Issue 165, January 2019
May I extend to all readers of this newsletter my best wishes for 2019, writes Keith Orchison. This time last year I also expressed a wish for our political leaders to display the strength of character needed to progress transformation of energy supply in the best interests of the economy and Australian consumers. That they fell well short of this, despite the hard work of their advisers, is obvious to all. As one commentator put it at December’s close, politics is not a neat business but in 2018 it was a real garbage heap – and the reek has been greatest within the federal Liberal Party. The federal election, whenever it is held in the first five months of the year, seems likely to see a harsh community judgment of such inadequacy – activists are already asserting it will be a “referendum on climate” – but the overall make-up of the next Parliament in Canberra nonetheless remains a big question. As well, the New South Wales State poll in March surely will see exhibitions of voter unhappiness with the main parties. A certainty, however, is that energy policy will be high on the campaigning list in both elections and that the supply companies will struggle to regain better standing with both consumers and the next MPs.
“Australians have every right to feel let down by politics in 2018” – Labor leader Bill Shorten in his new year message.
“Australia has turned climate and energy policy in to an economic millstone and political suicide bomb” – commentator Chris Kenny, writing in The Australian.
“Energy costs in Australia have roughly tripled over the last several years while prices in other resource-rich countries, like the US, have stayed roughly flat” – Jeanne Johns, CEO, manufacturer Incitec Pivot.
“Business has been beating down the doors of federal, State and Territory politicians, calling on them to work together to get the price of power down and get reliability up” – James Pearson, CEO, Australian Chamber of Commerce & Industry.
“In Western Australia, we are in the fortunate position of being isolated from the chaos of east coast energy markets; stable, bipartisan policy has ensured adequate provision of gas for local customers” – Woodside CEO Peter Coleman.
“Energy efficiency has the potential to be the sleeper hit of Australia’s energy transition; it is an easy win for electricity prices and emissions that all parties should commit to supporting” – Luke Menzel, CEO, Energy Efficiency Council.
Emerging in to the policy arena for the first time since losing the prime ministership, Malcolm Turnbull told a conference in Sydney in early December that there is a “huge gulf” in views on energy between members of the federal Coalition.
“You’ve got very entrenched differences of opinion and people are prepared to cross the floor and blow up the government to get their way. There was a minority of Coalition MPs who effectively torpedoed what was fundamentally a very good, technology-agnostic policy that united climate and energy policy.”
He said power prices will be more expensive and carbon emissions higher without the “national energy guarantee” he championed.
Later he tweeted that he had not endorsed the current Labor stance. “They have adopted the NEG but not demonstrated that their 45 per cent emissions reduction target will not push up prices.”
In its new Health of the Electricity Market report, handed to CoAG ministers in mid-December, the Energy Security Board points to calculations that 2018-19 financial year will see 16 per cent of electricity consumed in the east coast market coming from wind power and solar photovoltaics. “This level is forecast to increase rapidly,” it adds.
The ESB declares that “while a shift towards renewable energy is imperative to meet Australia’s committed emissions reduction targets, more variable and distributed generation in the system is creating operational challenges.”
This includes the increased risk of “significant” load shedding, it says.
Meanwhile the latest Energy Quarterly report shows that estimated rooftop solar electricity used on the east coast for the 12 months to September 2018 was 15 per cent higher than in the same period of 2016-17. The recent use was estimated at 7,659 gigawatt hours.
In the same period, large-scale solar production was 949 GWh (previously 520 GWh) and wind farm output was 13,627 GWh (up from 11,296 GWh).
Black coal generation on Australia’s east coast rose in the 12 months to September last year, according to the latest EnergyQuarterly report published by Graeme Bethune’s EnergyQuest consultancy.
The report shows black coal plant contributed 57,075 gigawatt hours in New South Wales and 53,065 GWh in Queensland, a total of 110,140 GWh, up 2.6 per cent on the same period of 2016-17.
Victoria’s brown coal production was 5,182 GWh down on the previous year to September as a result of the closure of Hazelwood power station.
“Coal still dominates east coast power generation,” says Bethune, “although Q3 2017 (production) was third-lowest since Q4 in 2014. Coal plants still operated at 60 per cent of capacity (in the September quarter), accounting for 70 per cent of (NEM) generation.”
The latest “national energy emissions audit” prepared by Hugh Saddler for The Australia Institute says carbon emissions from national electricity supply has fallen seven per cent since 2005 – while those from transport have gone up 23 per cent. Along with growth in emissions from stationary energy and other sources, power sector abatement has been more than offset.
Saddler adds: “High wholesale gas prices mean that increasing wind and solar generation is displacing gas rather than coal, meaning emission reductions (in the power sector) are less than they would be if coal was being displaced.”
However, his commentary highlights the relatively miniscule contribution of rooftop solar power despite high expenditure by households on the technology. Saddler estimates that the total capacity of rooftop PV in the east coast market is 210 megawatts – and it is “generating just under 0.2 per cent of total NEM annual electricity consumption, but this could more than double in two years if current rates of growth continue.”
Meanwhile the Minerals Council of Australia is pointing to the year-end national emissions projections released by the federal government to argue for a “measured” approach to carbon policy.
MCA chief executive Tania Constable says the new data show Australia’s 2030 abatement challenge has fallen by 173 million tonnes since the previous review in 2017. She argues Australia is “clearly on a path” to meet its commitment to decrease emissions by 26 to 28 percent from 2005 levels.
Constable says: “Addressing climate change is not easy, especially for a major energy and resource-intensive country which needs a diverse energy mix to balance affordability, reliability and emissions reductions.”
The NSW Minerals Council fears time is running out to properly plan to replace the capacity that will be lost when AGL’s Liddell power station is closed in 2022.
In a statement reacting to the State government’s pledge to pursue “net zero emissions by 2050” that it labels “an exercise in heroic futility,” the association argues many of the large number of renewable energy projects being canvassed may not proceed – “and, even if they do, integrating (them) in to the power grid is fraught with risk.”
Without a Liddell replacement plan, it adds, NSW is likely to become reliant on interconnectors feeding intermittent power from Queensland and Victoria. “Sound policy,” it says, “should be based on planning for the worst, not hoping for the best. An energy policy focused on meeting unrealistic emissions targets by hoping technology will be available or that renewable projects will proceed is economically irresponsible.”
The Australian Energy Market Operator expects the consumption of grid-supplied electricity to remain flat in the NEM over the next 10 years due to growth in rooftop PVs, increasing use of local energy storage and improved consumer energy efficiency – before a rising population creates “some growth” again in operational grid demand.
AEMO forecasts high growth in residential and business sector investment in PVs for another three years and then a 10-year plateau.
The operator reports that 185,161 gigawatt hours of electricity was traded in the NEM in 2017-18 for $16.1 billion – and 17,899 GWh in Western Australia’s SWIS for $1.7 billion.
The impact of the stand-off on energy and climate change policy on investor thinking has been highlighted by the chairman of EnergyAustralia, Graham Bradley.
He told the media that the company, owned by Hong Kong-based China Light & Power, has “several projects on the drawing board with capacity to stabilize the NEM and ease pressure on wholesale prices. “ But, he said, “we desperately need policy stability and certainty.”
Federal Energy Minister Angus Taylor has hastened to welcome announcements that half a million mass market account-holders, including 39,000 small businesses, in eastern Australia will have their power bills cut from the first week of January as the major gentailers (AGL, Origin and EnergyAustralia) bring down their contract standing offers for loyal customers.
Media report that the average benefit for New South Wales customers will be $200 a year and householders in Victoria will be given an average cut of $313.
Taylor accuses retailers of previously “massively increasing” electricity prices for customers who remained loyal to them. Getting rid of the so-called “loyalty tax” has been his priority, he says, claiming government pressure had forced the companies to act.
About eight per cent of east coast residential customers are on standing offers
The Australian Energy Market Commission says east coast residential electricity consumers can expect “flat to falling” bills because a pipeline of new renewable generation in a market where demand is not changing will reduce pricing pressure.
The commission’s CEO, Anne Pearson, says its new price trends report indicates ACT prices will rise because of higher environmental and network costs but the major areas of consumption – Victoria, NSW and south-eastern Queensland – will see falls.
She reports that, for Australia as a whole, household bills can be expected to drop by an average of 2.1 per cent, with east coast falls offset by rises in Western Australia and the Northern Territory.
Pearson says managing the cost of connecting new generation will be “a major challenge” and urges avoidance of “over-engineered solutions.” There is a need to develop an integrated, modernized grid that reduces consumer costs, she adds.
The commission expects to see 4,822 megawatts of large-scale, intermittent generation, primarily wind and solar power, and 100 MW of battery storage added to NEM capacity in the current and next financial years. For the four financial years from 2017-18 to 2020-21, it projects the market will see 8,961 MW of new large-scale, intermittent generation, 566 MW of new thermal generation (including the diesel plant already installed in South Australia) and upgraded capacity at existing power stations – plus 205 MW of battery storage.
The Australian Energy Council, the lobbying body for gentailers, is using a report it commissioned from Frontier Economics to promote the argument that shifts under way in generation, storage, market architecture and supporting infrastructure are overcoming the need for government and regulatory intervention in the NEM – which it says has become the market’s “new normal.”
AEC chief executive Sarah McNamara says interventions proposed because the market is perceived to be insufficiently competitive often do not take in to account the “dramatic changes” already underway. “When contemplating regulatory intervention,” she adds, “it is crucial to think about its necessity in the new industry, not the legacy one.”
The Frontier Economics paper suggests that the transition now under way is likely to offer three major benefits from the perspective of policymakers and regulators: helping to smooth wholesale price volatility, reducing the advantages of the vertically-integrated gentailer business model and encouraging more competitive behavior in the NEM wholesale market.
The AEMC sees Victorian gas consumers being confronted by rising fuel prices for the period 2017-18 to 2020-21.
The commission says the situation flows from a combination of tight supply and demand conditions as well as retailers transitioning from legacy contract to more expensive new agreements.
Meanwhile the Energy Users Association, representing, it says, companies that “employ more than a million Australians, pay billions in energy bills each year and are desperate to see change that puts downward pressure on electricity and gas costs,” has declared that “the gas crisis still has an iron grip” on manufacturing, chemicals and food processing industries.
“Targeted assistance is needed if we are to avoid the worst,” says Andrew Richards, the EUAA chief executive. “Many companies are actively considering their future in Australia.”
He quotes the chairman of the Australian Competition & Consumer Commission (which has just published a new review of gas supply) warning that “once large manufacturers relocate or shut down their plants, they won’t come back.”
The association is calling on the CoAG Energy Council to make gas market reform a priority in 2019.
The Australian Industry Group has also reacted to the latest ACCC review – which comments that the most material benefits for gas consumers are likely to come from the southern States producing more lower-cost supply – by saying it is “very concerned” by the rising trend for prices in 2019.
AiG chief executive Innes Willox says the Victorian and New South Wales governments are “excessively wary of permitting development of gas fields to satisfy appropriately strict environmental standards.” He has called on them to reconsider their approach to avert a “devastating impact” on gas supply.
Most of the media coverage of the CoAG Energy Council meeting held in Adelaide on 19 December focused on a spat between the Coalition government of New South Wales and the Morrison government, but the discussion also threw up a commitment on NEM reliability.
Ministers agreed a work program for the Energy Security Board to “develop advice on a long-term, fit-for-purpose market framework to support reliability that could apply from the mid-2020s.”
As well, the meeting signed off on the draft amendments to the national electricity law to give effect to the retailer reliability obligation – and to see the final package of rules in the first half of 2019 to enable the measure to be launched on 1 July.
The ministerial communiqué on the meeting noted “the obligation will incentivize investment in dispatchable generation to be available when and where it is needed most.”
The much-publicized row between NSW and the Morrison government over a proposal without notice to draft a NEL amendment to include an emissions obligation in the legislation morphed in to an agreement for an out-of-session discussion of the issue in February.
Energy Networks Australia has published a wish list for 2019.
The lobby group for electricity and gas networks says there have been so many unsuccessful and short-lived policies in the past decade that “it feels like our game of prime ministerial whack-a-mole is more stable than energy policy.” Infrastructure investors, it declares, are “crying out” for a workable climate in policy. “It’s simple,” the association adds, “no policy, no confidence, no investment, less new generation capacity, higher wholesale prices.”
ENA calls for regulation focused on long-term outcomes, saying that decisions seeking short-term gains or influenced by political considerations “will have a high cost for current and future consumers from diminished regulatory confidence.”
In an environment where power networks are increasingly becoming a two-way platform for generators large and small, the association maintains its push for cost-reflective tariffs.
ENA also wants the Council of Australian Governments to support inclusion of an “actionable integrated system plan framework” in the national electricity rules, noting that coal generation in the NEM supplying the equivalent of the entire demand of New South Wales is set to be retired by 2035 “and must be replaced with new capacity unlikely to be built in the same spots.”
The wish list includes a call for the roll-out of smart meters to be better managed. “In States other than Victoria, the roll-out has been less than smooth,” the association says, with the current approach pursuing an arbitrary replacement plan where households only get a new meter when their current one is at the end of its life. “A better approach would be (to install them) on a targeted basis in areas where they are needed, such as high solar penetration areas.”
Energy Networks Australia has hit out at the Australian Energy Regulator’s mid-December decision on the allowable rate of return for its members over the next four years.
Releasing the ruling, AER chair Paula Conboy has commented that “estimating rate of return in a complex exercise.” She says the 2018 decision is “the result of the most comprehensive process we’ve ever undertaken with consumers, investors and businesses.”
The AER believes the decision will help reduce mass market consumer bills by between $30 and $40 a year. Conboy says the regulator is “confident we have got it right,” in providing a rate of return high enough to attract investment in long-term assets “but not so high that it attracts over-investment.”
However, ENA’s chief executive, Andrew Dillon, has declared the decision is “short-sighted,” saying it is “inconsistent with market evidence” and warning it “could end up delivering perverse results for customers.”
Dillon says Australian networks now face lower regulated returns than their peers. “Our returns used to be comparable to (those in) the UK, USA and New Zealand – now they resemble those of heavily centralized East European countries with poor reliability.”
He argues that capital expenditure on networks in Australia “is already at decade lows” and a lower rate of return isn’t needed to reduce spending. “That’s already happening.”
Dillon asserts the AER decision will discourage network companies from investing in technologies needed to modernize the power grid to accommodate fast-rising investment in solar and storage driven by government policy. “The decision misses the critical point that a key part of lowering long-term power prices is timely, strategic investment in the grid.”
Without record royalties from the minerals sector, the cash-strapped Queensland government’s budget surplus would collapse, according to the Queensland Resources Council.
Ian Macfarlane, CEO of the association, says the surplus of $524 million for the financial year would be a deficit of $4.6 billion without resources royalties, especially from the black coal sector. “Without coal royalties, the budget would be in the red for the foreseeable future.”
Coal royalties are now expected to be $4.26 billion, $700 million more than forecast in the last State government budget.
The ball is now in the politicians’ court: after a two-year due diligence process: the independent board of Snowy Hydro has given approval for the 2,000 megawatt Snowy 2.0 pumped hydro project – subject to approval by the sole shareholder, the federal government.
Federal Energy Minister Angus Taylor says the government “will take whatever time is needed” to make a final decision but in reality the government only has until late March at most – when it moves in to caretaker mode if Scott Morrison opts for 18 May, the latest possible date, for the next election.
The project’s capital cost is an estimated $4 billion.
Meanwhile the NSW government has announced it is giving consideration to development of 7,000 MW of pumped hydro from 24 projects in the State using WaterNSW sites.
By the time this new year is half over we will have had two political decisions that may dictate the future of energy policy in Australia not just for the next little while but for the looming third decade of the century.
These decisions, of course, are the verdicts of the community in a federal election (to be held in May or earlier) and in the poll in country’s largest sub-region, New South Wales, on 23 March.
The likelihood that the federal election will deliver a Labor government is high, although the community may spring some significant surprises via support for independents and minor parties, especially in the Senate vote, raising issues for delivery of ALP plans, which now include creating a federal environmental protection agency, potentially adding to the overlap in this area between national and State processes.
The outcome of the NSW poll is less clear. If Labor win here as well as nationally, they will control government everywhere except Tasmania and South Australia – with implications for the CoAG Energy Council’s next steps. (The next State election after this one will be in October 2020 in Queensland.)
As the past several years have demonstrated, it is impossible to separate politics from policy in this field and, with the current Liberal party irretrievably split on core energy issues, Labor seems about to be handed both the opportunity and the danger of incumbency at a point where the energy costs threat to manufacturing (and the C&I sector more generally) may turn in to the nasty reality of plant closures, job losses and economic pain.
The Rudd regime of a decade ago made such a mess of the opportunity it was handed in this area that it is tempting to see history repeating itself. Little that Labor has had to say about energy policy since 2016 has provided grounds for high hopes that this time will be different – but the national interest dictates that it has to be.
Stakeholders will take some comfort from Bill Shorten’s promise to re-introduce the “national energy guarantee” proposed by the Energy Security Board, promoted by the Turnbull government and dropped in August’s Coalition car crash.
The nature and scale of the task is not so difficult to understand if advice politicians are receiving is heard and understood.
In its Health of the Electricity Market report published in mid-December, the Energy Security Board has provided this succinct summary: “A shift towards more variable and distributed energy resources has been driven by more than just government policies. Significant reductions in technology cost and changing consumer preferences have also contributed to the rapid uptake. The NEM will not continue to operate smoothly without greater control over when and where this generation exports in to the grid.”
The board goes on point out what should be obvious: “the fundamentally different characteristics of variable distributed energy resources to traditional generation mean that changes to the way the NEM operates must be made.”
And the ESB warns: “Ultimately (a) chaotic approach to energy policy will result in consumers paying more than is necessary.”
When it is appreciated, as it often is not in populist debate, that some 70 per cent of consumption is by business, then pursuit of a chaotic approach is a dangerous game.
Add to this the problems of gas supply, as well as an unwillingness to consider the merits of new nuclear technology, and the cup Labor is apparently being handed at federal and State levels may well be poisoned if its leadership is unable to act sensibly on the advice it is getting from a number of quarters.
There is good reason for seeing the new year, the Year of the Pig, as potentially especially momentous for energy policy and the nation.
1 January 2019