Coolibah Commentary

Issue 141, January 2017

Welcome to 2017. May it turn out to be a better year for energy policy than 2016, writes Keith Orchison. Top of the agenda will be the Finkel task force report, the ensuing Council of Australian Governments’ debate and the federal government’s already controversial review of climate change policy. As well, the NEM situation after the closure of Hazelwood (scheduled for March) will have generators, industrial consumers and politicians on tenterhooks. The prospect of new high voltage links being built in the NEM also remains highly contentious.  Last year’s “black swan” events were the twin “energy crises” in South Australia – what might this year bring?

Objective case

The Australian Energy Council is calling on policymakers to exercise caution in the new year as efforts grow by environmental activists to push for a rewording of the “national electricity objective” – the underpinning of the east coast market – to make carbon abatement a driving force.

The AEC, which represents power generators and energy retailers, says the current NEM goal is efficient energy services, taking a long-term perspective. Given that emissions reduction is a progressive goal, the council adds, it is a “more dynamic metric and a more challenging reference point” for rule-making.

The AEC argues that the NEM governments “already hold the trump card” because their decisions can over-ride market efficiency concerns. “For better or worse, they have the ability (now) to set policy, including environmental policy, that may or may not meet the NEO.”

The council suggests that, if clear national policies are set for emissions reduction, this will inform the work of the market rule-making, regulatory and operating bodies regardless of whether the NEO references them.

The AEC acknowledges that the calls for an environmental objective in the NEO reflect ongoing frustration with the inability of policymakers to provide stable climate change strategy to drive efficient emissions reduction. “But changing the NEO is not an effective substitute for sound policy settings.”

The council says if the long-running policy mess can be resolved, “it is likely market decisionmaking will internalize (climate) settings and (be) the driver of decarbonization.”

Focus on Finkel

Australia’s Chief Scientist, Alan Finkel, who is chairing a critical review of east coast energy security for the Turnbull government, has told a Grattan Institute forum in Melbourne in December after his first CoAG briefing that it will take a long time to make substantial change to the NEM.

Finkel says he is confident the government will accept the advice of the task force “because we are working in a very objective fashion and we are going to present independent, carefully considered advice.”

Finkel adds that the first step for the task force is to “identify the problem.”

In a media statement after the CoAG first ministers’ meeting in Canberra in December, Finkel said the September blackout in South Australia is a reminder that “the grid is under pressure and in need of urgent attention.”

He declared: “We now have a once-in-a-generation opportunity to reform the electricity sector to maximize its resilience in the face of rapid market change.” He added: “It is clear from our early consultations that investors are less confident today than they were in the past. There are solutions to the challenges we face and we will have to change the way we operate.”

The key points the task force preliminary report put to the Prime Minister and premiers are:

Submissions to the task force inquiry close next month.

Finkel also provided a briefing to the CoAG Energy Council in mid-December and ministers subsequently issued a communiqué that committed the council to “fast-track for consideration in February additional measures to strengthen the NEM and accelerate proof-of-concept projects in order to respond to security and reliability issues identified in the preliminary report.”

Not baby steps

The Energy Users Association has called on policymakers to eschew “baby steps” in favour of “giant leaps” in addressing energy supply security and cost issues.

Representing large business consumers including manufacturing, food processing and transport, EUAA declares that the “current energy market trajectory will leave us all worse off, put even more pressures on users and create an unworkable and unreliable energy system.”

It tells CoAG “the situation is critical and requires urgent attention,” arguing that “the lack of a national approach to energy planning is leaving all energy users out in the cold.”

Meanwhile the Business Council has commented that “Australia needs a suite of durable, post-2020 climate change policies that are integrated with broader energy policy and are capable of delivering emission reduction targets at lowest possible cost while maintaining competitiveness and growing the economy,

Dire straits

The upstream petroleum industry is ringing alarm bells over the state of Australia’s search for oil and gas.

The Australian Petroleum Production & Exploration Association says the results of the latest rounds of bidding for offshore acreage “confirms a deepening problem – offshore exploration is in dire straits.”

The federal government has announced that it has awarded nine new offshore exploration permits with work plans for $475 million in investment over six years.

APPEA chief executive Malcolm Roberts says the situation is “something more fundamental than just a passing, cyclical downturn.”  He points out that offshore drilling has been in a steady decline for “many years” despite strong commodity prices until recently.

APPEA notes that Australian oil production is now at its lowest level since the 1960s and is calling for “urgent action” to reverse the exploration trend.

Roberts says “there are no easy solutions that will deliver a quick turn-around” and calls for development of “practical options” to promote the search for oil and gas in promising areas.

Meanwhile the annual global survey of “barriers to investment” for the resources sector by Canada’s Fraser Institute has listed New South Wales among the 10 least attractive investment destinations. The others include Libya, Venezuela and Russia. Victoria has gone from being Australia’s most attractive jurisdiction for petroleum exploration in 2011 to the second worst in 2016.

Roberts says the survey is a “timely warning” for the two States at a time when the east coast gas supply market is tightening. The market, he asserts, “is at a tipping point” and consumers face increasing pressure by a failure to unlock new resources.

Retirement cost

The Australian Energy Market Commission foresees household electricity prices rising in most parts of the country over the next two years.

Releasing the commission’s annual report on residential power bills in mid-December, AEMC chairman John Pierce said there are two exceptions: there will be slight falls in bills for south-east Queensland and Tasmania.

Pierce said the closure of the Hazelwood brown coal power station in Victoria in 2017 will lead to wholesale electricity price rises of 3.5 per cent annually on average in most eastern States – but he predicted a slight decrease again in the 2018-19 financial year because of more wind power coming on line.

The AEMC sees the Hazelwood closure turning Victoria from being a net exporter of electricity to New South Wales in to a net importer and says the State will also export less power to South Australia.

It adds that the integration of energy and environmental policies will continue to have significant effects on electricity price trends as Australia moves towards meeting its emissions reduction target.

Investment in large-scale wind generation to meet the 2020 capacity needs of the RET is expected to suppress wholesale electricity costs in the short term – but, as this contributes to earlier retirement decisions for other generators, this will place upward pressure on wholesale costs in the medium term.

The AEMC comments that retirements of plants like Hazelwood and South Australia’s Northern power station reduce the amount of generating capacity available to meet demand, and therefore generally increase the wholesale cost of electricity. “In turn, increasing wholesale costs usually place upwards pressure on retail prices because retailers pass through cost increases to consumers.

Big GPG need

The 2016 review of transmission released in December by the Australian Energy Market Operator indicates that up to 12,000 megawatts of new gas-powered generation may be needed in the next 20 years if alternative technologies cannot provide the energy and system stability services currently delivered by coal-powered generation.

The market operator says its modelling assumes new gas plants will be located to use existing electricity transmission infrastructure, made vacant by coal generation withdrawals. “However, new GPG capacity in these locations would require development of gas production and pipelines.”

AEMO’s modelling foresees coal generation in the east coast market reducing from 74 per cent of power production in 2016-17 to 24 per cent in 2035-36, increasing the need for frequency and voltage support to maintain a reliable supply as 22,000 MW of wind farms and large-scale solar farms enter the supply system.

The operator says about 9,000 MW of coal generation will reach the end of its technical life in the 2030s. “Whether coal generation is refurbished or replaced will depend on future climate change policy, technological advances, future gas prices and the level of consumer demand. This introduces a decade when investment decisions could have divergent implications for the energy system.”

SA discomfort

Reacting to a consultant’s report showing that South Australians, on average, pay most for power -- $2,000 a year for a home using 6,000 kilowatt hours compared to as little as $1,400 in other States – the Australian Energy Council has said that, because of the SA energy mix, it does not expect prices there to ease “any time soon.”

The AEC adds: "Until there is greater firm generation available to the South Australian grid, things are likely to continue to be uncertain.”

Gavin Dufty of St Vincent de Paul Society, which commissioned the consultant’s review, says a "trifecta" of events in South Australia was driving prices up. "You've got lots of poles and wires and not a lot of people to pay for it so there are higher costs," he says. They have a high retail component so that comes into play and also they have higher wholesale costs than in other States."

‘Rocky progress’

The network “roadmap” report prepared by CSIRO and Energy Networks Australia shows that this country is “making rocky progress” on reducing carbon emissions while maintaining energy security and keeping prices low, according to the research body’s chief energy economist, Paul Graham.

The publication sees the next 10 years – to 2027 – as being “a time of step-change in the adoption of new (electricity) technologies.”

The “roadmap” modelling includes households potentially spending a further $200 billion on installing rooftop PVs and energy storage between now and 2050.

Four scenarios for the energy market were modelled by CSIRO in the “roadmap”: in one, consumers "set and forget" their energy use, a second considers the rise of the "prosumers” actively involved in sourcing their energy, a third canvasses mass market users leave the grid and the last looks at a market with100 per cent renewables.

Graham says the study shows it is possible to contribute to global targets to reduce emission while lowering the impact on household bills.

He also acknowledged that the “roadmap” analysis confirmed the critical role of thermal plant in balancing variable renewable energy output during the transition, saying this would need to be replaced over time by low emission solutions like battery storage, pumped hydro, gas fired generation with carbon capture and storage or power to gas hydrogen technology.

“Our analysis confirms it is possible for the electricity sector to maintain a reliable, stable grid while achieving zero net emissions by 2050, in line with the aspiration of the COP 21 Paris Agreement. On the way to a zero net emissions future, Australia’s electricity sector could exceed its share of current national carbon abatement targets, achieving 40 per cent below 2005 levels by 2030.”

The analysis concludes that an integrated set of measures would be required, including stable enduring carbon policy frameworks and incentives to enable “orchestration” of millions of distributed energy resources, like storage, electric vehicles and smart homes.

ENA chief executive John Bradley says the electricity industry can reposition itself for the long term over the next 10 years. “If we act now, the grid will be more secure and resilient, despite high growth in large scale renewables and two-thirds of small customers taking up solar and storage by 2050,” adding that “customers want an electricity future which avoids more frequent blackouts and bill shock while addressing global warming.”

Basslink imbroglio

The Tasmanian government has denied it is manoeuvring to take over the Basslink interconnector.

The issue has flared after the Bass Strait interconnector managers published an expert assessment that the cause of the cable failure 12 months ago, cutting off Tasmania from the mainland for six months, could not be established and should be attributed to “force majeure” – quickly followed by Energy Minister Matthew Groom refusing to accept this position and the Basslink CEO describing the government attitude as “irresponsible.”

The imbroglio revolves around money, Groom admits – accepting the “force majeure” claim “would mean more money for Basslink and less money for Tasmania.”

The State Labor opposition claims the government has embarked on a tactic to force Basslink to sell the company or make it a regulated transmission line.

The issue will now go to arbitration.

Meanwhile Groom is claiming that the latest Australian Energy Market Operator review of NEM transmission developments is “building momentum” for construction of Basslink 2, a cable project rejected earlier on economic grounds but revived in the wake of the State’s supply crisis in the first half of 2016.

Federal Environment & Energy Minister Josh Frydenberg comments that greater power connectivity between Tasmania and the mainland “is a good thing – the question is who pays?”

The AEMO report says the benefits of Basslink 2 are marginally greater than its $1 billion price tag. However it notes that the primary benefits of a second interconnector do not relate to providing redundancy for Basslink, but rather to deferring the need for peaking generation capacity investments in the NEM with reductions in fuel and variable operating and maintenance costs, due to production from hydro and wind generation in Tasmania, displacing natural gas generation on the mainland.

AEMO adds that the development could avoid the need for extra peaking power to be built in Victoria and New South Wales as coal plants close and there is greater reliance on intermittent resources.

However, the Australian Energy Council is warning that the benefits of new interconnectors need to be assessed carefully against potential risks, saying they could increase costs and reduce system reliability if they are not part of a national energy and climate strategy.

Doing better

The Australian Energy Regulator says most electricity transmission and distribution networks have improved their productivity.

Releasing the AER’s 2016 benchmarking report, the regulator says distribution businesses in the ACT, South Australia, Tasmania and Victoria have all done better as have transmission networks in SA and Tasmania.

New South Wales and Queensland distributors are still not performing as efficiently as they should be, the AER adds.

Overall, the report says, the long-term network industry trend of declining productivity continued in 2014-15. ”Combined industry inputs have increased at a greater rate than outputs since 2007 -- in other words, the resources used to maintain, replace and augment the networks are increasing at a greater rate than electricity services delivered (measured in terms of customer numbers, line length, energy throughput, maximum demand, and reliability).”

NY resolution

Australia’s largest distribution network business, Sydney-based and newly-privatized Ausgrid, is urging New South Wales householders to make a new year resolution to be more energy efficient.

The network says a typical household of four people can save up to $400 a year by not over-cooling homes, reducing showering times by two minutes per person, turning off appliances not in use at the power point – and using a clothes line in summer instead of a dryer.

Last word

As we move in to 2017 the future volume of gas available on the east coast, its price, its impact on manufacturing and the growing realization that the fuel almost certainly needs to be an important part of the power generation transition now under way, especially if there is a much larger reliance on variable renewables, throws all the suppositions of the recent past in the air.

To quote the Australian Energy Market Operator, which has just published its 2016 forecasting report for the fuel, our gas future for the next 20 years is “at a crossroads.”

AEMO chairman Tony Marxsen, talking to the Committee for the Economic Development of Australia in Melbourne, said the report highlights “the need for co-ordinated, holistic approaches” to the gas and electricity industries.

He noted that, if you exclude gas for power generation, the fuel’s domestic use is set to fall with demand growth from a rising population offset by switching to electric appliances and an ongoing decline in gas-intensive industry.

That latter point is a signal of continuing loss of factory jobs, something about which the Great Australian Media and umpteen politicians emote every time more gates shut.

Marxsen asserted what a number of other energy industry experts are saying – even as the green activists rail against gas exploration and development, now with legislated support in Victoria. “If we want a secure, affordable supply of electricity, we need a secure, reliable and affordable supply of gas.”

I’ve trawled through the mainstream media coverage of Marxsen’s CEDA talk and no-one reported this quote – yet arguably it is at the heart of the current power security debate.

Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, has seized on the issue in a media statement, saying “we need more gas because we need more renewables.” 

He adds: “People willing to think about the nuts and bolts of decarbonizing Australia’s generation know that a cleaner sector means, for many years, more gas-fired generation.”

Eventually, he acknowledges, the balancing role in the power market may be taken by large-scale affordable storage of excess wind and solar power, “but for the foreseeable future gas will be the guarantor of system security.”

Or will it?

As Roberts also points out, in eastern Australia gas-fired generation is being squeezed between cheap coal power and subsidized renewables. The gas plant share of the NEM has been falling for the past two years.

The current edition of the excellent quarterly review published by Graeme Bethune’s EnergyQuest business contains power generation data for the year to September. In the three eastern mainland States that account for 7.4 million mass market customers and roughly 900,000 of the NEM’s million businesses, the breakdown of supply was like this:

Pursuit of 50 per cent renewables across these States will not only need Herculean investment in wind and solar power along with more delivery infrastructure but also a large amount of gas-fired generation.

The AEMO forecast suggests that, on present policies, the annual volume of gas for the NEM power sector by the ‘Thirties will need to be almost double what it now is. (On the other hand it sees a steady decline in industrial requirements for gas via plant factory closures, energy efficiency improvements and fuel switching.)

You only have to read the operator’s report (or any other of the numerous substantial reviews of the energy markets in 2016) to appreciate how complex any future-telling is and how many variables can influence outcomes.

For example, the CSIRO/Energy Networks Australia “roadmap” published in December included prospects for the 2030 east coast generation mix – which today sees 114 terawatt hours provided by black coal, 45 TWh by brown coal, 18 TWh by gas, 20 TWh by non-hydro renewables and 16 TWh by hydro power.

The “roadmap” suggested that in 2030, with variable renewable energy having been on a quite fast escalator along with significant coal plant closures, VRE production could be around 60 TWh annually – and gas could be delivering between 73 and 97 TWh. This would require a helluva lot more gas than under the AEMO scenario.

At the heart of all this is the fact that we really don’t need politicians picking winners, nor banishing technologies to the naughty corner.

A raft of stakeholder organizations – from business, the trade unions, environmental activist bodies and NGOs like St Vincent de Paul Society – pushed out a brief statement in December (perhaps they couldn’t agree on more than a couple of hundred words!) stressing the urgency of policymakers “fixing the energy situation” and urging “a raft of reforms.”

Separately, the Australian Pipelines & Gas Association has made the point that what’s at stake, with respect to sorting out the gas muddle, is a strong or a weak manufacturing sector, a strong or weak power generation emissions abatement program and a strong or weak national economy

In a nutshell, strategic, sensible and timely decisions need to be made on just about every major facet of energy and carbon abatement strategy. This applies equally to gas as to electricity.

In the present political environment this is a lot easier to say than to see done.

The Australian Energy Council has commented that rising electricity prices will be increasingly volatile without a clear national energy strategy. “At the moment,” according to CEO Matthew Warren,” the electricity system isn’t transforming, it’s just degrading. No-one knows what is going to happen next.”

Tremendous hope is being placed in the final report of the Finkel task force, but let us not forget, as we enter 2017, that the decisions have to be made by politicians – and let’s be blunt: how many of the present crew of pollies messing with energy (including those in the Senate needed to support any amending federal legislation) would you trust, on past form, with even bringing in the washing?

What was really said (or done) in 2016 to encourage us to believe an urgent, viable, durable, collegial fix of what ails national energy policy is at hand or even just over the horizon?

Keith Orchison

1 January 2017

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