Issue 99, July 2013

Welcome to the mid-year issue of the newsletter, writes Keith Orchison, as we enter a period of renewed federal political turmoil and the Productivity Commission’s final networks report is released to reveal disdain for the “tardy” NEM governance process and support for network privatisation.

Industrial hangover

New South Wales continues to drag down power demand on the east coast as the influence of the nation’s manufacturing problems impacts on consumption.

Data released by the Australian Energy Market Operator in Melbourne at the end of the financial year indicate that energy sold by generators in the NEM in 2012-13 will be about 188.7 terawatt hours compared with 193 terawatt hours in 2011-12.

A further fall in 2013-14 is anticipated.

Above all, the demand and supply scene reflects a pricing situation in which average residential bills rose 70 per cent in real terms (inflation adjusted) between June 2007 and December 2012, with further rises in charges now being implemented, including a whopping 22.6 per cent hike in Queensland.

The market operator’s data show that annual energy sent out in the NEM has declined 8,328 gigawatt hours between 2008-09 and 2012-13 – and 5,947 GWh of this has occurred in the largest sub-region, NSW.

AEMO points to the closure of the Kurri Kurri smelter in NSW as a leading factor and, looking forward following consultation with major customers, expects further falls in the State’s industrial load. Recent decreases in global metal prices and the sustained high Australian dollar (until recent weeks) are cited as factors.

The operator says a number of large proposed industrial projects are not expected to go in to production on the east coast

Forecasts of power demand are now widely recognised as being extremely challenging, with continuing growth of household use of solar PV arrays and more energy efficient buildings also current factors.

Despite projection problems, AEMO is still prepared to look out 10 years and is forecasting that annual electricity production will rise 1.3 per cent over a decade, taking in to account the commissioning of three large LNG projects in Queensland, population rises in most areas and anticipated easing in electricity price growth.

A higher population will feed in to more residential, commercial and light industrial demand for electricity, AEMO says.

It adds that, despite the population rise, average residential electricity use is expected to decline and flatten over 10 years as householders respond to higher prices with reduced use and continue to take advantage of incentives to use solar PVs.

Residential customers, AEMO says, are also buying energy efficient appliances and adopting other measures to lower their consumption.

The operator also says that it expects east coast maximum demand in 2013-14 to be 728 megawatts lower than it predicted a year ago.

Not good enough

The Productivity Commission report on electricity networks, finally released by the federal government 78 days after receiving it, has given governance of the east coast market a towelling, pointing out that governments and their regulators still play too large a role 22 years after a Special Premiers’ Conference (the Council of Australian Governments’ predecessor) decided to establish a national grid.

The commissions says the processes of the ministerial energy committee – these day’s CoAG’s Standing Council on Energy & Resources, chaired by the federal energy minister – are too slow.

“Consumers,” the commission adds, “have a weak voice in most regulatory processes, notwithstanding that their interests are ostensibly the essential plank on which market regulation is based.”

The regulatory settings for network reliability and transmission planning are “far from optimal,” it says.

The regulatory rules have led to inflated costs of capital and created incentives for inefficient investment. There are significant deficiencies in arrangements for demand management.

“The NEM has too often proved a graveyard for reform proposals,” the commission complains. It points to reforms for transmission planning and reliability being first set out in 2002 and, under the current processes, not expected to be in place until 2022.

Delays to reform, the commission claims, have cost NEM consumers hundreds of millions of dollars.

That price promise

Now-ousted Prime Minister Julia Gillard made a big play last December, and got widespread publicity, with a promise to Australian householders that reforms being processed through CoAG would see a $250 a year cut in their bills.

Despite this promise, which Gillard premised, she said, on the draft Productivity Commission report, being vigorously challenged in “Business Spectator,” in the “This is Power” blog and in this newsletter, the mainstream media chose not pursue the Prime Minister on her claim – neither did the Coalition in Parliament.

Now the final report of the commission firmly bells this cat, reiterating the caveats initially set out and revising downward the potential savings to be made. 

The commission says that, if carefully implemented, critical peak pricing and a smart meter roll-out on the east coast could produce average savings of around $100 to $200 per household each year after accounting for the costs of the meters.

For NSW, where some 25 per cent of current electricity bills is required to meet around 40 hours of very high demand each year, the commission adds, there is a need for a phased and co-ordinated suite of reforms, including customer consultation, the removal of retail price regulation and the staged introduction of smart meter accompanied by time-based pricing for critical peak periods.

The Productivity Commission says the implementation of critical peak pricing across the entire NEM will require a universal roll-out of smart meters – and this will entail high upfront costs and in many areas, where there are no immediate network constraints, will produce only limited savings.

Such a “big bang” approach, it warns, will be likely to meet significant consumer resistance, as has already occurred in Victoria where there were major problems leading to consumer wariness of imposed technological change.

“It is worth mapping out the desired end point (for cost-reflective pricing) – some years away – and then ensuring there is an orderly transition,” it adds.

On the job

The federal government response to the Productivity Commission report on networks, tabled in parliament along with the review, claims that the reform agenda being pursued by the Council of Australian Governments “addresses many of the issues” that have been raised.

The government response to the core thrust of the commission report – that the processes and decision-making of the CoAG system take far too long – is that it will “consider opportunities to expedite reform processes where possible.”

The inevitable “however” follows:  “Ultimately, the process and the success of reforms is based on the ongoing commitment and support from all jurisdictions.”

This is a far cry from Prime Minister Julia Gillard threatening State governments with a “big stick” back in August last year when she set out to ride the media-fuelled community backlash on power prices.

The new government responses says: “Recognising the technical complexity of the matters at play, and that decisions should not be at the expense of ensuring that outcomes are appropriate and proportionate, CoAG has noted that full implementation of the reform agenda will take sustained commitment over time.”

The government claims that the present reform process being supervised by the CoAG Standing Council on Resources & Energy is “currently on track” while acknowledging that further work is needed to deliver efficient outcomes for consumers.

It accepts that there are “grounds for further consideration” of the commission’s concerns about the timeliness of regulatory rule changes.

On network ownership – where the commission’s robust advice is that the assets remaining in State hands should be privatised – the government is only prepared to “encourage State and Territory governments to give consideration to these recommendations.”

It calls for greater transparency on dividends and other payments State governments reap from the network businesses.

Get on with job

The Energy Networks Association has greeted the Productivity Commission report with a call to governments to “get on with the job” of implementing the reforms developed over the past two years.

ENA chief executive John Bradley says the commission is right to support fundamental, national and consumer-focussed reform and “this is exactly what Australian energy consumers are getting.”

After a blizzard of policy reviews over two years, network businesses are in implementation mode, according to Bradley.  “(They) are already assisting the Australian Energy Regulator to finalise six separate guidelines by the end of 2013.

“Our focus now is on getting the incentives right, lowering the volatility of price outcomes and encouraging demand management where it is more efficient.”

Bradley also welcomes the commission’s conclusions on the limitations of comparative benchmarking in the regulatory process. “Benchmarking provides some useful information but it can’t be used arbitrarily to set network revenues dues to the variation in network size, scale, density, location and customer base.”

Meanwhile the Energy Supply Association has hailed the fact that the commission is endorsing deregulation of electricity markets as a key step in completing reforms begun 20 years ago.

ESAA chief executive Matthew Warren says the PC report “leaves no doubt that consumers are the big losers when governments try to regulate energy prices.

“Governments need to get out of regulating energy markets. Regulation is stifling competition and innovation, blocking moves to make the system more efficient.”

Warren adds that the uptake of air-conditioning and of solar PV systems has “put a huge strain on electricity networks,” pushing up power bills for those who don’t use them. “To ensure that those who can’t afford the latest energy technology aren’t paying more than they should for electricity, we need to work towards customer-focussed reform such as time-based prices.”

The Energy Users Association has used the commission report to call for an end to “paralysis of energy network policy.”

EUAA chief executive Phil Barresi says the association strongly supports the commission’s view that the program of reforms initiated under the CoAG umbrella is “a good start” – but he calls for more to be done to address consumer needs.

“The paralysis and ossification that has characterised policy and regulatory decision-making processes for the NEM must come to an end,” Barresi says. “Improving productivity in the electricity industry is critically important.”

The EUAA has called on the federal government to show leadership to ensure the urgent and thorough implementation of the PC’s recommendations.

Not so sunny

The Productivity Commission has called for the federal and State governments to discontinue subsidies for rooftop PV units and other forms of distributed generation delivered via feed-in tariffs, including the small-scale component of the renewable energy target.

The commission wants the way governments reimburse small-scale distribution generation to be (1) replaced by network businesses paying for such supply at a level that reflects their cost savings and (2) FiTs to be set to approximate the wholesale price of electricity at peak and non-peak demand times.

In its reply, the federal governments says it does not intend to remove the small-scale component of the RET scheme but the PC recommendation leaves the door open for the Coalition to take this step if it wins office.

Closer monitoring

The EUAA is calling for the Australian Energy Regulator to be given greater oversight of emissions-related power price increases.

The association’s claims that electricity generations are obtaining a windfall at the expense of consumers. “Some generators are passing through around 115 per cent of what it costs them to comply with the carbon tax regime,” says association CEO Phil Barresi.

Gas-fired generators, he claims, have been able to recover 44 per cent more than the carbon scheme costs them.

He asserts that research undertaken for the association has uncovered that, in the first nine months after the tax was introduced, generators “have been adding a premium to the cost of emissions permits.”

The EUAA says confidence in the current pricing of carbon is being undermined by the east coast market’s inability to deliver abatement at the lowest possible cost.

“Even when there is an over-supply of capacity in the market, generators appear to have been able to achieve price increases over and above their emissions obligation costs,” Barresi says. “This challenges the concept that the NEM is a competitive market.”

The association wants the CoAG Standing Council on Resources & Energy to agree that the AER should have greater powers to monitor wholesale electricity price movements.

In one of his last statements as Industry and Climate Change Minister before quitting after the return of Kevin Rudd to the prime ministership – and also announcing that he was leaving politics – Greg Combet said there was no evidence of windfall gains, given that the generation of Australia’s seven most highly polluting power stations was down 14 per cent since the start of the carbon price and more than 3,000 megawatts of coal-generating capacity had been mothballed.

“The market is highly competitive and it is incorrect to assume that all differences in the wholesale prices between 2011-12 and 2012-13 are due to carbon pricing,” Combet said.

Gas price hike

A new report by the Grattan Institute estimates that east coast household gas prices, especially those in Victoria, will rise by as much as $170 a year as suppliers export LNG to Asia and efforts to bring on new resources are curtailed by political decisions.

The institute’s Tony Wood says large industrial users of gas will face equally significant price rises.

The institute urges government to pursue three key steps to enable the east coast gas market to work more efficiently:

First, resolve the coal seam gas impasse in NSW “one way or the other – industry, the community and environmentalists need real clarity.”

Second, create a more transparent gas market that includes new trading hubs and a price index that “provides clear information to all players.”

Third, remove barriers to efficient supply by freeing up trading of pipeline capacity and moving towards elimination of joint marketing arrangements.

“There is no shortage of gas,” Wood says. “But infrastructure may be physically unable to meet growing demand in the short term.”

If gas producers don’t find a way to respond to consumer needs, he warns, political pressure will push governments to intervene.

Wood adds that governments should resist manufacturing calls for reservation of some gas resources or capping of end-user prices.

“Capping prices is a very bad idea,” he says. “”It amounts to a tax on producers and a subsidy for domestic users. Ultimately, it will lead to less investment, higher prices and damage to the economy.”

Wood says that the global gas revolution is creating major economic opportunities for Australia as well as “real challenges” domestically, but it is a false argument to portray the situation as export earnings versus pensioners freezing in their homes (as the “Newcastle Herald” did in a mid-June editorial).
“Competitive industries and a compassionate society can go together.”

As well, the institute report has bad news for wannabe gas-fired power generators.

Wood says the “dash for gas” argument of a decade ago foresaw the fuel providing the bridge from coal-fired generation to low-carbon technologies. “Falling electricity demand, rising gas prices and the effect of the renewable energy target, largely supporting wind power, means that new gas-fired generation is unlikely to be required for at least the next decade.”

Rude shock ahead

The upstream petroleum industry says that a “rude energy shock” lies ahead for NSW businesses and households.

Releasing a report written for it by ACIL Allen Consulting, the Australian Petroleum Production & Exploration Association says the State’s policy approach to coal seam gas threatens to damage energy security, drive up energy costs and cost jobs.

APPEA chief executive David Byers says the failure in NSW to develop its gas reserves to “appease vocal and extreme minorities” means the State now faces unnecessary risks. He calls for the blanket exclusion of “vast tracts of the State” from gas development to be “urgently reconsidered.”

The ACIL report centres on a situation where NSW continues to sources 95 per cent of its gas from other States because of local barriers to development.

Under the “CSG freeze scenario” modelled, the consultants say wholesale gas prices in Sydney can be expected to be 24 per cent higher between 2025 and 2035 than they will be if the State’s resources are exploited.

The study warns that the “CSG freeze” will see investment moving to other jurisdictions and a reduction in the State’s real GDP of $14.2 billion, more than 34,000 jobs lost and a cost to households (in inflation adjustment terms) of $290 per year.

Also, reacting to the federal government’s changes to the Environmental Protection & Biodiversity Conservation Act to create an industry-specific trigger targetting CSG, Byers says that policies undermining energy projects and curtailing production will impose costs on the national community in the form of lost jobs, foregone economic opportunity and higher energy bills.

Last word

This publication will shed not a tear over the political demise of Julia Gillard, Wayne Swan and Greg Combet.

Over three years since the last federal election this trio did more to add to investor uncertainty in the energy sector than everyone else put together.

Even the next federal election will not immediately provide deliverance from their efforts, whether the nation delivers government to Tony Abbott and the Coalition, which still seems the most likely outcome, or whether a resurrected Kevin Rudd can persuade voters to give Labor another term in office.

The governance and policy malaise affecting the energy sector, of course, cannot be sheeted home solely to the Gillard Three or the whole federal Labor government.  The behaviour of all jurisdictions over the past decade, the reductionism of issues to simplistic Punch ‘n Judy shows by the media and the venal self-interest of some stakeholders are all contributing factors.

The Productivity Commission network report, hidden from public view for almost three months after its delivery to Canberra and appearing by happenstance at a time when the nation’s attention is fastened on the federal political drama to the exclusion of much else, is a wake-up call to governments about the governance malaise, always supposing anyone is actually listening.

One has only to read the federal government’s 66-page bureaucratic response to the commission’s 355-page report to appreciate that, under the present mindset, the game is unlikely to change much and, where change does come, it will be at a limping pace and always hampered by the politics of the day.

It is not especially encouraging to be required to say, in fairness, that we are not alone in blundering around on this darkling energy plain – any objective consideration of what is occurring in Germany, in Britain, in Japan and in California, to name but four jurisdictions, highlights that inability to produce efficient policies to meet 21st Century energy needs is an international problem not just one confined to New South Wales or Australia.

Feedback received from an international gathering of energy sector executives earlier this year places emphasis on the emerging consumer reaction against the present state of affairs in a large number of developed nations.

The message is that, whether suppliers and politicians like it or not, consumers intend to be increasingly involved in decisions about electricity supply and consumption.

This will not change the fact that electricity will continue to grow in importance globally, especially as China leads hundreds of millions of people in the developing world in to better lives, but consumers (as voters) in countries like Germany, England and Australia can be expected to impose their preferences for supply to a greater extent.

This does not only put a greater onus for leadership on politicians but it also raises the bar for suppliers in efforts to explain themselves to the community.

Back in the 1990s, I notoriously told a meeting of Australian electricity CEOs that their harping on “customer focus” as a new paradigm was, in reality, no more than the “we know where you live” approach of previous times; in the way it was being pursued it could not and would not make for a better relationship.

Neither has it.

The majority of consumers today are as confused about electricity supply as they have ever been – and they are much more agitated about its cost than they have been previously.

The angst about cost is accompanied by a large degree of inchoate angst about “climate change” and activist-fuelled beliefs that we face an imminent global crisis.

This leads, as a recent opinion poll demonstrated, to the public simultaneously being deeply concerned about cost of living pressures and eager to see a bigger switch in energy supply to renewables.

This poll threw up that 78 per cent of respondents were bothered by living costs, 79 per cent by the perceived failings of the health system and 71 per cent about how we will meet our future energy needs – with 56 per cent considering it very important to reduce carbon emissions.

Can consumers afford what the community says it wants?

This is perhaps the electricity question of the decade (and probably rather longer) and, as the Productivity Commission report highlights, the capacity of our body politic to produce timely, efficient and effective answers to power supply questions is, to be polite, in some doubt.

It is symbolic of the problem that the Canberra political and bureaucratic system took 78 days to produce a response to the commission report and that the response is a model of the “Sir Humphrey” mode of management.

Funnily enough, the system, messy though it is, may be producing a way forward – through the development of a consumer advocacy entity to bring a new player to the table of regulatory decision-making on the east coast.

How far this will get and how satisfactory consumers will find the mechanism has yet to be seen.

The problem, as it usually is with energy supply, is time – like the boiling frog, Australians are getting closer to serious discomfort about electricity and gas supply, its costs, the impacts on the economy and the disconnects between political promises (including those about abatement) and reality.

Standing at the start of a new financial year, no-one can be sanguine about where we are in the electricity environment and about how we are going to get to where we think we want to be without a serious stumble.

Though it may be harsh, it is a fair judgement that three of the most important national players – Gillard, Swan and Combet – have done next to nothing to resolve this conundrum over the past three years.

Keith Orchison
2 July 2013

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