Coolibah Commentary

Issue 122, June 2015

Welcome to the final issue of the newsletter for the financial year 2014-15, writes Keith Orchison, 12 months in which a lot has happened and a lot not happened in almost equal measure. Some of the extant challenges are canvassed in this issue.

Assumed away?

The Australian Energy Market Operator says that the east coast gas supply shortage it previously predicted has disappeared – but has it just been “assumed away,” asks energy advisory firm EnergyQuest?

Graeme Bethune, EnergyQuest CEO, says that one reason for the change is that AEMO “has cut what was always an unrealistic forecast of industrial gas demand.”

However, he says, “other factors include ignoring reserves risk, understating gas demand for LNG and overstating future east coast production.”

The east coast shortage, he declares, is “still there; it has just been assumed away” by the market operator.

He accuses it of “failing to provide an in-depth, professional analysis of the gas market outlook – and, worse, providing ammunition to those intent on restricting future supply.”

Bethune says AEMO fails to recognize that, following the oil price fall, exploration and development companies on the east coast have slashed their capital spending and their work forces.

A further significant factor, he argues, is that buyers and producers have committed to the three Queensland LNG projects with limited reserve cover. The projects, he says, still have substantial reserve and deliverability risks.

The AEMO forecast, made without input from geologists and reservoir engineers, Bethune adds, “greatly over-estimates the volumes of gas that can be supplied to the east coast market with a high degree of certainty.”

Moreover, he says, the AEMO forecast of demand for the Gladstone LNG projects for 2019 looks to be too low by nearly 80 petajoules while it assumes Cooper Basin production that is too high by 80 PJ based on EnergyQuest analysis of industry expectations.

Bethune also points out that, in looking at domestic consumption, AEMO has wiped away 30 PJ of its previously-assumed growth in industrial demand – but the level it now asserts assumes closure of major industrial plants, “which is economically and politically significant.”

Done all we can

Federal Industry Minister Ian Macfarlane says his government has “done all we can” to promote coal seam gas development in New South Wales.

“In the end, it is up to the State government,” he told media at the annual conference in Melbourne in late May of the Australian Petroleum Production & Exploration Association. “The political reality is that the NSW government has a process and will work through it.”

Macfarlane adds that he has been predicting supply problems in NSW for five years. The State should follow Queensland and allow CSG development because it is environmentally safe and will “greatly enrich” its economy.

He declares that the success of the CSG industry in Queensland is “testament that the resources industry and the agricultural industry can work together to mutual advantage, providing significant benefits for local towns through new job opportunities and economic resilience.”

Elsewhere, the “unnecessary scare campaign” against unconventional gas, and CSG in particular, he says, “has not served the community’s interest.”

He adds that the federal government will continue to work with the east coast States on gas supply and on a proposed pipeline to link Northern Territory gas to eastern Australia.

The CoAG Energy Council, which he chairs, has tasked the Australian Energy Market Commission, with reviewing the east coast wholesale gas market and pipeline arrangements.

How now, RET?

While the political negotiations between the federal Coalition government and Labor appear to be moving towards closure on a revised renewable energy target, debate on whether sufficient generation can be built to deliver 33,000 gigawatt hours of electricity by 2020 rumbles on.

AGL Energy, for example, has told investment analysts that it believes the RET “is unlikely to deliver further investment due to financing constraints.”

Industry Minister Ian Macfarlane says the federal government “has concern about the ability of the industry to build in five years what it’s taken 15 years to build to date.”

He urges the wind farm developers to “get very busy.”

Renewable sector managers says passage of the RET revision legislation, introduced to Federal Parliament by Environment Minister Greg Hunt on 26 May, will improve the outlook for wind farm developments but is no guarantee of success for individual projects because they still need to obtain power purchase agreements with retailers.

Meanwhile, the sector is concerned that disagreements between Labor and the Coalition on future renewables targets in the run-up to the next federal election will continue to create uncertainty for investors. Labor’s Mark Butler, who negotiated the settlement with the Coalition, said immediately after the announcement that the ALP will increase the target if it wins the 2016 election.

Views differ on the cost of construction new projects to deliver the extra 15,000 GWh for the target required by the legislation. Capital outlay estimates range from $10 billion to $15 billion.

It is estimated that 5,500 MW of wind plant will need to be built in four years – and about 3,500 MW in calendar years 2017 to 2019. There are some 6,000 MW of wind farm projects with regulatory approval in South Australia, Victoria, NSW and Queensland.

Renewable energy certificates still in the RET market system (created by the dash for solar PVs) are expected to delay the need for power from new capacity until well in to 2016.

Green jobs

The Clean Energy Council claims that resolution of the renewable energy target imbroglio can be expected to support more than 15,000 jobs.

It bases this assertion on 6,500 jobs resulting from construction of large-scale renewables projects (mainly wind farms) and 8,700 jobs to support the ongoing use of solar PVs.

CEC says total investment will exceed $40 billion, including development of wind, utility-scale solar, hydro power and bio-energy projects, arguing that there are “hundreds” of commercial and industrial businesses “looking to manage their own electricity production.”

The comments contrast with media coverage after the RET political settlement was announced highlighting a claimed loss of $6 billion in large-scale investment as a result of the reduction of the target from 41,000 GWh. This was based on analysts claims that $14.7 billion would need to be spent reaching the new lower large RET instead of $20.6 billion under the previous scheme.

The CEC says some 50 new solar power systems were installed in 2014 in the more than 100 kilowatt and less than one megawatt range, making them eligible for support under the large-scale part of the RET.

Policy mess

Proponents of green energy policies are up in arms over a new Grattan Institute report about the “policy mess” of solar PV programs in Australia.

They are especially unhappy that the institute – in a paper written by Tony Wood and David Blowers – estimates that the measures pursued at State and federal government levels will have accrued $9 billion more costs than benefits by the time they run out in 2028.

“Australia could have reduced emissions for much less money,” the 62-page report declares. “Governments have created a policy mess that should never be repeated.”

The paper also calculates that the subsidy process will have resulted in a majority of consumers without solar PV systems subsidizing householders with them by about $14 billion over their remit.

The Clean Energy Council argues that the Grattan study does not give sufficient weight to the benefits of solar subsidies, pointing to 13,000 jobs being created to supply and install PV systems.

The Australian Solar Council says the worst thing about the report is that it still sees big power companies as the centre of the energy sector. “They are not. Australian families are.”

Going forward

The Grattan Institute solar study calls for State governments to agree to new electricity tariffs that encourage consumers to use less power in periods of peak demand.

The study by Tony Wood and David Blowers argues that regulation of power networks must be further tightened to ensure consumers do not pay for more surplus infrastructure. They say the regulatory process still has flaws that encourage over-investment in distribution assets.

They propose that the Australian Energy Regulator should be authorized to require DBs to explicitly demonstrate prudent capital expenditure during the previous five-year determination period; if they can’t, the AER should be able to reduce the asset base.

The institute calls for mandatory introduction of demand-based electricity tariffs by no later than 2020 accompanied by a roll-out of advanced meters.

The report says critical peak pricing and more cost-reflective feed-in tariffs should also be introduced to provide price signals for consumers that will help prevent increased infrastructure spending.

It adds that an important step will be a process to establish who should pay for redundant electricity supply assets and under what arrangements.

The institute believes there should be competitive process through which a community can opt to become an islanded network, including arrangements for payments for connection to the grid and for maintaining consumer protection measures.

Death spiral, not

The Grattan Institute report debunks the much-proclaimed mass exodus from the grid facing distribution businesses, a fate loudly proclaimed by then Greens leader Christine Milne in the current Senate inquiry in to DB performance.

Without a back-up source of power, the paper argues, very large investment would be needed for households to have a reliable off-grid system.

Off-grid households, Tony Wood and David Blowers point out, lose the financial benefit of being able to export electricity.

Highly-variable solar power cannot reliably generate all household power needs, particularly in winter, meaning that supporting battery power would need to be large enough to cope with days of weak sunlight.

The physical size of the battery and solar PV arrays needed to cope with this problem will exceed the dimensions of all but the biggest houses. For example a seven kilowatt system requires roof space of 60 to 70 square metres.

Institute modelling shows a 7 kW system with 35 hours of battery storage would cost about $34,000 and still leave a householder without power for the equivalent of 18 days a year.

Pursuing 99 per cent reliability off-grid would require an outlay of $72,000 on a 15 kW solar system supported by 85 kWh of battery storage, prohibitive cost and beyond the roof size of all but the largest houses.

By comparison, the report says the total cost of a household relying completely on the power grid is about $13,000 for 10 years.

Milne diatribe

Senator Christine Milne, speaking after being replaced as leader of the federal Greens by Richard Di Natale, has launched an assault on electricity networks, declaring them their own worst enemy.

Milne, in a speech, claims that their working model “is now clearly dead” and calls for “a radical reformulation of the national electricity market.”

She adds that networks should be “incentivized to adopt solar and distributed generation,” adding: “We need our grids to be adapted for the future, even if for many people (they) are no longer an essential service.”

She accuses the networks of spending $45 billion on capital outlays since 2010 “out of greed of companies (who) knew they could game the system.”

Milne says revaluation of State-owned network assets is the “least worst option” because an increase in the cost of capital for grid firms through higher risk “will be insignificant” compared with the savings Australians will experience in their power bills.


The Energy Supply Association has hailed the Grattan Institute solar power report for supporting tariff reform.

ESAA chief executive Matthew Warren says more than one in eight Australian households now have rooftop solar. “For this transformation to be truly sustainable, we have to have the right price signals and to stop transferring unfair costs on to other consumers.”

Warren says a more fair electricity pricing structure will encourage the use of products like storage without adding to the power bills of people who do not take up such technologies.

In Victoria, he adds, after a government-mandated installation of smart meters in homes, the power sector is now working with customer groups to develop new ways of charging to better reflect use.


The Energy Networks Association has published commissioned research on power customers with payment problems and is calling on governments to undertake a national review of hardship assistance programs, including not only how they can be improved but also how vulnerable users can be helped to shop around.

ENA says the study by economists HoustonKemp demonstrates that vulnerable customers can make potential savings five times more than government assistance offers by pursuing deals with retailers.

The association says the sweeping technological changes now occurring and the changes in consumer behavior throw up the need for re-evaluation of hardship programs.

For most household customers, says ENA chief executive John Bradley, energy is a small portion of their budget – about two per cent – but lower-income residential account-holders can spend up to 10 per cent.

Research shows, he adds, that 80 per cent of these customers are paying more today than they would after the introduction of cost-reflective tariffs.


Fitch Ratings expects “subdued” consumption to continue in Australia’s east coast market.

In a ratings note on Origin Energy, Fitch says the company and other market participants “face significant and unprecedented” changes in power use, highlighting increased use of energy efficiency appliances and solar PVs.

It expects competitive pressures on retailers to continue although it observes that customer switching has declined this financial year.

Off to court

The Australian Energy Regulator finds itself pursued in to court – the Australian Competition Tribunal, part of the Federal Court structure – by not only a trio of unhappy New South Wales distributors but also the Public Interest Advocacy Centre.

The networks believe they have been substantially shortchanged by the regulator in the revenue determinations for 2015-19 – and the centre argues that the distributors are being allowed to operate inefficiently over the next four years, keeping prices unnecessarily high for consumers.

The PIAC application is the first time that a consumer organization has appeared before the tribunal, taking the opportunity provided by changes to the National Electricity Law to enable user representatives to access the determinations review process.

The centre argues that NSW network charges are double those in Victoria. “It costs twice as much to get electricity from a power station in NSW to a consumer than it does in Victoria,” it says. “This is bad news for economic productivity in NSW, especially for small businesses, and it is bad news for families.”

The centre adds that it is particularly concerned that the AER revised its draft determination, made late last year, to produce a final outcome in April that allocated an extra $2.3 billion to capital and operating expenses for the NSW distributors.

Meanwhile Networks NSW, the management umbrella for Ausgrid, Essential Energy and Endeavour Energy, has opted to appeal the average annual cuts of $324 million the regulator is seeking to impose on the trio’s operating expenditure, adding that the problem this presents is compounded by a retrospective decision to cut $876 million from their budgets for 2014-15, a move taken 10 months in to the financial year.

Networks NSW chief executive Vince Graham argues that the AER has made “serious material errors using flawed benchmarking” to justify its decisions.

The final determination, he says, has left 2,750 jobs in the businesses unfunded from July 2015.

The regulator’s determination is also being appealed by Canberra’s network service provider, ActewAGL.

Under fire

New South Wales Labor leader Luke Foley, defeated by Bruce Baird in the March State election, is under fire from the political left for opposing the legal challenge to the Australian Energy Regulator’s revenue determinations that, it is claimed, threaten more than 2,500 jobs.

Foley, and federal Labor’s energy spokesman, Gary Gray, support the AER decision, pointing to its saving householders some $313 a year in electricity bills. Foley adds that lower bills will benefit every business in NSW and help create jobs.

Changing gears

Gentailer AGL Energy is looking to sell its half share of the 420 megawatt Macarthur wind farm, Australia’s biggest, in Victoria as its reorganizes its executive management and business strategy.

Its partner in the Macarthur project, New Zealand’s Meridian Energy, sold 50 per cent of the wind farm to Malaysian power producer Malakoff for $650 million in 2013. AGL has told market analysts and the media that it hopes to garner $500 million from selling its share.

Media report that AGL, under new chief executive Andy Vesey, plans to transform itself in to a greener and lower-cost energy supplier, aiming to raise $1 billion in asset sales and to cut costs and working capital $470 million by mid-2017.

In a briefing to analysts, the company says it is pursuing sustainable increases in earnings by unlocking growth in an intensely-competitive east coast retail market while dealing with rising carbon constraints and growing challenges from new technologies.

AGL declares that it aims to become a leading Australian company in provision of rooftop solar power, metering services, energy storage and electric vehicle services.

Fund managers reporting back from AGL’s Hunter Valley “show-and-tell” exercise in late May say that the company has indicated it does not plan to extend the life of its Liddell black coal power station beyond 2022 even if wholesale prices rise in the NEM.

The company is also expected to make an announcement about its upstream gas activities in June.

Carbon target

One of the key energy-related decisions to be made by the federal government in coming weeks is the setting of a post-2020 target for greenhouse gas emissions.

A task force in the Department of Prime Minister & Cabinet is evaluating a large number of submissions on the topic.

While the radical environmental movement is focusing on squeezing fossil fuel activities on multiple fronts, major industry players are supporting arguments for progressively reducing carbon emissions over the next 15 years to 2030.

The Origin Energy submission to the task force warns of the risks of locking Australia in to “an excessive target that is inconsistent with broader international action.”

It argues that “a more appropriate approach will be to reference Australian target setting to actions by other countries, noting that all economies are different and that emissions reductions should be balanced with ongoing growth and social development.”

While the common radical ploy is to measure Australian emissions per capita – to the country’s detriment – the Origin submission points to research it had Deloitte undertake last year and which examines carbon dioxide output per unit of GDP.

The company adds that the G20 countries represent 66 per cent of global population, 85 per cent of world GDP and 76 per cent of emissions. Australia, Origin says, performs better than the G20 average on this measure and its emissions intensity has reduced at a faster rate.

It argues that this comparator could be a used by the government as a key measure of comparative national efforts.

Origin also points out that Australian emission levels are small when compared to the “big three” emitters and a 2025 national target can make little difference to global abatement – but exporting low-emission fuels (like LNG) can improve the position for major economies like China and potentially India and other nations, too.

Origin tells the government that, with respect to local policy, it continues to support a well-designed market mechanism for electricity generation that can be complemented by regulation promoting orderly retirement of old, highly emissions intensive plant, emissions performance standards for new plants and encouragement for commercial deployment of renewable generation “without excessive subsidy.”

Consultation on long-term electricity sector abatement policy is “essential,” the company adds.

In order to set national emission reduction targets with confidence, Origin comment, it is important for policymakers to understand the costs of pursuing them.

Last word

The inability of policymakers in Australia, federal and State, to formulate efficient policy to sustain both energy security and moves towards a lower environmental footprint for the sector could hardly be better illustrated than by the new Grattan Institute review of solar programs and the inter-related issues of electricity tariffs.

The howls of indignation from green lobby groups that have followed publication of the institute study serves only to underline that some of the messages hurt. It doesn’t make them wrong.

The real issue, however, is whether these messages resonate with policymakers in the major parties?

Unfortunately, there is a fair amount of evidence available to suggest that they may not – not for a federal government that is already in election mode many months ahead of when a poll is due, not for a federal opposition that is more focused on internal manoeuvres and on the need to ward off the Greens in electorates important to Labor -- and not for State governments of both colors for whom populism is a big driver as is how they are presented to followers of tabloid media.

In this environment, a 62-page commentary on a key (but complex) set of issues for efficient electricity supply has little chance of really cutting through.

Ditto for some of the serious corporate contributions to the task force on future carbon targets.

In a world of tweets, 30-second grabs and never-mind-the-quality-feel-the-width journalism, meaningful debate is not really a runner.

The situation is not helped by the tenor of messages from the energy industry itself.

A common complaint is that they are too complicated and still top-heavy with jargon.

By the time they reach the public audience, including MPs, through the media, with journalists prone to include their own opinions or to color reports according to their leanings, the confusion increases.

The energy industry itself, and notably the electricity supply chain members, are struggling to come to terms with what is perceived as a radical transformation of the business.

Companies are starting to re-invent themselves, or at least parts of their operations, and the language of this, as it filters through to the community, creates its own confusion.

A case in point in recent weeks was a burst of “death of coal” media reporting and commentary off the back of a major company announcing that it intended to phase out of use of the fuel – between now and the middle of the century, the bit lost in the translation to the public domain.

Perhaps the biggest challenge facing both the electricity industry and politicians in government over the next 2-3 years is the need to make significant changes to the tariff structure, a key issue raised in the Grattan Institute report. 

The prospect of this change being botched through political knee-jerking and short-sightedness is not minor – and much of the policymakers’ perspective at federal and State levels will be impacted by how the restructuring (which is already under way) is perceived in the media.

There is much talk in the energy industry today about the increased risks flowing from changing consumer attitudes, the availability of new technology and regulatory reform; it needs to be borne in mind that communications risk is also one of the sector’s largest ongoing challenges.

Keith Orchison

1 June 2015

Subscribe to Coolibah Commentary by email

| to top of page |