Issue 101, September 2013

Welcome to the new edition of Coolibah monthly newsletter, writes Keith Orchison, as the nation girds itself to change government – but will it change the make-up of the Senate? – and energy suppliers and major users alike fret about what the next 2-3 years holds for them.

Down to wire

While it now seems highly likely that the Coalition will win the election for the House of Representatives – estimates at the end of August were that Labor will lose at least eight seats and the Liberals and Nationals will win at least 10 (including reclaiming two seats held by independents) – there is considerable doubt that the composition of the Senate will work to an Abbott government’s advantage.

The most likely outcome for the Senate, some expert analysts believed at the end of a particularly insipid election campaign, is for its numbers from 1 July to be unimproved from a Coalition perspective.

Where this will leave Tony Abbott in terms of his pledge to repeal the carbon pricing legislation and to go to a double dissolution election – which couldn’t happen until early 2015, uncomfortably near to the New South Wales State election, fixed for March of that year – is a topic of much debate in energy business circles as polling day nears.

A re-elected Kevin Rudd would shift the carbon regime to emissions trading linked to the European Union scheme from next July – but what will Abbott do if, as is widely expected, Labor and the Greens combine in the Senate after 7 September to baulk his promised repeal of the “clean energy” legislation?

One expectation is that, prevented (at least initially) from pulling the carbon price off consumers’ backs, an Abbott government will move harder and faster to change the renewable energy target and to promote any savings for consumers as a valuable step towards meeting his election promises.

The Coalition is also committed to disbanding the Clean Energy Finance Corporation, the Climate Change Authority, the Climate Commission and the Energy Security Fund.

Extremely challenging

Regardless of who is in office after the election, the east coast energy market will remain a focus of investor concern – with the degree of angst in the marketplace highlighted by EnergyAustralia’s owners, CLP Holdings of Hong Kong, in an August review of the international group’s performance.

CLP describes the Australian energy business environment as “extremely challenging,” commenting that the local market is “facing unprecedented structural changes, taking place at a rapid pace.”

“In particular,” the statement adds, “the past two years have seen a pronounced decline in residential electricity demand in response to rising prices. The deployment of rooftop solar photovoltaic systems and energy efficiency savings have more than offset any increase in demand from population growth.

“Commercial and industrial demand has also been impacted materially by a difficult manufacturing environment, “it goes on, “in part due to rising energy costs, a highly valued Australian dollar and a slowing global economy.”

CLP says that this soft demand environment, combined with increases in renewable energy generation, has suppressed wholesale prices. “This is likely to continue,” it forecasts. “These factors are impacting the industry as a whole, providing difficult trading conditions for ourselves and our major competitors alike.”

The company bemoans the fact that the financial performance of its Australian operations “continues to be adversely affected by a number of issues.”  These include problems with its new customer billing system and industrial action in the Latrobe Valley.

EnergyAustralia is in the forefront of the push by some east coast market participants, including Origin Energy, for changes to the RET, arguing that the current target of 41,000 GWh in 2020 presents a significant problem for an over-supplied wholesale power market.

AEMO outlook

In its new review of the east coast marketplace, released in mid-August, the Australian Energy Market Operator says that reduced growth in energy use, rising domestic rooftop generation, increasing consumer responses to higher electricity prices and the development of large-scale renewable generation are expected to defer further thermal power plant investment.

AEMO has reduced its 10-year growth outlook for the market to an average annual rate of 1.3 per cent, down from 1.5 per cent in its 2012 forecast.

The operator points to lower than expected growth in most industrial sectors, the solar PV situation, higher estimates of the impact of energy efficiency measures (including changes in building standards) and a higher estimate of how customers will react to power prices as grounds for again lowering its outlook.

It says 522 megawatts of new capacity were added to the east coast system in 2012-13, mainly consisting of the Macarthur wind farm (420 MW) and the Morton’s Lane wind project (19.5 MW), both in Victoria. Fossil fuel additions were a 21 MW cogeneration plant installed by Qenos in Victoria and a 60 MW increase in one Eraring power station unit in NSW.

Over 2012-13, it adds, 870 MW of Queensland coal-fired generation was placed in either seasonal dry storage or decommissioned.

While demand-driven investment signals for new plant “remain muted,” AEMO says, the RET continues to drive construction of new renewable generation. Six wind farms with a total capacity of 954 MW are committed to be commissioned between mid-2013 and the end of 2014.

It notes that investors are examining plans for 30,000 MW of new generation development – 45 per cent of it wind power, 37 per cent gas plant and 11 per cent coal-fired generation.

It’s rough

Leading infrastructure service provider Tenix, noting the utility transmission and distribution industry in Australia has had a “tumultuous year,” characterised by generally adverse conditions, adds: “Not within living memory have utilities (here) had to deal with such a broad range of issues.

These, it says, have included reduced demand, increased regulatory and political pressure on expenditure, consideration of reductions in reliability standards to reduce expenditure (in NSW), commitments to limit tariff increases (in NSW and Queensland), increased power to regulators, job cuts, uncertainty about privatisations (in NSW and Queensland) and potential reversal of privatisation in the ACT as well as ownership changes (for ElectraNet, SPAusNet and Jemena).

This, it notes, follows 2011-12 when T&D utilities spent a record $11 billion on building and maintaining networks, with two-thirds of the outlays in NSW and Queensland.

CoAG pledge

Tony Abbott is committed to convening a meeting of the Council of Australian Governments within six weeks of being sworn in as Prime Minister, according to a report in “The Weekend Australian” newspaper.

If the Coalition wins federal power, the Liberals and Nationals will be in a majority on CoAG for the first time in many years, holding government in Queensland, New South Wales, Victoria, Western Australia and the Northern Territory as well as Canberra.

The business sector will push for a sharper CoAG approach in numerous areas, not least action instead of rhetoric in dealing with the major problem of duplication of project approval processes across Australia, and it will call on Abbott to ensure that energy reform is driven harder and faster.

The activities of the Standing Council on Energy & Resources (the CoAG ministerial committee for this sector) were sharply criticised earlier this year by the Productivity Commission in its review of electricity network activities.

The commission called for “adding some urgency to the existing tardy reform process” and opined that reforms “bogged down by successive reviews” were costing consumers in the east coast energy markets “hundreds of millions of dollars.”

The Energy Users Association of Australia, in its contribution to the federal election debate late in August, has accused “SCER” of failing to deliver the objectives of the cornerstone legislation of the markets, the National Electricity Law and the National Gas Law.

EUAA says large industrial and commercials users “have had to bear the brunt for too long of half-baked priorities” in the reform process and via measures such as the RET.

It wants the processes of the ministerial council revised “to reverse past failures to deliver energy objectives.”

Earlier, the Energy Networks Association said there was “stark evidence” from supplier discussions that the current cycle of regulatory review and policy churn must come to an end.

ENA said investors in ASX-listed energy companies regarded regulatory risk as the most important they faced, ahead of debt markets, declining energy volumes and the state of the national economy.

“It is in the direct interest of consumers,” said ENA chief executive John Bradley, “that network infrastructure is funded efficiently – and this requires investors in long-lived infrastructure to have confidence that the reform framework approved by energy ministers will now be implemented as intended without further upheaval.”

Hilmer redux

The Grattan Institute has invoked the spirit of the landmark Hilmer Report on national competition policy, which had its 20th anniversary in August, to press governments to “revitalise the energy reform agenda that has languished under both main parties.”

The institute’s energy policy director, Tony Wood, says the Hilmer Report “unleashed a 10-year wave of economic reform that produced big productivity gains and lower prices” but a combination of reform fatigue, the end of payments from Canberra to the States to encourage implementation of change and “resistance from vested interests” has stalled the process.

“Having steadily risen from the mid-1970s to the late 1990s, electricity sector productivity has steadily declined,” he adds.

Wood claims that the most important failure of competition policy is in the governance of the energy sector. He asserts that slowing the energy sector productivity decline by half each year since 2000 would have saved Australia $17 billion.

The incoming federal government, he says, should “return national competition policy, a proven winner, to the centre of energy and economic policy.”

Farmers fret

The Queensland Farmers Federation and Cotton Australia convened a forum in Brisbane in mid-August to urge policymakers to do more about still-rising energy prices.

QFF chief executive Dan Galligan said farmers are especially sensitive to the energy price rises because they are unable to pass the costs down their value chain.

Attendees at the forum were told by the Australian Farm Institute’s Mick Keogh that “the first rule of Australian agriculture is that farmgate prices equal the international commodity price minus supply chain costs.”

Keogh acknowledged that agriculture is a relatively small component of the east coast electricity market, with farmers spending about $300 million a year on power bills. (Food processors, he added, spend $470 million a year.)

But, he said, for a sector characterised by narrow and volatile margins, small added costs can be critical.

The forum was told that, in the Queensland dairy industry, the average power bill increase over six years had been $15,000 and had ranged as high as $57,500.

The QFF is calling for a “food and fibre tariff” for electricity supply to agriculture to recognise “the unique needs of the farm sector.”

Bush benefits

The Queensland government has reminded electricity users in the Ergon Energy franchise area – 97 per cent of the State – that they benefitted last year from a $260 million subsidy, which ensures they pay the same regulated price as consumers in the south-east corner, while assuring them that it is working on finding a way to give them freedom to choose their power retailer.

The government has received a 9,000-signature petition, organised by a power purchase accumulator, calling for electricity retailing to be deregulated in regional Queensland.

Meanwhile, St Vincent de Paul Society has told Queenslanders with access to the deregulated market that paying their bills on time can save them as much as $280 a year under certain contract arrangements.

An average household in the State using 8,000 kilowatt hours a year now has a $2,550 annual bill following increases from 1 July which added $400 to their payments.

Selling MacGen

Speculation is mounting in business media over the contenders, and likely winners, in the NSW Government’s efforts to sell Macquarie Generation, the country’s largest power production asset.

Having wrapped up sale of the rump of Eraring Energy and Delta Electricity’s Blue Mountains assets (Mt Piper and Wallerawang power station), the NSW Treasury is now focussing on the MacGen sale, leaving the privatisation of Delta’s Colongra gas-fired plant and Vales Point coal plant (both on the State’s Central Coast) until later in 2014.

The sale of MacGen, which may need to be split in two (comprising the ageing Liddell power station and the Bayswater A operations with the adjacent Bayswater B vacant site), is expected to be completed early in the new year and the State government is said to be hoping to obtain $2 billion from the process.

International bidders for some or all of the MacGen assets are thought to include China’s giant Shenhua Group and the largest private power producer in Thailand, Ratchaburi Electricity Generating Holdings.

There is media speculation of ERM Power being part of the action.

Reuters says that the sale is occurring “at a time when Australian infrastructure assets are in strong demand internationally thanks to a relatively stable economy, with interest from both domestic and overseas pension funds and strategic investors.”

Inevitably, the Electrical Trades Union has rushed to attack the MacGen sale, claiming privatisation “doesn’t make economic sense” because it will lead to higher electricity prices and a loss of $124 million a year in dividends to the NSW government.  “The assets are likely to be flogged off to foreign investors in China, Singapore or Korea,” the union adds.

Joining the chorus, Labor State leader John Robertson, part of a former government that had pursued the controversial “gen-trader” privatisation process in 2010, argued that the MacGen sale “is just the latest step in the O’Farrell government’s plan to privatise the State’s electricity assets, which will send bills soaring for households and businesses.”

Meanwhile The Greens declaimed that the sale of Bayswater and Liddell power stations will “make the move to clean energy much more expensive and disruptive,” declaring it “a greenhouse and economic disaster.”

Not needed here

Unconventional gas, including coal seam gas, is “a resource Australia does not need for domestic use,” The Greens have declared as part of their campaigning in the 2013 federal election.

“The real driver of CSG expansion is the attraction of lucrative overseas markets,” the party argues. “Profit not necessity is driving the proliferation of an industry that threatens the long-term viability of farmlands.”

The Australian Petroleum Production & Exploration Association, which has launched a $5 million advertising campaign during the election campaign, retorts that the community should not be misled in to believing that saying “no” to natural gas development is “somehow without consequence.”

APPEA chief executive David Byers says people opposing CSG and other gas development “are saying no to tens of thousands of new Australian jobs and the next wave of economic growth.”

Meanwhile APPEA also reports that 4,017 land access agreements with farmers have been negotiated in Queensland between 2011 and 2013, with Queensland Gas Company needing only another 200 to meet its target of 2,000 to fuel its Curtis Island LNG export venture.

In Sydney, fertiliser company Incitec Pivot said it had decided to invest $940 million in building a new ammonia plant in Louisiana rather than NSW because of the more favourable regulatory and political climate in America, lower construction costs and cheaper natural gas.

Australia, said Incitec Pivot CEO James Fazzino, lacked political leadership and costs and productivity here are “out of control.”

At sea in West

The difficulty that Australian governments are experiencing in coming to terms with the challenges inherent in the emerging rooftop solar photovoltaics developments have been nowhere better illustrated than in August’s pratfalls and backflips in Perth.

Bothered by the fact that electricity charges in the State rose by four per cent in July despite an election promise that it would tie them to the inflation rate – thereby ensuring that they could not be cost-reflective – and thus giving open slather to critics using the fact that household bills had doubled in four years, the Barnett government made a Budget announcement that the rooftop solar subsidy would be halved.

The public backlash was even more fierce than that from the government’s political opponents, the environmental movement and businesses with a vested interest.

Within a week, Colin Barnett and Treasurer Troy Buswell – labeled B1 and B2 by the WA media – announced that the change would be abandoned.

“I apologise. I’m sorry this happened. It was a mistake. We’ve reversed the decision. Let’s move on, “ Barnett went on radio to tell his community.

At roughly the same time the Tasmanian government was announcing that it would scrap its current feed-in tariff scheme for solar PVs, replacing the 27c offer with one for eight cents for future investors.

(This echoed moves in other east coast States – for example, a year ago the new Queensland government slashed the Bligh regime’s 44c per kilowatt hour subsidy to eight cents.)

Behind all this lies an important unresolved dilemma for Australian governments that have rushed in populist solar schemes, discovered Australians know a good deal when they see it and have reeled back under the rush.

In 2011 and 2012 Australia led the entire OECD for the number of customers choosing to install self-generation systems, mainly solar PVs.

As the WA government-owned network business Western Power pointed out in its most recent annual report: “The vast majority of these customers remain connected to the grid but pay a decreasing share of the costs associated with maintaining the network.

“Over time,” said the utility’s chief executive, Paul Italiano,” this is shifting the financial burden of network charges to those who have not or cannot install such systems.

“Managing the fair allocation of charges across a network in this environment is a looming challenge.”

With one million out of nine million household electricity account holders across Australia having so far leapt on the solar bandwagon, and the task of managing ageing networks a critical factor in power bills, “looming” is possibly an understatement.

Earlier this year, the Energy Supply Association ran in to a furious reaction from environmentalists and solar system sellers when it published a discussion paper titled “Who pays for solar energy?”

ESAA argued that there is a need to look at the way consumers are charged for the cost of network services “to ensure everybody pays their fair share.”

Part of the solar industry’s pushback was to argue that the same question could be posed about the millions of households using air-conditioning.

All of which, and not least the unhappy August experience of the Barnett government, goes to illustrate the point that efficient management of solar PVs is important unfinished business for governments across Australia.

Sun stroke

The ACT government has announced 20 megawatts of solar farm development and committed itself to seeing 690 MW of renewable energy constructed in the Territory by 2020.

The Territory decision adds two more farms (one of 13 MW, the other of 7 MW) to the 20 MW Royalla approved earlier.

The trio of developments will involve a capital outlay of $100 million for Canberra and its neighbourhood.

Carbon bombshell

If ever there is a topic that should be debated by the Labor and Coalition leaders before 7 September, this surely was it.

“This is Power” blog revealed in mid-August that Rudd government carbon guru Ross Garnaut was proposed a major change to the 2020 carbon abatement target.

The domestic social and economic implications of (as Garnaut proposed at a Grattan Institute forum) dropping the present bipartisan five per cent target in “an honest effort to do no less than the United States” are major.

Waiting in the wings for the election campaign to end is announcement of a Climate Change Authority recommendation on the issue.

Garnaut told the institute audience that Australia must not be a laggard behind America and Canada in pursuing emissions abatement.

The bane of good energy policy since the middle of the past decade has been the tendency of leaders in Canberra to make sudden dashes in new green directions – either in pursuit of populist support at home or kudos abroad – and Garnaut, it could be argued, has done us all a favour by highlighting a serious prospect for a new veer.

But it is not an issue that mainstream political leaders want to touch before the poll.

Last word

Enough is enough.

This is clearly the prevailing sentiment in the community as we drag through the last days of one of the poorest federal election campaigns in the past 40 years.

By mid-September, according to a consensus of the opinion polls, we should see an Abbott government ensconced in Canberra – whether by a comfortable margin or a landslide remains to be seen – but whether this development is the harbinger of better times for energy investors and consumers is another matter.

As reported above, the outcome of the Senate poll is also highly important and the prospects of the Coalition having an upper house configured to its advantage are doubtful.

A flurry of attempts by an Abbott government to undo the carbon policies of the Rudd-Gillard-Rudd regimes may lead us in to the badlands of a 2015 double dissolution election and exacerbate uncertainty for energy suppliers rather than ameliorate it at least in the next 12-15 months.

As also reported above, the last thing the supply sector wants to see is another round of reviews and inquiries, but the chances are high that this will occur.

We have been told by Coalition numerous times that it will pursue a second stab at an energy white paper and that it will embark on another review of the renewable energy target.

With the best will in the world, the outcomes of these moves will not be apparent until the second half of next year.

Tony Abbott is committed, it seems, to bringing the Council of Australian Governments to a meeting as soon as possible after being sworn in as Prime Minister.

This presents an opportunity for the nation’s first ministers to pick up on Kevin Rudd’s view – expressed to the National Press Club before he opted to change the election date by a week from that chosen by Gillard all those months ago – that the country expects action on energy prices.

How far Rudd understood that this step requires more than populist posturing – something pursued with vigor in this area by Julia Gillard – is open to question.

Abbott should be in no doubt: the long-term interests of energy consumers will not be served by political knee-jerking.

Providing secure and affordable electricity and gas while pursuing the national ambition of a lower environmental footprint for the energy industry is not a new ambition.  Successive governments since the 1990s have evinced their determination to achieve this – and look where we are today.

The Grattan Institute’s call (see above) for a new focus on energy reform and productivity, invoking the Hilmer Report, which was delivered 20 years ago and kick-started the electricity disaggregation process, is an important message for the incoming government.

Of course, every step in this process is complex and politically risky – the extra-ordinary contortions of the R-G-R regime on carbon policy, including the renewable energy target, since late 2007 are evidence of this.

The vigorous debate between environmentalists, farmers, the upstream gas industry and the manufacturing sector about gas supply also highlights the problem.

The CSG imbroglio, in particular, is an area that requires vision, leadership and a capacity to bridge divisions between at least three of contending parties – one only has to read The Greens’ election manifesto to understand why they, and their radical offshoots of the “lock the gate” variety, are never going to be part of a rational solution.

Of course, in this and other areas, the onus is not just on a Coalition government in Canberra – the Coalition administrations in Melbourne, Sydney and Brisbane have got to do a far better job in the energy policy arena than they have so far achieved.

The NSW government, in particular, has a vital role to play in the months ahead – not only in finding a solution to the worsening gas supply situation but also in ensuring that the biggest sub-market for power in the country gets on with the reform business recently outlined so clearly by the Productivity Commission.

The Energy Networks Association, as reported here, has said some sensible things about the national fixation on remedies and cures for what ails energy supply.

There are no miracle cures, as ENA said in its July newsletter, and quack remedies will do more harm than good.

As ENA argues, the cycle of review and churn in energy policy and regulation must now come to an end.  Companies in the sector see regulatory risk as one of their worst risks, worse even than the impact of the state of the economy and declining energy demand.

In almost a decade – starting with the Howard government’s energy white paper effort in 2003-04 and including the network regulatory changes – energy management has become as bogged down as a ute on a flooded Outback track.

An Abbott government faces many tasks, but none of them is more important than getting the vehicle of energy reform back on the road through leading the work to restore investor and consumer confidence in domestic energy supply.

Keith Orchison
1 September 2013



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