of the Department of Industry, Innovation & Science projects Australian LNG export volumes will rise to 77 million tonnes annually in 2018-19, up from 52 Mt in 2016-17 – but then the US, as a result of five new projects scheduled to start construction next year, will reach 86 Mt in 2025.

Qatar’s current exports are 74 Mt.

Top End ‘tragedy’

EnergyQuest chief executive Graeme Bethune says the Northern Territory’s failing to progress development of its onshore gas industry is “a complete tragedy.”

Bethune says the NT has some of the most prospective onshore petroleum acreage in Australia and the longer its government holds up exploration and development the more likely it is that export opportunities will be gazumphed by American operations.

There are strong gas markets available at present, especially in China, he adds. “The Territory has had a successful onshore gas industry in Central Australia since 1960 – and I don’t think anyone could claim there have been any significant environmental problems.”

An independent inquiry in to hydraulic fracturing of onshore unconventional reservoirs in the Territory is due to deliver its final report to the NT government in March.

Last word

A recent comment in an international energy magazine resonates with me. “Transition,” says the writer, “is energy's new buzzword. Benign as it sounds, for oil companies and many utilities it means the game is up. Or will be. Sometime. A consensus about when hasn't emerged. But predictions of the end are legion these days.”

It came to mind again when I read in local media a remark by Jeff Dimery, CEO of Alinta Energy, new owners of Victoria’s Loy Yang B power station. “This is the newest, lowest-cost brown coal plant,” he says, “so we would expect it to be the last plant standing (over) a couple of decades before coal-fired generation is essentially filtered out of the (NEM).”

The point (to me) is that so much of the current debate is directed towards rushing towards the (green) end of the game and this mindset, with the turbulence it creates in the political debate (as Labor and the Coalition jostle for votes with smaller parties in an increasingly crowded political marketplace), fuels the uncertainty infecting investors in new infrastructure. It also does very little to resolve the here-and-now issues.

Casting a big shadow over this scene is the broader attitude of users (small and large) that the present electricity price regime is unacceptable, dragging the incumbent federal government in to making noises about a change in costs that is open to query.

Here again Dimery is telling journalists he “sees no reason why in coming years wholesale power prices (in Victoria and New South Wales) shouldn’t shift down to about $70 per megawatt hour from current levels of $100 to $120.” This, as a writer in The Australian observes, “is still a lot higher than $40 two years ago.” There are others, of course, who expect (or fear) that wholesale prices have yet to peak, which is not inconsistent in the medium term with Dimery’s comment, but would present a substantial short-term headache for the Turnbull government.

The politics of all this is on display again with Josh Frydenberg (who was busy in the public arena over the holidays) sticking pins in the Andrews Victorian government (which goes to the polls on 24 November), demanding it explain how it will achieve the renewable energy target it has just legislated without pushing up prices. Frydenberg argues that VRET could bring forward the closure of Yallourn power station – and he adds that Victoria needs to bring on 25 times more gas than it currently produces to ensure affordable, reliable power under the target.

A commentary by Angela Macdonald-Smith in the Australian Financial Review puts a finger on another sore point, quoting the Grattan Institute’s Tony Wood as describing a “quite dramatic” difference between officials pointing to a decline in consumer costs and market signals.

Wood is certainly right, in my view, to express doubt that the impact of higher energy prices has played out among commercial and industrial consumers, leaving investment and jobs still much at risk. I’m expecting to hear a lot more about this at the Australian Domestic Gas Outlook conference I am co-chairing in Sydney next month – it kicks off on 28 February. An outbreak of “demand disruption” in 2018 would be no less influential than the South Australian blackout of 2016.

The broader point Wood makes shouldn’t be lost to sight either. It is difficult, he asserts, to put much faith in modeling pointing to lower retail prices five years from now (versus today’s costs) given the “substantial unknowns” that need to be taken in to account. They include, he adds, the amount of network investment required to bring energy to customers in a market with a lot more variable generation and the cost of storage – which he labels as “poorly understood.”

In this context, his institute colleague David Blowers, writing on The Conversation at the start of the year, makes the salient observation that no single factor or decision is responsible for the electricity prices – 44 per cent higher in inflation-adjusted terms for NEM customers than 10 years ago – that we now endure. Rather, it is the confluence of many different policies and pressures at every step of the electricity supply chain.

It follows that unravelling this situation cannot be achieved overnight or over a couple of years even if both sides of mainstream politics broadly agreed on policy.

Blowers asserts that “there is a huge void where sensible policy should be.” Frydenberg and Turnbull argue that they now have a plan (the NEG) to overcome this. Shorten & Co argue they are wrong. Green boosters tout the renewables “transition” as a panacea and demand it should be hastened.

I have been saying to conference audiences for years that the whole energy debate can (and probably should) be boiled down to two four-letter words – time and cost – and see nothing in the present situation that undermines this point.

If, as Frydenberg claims in an op-ed in The Australian, the “national energy guarantee” is the only game in town, the matters of time and cost rise inexorably to the top of mind.

How long to negotiate a Council of Australian Governments’ acceptance of the NEG? How long to implement actions from it that will impact on power security and cost? How long to put in place adequate south-eastern gas supply, which is critical to any resolution of the current mess?

What are the implications for the timing of NEG policies and measures of elections in South Australia, Tasmania (both March), Victoria (November), New South Wales (March 2019) and federally (anyone’s guess, but a poll being dragged out to late 2019 seems a bit unlikely under present circumstances)?

Parochial and partisan politicking has brought us to where we are now; how confident can we be that the menu for the next 12-18 months is not laden with more of the same?

Perhaps we could take solace in the saying that time wounds all heels – except we the community are on the front line of all this.

Keith Orchison
31 January 2018