Coolibah Commentary

Issue 133, May 2016

With a long drawn out federal election off to a fast start, writes Keith Orchison, the hills (and every other bit of Australia) are alive with the sound of chin music – with claims and counter claims about energy and carbon policy currently front and centre. Meanwhile companies and bureaucracies continue to chip away at the multitude of issues affecting supply.

Back to future

Labor has re-ignited the carbon war of 2010-13 with publication of its long-signalled, re-warmed suite of carbon policies, immediately attacked by the Coalition for threatening a substantial increase in power prices – and criticized by a large part of the business community for being too ambitious with its national emissions abatement target and its renewable energy target.

In what has been labeled in some media a “jump to the left,” Labor is promising to increase the abatement target to 45 per cent below 2005 levels by 2030 (versus the Coalition’s 28 per cent), to lift the RET to 50 per cent by 2030 bolstered by government power purchase agreements, to impose an emissions trading scheme on fossil-fuelled power generation and to launch an inquiry in to “electricity modernization.”

Labor’s environment spokesman, Mark Butler, says “there is a pressing need to start a very difficult process of decarbonizing our electricity sector,” which, he points out, will have two-thirds of its generation fleet more than 40 years old by 2030 on present trends. Policy, he says, “needs to deliver an orderly process of closing down coal-fired power stations.”

According to Bloomberg New Energy Finance, the Labor RET plan would require more than $48 billion to be spent over 14 years building 25,000 megawatts of large-scale renewable generation. The Grattan Institute estimates up to 10,000 extra turbines would be needed if the goal was wholly met by wind power.

Reacting to the ALP announcement, the Business Council says “the last thing Australia needs is to start (again) from scratch on carbon policy” – but it sees the Labor plan as having the potential to “provide a platform for bipartisanship to deliver energy and climate change policy durability.”

The BCA adds that “it is disappointing” Labor is “taking a gamble (in) committing Australia to a 45 per cent emissions reduction target without a full understanding of the costs.”

Real challenges

The Australian Energy Council says the Labor climate change plan “reveals the significant investment and systemic challenges” facing efficient transformation of the energy industry.

Council CEO Matthew Warren has welcomed Labor’s support for a market-based approach to emissions reduction and its recognition of the need for more planning to integrate higher levels of renewables in to the power grid – “a major technical challenge.”

Warren adds: “This transformation will not be costless. It will require at least $230 billion in new generation investment by 2050.”

The Energy Networks Association says outcomes of the ALP plan for customer bills and supply reliability will depend on how it is implemented. “It’s too soon to judge how an emissions trading scheme would work together with a specific renewable energy target of 50 per cent,” comments CEO John Bradley.

“Renewable energy is just one tool in the toolbox of energy sector abatement, which also includes demand management, low emissions fuels like gas and biofuels and carbon capture and storage,” he adds.

Research for ENA by consultants Jacobs has shown that community costs from a 50 per cent RET are likely to be higher than a fuel-neutral approach to abatement, Bradley says.

The Minerals Council warns that the Labor approach “poses the risk of significant electricity price rises with adverse consequences for the competitiveness of the export sector and the broader economy.” A better course would be to allow all low emissions energy sources to compete.

The MCA adds that Labor has ignored the transformation under way in global coal generation with new plants capable of delivering baseload energy with a 50 per cent reduction in emissions. “Labor has apparently ruled out any role for nuclear power.”

Meanwhile the Greens declare that ALP policy “still fails to address the urgent need to phase out coal.”

Brown coal ‘pinched’

The move in its new budget by the Victorian government to treble the royalty on brown coal will add $2 per megawatt hour to the cost of power generated from the fuel.

The Australian Energy Council says the rise, to be implemented next year, will shift the royalty impact up from $1 per MWh to $3. It calls the step “a significant tax increase that will either be passed on to consumers or impair businesses expected to reinvest in the decarbonisation of electricity.

Council CEO Matthew Warren says: “This will be the most expensive royalty in Australia.

“If the businesses can’t pass the cost on, it will simply come off their bottom line and impair their ability to continue to invest in new cleaner generation.  Yet the businesses at which this tax is aimed each have a demonstrated commitment to investment in renewable power generation.

“Pinching revenue from already marginal businesses does nothing to assist in (the) considerable investment challenge (from now to 2050).

“The energy industry supports an efficient, national approach to reducing emissions.  Big increases in state-based taxes such as this are a step backwards.”

Grattan Institute energy director Tony Wood says that, despite the royalty move, brown coal will still have a significant cost advantage on a fuel basis in the east coast power market.

The Minerals Council of Australia claims the impost will “no doubt increase costs to consumers.”

The Victorian government estimates that the rise will garner it $252 million over four years.

Search for sensible

Peter Coleman, CEO of Woodside Energy, has told media on the sidelines of a university conference in New York that Australia should be seeking to inspire a “sensible policy debate” globally, given that this country is “overwhelmingly a net exporter of energy.”

Coleman told the conference that gas and renewable energy should be seen as complementary. “Where renewables are weak, gas is strong – and vice versa – and together (they can) provide a reliable system.”

Coleman said energy security requires countries to get away from picking winners and the gas industry, he added, needs to stop seeing renewables a threat – “we need to see it as complementary to our offering and how we can work together in the future.”

He said the industry is in a five-year period of uncertainty “and we are in for a heck of a ride; the margin for error is very small.”

SA price warning

The Business SA lobby group says South Australian wholesale electricity prices have surged 25 per cent in nine months and “will soon flow through to household and small business power bills.”

The association says the rise is already imposing “a substantial cost burden” on the State’s energy-intensive business consumers, including food and beverage manufacturers and irrigators.

The State’s media have been quick to point out that South Australia already has “some of the highest power prices in the world.”

Analysts have estimated that the State’s wholesale prices may rise as high as $90 per MWh by 2019 compared with current costs of up to $41 in Victoria and $48 in New South Wales.

Leigh Creek Energy says that it is investigating building a 300 to 600 megawatt power station at the coalfields 550 kilometres from Adelaide to use in-situ coal gasification.

The project costing up to $2 billion in total, including pipelines, would also provide gas for fertilizer manufacture and interstate supply. Hong Kong-based Shanghai Electric is a partner in the project venture.

Nuclear ‘insurance’

The Business Council has called for nuclear energy to be considered as an “insurance policy” for Australia’s future need to manage the higher costs of low-emissions power generation.

In a submission to the South Australian nuclear royal commission, which is due to hand down its final report in May, the BCA has called for a nuclear energy regulatory framework to be prepared and work to begin on it “as soon as practicable.”

“Given Australia’s stable geological, social and political framework, nuclear power should not be categorically ruled out,” the council says, noting that a study it has commissioned from Bain & Co warns that future abatement concepts for generation “lean heavily” on the assumption that the cost of solar power will continue to decline rapidly and on LNG exports leading to only “relatively modest” increases in domestic gas prices.

The Bain report comments that “Australia’s electricity sector is in the early stages of the greatest technological disruption in its history.”  It also says that a fast transition in which coal-fired generation is phased out by 2035 will be “risky and costly” unless the performance and costs of grid-scale solar energy and battery storage change faster than currently expected.

Reliable, grid-scale lithium-ion batteries are expected to be commercially available by 2030, Bain say. “If this development fails to materialize, penetration of solar and wind energy will be limited.”

The consultants’ modelling allows for national electricity demand to rise by an average one per cent annually to reach 300,000 gigawatt hours a year in 2050.

Right to worry

The Australian Industry Group says the gas inquiry report from the Australian Competition & Consumer Commission shows that gas users have been right to be worried about the east coast market. “The story that the ACCC tells is one that should galvanise attention and action from all levels of government,” it declares.

AiG says the report shows the market is opaque, that competitive dynamics south of Queensland are deteriorating and “there are significant risks to supply.”

It argues that "Local supply of gas is being buffeted as gas exports take off; international oil prices crater investment; and regulatory barriers and community concern further choke resource exploration and development.

“The headline that identified reserves are adequate to meet projected demand is important and reassuring. But there are many hurdles in the way of those reserves being brought to market in full and on time. Replacing blanket bans with smart, effective regulation of onshore gas development will help over the medium term and should be a priority for the States and Territories.”

The Australian Petroleum Production & Exploration Association says the ACCC report “confirms the urgent need for policy and regulatory changes to enhance gas supply.”

APPEA chief executive Malcolm Roberts asserts the report highlights that “the greatest risk to the market is regulatory failure, not market failure.”

He adds: “Australia has ample gas resources to supply domestic and export markets – if industry is allowed to develop them. But, at a time of unprecedented demand, government policies risk creating an artificial shortage of gas and higher prices.”

Roberts says the CoAG Energy Council must give regulatory reform priority.

The Energy Council, after meeting with the ACCC chairman, Rod Sims, says it has been giving gas sector reform “a priority” for two years and acknowledges that the commission “rightly notes” that even the best-designed markets will falter without gas to trade.

It aims to deliver a plan in mid-2016.

Spaghetti junction

Mark Coughlin, leader of the energy, utilities and mining consulting activities of PricewaterhouseCoopers in Australia, has called for “an informed and unemotional debate” about the future of energy as we head in to the federal election.

Speaking at a forum to launch the 2016 On Power yearbook, Coughlin commented that the electricity industry is at “a spaghetti junction” of changing technologies, shifting customer expectations and “policy quicksand.”

Decline ends

Analysts Pitt & Sherry say “there is little doubt that the period for falling demand for electricity across Australia has now ended,” pointing to consumption increases in the east coast market for 13 months in succession as well as the seventh successive month of a rise in Western Australia.

Demand has increased in every State except Tasmania – where the Basslink failure and supply crisis continues to have an impact.

Queensland consumption has been pushed up by the LNG industry and “abnormally high average summer temperatures” are seen to be a key factor in the other four mainland States.

Pitt & Sherry say that total annual demand in the NEM is now 2.5 per cent higher than the low point registered in the 12 months to February last year. “Sustained growth at this rate was considered normal in the electricity industry up to about 2004 but, until now, has not been seen since.”

The firm’s Cedex report records an increase in electricity demand, generation and emissions from the sector in the year to March 2016 that, the analysts add, has been the general pattern for 17 months. Annual generation emissions in the NEM for the year to March, they say, were five per cent higher than in the financial year 2013-14.

Black coal generation met 53.1 per cent of NEM demand in the 12 months under review, with brown coal plant delivering 23 per cent and gas 10.7 per cent.

Tariff reform

Australia leads the world and Queensland leads Australia in the market penetration of rooftop solar panels, but better electricity tariffs are needed to support consumer fairness, says the Energy Networks Association.

In a submission to the Queensland Productivity Commission inquiry in to solar feed-in tariffs, ENA urges rewards for customers helping to reduce peak power demand.

The association supports the QPC draft finding that “blunt feed-in tariffs” are not an efficient mechanism to deliver emissions abatement or power network savings. All customers will end up paying more for subsidies not focused on efficient emission reductions and lowering supply system costs, it says.

“The electricity grid is the backbone of the energy system, the submission adds, “and it is a vital platform for integrating renewable energy sources. By rewarding customers who reduce peak demand, we can encourage the best use of solar panels and battery storage and reduce cross-subsidies between customers.”

Bigger grid

South Australia’s Minister for Climate Change, Ian Hunter, is calling for new high voltage transmission investment to enable intermittent energy (like his State’s wind and solar power) to be despatched interstate.

Hunter has told a conference in Sydney that a stronger link between SA and New South Wales and a second interconnector between his State and Victoria should be built. NEM rules about grid development should be changed.

Meanwhile an announcement by Prime Minister Malcolm Turnbull and Tasmania’s Premier, Will Hodgman, of a Canberra-supported feasibility study of a second Basslink has been welcomed by the Clean Energy Council, which says “a strong electricity network is crucial to deliver a smarter and more flexible system that could transport renewable energy to where it is needed.”

The CEC says the announcement will “set a benchmark to better assess other opportunities to improve the interconnection of the energy system across the country.” 

It adds that this could help ever-greater amounts of renewable energy from South Australia to be “easily integrated.”

Turnbull says a $1 billion Basslink 2 project could be commercially viable with private sector support “because it offers opportunities to sell hydro and wind power to the mainland on a much larger scale.”

The feasibility study is due to be completed by the year-end, with a preliminary report to be provided in June.

Hydro Tasmania says it has been working with the Tasmanian government for 18 months on the prospects for Basslink 2.

The announcement coincided with the existing link operator saying that 1,355 metres of new cable has been laid on the seabed as part of the repair of Basslink and the project is on track for completion next month.

Last word

I remember reading sometime last year one of the more prominent local environmental campaigners opining that “fossil fuels are finished; the rest is mere detail.”

As sweeping generalities go, I thought then that it was worth a gold medal – and never a week goes by without something cropping up to underline that the “mere detail” is much more a mountain than a molehill. In fact, a whole mountain range.

There’s been an example of why this is so recently at the talking shop on the hill in Canberra.

Among the multitude of inquiries the Senate has been pursuing is one in to the future of the “strategically vital” (to quote the terms of reference) steel industry – and among the submissions it has received is one from BlueScope Steel, which, the company points out employs 7,500 people in Australia, part of a supply chain providing 90,000 jobs.

More than 80 per cent of BlueScope’s greenhouse gas emissions, the submission said, comes from the use of coal and coke as chemical reductants and energy sources in the ironmaking process. “There are,” it asserted, “currently no proven and commercially viable technologies to replace coal/coke in the blast furnace/basic oxygen furnace iron and steelmaking process.”

The line BlueScope takes on climate change and energy policy is pretty much the standard one run these days by members of what Rudd and Gillard’s governments routinely excoriated in their brief heyday as “big polluters,” not a term that seems to have much currency any more outside attacks on coal-fired power generation.

“We support measures to reduce emissions on a global basis,” said BlueScope chief executive Mark Vassella in the Senate submission. “Policy to achieve Australia’s emissions target must not be ‘one size fits all.’ It must take account of our national circumstances and the differing technical and financial capabilities of each sector to reduce emissions – as well as the sources of each sector’s trade competition.”

This is not new; it’s been a core point of resources and manufacturing industry argument since the 1990s when I was running the national electricity lobbying body and helped to establish the Australian Industry Greenhouse Network, which, at its inception, represented 14 sectors.

It remains one of the most important of the “mere details” that radical environmental campaigners still ignore or try to brush aside in their soundbite efforts to win the hearts and minds of voters, a task that will be ratcheting up across the country in the long federal election campaign now launched by Malcolm Turnbull.

Vasella and BlueScope argued in their Senate submission that, in establishing carbon targets and the policies to achieve these goals, the size of which is an important Labor and Greens campaigning stance this year, five points are critical:

Vasella added that, if all known lower-carbon technologies were implemented by BlueScope, “they could potentially deliver a modest reduction in our emissions (but) this would require many hundreds of millions of dollars and could have considerable technical and financial risk.” 

In the current global steel trading environment, he said, “there are few if any companies that can afford such investment.”

More than 85 per cent of the flat steel Australia imports, he pointed out, comes from countries that don’t have mandatory emissions trading schemes or carbon taxes imposing direct costs on makers. And more than 75 per cent of BlueScope’s exports from Australia go to countries, including the US, that do not impose direct carbon costs on their steel industries.

Going down this path, Vasella argued, does not represent “cost effective emissions reduction.”

Both Labor and the Coalition, of course, have quite recently acknowledged this point by agreeing to exempt emissions-intensive, trade-exposed companies from the renewable energy target, a step Vassella noted saved BlueScope $5 million in the past year alone.

The broad argument here is not that Australia shouldn’t be pursuing greenhouse gas abatement but that the target has to be trimmed to local circumstances as part of a global effort (something that seems to have gained new impetus after the UN summit in Paris last December).

But the game our politicians play – whether Labor, Greens or Coalition luminaries like Greg Hunt – is to accentuate aspects and issues of abatement that hit the spot with the large (and growing) number of “post-materialists” in the big cities and some key regional areas. These are folk I saw a Monash University academic characterize the other day as “social progressives who have views over a range of issues that have nothing to do with the vagaries of the industrial economy.”

Elsewhere, of course, these politicians have no hesitation is playing compassionate cards when large industrial sectors such as automotive manufacture and shipbuilding are driven to close plants and shed big numbers of jobs.

The links between jobs, the economy and anti-fossil fuel campaigns are not “mere detail” but the carbon/energy debate mostly rolls on as if they were.

Keith Orchison

1 May 2016

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