Issue 117 January 2015

Welcome to a new year and best wishes for 2015, writes Keith Orchison. Is this the year in which we will see an end to what has been described as “marshmallow politics” – small, soft offerings voters can digest – in energy policy?  Supply stakeholders will be looking for early indications via the shape of the federal white paper and a revised renewable energy target as well as a resolution of the gas development impasse threatening New South Wales with winter shortfalls later this decade.

Fix the glut

The Energy Supply Association is urging resolution of the current over-supply in the east coast wholesale electricity market as the key to resurrecting investor confidence.

New NEM investment in any generation capacity looks unlikely given the current situation and the lack of a bipartisan approach to major issues, ESAA says in its submission to the Climate Change Authority, which has embarked on yet another review of the renewable energy target.

The level of the medium-term challenge is highlighted by Hydro Tasmania, which points out that 75 per cent of existing thermal generation will be more than 35 years old by 2025. There needs to be a clear policy framework to guide investment in replacement generation, it says.

AGL Energy adds that barriers to market exit for existing thermal plant is a “critical challenge” facing the power industry and government.

The 2014 debate on the RET “fundamentally ignores the systemic nature of this issue,” AGL argues. “The requirement to address it is a cornerstone of any RET policy adjustment.”

It says that, without policy measures to address oversupply and barriers to exit for existing generation, regardless of form, “new investment is unlikely to be forthcoming.”
The Clean Energy Council also argues that policy uncertainty combined with barriers to exit for ageing coal-fired plant is “stifling signals for new investment.”

Ann Burns, leader of management consultant Accenture’s Asia Pacific utilities strategy activities, comments that uncertainty caused by higher price volatility, possible privatizations, a lack of clarity on carbon pricing and the acceleration of distributed power generation will impede new-build decisions regardless of fuel.

Clarity in energy policy is essential to support development, she adds.

Meanwhile, the CoAG Energy Council, meeting in Adelaide in mid-December, says it won’t support radical change to the NEM’s design nor assistance to generators to exit the market. It “opposes the transferal of the costs of retiring assets on to consumers or taxpayers.”

However, the council communiqué also calls for RET policy to have “regard for the efficiency of the wholesale market,” perceived as an acknowledgement that the measure is contributing to the over-supply of generation.

As the council was meeting, AGL Energy was announcing that it will shut half its Torrens Island gas-fired power station (some 480 megawatts of older capacity) in Adelaide from 2017.

Overall, ESAA says, market conditions, a decade of constant policy change and government interventions “has left the electricity generation sector virtually unbankable.”

The association published a review by PricewaterhouseCoopers in mid-December which it said highlighted “chronically weak wholesale electricity prices” as “the most significant inhibitor to any generation projects obtaining finance.”

Coal rolls on

A new 25-year outlook published by the Australian Energy Market Operator in December claims that coal-fired power’s share of east coast electricity generation will fall only marginally between now and 2038-39.

AEMO’s modelling, which focuses on the least-cost expansion of large-scale power supply, shows that NEM generation capacity is likely to fall by 3.5 per cent over 25 years during which it forecasts 6,756 MW will be retired and 4,377 MW (“mainly wind”) will be installed.

In this environment, says the market operator, coal-fired generation will still provide 79.3 per cent of NEM electricity output in 2038-39 compared with 84.9 per cent now.

The modelling assumes the current RET runs until 2029-30. It excludes rooftop solar power.

The outlook, says AEMO, includes a 32 per cent decline in gas-fired generation.

The operator says this scenario indicates a sharp fall in new generation capital outlays compared with previous forecasts – down from $25 billion (in inflation-adjusted 2014-15 dollars) in the last AEMO projection to $11 billion.

‘Taking action’

Federal Industry Minister Ian Macfarlane claims the latest CoAG Energy Council meeting, held in Adelaide in mid-December, demonstrates that there is a new focus on reforms to put downward pressure on electricity prices and to give consumers greater power over their bills.

Macfarlane says the council meeting supported “action that will translate directly in to delivering more information and more control to consumers by accepting that the price (they pay) to have electricity delivered to their homes or businesses should reflect the way energy is used.”

He says the council agreed to support a competitive, market-led, voluntary roll-out of smart meters “with incentives for customers to seek out meters that provide the information and service they want (plus) protection to ensure that they can access useful and consistent information.”

The council communiqué says energy ministers “support the right of consumers to take up new technologies” but this should not be on the basis of cross-subsidies. They support tariff reform as “an essential step” to provide better price signals to end-users with new network charging arrangements to “set prices that reflect efficient costs of providing services to each customer.”

‘Unfair explosion’

The Energy Networks Association says maintenance of the existing east coast distribution tariff structure “will encourage an explosion in unfair cross-subsidies, leading to a world of haves and have-nots by 2034.”
The association published a position paper in mid-December based on independent analysis that claims the current structure “will lead to network prices five times higher than necessary.”

Chief executive John Bradley argues that a range of barriers to fairer tariffs need to be addressed urgently.

“The first step is removal of outdated regulatory restrictions that prevent efficient network costs being charged to retailers.

“The second step is to develop an industry standard for implementing reform, including collaboration with retailers, establishing foundation principles and working with consumer advocates on measures to support vulnerable customers.”

Bradley adds that “Australia’s rate of rooftop solar installation is both an opportunity and a threat to fair pricing, with up to seven million customers projected to install solar panels by 2034.”

He says that, without change, cross-subsidies of up to $655 a year will eventuate, leading to “massive over-investment” in distributed generation and cumulative community costs of up to $17.7 billion.

Analysis by consultants Energeia for ENA comments that “tariff design choices and metering policy settings will have a profound impact on future network price increases, customer bills and cross-subsidies.”

Material risk

AGL Energy, which is the largest private owner, operator and developer of renewable generation in Australia, has told the Climate Change Authority that there is “material risk” the large-scale RET cannot be achieved.

“A convergence of factors is making future investment in renewable energy intractable,” the company asserts.

It calls on the CCA to provide an objective assessment of the situation and “to explicitly consider the impact of generation oversupply on new renewable investment.

Policymakers face a simple choice, AGL argues: either the RET generally and the LRET specifically require substantial revision or the environment in which the measure operates must be adjusted through complementary policy.

“Component parts of the electricity industry cannot be assessed, nor their issues solved, in isolation,” it adds.

True target

Origin Energy believes Australia is “well on its way” to achieving a 20 per cent renewable energy target; the present level is about 16 per cent, it says.

Adjusting the RET legislation to deliver a true 20 per cent by 2020 will leave “plenty of room” for more investment in wind farms and solar technologies, it claims, estimating that this could involve development of a further 1,500 megawatts of wind generation and installation of another 3,000 MW of solar PV power by the end of the decade.

In a submission to the Climate Change Authority, Origin says that, this development achieved, “the longer-term focus should be on retiring highly emissions-intensive coal-fired generation to make room for increasing levels of low emissions and renewable generation beyond 2020.”

At a minimum, the company adds, the large-scale RET should be adjusted for the significant contribution of solar PV and solar hot water – which, it says, is well above the four terawatt hours allocated to small-scale supply when the scheme was last adjusted by the Gillard Labor government.

Origin points out that the CCA estimated in 2012 that small-scale systems would contribute about 11 TWh by 2020 and this input already exceeds 8 TWh and is expected now to reach 13 TWh at the decade’s end.

Even this forecast, it says, contains only modest assumptions about the growth in solar PV systems in the commercial sector, an area with significant growth as new leasing models are rolled out.

Origin predicts that solar PV will continue to be a popular choice with consumers without “generous” subsidies. A trend towards installation of larger PV systems – the average is now about four kilowatts – “further mitigates the need for upfront subsidies as it shows that customers are looking for larger, longer-term systems as a potential hedge against electricity prices.”

Sale time

New South Wales Treasurer Andrew Constance says the Coalition government will sell Australia’s largest transmission business, Transgrid, if it wins the March State election (and obtains sufficient support in the Legislative Council as well as the lower house where the large majority gained in 2011 should see it retain office).

The privatization process will also involve part-sales of Ausgrid, the largest distribution business in the country, and its fellow urban network operation, Endeavour Energy.  Under pressure from its National Party partner in government, the Liberals have agreed not to privatize rural and regional Essential Energy.

The distribution sales will cover most customers in NSW because Ausgrid and Endeavour have franchises that cover the conurbation running from Wollongong through Sydney to Newcastle.
Constance told media in mid-December that the government may consider an IPO for 50.4 per cent of the part-privatized Ausgrid and Endeavour, but will sell Transgrid outright. Technically the latter’s sale will be a 99-year lease.

State Grid of China, the world’s biggest electricity company, already owns 20 per cent of Australia’s AusNet Services and 60 per cent of Jemena, both in Victoria, and is considered to be among the frontrunners to bid for NSW assets.

Constance says he is “excited” by the interest also being shown by superannuation funds.

He added that governments shouldn’t be running electricity delivery businesses, which he described as currently “highly inefficient,” asserting that NSW customers had been “ripped off” through large increases in network charges. The previous long-serving government had allowed trade unions to “run amok” in this area, he claimed.

Long way round

Northern Territory Chief Minister Adam Giles claims that New South Wales Premier Mike Baird is “very keen to see the NT move to a position where we can be providing up to 40 per cent of their (gas) shortfall.”

Giles, promoting the concept of a pipeline linking the Territory to the east coast gas market at a time when consumer prices are rising and activists continue to stymie NSW development, has told “Gas Today” magazine that a link between Alice Springs and Moomba may “present the best opportunity.”

Three possible pipeline routes are under consideration by APA Group at present.

Giles claims the pipeline could be operational by 2018.

Federal Industry Minister Ian Macfarlane says the Abbott government will work with the NT administration to “progress the project as quickly as possible.”

Meanwhile Santos senior executive James Baulderstone told a company breakfast forum in Sydney in mid-December that, while there seemed sufficient gas supply contracted for 2016, winter 2017 could see NSW encountering gas shortfalls.

The Australian Petroleum Production & Exploration Association has welcomed the CoAG Energy Council’s “firm dismissal” of arguments for gas reservation at the ministerial committee’s December meeting in Adelaide.

APPEA chief executive David Byers says ideas such as reservation policy or a “national interest” test for LNG developments “should be consigned to the dustbin,” calling again for the removal of regulatory burdens restricting exploration and production of natural gas, especially in NSW and Victoria, to bring on new supplies for domestic use.

Picking winners

In a commentary looking at what can be expected in 2015, the Energy Policy Institute has urged policymakers to limit climate measures to emissions reductions and to shun picking winners or losers in energy technology.

EPIA says some political leaders in Australia have treated climate policy as dominant to energy policy – and it argues against “so-called partisan policy” derived from a political negotiating process rather than unbiased analysis, warning that outcomes will be “no more certain and stable than policy decided unilaterally.”

It says that renewable, fossil fuel and nuclear technologies should all be allowed to compete against each other on a level playing field without subsidies.

Price paths

The Australian Energy Market Commission forecasts that electricity prices will show “modest declines” or be stable in 2015-16 and 2016-17 across most States and Territories, driven by subdued wholesale power prices and lower network charges.

While one of the main factors is the removal of the carbon tax, another will be the new rules being applied by the Australian Energy Regulator, taking effect from July this year.

However, retail costs associated with retention of the renewable energy target in its present form and the impact of other green schemes are expected to increase. The RET impact will rise at an annual average of 4.6 per cent.

Solar fee-in tariffs are “expected to be a key driver” of price movements in Queensland. The AEMC says the recovery of costs associated with the solar bonus scheme introduced by the Bligh Labor government is expected to aggregate $1.4 billion over the next five years; however, the Newman government is proposing to offset the cost as part of its plan to privatize some power assets.

Residential prices in south-east Queensland are expected to go up 6.2 per cent in 2015-16 and four per cent in 2016-17 after decreasing slightly in the current financial year.

Household power bills in NSW are expected to display an annual average decrease of 5.8 per cent over three financial years while those in Victoria will rise by 2.3 per cent in 2015-16 and 1.5 per cent in 2016-17 after falling 5.5 per cent in the current financial year.

These three States account for 7.4 million of Australia’s 9.2 million household electricity accounts.

VEET encore

The new Victorian Labor government’s decision to retain the State’s energy efficiency target (VEET) rather than close it at the end of 2015, as the defeated Coalition had intended, has been criticized by the Energy Supply Association.

The scheme requires retailers to provide incentives to Victorian power users to pursue energy efficient appliances.

ESAA says that, while the Andrews government desire to shore up jobs in the energy efficiency sector is laudable, retaining the VEET is a wrong step.
“If creating jobs was as simple as distorting the market place by subsidizing companies to provide free services, it would be easy to create net jobs across the whole economy by setting up similar schemes,” says ESAA chief executive Matthew Warren. “But the reality of such steps is that they transfer costs on to households and businesses that are not part of the scheme. It’s a levy on all other consumers.”

Warren points to research by consultants Oakley Greenwood that estimates the VEET to cost the Victorian economy more than $700 million over 15 years to reduce greenhouse gases by four million tonnes. “The scheme will lead to higher electricity bills for the business sector and this will cost jobs, not create them,” he says.



Last word

In 2005 the International Energy Agency considered Australia’s east coast wholesale power market, the NEM, to be one of the world’s best electricity reforms.

That plaudit is not going to be repeated in 2015 and nor, thanks to a marked change in approach to network development late in the past decade plus political interventions to promote green schemes, is Australia’s status as one of the lowest-cost electricity nations in the developed world.

AGL Energy in an economic working papers published in late 2014 characterized the NEM as being – from 2007 to 2013 – “one of the worst-performing electricity market in the world” where residential tariffs rose faster than even in Spain, Portugal and Germany, systems notorious for their price spikes.

How to dig the NEM out of the hole in to which it has fallen is one of the most important energy issues for this country in the rest of the second decade of this century, one that will grow to be a bigger problem if policymakers do not come to terms with further reform.

Nor is this an esoteric issue for debate between energy policy wonks.

As the Minerals Council of Australia points out in a recent submission to the Climate Change Authority, low-cost, reliable energy has been a critical element of the international competitiveness of industry and the living standards of households for several decades. This advantage, the MCA asserts, has been lost, “substantially due to ill-judged policy interventions.”

The immediate target for the MCA is the controversial measure to subsidize renewable energy, including the small-scale scheme, which the lobby group rightly attacks for being a problem because of “poor design and a series of inchoate policy shifts.”

But the RET is only part of the problem and dealing with it in isolation merely exacerbates one of the key policy failures of the past 10 years: the fact that politicians in government address electricity supply issues in silos instead of holistically – and not least the way policymakers have chased after carbon abatement kudos while paying insufficient (or no) attention to the flow-on effects for energy policy.

As the Energy Supply Association argues, the RET needs to be considered as one part of the issues affecting the market as a whole.

Addressing all of this is a critical challenge for the federal government’s energy white paper, which supposedly was going to be published last month after the project was launched in December 2013 but is now postponed to a yet-to-be-named time in 2015.

Remedial work, however, goes beyond this document in to the realm of federal/State relations – and, ultimately, because of the importance of energy in the life of the nation, it is an issue for the Prime Minister.

His predecessors, Howard, Rudd and Gillard, bought in and out of energy affairs as it suited them.

Howard took a strong role in overseeing the 2004 energy white paper but failed to take an adequate grip on melding abatement and supply.

Rudd’s management style and Gillard’s interventions in carbon policy made the task of producing a coherent Labor version (eventually published in December 2012 after being begun in 2008) almost impossible.

Put bluntly, Prime Minister Abbott can’t afford to squib this challenge in 2015, notwithstanding all the other demands on his time.

There are many aspects to overall energy policy, but a central one is the health of the NEM,

In this respect there are two stand-out issues:

First, a long-term carbon abatement policy framework accepted across mainstream politics at federal and State levels – and not subject to reworking at each and every election (and sometimes by-election) – is essential for efficient investment decisions about long-lived power infrastructure.

Second, given where we now are with the NEM, a reform agenda that facilitates investment in optimal generation plant mix (in a technology-neutral environment) while helping to resolve the capacity over-supply problem must be put in place quickly.

The uncomfortable reality as we enter 2015, as the government has been told in one white paper submission, is that today Australia lacks an “investment grade” energy policy, nowhere more so than in respect of the NEM and the related supply areas, such as network operations.

In a word, this is unconscionable.

Keith Orchison
1 January 2015



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