Issue 102, October 2013

Welcome to a new Coolibah Commentary newsletter, writes Keith Orchison, at a point where concerns about gas supply have almost obscured ongoing activity in electricity reform, the dominant issue this time last year, and when the protracted outcome of the Senate half-election suggests the new Abbott government can push its radical remaking of carbon policy through federal parliament.

Carbon capers

The long-drawn out half-Senate election vote count has finally delivered the new Abbott government the means from 1 July next year of pursuing its plan to sweep away the Gillard regime carbon policies.

While the Coalition is expected for political reasons to march legislation in to federal parliament to repeal the carbon tax/price arrangements as soon as sittings resume, it will almost certainly be after mid-2014 (when new senators take their seats) before new bills will pass, leaving the energy industry to operate under existing arrangements for most of another year.

The new Senate will feature eight cross-bench members and 33 Coalition members (out of 76 senators) from 1 July – and six of them are reported to support the repeal actions, removing the need for the Abbott government to consider a double dissolution election in early 2015.

A notable feature of the Senate election was the loss of more than half a million votes by the Greens (compared with 2010) after a campaign in which their opposition to coal seam gas was featured strongly along with their calls for support to baulk the carbon policy changes.

Beyond months of media froth and bubble over carbon policies and programs between now and mid-2014, sooled on by loud protests from the Greens and the environmental movement, electricity sector attention now will be most focussed on what the Coalition proposes to do with the renewable energy target.

Frontbench comments since the mid-September poll victory do not make it clear whether the Coalition will cut the RET back to a “true 20 per cent” of power demand by 2020.  

Industry Minister Ian Macfarlane has told journalists the new government wants to set the RET on “a sustainable path for the long term.”

Energy bill

The average Australian household pays far more on fuel to run a vehicle than on electricity and gas, new Bureau of Statistics data show.

According to an ABS survey of household expenditure, the average petrol bill in 2012 was $60 per week versus $39 for electricity and gas.

The bureau says that households in the Northern Territory pay the most -- $110 per week on average – and those in Queensland the least, averaging $93.

As always with averages, the numbers mask higher and lower outlays. The bureau says energy costs for people with mortgages averaged $123 a week while those living in public housing spent $56.

Families who had installed solar PV systems or solar hot water systems were saving $6 a week on average.

The ABS adds that overall energy costs represent about five per cent of average household disposable income across Australia and points out that this, too, masks a range: low-income households spend about 10 per cent of income versus three per cent for high income homes.

Outlays on electricity and gas are calculated to be two per cent of nation-wide income, with South Australians paying the highest (2.5 per cent) and Queensland and Western Australia the lowest (1.7 per cent).

The ABS also found that 13 per cent of low-income households had electricity or gas supply cut off for non-payment of bills in the 12 months covered by the survey – and 18 per cent had been unable to pay bills on time.

The survey also threw up that fewer than a third of households have taken steps to improve their energy efficiency despite sharp rises in their bills.

Flawed & expensive

Western Australia Energy Minister Mike Nahan says the State’s power system is “high cost in terms of administration, in terms of construction and in terms of promoting excess capacity.”

Describing the service as “flawed and expensive,” Nahan has told the Committee for the Economic Development of Australia (CEDA) at a Perth forum that governments focussed on comparative advantages of access to low-priced energy and resources in the past but lost sight of keeping down consumers bills.

“I think in WA we have implemented a whole range of taxes, charges, restrictions, regulations and inhibitors that have increased the cost of electricity quite dramatically and particularly for energy-intensive industries,” he says.

Nahan is at odds with the State’s Independent Market Operator on WA gas availability, saying he is not sure he agrees there is sufficient supply for domestic use going forward. “I think the market is much tighter in capacity, and therefore in price, in to the future.”

Meanwhile, the Liberal-led government has tangled its message lines on power asset privatisation in the wake of the State being stripped of its AAA credit rating by Standard & Poors.

Nahan told journalists in late September that the government-owned generator Verve Energy and retailer Synergy, due to be merged in 2014, would be split within five years in to two vertically-integrated businesses (gentailers) and could be part-privatised “eventually”.

Nahan added that the government could not rush in to privatisation because it needed to establish a clear understanding of the value of the utilities it is creating through the merger.

The WA Chamber of Commerce & Industry moved quickly to endorse Nahan’s view, saying privatisation would ultimately lead to lower prices – but it chided the government for sending mixed messages to consumers.

CCI chief economist John Nicolaou said the State government should reveal the full extent of its plans.

However, talk of privatisation was promptly denied in parliament by Premier Colin Barnett, who said: “The government is not privatising. We are bringing Verve and Synergy together to get a bit of accountability and a bit of performance and savings for taxpayers.”

The Labor opposition said the government’s energy policy is a shambles.

Meanwhile, taxpayers are still subsidising WA household electricity bills – with the outlay forecast to be $380 million this year. A typical south-west household in the State now pays $1,510 a year, about 20 per cent less than the cost of supply.

The Barnett government has overseen a 70 per cent rise in residential prices since coming to office in an effort to head off burgeoning subsidy debt while spending substantially on power network upgrades.

Sims says sell

Rod Sims, chairman of the Australian Competition & Consumer Commission, says there are compelling grounds to sell all electricity network businesses in the east coast market.

The New South Wales, Queensland and Tasmanian governments still own their States’ network assets and the ACT government still part-owns the Territory service company.

Speaking in Wollongong, Sims cited Victoria as a good example of the potential gains of electricity privatisation. “The efficiency of the Victorian network businesses has improved significantly over the past 10 years since they were privatised.”

Sims argues that “it is important to get governance arrangements right to align the objectives of the network businesses with those of the incentive-based regulatory regime.”

He adds: “As any introductory textbook on economics will explain, profit-maximising incentives act as an impetus for cost reductions and quality improvements.

“Network businesses that have conflicting objectives will not be as responsive to incentive regulation.”

The NSW and Queensland networks are estimated to be worth some $50 billion, a significant sum for State governments struggling to cope with infrastructure and public service budgets and credit ratings.

Bids due

October is expected to see the bids for Macquarie Generation publicly revealed, with the sale to be completed by March next year.

The MacGen sale is the final stage of a long-drawn out saga involving both NSW Labor and Coalition governments. 

Media speculate that Bayswater A and Liddell power stations, with a combined capacity of 4,700 MW, will fetch about $2 billion, the book value of the plants, but the O’Farrell government is hopeful of getting more.

The prospect of the Abbott federal government repealing the Gillard carbon price regime and the likelihood of much higher gas prices curbing competition from gas-fired generation may work to the advantage of the State government in the sale, which has attracted interest from Brisbane-headquartered ERM Power as well as major companies in China and Thailand.

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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
Editor, OnPower

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Go for it

The Australian Energy Market Commission has concluded that the NSW government no longer needs to have electricity and gas price regulation.

While the decision is seen in many quarters as a formality – the AEMC had clearly signalled its views in an earlier draft report – the final version of the review clears the way for the O’Farrell government to take a step energy retailers have pursued long and hard.

Whether the government has the will to do so is another matter.

AEMC chairman John Pierce says more than 60 per cent of NSW energy consumers are already on market contracts. “Consumers are voting with their feet and switching to contracts in large numbers and our review points to opportunities to make it even easier for them to understand and compare retail offers.”

He adds that steps to maintain consumer protection are a key part of the shift to deregulation. The AEMC recommends ongoing market monitoring, with the ability to re-introduce regulation, as part of the change process.

Regulated power prices have more than doubled in NSW over the past six years – mainly due to rising network charges and government-imposed green schemes.

“Retail price regulation,” says the AEMC, “has not protected consumers from these rises because they relate to increases in underlying input costs of supply faced by all retailers.

The Energy Retailers Association, welcoming the commission report, says the key finding is to recommend retail price monitoring – “the best way for consumers to be empowered to manage their energy bills through flexible offers."

Causes of the fall

Clean Energy Council chief executive David Green has identified five main factors influencing “the apparent miracle of falling energy demand at a time when Australia’s trend growth for the economy remains ahead of many other western nations.”

Green told the Australian Institute of Energy in Melbourne at the end of September that one cause is the fundamental change in the nature of our economic base: less is made here and more is imported.

He pointed also to the impact on demand of milder summers.

And he highlighted higher prices, saying “We shouldn’t necessarily panic over higher unit prices for electricity because more efficient use is generally positive.”

A fourth factor, he said, is the influence of energy efficiency, including the roll-out of insulation measures during the GFC that improved a million homes.

The fifth factor, he said, is the take-up of rooftop solar power.

Meanwhile consultants Pitt & Sherry, in their latest Carbon Emissions Index report that east coast electricity market demand has fallen by almost seven per cent since it peaked in 2008, with the drop dominated by reduced consumption in NSW.

Wanted: strategy & spine

The communiqué the NSW government produced after its “energy security summit” in Sydney at the end of September – attended by 230 people from the administration, the supply sectors, business, farmers, trade unions and academia – highlighted the need to develop a strategy to “balance future energy sources in an efficient and cost-effective way.”

It said the strategy should focus on energy security through supply diversity, downward pressure on prices through increased supply and investor confidence leading to investment, exports and jobs.

The summit was held as AGL Energy was telling its shareholders that “a critical shortage of gas” is likely to emerge in NSW “from 2017.” 

The company warns that “the inability to obtain reliable supplies of gas at affordable prices will have a material effect on many industrial businesses in NSW, with flow-on effects across the wider economy.”

Energy consultant Jim Snow of Oakley Greenwood told the summit that the situation in NSW is likely to set gas prices for Melbourne and South Australia as well as Sydney.

Resources & Energy Minister Chris Hartcher acknowledges that the summit saw an urgent need to address State gas supplies to avoid job losses in industries that are a major user of the fuel.

The communiqué also notes that high prices are likely to limit investment in gas-fired generation in NSW, increasing reliance on coal for baseload production across the east coast in the short to medium term.

It calls for a coordinated effort by the NSW and federal governments to streamline planning and environmental approval processes.

The government wrote in to the communiqué that, in developing new gas production in NSW, priority must be given to satisfying domestic users’ needs while recognising that increasing supply sources and competition will be more effective in placing downward pressure on prices rather than intervention in the market.

However, the O’Farrell government moved within days of the summit to rule swathes of land off limits for CSG drilling, fixing in place buffer zones around residential areas and no-go zones around horse studs and vineyards.

The upstream petroleum industry responded that the government is continuing to send a message that it does not really welcome development of gas in the State and that the advice it had sought at the summit “appeared to have had little effect.”

Meanwhile the Australian Energy Market Commission, which is undertaking a review of the east coast gas market, has published a consultants’ report suggesting “conditions are expected to tighten over the next three to five years as domestic customers compete with each other, and potentially LNG proponents, to secure supply from a much smaller set of producers.”

The AEMC says that the critical question is whether gas production can rise quickly enough to address the 2015-18 supply shortfall that is anticipated.

While pointing to gas resources beyond the coal seam methane reserves identified within NSW – including possible supply from the offshore Gippsland Basin in Victoria, the Bowen/Surat basins in Queensland and the Cooper Basin – the commission says bringing new supplies on line will require significant investment and, in some cases, new transmission pipelines.

AEMC chairman John Pierce says a strategic plan for gas supply on the east coast needs to focus on the next 10-15 years.

New federal Industry Minister Ian Macfarlane has told journalists that resolving the coal seam gas impasse in southern States is one of his most urgent priorities.

He is stressing the need for the O’Farrell government to “show leadership” on the issue – while the Business Council president, Tony Shepherd, spoke out at the summit for “political courage and practical resolve” to increase NSW supplies.

A Newspoll has found that 35 per cent of respondents in Queensland are in favour of CSG production versus 30 per cent against it – while 56 per cent of those polled in NSW and the ACT oppose the industry and just 20 per cent favour it.

‘No Armageddon’

One of Australia’s leading water scientists, professor Craig Simmons, director of the National Centre for Groundwater Research, says there is no reason for landholders to fear “an Armageddon scenario” from hydraulic fracturing in coal seam gas activities.

Simmons told the ABC there have been “millions of fracking jobs” in upstream petroleum activities in the US over 70 to 80 years. “We aren’t the Robinson Crusoe of CSG production.”

Simmons says the heat needs to be removed from the public debate “to make sure that the scientific discussion and the technical discussion are really well-informed and not just emotive.”

Speaking at the APPEA onshore gas conference in Adelaide, former federal Resources & Energy Minister Martin Ferguson, who has been appointed chairman of the association’s advisory board, called on the NSW and Victorian governments to “rise above populist concerns” about the CSG issue.

Long link

The South Australian and Northern Territory governments are to pursue talks on construction of a gas pipeline from Alice Springs to Moomba in the Cooper Basin to provide a north/south link between the large NT onshore and offshore resources and the major domestic load on the southern coast.

Territory Chief Minister Adam Giles told the APPEA onshore gas conference in Adelaide that he is “convinced that the future development of the Australian energy sector will require provision of connecting pipelines linking the emerging NT resources” with the east coast.

SA Premier Jay Weatherill, who thinks the long link is “an exciting idea,” says a north/south pipeline could also be used to carry Cooper Basin gas to the NT for export.

Giles says he has also discussed the concept with NSW Premier Barry O’Farrell. He adds that a link in to Queensland via a pipeline from Tennant Creek to Mt Isa is also a possibility.

The pipeline from Alice Springs to the Santos-operated gas hub at Moomba would be 830 kilometres long.

Upstream value

The Australian Petroleum Production & Exploration Association claims that the upstream industry was responsible last year for delivering more than 100,000 jobs across the country, putting about $10 billion in to the economy and paying more than $8 billion taxes.

By 2020, APPEA says, the value-added contribution to the economy will exceed $64 billion and the industry will be paying more than $13 billion annually in royalties and taxes.

“At a time when government spending demands are outstripping revenues,” says APPEA chief executive David Byers, “this will equate to the funding needs of more than 25,000 public hospital beds or the cost of educating a million primary students in government schools.”

The calculation for 2020 is based on petroleum projects already approved or considered highly likely to be built.

APPEA adds that, if projects currently mooted for development went ahead, the industry could contribute $90 billion to the economy by 2020 and $18 billion in royalties and taxes.
Byers says the larger developments can only be achieved in a policy environment that does more to encourage investment and “avoids shocks and surprises.”

A key part of the policy approach APPEA advocates involves the federal, State and Territory governments resolving the problem of duplicated green and red tape across jurisdictions. Byers says this problem is “adding to the time required to develop projects, adding to development costs and adding to the risks faced by investors."

More woe to come

Leading generator and retailer AGL Energy says difficult trading conditions affecting all participants in the east coast market “are expected to continue for some time.”

Chairman Jeremy Maycock says the market is characterised by high levels of competition and softening demand.

Writing in the new AGL annual report, Maycock says a number of areas of Australian energy policy are “in an unsatisfactory state” and the next two to three years are “likely to be challenging times”.

“The basis for pricing the cost of carbon emissions remains highly uncertain,” he writes.

“Poorly-designed subsidies for rooftop solar installation have distorted the market for renewable energy certificates and contributed to high electricity prices for all consumers.

“Cost escalation and cost recovery in distribution networks remain the dominant factor in increasing retail prices.”

To this managing director Michael Fraser adds: “Current market and political conditions are not conducive to building new electricity generation assets.

“A reduction in total demand for energy has led to an over-supply of electricity generation. Wholesale prices are at levels below those required to provide a satisfactory return on investment.

“Ongoing uncertainty about the RET is also a key factor in investment decisions.”

Under “key challenges,” the AGL report says energy demand has weakened across the NEM due to a combination of increased retail prices, reduced manufacturing volumes with industry impacted by the high dollar, consumer energy efficiency initiatives and rising use of rooftop solar generation.

It says retail market competition is high with discounting and customer churn “at significant levels.”

No to NESI

EnergyAustralia, which has 2.8 million household and business customers, says that the national energy savings initiative promoted by the previous federal government is a bad idea.

The company, responding to a discussion paper published by what is now the Department of Industry, argues that initiating NESI will “risk moving consumers and the economy away from optimal patterns of energy-related consumption and investment.”
EnergyAustralia says that compelling retailers to participate in an energy efficiency services market will make it harder for each business to “distinguish itself from the pack” and build competitive advantage.

The company points out that there are at least 60 existing energy efficiency policies operating across Australian jurisdictions and claiming to target market failures.

EnergyAustralia says the prime driver of deteriorating energy affordability in Australia has more to do with when households and businesses consume energy as opposed to how much they use. It cites consultancy work for the AEMC demonstrating that peak demand reduction could reduce capital outlays by up to nine per cent.

“A NESI,” it argues, “is a very blunt instrument for addressing energy affordability, given that the prime driver of final price rises is increases in network charges arising from peak demand growth.”

EnergyAustralia says that the pursuit of a mandatory target under a NESI “which over-states the potential benefits or under-states the costs of achieving them will drive reductions that are not economically efficient as the cost of the scheme for all users increases to achieve an uneconomic target.”

It urges the federal government to pursue only policies that are directly relevant to market failure and allow the market to determine the appropriate level of reductions. “A competitive market for energy efficiency services in combination with well-targeted, information-based regulation will result in the most effective, equitable and efficient patterns of energy consumption and investment.”


Last word

Despite the overdue defenestration of the federal Labor government by voters, it is hard to be optimistic about the immediate future for the energy supply sector.

Far too many uncertainties about policies, regulation and market conditions are the basis for this negativity and, as can be seen from several reports above in this edition of the newsletter, there is not a lot of reason to suppose that change will happen quickly – or that, once implemented, it won’t still be at the mercy of jerking political knees, especially in the States.

The Abbott government will need time to settle in office and its leadership will struggle to implement large menu of policy developments that go well beyond the major changes in the energy arena to which it is pledged.

The State governments are a worry.

While the Newman administration in Queensland is at last showing some signs of coming to terms with development of an energy policy, although all the hard decisions still lie ahead of it, the O’Farrell government in NSW is not doing anywhere near enough to win energy sector investor confidence – while the Napthine government in Victoria lives on a parliamentary knife edge and will soon be off to the polls.

Ironically, the Labor government in South Australia, which is well-regarded for its resource-related regulatory arrangements, is in deep local trouble politically and odds-on to lose office at the next State election.

As this issue reports, perhaps the less said about the Barnett government’s approach to energy policy in Western Australia the better: the premier and his ministers give the impression of only opening their mouths to change feet.

All of which, taken nationally, is galling for investors and dangerous for the best long-term interests of energy consumers.

Writing in the Australian Energy Regulator’s 2012-13 annual report, chairman Andrew Reeves comments: “Significant changes are occurring in the way in which energy markets operate, creating challenges for energy consumers, businesses, regulators and policymakers.” 

No arguing with that, but I place those challenged in reverse order to Reeves: the ball is clearly at the feet of policymakers and then regulators once legislators have acted.

Supply businesses at least have the option to vote with their feet – and an increasing number have been doing so in the sense of not investing – but consumers have nowhere to go; the buck literally stops with them in the form of ever-rising costs. 

This leads to the conclusion that an all-out effort is needed, involving individual jurisdictions and their collective activities through the Council of Australian Governments, to identify, then rectify, the problem areas affecting security of energy supply and contributing to rising costs.

A speech by David Green, chief executive of the Clean Energy Council, to the Australian Institute of Energy in Melbourne on 25 September (available on the CEC website) will be useful reading for government policymakers (and those getting in their ears from a multitude of directions).

Green, who had extensive experience in Britain before taking up the CEC role, makes a number of very good points and this critical one: “We need change but we have to avoid the quick fix as all too often the law of unintended consequences comes back to bite.”

We are just emerging from a period, and it stretches back to the last 12-15 months of the Howard government, where the political temptation to pursue quick fixes, populist actions and “it seemed a good idea at the time” programs has bedevilled the energy market to the detriment of suppliers and consumers.

The opportunity presented by today’s political environment does not come along too often; it is hard work to take advantage of it and relatively easy to drop the ball.

This is all about leadership and the onus falls on all jurisdictions, but most especially on the national government.

Keith Orchison
4 October 2013


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