Coolibah Commentary

Issue 158, June 2018

As we move to the end of a turbulent financial year for the energy sector, writes Keith Orchison, electricity and gas suppliers can look forward to more of the same in 2018-19, starting with the Australian Competition & Consumer Commission publishing a new report on making electricity more affordable that is sure to get high and wide political and media attention. As ACCC chairman Rod Sims says, energy prices remain a headline issue for Australian consumers and the next 12 months also will see contentious network charges once again prominent in the debate via the work of the Australian Energy Regulator. The core challenge for energy producers and suppliers is encapsulated by the chair of the Australian Petroleum Production & Exploration Association as the need to address “the battleground that really matters – 60 square centimetres of screen” by finding a better way to deal with public concerns about reliability, affordability and the role of their sectors in addressing greenhouse gas abatement.

Consumer first

Energy Users of Australia Association is urging policymakers to embrace a “consumer first demand response” mechanism for the east coast power market.

Speaking to Australian Energy Week in Melbourne, the association’s CEO, Andrew Richards, argued for a “consumer first” approach that asks what they need and/or value the most and what barriers need to be removed to allow greater consumer participation in the NEM.

Richards says this would free large users to have direct access to, and participation in, the market and allow them to decide when and at what price they could offer demand response, load control or cogeneration. He also suggests the federal government should allow accelerated depreciation for consumer-side investment “given the significant avoided cost and increased security/reliability this could bring to the market.”

Quotes of the month

“There are now so many sectors of the economy where it appears households are getting the rough end of the stick at the hands of big multinational companies” – federal Labor’s energy spokesman, Mark Butler, opining on allegations that power networks are “gouging” consumers over their regulated tax allowances.

“I am concerned network businesses may be collecting more than is needed to cover their tax liabilities” – Josh Frydenberg in a letter to Australian Energy Regulator chair Paula Conboy.

“Political interventions like we saw with the announcement of the review by the Australian Energy Regulator of the regulatory tax approach are unhelpful and unfounded and will only increase uncertainty and riskiness (about) regulatory outcomes” – Spark Infrastructure chairman Doug McTaggart.

“Energy networks are not gouging customers. The current benchmark approach to tax allowances is set by the AER to avoid customers in different suburbs paying different charges and the risk of sudden price rises when there is a change of ownership” – Andrew Dillon, CEO, Energy Networks Australia.

‘Not what we hoped’

ACCC chairman Rod Sims told a Committee for Economic Development of Australia forum in Brisbane at the end of May and the ABC that competition and deregulation in the power supply industry on the east coast “have not worked as well as we hoped” with “too many customers paying far too much.”

He said of the NEM: “At the moment it’s an extremely complex market to sell an extremely simple product.”

While noting that “excessive reliability standards” have pushed up network costs and green schemes have also impacted on end-user costs, Sims said that the commission “wants to make sure there isn’t an excessive focus on generation reliability” via the ongoing CoAG discussion of the “national energy guarantee” and paid particular attention to the retail market, which he described as a “mess.”

He accused retailers of “trying to keep markets as opaque as they can so that they can keep people on offers higher than they need to be.”

Competition scrutiny

June will see publication of the Australian Energy Market Commission’s new report on energy retail competition at a point when the issue is moving up the political agenda – with federal Environment & Energy Minister Josh Frydenberg reported to have told the Coalition party room in mid-May that he is “worried” about the concentration of ownership in the NEM “and what this means for consumers.”

Also in May, ACCC chairman Rod Sims told large energy users that the market is not working effectively for commercial and industrial consumers (who make up 60 per cent of electricity demand).

The AEMC report will include focus on the number of retailers in the NEM and the extent of rivalry.

Speaking at Australian Energy Week in mid-May, the commission chairman, John Pierce, commented that the “power price rollercoaster” in the market is “unacceptable” and needs to be addressed by “restoring the integrity of power price signals.”

The “rollercoaster,” he added, “is being driven by the changing mix of generation, with the proportion of weather-driven power supply rising fast and the closure of ageing coal plants. “The failure to agree a mechanism that integrates energy and emissions reduction policy,” he said, “has broken the links that make the market work.”

Go figure

The country is split over whether the Coalition or Labor can deliver improved national energy security and lower power prices, according to a new Newspoll survey conducted for The Australian.

The poll outcome shows 39 per cent of 1,591 respondents favoring Labor, 37 per cent the Coalition and 24 per cent “don’t know.”

Tanna’s view
EnergyAustralia managing director Catherine Tanna says energy politicization is disproportionate in this country.

In an interview with Bloomberg, she opines that other countries seem to solve their energy problems “far more easily” despite differences of approach. “They do this by taking politics out of energy policy.”

She sees the “national energy guarantee” as “a real opportunity to get stable policy settings right.”

Tanna told Bloomberg coal-fired generation will continue to have a role in Australia but she doesn’t expect any new coal plants will be built here. She does look for an integration of renewables with existing fossil fuel power production.

The conversation here needs to shift to what carbon abatement opportunities are available outside electricity, too, she said.

Taxing questions

The Australian Energy Regulator included $5 billion in estimated tax payments in calculating allowable revenue for energy networks between 2012 and 2017 and has now launched a review of its approach to this issue amid media and political noise about “gouging” by the businesses.

Typical of the media approach is this Sydney Morning Herald headline “Watchdog to probe possible $400 million price gouge” based on an assertion that networks “have overcharged consumers by $400 million a year to cover their corporate tax bills.”

The AER plans to issue an initial report by the end of this month.

The regulator says its advice from the Australian Taxation Office is that networks privately owned or listed on the Stock Exchange actually paid less tax in 2012-17 than estimated while those owned by State governments paid more.

The electricity networks sums involved are $3.9 billion for distribution businesses and $743 million for transmission businesses. Of this, $1.9 billion is tax allocated to State government-owned operations.
In an issues paper, the AER says it has “encountered significant difficulties in obtaining accurate and consistent information in the public domain on actual tax payments” for the networks.

Multi-billion revenue bids

The Australian Energy Regulator is mulling bids for more than $13 billion in revenue from the three electricity distribution businesses in New South Wales for the period from 2019 to 2024.

The first intimation of the regulator’s reaction to the proposals by semi-privatized Ausgrid and Endeavour Energy and still wholly government-owned Essential Energy will come late this month when it publishes an issues paper. It will be taking submissions on the bids from stakeholders until early August. The trio of networks deliver power to almost five million householders and business customers in the State.

The determinations will be delivered at a time when energy costs will be a “hot button” issue in NSW ahead of a State election in March next year and of a federal election (with the date still up in the air) where State voters will have a crucial role.

Ausgrid, the largest network business in the country now half-owned by the private sector, says it proposal offers to decrease its capital expenditure by 1.3 per cent to an average $617 million annually for the determination period. It says the $3.08 billion it wants to spend on capex will include $1.67 billion replacing aged infrastructure. Another $241 million is needed to connect new residential, commercial and large industrial customers to its system. The Ausgrid bid also includes recovery of a cumulative $2.6 billion in operating expenditure over five years.

Taken together, the three businesses propose to spend more than $7 billion on capital works between 2019 and 2024.

The regulatory process for the trio will be the first since the federal government abolished the appeals process for AER determinations on network revenues – although businesses can still take applications for review to the Federal Court.

The bids have been made as the AER produces a final determination for the other NSW power delivery business, TransGrid, in which the privatized company’s initial request for approval of $4.2 billion in revenue recovery has been cut back to just over $4 billion. The decision includes approval for $1.25 billion in capital expenditure.

$25 billion needed

A report prepared by KPMG for the Australian Energy Council on long-term energy market design principles says that around $23 billion will need to be spent on generation in the NEM by 2030 and another $2 billion in Western Australia’s SWIS.

The modeling includes $12.48 billion spent on wind farms, $4 billion on large-scale solar PV and $4.8 billion on pumped hydro systems as well as $1.7 billion on battery storage.

Basslink woes
Tasmanians are being assured that their electricity supplies are not at risk as the latest round of repairs to the Basslink interconnector drag on in to June.

The previous failure – the cable was holed in December 2015 and out of service for six months – caused an energy crisis for the island State, but its government and Hydro Tasmania are assuring consumers that the big difference this time is that hydro dams are well stocked.

Hydro Tasmania CEO Steve Davy says the dams are at 37.6 per cent capacity, winter rains are imminent and, along with wind power and gas plants, “demand can be comfortably met.”

The latest interconnector failure is down to damage the link incurred during routine maintenance work by a sub-contractor in March. The Basslink operator initially estimated that it would take just two weeks to return the line to service.

Meanwhile Basslink is still at legal loggerheads with the Tasmanian government over the level of compensation to be paid for the 2015-16 failure. The dispute is now in arbitration.

‘Ongoing feud’

The political dilemma represented by the long-running contest between Australia’s gas industry and environmental activists over hydraulic fracturing was well-illustrated by South Australia’s new premier, Steven Marshall, when he opened the 58th Australian Petroleum Production & Exploration annual conference in Adelaide in mid-May.

Marshall told attendees that a 10-year moratorium on fracking in the SA Limestone Coast farming area will not be lifted. He said his government aims to avoid an “ongoing feud” there between resource companies and the community.

However, he added, the government is “right behind” hydraulic fracturing in the semi-desert Cooper Basin.

The problem in the 21,000 square kilometre Limestone Coast, he said, is that petroleum companies have not been able to gain a social licence to operate in a major area for wine-making and food production. (It is also an area that traditionally votes strongly for the Liberals but now has an independent MP.)

Meanwhile the federal Resources Minister, Matt Canavan, told the APPEA delegates that the industry needs to broaden its community message nationally well beyond talking about LNG export earnings.

He called on State governments, notably Victoria, to free up access to their gas resources and to “act in accordance with science” rather than be influenced by “ill-informed and ignorant” campaigns.

Gas price spike risk

Consultants Wood Mackenzie believe Australian east coast gas prices could rise up to 30 per cent by the middle of the next decade.

In a presentation to the APPEA conference in Adelaide, Saul Kavonic, the firm’s head of oil, gas and energy for Australasia, said current high prices “are only going to continue to get higher as LNG prices increase and transport infrastructure becomes more congested.” He also pointed to new gas supply sources becoming “far more expensive” to develop in the region than the reserves that maintained supply for decades from the Cooper Basin and offshore Victoria.

He added: “A major new development in the market will be how gas flows and pricing change become increasingly seasonal and complex.”

The situation, however, he said, means that the east coast presents “a new high value opportunity” for gas storage, trading, new investment in supply and importing LNG in to the region.

Meanwhile EnergyQuest managing director Graeme Bethune told the conference that domestic gas consumers are paying $5 to $6 per gigajoule in Western Australia versus $8 to $10 in new contracts on the east coast. Like Wood Mackenzie, EnergyQuest predicts a strong upward trend in eastern prices in the new decade, Bethune saying Victorian consumers could be paying $11 to $12 per GJ by 2025.

AGL saga

The squabbling between AGL Energy and the federal government continues – with the company declaring a commitment to spend $400 million on a new gas-fired power station near Newcastle (made up of 14 reciprocating engines of 18 megawatts capacity each) and Environment & Energy Minister Josh Frydenberg retorting this will “do little” to address the potential shortfall when Liddell coal plant is closed in 2022.

AGL has turned down an offer by Alinta Energy to buy Liddell and keep it operating.

Managing director Andy Vesey says AGL is also continuing to assess development of another 500 MW of gas-fired generation in addition to 100 MW “efficiency upgrade” of its Bayswater coal-burning power station and an agreement to take 300 MW of capacity from a new Sunraysia solar farm.

The company also acknowledged at the end of May that it is working with Idemitsu to investigate transforming a soon-to-be-closed Hunter Valley coal mine in to a pumped hydro storage system.

On target

The Clean Energy Regulator says there are enough projects now completed or under way to meet Australia’s 2020 renewable energy target.

Speaking at Australian Energy Week, CER general manager Mark Williamson said “we think everybody is underestimating the pace of renewable energy development.”

He said there is now 6,553 megawatts of renewables capacity under construction or already built, more than what is required to take the RET to 33,000 gigawatt hours a year. A further 1,454 MW is in the pipeline and financed for construction in 2018.

Between now and 2020, he added, the CER expects more than 9,000 MW of capacity to come in to the power system.

Williamson noted that 40 per cent of the 4,000 MW of renewables “firmly announced” for development is large-scale solar after years of dominance by wind farm construction. “That’s unprecedented.

The regulator has also announced that 50,592 small scale renewable systems were installed across Australia in the first quarter of this year. They have a capacity of just under 260,000 kilowatts.

Commenting on the RET announcement, Matthew Warren, CEO of the Australian Energy Council, says that two years ago there were fears that the target could not be met. “Two years later and renewables are not only on track to meet the target but to spill over the sides,” he declares. “That we don’t need a RET any more says a lot about how far the transformation of the energy sector has come.”

Warren adds that there are 5,287 MW of large-scale solar and wind generation operating now and “there will be a doubling of this capacity over the next two years.”

What this adds up to, he says, is that renewables “are the new normal” – and “there is  (now) work to do on how we ensure an efficient and reliable transition as intermittent, zero emissions generation expands its role.”
The Clean Energy Council says renewable projects completed, under construction or now with financial commitment add up to $5 billion investment – of which $2.6 billion is in Queensland.

‘Coal can compete’

The Minerals Council has rejected assertions that coal-fired power cannot compete as a future Australian energy source.

MCA executive director – coal, Greg Evans, declares that claims regarding the economic viability of high-efficiency, low-emissions coal plant are “not accurate.”

He adds that claims HELE coal plant is not sufficiently flexible to compete in a market with growing levels of renewable energy “are also wrong,” pointing to the Neurath plant in Germany that can ramp production up and down by 500 MW in 15 minutes and modern coal generators that operate at as little as 20 per cent of their nameplate capacity.

The comments are a response to Snowy Hydro CEO Paul Broad telling a Senate estimates committee hearing that HELE plants could not make money once his Snowy 2.0 project is in operation.

Meanwhile Environment and Energy Minister Josh Frydenberg told the Australian Energy Week policy forum in Melbourne in May that, despite media speculation about the future for coal power under the proposed “national energy guarantee,” the fuel “will have its best chance to continue as an important source of generation in the NEM” via the NEG with its “premium on reliability.”

He added: “Coal continues to be a critical part of our energy mix. We have coal power stations with an average life of 27 years (and) under the NEG there will be more incentive to invest (in them).”

Last word

Probably the most interesting speech on energy issues given in May came from Shell’s Australian boss, Zoe Yujnovich, delivering the chairperson’s address to the Australian Petroleum Production & Exploration Association conference in Adelaide.

She told the 2,000 attendees (from 22 countries) that the Australian upstream petroleum business is “overwhelmingly welcomed” in places where it operates – “in every single community where we operate our economic contribution is accepted as the lifeblood of the regional economy” – but this is not the case in capital city-centric commentary. “It is not the narrative in Facebook, Instagram or Snapchat feeds.”

Why, she asked, is there such a gulf in perception between regional areas where the industry operates and the inner cities where communities rely on its products?

And, she said, it was no longer enough for the industry to take its argument to Canberra and the business pages of major newspapers. “We must extend this conversation to the lounge rooms, train stations and coffee queues across the country – where 60 square centimetres of screen has become the battleground that really matters.”

She added: “We must find a way to address genuinely-held concerns about energy reliability, affordability and how we will meet international commitments of greenhouse gas reduction.”
Yujnovich pledged on APPEA’s behalf “beyond our ongoing engagement with politicians and mainstream media, we will broaden the conversation.”

Any objective onlooker at this point cannot help make the point that the “conversation” has degenerated in to a shouting factory over at least the past five years. This applies not just to petroleum issues but also electricity and mining – and activists give every impression that they like it this way, indeed go out of their way to pour fuel on the fire at every opportunity, while there are deeply conservative elements bent on the same approach from the other edge of the spectrum.

In this context, it is also interesting to hear Yujnovich tell the APPEA audience: “Given that climate change is the reality, then energy transition must be our mission.”

Globally, the Shell executive pointed out: “The move to decarbonize the energy system will require us not only to transform or replicate the $55 trillion already invested – we will have to build extra capacity for more than a billion people living today without electricity. On top of this we need to cater for growth from both population increases and in demand from increased urbanization.”

The problem for the Australian energy industry, she said, is that, where its members should be considered trusted advisers on technical grounds, its detractors have painted it as dinosaurs.

And, Yujnovich added, “what communities care about is the shared value we bring,” including jobs for young people, investments in education, creation of infrastructure and prosperity – and a fair contribution to the nation’s tax system.

As it happens, I was also struck by a speech by her boss that I read on the Shell Global website recently. Ben van Beuren, Royal Dutch Shell CEO, in the 2018 Elsevier Economic Lecture, declared: “No-one can answer the energy challenges the world faces alone. No government. No NGO. And definitely no energy company. We will have to collaborate.”

He told his audience: “Shell seeks intensive collaboration.”

Translate this here, taking in to account Yujnovich’s speech as APPEA chair, and the questions have to be “what does intensive collaboration look like?” as well as how do you collaborate with people who have no such intent or with governments whose leaders are, politically, on the make?

This is not to dismiss or downplay what Yujnovich said in Adelaide. APPEA is not the only industry association wrestling with this challenge. It’s how the member companies drive these bodies and themselves in next steps that begs questions.

Woodside’s Peter Coleman spoke at the conference about the risks for energy businesses of “talking to ourselves in our own echo chamber.” That’s not just an industry issue. It applies equally to governments and to the more serious environmental players.

So what change will we see in the financial year just about to begin?

Keith Orchison
31 May 2018