Coolibah Commentary

Issue 150, October 2017

Welcome to the 150th edition of this newsletter, writes Keith Orchison. The first issue, published in January 2005, focused prominently on the Labor government in New South Wales publishing an electricity “directions” paper looking out to generation needs in 2020; how the political locusts have eaten the time for sensible planning over the past 12 years: today NSW is front and centre in the “energy crisis” shemozzle engulfing not just the “premier State” but the whole east coast market. Who can tell what further political zigs and zags will emerge just in October, let alone the rest of 2017 or the run-up to the federal election, not to mention the State elections due between now and early 2019? Certainly, who could have forecast only months ago that the fate of Liddell power station would be a national issue?

Quotes of month

In the past month’s maelstrom of assertion and argument about energy policy, the most apt quote in September came from an editorial in the Australian Financial Review. Commenting on the Turnbull government’s finger on the trigger of gas export restrictions, the paper’s editors said: “LNG has simply become roadkill in the careless driving of energy policy in this country, singled out despite the massive complacency that allows smug State governments to not develop their own gas resources for entirely unscientific environmental reasons. There will be a cost. We have already made our resources projects expensive compared with our rivals because of the costs that were allowed to build up during the boom. What we did have going for us was minimal sovereign risk. But the prospect of retroactive rule changes (alters) all that. It's understandable why that issue is now secondary for a desperate government, but it will bite us all the same.”

In another Financial Review quote, Chanticleer columnist Michael Smith asserted: “Energy companies have replaced banks as the top political target for populist politicians, at least this month. This makes sense given soaring electricity bills are the number one concern for households and there are genuine fears about the impact of energy shortages expected this summer. This means politicians will try to blame energy companies for a crisis both sides of politics failed to resolve while claiming credit for solving a gas shortage that the gas suppliers say never existed.”

To which one of the paper’s political reporters has added: “If you are a big business ripping people off, perceived or otherwise, the government is coming after you. Because that's where the votes are. If that means embracing socialism, intervention, imposing taxes or eschewing the odd free-market principle, then so be it.”

Gas guarantee

The upstream petroleum industry ended September, after a month of highly-publicized interaction with the federal government, declaring that “gas producers will guarantee that the east coast market will not be short of gas in 2018, despite surprisingly high forecasts for demand.”

Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, says: “There is no reason to fear that eastern Australia will run out of gas in 2018. The industry will ensure there will not be a shortfall of gas in the domestic market. The businesses present (at a month’s-end crisis meeting with Malcolm Turnbull and ministers) gave a commitment that all uncontracted gas will be offered to the domestic market first.”

The latest twist in the long-running east coast gas saga followed the Australian Energy Market Operator publishing a forecast of the near-term gas supply/demand balance that APPEA described as “a huge, abrupt change” from its March prediction despite, it said, producers having increased the flow of gas to the market “substantially” in the interim.

The focus now is moving again to the cost of gas for manufacturers, especially where it has to be transported from Queensland to the southern States, with the federal government and the Labor government of Victoria butting heads over the State’s current blanket on onshore gas development. Chemical manufacturers are to the fore in arguing that the deal between the Turnbull government and suppliers still leaves them stuck in the “huge gap” (Dow Chemical) between what they can afford to pay and the asking prices for contracts.

‘Soft target’

The upstream petroleum industry sees today’s gas politics as having the hallmark of a “race to the bottom.”

Malcolm Roberts of the Australian Petroleum Production & Exploration Association laments the fact that, far from being hailed as a huge export success story, the Gladstone-based LNG industry has become a “soft target” in the political battle to assuage community anger over domestic energy price rises.

The federal government and the Labor opposition, he says, “have largely disowned” this industry. “Nothing is said about its 40,000 direct and indirect jobs or the $315 million paid to farmers.” Instead the Gladstone-based LNG businesses are being blamed for east coast tight gas supply and rising prices.

“The policy failure is not that Queensland has developed a massive new supply from its own fields (but) other States have (not) done the same. The domestic market is tight because the two largest States have virtually no production.”

Roberts says the current attitude to the LNG sector in Canberra is “bizarre” when the role of Queensland gas in powering economic growth and boosting the national trade balance is taken in to account.

He points to new Australian Bureau of Statistics data showing a record $23 billion in LNG sales in 2016-17. The value of LNG exports is expected to increase to $32 billion annually.

He urges “a pause in (gas) industry bashing and a sober focus on co-operative action to reduce the costs and risks of producing gas for the domestic market.”

No silver bullets

Rod Sims, chairman of the Australian Competition & Consumer Commission, has warned politicians that no one policy move can guarantee reliability, affordability and sustainability of electricity.

Speaking to the National Press Club in Canberra, Sims called on policymakers to “very much beware silver bullets” (claimed) to address all three objectives.

And he argued with the commonly-expressed view that a policy approach guaranteeing certainty for power generation investors will lower electricity prices and make the NEM more secure. “This ignores a hell of a lot,” he said, noting there are a myriad reasons gas and power prices are high and no easy way to bring them down. “We are in a very, very bad place.”

‘Outdated, unfair’

Queensland Premier Annastacia Palaszczuk wants the east coast electricity market rules rewritten because, she says, they are outdated and unfair.

Speaking to a Committee for the Economic Development of Australia forum in Brisbane, Palaszczuk, who is expected to call a State election soon, has declared that her government-owned power assets will remain in public hands and that she will “continue to push towards” a 50 per cent renewable energy target by 2030.

Queensland, the premier boasts, is the only east coast region the Australian Energy Market Operator does not expect to be at risk of a summer shortfall of power generation – “a stark contrast to the privatized States of New South Wales, Victoria and South Australia,” adding that “we are already Australia’s energy powerhouse, with the youngest and most efficient fleet of coal-fired generators, on a daily basis sending vast amounts of electricity in to the NEM.”

She also asserts it is unfair that “Queenslanders are paying more for electricity because other States are failing to develop their gas basins.”

Meanwhile the Queensland Resources Council has commented that “surging” State power costs are “stifling” the resources sector and threatening jobs. QRC chief executive Ian Macfarlane, a former federal energy minister, says his members are “gravely concerned” that wholesale electricity prices in the State have risen from $30 per megawatt hour to more than $100 since 2012.

The State opposition leader, Tim Nicholls, who has committed the Liberal National Party to building a new high-efficiency coal generator in northern Queensland if it regains office, has responded to Palaszczuk by accusing her of “ripping out dividends from the government’s energy businesses, loading them with $5 billion of debt and allowing Stanwell Corporation to price gouge.”

Prime Minister Malcolm Turnbull has also accused the State government of allowing Stanwell and CS Energy to “game the system to increase profits.”

Turnbull, on a visit to Queensland with other federal ministers, said the NEM issue “isn’t renewables versus coal but getting the right mix.”

Big power picture

The just-published Australian Bureau of Statistics’ household expenditure analysis has thrown up the fact that the share of residential budgets spent on electricity is unchanged from what it was in 1984 – it is still 2.9 per cent. This, however, is higher than it was between 1998 and 2010 – when it stood at 2.6 per cent.

The ABS review, which is undertaken every six years, highlights major areas of family stress: rents, rates and mortgages now taking 19.6 per cent of budgets compared with 12.8 per cent in the 1980s – and education costs that have more than trebled as a share of budgets.

The bureau analysis says household electricity and gas bills account for $41 of average weekly disposable income of $1,425 – just under $6 a day and a sixth of what households spend on recreation and alcohol. Grocery purchases represent 17 per cent of current outlays (down from 20 per cent in 1984) and transport bills 15 per cent (down from 16 per cent).

After allowing for inflation, energy utility costs are 11 per cent higher than they were when the previous ABS review took place at the end of the past decade.

The study has found, when extrapolating from those interviewed, that 1.3 million Australian households (15 per cent of the total) are exhibiting signs of financial stress with 59 per cent (or 5.1 million households) suffering no budget angst.

It also shows that average annual household expenditure on energy (including electricity, gas, heating oil and wood) is higher in Melbourne ($2,427) than Sydney ($2,078) or Brisbane ($1,829).

TransGrid denied

The Australian Energy Regulator has cut $992 million from TransGrid’s capital works program for 2018 to 2023, allowing the New South Wales and ACT transmission business that serves three million homes and more than 30,000 businesses to recover $3.91 billion from consumers over five years instead of its proposed $4.27 billion.

The regulator says the impact of the draft decision on the average residential customer in 2022-23 will be bills $42 a year higher than in 2017-18. Transmission charges represent seven per cent of the household bill in NSW and the ACT.

TransGrid CEO Paul Italiano has responded to the determination by saying that the company’s plans include seeking to replace deteriorating high voltage cables installed in the 1960s and 1970s to serve the Sydney CBD.

The final regulatory decision will be made in April next year.

‘Not our plan’

Federal opposition leader Bill Shorten says a 66 per cent renewable energy target proposed by green lobbyists is “certainly not on our work plan” while committing Labor to pursuing a national carbon emissions target of 45 per cent for 2030.

He was reacting to comment by The Australia Institute that the “least-cost path” to meeting this country’s commitment under the Paris carbon agreement would be to go for 66 to 75 per cent renewable electricity production by 2030.

Liddell saga

The decision by the Turnbull government to try to force the ongoing life of Liddell power station in the NSW Hunter Valley after its chosen use-by date (2022) by AGL Energy is arguably the oddest twist in a decade of off-the-wall energy policy developments in eastern Australia.

The pressure from the Coalition government (and the Prime Minister in particular) has seen AGL mount a public relations campaign in reaction to demonstrate the power plant’s unsuitability for an extended life.  Meanwhile federal Labor has made it known that it favors development of gas-fired generation to underpin NEM dispatchable supply, using, it says, gas redirected from LNG exports out of Gladstone.

The Liddell saga started with a report from the Australian Energy Market Operator to the federal government on NEM security, including a warning of shortage risks this summer and when the power station is shut by AGL in five years time. Subsequently the market operator’s CEO, Audrey Zibelman, went public with the observation that “there is plenty of time” to build 1,000 megawatts of capacity to replace Liddell’s lost load. She told a House of Representatives committee that the years available from now to its scheduled closure “give us an opportunity to develop the right kind of auction approach to procure the resources we need.”

Zibelman added: “Our recommendation is that, if Liddell retires as AGL has announced, we're going to need replacement capability and we should design a mechanism that allows us to get there at the lowest economic cost to consumers. We have not done a comparison of the cost of keeping Liddell open versus finding a substitute.”

En passant, the emergence of the Liddell issue has seen the national chief scientist, Alan Finkel, lead author of a recent wide-ranging report on electricity supply, seemingly go a bit beyond its recommendations and express in a September speech support for keeping coal plants open. "There is some advantage in investing in existing coal generation to give us time to bring on the batteries, the pumped hydro and the other support systems we need to make the wind and the solar work with the maximum effectiveness for us in terms of security and low cost," Finkel said. "Investing in extending existing coal generators is absolutely consistent with what we recommended in our report."

A notable feature of the Liddell debate has been that the Coalition government in NSW has kept right out of it despite reports of an unsourced claim that the Berejiklian administration could buy the plant back if AGL made a decision to allow it to be sold. On the record, Premier Gladys Berejiklian told a State parliamentary committee in early September that she would not rule out the option of a new coal-burning power station being built in NSW.

Back in July her Energy Minister, Don Harwin, told a CEDA forum in Sydney that “the notion of baseload power is an outdated paradigm. The new paradigm is about better forecasting demand, factoring in intermittent sources and then balancing the rest through dispatch and demand management.”

The AGL view

Retiring AGL chairman Jerry Maycock canvassed the Liddell issue at the company’s annual general meeting at the end of September.

Critically, he asserted that “while it may be technically possible to extend (Liddell’s) life, the costs of doing so in a way that ensures the plant is even moderately reliable (beyond 2022) are certain to be substantial.” He added: “The sale of the asset will be challenging because it will be difficult to ‘unbundle’ from AGL’s wholesale portfolio and physically from the adjacent, interconnected Bayswater plant.”

His comments underline the most curious aspect of the Liddell affair: why did the Prime Minister leap on forcing a greater life for this power station in the most public way possible without first establishing its state and prospects in a quiet conversation with the company?

Maycock told shareholders AGL is committed to responding to the Turnbull government by early to mid-December, timing that coincides with media and political pressure for Turnbull to resolve the vexed (for the Coalition) issue of the carbon emissions target by the year-end.

Three phases

AGL managing director Andy Vesey presented shareholders with the company’s perspective of the NEM wholesale power price situation at the AGM. He emphasized three phases.

“Firstly,” he said, “until 2015, prices remained relatively low because the market was balanced and was relying on fuels at relatively low prices.

“Secondly, prices began to rise sharply, signalling the need for new investment to replace the ageing generation fleet, just as gas prices were also rising. The disorderly withdrawal of non-AGL plant such as Northern in South Australia and Hazelwood in Victoria exacerbated the problem. It placed additional stress on the remaining plant in the system, while creating extra demand and price pressure for black coal, the cost of which was already rising.

“The good news,” he declared, “is that I believe we are now entering a third phase. Spot electricity prices have moderated somewhat from extreme highs earlier this year.

“Forward prices, while not always a direct predictor of the prices that will occur in the future, do indicate lower wholesale prices are achievable over time. This is because the market is responding to the signal of high prices to bring on new generation investment. Indeed, more than 4.5 gigawatts of new wind and solar projects are currently under development in Australia. It is essential that policy delivers the certainty to enable new investment to support these developments and facilitate a smooth transition to a reliable and affordable carbon-constrained future.”

Defence lines

The Australian Energy Market Commission has published new NEM rules that it says will help to guard against technical failures leading to cascading power blackouts.

AEMC chairman John Pierce says that the new rules, along with those published in March, address security issues arising as synchronous generation (like coal) retires and more variable plant (mostly wind and solar power) enter the market.

The rules, he adds, are designed to provide more confidence in the NEM system at least cost to consumers – and to investors who are called on to spend billions of dollars on new capacity.

Taking heart

The South Australian government has seized on the latest AEMO review of NEM supply security to talk up its plans to avoid further blackout problems in the coming summer.

Tom Koutsantonis, Treasurer and Energy Minister, says the market operator’s new commentary is “proof that our energy plan is working.” He takes heart from the review stating that the SA energy plan “will help alleviate risks to consumer supply” in the State by acting to provide additional energy at times of system stress.

“AEMO’s modelling,” he adds, “shows that any supply shortfall in South Australia will be more than covered by our back-up power plant and grid-scale battery,” both of, he asserts, are on track to be available at the start of December.

Snarling at One Nation

The upstream petroleum industry has dropped on One Nation like a tonne of bricks for a pitch to Queensland voters to ban gas exploration in the State’s segment of the Cooper Basin.

With the State election looming and both major parties concerned about One Nation’s standing, especially in North Queensland, Pauline Hanson’s party wants Cooper Basin drilling banned until it can be proven that it does no damage to the Great Artesian Basin.

The Australian Petroleum Production & Exploration Association accuses the party of “economic vandalism,” pointing out that the Cooper Basin accounts for 14.5 per cent of the State’s gas supply and that industry activity there represents a fraction of one per cent of the land area.

APPEA says companies operating in the area have wide local community support and are subject to layers of regulation to protect the environment.

The Queensland government resources minister, Anthony Lynham, has also attacked the One Nation stance, saying it would “deny the State almost decades of gas supply.”

‘Deeply worried’

The Australian Industry Group says its members remain “deeply worried” about the state of the domestic gas market and it is urging the Turnbull government to maintain pressure on suppliers.

AiG chief executive Innes Willox says the domestic gas market remains non-transparent and member businesses continue to experience “extreme contract prices” and poor contract availability despite some recent positive signs of action by producers.

In a September submission to the federal government, AiG acknowledges that factories vary widely in their energy intensity and the role of gas in their energy mix. It says some large gas users have very long term contracts which will meet the bulk of their needs for some time. “However, gas prices at double export parity will have a substantial impact on many businesses.”

The association says some of its members believe that they will be able to weather very high gas prices, including through investments in efficiency, fuel switching and (power) self generation. “Some say they will be able to manage in the near term, but cannot reinvest unless gas returns to export parity. Some businesses have indicated that current gas prices will close parts of their supply chain and put their own immediate viability in doubt. A few may not be viable even at international price parity. Small and medium sized manufacturers, who are less likely to have long-term supply agreements and who have a weaker hand in supply negotiations, are the most at risk.”

Meanwhile EnergyQuest chief executive Graeme Bethune says the east coast continues to have “some of the highest gas prices in the world.”

Rising in West

The new West Australian Labor government, riding on its solid poll victory in March, is pursuing eradication of subsidies in its south-west electricity system, putting up network charges 11 per cent this financial year and signalling further increases out to 2020-21.

Energy Minister Ben Wyatt says the operating subsidy for Synergy, the State-owned utility, will be $146 million this year, falling from $280 million last year, and becoming zero in a year’s time.

Lyndon Rowe, Synergy chairman, says the new government “is to be congratulated for making the tough but completely necessary decision to undertake tariff reform.” He adds: “Increasing electricity prices is not a vote winner but there were many inequities in both the level and structure of household tariffs, particularly related to the cost of network connection.”

Rowe says that the cost of the SWIS network was increasingly being paid for by a smaller and smaller group of customers, often those with the least capacity to pay, or the State’s taxpayers.

Last word

The quote from an editorial in the Australian Financial Review that opens this October newsletter in essence underscores a critical issue for energy supply development in this country, one that has been a thread running through the 150 editions of the Coolibah newsletter I have published since 2005 as well as more than 850 posts on my This is Power blog since 2010: sovereign risk.

Graeme Bethune of EnergyQuest quotes international reaction to our domestic gas imbroglio as “we thought Australia was a safe, secure place to invest but sovereign risk is now sky high.”

Michael Baume, a former federal Liberal MP, senator and past consul-general in New York, declares in The Spectator magazine in September that “created by a combination of federal political incompetence and ideology-based State stupidity, it is sovereign risk, above all else, that is condemning Australia to (an ongoing) energy crisis.”

My observation is that our body politic, federal and State, has shown an inability to properly appreciate sovereign risk dangers when intervening in electricity, oil and gas supply too frequently over a very long period. This problem has cropped up many times across the more than 40 years I have been involved in Australian business issues management.

The one, Herculean effort to rise above the threat of sovereign risk was the creation of the east coast electricity market in the late 1990s, a bid to leave new investment to market forces that was successful for its first 10 years and has been comprehensively undermined this decade.

Our present state of affairs, the domestic “energy crisis” as dubbed by Prime Minister Turnbull, is the heaviest price for this failing we collectively (consumers and suppliers) have paid – and we will continue to pay for it well in to the future. What’s more, the extent of this payment (for example, in lost direct and indirect factory employment) has yet to become clear.

The to-do over the past month with respect to the closure of Liddell power station (in 2022) demonstrates the point. If forcing the longer-term retention of Liddell production is an answer to today’s core market issues of security and cost, then what was the question? If a central issue is business reluctance to invest in dispatchable generation because of concerns about political interference, how does attempting to force a company to sustain output of an arbitrarily selected plant, an old one with reliability problems, improve matters? 

Veteran energy journalist Angela Macdonald-Smith writes that investors have been “rattled” by such unpredictable interventions in the market – from both State and federal governments. Even before the Liddell manoeuvre, I have personally observed this over the past 15 months in co-chairing the Quest Events’ energy outlook conference series and participating in other forums.

Reporting from an energy roundtable organized by the Financial Review, Macdonald-Smith notes that investor alarm has reached the stage where chief executives can raise the possibility of re-nationalization of the power sector. This is a notion that would have been considered ludicrous two years ago but was given some credence in September by the alternative Prime Minister, Bill Shorten, declaring that that the energy crisis has been “driven by privatization.”

Rather than rising above the fray and providing statesman-like leadership towards a consensus on policies that, over time, will underpin security and affordability of electricity supply and that will also contribute to a reduction in energy-related carbon emissions, the heads of our main political parties less and less give the appearance of measured, long-term thinking and more and more that of desperately seeking winners in pursuit of votes at the next election.

No good can come of this.

Almost a year ago the Finkel report was seen as a circuit-breaker. Can this still be said? And, if not, what can be?

To quote a headline from a commentary in The Conversation in late September, to avoid the crisis worsening, what the energy market needs is a steady steer, not an emergency swerve.

Keith Orchison
2 October 2017