Issue 162, October 2018
A year ago we entered the last quarter of 2017 with quite high hopes that the long, distorted debate on electricity policy was heading for a decision point, although opinions differed on the destination. We go into the last quarter of 2018 in a state of confusion, chiefly as a result of the disintegration of Malcolm Turnbull’s government. Will the CoAG Energy Council discussion in mid-October help or hinder any policy progress? There’s no way of knowing. Can, in fact, there be any significant decisions on policy this side of the next federal election? October is also a month where the Wentworth by-election to replace a departed prime minister may be seminal in determining further political developments. Hovering over the major electricity suppliers, as well, is the spectre of a royal commission regardless of who is in power federally. Meanwhile east coast gas supply remains questionable, not least for manufacturers heading for yet another year of fears about costs.
Electricity generation across Australia, including rooftop solar power, totaled a record 258 terawatt hours in financial year 2016-17, according to the federal government. Nationally, coal plants’ share was 61 per cent in calendar 2017, a fall from 80 per cent at the start of this century.
The Department of Environment & Energy’s latest Energy Update also says natural gas generation’s national share was 21 per cent in calendar 2017, giving fossil fuels, including oil, 84.9 per cent (220.3 TWh) of Australia’s power production last year.
The report records hydro power’s contribution in 2017 as five per cent (13.9 TWh) and wind power as just under five per cent (12.6 TWh). Solar power provided three per cent, most of which (8 TWh) was use of rooftop PVs.
Looking at all forms of energy consumption, the report finds oil remains the major source with 37.7 per cent (2,315.4 petajoules) followed by coal with 31.5 per cent (1,936.9 PJ) and gas 24.7 per cent (1,515 PJ). Renewables account for 6.2 per cent.
Electricity consumption and transport shared the largest amount of overall national energy demand in 2016-17 – each with 27.5 per cent – followed by manufacturing (17.8 per cent) and mining (10.9 per cent). Householders’ share of energy use in the financial year was 7.5 per cent with agriculture at 1.9 per cent.
The largest State consumer of energy in 2016-17 was Queensland (25 per cent) followed by New South Wales (24.9 per cent), Victoria (22.8 per cent) and Western Australia (19.2 per cent).
Meanwhile in the NEM, black and brown coal generation delivered 80 per cent of grid-connected power in the first half of 2018.
EnergyQuarterly statistics show that 92,624 gigawatt hours of electricity was sent to the east coast market between January and June – with 74,300 GWh coming from coal plants. Other contributions were 8,885 GWh from gas plants, 7,815 GWh from hydro power, 6,247 GWh from wind farms and 377 GWh from large solar systems. An estimated 3,587 GWh was used by residential and other rooftop solar PV systems.
“We want lower prices while we keep the lights on and we won’t allow anything to get in our way” – new federal Energy Minister Angus Taylor. “We’ll be taking action by backing investment in new generation, making sure the rip-offs from the big companies are stopped and making sure customers have a fair price they don’t have to spend hours on the phone negotiating.”
“I think that what will happen going forward is that the reliability obligation part of the NEG will probably get support” – Energy Security Board chair Kerry Schott.
“Another sad thing is that, while the national government is in the state that it is at the moment, there is a flavor of more market intervention than just stepping back and letting the States and the market get on with it” – ESB’s Kerry Schott.
“Although energy was not within the task force’s remit, it is clear from submissions that, if the resources sector is to strengthen its standing and add value, it will need to rely heavily on access to affordable and reliable power” – Andrew Cripps, chairman of the Resources 2030 task force reporting to federal Resources Minister Matt Canavan.
“We’re making Victoria the capital of renewable energy” – Premier Daniel Andrews.
“With State and federal elections looming over the next six to nine months, any policy clarity is unlikely to come soon” – Parvathy Iyer, S&P Global Ratings analyst.
Federal Energy Minister Angus Taylor says the Morrison Coalition government will “back investment in new generation that increases power supply and keeps competition in the NEM.”
In radio interviews following his shift in to the portfolio, Taylor has also warned that the government “will create powers of divestment” to deal with a situation where “a big company decides they want to close a big generator that is needed in the system to keep it affordable and reliable.”
What it wants, he adds, is generation that will provide “a downward hit on prices and keep the lights on,” adding that “this could well be coal; it could be other technologies.”
Grattan Institute energy director Tony Wood says Angus Taylor faces a dual challenge: he must be seen to take actions to reduce electricity prices and maintain pressure on the supply industry – “but he should also seek to frame these actions and his own narrative in a broader policy framework.”
Wood says the first will test his political skills and the second his “deep understanding of energy and financial markets.”
He argues that Taylor should work with the CoAG Energy Council to “implement a prioritized agenda focused on outcomes: actions that will have a short-term impact on prices and actions that will sustain downward price pressure while maintaining reliability.”
The federal government’s latest Energy Update says Australian household electricity bills rose by almost 12 per cent in the 2017-18 financial year after a six per cent increase in 2016-17.
“The market sentiment about incumbent energy players is at an all time low,” says Deloitte Australia partner John O’Brien. “It comes just as they need to protect their patch and communicate with their customers in a new way. The ‘cash cow’ of customers just signing and forgetting is long gone.”
He says some incumbents in the energy marketplace risk the same fate as Kodak, Nokia and Borders if they “fail to change their spots.” He adds: “The companies understand this challenge but are not yet hurting badly enough to (pursue) rapid business model change.”
O’Brien says: “It is an exciting time to be in the energy industry, After 20 years of talk about major change, it is now happening in front of our eyes. The consumer is now dictating interactions with the energy market. Households and industry consumers are increasingly aware things are changing and their options are growing. This a major shock for those who assumed the centralized approach to energy would remain in place until their retirement.”
Financial markets analyst S&P Global Ratings says it believes Australian private investment in new, large-scale coal-fired power plants in the foreseeable future is “highly unlikely” unless government underwrites the costs because investment returns may not be sufficient. It adds that high capital costs and a development lead time of about four years would see proponents struggle to meet investment criteria.
S&P says current high fuel wholesale prices may raise the same question for new gas-fueled generation, but it expects GFG and pumped storage to “bridge the gap” until “large-scale renewables or renewables together with storage capabilities such as batteries become more established.”
The agency warns the lack of flexible policy to encourage investment in a mix of “appropriate assets” will fail the NEM “in all key areas” that the “national energy guarantee sought to address.
It also warns that regulatory intervention to reduce end-use consumer prices “could wind up being credit negative” for the supply sector by reducing incentives for investment. “Although such measures may offer a short-term reprieve to end-consumers,” S&P says, “they could hurt the profitability of market participants and may price out small players, reducing competition.”
Efforts to force aged thermal plants to stay open could also backfire, the agency says, because owners could be exposed to safety issues if rising maintenance costs make units uneconomic. “The prolonged operation of aging plants may require material refurbishments to improve their availability and reliability, adding to their cost base.”
Energy Networks Australia is calling for generators to be required to give longer notice when closing power stations.
ENA chief executive Andrew Dillon, in a submission to the Australian Energy Market Commission, says three years’ notice may be enough when replacement plant can be incorporated easily in to the NEM grid, “but it’s a tight squeeze if retirements trigger a need for new infrastructure such as interconnectors, factoring in approvals, environmental assessments, project plans and build time.”
He points out that regulatory test processes can take up to 18 months and land access and construction approvals up to 30 months.
The sudden closure of Hazelwood power station in Victoria, he adds, “highlights that we have to get this right – pushing out the notice period to five years will provide more certainty.”
Santos CEO Kevin Gallacher says sovereign risk is “rising fast” in Australia, a country that relies on foreign investment.
He told a conference in Darwin that talk by political parties about price controls, export controls and forced divestiture of assets in the energy sector are increasing the prospects of investors assessing Australia as a too-risky destination for their funds – and he fears populist talk about interventions will grow as the federal election gets closer.
“In a low-risk country, governments do not intervene in negotiations between producers and consumers or insist resources be supplied at prices that pay no regard to production costs. Gas producers should not be required to subsidize companies that refuse to address their own inefficient cost structures.”
Gallacher said energy company CEOs are being regularly summoned to Canberra by the federal government to be “a punching bag for politicians seeking votes from consumers annoyed by rising prices.”
The contribution by the gas industry to the national economy needs better recognition from both sides of politics, he added.
Output from gas-fired generation in the NEM rose by 32.3 per cent during 2017, largely filling the baseload gap left by the closure of coal-fired plants in South Australia and Victoria, says the Australian Energy Council.
Total gas generation in SA last year was 4,720 GWh, making up 59.6 per cent of power produced within the State, according to the AEC, a marked rise on the 2015 share of 39.4 per cent before the closure of the Northern brown coal plant.
In Victoria, production by gas plants reached 6.96 per cent in 2017 compared with 1.68 per cent the year before when the Hazelwood coal power station was still in operation.
Meanwhile, in Queensland, gas turbine output has been falling since 2015 but in New South Wales it went up to 4.5 per cent of in-State production last year.
The EnergyQuarterly report published by analysts EnergyQuest says that NEM gas-fired generation in financial year 2017-18 totaled 19,219 GWh – up from 17,768 GWh in 2016-17 – with the largest State demand being in South Australia (7,269 GWh versus 5,513 GWh for wind power).
Government-owned gentailer Synergy says rooftop solar power is now meeting an estimated seven per cent of total electricity demand in Western Australia’s isolated south-west integrated system.
In its new annual report, Synergy says installed rooftop PV capacity is now 918.5 megawatts in the SWIS, a 25 per cent rise in a year. “This trend is forecast to continue as customers, facing rising electricity prices, look for cheaper alternatives.”
Synergy says residential power demand in the system fell by 238 gigawatt hours (3.9 per cent) over the past financial year, partly due to the growing uptake of solar PVs.
The EnergyQuarterly report shows that overall generation in the SWIS for the 12 months to June this year reached 19,326 GWh – made up of 8,921 GWh from coal plants, 7,474 GWh from gas units, 1,572 GWh from wind farms and 1,269 GWh from rooftop solar power – with the latter 223 GWh higher than in 2016-17.
In an environment where the Energy Users Association claims there is “a very real possibility that future domestic gas prices will force the closure of large parts of Australia’s manufacturing base” and the AGL chairman says “rational analysis points to the fact that we are short of gas for domestic consumption at least in the medium term,” the outlook for east coast gas industry is being described by Graeme Bethune, principal of EnergyQuest, as subject to “considerable uncertainty.”
Exploration for gas, Bethune notes, is at historic lows, more than 5,000 petajoules of coal seam gas reserves have been written down in the past three years, reserves in Victoria’s Gippsland basin are declining and domestic consumption is “subject to price, demand and government policy uncertainty.” There is not enough flexible gas in the east coast LNG developments to offset declining Victorian production.
Bethune says east coast gas producers should prepare for heavy-handed political intervention over the next year, regardless of who wins the next federal election. “Politics has overtaken rational policy that is in the national interest.”
In the circumstances, he adds, “the idea of prospective reservation of gas reserves on the east coast is starting to look like a moderate way to respond to concerns about domestic supply – at least it does not trash Australia’s reputation with investors, providing it is not retrospective.”
He says the issue is complex “but it is clear that the (supply) industry is no longer in a political environment where it can keep asking the community to put its faith in the market to deliver the best outcomes.”
The Queensland Resources Council wants the Coalition and Labor to adopt bipartisan policy to pledge federal rewards to States that act to ease pressure on east coast gas supply – and the Queensland government says it “applauds” the idea.
QRC chief executive Ian Macfarlane, a former federal industry minister who oversaw publication of the last energy white paper three years ago, says no government in Canberra can force Victoria and New South Wales to act to support new gas development – but it can reward Queensland for “its commitment to being part of the solution” and this should be at the expense of the “recalcitrant southern States.”
Macfarlane says NSW and Victoria have been steadfast in refusing to support new gas supply. “They’ve been offered the carrot, perhaps now they need the stick.”
QRC calculates that development of the east coast LNG industry has generated $63 billion in investment and fuelled record Queensland export growth, creating 12,000 full-time jobs.
The Australian Petroleum Production & Exploration Association says its industry has invested $300 billion in oil and gas projects over the past decade to deliver “decades of economic growth, exports and jobs.”
CEO Malcolm Roberts says “oil and gas is not ‘just’ a resources industry – it supports a vast supply chain of businesses in manufacturing, services and construction.”
APPEA is highlighting new Bureau of Statistics data showing that Australian LNG exports increased by 39 per cent in 2017-18, reaching a record $30 billion in trade.
A Deakin University centre has raised a question mark over the “oligopolistic” nature of the Australian domestic gas market, saying the present regulatory system disadvantages local consumers while producers have to compete strongly in the international market.
Academics at the Deakin Business School Centre for Energy, Environment & Natural Disasters say a lack of competition in transportation and distribution should be remedied by modernizing the regulatory framework – “a mechanism adopted a long time ago” – to lower barriers to market entry and create greater transparency about supply.
Deputy director Shuddha Rafiq says profit-motivated suppliers at present have no incentive to invest heavily in east coast infrastructure. Economist Munirul Nabin says six firms control 60 per cent of gas production and one firm owns almost 60 per cent of eastern Australian gas transmission.
Australia’s energy networks sector is pushing back at critics in an environment where the calls for a royal commission, now mooted by both major sides of politics, to include scrutiny of privatization are growing louder.
Energy Networks Australia chief executive Andrew Dillon claims “the reality is privatization has delivered good results for customers – analysis of prices and reliability pre- and post-privatization makes strong case for having privately-owned networks.” He says keeping prices down is a key priority for network businesses.
Current energy woes and high power prices can’t be blamed on privatization of the businesses, he adds. While network costs have risen in the past, retail and wholesale costs have delivered more recent increases. “Network charges in privatized energy distribution and transmission markets have been among the lowest in Australia.”
He points to comment by the chairman of the Australian Competition & Consumer Commission, Rod Sims, that the privately-owned networks are “the most efficient in the country” and that “there is no doubt privatization has worked with poles and wires.”
The Clean Energy Council says wind and solar power, battery storage and pumped hydro are now the lowest-cost form of investment in new electricity generation and do not need new subsidies, only policy certainty.
It declares: “Record levels of investment are flowing in to energy generation on the back of the renewable energy target – but the RET will soon be met. Policy certainty is essential to ensure investment continues beyond 2020.”
The Australian Energy Market Commission is again considering a request for a demand response mechanism in the NEM, having turned down the concept three years ago.
The new request comes from The Australia Institute, the Total Environment Centre and the Public Interest Advocacy Centre. The trio argue that the mechanism can be a “key enabler” of the orderly retirement of coal-fired generation by providing for rapid dispatch of “negawatts” of avoided consumption to help manage the increased use of distributed, variable and renewable power.
They claim that, since 2016, technological change and changing market conditions – “in particular, rising wholesale power prices and system security issues” – have created new impetus for the creation of demand response market. This will also, they say, limit the potential for incumbent generators to charge high prices during periods of tight power supply balance.
The AEMC has embarked on stakeholder consultation in a six-months process to evaluate the rule change request.
The Energy Security Board will report to December’s CoAG Energy Council meeting on the integrated system plan for the NEM proposed by the market operator.
The plan includes recommendations on multi-billion dollar transmission investments to support expansion of renewable energy in the market.
In August Energy Council ministers asked the ESB to consider how the AEMO proposal can be converted in to “an actionable strategic plan.”
The market operator declares that Australia is in the midst of “a transformative and unprecedented” rate of power system change and it has projected reliability and security systems needed for the NEM over 20 years. By 2040, AEMO says, coal and gas generation representing about a third of current production will have left the market. The plan envisages between 14,000 and 48,000 megawatts of grid-connected variable renewables being added to the market in two decades.
A power system modeling paper prepared by a group of engineers and scientists with decades of experience in the power industry and circulated to federal, State and Territory governments and oppositions is calling for Australia’s ban on nuclear generation to be removed. A bipartisan federal parliament agreement to do this is “now a matter of urgency,” it says.
Barry Murphy, a former Caltex Australia managing director and spokesman for the group, says “the ban is the result of a political deal done 20 years ago and is now an obstacle” to planning future supply. “Its removal would allow more competition between various technologies to supply future electricity needs.”
He told The Australian “countries like Germany can experiment with high levels of renewables because they can always import nuclear power from France or the Czech Republic when there isn’t enough wind or solar – but we’re on our own.”
Modeling undertaken for the paper shows that the NEM has an average constant electricity demand of 18,368 megawatts.
Apart from arguing for the nuclear ban to be lifted, the paper calls for renewable subsidies to be wound up and for a capacity component to be added to the NEM.
One of the most interesting comments about energy in September came from the EnergyAustralia managing director, Catherine Tanna.
In an interview with the Australian Financial Review, Tanna declared: “We’ve been talking for years about a transition to a clean energy future (and) it needs to be a smooth transition. Without talking about emissions, it’s not going to be smooth. And we’ve got to talk about reliability or its not going to be smooth.”
She emphasized that “we have to work on all three elements of the trilemma,” pointing out what should be obvious but gets all-too frequently ignored: if too much emphasis is put on one, the other two are put at risk.
Now this isn’t rocket science, but you might think it was as you watch not only politicians but many of the loud voices in the debate ranting about their hobby horse without even a nod to the other two runners – or at best pushing glib assertions (eg going for much greater levels of renewables will bring down power prices).
A long way from here – in Hamburg, Germany – the International Energy Agency executive director, Fatih Birol, made a point to a conference that is germane. While engaged in talking up wind farms to the Global Wind Summit – well, he would, wouldn’t he – Birol highlighted that, with very much higher levels of variable generation in systems, much greater levels of flexibility will be needed, notably in storage, grid connection and demand management. “Grids, grids, grids are the issue,” he said. “Flexibility is the magic word.”
Of course it is – and the four-letter word riding tandem with it is “cost.”
For eastern Australia, we now have the Energy Market Commission about to introduce a NEM rule about connecting new generation to the grid – and emphasizing this is about “keeping the lights on at the lowest cost.”
We need, says the AEMC, “to have the right technical standards so these generators can join the power system at the lowest possible cost while maintaining system security.” Which, it shouldn’t be necessary to highlight, is not the same as driving down today’s power bills.
In all this context, I suggest, more than a few of today’s spruikers would do themselves a favour by reading a Clayton Utz commentary, just published, on the topic that the ACCC report on electricity (which is high in the eye of the federal government in its post-NEG phase) “offers no easy solution” to maintaining energy security, increasing the role of renewables in the overall NEM generation mix and “keeping (power) prices to a generally acceptable level.”
As the recent Australian Energy Market Operator’s paper on integrated system planning – now being examined by the Energy Security Board for the CoAG Energy Council – has mooted, the infrastructure costs for this pursuit may be around $27 billion (and that’s before incumbent coal and gas generation businesses start spending on upgrading existing assets, which they will, I’d suggest, in self-defence.)
Writing in a trade magazine last month, the Electric Energy Society’s president, Robert Barr, makes a good point. “As customers and voters,” he says, “we need to identify what success or failure might look like” in pressing forward in the wake of “NEG 1.0.”
Success, in his view, would see end-user prices lowered to their pre-Hazelwood closure levels, no major blackouts and the continuation of all existing energy-intensive industry in eastern Australia. Failure would be rising prices, blackouts and more manufacturing closures.
Barr adds that a litmus test may be the ability of the Portland aluminium smelter in Victoria to secure a new, subsidy-free electricity contract at rates that allow profitable production. The present contract comes to an end in a few years.
He makes another point that easterners might ponder: the “bizarre” situation on the east coast could provide Western Australia with an advantage in attracting new industry.
All of which serves to burnish the Catherine Tanna argument for the importance of finding a smooth path forward for energy policy. Unfortunately, everything right now points to the path getting even more bumpy.
30 September 2018