Issue 127, November 2015

Welcome to the second-last newsletter for 2015, a year that has whizzed by, writes Keith Orchison, and one where there is so much unfinished business, leaving a lot to happen in 2016, an election year federally. As a result, the uncertainty for electricity and gas investors will linger on – not least because of the impact on the petroleum sector (and beyond) of the oil price crisis. One of the biggest questions remains the interaction of energy and carbon policies – after the Paris talks and as a result of the Australian poll? Bit tough on investors that we are still wrestling with this after three elections and four PMs since 2007.

Better place

Fifteen million Australians now “benefit from full and unfettered access to big discounts and the best electricity deals,” says the Energy Supply Association, welcoming the New South Wales Parliament’s passage of legislation enshrining retail deregulation and updating safeguards for energy customers.

ESAA chief executive Matthew Warren says the step means (more than six million residential) customers in NSW, Victoria and South Australia can take advantage of retail competition and offers of a wider range of products and services.

Despite the importance of the decision to users and an ongoing media focus on alleged “gouging” and “swindling” of customers by retailers, no news outlet in NSW reported the parliamentary decision or ESAA’s claims of benefits.

NSW Industry, Resources & Energy Minister Anthony Roberts points to NGO modeling indicating that State residential consumers switching from the worst power standing offer to the best market offer can cut their bills by between $550 and $1,050 annually. He says 20 per cent of NSW’s 3.3 million mass market electricity customers remain on the transitional tariff that replaced the former regulated price when deregulation was initially introduced in the State.

Roberts says 20 retailers are now active in NSW and four new ones have entered the State market since July last year.

Using the most conservative estimate of residential savings by switching to competitive market offers -- $290 annually, calculated by the State’s Independent Pricing & Regulatory Tribunal – all home-owners moving from the transitional tariff could collectively save more than $171 million a year.


Time to split?

Pressure on the federal government to separate the Australian Energy Regulator from the Australian Competition & Consumer Commission, a move the two organizations oppose, is growing with the Vertigan energy market governance panel telling the CoAG Energy Council it agrees with the Harper competition policy review that the approach required to regulate a monopoly industry differs from that of a competition law enforcement agency.

As the panel chaired by Michael Vertigan says in its final report, delivered at the end of October, opinions differ strongly on the issue. They range from support for a stand-alone access and pricing regulator (the Harper panel proposal) to satisfaction with the current arrangements.

The Vertigan panel says the AER’s role is going to increase in complexity and breadth in a changing market environment. It believes the most effective way to ensure that the regulator is independent, adequately resourced and organizationally capable is to separate the AER from the ACCC.

This, it says, will encourage the AER to “vigorously pursue and promote information discovery” and also to “adapt and adjust to new challenges” in the energy sector.

Vertigan’s panel also believes that the performance of the regulator needs to be reviewed every three to five years in addition to the process for appealing its decisions to the Australian Competition Tribunal.

Right blueprint

The Energy Networks Association has welcomed the Vertigan panel energy market governance review as “delivering the right blueprint at the right time.”

The association is urging the CoAG Energy Council, which commissioned the report, to take up the panel’s key recommendations. CEO John Bradley says doing so “will produce more agile and streamlined energy policymaking, regulation and market operation at a time of significant transformational change in the energy system.”

Bradley says the ENA “strongly supports the panel’s view that the reform work program needs to be more strategic and better co-ordinated.” The risks and costs for consumers of fragmented and poorly-considered energy policies loom large in a period of profound change, he adds.

In particular, Bradley says, energy networks will welcome the role of the Australian Energy Market Commission being strengthened “to support ministers with regular, robust, evidence-based advice.”

Better choice

A new national code of conduct has been launched for energy price comparators to help consumers faced with more than 100 different products when they consider switching electricity providers.

The code was co-operatively developed by energy retailers, comparison businesses and consumer groups with the ACCC participating in the process as an observer.

The Consumer Utilities Advocacy Centre says comparison services are often plagued with problems of accuracy, consistency and transparency – and the new code has signatories committing to standards of impartiality, correctness, consistency, complaint handling and “consumer empowerment.”

CUAC executive officer Mercedes Lentz comments that comparison sites can take the hassle out of switching for households “but you need to be able to trust them and know you are getting a good deal.”

Critical role

AGL Energy, in its submission to the Australian Energy Market Commission’s review of strategic priorities for markets (to be tabled for resources ministers at the CoAG Energy Council meeting next month), says that, while the natural evolution of competitive markets will see customer engagement increase over time, the provision of high quality and meaningful information will critical in enabling them to assess their options and best choose products to meet their needs.

AGL adds that it is particularly important for vulnerable customers to be able to take advantage of the savings provided by market offerings.

“Customers,” the gentailer says,” need to be empowered to make informed choices, to select and services that suit their circumstances and to avoid ones that do not.”

Strong competition arrangements, it argues, are better than price regulation.

AGL says residential customers in the NEM are now using 17 per cent less electricity than they did in 2009, responding to higher energy bills by installing solar PV arrays or buying more efficient appliances.

There needs to be a continued emphasis on “behind the meter” products and services as end-user prices remain flat or fall further over the next few years, it says, to ensure that efficiency gains achieved by consumers are not eroded if they focus less on the need for savings.

Meanwhile, another gentailer, EnergyAustralia, in its submission to the AEMC points out that CSIRO research earlier this year shows that there is a limit to the amount of information that customers will absorb.

“Added complexity will often cause customers to disengage with the market,” it says. There should be a focus on the minimum information customers need and ensuring this is delivered in a simple format.

The company adds the proposed transition to demand-based network tariffs “will undoubtedly cause customer confusion.”  Governments must ensure the reform is supported by effective education campaigns and is “introduced gradually to avoid bill shock.”

Choked market

NEM wholesale electricity prices are well below the level required to incentivize new investment in generation, whether thermal or renewable, AGL Energy has told the AEMC in its market strategic priorities submission.

The company, which has more than 10,000 megawatts of capacity, including the major coal plants of Liddell, Bayswater and Loy Yang A, says that, under current settings, forecast revenue streams for the life of new generation projects “are not necessarily sufficient” to justify the capital expenditure required.

AGL calls for government policies to “effectively incentivize” new renewables and other low-emission projects as well as addressing oversupply and “ensuring there is an orderly exit of older, emissions-intensive power stations, similar to those in place in North America.”

Market settings, it adds, need to support the “orderly decarbonization of the NEM over time.”

AGL calls for the AEMC to work closely with the Australian Energy Market Operator, academics and technical experts on regulatory responses “including the entry of significant intermittent generation and the mothballing or retirement of synchronous generation.”

This is a particular issue in South Australia, it says, where there are “clear risks” of system reliability and stability, including “widespread outages in the event of interconnector failure.”

Work in progress

Ten months after its surprise election victory in Queensland, the Palaszczuk State government is still working on how to bring about its poll promise to merge its two generation businesses and also three network businesses.

Treasurer Curtis Pitt has told media the plans “will be clarified” later this year and the government is “working on a range of options.”

Energy Minister Mark Bailey adds that the government is consulting with the ACCC on its generation merger plans. The commission has expressed concern about the impact on NEM competition of consolidation of the two businesses, which between them control almost 7,000 megawatts of capacity.  They have a 66 per cent market share in the NEM’s Queensland region.

The ousted Newman LNP State government had planned to privatize all the electricity businesses.

The recently-created Queensland Productivity Commission, which is inquiring in to the State’s power prices at the government’s behest, has said in a discussion paper that the generation merger “could have implications” for retail prices.

Work undertaken for the Queensland Competition Authority by consultants earlier this year also warned that increased regional market concentration in generation could increase wholesale power prices.

Sun in West

Western Australia’s Barnett Coalition government is upbeat about the future of solar power in the State’s south-west interconnected system (SWIS).

Treasurer and Energy Minister Mike Nahan has told WA media that the government expects rooftop solar arrays to provide more than 750 gigawatt hours of electricity in the current financial year. SWIS residential consumption is about 5,400 GWh a year out of a total system requirement of almost 19,000 GWh.

State network business Western Power says it is connecting about 17,000 rooftop PV arrays to its system annually.

In August Nahan told a conference the government expects Perth’s residential needs to be met by solar power within a decade.

One in five of the city’s homes use PVs to meet part of their needs today and SWIS take-up of solar is claimed to be growing at 27 per cent annually. Installed rooftop capacity is reported as 500 megawatts at present. The State also has 450 MW of wind generation out of a total SWIS capacity of 6,400 MW.

Meanwhile, as a result of years of political attempts to shield households in the State from the real cost of electricity, the government provides a million residential customers with subsidies totaling $600 million annually.

Focusing on gas

The east coast gas inquiry being undertaken by the Australian Competition & Consumer Commission has drawn more than 40 submissions.

Summarizing the input to date, lawyers Ashurst say that “the broad theme that has emerged is gas buyers and users believe both gas and gas transport are difficult to secure and increasingly expensive as producers prioritize LNG exports while producers and pipeline owners by and large believe the markets are working and the key impediment to increasing supply is regulatory obstacles to developing new fields and sources (such as coal seam gas).”

The ACCC is due to deliver its report to the federal government in April next year.

Ashurst comments that, while the ACCC has indicated it that it does not intend to comment on broader policy (such as environmental regulation), given the arguments that this directly affects competition in domestic wholesale gas markets, it seems that it will be difficult for the commission to avoid expressing a view.

The lawyers, in a review of proceedings to date, add that it is “significant” ACCC chairman Rod Sims (in a talk to the Eastern Australia’s Energy Market Outlook conference) has said gas buyers' complaints about being unable to access gas, particularly between 2012-2014, are "largely true", and that the gas supply offers that are being made are "largely on take-it-or-leave-it, inflexible terms" – although, they note, he acknowledges there have been signs during 2014 and 2015 of more gas supply becoming available (but on short term contracts with higher prices), which he suggests could be attributed to "slippage in LNG project timeframes" and coal seam gas becoming available.

Ashurst say it appears the ACCC will proceed on the assumption there has been a permanent change in the east coast gas market and will be focused on developing recommendations to improve market efficiency in this new environment.

Wrong perspective

Malcolm Roberts, chief executive of the Australian Petroleum Production & Exploration Association, says it is wrong to assume development of the east coast LNG industry is solely or even primarily responsible for rising domestic gas prices.

Speaking to the Energy Users of Australia Association annual conference in Melbourne in October, Roberts has argued that “there are more factors at work” and, in order to manage the transition taking place, stakeholders need to respond to all the underlying causes of higher prices.

He points to analysis by EnergyQuest demonstrating that production costs and the general supply/demand balance on the east coast are more important to gas price outcomes that LNG netback prices.

Roberts disagrees that domestic supply and LNG exports are competing priorities. “They are complementary as well as competing uses,” he argues.

The LNG developments, he adds, have brought scale and capital to the market, “which is especially important for in industry with relatively high fixed costs.”  Meeting local and international demand has required a “massive re-investment” in extracting more gas from conventional reserves.

It is arguable, he says, that $800 million invested in reviving production in the onshore Cooper Basin, where output fell by two-thirds between 2002 and 2012, would not have viable without the demand from LNG projects.

Roberts has told the EUAA members that the gas market may remain tight for the next five years, but he points to nine new projects proposed to supply the east coast. “It is vitally important they proceed – but the market conditions are far from favourable.”

The risk for producers and customers alike, he says, is that the difficult conditions in the global market flow through to diminish exploration and development in Australia.

The situation is exacerbated by “clear sovereign risk” for investors in Victoria and New South Wales because of the political environment affecting gas operations. “The greatest risk facing the industry and its customers is government failure not market failure.”

Gas development will only proceed in these jurisdictions, he says, with “sensible, efficient and balanced” regulatory regimes.

Gas trade

In the past financial year LNG cargoes earned Australia $16.9 billion in export revenue, according to the Australian Petroleum Production & Exploration Association. Sales from the Queensland developments amounted to $1.4 billion.

APPEA says Australia remains on track to be the world’s largest LNG producer by 2018 with five projects progressing towards completion.

Far out

CSIRO says it is developing subsea technologies for the production of gas resources as far as 300 kilometres offshore at a depth of a kilometre.

The leading science agency, in a website commentary on offshore petroleum exploration and development, says Australia’s deep sea remains relatively unexplored despite the vast majority of current oil and gas here coming from the marine territory.

Only 12 per cent of the Australian offshore area is properly mapped, it says.  And more than 80 per cent of national gas resources are believed to be in deep, remote offshore reservoirs.

Off grid?

The concept of consumers moving off the electricity grid may be gaining momentum in the media, the Energy Supply Association says, but actually doing this is not as straight forward as it seems for householders.

In a website commentary, ESAA says going off grid has been a viable option in remote Australian communities for some time and battery storage developments may enhance this movement in fringe areas where the cost of electricity has to be heavily subsidized; however, it adds, suburban houses going off grid on their own is “clearly not economical.”

ESAA points to a report by the Alternative Technology Association and suggests it may be possible by 2020 for greenfield housing developments to be serviced by micro-grids where energy is delivered by a specialist service provider that procures, designs and installs technology and then maintains it.

It also points to modelling by Oakley Greenwood that shows the 600,000 homes across Australia with three or more air-conditioners would need to outlay $72,000 in capital on stand-alone supply, requiring monthly payments of almost $900 over the life of the system to replay a bank loan.

“It is hard,” the association adds, “to see the economic value for customers who already have a grid connection switching to a stand-alone power system.”


Last word

Lambasting the ABC in an op-ed last month in “The Australian” over the national broadcaster’s coverage of the federal government’s approval of the Carmichael coal mine project in Queensland, former Keating government minister Gary Johns, now an academic and author, calls for TV viewers (and by extension other followers of media) to be provided with “context, perspective and balance.”

Leaving aside the fact that the particular ABC report was an egregious example of the green propaganda that now passes often for news on television, Johns’s jibe goes exactly to what gives me the irrits on an almost daily basis about media coverage of energy issues.

For me, the point goes beyond what is presented in particular coverage to what is not put to air or written: “context, perspective and balance” in the complex arena of energy news can really only be delivered over time and I believe an objective view of Australian media would find that this is not happening.

It seems to me that Australians are being told less and less about more and more of energy information relevant to their appreciation of our policy needs.

Note that I said “news” – opinion is another matter but even here an organization like the ABC, as well as the major newspapers, have a community obligation to present commentary from across the spectrum of opinion. A few do; most don’t.

Combine the fact that most mainstream media are falling down on the job with the widespread, and growing, impact of so-called social media, where no holds are barred, and it is only too clear that “context, perspective and balance” have been defenestrated in today’s Australian society with respect to energy affairs.

An avuncular view of all this is that journalists are attracted to controversy and what interests them are not the intellectual arguments so much as the underlying drama, but, as a former journalist who still contributes to the media, I think this is too glib.

In demanding accountability from the rest of us, whether as business people, trade unionists, community sectors, policymakers or public servants, the owners and directors of media outlets can’t (or at least shouldn’t) get away with their own irresponsibility and, in more than a few areas, a lack of professionalism.

The two national newspapers do a fair job in what they cover, I think, but their readership is quite low compared with the size of the population and their coverage of what’s happening in energy is actually pretty thin (a factor often of the commercial pressures they face).

In the case of the ABC, so pervasive in the flow of information to the rest of us, its coverage of energy, I think, is both far too often falling at the hurdles Johns lays out and far too shallow in its perception of real issues.

Meanwhile most of the other mass market media are a swamp of energy illiteracy, shameless beat-ups and inability to come close to the Johns test.

This all matters because a majority of Australians get their information from either the latter sources or the activist social media.

They regurgitate what they see and hear to opinion pollsters, whose products then inform what passes for a political debate on energy – rightly characterized recently by an industry leader as “mostly a shouting match.”

Now “context, balance and perspective” require one to record that, despite this shambolic state of affairs, Australians still enjoy some of the world’s best energy service – whether looking at electricity, gas or transport fuels – with respect to affordability, security and safety of supply. This country is also one of the biggest trading nations in coal, gas and uranium.

The real policy issues relate to how much better things could be and what pitfalls lie ahead as a result of today’s energy management “dog’s breakfast” (to quote a leading independent commentator on energy)?

The line being run by the Australian Energy Market Commission at present – “It’s all about consumers” – is right up to a point, but it’s equally, I believe, about investors (without whom many of the services we take for granted would not be available in their present form) and it’s about the community as a whole (not least in the benefits accruing in taxes and royalties from energy activities).

In the case of our energy exports, it’s also about consumers elsewhere, especially in Asia, and helping them and their communities to attain or sustain the sort of lifestyle Australians assume is their right.

And it is impossible in 2015 not to accept that it is also about a global effort to reduce carbon emissions to the planetary atmosphere, an endeavor now so enmeshed in alarmism, ideology and pursuit of vested interest that “context, perspective and balance” in media coverage seem a lost cause.

How this total situation impacts on investment over the longer haul is a critical issue in Australia (and elsewhere).

Locally, it is not at all clear how the considerable added risk for investors resulting from government intervention as politicians pander to what they perceive to be public sentiment is going to play out over time (ie the next 15 to 25 years, a realistic horizon).

That investment has been weakened and distorted in recent years by poor policies poorly implemented can hardly be denied – but the full consequences of this are not so clear (and, in particular, not clear to ordinary Australians) from today’s standpoint. Such outcomes are further obscured by the manic behavior of so much of the media.

British prime minister Stanley Baldwin (a cousin of Kipling) 75 years ago hurled at the 1930s media barons the barb that “power without responsibility has been the prerogative of the harlot throughout the ages.”

How much more true is this in relation to today’s media where technology has taken their influence to a level beyond Baldwin’s imagining?

Keith Orchison

1 November 2015

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