Coolibah Commentary

Issue 138 October 2016

Welcome to the last quarter of a year in which little has been resolved on Australia’s energy scene and policymakers see the scale of their challenges continuously rising, writes Keith Orchison.

This month’s “Re-powering New South Wales” conference in Sydney will highlight these challenges at a time when the prospect of a substantial east coast power plant closing is suddenly not a long-term issue.

Gallic shrug

The Victorian government, focused on talking up its long-term plans to boost renewable energy, got a Gallic shrug in late September when it hurriedly telephoned Engie in Paris to ask for information about the fate of the Hazelwood brown coal power station, provider of a quarter of the State’s electricity supply.

Reacting seemingly in panic to a speculative newspaper report, State Energy Minister Lily D’Ambrosio called senior managers in Paris only to be told “no decision has been made.” Executives, she hurried to explain to the Melbourne media and a worried Latrobe Valley community, had not said a closure was imminent and had not offered any closure timeline.

While the federal Greens exulted that “the age of coal is over,” the Coalition called on the Andrews government to announce its plan to help 550 people directly employed at Hazelwood.

Engie’s CEO, Isabelle Kocher, told a French conference in September that the company “will exit from coal over the next three years” but declined to set 2018 as a deadline for the move.

Engie’s global financial woes have been well-documented in the media this year. Having posted a net loss of $US5.2 billion last year, the company has embarked on large-scale restructuring and says it will dispose of billions of dollars worth of assets, notably in exploration and production, coal-fired power plants and gas plants in the US.  Engie says it will also invest billions in renewables, decentralised energy technology and energy services.

Meanwhile, the company has announced that it is considering a turbine refit for its other Latrobe Valley operation, the Loy Yang B power station, saying this would enable both a reduction in carbon emissions and an increase in power output.

Please explain

The Business Council has assailed the Victorian government for failing to put forward “fundamental details that are crucial to the operation” of its renewable energy target for “effective consultation” before pushing forward passage of legislation by autumn next year.

In a submission to the State government, the BCA demands a comprehensive cost-benefit analysis for the VRET of 25 per cent by 2020 and 40 per cent by 2025. It complains that there has been insufficient discussion about the effects of VRET on the State generation mix, calling for a “more managed” transition from the brown coal fleet.

How many of the 4,000 jobs the Andrews government claims will be created by VRET will be full-time, the BCA asks, and how many jobs will be lost as a result of higher electricity prices?

Last calendar year the brown coal generators provided 47,746 gigawatt hours of the 54,483 GWh produced in the State versus 3,136 GWh from wind farms.

At risk

AGL Energy says ongoing problems in resolving a pay dispute at its Victorian power plant, Loy Yang A, could put the State’s energy supply at risk through strike action.

In a statement in late September, the company says it has “exhausted all avenues” in getting a new enterprise agreement settled, with Loy Yang workers voting against it in a secret ballot.

AGL says it will apply to the Fair Work Commission in mid-October “as a last resort” to have the existing agreement terminated.

Pressure cooker

The Energy Policy Institute of Australia has added fuel to the national debate about integration of variable renewable energy in power systems with publication of a paper warning that the practical upper limit is around 40 per cent in most cases.

The paper has been written by University of Queensland professor Simon Bartlett, who is a former senior executive of Powerlink Queensland and a former director of South Australia’s ElectraNet.

Bartlett says increasing intermittent generation has a “pressure cooker effect” and can involve high levels of integration costs.

He also warns that the scale-up of intermittent renewables in a system can magnify the short and long-term risks of investment in non-renewable generation assets and the power grid itself.

The EPIA paper has appeared as the World Energy Council publishes a report acknowledging that high levels of variable renewable generation in periods of low demand in various countries “has led to market disruptions and substantial curtailments.”  The council concludes “substantial investments in renewables capacity have often not been directed efficiently.”

The WEC calls for changes in market design to cope with the rise of VRE along with “improved generation forecasting, greater generation flexibility to address rising intermittency, expansion in capacity and sophistication of electric transmission, and expanded energy storage capacity.”

The council cautions against a “one-size-fits-all” approach, noting “each country’s power system is unique.” Its secretary-general, Christoph Frei, says: “The success of both the development of intermittent renewables and their efficient integration in electricity systems fundamentally depends on the right market design and regulatory framework and solid regional planning to avoid bottlenecks.”

Meanwhile, writing in the “Australian Financial Review” in mid-September, Nino Ficca, CEO of AusNet Services, the largest privately-owned power network company in the country, says that the current review by the CoAG Energy Council of the regulatory test for new east coast interconnection must ensure that development of new links is underpinned by fully competitive processes.

This should apply to all parts of the transmission grid, he adds. “We let competitive markets decide who builds new renewable projects and where; it's time we let competition determine how much it costs them to connect to the grid. Consumers not only want more renewables, they want competitive forces ensuring the green electrons that will empower their energy futures are delivered as cheaply as possible.”

Ficca argues that “competition is all too often forgotten when we talk about new grid developments, with most of the country not having a truly competitive process for building new transmission lines.”

Full understanding

The Australian Energy Council has told the Queensland government that “the dynamics between environment policy and energy markets” should be fully understood before politicians commit States to arbitrary renewable energy targets.

In a submission to a Queensland review of “advancing climate action” in the State, the AEC warns again the State government pursuing a 50 per cent renewable energy target by 2030. In Queensland, it says, this will mostly require recourse to wind power and solar photovoltaics and will not be a least-cost approach to pursuing carbon emissions reduction.

The Energy Council says it shares State government concern that “a lack of national leadership may increase the difficulty” of pursuing Australia’s 2030 abatement target – but it argues that a fragmented approach by State jurisdictions will be “counterproductive” and can result in east coast energy market distortions.

It urges the Queensland government to work to understand the power quality and capacity impacts of high shares of intermittent generation in the State’s populous south-east, repeating its view that the recent experience in South Australia amounts to “an accidental experiment in high shares of variable generation.”

In addition, the Queensland Resources Council has called on the Palaszczuk government to “explicitly model the frequency, reliability and security of electricity supply under a range of circumstances,” including an outage of the QNI link to New South Wales and an outage of the transmission line to Far North Queensland, arguing that the State “cannot afford to expose its economy” to risks similar to problems recently encountered in SA and Tasmania.

‘Gas ban madness’

As Australia continues to be embroiled in what the “Australian Financial Review” in an editorial has lashed as “gas ban madness,” the Academy of Technological Sciences & Engineering has urged the governments of Victoria and the Northern Territory to reconsider their approaches to exploration and production and to rely on scientific evidence.

The comments come as the Australian Petroleum Production & Exploration Association warns that “eastern States face a very real risk of a supply shortfall by 2019.”

As well, Rod Sims, chairman of the Australian Competition & Consumer Commission, says that “there is little prospect of a significant increase in supply from the existing production basins in the southern states.” 

Sims adds that “development of replacement reserves is currently lagging and may not be available soon enough.” He says “there is potential for a significant reduction in supply from traditional sources in the southern States.

ATSE expresses concern that Victoria has introduced a permanent ban on unconventional gas exploration and extended a moratorium on onshore conventional activities while the new NT regime has imposed a moratorium on hydraulic fracturing.

The scientific evidence, it adds, is “clear” -- although unconventional gas extraction (including fracking) presents risks, they can be managed through the use of best practice, effective regulation and comprehensive baseline studies and monitoring.

ATSE acknowledges that social and community concerns about these risks are legitimately held and says it is essential that governments and industry “actively engage with communities through evidence-based information derived from properly conducted research, not via arbitrary, state-wide bans.”

The academy argues that Australia’s need to decarbonize its energy markets by moving away from coal towards lower emissions sources will require greater reliance on natural gas as a transition fuel.

“Similarly, until such time as storage technologies are able to manage the issue of intermittency, gas will continue to be an important back up for renewable energy.”

Australian manufacturing and agriculture relies on adequate and reliable supplies of natural gas as a feedstock for important products such as plastics and fertilisers, it says.

“To ensure the availability, stability of supply and the affordability of gas for industrial and domestic consumers, utilising new local sources of gas (both conventional and unconventional) will be critical.”

Solar’s ‘brightest day’

The Australian Renewable Energy Agency has hailed big solar’s “brightest day” in this country as it claims its financial support will help unlock almost $1 billion worth of investment in solar farms.

ARENA chief executive Ivor Frischknecht says Australia’s big solar industry is “coming of age” thanks to ARENA support, “ensuring large-scale solar is a competitive, sustainable energy option.”

He adds: “Six plants in Queensland, five in New South Wales and one in Western Australia are slated for funding, in a major milestone that’s expected to triple Australia’s large-scale solar capacity from 240 MW to 720 MW.  They will provide enough energy to deliver one tenth of the new capacity required to meet Australia’s 2020 renewable energy target.”

Market works

The mainstream energy industry is well pleased with a report from Sydney’s Independent Pricing & Regulatory Tribunal that gives a solid tick to the New South Wales electricity market.

“This report shows that the retail energy market in NSW is a vibrant one,” says the Australian Energy Council, “and IPART has confirmed that retailers are behaving appropriately in setting prices.”

The State Energy Minister, Anthony Roberts, claims the report shows Baird government reforms have boosted competition and lowered prices.

IPART chairman Peter Boxall, releasing the report in draft (it is to be finalized next month), says retail electricity market competition in the State is “working well.”  There has been a substantial increase in market-led product and service innovation since mid-2014, he adds, and six new retailers have entered the market in a year.

IPART finds that residential customers willing and able to shop around can save between $250 and $445 per year.

Boxall says that residential price rises of between seven and 15 per cent announced by retailers in July “reflect changes in the efficient costs of supplying small customers.” The main driver is a rise in wholesale power costs “from historically low levels to prices more representative of the longer term.”

Out to tender

The South Australian government will put 75 per cent of its long-term power needs, including electricity required for schools and hospitals, out to tender, hoping to bring new generation in to the State market.

It is also going to spend $24 million on encouraging companies with existing gas reserves in SA to bring their fuel to the State market.

Premier Jay Weatherill has told media that he hopes the steps will contribute to cutting SA energy prices for consumers.

Basslink 2

John Tamblyn, former chairman of the Australian Energy Market Commission, will lead the ongoing federal and Tasmanian government efforts to assess the prospects for a second power interconnector across Bass Strait.

Tamblyn takes over from Warwick Smith, who ran the initial inquiry launched during the federal election and at the height of the row over the failure of Basslink.

Federal Environment & Energy Minister Josh Frydenberg says the study will also provide advice on how best to develop Tasmania’s renewable energy resources.

The final report is due next January.

Meanwhile Hydro Tasmania chief operating officer Evangelista Albertini says it is “nonsense” to interpret its 10-year asset management plan leaked to a Hobart newspaper as consideration of abandoning some of its operations.

The plan, he says, proposes a focus on the assets that produce 70 per cent of the government-owned utility’s energy, but “tens of millions of dollars” are being and are proposed for expenditure on the stations providing the other 30 per cent of production.

The newspaper claimed the report showed Hydro Tasmania would “struggle” to maintain its hydro operations under its current maintenance budget, leading the Labor opposition to worry aloud “future blackouts and brownouts.”

‘This is a nonsense’

The Minerals Council of Australia has lambasted the Australia Institute for claiming that shutting down the export of coal (the country’s second-largest export industry) would have limited economic impact.

“This is a nonsense,” the MCA declares, pointing to export income of $38 billion in 2014-15, double that of beef, wheat, wool and wine combined, and to 44,000 direct jobs in the coal sector. “It is just another example of the greens trying to swing a wrecking ball through the economy.”

There is a “gaping hole in the institute’s economic prognostication” that the coal export business is in “terminal decline,” the association declares, asserting that the construction of new, much more efficient coal generation has seen 725 units brought in to operation with a further 1,142 units under construction or planned.

Asia has not signed up to green think tanks’ view of the world, the MCA says, arguing that the need for affordable and accessible power is complemented by ongoing large-scale demand for coal in steelmaking.

Last word

It’s not often, outside obituaries, that an industry association will issue a statement to comment on a departing member company CEO.

The fact that the Australian Energy Council has done so for Origin Energy’s Grant King speaks volumes about the individual.

Matthew Warren, the association CEO, says of King “he has been an outstanding leader of the energy industry in Australia,” lauding him not only for building a leading integrated energy business over the course of this century but also as “a strong advocate for energy policy reform.”

Warren adds: “His knowledge and vision have been an invaluable influence on the energy industry and governments alike.”

I’ll leave it to the shareholders of Origin to judge King’s success in running the business – I have watched closely as he has turned the Boral spin-off in to one of the major national companies – but, having often used his views to underpin my commentaries here, in the late “Business Spectator” and elsewhere over the past decade, I certainly support Warren’s judgment of his wider influence.

Part of this legacy lies in the many submissions Origin under King has made to federal and State government inquiries, an important part no doubt exists in his face-to-face meetings with his peers, senior public servants and politicians – and some can be found in the relatively few speeches he has made, not least to forums of the Committee for the Development of Australia (CEDA) where his name on a program is almost a guarantee of a sell-out audience.

I have made a habit of hanging on to print-outs of King’s speeches and they contain many comments and advice that remain valid over years.

For example, here he is kicking off a CEDA talk in 2011: “For the greater part of my working life, the energy industry has gone unnoticed in the background quietly delivering a reliable and competitively-priced product, but (now we are) in the forefront of media attention, reflecting at least the perception of significant issues affecting our industry.”

This, it seems to me, encapsulates the biggest problem the energy sector confronts: the shift in a relatively short time from being valued (and taken for granted) to being the butt of unceasing vituperation in the public debate – and its struggle to cope, to get its version of the facts understood, let alone accepted, continues to weigh down its collective prospects.

King has never been shy of calling out the mud-throwers. His 2011 comment on this has been repeated in various forms over the years: “I believe that much of the discussion of issues has not been troubled by the facts, in substantial part because broader political and ideological agendas have overwhelmed a more balanced debate.”

And last year: “The debate that we often hear around energy policy and climate policy is between two groups of people shouting at each other – those that place economic development at the highest order and those who place environmental outcomes at the highest order.”

His valid point being “what we are trying to do, and what humans have been trying to do for all of history, is to strike a balance between the benefits of increased energy use and the consequences that come with this” – with the punch line that “today’s society will not give up economic gains solely for the purpose of environmental outcomes.”

King summed this up: (in the energy industry) we are struggling to find the right answer. “How do we balance? How do we even know what progress we are making (in balancing) environmental and economic outcomes?”

And he took aim at the campaigners (led, I might add, by media organizations like the ABC and the mass market Fairfax papers) who unceasingly use the per capita emissions stick to bludgeon community opinion. “This is mathematically true and completely misrepresents, in fact ignores, the balance that we should seek between economic development and environmental outcomes,” arguing that a useful measure would be to understand the carbon intensity of economies, claiming that only three countries (Australia, the US and Canada) have “achieved the trifecta” of simultaneous economic growth, reduction in absolute carbon emissions and a reduction in carbon intensity” in the period since climate change charged out of academic journals and on to the media front pages.

What’s more, King said, Australia can claim to be doing the best of any country in pursuing this objective.

My particular problem is that the follow-up is missing. The “trifecta” point is critical, and King made it well, but it has since sunk without trace in our public debate.

How many members of the community would be aware of it?

The business community and its representative organizations, I submit, need to consider why this is so.

The communications efforts made via industry associations are very large, Herculean one might say, but somehow they lack a cutting edge.

The standard “anti” response, Trump-like, is to hurl insults at spokespeople for the mainstream energy sector, to badmouth fossil fuels ad hominem and to talk up the value of variable renewables without comprehension of the needs of the energy supply chain. Industry really has to rise above this and appeal over the heads of the activists and ideologues to what Turnbull calls the “sensible centre” but the challenge remains before it.

In this respect, I rather like a point King made in a speech, suggesting the emergence of utility-scale solar on a large scale. He noted that Australia would need 250 solar projects averaging 40 megawatts to meet the 2020 RET and much more to get to the national 2030 abatement target. It may sound unachievable, he said, but so last decade did the thought of building 25 million tonnes of LNG capacity in Queensland in six years.  “Extra-ordinary things can be achieved when people are really focused.”

Corporately, today’s Origin Energy represents what can be achieved when people like King, his board and his workforce are “really focused.”

The broader challenge, in the policy arena, is for the resources sector to apply a qualitative effort like this to the big picture, obviously not in a one-eyed fashion on pet technologies but across the board of options to achieve the best outcome consistent with economic sustainability.

This requires, to pick up the accolade Warren applies to King, outstanding leadership collectively, the more so because the body politics’ failings in this regard are there today for all to see.

Keith Orchison
30 September 2016


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