Issue 86, June 2012


Welcome to the mid-year edition of the newsletter where we are celebrating the fact that May brought a record 25,858 unique browser visits to the Coolibah website. This edition includes coverage of the 2012 APPEA annual conference in Adelaide – which attracted more than 3,000 delegates and highlighted, among other things, that New South Wales faces an impending energy crisis affecting more than a million customers because of the end of interstate gas contracts mid-decade. Most of all, the past month’s news highlights the ongoing uncertainties facing energy investors. Last Word looks at the rising issue of energy poverty and stress.

Handle with care

The electricity market is faced with a number of challenges that require careful management to ensure consumers continue to be provided with a reliable, secure supply at an efficient price, says John Pierce, chairman of the Australian Energy Market Commission.

A big challenge is development of a market environment to facilitate efficient investment.

In a keynote address in May to a global forum on energy regulation in Quebec City, Canada, Pierce has warned that Australian policymakers and market designers “must comprehend the principle of cause and effect.”

Excessive interference or regulation, he says, can impede the ability of supply firms to maximise their profits or create perverse incentives, leading to market distortions and inefficient outcomes.

“Bespoke technology-specific measures are generally poor value for money and can create frustration for consumers. Interactions of various renewable energy subsidies with each other or with existing markets may result in unexpected or undesirable outcomes.”

Pierce points to solar PV programs, with carbon abatement costs of $300 to $500 per tonne in real terms compared with $55 to $80 per tonne for large-scale renewable generation, including wind power.

The high cost of abatement has created pressures on governments to overhaul or cancel projects – while uncertainty regarding policy direction has adverse implications for manufacturers and installers of solar systems.

Past and current market interventions have had unintended consequences with the potential to reduce overall supply efficiency.

One current un-hedgeable risk in Australia, Pierce says, is political uncertainty over the future of any price on carbon with the potential for the policies to be suspended or substantially altered in the event of a change of federal government.

The role of gas in power generation is cited by Pierce as a major uncertainty, with electricity and gas markets become increasingly interlinked.

“This will influence the security and reliability of supply in the (east coast) market,” he says, “as any major interruptions in the gas supply chain can result in sustained supply shortfalls.

“LNG development (on the east coast) will link domestic and international gas prices, making it increasingly difficult to calculate gas forward prices and design gas supply contracts.

“This will increase the complexity of making trade-offs between the cost of gas, coal and carbon when developing new generation projects.”

Generation falls back

East coast generation production in the March quarter was 1,689 gigawatt hours below the output for the same period in 2011, according to analyst EnergyQuest.

It says there was a fall in output from all three main sources of supply – gas generation was down 727 GWh, coal-fired output fell 598 GWh and hydro production dropped 578 GWh.  However, wind farm production rose by 300 GWh, led by a further increase in South Australia.

Lower gas generation saw a fall in demand for the fuel on the east coast of 5.9 petajoules for the quarter, EnergyQuest adds.

Lower demand and increases in supply of wind and solar power saw average east coast wholesale electricity prices in mainland States drop to $25 to $30 per megawatt hour while retail prices rose in all eastern capital cities – ranging from 5.4 per cent in Melbourne to 17.9 per cent in Adelaide.

Meanwhile AGL Energy managing director Michael Fraser, whose company has received ACCC approval to acquire all of Victoria’s Loy Yang Power after five months of negotiations, has said in a media interview that he expects east coast wholesale prices to remain “soft” over the next two years.

How far will EVs drive peaks?

A study undertaken for the Australian Energy Market Commission has highlighted how careful management of the introduction of electric vehicles can reduce extra national power network costs required in the transport transition by about $2 billion by 2020 and more than $5 billion by 2030.

The largest costs will be borne by the distribution system, accounting for 60 to 75 per cent, depending on the State.

The study by AECOM looked at possible impacts in the east coast power grid and the southwest integrated grid in Western Australia.

AECOM’s analysis suggests EVs could account for 20 per cent of Australian vehicle sales by 2020 and 45 per cent by 2030. Ninety per cent of the sales on the east coast are expected to be in New South Wales, the ACT, Victoria and Queensland. 

AECOM points out that forecasting by the Australian Energy Market Operator indicates peak demand will require an extra 13,000 MW of supply capacity by 2020 and 27,500 MW by 2030 but even unmanaged charging of electric vehicles would add only between three and five per cent to the load, with the largest spikes in NSW and Victoria.

The impact falls considerably, the consultants say, if drivers can be encouraged to charge vehicles in off-peak periods.

Path of the sun

Production from solar photovoltaics has reached an “observable level” in the east coast electricity market, says the Australian Energy Market Operator, reporting that output in 2011 was 1,200 gigawatt hours – or 0.6 per cent of total supply.

AEMO says PV uptake over four years has been rapid on the east coast, rising from 23 megawatts in 2008 to 1,450 MW by February this year.

It forecasts that rooftop uptake will be “relatively restrained” until 2017, averaging 320MW annually due mainly to the reduction of, or withdrawal of, feed-in tariffs, but it will accelerate after 2018, averaging growth of 620MW annually until 2025 in the organisation’s “moderate scenario” modelling.

AEMO forecasts that installed PV capacity on the east coast will reach 5,100 MW by 2020 and increase to 12,000 MW by 2031 in a “moderate scenario” in which end-user prices continue to rise steadily, PV costs fall further and governments maintain subsidy support.

The report is being hailed as “the first formal recognition of the potential for rooftop solar power.”

However, claims that the AEMO forecasts show that solar PV will be “an energy game-changer” in Australia ignore the potential for significant competition.

The market operator does not offer an opinion on what may happen to solar PV investment if gas-fired fuel cells start to receive similar distributed generation support.

But its report has been published just as the Victorian government begins consideration of a recommendation from its Competition & Efficiency Commission that the State’s feed-in tariff be extended to include fuel cells, the first move of its kind in Australia although, as Melbourne-based Ceramic Fuel Cells Limited points out it is already receiving such support in Germany and Britain.

VECC has recommended that the policy be extended to include small-scale, low-emission technologies of 100 kilowatts or less which are defined as offering 50 per cent or more emissions intensity than the grid average.

CFCL claims that its product has the highest electrical efficiency of any small-scale generator in the world, producing power 24/7 regardless of weather, with its standard household unit delivering 13,000 kilowatt hours a year plus enough neat to make 200 litres of hot water a date.

It also claims a substantially higher abatement outcome compared with the same-sized solar PV unit operating in areas where coal-fired generation dominates.

In a market environment where the surge in retail power prices is continuing to scare politicians and the ongoing trend for peak power growth is worrying industry experts and watchdogs, a shift towards a low-emissions feed-in tariff rather than a solar subsidy could become a means of ameliorating the problems.

Coal closure move closer

Climate Change Minister Greg Combet says negotiations with coal-fired power generators over funding to facilitate closure of high-emissions plants will be concluded at the end of June. No closures will occur under the scheme before 2016, he has told media, with the aim of achieving the initial program by 2020.

Meanwhile Combet has piloted the legislation to create the Clean Energy Finance Corporation through the House of Representatives. The government will rely on the Greens to win Senate approval.

Buying wind

A new agreement to buy renewable energy will take Origin Energy’s wind power purchase agreements to 727 MW.  The company, which is Australia’s largest energy retailer and already has PPAs for 457MW of wind capacity, has closed a deal with New Zealand-based TrustPower for supply from its second Snowtown wind farm (270MW) in South Australia. The projects are 160 kilometres northwest of Adelaide.

Stop politicking

The Energy Supply Association has called for politics to be taken out of energy management in Western Australia.
ESAA chief executive Matthew Warren says recent painful power bill increases were necessary because of a decade-long freeze on prices that had left taxpayers with $1 billion in debt.

Warren says the 57 per cent price rises imposed by the Barnett government since ousting Labor in WA have “broken the back” of the problem, but further rises of 23 per cent are needed to bring tariffs to where they reflect costs.

ESAA has decried a proposal by Premier Colin Barnett to remerge generator Verve Energy and retailer Synergy, saying that, if the move scared off private investment, taxpayers would need to contribute another $2 billion this decade for generation expansion.

Crisis ahead

New South Wales has been in the energy headlines in the past month, with thousands taking to the streets in Sydney and regional towns to demonstrate against coal seam gas development, the State Energy Minister warning of a crisis ahead when existing gas contracts expire and the O’Farrell government finally succeeding in legislating for the sale of all its generation assets except its majority share in Snowy Hydro.

The “lock the gate” demonstrations against coal seam gas development – described by a National Farmers’ Federation executive to the upstream petroleum conference in Adelaide as “an unholy alliance between natural enemies” – represents a substantial political problem for the O’Farrell government, which needs to oversee significant new gas contracts for the State by mid-decade.

Some 7,000 people demonstrated against CSG in Lismore, 3,000 in Murwillumbah and 4,000 in the Sydney CBD in May.

State Energy Minister Chris Hartcher told the Australian Petroleum Production & Exploration Association conference that it is essential NSW’s coal seam gas resources be developed to ward off an energy crisis from as early as 2014.

At present the State imports 95 per cent of its gas needs from South Australia’s Cooper Basin, which is in decline, and Victoria’s offshore fields.

Today NSW produces just six petajoules a year of gas – four percent of its consumption – but it is claimed by the petroleum industry to have about 15,000 PJ of reserves and resources.

It is also claimed that a coal seam gas industry in northwest NSW will provide 3,000 direct jobs and deliver the State $3 billion in royalties over 25 years.

Today only five per cent of NSW power generation is gas-fuelled but, with some coal-fired plant reaching the end of its planned life (the Liddell power station will be 50 years old in 2022, for example) and with new coal developments unlikely to be approved in a carbon-constrained environment, the State, it is argued, can expect to need about 3,000 PJ of cumulative gas supply just for power delivery over two decades.

There are six gas-fired power plants under consideration for NSW at present.

NFF vice-president Duncan Fraser told the APPEA conference that a community backlash had been created by “cowboy” behaviour by companies, contractors and individuals and can only be resolved if the industry can deliver assurance that its operations will not affect water quality and quantity.

TRUenergy chief executive Richard McIndoe says governments in NSW have been too slow to deal with the “gas crunch” that will emerge when the Queensland LNG industry starts exports in 2014. Diversion of gas from other States to Queensland could leave NSW’s 1.1 million business and residential customers for the fuel stranded, he warns.

“NSW is a big risk around 2015,” says McIndoe.

Meanwhile, the O’Farrell government has shrugged off opposition and media criticism of a deal it has cut with the Shooters’ & Fishers’ Party, allowing more controlled culling of feral animals by recreational hunters in national parks, in order to ensure passage through the NSW Legislative Council of its legislation to enable sale of Macquarie Generation and the balance of the assets not auctioned by the Keneally government in its “gen-trader” privatisation before losing office.

The government is talking of obtaining $3 billion from the sales but industry opinion is that this is a deliberate downplaying of the prospects – they value the assets at about $5 billion.

Premier Barry O’Farrell says the sales will save the taxpayers having to support $6 billion in investment on new generation in the years ahead.

He also revealed that the generators have current operational and maintenance costs of $850 million a year.

The Energy Supply Association has welcomed the move to finish the sale of NSW generation assets begun under the Keneally government.

“A half private, half public generation sector was never going to work,” says ESAA chief executive Matthew Warren. “ It was never going to deliver good outcomes over the long term. This development will encourage more private sector investment in new generation.”

Warren says the claim that privatising the generators will lead to higher end-user power prices is not supported by the facts.

Pricing for dummies

The inability of many Australian journalists to understand the elements of the power supply chain and its pricing is again on display in reporting of the NSW generation privatisation.

The Labor State opposition and the trade unions have been given free rein and wide publicity by newspaper, radio and television for their claims that the move will drive up retail prices.

Not one media outlet has asked opposition leader John Robertson and the unions to explain how this could happen – the point being that the power stations, regardless of ownership, have to sell their output in to the east coast competitive market with regulators hovering to ensure that there is no trading misbehaviour.

Power price increases over the past four years and in the period from now to 2014, which is affected by current regulatory decisions on network charges, relate in the main to delivery costs plus the effects of State and federal green schemes and will be impacted by the Gillard government’s carbon price from July.

Future wholesale power prices are forecast to rise on the east coast – as a result of more generation being gas-fuelled and gas prices rising as a result of the impact of the LNG export trade. This has nothing whatever to do with power plant ownership.

Closed down

Late May marked a small turning point on the east coast, but one the environmental movement either missed or did not feel like celebrating.

Stanwell Corporation closed its final 120 MW Swanbank B power unit near Ipswich, ending an operation that has burned 21 million tonnes of black coal in two plants over 46 years. Swanbank A was shut in 2007 and the B plant’s other three units were closed during 2010-11.

The development still leaves the 385MW Swanbank E gas-fired baseload power station in operation, with Stanwell proposing a $40 million overhaul from August. Last year the plant set a world record for continuous operation of an Alstom gas turbine before closure for maintenance.

The government-owned company continues to operate 3,400 MW of coal capacity with a power station at Rockhampton and two at Tarong in the South Burnett.  Stanwell said in April that the 28-year-old, 1,400 MW Tarong plant – the other is Tarong North – is expected to continue to operate until at least 2030.

Carbon cost

The Queensland government claims that the federal carbon tax, which takes effect on 1 July, will cost Stanwell Corporation $389 million a year and CS Energy $225 million.

Treasurer Tim Nicholls has told State parliament that Queensland’s generators “will receive not one cent of compensation while the Gillard government gives compensation to Victoria for its dirty, polluting brown coal generators.”

Nicholls says modelling undertaken by the State Treasury and Deloitte Access Economics found that the carbon tax will “impose a hit on Queensland’s gross state product of up to $9.6 billion out to 2020.”  He says that up to 21,000 jobs could be lost this decade and average real wages reduced by up to $2,940 a year.

Under scrutiny – again

The new Queensland government chose the week its Competition Authority approved a 10 per cent increase in electricity prices for business (users of 100 MWh or more a year) and a similar rise in household off-peak tariffs to announce that it is launching yet another review of its two network distribution businesses, Energex and Ergon Energy.

The DBs were scrutinised in detail in 2004 and again late last year by the previous Labor government – with the earlier inquiry leading to $12 billion expenditure on network assets to improve reliability, which had become a politically sore point, especially in south-east Queensland, early in the past decade.

The new review panel will be chaired by Tony Bellas, a former senior Queensland Treasury officer and subsequently chief executive of CS Energy and then Ergon.

State Energy Minister Mark McArdle claims that the businesses are “significantly and needlessly” pushing up power prices, which have risen 60 per cent since 2005. He has asked the panel to investigate merging Energex and Ergon to save operating costs. It will report next January.

The Queensland Council of Social Service wants McArdle to extend the panel’s review to look at power price impacts on disadvantaged people and to examine the present concessions available to them.

The Competition Authority decision will add an average $127 a year to the power bills of 725,000 households with electric hot water systems, air-conditioning and swimming pool filters.

Business on average will pay $112 more.

QCA says the increases are attributable to the carbon price and also the impact of expenditure on network infrastructure.

Meanwhile canegrowers have complained that higher electricity bills, coupled with large increases in the cost of irrigation water, may force some farmers off the land.

The government has stuck to its election promise to freeze the main household tariff for a year. It claims that this will save an average household $120 in 2012-13.

Premier Campbell Newman told State parliament: “We are not going to lie down and accept that electricity prices will go up.”

Soon forgotten

It received a minimum of coverage in the mainstream media in Budget Week and has been completely lost to sight since, but the Gillard government’s
broken promise on energy efficiency is not a minor issue.

At the 2010 election the Prime Minister promised a $1 billion support scheme for energy efficiency in buildings, welcomed at the time by the Energy Efficiency Council as “the first step to kick-start a transformation of the building sector.”

The measure was described as having the potential to save the economy $1.4 billion a year, cut carbon emissions relating to buildings by 30 per cent and create 27,000 jobs this decade.

The scheme was scrapped in the 2012 federal Budget, the government claiming that it is redundant because of the carbon tax, a view rejected by the Energy Efficiency Council as “absolute rubbish.”

Critics point out that commercial buildings will be among the last parts of the economy to respond to a price on carbon because property managers, developers and private landlords don’t pay the energy bills.

A former Victorian Labor government minister and current president of the Australian Sustainable Built Environment Council, Tom Roper, reacted to the Budget announcement by asking “How can we let such an outstanding opportunity for sector-wide carbon reductions and efficiency simply slip through our fingers?”

German ‘miracle’?

There are two types of energy stories emerging from Germany.

One is a seemingly endless riff on the theme of “Germany’s renewable energy revolution leaves us in the shade” and it appears regularly in our media, especially on Internet sites devoted to promoting decarbonising policies and products.
The other theme, not seen very often in Australia, is the growing unease in Germany over energy prices and over Chancellor Angela Merkel’s policies based on her rejection of nuclear power, which provided 23 per cent of consumption.

Stories are now emerging in the German media suggesting that any significant further rise in power bills will erode her ability to win another term in office when elections are held in 2013.

McKinsey & Co have estimated in a new study that Merkel’s policies could see Germans paying 60 per cent more for electricity by 2020.

More importantly, it is argued that power bills at such levels could impact on German exports, making the country more vulnerable to the economic crisis affecting most of the rest of Europe.

According to the European Union, Germany today is charging its residential customers nearly double the tariff in France – 27.8 euro cents per kWh versus 14.7c – and far more than British householders pay (16.7c).

Industrial customers (using the tariff for 20 GWh demand a year) pay 11.9 euro cents in Germany versus 6.9c in France and 10.1c in Britain.

The president of the German trade body for the metals industries says a “gradual process of de-industrialisation” is taking place in Germany and warns that the production of aluminium in particular is at risk because of uncompetitive power prices. Only Italy and Slovakia have higher prices in the EU for heavy users of power.

Germany’s third-largest aluminium producer filed for bankruptcy in May, blaming falling commodity prices and higher production costs.

McKinsey say that, because of greater use of fossil-fuelled power to replace nuclear, Germany will fall nine per cent short of its target of reducing greenhouse gas emissions to 40 per cent below 1990 levels by 2020.

The high cost of the switch from nuclear was brought home to many Germans in late May when the country’s four power grid operators delivered a report to the government showing that the cost of network augmentation to link large-scale new renewable generation to load centres will be about $Aust25 billion.

The plan incorporates upgrading 4,400 kilometres of existing networks and building 3,800 km of new high voltage lines in 10 years.

The grid operators told Merkel: “This investment will account for only a fraction of the cost of the energy transition, but the policy cannot succeed without it.”

The operators also pointed to high stresses on the grid system at times of maximum demand.
In February’s cold weather, when transmission lines were being used to full capacity, Germany needed 935 MW of reserve capacity in Austria plus access to several hundred megawatts of capacity from further abroad to avoid load-shedding.

Merkel’s aim is to double power output from renewable resources to reach 35 per cent of generation by 2020.

Meanwhile, lost to view in stories extolling, for example, the virtues of large solar power production over a weekend of warm autumn weather, is the fact that the closure of the nuclear power stations has led to a drop in the export of German zero-emissions electricity, resulting in its neighbours using more fossil-fuelled supplies.

German imports of electricity rose 7.7 per cent in the year to February.

Also lost to view in the media is the fact that the German electricity mix at present sees 25,000 MW of solar capacity delivering 2.4 per cent of national consumption versus 15.3 per cent from the remaining nuclear power stations (due to be shut by 2022) and 71 per cent from fossil-fuelled plants.

There are 19 fossil-fuelled power plants currently under construction in Germany

Meanwhile Chancellor Merkel, faced with rising bad reactions from the community over energy issues, has turned to a time-honoured political practice: she has sacked her energy minister, a gung-ho promoter of solar power, and replaced him with a politician whose previous job was to keep the current governing coalition united.

APPEA conference

More than 3,000 delegates from 35 countries turned up in Adelaide for May’s annual conference of the Australian Petroleum Production & Exploration Association and they were overwhelmingly there to talk about gas.

The chief focus was on LNG exports, but not far behind was discussion of the backlash against coal seam gas developments on the east coast.

Some of the attendees at the Adelaide forum were off to Kuala Lumpur early in June as Malaysia hosts the world gas conference, where about 5,000 delegates from 46 countries are participating, testament to the huge need for, and commercial potential of, the trade in gas.

While the Kuala Lumpur conference is about the global marketplace, the Adelaide APPEA debate combined this with a focus on domestic problems, worrying about the industry’s “social licence,” the instability of the policy process and the challenges to the full realisation of Australia’s LNG export potential.

That the domestic community issues are receiving attention internationally is highlighted by the accusation from Fatih Birol, chief economist of the International Energy Agency, that companies pursuing coal seam gas developments on the Australian east coast have not taken community concerns about water contamination and land degradation seriously.

In a comment guaranteed to annoy the local upstream petroleum industry, Birol adds that the increase in costs faced by developers in dealing with regulation imposed by politicians reacting to CSG opposition is “peanuts” compared with the “rather handsome revenues” they stand to gain.

In a paper tabled at the APPEA conference, consultants Deloitte say it is “critical” that proven gas reserves are commercalised in time to both mitigate the risk of a domestic supply shortfall and to take advantage of the “enormous” export opportunities.

Deloitte say economic benefits from LNG sales could be lost if the domestic market is unable to supply gas in a quantity and at a price that maintains Australia’s competitiveness internationally.

Deloitte add that it is not economical to access the 60 per cent of Australia’s conventional gas supplies located in the country’s north-west for east coast use and point to declining supply – 30 per cent from Victorian fields since 2010 and 21 per cent from Queensland fields.

“Domestic supply pressures are likely to intensify,” the consultants add, “as conventional production declines while exploration and production costs rise, regulation of the coal seam gas industry increases and gas-fired power generation expands.”

They say east coast gas prices are widely expected to rise significantly, potentially doubling over the next few years.

No to gas reservations

The federal Opposition has rejected the concept of mandating that a percentage of gas extracted from Australian reservoirs should be reserved for domestic use.

The Coalition energy and resources spokesman, Ian Macfarlane, has told the APPEA conference that it will not accept the proposal that 15 per cent of gas resources should be set aside for use in Australia.

“This,” Macfarlane says, “is asking one multi-national (a gas producer) to subsidise the profits of another multi-national (a gas consumer).

“There are inherent dangers in interfering with the gas market and mandating the reservation of gas, not least the distortion of the price signal and undercutting the competitiveness of Australian gas projects.

“It also threatens Australia’s sovereign risk status because, by mandating that a certain percentage of gas in projects already in production, or being developed, be set aside for domestic sale, you are changing the rules of the game for investors mid-stream.”

Macfarlane says that, while the Coalition understands the cost of living pressures on manufacturing, mandating the supply of gas is a band-aid solution that won't work and may cause exploration and development to go elsewhere.

Macfarlane warns that a range of circumstances – including the Queensland LNG projects, the maturing of many user contracts in the next few years and difficulties in securing new ones as well as the federal government fomenting resentment towards large resources companies – will impose pressures to impose irresistible pressures on State governments to “do something.”

However, he adds, “it will be counter-productive if that ‘something’ is a kneejerk, retrospective, mandatory reservation policy.”

Macfarlane suggests that it could be more effective and less destructive for energy investors if some exploration acreage is reserved for domestic production and for governments to forego some taxation revenue to reduce the price of gas produced from such areas.

Alternatively, he suggests State governments could take their royalties in gas not cash, allowing them to decide whether to subsidise or discount sales to manufacturers.

Liveris hits back

Dow Chemical’s global chairman and chief executive, Andrew Liveris, says Australian industrial users who can negotiate new gas contracts in the next few years will face double their current costs.

Liveris was responding in an Op-Ed article in The Australian newspaper to points made at the APPEA conference against reservation of east coast gas resources for domestic use.

He accuses “the international oil companies that dominate Australian gas supply” of “digging in to their basket of red herrings” to raise sovereign risk issues.

Liveris says industrial users of gas are “having their supply turned off.”

He argues that the debate should be about the value of gas put to use inside Australia rather than its value when sold to other Asia-Pacific nations.

“So long,” he adds, “as Australia allows its energy policy to be boxed in by the narrow self-interest of the commodity exporters, the wider community will be denied real opportunities (from new, high value local industries).”

Less competition

Equity analysts UBS say the acquisition of Loy Yang Power by AGL Energy, a move approved in late May by the ACCC, may see an increased degree of vertical integration in the Victorian power industry.

UBS say that this, coupled with some potential capacity closure resulting from the federal government’s carbon policies, may see less competition in the State market.

The passage of legislation to allow sale of the State-owned generators in New South Wales, UBS add, could see vertical integration “materially reduce” the significance of the east coast electricity market.

Price debate sought

The NSW government says it supports a proposal by the State’s energy and water ombudsman for a national debate on the impact of rising power prices.

Ombudsman Clare Petre says the latest increase in power bills in NSW – the Independent Pricing & Regulatory Tribunal has approved a 16.4 per cent increase, including the impact of the carbon tax, for 2012-13 – will take the change in three years to 43.4 per cent for households.

Petre says energy affordability has become a serious social and economic issue and needs to be addressed by all stakeholders, including energy retailers and networks.

The impact is reflected in growing numbers of customers in hardship programs, a significant number of customers in arrears and the increased
referral of accounts to debt collection agencies.

She says there has been a 21 per cent spike in calls to EWON by customers denied payment extensions.

National legislation to stop energy suppliers from disconnecting households owing less than $300 – on condition that they make arrangements to pay the bill – comes in to effect on 1 July.

NSW Energy Minister Chris Hartcher says he welcomes the call for a debate on affordability.

Meanwhile Origin Energy has told IPART that it finds the regulator’s decision to decrease the non-carbon energy cost component of power bills for the 2012-13 pricing decision “surprising” and “unrealistic.”

Consultants advising the regulator have under-estimated the cost of coal and gas contracts, it says.

Last word

There’s a macabre medical joke – the operation was a success but it’s a pity the patient died – that has some resonance with the debate going on about our national electricity market.

The “NEM,” of course isn’t national – it excludes Western Australia and the Northern Territory. It is even more lopsided than this. Almost 80 per cent of its customers, residential and business, are concentrated in three states (New South Wales, Victoria and Queensland).

Among the energy supply community, here and overseas, the “NEM” is widely regarded as a qualified success. Martin Ferguson’s draft energy white paper is not alone in asserting, in effect, that, while the market is a work in progress and needs continuing reform, it has generally done well in delivering safe, reliable and competitively-priced power.

The loudest of the naysayers tend to be the manufacturers, who are squealing a lot about the combined impact of network charges and the impending impact of federal carbon policy, but there is a growing concern in some quarters that it is the underdogs in our society who are in real trouble in the present set-up.

The biggest issue with the “NEM,” the argument goes, is not its lopsided geography nor its charges to energy-intensive users but whether or not its delivery of an essential service to the least well off is fair and reasonable.

A paper by two NSW academics suggests that, in fact, this is not a looming problem but one we are already sharing with the Europeans.  

Lynne Chester of the University of Sydney’s Department of Political Economy and Alan Morris of UNSW’s School of Social Sciences and International Studies point out that some European power prices rose by more than 100 per cent between 2000 and 2010 while NSW households have been hit with an 80 per cent rise in the past five years.

They say the “energy impoverished” population here and in Europe is rising rapidly and argue that policy responses are ineffective and poorly targeted.
They claim Australian policymakers are relying on measures that significantly understate the impact of higher charges on those least able to deal with them.

Chester and Morris say that, while most Australian households are now able to choose an energy retailer to provide their electricity, large numbers have opted to stay under the umbrella of regulated arrangements where the state and territory governments still set their prices.

Two-thirds of NSW households, 40 per cent in Victoria, a third of South Australians and nearly 60 per cent of Queenslanders are still under the umbrella – and one of the big ticket ambitions of energy retailers is to get governments (other than in Victoria, which has deregulated) to drop this arrangement.
CoAG agreed as far back as 2006 that retail price regulation should be phased out in the “NEM,” but most governments have dragged their feet on the issue because they fear the political consequences.

However, the regulators have been pushing residential prices nearer being cost-reflective. In the five years to 2011-12 this has seen an 80 per cent rise for NSW households and more than 60 per cent for Queensland, South Australia and Tasmanian homes – while residential prices in the West have gone up 57 per cent.

It’s harder to evaluate what’s happening in Victoria because the only available data since 2009 is for average market contract prices.  Chester and Morris say some Victorian accounts have had a 35 per cent price hike for weekday supply since mid-2010.

Households in the most populous states face potential increases of 33 to 42 per cent during the next two years.

The hard-nosed way of looking at this is to remind householders that most of them are spending more of their disposable income on booze and cigarettes or entertainment than on electricity services.

A popular gambit – I have used it myself – is to compare average daily household electricity costs with the price of a good cup of coffee in a café.

While the power charge has shifted ahead of the coffee price in recent years, they are still roughly in the same ballpark.

Chester and Morris argue that we need to look at this rather differently for a growing number in our community.

In Britain, they point out, the official line on fuel poverty is that it is reached when a family needs to spend more than 10 per cent of its income on fuel to achieve an “adequate” level of warmth and on other energy services.

They say recent energy price rises have shoved four million homes in England alone in to the “fuel poor” bracket.

The problem here, say Chester and Morris, is a paucity of data, but they posit that energy poverty is growing.  Policymakers, they say, are relying on evidence that “severely understates” the situation.

Around 3.5 million households – there are about nine million residential electricity accounts nationally according to the Energy Supply Association – fall in the two lowest income quintiles.

Chester and Morris say that in 2009-10 the lowest quintile homes spent 4.7 per cent of their income on electricity, nearly six times the outlay of the wealthiest quintile and more than three times the national average.

They say 37 per cent of Sydney households pay four per cent or more of disposable income in overall energy bills.

For the lowest quintile Sydney households, power bills may be swallowing more than 10 per cent of disposable income.

They quote Wesley Mission to point out that more than 70 per cent of financially stressed households in Australia are making sacrifices to meet power bills and the ABS to show that nearly 40 per cent of the two lowest household quintiles were unable to pay electricity, gas or telephone bills on time in 2010.

The salient point, Chester and Morris argue, is that higher electricity prices are having a disproportionate impact on poorer households.

They claim that this is an existing Australian problem rather than a future one, as some economists are suggesting, and cite Barnardos on the health effects on adults and children in poorer homes when they can’t afford heating in cold, damp weather.

A controversial issue is deaths resulting from energy poverty, especially in the northern hemisphere’s extreme cold. 

We are not immune here from climate-related deaths, say Chester and Morris. They tend to be concentrated among the elderly and are more related to extreme heat than cold.

There are a range of governments programs trying to address energy poverty issues, but Chester and Morris argue that the majority of them are so tightly targeted that they do not capture all those caught in this trap.

“There is a high prevalence of reactive, temporary financial assistance measures for vulnerable households in preference to providing widespread and long-term improvements in the energy efficiency of housing.”

Our governments, they say, are entrenching and exacerbating the problem, rather than ameliorating it.

That’s a sobering thought at a time when our federal pollies are doing their ritual Budget dances in Canberra.

The kneejerk political (and media) reaction to power price issues is to beat up on suppliers, but the time has surely come for a more sophisticated approach to this issue, recognising both the real requirements of infrastructure outlays to deal with demand and the growing impact the situation is having on the least well-off members of our society.

Keith Orchison
5 June 2012

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