Coolibah Commentary

Issue 195, July 2021

What will be financial year 2020-21 bring for energy in Australia?

Apart from the ongoing impact of the Covid pandemic on the economy, a certainty is a federal election, although its outcome remains unclear no matter what pundits may say about opinion polls – and a political wild card domestically is what may come out of the UN climate summit meeting in Glasgow in November with its implications for “net-zero” policy and the “carbon wars” debate in Australia running up to that poll. The local marketplace continues in flux, with NEM 2.0 remaining a work in progress; the Energy Security Board is still processing stakeholder responses to its proposed market rule changes, including important transmission access steps, while energy companies wrestle with how to manage their commercial stability amid expanding anti-fossil fuel activism.

Quotes

“The challenges concerning grid connection combined with continuing political division, lack of clear targets and policy and unpredictable government interventions are all creating unacceptable levels of risks for investors” – Clean Energy Council’s Kane Thornton, lamenting a 76 per cent fall in large-scale variable renewable development in first quarter 2021 compared with the same period last year.

“We shouldn’t be fighting about which innovations we use; we should be using as many of them as we can” – federal Labor MHR Joel Fitzgibbon.

“The decades-long transition to net zero should not be framed simply as a matter of demonizing and precipitously shutting down old industries such as coal and gas, which will continue to meet the energy needs of Australia and be exported for decades to come” – the Australian Financial Review in an editorial.

“I know there is a new energy economy coming and we need to be ready for it” – Prime Minister Scott Morrison addressing the Australian Petroleum Production & Exploration Association annual conference in Perth.

“Gas is critically important for supporting solar and wind in electricity generation as power grids move away from coal” – former chief scientist Alan Finkel addressing the APPEA conference.

“I urge everyone to consider decarbonization not simplistically as a threat but as an opportunity to establish a new, large-scale industry producing carbon offsets” – APPEA chairman Kevin Gallagher, CEO of Santos, at the conference.

Grid money

While current media coverage of the energy sector focuses on wholesale power prices in the NEM, a major issue for residential and small business consumers in particular is always the presence of network charges in their bills. These charges make up between 40 and 50 per cent of the final account.

In its latest market survey, the Australian Energy Regulator reports that network businesses in 2020 were permitted to take $12.4 billion in revenue – distribution businesses earning $9.7 billion and transmission companies $2.7 billion.

The regulator says the distribution take was 1.5 per cent less than in 2019 and 25 per cent less than the sector’s peak in 2015 – when the flow-through impact on consumers of large investment in new infrastructure based on projected increases in power demand (which failed to happen) threw up political shock waves.

The transmission companies’ take last year was only marginally lower than in 2019 (0.6 per cent) but 18 per cent below its peak in 2013.

AER reports that network businesses overall invested $5 billion on capital equipment in 2020, a fall of 44 per cent from the peak of 2012. Expenditure on operating and maintenance outlays was $3.5 billion.

The key driver of reduced revenues for most network operators is the regulator imposing lower allowable returns on invested capital, an unpopular step with the grid companies.

Looking at its current five-year determinations, the AER adds that distribution revenue in the market is expected to aggregate $44.8 billion and transmission earnings $13.1 billion.

The regulator says network revenue is expected to continue to fall “over the next few years” but “beyond that point investment on transmission networks is likely to push revenue higher.”

Dangerous & wrong

Federal Labor’s resources spokesperson, Madeleine King, told 1,700 attendees at the annual APPEA conference in Perth in June that the “inevitable global transmission to net zero emissions is a massive economic opportunity for Australia – and its natural commodities, including gas.”

King, MP for the West Australian seat of Brand, declared “Labor recognizes the important role the gas industry will play in achieving net-zero emissions by 2050,” promising that, if the ALP wins the upcoming federal election, “our government will commit to Australia achieving the target.” She also endorsed carbon capture and storage, which, like further development of the gas sector, is strongly attacked by the Greens and environmental activists.

“We believe the gas industry is part of the solution,” she told the APPEA conference, acknowledging that “people who care about the future of the energy sector” often find themselves “caught between opposing forces in the toxic climate wars”.

She categorized both those who “demonize all fossil fuels” and the “climate change deniers” as “dangerous and wrong.”

Her comments – and the demotion of Resources Minister Keith Pitt to the outer ministry of the Morrison government as part of the factional fighting in the National Party that has seen Barnaby Joyce returned as Deputy Prime Minister – came as the federal department of Industry, Science, Energy & Resources forecast that Australia’s resources and energy exports would produce record earnings of $310 billion for 2020-21, the largest contribution to national GDP.

Meanwhile the federal government has ruled that one of the flagship projects of the “green energy” export push – the proposed $53 billion “Asian renewable energy hub” in WA’s East Pilbara region – is “clearly unacceptable” because of its impact on wetlands and migratory birds.

Environment Minister Sussan Ley, who was immediately attacked by activists, said the project would result in “permanent and irreversible” damage at Eighty Mile Beach.

The first stage of the “hub” would see 26,000 megawatts of wind and solar farms on a 666,000 hectare site to enable extraction of hydrogen from water for conversion to ammonia as well as the creation of a new town between Broome and Port Hedland. The WA government gave environmental approval for the first 15,000 MW stage in 2020 and federal industry ministers gave it “major project” status last October.

‘Didn’t make sense’

The long hiatus, starting in 2012, in onshore efforts to replace Victoria’s dwindling gas resources is coming to and end with the Labor government permitting exploration – however with a ban on fracking.

The moratorium included a three-year scientific examination that eventually found that onshore exploration does not pose a threat to the State’s environment or the agriculture sector. This was followed by another year’s delay while the Andrews government put legislation through State parliament.

The Australian Petroleum Production & Exploration Association says Victoria has “abundant” onshore gas resources and the ban “didn’t make sense.”

The Victorian shift comes as the Australian Energy Regulator, in its new report, warns that there is a risk current eastern gas projects – including the controversial Narrabri onshore development in NSW and five LNG import terminals under consideration for NSW, Victoria and South Australia – may not come on line to ward off supply/demand imbalances in southern States by 2024.

Meanwhile, APPEA has told a federal parliamentary committee looking at the regulation of export industries that declining access to capital is a key issue and growing concern for its member companies.

The association says petroleum businesses are finding it increasingly difficult to access both debt and equity capital despite Australia having abundant gas reserves “that will deliver the reliable, cleaner supply of energy that is essential to reducing emissions.”

In a new statistical report, APPEA adds that Australia recorded its highest surplus in trade of oil and gas in 30 years in 2019-20, reaching $27.9 billion –primarily due to $47.5 billion worth of LNG exports. This, it declares,”has helped Australia maintain economic resilience in the face of Covid-related challenges.”

It points out that this achievement is based on investment of $473 billion in petroleum exploration and development in the decade to 2020. Despite delays created by the pandemic, it says, there were $135 billion worth of projects “in the pipeline” at October last year.

Value for service

The energy retail sector is applauding itself for a consumer poll that shows 70 per cent of respondents believe their power service is providing value for money and 46 per cent think the electricity market is working in their long-term interests.

The Australian Energy Council, representing gentailers, has hailed the outcome of the Energy Consumers Australia poll as “extremely positive,” pointing out that there has been a doubling in the number of satisfied customers since December 2017.

Lynne Gallagher, CEO of Energy Consumers Australia, says the rise in satisfaction reflects a fall in NEM wholesale power prices from historic highs.

Asked to identify the two most important issues for them about power supply, respondents to the ECA poll nominated having affordable prices (56 per cent), a transition to renewable energy (40 per cent) and investment in new technologies to replace old generation plants (35 per cent).

However, the survey found 60 per cent of respondents worry about a rise in the number of power outages over the next 10 to 20 years and 72 per cent of households interviewed are concerned about the effective management of the closure of NEM coal plants.

Need to re-examine

The Australian Energy Market Operator has told a federal parliamentary inquiry that the rapid transformation and decentralization of electricity systems in the NEM and in WA’s south-west system is driving a need for market re-examination. A number of technical and market changes are needed, it says, “and this will not happen automatically.”

In its submission to the House of Representatives inquiry in to the future need for dispatchable generation and storage in the markets, AEMO warns that “consumer benefits will only be realized” if market arrangements can be changed to “encourage optimal use of existing resources and give appropriate signals for new investment.”

It says market design needs to “reward the increasing value of flexibility and dispatchability” in complementing and firming variable generation “as well as providing other system security services currently provided by existing generators scheduled to retire.”

Appearing at the committee’s first hearing, AEMO’s chief design officer, Alex Wonhas, told MPs the operator expects to have to run the system on 100 per cent renewables at certain times “if there are no other constraints.” In answer to a question, he added: “It’s not a trivial challenge.”

In another submission to the inquiry, the federal department of Industry, Science, Energy & Resources points out that dispatchable generation in the NEM fell from nearly 98 per cent of total electricity supply in 2010 to just over 80 per cent last year.

At the committee hearing, department officers described the NEM transition as “incredibly fast,” saying rooftop PV is expected to “grow not slow.”

DISER’s electricity division head, Rachel Parry, told MPs that, with the economics of coal-fired generation being challenged in a fast transition, the federal government is “very keen to ensure that the triumvirate of reliability, security and affordability remains first and foremost.”

Total system costs

In a submission to the federal parliamentary energy inquiry, consultants Gamma Energy Technology have pointed out that their total energy system costs modelling shows, in a net-zero emissions Australia if neither carbon capture and storage nor nuclear energy are in use, the NEM could be faced with extra costs of $20 billion annually.

Gamma director Geoff Bongers says the modelling demonstrates that 95 per cent decarbonization of the NEM in 2050, with no restrictions on technology use, could see a total system cost of $33 billion a year (calculated in 2020 money values). “Every constraint will significantly increase this expense.”

Bongers adds in the submission: “Given the high social and economic impacts of expensive electricity in the NEM, as already demonstrated in the past decade, this is an important issue.”

He tells the committee: “A significant issue is the influence of stakeholders with vested interests, most of whom favor specific low-carbon technologies. Our work has demonstrated that it is far better to consider all technologies as a member of a team. Restrictions of the availability of any technology, like a player missing from a team, will limit the collective capacity to claim the real prize: the lowest possible cost transformation.”

The Gamma submission says the NEM is not a simple system and consists of many moving parts “and so should the metrics used to model it.”

NEM generation 20-21

The east coast market is still far more emissions-intensive than the average global power system, say analysts EnergyQuest.

In their latest quarterly report, EnergyQuest note that the latest available data from petroleum giant BP says global coal-fired electricity averages is 36 per cent of supply, with gas-based power at 23 per cent, hydro 16 per cent and wind, nuclear and solar power each at 10 per cent.

EnergyQuest report that, in the 12 months to the end of March 2021, coal-burning generators sent 131,723 gigawatt hours to the NEM grid, with gas providing 12,778 GWh, wind farms 18,310 GWh, hydro power 13,912 GWh and solar farms 7,140 GWh. In addition, an estimated 13,902 GWh of rooftop solar PV was used on the east coast.

Leaving out rooftop PV, coal generators’ market share for this period was 71.6 per cent with the total fossil-fuelled share at 78.59 per cent.

Power sent to the NEM grid for the 12 months totalled 183,875 GWh – down from 191,356 GWh in the year to March 2020.

Black coal generation in New South Wales and Queensland fell 7,504 GWh between the two periods while brown coal output rose 1,343 GWh. Gas-based generation tumbled: down by almost 24 per cent.

EnergyQuest CEO Graeme Bethune comments in the new quarterly report that there is a widespread belief achieving net zero emissions will be easy and can be done with renewables. This notion, he says, has been torpedoed by a new International Energy Agency paper, produced at the request of the organizers of the upcoming UN climate policy summit, that “makes sobering reading.”

Bethune says the IEA report shows that achieving the 2050 net-zero goal through a global energy transition “calls for nothing less than the complete transformation of how we produce, transport and consume energy (and) appears impossible.”

He adds: “In a world of hype about how easy it is to achieve net-zero emissions by 2050, the IEA provides a valuable cold shower of reality.”

But, he says, EnergyQuest believe Australia does need more ambitious targets – “to be a leader rather than the reluctant follower it is now.”

Up and down

Electricity demand by more than 10 million NEM consumers was three per cent above 2014 levels last year – but power sent to the grid fell by more than two per cent.

The Australian Energy Regulator, in its new annual report on the market, attributes this to the rising number of customers with rooftop solar installations allowing to self-supply part of their needs.

AER also notes that grid-based power consumption is forecast to decline marginally over the next 10 years while recording that this could be more significant if energy-intensive loads (such as by aluminium smelters) are closed.

ACCC expects falls

The Australian Competition & Consumer Commission expects east coast household electricity bills for 2021 to be lower than last year despite the pandemic’s impacts.

The commission says residential consumption rose 10 per cent last year as people spent more time at home while small business demand fell 17 per cent.

“Covid-19 had a major effect on electricity use last year,” says ACCC chairman Rod Sims. “Many households experiencing financial difficulty had higher bills to pay and, although lower bills for small business would normally be something to celebrate, it wasn’t a welcome outcome in the context of the pandemic recession.”

He notes that homes with rooftop solar power on average paid $94 less on quarterly bills than those without. However, he says, residential users on hardship or payment plans also have the lowest amount of rooftop PV and “you have to question how fair it is for these people to be subsidizing the costs of solar customers.”

Sims reports that average wholesale spot prices in the NEM – what retailers pay day-to-day for uncontracted purchases from generators – dropped 50 per cent between mid-2019 and early 2021 although there were higher prices in May and June this year created by a major generator failure in Queensland and other factors. Overall, he says, the commission expects retailers’ wholesale costs in 2021 to be lower than in recent years.

Outdated

Tasmanian Energy Minister Guy Barnett says current NEM arrangements for bringing on new transmission links are “inadequate and outdated.”

He expects the issue to be discussed by federal, State and Territory ministers at a meeting next month.

The impetus for the Tasmanian push is the need to fund the $3.1 billion to $3.5 billion “Project Marinus” to build two new high voltage links across Bass Strait in the second half of the decade.

The Tasmanian government is encouraged in its efforts by research its State-owned utility sector has commissioned that demonstrates the benefits of Marinus will be felt through price impacts across the NEM. Barnett says a new reports “proves there will be downward pressure on prices in all mainland States.”

Barnett argues the report underlines the current NEM rules are “not consistent with the beneficiaries pay principle.” He says the federal government supports a change.

Bess Clark, the TasNetworks general manager overseeing the Marinus development, says the largest portion of benefits (38 per cent) of the 1,500 MW links between Tasmania and Victoria will be felt by customers in New South Wales. In a newspaper interview, she said energy ministers can lodge a rule change request with the Australian Energy Market Commission that can be fast-tracked. “That’s the path being pursued at the moment.”

The Australian Energy Regulator, in its report on the NEM published at the start of July, says that the Marinus project “will only proceed” if agreement is reached between the States on how the costs will be recovered.” It warns “the issue has the potential to delay the project.”

Meanwhile, the Australian Energy Market Operator is due to provide a new report on the need for extra interconnections across the NEM before the end of 2021.

‘Balkanization’

The Energy Users Association of Australia, in a submission to the market reform process being pursued by the Energy Security Board, declares it is increasingly worried by the “balkanization of the NEM.”

It tells the ESB that the cause of its concern is State governments implementing significant policy agendas on their own “that seem to put State interests above NEM interests.”

EUAA adds: “While this is understandable from a State government perspective, it is unlikely to lead to the most efficient allocation of resources, leading to higher costs for consumers.”

As an example, the association points to the NSW government’s renewable energy zone plans. “Even if it is cheaper for NSW consumers to bring renewable energy from Queensland in to the State on the QNI link, NSW does not seem to be interested.”

It adds that the Coalition government in Sydney “only seems to want NSW projects to contribute to the NSW system because they have regional development benefits, they enable a State-based level of reliability to be achieved and they contribute to State-based environmental targets.”

EUAA asserts: “It seems that rather than interconnectors being the great energy freeways that allow participants to freely trade across borders in an efficient manner,” the NSW government has gone back to an insurance policy when State-based generation is insufficient.

Acknowledging that the ESB has “some sensible proposals for a common approach to integrating jurisdictional schemes for new investment in the NEM to achieve consumers’ best interests,” the association says it “fully expects State governments to continue to do what they wish.”

‘Moving rapidly’

The Australian Energy Regulator, in its new “State of the Energy Market” report highlighting that the NEM is “moving rapidly” away from a centralized system, says that ensuring reliable supply is the “pivotal challenge.”

Chair Clare Savage says that in 2020 more than 3,700 MW of large-scale wind and solar generation was added to the NEM, driving record levels of variable renewable power production, with wind power exceeding supply from gas-fired units for the first time.

In the period since 2014 more than 4,000 MW of capacity fired by coal or gas has left the market while 12,500 MW of large-scale wind and solar capacity has been added – along with 8,500 MW of rooftop solar PV installations.

Over the next two decades, Savage adds, the market is likely to see the retirement of more than 16,000 MW of coal generation and around 4,000 MW of gas-fired plant while up to 50,000 MW of wind and solar farm capacity is added along with some 24,000 MW of rooftop solar panels.

She notes that almost 24 per cent of market consumers now partly meet their needs through rooftop PV compared with 0.2 per cent in 2007.

“We know that, with the growth of renewable generation, there needs to be investment in dispatchable resources to stabilize the grid.”

The report also highlights the size of the network now needed to support the NEM.

Savage says the total asset value of transmission and distribution supervised by the AER (including the stand-alone Northern Territory system) now exceeds $100 billion.

She asserts also that the Australian Energy Market Operator’s “integrated system plan” is “critical” to developing a least-cost development pathway to support the NEM transition.

Intervention

The use of Australian Energy Market Operator interventions to manage NEM system security reached record levels last year.

The Australian Energy Regulator reports that market operator directions were in place for more than a third of 2020.

In South Australia, AER notes, the operator intervened a record 64 per cent of the time to ensure a minimum level of gas-powered generation to support grid strength at times of low demand.

Generators affected by AEMO directions are entitled to claim compensation. These costs NEM-wide averaged $25 million in 2018 and 2019. In 2020, AER says, they rose to $66 million.

The regulator also reports that the cost of market frequency control ancillary services rose four-fold between 2015 and 2019 to more than $220 million – and then spiked in 2020 to more than $350 because of an expensive first quarter.

Last word

The community at large, reading most mainstream media (and still more so social media), can’t be faulted for assuming the push to net-zero emissions in the energy sector, and especially in electricity supply, is a relatively easy ride that will be made easier if politicians can get their act together.

Anyone who can be bothered to really read publications like the Australian Energy Regulator’s “State of the Energy Market 2021,” all 292 pages of it, cannot escape the realization that the so-called national electricity market, serving 10.3 million customers on the east coast, by far the bulk of national users, is a very complex beast and that the much-touted “transition” contains a multitude of traps for unwary policymakers with ensuing pain for taxpayers and those at the end of the supply chain.

Insouciant local and overseas media coverage of the recent International Energy Agency “Net Zero by 2050: A Roadmap” report has added to this sense of “just do it” being inculcated in the community.

As Graeme Bethune of analysts EnergyQuest points out in his new EnergyQuarterly publication, the IEA document has been produced at the request of the UK government organizers of the UN climate change in Glasgow in November. As he says, “it is not a recommendation or even a forecast; it simply aims to set out what would be necessary to achieve net-zero by 2050 and how this compares with current actions and plans.” He observes that “the IEA cannot say so, but achieving (the goal) within the parameters it has been set or assumed appears impossible.”

Leaving aside global agreements, he adds, just delivering Australia’s contribution to this mission requires long-term local agreement between our political parties and the wide array of domestic stakeholders, something that has been largely absent over the past decade – I’d go further, it has been largely absent over the past quarter century.

What’s more, as Bethune underscores, this issue is not just about energy supply – it calls “for a complete transformation of how we produce, transport and use energy” and for the period beyond 2030 requires use of technologies that are currently only at the demonstration or prototype phase.

He uses a phrase that I think can be applied in spades to NEM electricity supply – “beyond 2030 we are in uncharted territory.”

Moving on from EnergyQuarterly to the AER’s new report, as I have done in writing this newsletter, it becomes only too obvious that, for the resilience and affordability of the NEM, the “transformation” of the market beyond the middle of the present decade is a bouquet of thorns – prickly issues, like do we have enough nous to at least officially explore the use of new nuclear technology, our so-called leaders don’t have the intestinal fortitude to meaningfully pursue.

The most important of these issues, it seems to me, because of its implications for the economy as well the hip pockets of householders, is the need to pursue a genuine total systems cost analysis of the elements of the NEM “transition” – a point that has now been laid before the current House of Representatives energy inquiry (as reported again in this issue of the newsletter).

Lewis Carroll wrote that “if you don’t know where you’re going, any road will get you there.”

A few moment’s thought should tell us that, in the case of “net-zero,” especially with a clear-eyed reading of the IEA report, even having an idea of where we want to be involves much more than our community, and especially our voters, really appreciate.

National leadership requires the Coalition and the ALP to genuinely come to terms with this challenge in the lead-up to this financial year’s federal elections.

Keith Orchison

4 July 2021