Issue 103, November 2013
Welcome to a new Coolibah newsletter, writes Keith Orchison, as we near the end of a very eventful year, but with more to come before Christmas, including a federal report on east coast gas supply and the first manoeuvres in Parliament over the demise of the current carbon tax/clean energy program legislation. Resolving the New South Wales gas supply imbroglio remains top of the agenda with the window of opportunity for a timely solution getting ever tighter.
Industry Minister Ian Macfarlane has committed the new Abbott government to developing a gas supply strategy out to 2020 for the east coast.
Addressing the Energy Users Association annual forum in Brisbane in mid-October, Macfarlane acknowledged that significant electricity and gas price rises over the past five years have had a substantial impact on the cost of doing business in Australia.
He told EUAA members “there is enough gas in the ground to supply both the domestic and export markets – what we need is timely investment to get this gas to market and a regulatory environment that supports rather than hinders development.”
He declared that decisive action on gas supply is a vital part of delivering improved national economic productivity.
However, he dashed any lingering hopes from the manufacturing sector that a federal approach will include reservation of gas for domestic use.
“The Coalition will not consider any retrospective or blanket domestic gas reservation policy,” he said.
On the new energy white paper, which the Coalition has promised to produce, declaring itself dissatisfied with the Labor version published in December last year, Macfarlane told the EUAA forum that he wants its focus to be on “economy-wide reforms relevant to the energy sector, including streamlining regulation, improving workforce development and stimulating research and development.”
Meanwhile retiring Origin Energy chairman Kevin McCann has told his final annual general meeting that Australia must develop a comprehensive energy policy.
“The increasingly interconnected nature of energy supply, both domestically and internationally, requires this,” McCann said, urging that the policy should embrace “freeing and encouraging resource development,” maintaining “appropriate” environmental protection and reducing the cost burdens on consumers.
“Origin,” said McCann, “has long advocated that the greatest economic benefits for Australia will be realised by allowing all resources, including natural gas, to flow to their highest value use.”
The electricity supply sector is starting to hit political roadblocks in its attempts to change the network costing arrangements to take account of the impact of rooftop solar photovoltaic arrays on the system.
Both Senator Nick Xenephon and Rob Stokes, the New South Wales government’s parliamentary secretary for renewable energy, have spoken out against changing tariffs for households that have already purchased PV systems.
Xenephon told the Eastern Australia Energy Market Outlook conference that he is against any such move being “retrospective” while Stokes, writing in Fairfax Media, describes attempts to have solar system owners pay more than others as “unfair” and “discriminatory.”
“I cannot imagine anyone seriously arguing that households with air-conditioners should pay more network costs than other customers,” writes Stokes.
“The idea of slugging solar households for extra network costs is bad politics,” he adds.
A University of Queensland Global Change Institute paper warns that shifting generation to domestic and small business consumers – what it calls “democratising generation” – imposes a cost burden on customers overall.
The paper, the third in a series examining the competitiveness of Australia’s power system, focuses on ways to transition Australia to a “resilient power economy in an age of uncertainty” at reasonable cost.
It urges policymakers to “pursue the middle ground” and to concentrate on increasing the diversity of generation, decreasing carbon emissions from generators, pursuing electricity storage options and improving network efficiency.
The current structures of the renewable energy target and the carbon price do not encourage investment in energy sources other than wind and gas, the university authors argue.
They call for new coal-fired plant to only be licensed if it “meets world-class efficiency and environmental standards” and is fitted with carbon capture and storage technology – and they urge policymakers to “invest in community consultation on the acceptance of nuclear power” and on the siting studies and regulatory arrangements needed to enable the use of reactors.
The deployment of nuclear energy depends on “winning over an uncertain public,” they add.
“Funds from polluters,” the paper urges, should be used to invest directly in utility-scale carbon dioxide abatement and to minimise consumer costs of cutting emissions.
The UQ authors say that it has become clear from their studies that shifting from coal power to gas-fired supply is unlikely to improve the resilience of the Australian electricity system and its cost competitiveness or to reduce gross emissions by 2035.
They argue that Australia needs a power technology portfolio strategy that enables policymakers and suppliers to keep options open and “avoid the trap of an energy impasse.”
In Australia today, they point out, carbon price legislation encourages investment in gas generation and the RET encourages building wind farms, but “there are few policy levers to encourage significant diversification to industrial scale solar power, storage, biomass and other forms of generation.”
They call for a coherent long-term policy framework for Australia that focuses on “a managed transition to a more resilient power system at the lowest possible cost rather than a revolution.”
Economist Jon Stanford, speaking on the Eastern Australia Energy Market Outlook panel discussion on nuclear energy, said modelling undertaken for the federal government showed that, without reactors, half of electricity supplied to the "NEM” in 2050 will still be fossil-fuelled, mainly combined cycle gas turbines, some with carbon capture and storage.
The Gillard government’s white paper, he pointed out, had dismissed nuclear, saying there was no economic case for it in Australia while CSIRO modelling had excluded it from the 2050 default scenario but its “eFutures” model allowed others to evaluate the technology – which he had done.
Stanford, director of Insight Economics, said his version showed that nuclear energy could be introduced to the “NEM” just before 2030 and could provide half the market’s power supply by 2050.
This would enable an 85 per cent emissions abatement achievement from the electricity sector mid-century compared with 65 per cent under the official scenarios, delivering community benefits by reducing the cost burden on emitting sectors and thereby underpinning higher living standards.
Trade union leader Paul Howes has thrown down the gauntlet to his Labor Party to switch from supporting opposition to NSW gas development and to lead a drive to the middle ground on the issue.
In a fiery speech to the Eastern Australia Energy Market Outlook conference at the end of October, Howes, national secretary of the Australian Workers Union, demanded that NSW Labor “move forcefully to occupy the rational middle ground,” saying this had been left “wide open” by the O’Farrell government in its efforts to appease CSG development opponents.
It is not being Labor to stick up for the demands of “a tiny group” of opponents above the interests of “average working people,” he argued.
“Taking a wilfully obstructionist approach to developing NSW gas resources is a fundamental betrayal of Labor values.”
Decisionmakers in NSW have “made a complete hash of this issue,” Howes declared, also attacking the former federal Labor government for establishing a water trigger in the Environmental Protection & Biodiversity Conservation Act prior to the September election.
Howes added that exploitation of the State’s CSG resources “does not require entering in to some sort of Faustian trade-off” in which environmental protection is abandoned.
He deplored the fact that mainstream politicians have allowed “extremists” to define the phrase “coal seam gas” as synonymous with environmental destruction – and argued that the debate has demonised a fuel that offers a partial solution to addressing the biggest environmental challenge, global warming.
“A single gas well on a 15 metre square plot can produce the (energy) equivalent of 85,000 tonnes of coal,” he said.
“The only thing that is clear in all this confusion,” Howes told the conference, “is that we will never get anywhere close to where we need to be on gas so long as we yield to fringe interests. It’s the sensible middle’s responsibility – and therefore the responsibility of both major parties – to step up on this one.”
In answer to a question, Howes said he supported the call by the Australian Energy Market Commission for governments to develop a strategic plan for gas market development focussed on the next 10-15 years.
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If I have learned nothing else from 33 years engaged in communicating about Australian energy issues, including 25 years as CEO of two national energy industry associations, it is that context and “joining the dots” really matter.
It’s impossible to do this adequately in any one commentary even for the electricity supply chain, which is just one part of our domestic energy scene,albeit a very important one, so, I think, the answer is to do so in a continuum of thought-sharing and identifying real news rather than noise.
This is the key thought behind a new venture I have just launched with leading corporate design and communications company ArmstrongQ.
It is a combined on-line and print project focussing on east coast electricity supply, which accounts for 90 per cent of Australian demand and up to $40 billion a year in capex and opex.
With OnPower, ArmstrongQ and I are offering immediacy of key information plus well-informed comment on the Web plus a new version of a well-regarded annual of the power sector through a yearbook.
How information is presented really matters in the modern world and I am especially pleased with the high quality of design that the ArmstrongQ team has brought to the project.
I know from hundreds of contacts with energy sector stakeholders each year that one of the things they most value is ready access to news and commentary from a well-informed source as they work to cope with a highly uncertain business environment – and they also value this communications stream flowing on to other stakeholders, including the body politic.
Part of the attraction of the On-Power yearbook to industry managers is that we will provide it to every Member of Parliament, federal, state and territory, as a useful reference on a topic that is high on their agenda because of the barrage of concerns coming from voters, activists, consumer organisations and large-scale users of power.
We are working to ensure that the content of the website is accessible to other stakeholders in energy than just the industry’s managers and consultants – too much of the debate in recent times has been conducted in engineers-speak or economist-speak.
Jaqui Lane, Publisher of OnPower, and I are working flat out at present to quickly build recognition of the website and associated yearbook as a value-for-money subscription service combined with free information in a range of areas.
I hope you will take the time to visit the website to find out about OnPower and I look forward to your support – a venture like this has to be commercially viable as well as drawing compliments!
Keith Orchison AM
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The upstream petroleum industry has jumped on research by the Australia Institute to point out that, on the think tank’s own polling, Australians are “almost 10 times more concerned about economic growth and development than they are about coal seam gas production.”
The Australian Petroleum Production & Exploration Association says the institute’s survey – used to criticise APPEA’s ongoing promotion of CSG – throws up that concerns about gas development rank 13th out of 15 issues in the poll, with two per cent of respondents saying it is their top concern versus 18 per cent ranking economic issues as the subject most requiring politicians to take action.
The institute survey also found that 36 per cent of the survey’s 1400 respondents had not heard of CSG and 81 per cent said they didn’t know the difference between CSG and LNG. Despite this, the survey claims, 56 per cent of respondents oppose CSG development on agricultural land even if landowners consent to it.
The major energy industry associations are deploring the state of the east coast debate on gas issues.
APPEA chief executive David Byers, responding to another foray in to the debate by the “Lock the Gate” activist group, is warning on the “danger of taking a simplistic and ideological view on a complicated issue.”
Benefits from the CSG/LNG developments are not disappearing overseas, as “Lock the Gate” and the Australia Institute claim, says Byers.
He cites a McKinsey & Co report showing that 69 per cent of gas sale revenues from LNG projects remain in Australia, with the developers “spending vast amounts on local goods and services.”
Energy Supply Association chief executive Matthew Warren says the debate is “descending into farce,” decrying “a conga line of opinions based on hand-picked factoids filling the debate with clueless self-interest.”
Looking at the NSW situation, Warren says a well-orchestrated, largely activist campaign has evolved to oppose development of coal seam gas reserves – with many of the opponents apparently against development on any terms.
He adds that the NSW government decision to impose a two-kilometre perimeter “around not only dwellings but also vineyards and even horse stables” has “shut down gas for manufacturers who are screaming for it.”
Warren comments that it is harder to see a genuine public outcry in NSW, pointing to the “Stop CSG” party receiving just 4,225 votes in the State in the recent Senate election. “That’s 0.1 per cent of the vote.”
Meanwhile the Australia Industry Group CEO, Innes Willox, says his organisation is not advocating handouts for struggling manufacturers to deal with the “gas crisis.”
This, he says, should be a “last resort” and “not something we are advocating.”
An October speech by the AiG chief executive was interpreted as suggesting that governments might have to pay handouts to manufacturers financially crippled by price rises for gas.
However, Willox says “Our focus is on lifting supply barriers threatening gas availability and to find ways for industry to weather the rise in prices.”
The AiG approach, he adds, includes calling for a national interest test to be applied before the export of gas from new facilities or from extensions of existing ones is permitted.
The association, he says, supports export of Australian gas but is concerned because “an unintended consequence (of LNG sales) is to push up gas prices in Australia, making local industry pay global prices for a resource we own here.”
Federal Industry Minister Ian Macfarlane is pointing to modelling by the Australian Energy Market Operator as a key influence on his concern that the NSW gas impasse needs to be resolved.
“I can produce 30 economic studies saying that there will be a gas shortage but the people I believe are AEMO (because) they are the one charged by the States and the federal government to tell us what the energy supply situation is,” Macfarlane has told the media after convening a meeting in Canberra in late October of activists, gas companies, landholders and members of parliament for areas at the centre of the controversy.
“AEMO predicts there will be a shortage in the market and that gas prices will double to a point where businesses will close down in Newcastle, Sydney and Wollongong,” Macfarlane declared.
“In NSW the expectation is that the price will exceed $12 per gigajoule simply because there (will not be) enough gas in the market.”
He added that this will not occur as a reflection of international prices but because of a local shortfall.
“There will be a $4 to $5 premium on gas in NSW. We want to get rid of this because we want to keep industries in NSW competitive.”
$4.5 billion project
The biggest upstream petroleum project in southern Australia, the $4.5 billion Kipper-Tuna-Turrum offshore development in Bass Strait, has begun flowing gas and oil.
Operators ExxonMobil says the project includes conversion of the existing West Tuna facilities and the addition of two new pipelines to link its output to the existing Bass Strait gas-gathering grid.
At construction peak, 1,300 people worked on the development, which has delivered $2.8 billion in Australian content purchases.
Gas from the Turrum field is due to flow in 2014 and the Kipper oil and gas field will be brought on stream in 2016 after mercury scrubbing facilities are completed at the onshore Longford processing plant.
ExxonMobil says that project will help maintain gas production levels from the Gippsland Basin fields that have now been operating for more than 40 years.
Meanwhile, Kerrie-Anne Lanigan, gas and power marketing director of Esso Australia, has told the Eastern Australia Energy Market Outlook conference that developing more gas storage facilities should be pursued.
Lanigan said storage near demand centres could be filled during the summer months of lower consumption.
“The prize for the southern States,” Lanigan added, “could be in the order of 20 to 50 petajoules a year of additional supply simply through using infrastructure more effectively.”
She said Australia needs a multi-faceted approach to the gas supply situation, including bringing on new resources, adding to storage capacity, resolving market trading issues and addressing policy and regulatory reform.
AGL Energy economist Tim Nelson says that, apart from investment in renewable energy enforced by the RET, there is not likely to be any new development of power generation on the east coast this decade.
Speaking to the Eastern Australia Energy Market Outlook conference, Nelson observed that government policy “has been very successful in encouraging new investment in power generation in the ‘NEM’ – almost all new capacity over the past decade has received some form of subsidy.”
But, he said, the combination of the “energy only” market and government incentives has “created a significant distortion.”
The current over-supply of generation in the “NEM,” he said, “is almost the exact quantum as capacity added due to government subsidies.”
Politics, he added, “is very good at adding capacity but has ignored the resulting market over-supply dynamics.”
Continued development of renewable generation in a market of flat demand growth will further increase over-supply, he said.
It is unclear whether barriers to generators exiting the ‘NEM” exist, Nelson argued, but one important factor is “first mover disadvantage” where a power station operator makes other companies better off through a tighter supply/demand balance by shutting down.
He also pointed to expensive site remediation costs as a key issue for companies considering shutting generation.
Policy uncertainty, he said, remains an important factor.
“Will there or won’t there be carbon pricing long term? Will demand growth pick up due to interventionist government policy?”
Meanwhile, AGL’s main market rival, Origin Energy, used its annual general meeting in October to argue that the federal government review the effectiveness of the RET next year.
Chairman Kevin McCann said the company believed the 20 per cent target for the scheme, which Origin supported, “is already nearly met.”
Consultants Pitt & Sherry say demand for electricity on the east coast was seven per cent below the December 2008 peak in the year to September 2013. They report that New South Wales demand, which is the main influence on the falling trend, has reduced by 6,000 gigawatt hours annually since 2009.
The displacement of coal by wind, hydro, and gas generation, coming on top of the fall in demand, saw emissions down by 29 million tonnes, equal to nearly 16 per cent, over the same period.
Can the national electricity market, as currently designed, cope with the stresses imposed by policy interventions to drive clean energy and the parallel reaction of users to strong price spikes?
The question was on the minds of the 160 participants in the Eastern Australia Energy Market Outlook conference staged in Sydney at the end of October.
Co-chair Ed Willett, now retired as a commissioner of the Australian Competition & Consumer Commission, queried how well the “NEM” could be managed not only to continue to improve it but to avoid it “going backwards” in the present environment, pointing to the “compromised” UK market, which was the template for the local design.
ESAA chief executive Matthew Warren said that the key functions of the “NEM” are to dispatch electricity to meet demand at the most efficient price and to trigger generation investment as needed through response to price signals. Wholesale power prices in 2007 had triggered a round of gas plant developments “which are now increasingly unviable,” he commented.
One of the key present issues, he added, is that the renewable energy target, in its present mode, is likely to deliver 28 to 30 per cent of electricity demand in 2020 rather than the 20 per cent originally proposed.
Warren highlighted recent developments in the European Union, citing the Magritte Group, to underscore the risks confronting the “NEM.”
The Magritte Group of 10 CEOs of major EU utilities, which together have half Europe’s generation capacity, issued a dramatic warning to governments in October that security of power supply is under threat because of the region’s clean energy programs.
The CEOs, who named their group after initially meeting in an art gallery, says policy reform is needed to ward off blackouts and to help them cope with the financial problems they are now facing. They assert that the EU environment policy is failing and that rising power bills are undermining European industry competitiveness.
They blame political actions and “misguided subsidies” for solar and wind for what consultants Capgemini are calling “market chaos.”
Some 51,000 megawatts of gas-fired plant are now in mothballs in the EU and the consultants warn that the remaining 80,000 MW of gas generation is not recovering its fixed costs and is at risk of closure by 2016.
A very cold European winter could lead to serious energy supply and electricity grid balancing problems, Capgemini say.
Germany has recently increased the renewable subsidy paid by mass market consumers to 18 per cent of the final bill, further distorting the largest single market in Europe.
Utilities complain that this and policies in other EU countries mean that more than 50 per cent of the power bills Europeans are now paying have nothing to do with generation or network costs.
The Magritte Group is calling for a Europe-wide system of paying utilities to keep fossil-fuelled capacity on stand-by – a step attacked by the environmental movement as a subsidy for fossil fuels.
New South Wales government-owned high voltage powerline business, TransGrid, has decided to stop work on a $227 million project on the State’s Far North coast.
TransGrid says the decision is driven by a planning review which has concluded that a new HV line in the area is now not required until the 2020s “or possibly later.”
The development has been highly controversial and opposed by environmental groups and some of the local community.
The Queensland government is sticking to its stance that its power distribution system is not for sale and insists it will not privatise other electricity assets without a tick from voters at the 2015 election.
Reiteration of the Newman government posture has come as a result of pressure from lobbyists Infrastructure Partnerships Australia for sale of all the taxpayer-owned energy assets, with IPA claiming that they could reap between $40 billion and $48 billion, more than enough to meet the need to cut up to $30 billion from State debt.
The government has indicated that it will ask the electorate at the next election to approve the generation sales but continues to rule out network privatisation despite rumors that it may be open to offloading its high voltage business, Powerlink Queensland, which IPA claims to be worth $10 billion.
It is an arguable point that we are living through one of the most dishonest periods of public debate (about issues generally not just energy ones) in Australian history.
Certainly, there are a large number of people contributing to the energy arguments who use all sorts of sleight of hand to promote their particular views.
Of course, there are many contributing honest endeavours in following their corporate and policy interests, but one only has to go to the media (whose own faults in reporting energy news and views are many) to see how the conga-line of meretricious players bearing factoids (see ESAA’s Matthew Warren above) continues to dominate the scene.
As a result, we end up with opinion polls in which members of the public hold two contradictory opinions simultaneously (e.g. the need to cut energy prices while pursuing large carbon abatement targets), testament to the lack of capacity of mainstream politicians to seize the middle ground (see Paul Howes above).
In passing, the ideological pressure for 100 per cent use of renewable energy on the east coast, based on claims that this charge is supported by a study the Gillard government (bowing to pressure from the Greens) required the Australian Energy Market Operator to undertake, is a fine example of the genre.
AEMO was debarred from examining the carbon costs of this concept – but elsewhere there is academic research (from the green-friendly side) identifying the needed price as between $50 and $100 per tonne.
On the broader front, there is not an energy issue in contention at the moment where a majority of contenders are not talking their own book rather than addressing solutions from the perspective of the long-term interest of consumers and the community at large – although this is often piously dragged in to support whatever argument is being pressed.
In this environment, the new federal government has taken on a helluva task in committing to a fresh energy white paper for publication in 2014.
The version that was published in December last year, which the Coalition says is not good enough and, in truth, which was more a description of the issues confronting policymakers than a white paper and was not helped by so much of the ground being occupied by Gillard, Swan, Combet and others clinging to their parliamentary need for support by the Greens and independent MPs, is the marker for Ian Macfarlane and his advisors.
There is a large amount of new material now to hand in addition to what informed Martin Ferguson and his advisors – with more to come, including the report on east coast gas issues commissioned in May by stand-in minister Gary Gray for deliver in December.
The separate review of the renewable energy target – which was derided by the Australian Chamber of Commerce & Industry at October’s market outlook conference as “an ugly baby” – is of major importance for the white paper.
While “gas” may be the word of the day in the current energy debate, “power” has not vanished from the scene just because it is being less discussed on the big (media) stage.
As highlighted at the outlook conference (see some of the coverage here and also in reports on the “This is Power” blog), the ability of the east coast competitive electricity market to continue to fulfill its two main roles (in the short term to dispatch enough power to meet demand at the most efficient price and in the long term to create a price signal for new investments) is in question while there is a shipload of stakeholders who query whether the “NEM” is still fit for purpose, given the environmental agendas now running.
In this context, the latest message from the University of Queensland’s academics focussing on energy policy (see report above) is worth highlighting.
We don’t need, they argue (and rightly), a revolution – we do need a coherent long-term policy framework that focuses on an orderly transition to supplying energy fit for our 21st century purposes at the lowest possible cost, and, in the case of electricity, this should be technology-neutral (i.e. allowing consideration of nuclear power and CCS).
Central to where we go is settlement of the issue of placing a price on carbon, a debate that has now been running here for a decade with what can be charitably described as a complete policy muddle ensuing.
Do we need a link to a global price, with all the uncertainties entailed in that, given that the issue is as much a political football in Europe as it is here?
Or do we need a local structure designed to deliver an abatement target at a level and over a time with which our economy can live?
This is a central issue for any energy white paper and the document cannot, or at least should not, be written until this is finalised – which brings us right back to the need for the main parties to resolve the matter in the middle ground.
Cynics will say that we should not hold our breath waiting for this to happen.
Realists will point out that, unless it happens, our energy policy framework will stay broken and we will all pay for it.
1 November 2013
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