Issue 97, May 2013

Welcome to the fifth issue of 2013, writes Keith Orchison, as consumers confront higher energy bills for another year, State governments wrestle with how to help vulnerable customers, suppliers seek to woo politicians and consumers towards full deregulation and the main contending federal parties prepare for a defining election in September.

New white paper worries

A key issue emerging from the skirmishes ahead of the 14 September federal poll is what the Coalition will cover in its proposed energy white paper, with its victory at the election apparently a foregone conclusion.

Australia has had two energy white papers in nine years – one published by the Howard government in 2004 and the second handed down by recently-retired federal Resources & Energy Minister Martin Ferguson.

The Coalition is now committed to launching a third paper for delivery in 2014, dismissing the 2012 Labor version as “a damp squib.”

Observers worry that the new paper itself will be a very hurried exercise, with submissions required soon after the election and publication proposed early in the new year to be swiftly followed by legislation.

Spearheaded by Industry & Innovation Minister Greg Combet, the federal government is focusing its attacks on the Coalition in this area around the lack of clarity about how its “direct action” program will work, arguing that environment spokesman Greg Hunt is failing to provide adequate details of its alternative to the current “clean energy future” program.

In turn, Hunt is promising consultation with business after the election as part of a new white paper process.

A hurdle for the Coalition is its failure to date to convince the energy industry that the existing carbon price arrangements can be repealed without disruption of the electricity and gas markets.

There is concern that a new approach will be complex and costly.

An “Australian Financial Review” staff commentator claimed in late April that very few in the Coalition actually understand the policy themselves.

Industry, mostly privately, frets that what Labor has in place now is a process where companies abate emissions with funds dependent on the market, and is risky because of uncertain permit prices, while the Coalition wants to impose a scheme where the responsible minister will pay for abatement from whatever funds he can obtain from a federal Treasurer focused on cutting government expenditure.
Some would like to see the Gillard government overcome policy uncertainty by announcing a switch from a fixed price to a flexible scheme from 1 January next year rather than July 2015, its present position.

Others argue for both this step and an extension of the date for linking an Australian scheme to overseas emissions trading to 2018 – at which point, it is argued, the UN negotiations on a post-Kyoto approach should be finalised.

The Australian Industry Group is proposing that the government and the Coalition support a “sensible policy option” to drop the carbon tax and “move as quickly as possible to an internationally-linked trading regime.”

Energy Supply Association chief executive Matthew Warren says the industry is not calling for the Coalition to scrap its “direct action” approach but is warning that market conditions will make implementing it “challenging.”

Warren says there is a need to rethink “direct action.”

He adds that a new white paper process is “absolutely necessary” to resolve the issues relating to repeal of the “clean energy future” legislation.

The retiring Business Council of Australia president Tony Shepherd has told the National Press Club that large commerce and industry wants both major political parties to accept the lowest-cost method of encouraging the reduction of emissions.

“Action on climate change shouldn’t put our business competitiveness at risk,” he said, “and there should be no policy restrictions on the technology we use to lower emissions. Nuclear, gas and clean coal should not be excluded on ideological grounds.”

Research group RepuTex says scrapping the carbon tax could impact on the renewables energy target.

Its associate director Bret Harper says that without the $23 per tonne carbon price, with renewable energy certificates worth about $32 per megawatt hour at present, renewables will “not be a realistic investment option.”

He argues that there is a “gap in logic” in supporting the RET but not the carbon price. Removing the tax will require increasing the RET penalty price.

Other environmental commentators claim that current uncertainty over policies is undermining renewables investment “severely” and that a new Coalition government killing off the carbon tax and also the $10 billion Clean Energy Finance Corporation, which it is committed to close, will “stop the growth of renewable energy in its tracks.”

Meanwhile Greg Combet argues that the “reverse auction” system inherent in the Coalition “direct action” approach is a bureaucratic grant contracting system that is “less of a market mechanism than Stalin’s five-year plans.”

Administering the program, he claims, will involve a larger bureaucracy than that needed by the carbon price.

In answer to repeated Coalition calls for Labor to “accept the clear mandate of a new government” and not help to block carbon price repeal legislation in the Senate, Combet retorts that Labor will “never support any attempts” to do so.

“The reality,” Combet says, “is that the Coalition cannot and will not repeal the ‘clean energy’ legislation.”

Sinking in east

The prospects for privatisation of some $60 billion worth of electricity network assets held by two governments have dimmed after Queensland’s Newman government rejected proposals to sell its generation, distribution and transmission businesses.

Premier Kevin Newman told the Queensland parliament on the last day of April that his government, responding to a 1,000-page audit of State finances by a committee led by Peter Costello, would investigate the sale of generators CS Energy and Stanwell Corporation but not the network businesses.

The government has also committed itself to seeking a mandate for sales before taking any action – meaning that the genco auction would not happen before 2016.

It is hard to see the O’Farrell government in New South Wales boldly going where the Queensland Coalition declines to tread, meaning that the often-urged sale of four State network businesses is unlikely to be put to the NSW election in March 2015.

However the State Treasurer, Mike Baird, is at least keeping this option open. He told media in early April that the need to invest heavily in new infrastructure in NSW, including road and rail construction, could require the government to take a privatisation option to the next election.

Premier Newman has told parliament in Brisbane that his government has chosen “not to take the easy way out and have a fire sale of assets to get Queensland back on track. We will save the farm.”

The decision comes at a time when the trade union movement in the two States has been increasingly vocal about privatisation and the think tank Australia Institute has launched an attack on power sales, claiming they have “failed to deliver cheap power to consumers and have not improved efficiency.”

The Energy Supply Association has struck back at the institute’s report.
ESAA says it is “plagued by methodological problems and partisan assumptions.”
The association’s chief executive, Matthew Warren, says: “If this report objectively compared prices growth since the Victorian reforms, it would have to conclude that, over past five, 10, 15 or 20 years, costs have risen less (there) than in New South Wales.”

Warren argues that deregulation encourages competition and “that’s what is keeping prices for families as low as possible” where it is applied.

Competition, he says, means energy companies have to innovate and offer better, more flexible deals for consumers than regulated prices.

Price spikes continue

The national focus of politicians and the popular media on power prices hasn’t died away but, in the largest market, New South Wales, it has toned down at least, with the latest round of higher costs accompanied by indications that spikes will be lower later this decade.

The Australian Energy Market Commission has also published a review of national household electricity price trends in which it reports the average increase for the current financial year will be 14 per cent – but claims this will moderate to an average of three per cent in the next two financial years.

AEMC chairman John Pierce says the commission sees network prices continuing to drive total residential bills but, as investment needs are progressively re-assessed, costs in this sector may lessen.

At the same time, Pierce adds, overall wholesale energy prices are expected to remain flat and the commission sees retail cost flattening, too.

Finally, Pierce says, the price impact of environmental initiatives is also lessening. The carbon price has already been factored in to wholesale costs and the impact of State and federal green schemes is “likely to slow from this year,” reflecting changes to generous solar schemes.

The AEMC review appeared as NSW’s Independent Pricing & Regulatory Tribunal delivered a preliminary determination of regulated prices which imposes a 4.3 per cent price rise on the largest cohort of residential and small business customers in metropolitan Sydney and a 3.1 per cent rise for western Sydney, the Illawarra and the Blue Mountains.

The average three per cent rise for the State is reached when a much smaller increase (half of one per cent) for rural and regional NSW customers is factored in.

For a majority of NSW households, the proposed increase amounts to another $83 dollars a year on their bills with small businesses being charged an extra $117.

The federal Labor Party has taken advantage of the announcement to send selected NSW voters an email from “Julia,” in which the Prime Minister claims that “important reforms the federal government is leading to ensure customers are getting the best deal from their electricity service are working.”

Presumably, a similar email is not being disseminated in Queensland where the State regulator proposes an average increase in household tariffs of 21 per cent for 2013-14 (including a catch-up cost for a freeze on prices imposed by the Newman government after winning office).

Reacting to the NSW decision, the Energy Users Association has warned that business customers in the State are still struggling with increasing power bills.

New EUAA chief executive Phil Barresi, a former federal MP, says the determination is a step in the right direction for households, but further regulatory reform is needed to achieve better outcomes for business.

Barresi says that “soaring power bills for business will ultimately result in cost increases of goods and services for consumers as stressed companies are forced to pass on their expenses through the supply chain.”

Demand conundrum

The causes of the east coast slump in electricity demand and where and when it will bottom out continue to excite claims and comment but even independent experts struggle to come to terms with the issue.

The Australian Energy Market Commission, in calling for input to a new effort to development strategic priorities for energy market policy, says that it is “very challenging” to forecast future power demand.

The AEMC adds that uncertainty about future demand levels, both total and peak, creates a significant issue for the timing of investment in supply infrastructure. The commission comments that the future investment focus is likely to be less about the quantity of capital outlays than about the most efficient options.

The Australian Energy Market Operator, the AEMC points out, is forecasting demand growth “but this will require the recent trend of declining consumption to be reversed.”

While electricity demand continues to rise in Western Australia (a 2.1 per cent increase is forecast for next financial year), AEMO expects east coast demand in 2012-13 to be 2.4 per cent lower than in 2011-12 and to be flat next financial year.

While commentators, and especially those with green axes to grind, tend to focus on householders and their increased interest in energy efficiency as power bills have soared – they have doubled in NSW for example in seven years – as well as the take-up of rooftop solar PV systems, energy suppliers are highly conscious that 70 per cent of their sales are to commercial and industrial users.

While the services sector’s share of demand is rising, as was that of mining until the boom recently hit road bumps, manufacturing is under increasing pressure from a range of factors, including the stubbornly high $Australian.

Major suppliers are increasingly jittery about the impact of local and global issues on key industrial demand areas such as non-ferrous metals, steelmaking, plastics and chemicals and the automotive industry.

The AEMC points out that the long-term national outlook is for both the economy and population to grow strongly, leading to an increase both total and peak demand, irrespective of whether per capita demand stabilises or declines, but existing power sector investors face the conundrum of little clarity about how near the long term is.

AiG angst

The Australian Industry Group (claiming more than 60,000 business members) is weighing in to the energy debate with increasing frequency.

Reacting to the IPART prices determination for NSW in late April, the association said there are growing concerns in business about the availability and cost of energy in the State.

IPART’s decision to increase regulated gas prices by nine per cent for 2013-14 is “worrying,” AiG says.

It fears much more significant increases will follow as NSW gas supplies tighten.

“Ill-conceived regulatory responses to community concerns about coal seam gas make it very likely that supply will remain tight for some years,” the association adds.

AIG says that, if wholesale prices for gas treble to $9 per gigajoule – “which is well within the range of credible estimates” – retail prices for households will rise by about 15 per cent, small business costs will increase by 27 per cent and large gas users could be confronted by bills 50 per cent higher or more.

AiG chief executive Innes Willox says the clamp down on gas production in NSW and calls for similar steps in Queensland “should ring alarm bells for both industry and the community.”

He says that businesses with large numbers of employees are concerned that the already tight gas market will become “disastrously short of supply.”

Willox adds: “Right now we are seeing a domino effect as one government after another puts roadblocks in the way of resource development under pressure from a public that does not yet see the risks of a gas squeeze.

“Many have assumed that high gas prices will encourage more production and prevent an extended supply squeeze,” he adds, “but this will not happen if governments feel obliged to clamp down even harder on coal seam gas.”

He warns that a “permanent supply crunch” will hit jobs, investment and household budgets “not just in Gladstone and Brisbane, but in Sydney, Melbourne and Adelaide.”

“Willox says the CSG resource needs to be developed safely but “if it is not developed at all, the costs will come hard and fast.”

He points out that gas is an essential feedstock for many basic chemical products that underpin other industries and everyday life for Australians.

He says that gas prices paid by business have risen by more than 57 per cent in six years, two and half times the inflation rate, during a period when business power bills have gone up by 96 per cent.

“The rise in energy prices has come at the worst possible time,” he adds. “It has coincided with the surge in Chinese industrial capacity and the associated global challenge to manufacturing. It has also coincided with the stronger Australian dollar, making exports more expensive and imports cheaper.”

Willox argues that, while risks in CSG extraction should be addressed and the regulatory regime needs “the confidence of all serious stakeholders,” gas supply is “more important and fragile than many people realise.”

In mid-March, AiG joined with the Australian Petroleum Production & Exploration Association, the Clean Energy Council and the Energy Supply Association to call on government to “stop playing politics with Australia’s energy future.”

The quartet of associations said they are concerned that non-evidenced based policies are restricting the development of new energy sources with potentially significant negative consequences for the broad Australian community.

“Kneejerk policies continue to undermine the development of energy projects,” they said.

Too far ahead

The NSW Independent Pricing & Regulatory Tribunal has declined setting the State’s regulated gas prices for three financial years out to mid-2016 because there are “too many uncertainties” for the outlying period.

Instead IPART has settled in its draft determination, despite business concerns that focusing on just 2013-14 will add to operating problems, to fixing prices for 2013-14, deciding on an average rise across NSW of 8.6 per cent – which includes a 9.2 per cent in the area served by AGL Energy, retail supplier to 80 per cent of small regulated customers.

IPART considers it likely that regulated retail prices will increase again over the 2014-16 financial years. The domestic market will be more and more influenced by the international market for LNG and domestic prices may rise towards global levels.

The process, IPART adds, “is unlikely to be smooth with changing market dynamics having the potential to increase the level of price uncertainty in the medium term.”

WA switch

Western Australia’s Premier, Colin Barnett, having won a thumping victory in the State election, is now refusing to guarantee that electricity price increases will be limited to the inflation rate  (or near it) despite giving this promise in a television debate before the poll.

During an acid exchange with the Labor opposition over his also-controversial decision to merge the State-owned generation business, Verve Energy, with the government energy retailer, Synergy, Barnett dodged questions seeking to get him to re-affirm the pricing pledge.

Later the new State Energy Minister, Mike Nahan, told the Perth parliament that a key problem in the south-west integrated grid is that the private sector builds power plants and takes the construction risks but the market risks in price and quantity are all borne by Synergy (and eventually by the taxpayers, its owners).

As he explained, when it came to office, the Barnet government inherited an arrangement where the risks fell to Verve – and the government had to spend $1 billion to prevent it falling in to bankruptcy in a situation where retail prices, frozen for years by Labor, were well short of the actual cost of supply.

The government also increased power prices 62 per cent in its first term of office and in 2009 changed the vesting arrangements.

Without this move, Nahan said, the State would have had to spend “billions of dollars” bailing out Verve over time.

He also told the Perth daily newspaper that the State government will rely heavily on the private sector to build an estimated $10 billion worth of new generation when Verve’s aging plants need replacing.

Last word

From coast to coast, Australia’s domestic energy sector is caught up in issues that, in one way and another, contribute to an environment of uncertainty for both suppliers and consumers.

As in previous issues of this newsletter in 2013, this edition canvasses a number of areas where this air of instability is being exacerbated rather than improved.

In this respect, Australia is far from unique.

There are many other regions of the democratic world where the electricity sector in particular is caught up in situations that cause policymakers, regulators, suppliers and large consumers to lose sleep.

Our Business Council has summed up the imperative for a coherent energy policy here in a recent presentation.

A well-ordered approach, it said, will drive domestic supply and exports, improve national economic competitiveness, reduce greenhouse gas emissions and be underpinned by an efficient market.

The BCA recipe for achieving this desirable state has seven key ingredients.

Energy market reform needs to be progressed by privatisation of remaining electricity assets and deregulation of retail prices.

There needs to be a fast-track approval process for development of gas supplies.

The renewable energy target needs to be wound up while protecting those who have invested under the legislation.

The mainstream political parties need to accept a lowest-cost method of encouraging the reduction of carbon emissions – and action on climate change shouldn’t put business competitiveness at a disadvantage by moving ahead of the rest of the world.

There should be no restrictions on the energy technology used to pursue lower emissions – and nuclear energy, gas and clean coal technology should not be excluded on ideological grounds.

To describe this approach as a major exercise would be an understatement.

Some will see it as Mission Impossible, given the conflicting positions of political parties on either side of the main divide in a number of these areas – e.g. privatisation and retail price regulation.

The present political environment is simply not conducive to coming up with an energy policy that is long-lasting and in the interests of the majority of end-users and the community as a whole.

Over the past decade, despite two federal energy white papers and wide-ranging efforts at regulatory reform, governments collectively have failed to develop a comprehensive approach with clear priorities.

As I say, we are not alone in the unhappy state.

California is frequently held up to Australia as a fine example of how to pursue an environmentally-friendly energy policy, moving away from power supply predominantly dependent on fossil fuels to one that emphasizes renewable energy.

It also has one of the five most expensive electricity supply systems in the US, has been through a major crisis because of poorly structured market arrangements and criminal behaviour by at least one member of the supply chain and is bleeding manufacturing jobs.

In a recent critique of the situation, the Little Hoover Commission, an independent agency set up 40 years ago to oversight Californian governance, has told the state governor and legislature of the huge flaws in their political approach.

The commission says California has adopted a series of policy initiatives without the benefit of coherent design.

It has failed to produce a comprehensive statement of the total cost of implementing these policies.

It lacks the ability to impose order on the proceedings that determine how these policies unfold.

It is not clear how far meeting the renewable targets will come at the expense of power system reliability.

“Getting it right is far more important than speed,” the commission lectures the politicians.  The state needs to stop sprinting on so many fronts and collectively catch its breath.

Every word of these criticisms and strictures could be also applied to Australia.

The Council of Australian Governments was created to address cohesive policy-making between Canberra and the State and territory governments, to overcome duplication of efforts and to reduce the impact on the community, especially business, of red tape and green tape.

This is a process that, in its present form, has stretched across at least four prime ministers and three changes of federal government.

Leaving aside so many other examples that could be raked up, who can claim that CoAG has efficiently delivered the energy policies Australia must have for progress in the 21st Century?

Energy policy is serious business and here, as elsewhere, the community literally can’t afford for it to continue to be a political football, but it is hard to see who is going to start driving the sea change that is so necessary.

Keith Orchison

1 May 2013


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