Issue 98, June 2013

Welcome to the sixth issue this year, writes Keith Orchison, as the federal election inches closer, a new set of tariffs for the 2013-14 financial year (include a price shock in Queensland) confront energy users and debate rumbles on over renewable energy, carbon pricing and coal seam gas.

Bridge too far

The Newman government has had to come to terms with the fact that the renewed subsidy for household electricity customers it had mooted in the wake of the Queensland Competition Authority’s 2013-14 tariff determination is a budget bridge too far.

Treasurer Tim Nicholls says the government is “operating in tough circumstances where receipts are falling” and it can’t provide relief from the 22.6 per cent rise in power bills the QCA is imposing from 1 July.

The decision is embarrassing for Nicholls, Premier Campbell Newman and Energy Minister Mark McArdle, who were all vociferous in February in declaring the proposed increase “simply unacceptable” when it was 21.4 per cent.

McArdle promised users” “The Newman government will ensure (the increase) is reduced to the lowest level possible.”

Behind the backflip lies the Newman government’s realisation that it has over-promised voters on its capacity to contain cost-of-living increases and, like the federal government, seriously under-estimated the pace of the slowing of the resources boom, the reaction of consumers to troubling times and the consequent slump in its receipts from taxes and charges.

Like other governments, it is falling back on blaming events outside its control for higher power bills and admit that it can’t afford the cost of large-scale intervention.

Announcing the government’s change of mind, Nicholls told media that the Newman cabinet had considered limiting the increase to 16 per cent but this would have required a subsidy totalling $600 million over two years.

The government will include $136 million in its budget to help pensioners and concession card holders pay their power bills.

The tariff freeze the government imposed for a year after winning office has cost taxpayers $60 million in 2012-13 and is a contributing factor to the QCA 2013-14 determination.

The State government said in March that the freeze had saved 1.2 million households an average of $120 on their power bills for 2012-13.

Back in February Campbell Newman vowed to reduce the price increase for 2013-14 to a single-digit number.

Seeking now to mitigate fallout from the budget decision, McArdle has issued a statement pointing to Newman government efforts to reduce network outlays and claiming that Queensland electricity prices have been inflated 18.9 per cent by federal and State green schemes plus the Gillard government’s carbon price.

McArdle says the federal RET is adding $102 to the average household electricity bill in Queensland while the solar bonus scheme imposed by the previous Bligh Labor government adds $67. To this, householders, who pay on average $1,900 for their electricity supply in Queensland, can add $190 for the carbon price, he says.

Because the Bligh government legislated the solar feed-in tariff payments until 2028, he said, the aggregate cost for Queenslanders supporting the subsidy will be almost $3 billion. By 2015-16, he adds, it will be adding $276 to annual Queensland household bills on average.

The solar sector accuses McArdle of misleading the public on solar costs.

The Solar Citizens lobby group argues that the photovoltaic subsidies add seven per cent to household bills in Queensland versus 70 per cent for network and retail costs.

Solar Citizens says McArdle needs a scapegoat for the large new price rise and has chosen to blame 300,000 State householders who have bought solar arrays.

The new rates are not only an issue for householders. Under the QCA determination, small business customers on a flat rate will see their prices rise 15.7 per cent and those on time-of-use arrangements will be billed an extra 11.9 per cent.

The Chamber of Commerce & Industry Queensland says the cost of electricity for business, including the latest increase, has risen by nearly 100 per cent over seven years. “This is imply unsustainable,” says CCIQ.

The lobby group adds that rebates for vulnerable customers are a “Bandaid” where the supply industry “more or less needs open-heart surgery.”

QCA’s new chairman, Malcolm Roberts, says the latest round of price rises reflect increased volatility in the wholesale energy market, costs associated with the carbon tax and costs associated with increasing bad debts as well as higher network charges validated by the Australian Energy Regulator.


Not sweet

The Queensland Cane Growers Organisation is leading the charge against the latest round of State electricity price rises, which will add 20 per cent to its members’ bills and, it says, threatens to help push hundreds of farmers off the land.

The organisation is the more incensed since the Queensland Competition Authority’s first proposal was a rise for farmers of 17.4 per cent. “Now, with world sugar prices falling, is not the time to impose a doubling of power bills over seven years.”

The cane growers are arguing for the Newman government to “stop gouging” consumers through the revenue it is picking up from its three network companies.

They claim bills could be cut up to 20 per cent is the government earnings are cut back, pointing to a rise in State pecuniary benefits from the networks from a net $46 million in 2007-08 to $970 million in 2011-12 (taking in to account the community service obligation payments).

Greens ‘absurd’

New federal Resources & Energy Minister Gary Gray has slammed the Greens as “absurd” for announcing that they will go to September’s federal election advocating a blanket ban on all new coal seam gas exploration and development.

“It would be silly and counter-productive,” says Gray, “to price our clean gas out of the market by green tape, wrong priorities and absurd suggestions such as bans.”

Greens leader Christine Milne declares the ban should be imposed because “big coal seam gas mining companies” are “threatening precious water, valuable farmland and the global climate.”
Gray accuses her and the Greens of ignoring the role of gas in the transition away from coal and ignoring the “substantial” environmental regulations applied to the CSG industry.

New South Wales Energy Minister Chris Hartcher has added his voice to condemnation of the Greens, telling the Australian Petroleum Production & Exploration Association annual conference in Brisbane in late May that “extremist Greens” have “derailed the debate” over coal seam gas.

They are a “hard core of people opposed to any use of fossil fuels at all,” he said, “and have taken advantage of a level of ignorance (about the issue) in the community.”

Hartcher has also told the upstream petroleum industry that it has not done enough in the past to engage with the rural and regional community on CSG – and that the ongoing revelations about corrupt practices in the previous State Labor government has undermined public confidence in the governance of resource activities.

APPEA itself describes the Greens’ policy as “a farce,” accusing the party of “having a very poor grip on reality” as well as a poor understanding of the market and CSG regulation.

The association says the CSG sector today provides a third of east coast gas and provides employment for almost 30,000 people in Queensland alone.

Meanwhile Gary Gray has launched a new review of east coast gas markets, to be undertaken by the federal Bureau of Resources & Energy Economics and to be completed by the end of 2013.

Speaking to journalists at the APPEA conference, Gray said there are “complex issues” in play over has supply and his government is seeking to avoid policy being driven by “ill-informed populism.”

Part of the BREE task is to identify potential gas supply constraints as well as the possible timing of new production and the domestic implications of exposure to international gas markets, including the future cost of the fuel.

While opinions polls suggest strongly that the Gillard government will be defeated at the September federal election, the outcome of the BREE review has strong implications for both the NSW government, confronted by existing gas contracts rolling up by 2018, and a Coalition government planning to produce a new energy white paper during 2014.

Focus welcome

The Energy Users Association, now led by former federal MP Phil Barresi, has welcomed Gary Gray’s announcement of a study of the east coast gas market.

Barresi says energy policy today is “an abject failure” – and avers that the manufacturing and industrial sectors are “suffering a major impost” in the cost of energy on their viability.

Barresi claims current gas policies at State and federal level are not working and complains the debate has been dominated to date by gas producers.

However, he notes, there are now four east coast inquiries in to gas issues under way on the east coast – in addition to the review Gray has announced, Victoria has one being chaired by former Howard government minister Peter Reith, there is a NSW parliamentary inquiry and the Australian Energy Market Commission has embarked on a “gas scoping” study.

Green growth

Origin Energy managing director Grant King told an Association of Australian Stockbrokers conference in Sydney at the end of May that the “green part” of a typical New South Wales household electricity bill has grown from two per cent to about 15 per cent since 2007-08.

Average NSW residential prices have risen from $1,100 a year, with wholesale costs comprising 50 per cent of a bill and network costs 38 per cent, he said, to today’s situation where wholesale costs have fallen back to 26 per cent, network costs have risen to 49 per cent, the carbon price accounts for eight per cent and other green schemes for seven per cent.

Under present arrangements, the green component of bills will continue to rise, he added.

In several minds 1

A survey undertaken over the political opinions of people over 50 years old has thrown up yet again the split mindset of Australians on energy issues.

The poll undertaken for National Seniors Australia in May found that 42.8 per cent of respondents see the pledge to abolish the carbon price as an important influence on their vote – while 54.7 per cent say protection of the environment is very important.

In several minds 2

Australian manufacturers, still fiercely pursuing a reservation policy for east coast gas, have put forward several options for dealing with the issue – but not said which they prefer.

Lobbyists Manufacturing Australia claim that 200,000 jobs could “go” over the next five years if governments do not come to the rescue of factory owners by ensuring that there is “competitively-priced gas available in the quantities we need.”

Manufacturing Australia says the jobs at risk include 100,000 employees in fertilisers, aluminium, glass products, bricks, paper and construction plus 100,000 people in supply and service positions.

The association’s chairman, Sue Morphett says her members “do not want a cheaper price than we already have – we want a domestic market price.”

She argues that “A gas supply crisis is about to hit the east coast because gas currently devoted to domestic manufacturing is being diverted to export, leaving Australians to pay one of the world’s highest gas prices despite having one of the world’s largest supplies.”

Manufacturers Australia says there are several options available to governments, including applying a national interest test such as the one used /in Canada, “use it or lose it” provisions for identified gas resources, reserving “a small percentage” of gas for domestic market use, as happens in Western Australia, or using royalty arrangements or tax incentives.

The need for intervention is “urgent,” the association adds.

APPEA argues back that the manufacturing sector’s problems are not just gas supply – they include the persistently high value of the Australian dollar, skilled labor shortages and increased global competition for factory production.

“Asking expanding industries to underwrite struggling ones only serves to reduce the benefits flowing to the community via increased employment, tax payments and economic opportunity,” it says.

Meanwhile federal Resources & Energy Minister Gary Gray has adhered to the stance taken by his predecessor, Martin Ferguson, on the reservation issue.

Gray told the APPEA conference that shifting to the manufacturer’s desired position will create uncertainty for the energy industry and deter investments.

This approach, he said, “will not guarantee cheap gas or put more gas in to the market.”

Budget cuts

The Gillard government’s decision to cut or defer more than $1 billion in funding for energy-related research has the sector disgruntled and the renewables side worried about how a Coalition regime will add to its problems after September.

The May federal Budget slashed $662 million from support for carbon capture and storage R&D and deferred another $370 million in expenditure through the Australian Renewable Energy Agency, established a year to provide long-term stability for investors in green power. ARENA’s expenditure has been delayed until 2020.

The Clean Energy Council says the federal government has not established a clear path to put ARENA’s funds back on the table.

It expresses “disappointment” that the Budget has also scrapped $260 million in funding for utility-scale solar research and demonstration activity, but welcomed the decision to leave $1.2 billion in the Clean Energy Technology account, including $160 million to help companies be more energy efficient.

The CEC complains that the renewables energy industry “has constantly been asked to go, then stop, then go, then stop.”  It needs a steady and bankable policy framework on which investors can rely.

The Energy Efficiency Council is upset that $90 million has been cut from government’s community energy efficiency program, money it says needed to help community groups and local government cope with rising energy bills. It describes the move as “baffling.”

Energy Supply Association CEO Matthew Warren says the inability of the federal government to control the international price of carbon emissions places greater importance on the need to bring new, clean power sector investment to the market as soon as possible.

Research, adds Warren, remains one of the most vulnerable parts of the clean energy supply chain. “If governments drop the ball, no one else is going to pick it up until a new technology is able to be banked.”

The Australian Coal Association says the decision to cut funding for carbon capture R&D is “short-sighted” given the International Energy Agency’s call for governments around the world to do more about investing in CCS and the importance of coal exports for this country.

Meanwhile, a war of words continues between the Coalition and the Clean Energy Finance Corporation, which is working on spending its initial $2 billion contribution from the Gillard government despite the Opposition pledging to tear up any contracts it signs after winning office.

Coalition environment spokesman Greg Hunt rejects claims that cancellation of CEFC grants will put Australia’s international standing among investors at risk. "There is no sovereign risk because the corporation has been warned clearly what the Coalition intends,” he says.

Scrapping controls

The NSW government is promising to “look seriously” at the Australian Energy Market Commission’s recommendation for deregulation of energy retail controls in the State, the largest sub-market in the “NEM” with three million household customers.

The AEMC has delivered a draft report – the final version is due on 30 September – in which it recommends the removal of retail price caps in NSW and efforts to make it easier for the State’s customers to engage in the market.

State Energy Minister Chris Hartcher says the O’Farrell government will only go down the deregulation path if it is confident that individuals and small businesses will benefit.

Some 40 per cent of NSW households are still on regulated tariffs despite a strong increase in moving to market-based schemes in the past year.

Energy Supply Association CEO Matthew Warren says “fiercely competitive markets” like NSW don’t need regulation to protect the best interests of customers.

Energy Retailers Association CEO Cameron O’Reilly also urges the State government to replace retail price caps with price monitoring, pointing to the benefits of more products and more choice being experienced in Victoria and South Australia.

Green dreams

Armed with a new report from the Australian Energy Market Commission – an exercise forced on the market operator by the Gillard government as part of its pay-off to the Greens for support in the hung federal parliament – the renewable energy sector and its media supporters are maintaining a drumbeat of promotion for a shift towards 100 per cent non-fossil-fuelled power (but emphatically not nuclear energy) as soon as possible.

Curiously, the Industry & Climate Change Minister, Greg Combet, who released the AEMO study, has said not a word about it over almost two months since it appeared.

The renewables boosters’ version of the AEMO report is that it shows 100 per cent use of wind power, solar power, geothermal energy and other green generation is possible and “now we know what it will cost.”

The study assumes large-scale take-up of geothermal energy, which is still struggling to produce any power (other than a tiny trial operation in central Australia) after a decade of effort and expenditure of about $500 million in this country.

The AEMO modelling suggests that a 100 per cent renewables system on the east coast (the “NEM”) will require capital outlays of between $219 billion and $332 billion, excluding the costs of acquiring 2,400 to 5,000 square kilometers of land but including transmission capex. Its review also did not include compensation for existing generators for stranding their assets not the bill for modifying the urban distribution network in an environment where householders have invested billions of dollars in rooftop solar arrays that will still leave them vulnerable to peak demand periods.

Also not included in the AEMO work is any estimate of what carbon price would be needed to drive the transformation of “NEM” supply to wholly renewable nor its impact on Australia’s manufacturing, mining and small business sectors.

The Federal Treasury modelling used to support the Gillard government’s “clean energy future” policy imagined a $52 per tonne of carbon dioxide price in 2030 to support an Australia-wide generation mix that would still be about 70 per cent fuelled by coal and gas.

Nuclear proponents argue that the same task of decarbonising the electricity supply industry can be accomplished using reactors for less than $100 billion and taking up about 100 square kilometers of land.

Neither the Gillard government nor the Greens were willing to have AEMO include nuclear energy in the modelling.

Last word

“These are days of complete uncertainty for the east coast power sector” was the theme running through the two-day Power Pricing 2013 conference I chaired in Sydney towards the end of May.

The situation is perhaps exemplified by the trajectory of demand in the “NEM,” starting with it exceeding 200,000 gigawatt hours a year for the first time eight years ago, peaking at 206,000 GWh in 2007-09 – when the regulatory go-ahead was obtained for some $40 billion worth of network expenditure, federal and State governments initiated a multi-billion splurge on rooftop solar PV arrays and the federal government committed to a 45,000 GWh renewable energy target in 2020 – and dropping to 198,000 GWh and apparently still heading south, resulting in, among other things, a “ghost fleet” of mothballed generation units shadow the market with unclear consequences for future investment and supply.

The lack of certainty is exacerbated by carbon politics, which includes the fate of the federal carbon price, the future of the RET and widespread friction over coal seam gas development, especially in New South Wales, plus – and it is no minor matter – the dodgy state of manufacturing in eastern Australia, bearing in mind that factories accounted for 28 per cent of power demand at the peak of consumption.

Tim Nelson, AGL Energy head of economics, made an interesting point to the Powering Pricing 2013 conference: in real terms, east coast electricity prices (in inflation-adjusted terms) fell from 1985 to 2007 following sustained supply-side micro-economic reform.

But, once supply-side options largely were exhausted, reform stalled. As a result prices in real terms will be double 2008 levels by 2015.

The demand-side reform that should have kicked in is kindly referred to as “unfinished business.”

The cost of this failure for consumers can be measured in billions of dollars, jobs and, for many people, elevated stress levels.

In this market environment, as everyone in supply knows, peak demand outstripped underlying growth by quite a lot before the zenith of consumption was reached. The peak needing to be serviced in NSW, for example, is 70 per cent higher than in the mid-1990s.

The upshot is that electricity sector productivity has declined quite a lot and we now have higher unit costs for electricity before all the political add-ons are factored in.

Measured today in power units (per kilowatt hour), network charges (both distribution and transmission) are the biggest change factor – rising from $45 in 2008 to $137 in 2013 in NSW in a period when retail costs went up $4, generation costs $9 and fuel costs (including the carbon price) $26.
(It’s worth interpolating here that George Matlabarow, the former AusGrid CEO and another speaker at the conference, points out that 65 per cent of the network cost increases relate to the regulated return on capital and to depreciation arrangements, highlighting the fact that it is not “gold plating” that has driven charges but decisions by policymakers and rule-makers.)

Nelson argues that, assuming genuine market reform now in the wind can be achieved, the “NEM” retail prices could be 10 per cent lower than today by 2021 – but, of course, this still implies that they will be higher than today in nominal terms and this highlights the ongoing communications challenge for the supply sector and policymakers.

Looking at one of Nelson’s powerpoints, I noted something I think should get more attention: if you use seven megawatt hours a year in Sydney today (and many householders do), you are paying around $2,167 a year – as against about $1,100 six years ago – compared with $1,606 for use of 5 MWh.

In short, much more energy efficiency allied to an ability to participate in the competitive retail market – and four out of 10 people in NSW still choose to be on a regulated tariff – can lead to a real easing of power bill pain.

Of course, there are a raft of factors affecting energy behaviour – especially if you are renting a home – and, as the conference highlighted, the complexities of identifying and closing the best deals in the competitive market are not small.

Aiding everyday consumers to be better able to handle this is also “unfinished business.”

Meanwhile, we are where we are.

Uncertainty is the market’s new black and every stakeholder has a view of what should be done and which issues need priority.

As the saying goes, if it looks like it is broken, someone will fix it – which, to quite a large extent, is how we have got here from the early years of the past decade.

Getting the supply set-up right this time is really rather important – for suppliers and consumers.

Keith Orchison

1 June 2013

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