Coolibah Commentary

Issue 147, July 2017

After a frenetic focus on energy issues in June, leading up to and following release of the Finkel task force report, stakeholders are beginning a new financial year, writes Keith Orchison, in which it is critical for durable and effective action to supplant talk. A feature of the first half of calendar 2017 has been growing concern about whether the east coast electricity market (the NEM) can survive in an environment of rising government intervention. The policy ball is supposedly now in the court of the CoAG Energy Council which will start considering reforms proposed by the task force this month – while investors wait on the Turnbull government to come to a landing on climate change policy as well as the mooted national clean energy target.

Reversion

Are the latest federal government moves reacting to publication of the Finkel report a reversion to central planning by stealth or accidently through ignorance?

This is the question being posed by the Grattan Institute after Prime Minister Malcolm Turnbull responded to intensifying public debate, announcing that his government is “taking immediate action to put downward pressure on power prices and ensure reliable and secure energy for all Australians.”

One step is to implement gas regulation affecting LNG exports, a move immediately drawing upstream petroleum industry criticism for increasing sovereign risk.

A second is to abolish the “limited merits” review opportunities hitherto available to networks responding to Australian Energy Regulator revenue decisions. Energy Networks Australia complains the unilateral decision sidelines the CoAG Energy Council just a week after first ministers threw it responsibility for assessing the Finkel recommendations about market dysfunction.

The move, says ENA, will legislate away the powers of State governments, the role of the courts and the networks’ rights to pursue correction of regulatory errors.

The step possibly raising most eyebrows in the supply sector is the federal government opting to give the Australian Energy Market Operator the task of looking at “how to ensure that new continuous, dispatchable power is provided.”

The Grattan Institute argues that “effectively, the government is asking AEMO to identify whether there is enough NEM baseload generation and, if not, how steps should be taken to get more. The rushed nature of the announcement suggests ignorance of its impact is a factor.”

The institute’s David Blowers declares provision of simultaneous incentives for low-emissions generation through the clean energy target Finkel proposes and for baseload generation through a separate scheme “sounds like a recipe for an expensive, unreliable system.”

Meanwhile the Australian Energy Council is warning that “escalating government intervention” at federal and State levels “threatens to destroy the market.”

AEC chief executive Matthew Warren says death of the NEM will be “a colossal policy failure resulting in higher prices, re-regulation and un-reform.”

Economist John Quiggin says the NEM has already failed to provide reliable and affordable electricity and opines that the core measure of the Finkel report is “the shift to central planning by a new Energy Security Board, which effectively over-rides the multiple existing market bodies.”

The Prime Minister’s take on the situation, expressed in a media conference on energy policy, is that “you can’t just sit back, cross your fingers and hope everything will turn out okay.” His government, he says, believes there has to be stronger state involvement because “we have got to be very certain we’ve got affordability and security covered.”

He points to the US – “the home of free enterprise” – and argues there is much more government involvement and regulation in American electricity markets than here.

Over-inflated

Claims of a looming power shortage next summer are “over-inflated” according to the new head of the Australian Energy Market Operator.

In a newspaper op-ed at the end of June, Audrey Zibelman says the outlook for summer is better now (after the closure of Hazelwood power station) than it was in February this year. Keeping Hazelwood operating “is simply not required” to maintain power system security.

However, Zibelman warns that sufficient gas supply “remains a critical component” of power system security. “The federal government-led gas supply guarantee is a critical mechanism to ensuring supply availability.”

Zibelman has also told the Energy Week conference that there has to be a stronger focus on building new power interconnections and strengthening intra-state HV systems to enable development of variable renewable energy across the NEM.

She cites as an example a second Basslink interconnector having the potential to deliver more market value if wind farms in Tasmania are more attractive then projects in Victoria. And stronger interconnection between South Australia and New South Wales would enable greater use to be made of large-scale solar systems to take advantage of “different sun at different times.”

Meanwhile, in a new report, focusing on planning in Victoria, AEMO says the additional RET proposed by the Andrews Labor government will incentivize the deployment of 5,400 megawatts of wind and solar power by 2025, necessitating increased grid capacity within the State and requiring increased interconnection with other regions.

AEMO is about to start a pre-feasibility assessment this financial year of upgrading the Victoria/NSW interconnector.

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Strong support

The Minerals Council of Australia says it strongly supports the Turnbull government’s decision to task the Energy Market Operator with investigating how best to ensure the continued supply of low-cost, dispatchable baseload electricity as older power stations retire.

MCA chief executive Brendan Pearson applauds the AEMO review being guided by a technology-neutral approach and says all low cost, reliable generation operations should be on the table, arguing that high efficiency, low emissions coal-fired power represents “an obvious option” to replace retiring baseload plant.

The lobby group has launched a campaign to promote the prospects of constructing a new, brown coal-fired power station in the Latrobe Valley.

MCA has published a review – with former Electricity Supply Association chairman Ian Nethercote as the lead author – focused on potential use of new, world-leading German technology to take advantage of the large remaining brown coal resource and a now-underutilized power grid since the recent closure of Hazelwood power station.

“A multi-billion dollar project,” the paper says, “would assist in addressing economic, employment and social challenges confronting the Latrobe Valley.”

Completed and foreshadowed closures of baseload coal and gas plant across the NEM, it adds, will see a 38 per cent decrease in the market’s 24/7 capacity between 2012 and 2030, warning this could create “major security issues. “Unless new investment in baseload generation capable of operating 24/7 is made in the near term and energy prices start to stabilize and fall, Australian manufacturing, minerals processing and other energy-intensive activities will find themselves priced out of international markets.”

The paper comments that, while the Victorian power system may cope in the coming summer without replacement for Hazelwood, the closure “is like a car losing its spare wheel – it can’t afford to have another part of the system fail.”

The paper says it would take six to eight years to build an advanced ultra-supercritical brown coal power station in the Latrobe Valley, including a construction phase of around four to five years. Planning could be accelerated if the Victorian government gave the project major planning status and the building time could be shortened by using an existing site, such as the Hazelwood mine.

It adds that there is strong support from a wide range of community and regional groups, Gippsland business organisations and local government for a new state-of-the-art power station for the valley.

Hitting demand

The latest quarterly review by consultants EnergyQuest says that average east coast wholesale gas prices close to $10 per gigajoule are “clearly hitting demand” – but paradoxically the high prices are not translating in to a boom in gas development because of low international oil prices.

EnergyQuest CEO Graeme Bethune says overall east coast gas demand in the March quarter was 2.5 per cent below the same period of 2016 – but, when consumption by power generators and the Gladstone LNG export projects is excluded, consumption fell by “a staggering 16 per cent.”

Bethune adds that gas development is likely to remain constrained by sustained low global oil prices and, as a result, Australia’s east coast supply problems are likely to be long term despite “significant” undeveloped resources in central Australia’s Cooper basin and in New South Wales.

Take a stand

One of the next cabs off the energy rank will be the report of the inquiry in to modernizing the electricity grid by the House of Representatives’ standing committee on the environment and energy – and the Australian Energy Council is telling it that one of its biggest contributions can be to promote a bipartisan emissions reduction policy.

In a submission to the committee, AEC, which represents energy retailers and power generators, urges acceptance that modernizing is not a goal in itself. “What is relevant is security, reliability, sustainability and affordability.”

AEC says that recent threats to each of these goals have “been driven by how we have set the rules for the electricity system rather than because the transition is happening too fast or too slow.”

It adds that there is plenty of room for improvement in setting policy, pointing for example to renewables subsidy schemes that have been poorly integrated in to the energy system.

Reckless

Prime Minister Malcolm Turnbull has accused federal Labor of “breath-taking recklessness” in 2012 in licensing “so much” gas for east coast export “without a moment’s thought to the impact on the domestic market.”

Speaking to journalists with Resources Minister Matt Canavan to announce implementation of arrangements to provide the government with powers to licence gas export – a “significant action to deal with a significant problem,” Canavan said – Turnbull declared that the move will “help lower domestic gas prices to a more reflective international level.”

He added: “ You can’t seriously suggest that we, a nation about to become the largest exporter of LNG in the world, should have a shortage of gas in its east coast market.”

The Australian Petroleum Production & Exploration Association has responded to the government’s action by saying that the so-called domestic gas security mechanism is a sovereign risk issue, undermining this country’s reputation as a safe place for investment and that it risks exacerbating the problem it is attempting to solve by discouraging investment in new supply.

APPEA chief executive Malcolm Roberts says the latest AEMO outlook for energy supply “confirms there is no need for LNG export restrictions because production (over the next two years) will meet demand.”

The Australian Industry Group, on the other hand, welcomes the federal government’s intervention and says, if the current situation doesn’t improve, it expects Canavan to invoke export controls later this year.  Its member businesses “face massive increases in the cost of gas and electricity – the stakes are high.”

Speaking to the Energy Week conference in Melbourne, AiG chief executive Innes Willox said business that have, in the past, rarely thought about energy as a top tier issue, are now “deeply alarmed” about a situation in which “prices are soaring.”

Low and medium intensity energy users, he added, are rethinking expansion plans and thinking about cutting employment numbers. “For energy-intensive users, these prices threaten their very existence.”

Local corporate board and global head offices, Willox declared, “have started to wonder whether Australia really is an advanced economy with solid infrastructure or if we are a basket case with unstable energy systems and a political system to match.”

Addressing CSR’s annual general meeting in late June, the building products supplier’s chairman, Jeremy Sutcliffe, told shareholders higher energy charges represent a challenge from which many manufacturers will find it hard to recover, notwithstanding efficiency gains and cost control. “Manufacturing businesses across Australia face the real prospect of plant closures and job losses in high energy-intensive industries if this situation continues.”

Mind-boggling

Queensland Resources Council chief executive Ian Macfarlane, a former federal energy minister, says it is “mind-boggling that foreign-funded green activists have influenced energy policy in New South Wales, Victoria, South Australia and the Northern Territory, leading to gas shortages, blackouts and electricity prices going through the roof.”

He describes the federal government announcement of intervention in LNG exports as “extra-ordinary” and says it is important to remember the Gladstone gas export hub was approved because of an expectation that NSW would develop its own gas supply.

The test

According to Chief Scientist Alan Finkel, his electricity task force will know its report has been successful if power is not a topic of discussion in the community three years from now.

Speaking to the National Press Club in Canberra, Finkel said the report is a blueprint to preserve security and reliability of the east coast power system “in the face of certain change” at minimum cost. “Minimum cost but not the cheap electricity of the past,” he added. “I wish that were possible. More realistically, our blueprint is about achieving the lowest possible prices for commercial and residential consumers in to the future.”

Finkel said that, to minimize future price increases, a diverse energy mix will need to include fossil fuels.

Modeling undertaken for the task force did not address a “dash for 2030.” Instead, he said, it offers “a continuous trajectory” towards the second half of the century, with – if the proposed clean energy target is embraced – 42 per cent renewable generation in 2030 (including a 24 per cent contribution from large-scale solar and wind, eight per cent from hydro power and nine per cent from rooftop solar).

This renewable energy will operate alongside existing coal plants, Finkel said, with these generators providing 53 per cent of NEM electricity in 2030 compared with 57 per cent under a “business as usual” scenario.

Labor view

The Federal Opposition is using comment by Business Council president Grant King to press its case against new coal-fired power.

King has said: “If government were to finance or underwrite new coal-fired power plant, it would further frighten private investors and force taxpayers to potentially bankroll a second, third or fourth power station. Once government starts down this road it may not be able to stop.”

Quoting King, Labor’s shadow minister for climate change and energy, Mark Butler, says that, if the Turnbull government is serious about taking a “technology agnostic” approach to addressing the energy crisis, it should listen to the views of industry experts “and not flirt with spending taxpayers’ money on technologies that private investors won’t support.”

Going up

The new West Australian Labor government is imposing a $169 annual power bill increase, a 10.9 per recent rise over current rates, for the average household in the State’s south-west integrated system.

The State government is applying the increase to the supply charge homeowners pay for connection to the SWIS and it will cost an aggregate $170 million a year extra.

Treasurer Ben Wyatt says the move is “about ensuring that every West Australian linked to the grid pays for the cost of connection.” Current bills, he adds, are unfair because most of the bills were based on the amount of energy homes took from the grid.

Solar lobbyists in the State say householders who have bought PV systems will feel “betrayed” after investing in good faith. Solar Citizens group says solar owners are going to be “hard hit.”

WA Opposition leader Mike Nahan says the decision is a broken promise because Labor went to the recent election vowing that electricity prices would fall.

The Australian Energy Council has welcomed the change as recognition that prices need to reflect the real costs of power supply. Cost-reflective pricing is “long overdue” in Western Australia, it adds.

Meanwhile the association has rejected a call by New South Wales Labor for the State retail electricity market to be re-regulated. Chief executive Matthew Warren says any such move “would do nothing” to protect householders from rising living costs. Populist reactions to “unsustainable” power bills “will only make the situation worse” by constraining future investment.

NT gas trove

The upstream petroleum industry is hailing publication of the Northern Territory Labor government’s long-term industry infrastructure plan – which it sees as highlighting the potential for decades of onshore gas development for domestic and export markets.

The plan notes the Territory has an estimated 200 trillion cubic feet of gas in onshore basins.

A separate NT inquiry in to hydraulic fracturing has commissioned independent modeling the value of new gas development. A 2015 study by Deloitte Access Economics found the industry could increase government revenue by almost $1 billion by 2040 and create 6,300 jobs.

The framework also identifies renewable energy as an emerging development opportunity for the Territory.

Last Word

The Energy Week three-day conference that I co-chaired in Melbourne in the third week of June was an important event bringing together both the upside prospects for electricity and gas supply that could flow from getting our policies, regulations, prices and planning right and the fever-pitch alarm being felt in a growing number of quarters that we are more than capable of continuing to get it all wrong.

Just how wrong was encapsulated by the Australian Energy Council’s Matthew Warren: “Energy policy is a mess. Prices are rising sharply, reliability is deteriorating and we aren’t getting our emissions down at the rate we need.”

The task force report, on which Alan Finkel briefed a packed room during the conference, is described by one of our leading law firms as responding to two key policy challenges: the need to better manage the integration of renewable energy in to the east coast market and how we organize ourselves to respond to the global trend towards a more intelligent and decentralized power supply chain. The lawyers, and others, are critical that the report has not (as they see it) grappled sufficiently hard with the longer-term disruptive forces.

One problem, widely recognized but seemingly beyond the scope of mere political mortals to overcome, is that Finkel & Co, and all the rest of us, are living in a policy vacuum: until the issue of climate change policy is really resolved – the federal government is pursuing a review at present – and until both the Coalition and Labor can agree on a target, the rest of what is being pursued, necessary and urgent as much of it is, can’t be considered as investment-grade policy.

The big, deep issue is policymaking on the run, a poison that has infected the energy sector for years.

One example from the current situation will illustrate why businesses are so unsettled by the whole environment.

As Energy Networks Australia points out, the federal government decision to unilaterally abolish appeals against network regulatory decisions rides roughshod over the Federal Court and an inter-governmental agreement underpinning the NEM as well as sidelining the CoAG Energy Council (which decided in April to finalize appeals reform in July) less than a week after Finkel delivered recommendations addressing governance dysfunction. The move picks on a popular target (‘gouging” and “gold-plating” remain the epithets of choice when referring to power distribution businesses despite a complex history behind the 2008 revenue determinations that drove power bills up) although network costs (says ENA) are currently actually falling and June’s electricity bill rises relate to wholesale and retail costs.

It’s very hard to see the federal government announcement as anything more than a kneejerk reaction to the present media outcry over the latest round of energy price rises (coinciding with delivery of the past summer’s inevitably painful power bills) and to polling (publicly through Newspoll and no doubt reflected in the political parties’ private polls, too) that 60 per cent of voters want the federal government to give priority to “keeping energy prices down.”

This isn’t an isolated example, just the latest in what is characterized by Warren as “a decade of energy policy flip-flopping,” and there is no reason to believe it will be the last, Finkel or no Finkel.

The Australian Industry Group – whose CEO, Innes Willox, delivered a strongly-worded paper at Energy Week (it is now published on the association’s website) – is calling for “systemic thinking that considers all aspects of energy demand and supply, the interactions between them and the need to optimize for reliability, affordability and emissions.”

AiG thinks the Finkel report – with its recommendations for security and reliability obligations, greater reward for demand response, governance reforms and integration of energy and climate policy – is “sound.” Sectors objecting to elements of the study, Willox says, need go beyond criticism and offer superior and credible replacements.

He declares that the basic argument of the report – which is, he says, that investment in electricity and Australia’s ability to meet the commitments it made in Paris 18 months ago will be hamstrung without a credible, durable, bipartisan emissions approach to the electricity sector and that doing nothing is a “terrible option” – is widely accepted. 

Willox argues that, “if we are going to get out of the appalling energy mess we are in,” we need clarity on where we are today and where we want to be. “We need to get on with it.”

I think most of the more than 400 participants in Energy Week agree with this. As the cliché has it, the devil’s in the detail – and in our national inability to pull together.

Keith Orchison
30 June 2017