Issue 121, May 2015

Welcome to this year’s fifth issue of the newsletter, writes Keith Orchison, as the RET row drags on, the regulator roughs up the energy network service providers (and vice versa) and the federal government pursues a carbon abatement target separately from its energy white paper.


From an editorial in the “Australian Financial Review” on 4 May: “It is seemingly impossible to disentangle energy policy from climate change policy – yet that is what the Abbott government tried to do with the energy white paper released last month.”

From the Energy Networks Association submission to the federal government task force considering Australia’s post-2020 carbon emissions target: “ (A decision) will need to consider the costs to 10 million grid-connected consumers of electricity, 4.5 million gas-connected customers as well as investors in infrastructure who include “mum and dad” investors and the superannuation funds of Australian investors.”

From the Australian Industry Group submission to the task force: “Whatever the mix (abatement) purchasing, regulatory and price instruments ultimately adopted, no policy will be effective with broad support from the community and across politics.”

From AGL Energy’s submission: “Long-term policy certainty is a pre-requisite for achievement of emission reduction targets. This is particularly the case for the power generation sector where there are large upfront capital costs and decadal asset lives.”

And from the Australian Academy of Technological Sciences & Engineering: “The existing heavy reliance on coal for power generation, the lack of gas on the east coast that could be utilized for high-efficiency centralized generation and the lack of the option of nuclear energy will make (choosing a target) a challenging task.”

Finally, from a commentary by Paul Kelly, editor at large of “The Australian,” on 4 May: “(A new research project shows) people ……realize the policy status quo is increasingly untenable yet they are apprehensive about the ability of the political class to make viable and fair changes.”


Six weeks ago the media believed a deal on the renewable energy target was likely before Easter; now the political reporters’ pick is that the Coalition and Labor will resolve the issue early in the Budget sitting period of Federal Parliament.

The popular choice for breaking the political impasse is a RET target of 33,000 gigawatt hours in 2020 – the existing legislated target is 41,000 GWh and the Coalition government has been holding out for 32,000 GWh.

The Clean Energy Council is still proposing 33,500 GWh after a long period in which it claimed anything below the existing target would be a disaster for green generation investors.

The Australian Chamber of Commerce & Industry, which last July said abolition of the RET is “the most desirable outcome” of the Warburton review, is now calling on the Coalition and Labor to strike a deal, saying 33,000 GWh would be “reasonable.”

The Greens, who describe the Abbott government as “a wholly-owned subsidiary of the coal industry,” continue to support a 41,000 GWh target and call for the “immediate closure” of 9,000 MW of coal-fired generation in the NEM.

Greens leader Christine Milne asserts that the NEM is “broken” and is urging new electricity market legislation “to meet the needs of a low-carbon economy.”

Market dilemma

AGL Energy has spelled out for a Senate committee examining wind farming the significant challenge for policymakers.

In a submission, one of 359 received by the committee, the company says that, until stable and long-term renewable energy policies are established and the over-supply of generation capacity in wholesale electricity markets is resolved, “it is unlikely that any material new wind developments will occur” because projects can’t receive sufficient revenue to be economically sustainable.

AGL, which has 1,766 megawatts of operational wind, hydro and bio-fuel generation in its capacity mix, says that, given the energy-only design of the east coast power market, it is “inconceivable” that investment in large-scale projects to meet the requirement of the renewable energy target will be forthcoming without resolution of NEM over-supply.

Significant additional investment in renewable generation will be required for further energy supply decarbonization, the company adds, but new development is not feasible without restoring investor confidence.

Reform ‘working’

The Abbott government is claiming credit for the electricity regulatory reforms launched in 2011-12.

Industry Minister Ian Macfarlane, who is the third federal minister to steer the CoAG Energy Council in pursuit of better network regulation (the other two were Labor’s Martin Ferguson and Gary Gray), says the Australian Energy Regulator determinations mean consumers will see price reductions as a result of the reforms.

“The government is delivering reforms to ease the pressure on households and businesses.”

Industry insiders point to the fact that bipartisan pursuit of reform, involving State and Territory governments, was almost derailed by Prime Minister Julia Gillard in late 2012 when she sought to make political capital out of public antipathy to soaring prices and threatened the Coalition-run administrations in Brisbane and Sydney with “a big stick” if they did not implement an approach the ministerial committee was already collectively crafting.

Despite such politicking, the Energy Council agreed on the regulatory changes and now, says Macfarlane, the AER has power to ensure networks charge “only for necessary and efficient costs.”

For a typical household or small business in New South Wales and the ACT, the regulator’s final determination, which comes in to effect on 1 July, will equate to bill reductions of five to 12 per cent.

This, adds Macfarlane, means an average residential customer will save between $100 and $300 a year.

He says the preliminary determination for SA Power Networks in South Australia means the State householders will see reductions around $200 in 2015-16. Queensland residential account-holders will get only $34 but this, Macfarlane points out, is because the State’s networks need to recover the cost of subsidies for rooftop solar power introduced by the Bligh Labor government (and continuing until 2028).

Macfarlane asserts the reforms have strengthened the regulator’s ability to question network business proposals, “including expenditure benchmarking and setting a reasonable rate of return on investment.”

They have also, he points out, provided consumer representatives with expanded opportunities to participate in the regulatory process.

Macfarlane adds that the reforms have ensured that judicial review of the AER decisions will now focus on the long-term interest of consumers as the most important consideration.

The federal government is eager to point out that the CoAG reform outcomes are supplemented by its success in repealing the Gillard government carbon tax and, via the Australian Competition & Consumer Commission, assurance that savings are being passed through to consumers.

The South Australian and Queensland network revenue determinations will be finalized later this year and Victorian assessments will follow next April.

The next Tasmanian network decision by the AER will be made in April 2017.

Not so fast

Energy network service providers are urging caution in pursuit of lower grid charges.

Energy Networks Association CEO John Bradley, commenting on the determinations delivered by the Australian Energy Regulator, acknowledges that lower bills will provide significant benefits to small and large users, but counsels greater efforts to “get the balance right.”

Unless this happens, he warns, there is a risk that high catch-up spending will be needed in the future and there will be renewed price volatility – in effect pointing to the past decade where network capex suppression in the first few years of the century was followed by a huge outlay that was the engine for east coast power bills doubling.

Bradley also points to a paradox: the regulatory regime has been overhauled to give consumers a greater say but, he argues, the latest AER decisions ignore network customer research results. He claims the determinations may mean service or cost impacts on which the regulator has not consulted consumers.

The ENA is telling the community and legislators that some of the funding cuts being imposed may put at risk safety, reliability and long-term efficiency of grids.

Network businesses, says Bradley, are already delivering savings by reducing their financing costs and efficiency programs while some States have removed inefficient planning standards and changes in demand growth have reduced requirements for infrastructure building.

The additional cuts proposed by the AER, he asserts, are taking money away from areas such as bushfire mitigation, vegetation management, the capacity of service businesses to react to unplanned outages and also system inspections and maintenance.

He claims that the regulator has locked in $1.8 billion in operating cost cuts over five years for the New South Wales and ACT networks without clearly demonstrating that adverse impacts on safety, maintenance and outage response times can be avoided.

Overall, he adds, the regulator in its final and draft determinations has targeted total funding reductions of some $6.5 billion.

Conboy stands firm

Although the ActewAGL CEO says the regulator’s claims of network inefficiency based on benchmarking are “rubbish,” the Australian Energy Regulator is standing firm.

AER chair Paula Conboy says her organization has “a consistent body of evidence” indicating that the New South Wales and ACT distribution businesses are not operating as efficiently as other businesses.

She argues that the final determinations for the State and the ACT, which the grid firms claim will require job cuts of around 2,700 people, provide sufficient expenditure for an efficient business to deliver safe and reliable service.

“Any costs above efficient levels will need to be funded by the owners, not customers,” she declares.

Conboy says there has been “an unprecedented level” of consumer engagement in the AER decisions. “On the whole, customers have told us that the levels of expenditure sought by the networks are not justified.”

In the case of ActewAGL, she argues that its distribution services could be provided at “substantially lower cost” and says the regulator is not satisfied that the Molonglo sub-station needs to be built in 2015-19.

The biggest impact of the AER determination falls on the nation’s largest distribution business, Ausgrid, which the NSW proposes to part-privatize.  The regulator has slashed its allowed revenue from $9,574 million sought by the business to $6,576 million. This includes a $686 million reduction in Ausgrid operating outlays over five years.

The regulator says benchmarking demonstrates that Ausgrid’s costs are “above what a prudent and efficient operator would incur in delivering services to its customers.”

ActewAGL and the NSW government have the opportunity in May to decide whether to challenge the determinations before the Australian Competition Tribunal.

Green costs

Queensland power network business Ergon Energy has provided a Senate committee investigating wind power with graphic arithmetic of the impact of green schemes on its customers.

Ergon says that, taken together, the carbon tax, the large-scale RET, the solar scheme under the RET, the State scheme supporting gas generation and the State solar feed-in tariff cost its user base about $1,580 million between 2010 and 2015.

It says this equates to an average liability per customer over the five years of $2,229 – and this would have been $2,654 if the federal carbon tax had not been scrapped last year.

The costs, it adds, represent about 8.5 per cent of the average regional Queensland household power bill.

Ergon Energy also points out that the Bligh government solar FiT scheme runs to 2028 and will add $89 to a typical residential bill in the new financial year – a charge that relates to the FiT costs incurred in 2013-14 because networks have a two-year lag in recovery these costs.

Wind performance

A Victorian government submission to the Senate wind farm inquiry says that a modern 2MW turbine installed in the State is capable of producing 6,880 megawatt hours (or 6.88 GWh) of electricity a year, equivalent to annual power consumption by 1,050 typical households in national terms.

This, the submission adds, can offset 6,880 tonnes of carbon dioxide that would be produced by coal-fired generation delivering the same amount of electricity.

Victoria’s brown coal power stations produce some 46,000 GWh a year of electricity and the black coal-burning plants in New South Wales some 57,000 GWh annually.

Meanwhile, the Energy Supply Association, in its Senate submission, reports that wind farm electricity output has increased nationally from 1,700 GWh in 2005-06 to almost 8,000 GWh in 2012-13, with wind capacity rising from 650 MW to 3,221 MW.

Elsewhere, the Australian Renewable Energy Agency has hailed installation progress at AGL Energy’s solar farm near Broken Hill, saying that the $150 million, 53 MW plant will contribute enough electricity to power 17,000 homes.

The development forms part of a $440 million solar project that is supported by $166.7 million from ARENA and $64.9 million from the NSW government.

Missing out

Both the Energy Supply Association and the Energy Retailers Association are lamenting the Queensland government decision to delay electricity retail price deregulation just weeks before it was due to be implemented, arguing “sooner is better” because consumers will miss out on benefits.

The Palaszczuk government says it has “placed on hold” the Newman government’s decision to deregulate in south-east Queensland (the Energex network franchise area) while a new State productivity Commission, yet to be set up, reviews electricity prices and proposes policy reforms.

State Energy Minister Mark Bailey says the inquiry “will need to balance a range of competing interests and seek to protect the interests of consumers.”  It will also “take in to account the need for a competitive electricity market, efficient investment in infrastructure and good environmental outcomes.”

The Queensland Competition Authority will now continue to set electricity tariffs for households and small businesses until further notice.

Treasurer Curtis Pitt adds that the proposed review will also consider deregulation for rural and regional Queensland.

The State LNP opposition has labeled the move “an excuse to avoid making a decision”

The Energy Supply Association CEO, Matthew Warren, says deregulation is “crucial” to develop more choice for Queensland power consumers. “Open and flexible markets will unlock the best deals and encourage the most efficient use of new technology in a rapidly transforming system.”

Electricity prices have risen more in Queensland in the past three years than anywhere else in Australia, he points out. By contrast, deregulation has seen a 9.1 per cent fall in power bills in South Australia and a 1.5 per cent reduction in New South Wales.

The Energy Retailers Association CEO, Cameron O’Reilly, adds that regulating prices has not protected customers in the past, pointing out that most of the end-users’ bills are made up of wholesale costs of energy and network charges to which are added the costs of green schemes like the solar FiT. “These costs have to be passed through by retailers,” he says.

O’Reilly points out that most south-east Queensland households have chosen to enter in to market contracts with retailers rather than stay on regulated tariffs. “Most Australian,” he says, “embrace the right to switch energy companies when given the choice in pursuit of a better deal to suit their needs and lifestyle.”

Flattening out?

Analysts Pitt & Sherry say April was the second successive month for increases in electricity demand and power generation in the NEM, raising the question of whether the long slide in consumption of recent years is now flattening out.

Pitt & Sherry say that the absolute fall in demand for electricity since 2010 has been largely driven by residential consumers, falling by 13 per cent between 2010 and 2014 after rising by two per cent between 2006 and 2010.

In the industrial sector, they say, even a fall in use by major companies has still left total demand in 2013-14 well above what it was in 2005-06.

Demand by the third largest segment of the market, general business, has remained almost unchanged over eight years.

Pitt & Sherry conclude that “the apparent end to falling total demand is mainly being caused by the end of falling residential demand.”

The analysts’ latest Cedex report also points out that 15.6 per cent of the electricity used in New South Wales in the 12 months to April this year has been supplied from Victoria and Queensland over the high voltage connectors, a record. In the year to April 2015, they say, NSW black coal plants produced 75 per cent of State demand while Victorian brown coal generators exported power to Tasmania and South Australia as well as NSW – their output actually represented 101 per cent of Victorian demand.

Brown coal generation for the east coast grid reached 24 per cent in April, its highest contribution since September 2012,

Wind generation in the year to April reached a NEM 12 month record of 9,180 GWh or 5.25 per cent of east coast plant output.

Snubbed by Hunt

Federal Environment Minister Greg Hunt stayed away from a meeting in Adelaide in early May convened by the South Australian government to discuss carbon emissions abatement.

The West Australian and Northern Territory governments also did not attend and the New South Wales and Tasmanian governments sent public servants rather than ministers.

Media reports say the meeting agreed to collaboration between jurisdictions to drive the uptake of large-scale renewable energy and to pursue the harmonization of energy efficiency measures.

Meanwhile Hunt and Foreign Minister Julie Bishop are pursuing “stakeholder meetings,” starting in Sydney, on the setting of the country’s next national greenhouse gas emissions reduction target.

The Grattan Institute’s Tony Wood is urging the government to adopt a post-2020 target of between 15 and 20 per cent for 2025 – compared with the current bipartisan goal of five per cent below 2000 levels by the decade’s end – and is arguing that a fixed long-term target will be “poisonous to decision-making in general and long-term investments in particular.”

The Climate Change Authority has recommended the government adopt a 30 per cent target for 2025 to be followed by a 40 to 60 per cent goal for 2030.

The institute argues that this is “unrealistic.”


Last word

Steering the ship of state through a sea of uncertainty with respect to carbon abatement and energy security policies is a devilish task that has not to date produced navigation of a high standard from either of Australia’s mainstream political parties.

This is not a problem unique to these two areas; a report this month in “The Australian” of community perceptions, thrown up by research undertaken for the Business Council, highlights that the current level of faith in governance generally is the lowest it has been in 30 years.
For 18 per cent of those consulted, the competency of government is a major concern.

This, as the BCA points out, is flowing in to one-term governments, minority governments, “poll-to-poll decision-making” and “disruptive policy reversals, with newly-elected governments claiming as ostensible mandates what is actually an expression of underlying frustration and cynicism.”
We need leadership, the Business Council declares, to define the path between current reality and future aspiration.

Nowhere is this more clear than in energy policymaking and its Siamese twin, carbon abatement policy.

Investor anxiety in the energy industries about short-term political expedience leading to poor outcomes for both companies and consumers (whose backlash over issues such as soaring prices serves to spook politicians in to further panicky reactions) is now at a significantly high level.

Evidence for this is easily found in reading submissions to the score of energy-related government and parliamentary inquiries that have been launched in just the past five years.  

The sense of corporate and industry lobbyist frustration is clearly on display, but still the reviews keep coming (an egregious example right now being the new Queensland government’s initiation of another inquiry rather than getting on with retail price deregulation).

Trapped in a vicious cycle of mistrust, policymakers and their advisers either opt for timidity in decision-making or madcap attempts to pick winning approaches that end up simply serving to reinforce community apprehension.

Speaking more generally, “The Australian” commentary complains that the behavior of the body politic leaves the public without a sense of any over-arching plan or narrative.

This is certainly true about the carbon and energy twin areas of policy.

The public debate resounds with rhetoric in each area about intent to do good – downward pressure on prices and strong action to achieve abatement, for example – but the reality is an almost continuous clash of interests with the situation made worse by the “Animal Farm” style chanting on the sidelines of ideologues, radical activists and self-interested players, megaphoning their noise through social media.

(How far different is “Four legs good, two legs baaad” from “renewables good, fossil fuels bad”?)

Not surprisingly, there is a growing view in some quarters that the answer may be a National Energy Commission, an independent statutory corporation reporting to the Council of Australian Governments with power to define long-term strategy, to review policies, to oversee their implementation and to monitor outcomes.

How far this move is politically feasible in the current environment is a good question but one thing is clear: if carbon abatement and energy management continue on their present courses, a shipwreck is a near-certainty.

Keith Orchison
7 May 2015


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