Coolibah Commentary

Issue 148, August 2017

This is the winter of Australia’s maximum discontent about energy prices, writes Keith Orchison. An issue that has been simmering since Julia Gillard was Prime Minister is now boiling over under Malcolm Turnbull, whose Energy Minister, Josh Frydenberg, is continuously in the news, wrestling with State governments and some of his own colleagues. “Unequivocally,” says Frydenberg, the focus right now is on affordability even as Labor strive to make it about emissions policy. After months of attention to the Finkel task force, the electricity focus now falls on the ACCC investigating price issues ahead of a preliminary report late next month – while the Turnbull government’s move to restrict gas exports to boost domestic supply (and, it hopes, reduce costs) remains contentious.

Farmer fury

The depth of concern about energy costs in rural Australia is heavily underscored in a collective submission to the Competition & Consumer Commission by a dozen agricultural bodies, whose members contribute some $60 billion a year to the economy in gross value of farm production.

The Agricultural Industries Energy Task Force tells the ACCC: “Escalating electricity costs are already contributing to Australia losing its competitiveness in the international market for agricultural product. At the same time, they are impacting the viability of producers of fresh food and natural fibre consumed by Australian households.”

The task force adds that: “The impact is particularly severe on agricultural product produced by irrigators who need

power to pump water or product that needs processing, packaging and/or refrigeration.”

It asserts that “in every section of the electricity market the charges being passed on to consumers exceed the economically efficient cost of supply.”

And it declares that “the National Electricity Market (NEM) is failing to meet the needs of consumers, or the broader interests of the Australian society and economy.”

Major problems

Rod Sims, chairman of the ACCC, says Australia has “major problems” with energy affordability.

“We’ve seen prices over the past 10 years go up by 60 to 90 per cent above inflation,” he has told media. “We’ve had some overly-generous green schemes where the costs have been smeared to other consumers, and of course we’ve got very high gas prices which has pushed up electricity prices.”

Long-term problem

There is a risk that problems on the east coast with gas supply may be long-term, says Graeme Bethune’s EnergyQuest analysis and consulting business.

The company’s latest EnergyQuarterly report notes that, notwithstanding high domestic gas prices, Australia’s east coast is experiencing a drought of investment aimed at meeting local supply. There are significant resources in the Cooper basin and New South Wales, it says, but development of the former is constrained by low global oil prices and of the latter by activist opposition.

The company observes that gas shortages can bring down governments because of their impact on industry and employment and the increased risk of electricity blackouts. It says this means gas producers are “at a high risk of government intervention.”

The measures being pursued by the Turnbull government via the “domestic gas security mechanism” to re-direct gas from export at Gladstone will be difficult to administer and “have significant risks for potentially little reward,” EnergyQuest says.

It comments that the east coast gas situation is unique, being the only LNG industry to evolve in a country where the national government does not control onshore development.

Feedback from overseas, says EnergyQuest, is “generally amazement that Australia is exporting LNG from coal seam gas in a domestic market without provision for energy security.”

It adds that there is a risk that pressure on politicians to ensure gas volumes reach the domestic market and at a lower price “will entangle them in commercial negotiations, never a good outcome.”

EnergyQuest comments that the present feasibility study of a pipeline from Western Australia to the east coast is “perplexing” because gas from the West will be expensive and not reduce east coast prices.

The company says its studies for clients of LNG import options for southern Australia have concluded that, in an environment where domestic prices are likely to continue to rise until at least the early to mid-Twenties, the move can be competitive.

Substantial savings

The Australian Energy Regulator says east coast energy customers can save hundreds of dollars on their electricity and gas bills despite the increases retailers announced from 1 July.

AER chair Paula Conboy says analysis shows households switching energy providers, and especially those on so-called “standing offers,” stand to gain significantly by shopping around. Disparities between the most expensive offers and the best available in the competitive market approach $1,600 annually in some parts of the NEM.

The regulator declares savings in south-east Queensland for four-person households’ power bills can reach $900 a year, in Adelaide $1,500 and $1,600 in rural South Australia, while it is $1,400 in Sydney and Wollongong. In Canberra it is $800.

1-for-1 fallacy

The Independent Pricing & Regulatory Tribunal in New South Wales has put a wrecking ball through the widely-held view, especially by lobbyists for renewable energy, that power retailers’ payments to households under solar feed-in arrangements should be the same as retail prices (that is, 1-for-1).

In a report on the PV benchmark for feed-in tariffs, IPART has recommended to the NSW government that 2017-18 payments should be no higher than the financial benefits retailers receive from energy exported from homes.

The regulator, fending off “numerous” submissions accusing retailers of profiteering from solar customers, says “The metering and settlement arrangements in the NEM mean that retailers incur network and green scheme costs for every kilowatt hour of electricity they supply to a customer, regardless of where and how the electricity was generated.

“Retailers also incur costs in running their retail business – including costs related to billing and customer inquiries, regulatory compliance and corporate overheads. These costs depend more on how many customers a retailer has than on how much electricity their customers use. Therefore, retailers do not avoid incurring these costs when a customer exports electricity.

“If retailers were required to pay 1-for-1 solar feed-in tariffs, they would make a substantial loss on solar customers. Therefore, they would likely increase their retail prices to recoup this loss or choose not to supply solar customers.”

However, IPART has recommended a range of higher tariffs for the State’s 350,000 households with rooftop solar – lifting to more than double the 2016-17 voluntary levels – following large increases in wholesale power prices over the past year.

Light for gas

The upstream petroleum industry sees the Finkel report, delivered to the Council of Australian Governments in early June, as offering a green light for more gas-fired power generation even as the minerals sector argues for the proposed clean energy target to be sufficiently high to enable high-efficiency coal plants to be built on the east coast.

Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, is calling for a CET to be “realistically ambitious,” set at a level that “winds back dependence on coal generation without jeopardizing energy security.”

“The best option today to cut emissions is to use more gas-fired power generation,” Roberts says. “As the review confirms, gas can complement the intermittent nature of renewable power generation and produce electricity with one-third to one-half lower emissions than coal.

“Instead, we are seeing gas-fired generation squeezed out of the mix by cheap coal and subsidized renewables.  Along with policies to remove barriers to gas development, a Clean Energy Target could help reverse the trend of gas disappearing from the energy mix.”

Roberts adds that State government policies impeding development of new gas supplies “must be junked.”

The APPEA stance is echoed by Energy Networks Australia. CEO John Bradley says “Australia can’t address electricity system security without removing arbitrary blockages to gas supply and ensuring gas markets are working effectively.” To which Australian Pipelines & Gas Association CEO Peter Greenwood adds: “Gas generation of electricity has half of the carbon emissions of coal, and increasing the proportion of electricity generated by gas would be a quick way to assist Australia to reach its emissions targets.”

Meanwhile the Minerals Council of Australia continues to campaign strongly for a role for high efficiency, low emissions (HELE) coal generation in the future generation mix. MCA has released analysis showing that replacing ageing coal-fired power stations with HELE plants could deliver annual reduction of 24 million tonnes of carbon dioxide-equivalent greenhouse gases by 2030. To which, it says, upgrading other coal generation with new technologies could add a further 9 Mt a year of emission reduction by the end of the next decade.

Together, MCA argues, these steps could deliver 80 per cent of the electricity supply emissions reductions needed to help meet Australia’s 2030 carbon target under the Paris inter-governmental agreement. “The rest of the electricity sector’s emissions reduction task,” it adds, “could be met by continued investment in gas, wind, solar and hydro, storage technologies like pumped hydro and batteries, and energy efficiency and demand management measures.”

Unforgiveable

Federal Environment & Energy Minister Josh Frydenberg says it is “unforgiveable” that Victoria has imposed a moratorium on onshore conventional gas extraction and a ban on onshore unconventional onshore gas exploration. The State government’s approach, he adds, is “mindless” and “job destroying” and should be replaced by a case-by-case approach to projects where individual landowners and farmers have their say.

Speaking at the Energy Networks Australia “Gas Vision” forum in Melbourne, Frydenberg urged acceptance that gas is “an essential part of an affordable and reliable energy system.”

At the seminar, Ben Wilson, chairman of ENA’s gas committee, said “gas has a decarbonization trajectory in just the same way electricity does.”  Battery storage is now “very sexy,” he commented, “but the storage capacity for the Australian gas system today, already paid for, is the equivalent to six billion Tesla Powerwalls.”

The Australian Petroleum Production & Exploration Association, reacting to release of an interim report by an inquiry in to hydraulic fracturing in the Northern Territory, says its industry is “ready to invest billions of dollars” in the NT when the new Labor government’s moratorium on the technology is lifted.

‘Not a pass mark’

Energy Networks Australia says approval by the CoAG Energy Council of 49 of the 50 recommendations of the Finkel task force is “not a pass mark.”

ENA chief executive John Bradley says the ministerial council has so far failed to deliver the certainty needed for lower energy bills, security and national emissions targets.

“The hard work has still to be done,” says Bradley. “Time is running out for a national approach to carbon policy and the exploration and development of gas supplies.”

Bradley also claims that a Turnbull government decision to abolish the appeals regime for energy regulatory decisions will “increase investment risk and ultimately costs for energy customers.”

Meanwhile the Energy Policy Institute has praised the CoAG Energy Council for endorsing the Energy Security Board proposed in the Finkel report, saying the States “have accepted they could not be sure of a secure electricity supply” without it.

However, says EPIA executive director Robert Pritchard, each State government needs to expedite gas developments within its own borders. “The States have run out of excuses,” he adds. “They need to act in the national interest.”

Tipping point

The Australian Energy Council, representing power generators and energy retailers, says this country has “arrived at a tipping point on energy policy.”

CEO Matthew Warren argues that commitment to a national clean energy target “is critical if we are to bring down energy costs, increase (electricity) reliability and build a lower emissions grid.”

Warren declares that “energy prices are unsustainable and the reliability of the electricity system is deteriorating,” calling for a brokering of a bipartisan agreement on a CET and other reforms recommended by the Finkel task force to enable “investment that will run for decades.”

At present, he adds, “a decade of energy policy flip-flopping continues to undermine investment in new capacity.” This threatens to “destroy the electricity market,” he says. “By almost any measure, the death of the NEM would be a colossal policy failure resulting in higher prices, re-regulation and un-reform, a return to the government paternalism of the 1960s and all that entails.”

On the up side

In a time when concerns about the future for electricity supply are a constant theme, the Australian Energy Market Operator has published an “insights” paper in which it argues consumers are becoming smarter about energy use.

AEMO claims the uptake of distributed solar generation and use of energy efficiency appliances will keep grid-supplied power consumption stable for the next 20 years despite a projected 30 per cent increase in population.

“Advances in technology and economies of scale in production of solar rooftop panels, battery storage and efficient appliances are providing consumers with greater and easier opportunities to manage their energy use and costs,” says Audrey Zibelman, the market operator’s CEO.”

She says AEMO believes the uptake of rooftop solar PVs will “remain strong” through to the late 2020s before levelling off. Rooftop PV capacity is predicted to reach 20,000 megawatts in 2037 with residential and commercial uptake of battery storage forecast to exceed 5,500 MW by then.

However, she adds, the energy sector will require investment in generation, networks and/or demand-side solutions to ensure reliability and security.

The market operator also foresees an increase in the uptake of electric vehicles around 2020 “adding demand flexibility but having limited impact on annual consumption of power overall.”

LNG warning

The upstream petroleum industry is warning governments and the community not to take the benefits of Australian LNG development for granted.

Reacting to publication by the Department of Industry, Innovation & Science of a forecast that LNG exports are on track to overtake metallurgical coal as Australia’s second-largest export commodity in 2018-19, the Australian Petroleum Production & Exploration Association says local industry may soon find itself caught between Qatar, the world’s largest producer now signalling its intention to massively increase its export capacity, and the United States, pursuing five new export projects.

APPEA director Matthew Doman notes the federal government forecast that Australian exports will jump from $23 billion annually to $37 billion in the next two years as new projects in the Northern Territory and Western Australia begin production, but asserts that the local industry is under threat from “threats to export contracts” and possible tax increases for new developments.

Australia, he says, faces intense competition from low-cost producers in an over-supplied global market. “We can succeed as a high-cost, low-risk country but not as a high-cost, high-risk country.”

APPEA is also pointing to a new report by the International Gas Union that shows, it says, wholesale gas prices in Australia are not high by Asia-Pacific standards.

“While the Australian gas market is tight and prices for new contracts are higher than they have been historically,” Doman says, “it remains the case that, contrary to some claims, across the economy gas consumers here are not paying prices above those paid on average in Japan or other LNG importing nations. Quite the opposite is true.  Australia’s wholesale gas prices remain in the ‘middle of the pack’, a position they have held for many years.”

The IGU reports that average wholesale gas prices in Australia last year were around $US4.29 per MMBTU. By comparison, prices in Australia’s leading trade partners, Japan, South Korea and China, ranged between $US7 and well over $US8. Prices in Malaysia and Indonesia were also higher than in Australia.

Globally, Doman says, Australia’s wholesale gas price ranked 26th in a survey of 52 countries.

Still riding high

Analysis in the latest EnergyQuarterly published by Graeme Bethune’s EnergyQuest shows that coal-fired power remains massively dominant in the three States that make up 90 per cent of the NEM.

Looking at the 12 months to March this year, EnergyQuarterly statistics show brown and black coal power stations contributed almost 83.4 per cent of the 181,030 gigawatt hours produced in Victoria, New South Wales and Queensland. Overall in the NEM the market share of these generators stood at 75 per cent.

In South Australia, focus a huge amount of fuss in the past 18 months, the driver of commissioning the Finkel report, production of power fell 1,261 GWh following closure of the Port Augusta coal plants. SA-based production in the period reviewed was just 5.4 per cent of the NEM as a whole at 10,600 GWh – and the largest share was held by gas plant (4,989 GWh) followed by wind farms (4,675 GWh). The State imported 2,692 GWh over the interconnector with Victoria.

In the two largest demand States, each with more than six times SA’s production, black coal generation was by far the top producer – with 84 per cent of output in NSW and 82.6 per cent in Queensland.

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Last word

Is our energy transition in the NEM running off the rails?

This may seem a harsh question after the recent CoAG Energy Council meeting and the apparent outbreak of agreement over 49 of the 50 Finkel report recommendations as well as the noises federal Labor is making about co-operating in the creation of a clean energy target, as recommended by Finkel.

But I think it is not an unreasonable question when you take in to account the present environment overall – whether looked at politically or through the lens of long-established suppliers and consumers – and bear in mind that the recent outbreak of reasonableness tends to mask considerable actual disagreement, not just on party lines politically but also within the parties.

As the Grattan Institute says, a mess a decade in the making cannot be cleaned up overnight.

This is happening at a time when the power supply business is wrestling with a seminal shift (if it comes about) from dependence on consumer demand to dependence on wind and sunshine – or to quote an American trade magazine: “The energy industry is in transition on nearly every level. It is being buffeted by the cross-current of new technologies and competing systems that are disrupting long-established supply systems and conventional ways of doing business.”

One only has to read through the submissions to the ACCC power prices inquiry to see the wide differences between Australian stakeholders, both suppliers and users – and, of course, their representative organizations.

I was struck recently by the aptness for our situation of a comment, dealing with American politics, by the New York Times columnist David Leonhardt: “It’s often difficult to distinguish between what you want to happen and what is likely to happen.”

We have the truth of this thought illustrated virtually daily in the media portrayal of wrangling over the energy developments in Australia, now seemingly billed (with respect to supply security and prices) as the issue that could bring the Turnbull government undone – and just saying this demonstrates how far and how fast events have moved since the 2016 federal poll.

Speaking of quotes, I am also struck by this one from Isabelle Kocher, CEO of the international company Engie, which has been the centre of some of the key recent happenings here (with its closure of Hazelwood and proposed sale of Loy Yang B): “The energy revolution is generally recognized as the fulfilment of the promise of a decarbonized world, in which the interests of economic development and environmental preservation will finally be reconciled. Some fear, however, that the impact on jobs that will result from the decline of certain sectors and the emergence of new ones will be too great as the revolution in industry progresses in a frenzy of creative destruction.”

Is that what we have here today in the energy sector – a frenzy of creative destruction?

Coming back to the mundane, it is perhaps worth noting these assertions by Matt Rennie of EY:

“Three factors have made the electricity industry more complicated than ever. 

“First, the installation of large amounts of renewable energy has driven excess baseload capacity in many developed systems, decreased available inertia and, in the absence of capacity markets, reduced the economics of peaking plants. In some cases, this has threatened reserve margins and even made systems less reliable. 

“Second, energy customers are no longer disinterested non-participants in power markets but active players. They are installing distributed energy systems and pursuing the same capacity trading mechanisms in electricity that they already enjoy with ride-sharing and accommodation.

“Third, faced with the erosion of traditional business models and fuelled by yield capital, many electricity companies are introducing more innovative, higher-risk services to stave off new entrants from converging industries. The battleground for the customer is filling up with new and diverse competitors, all of whom are seeking to find and exploit pockets of profitability, some by keeping things exactly as they are and others by changing the game.

“In this environment, governments that intervene in energy markets risk doing more harm than good.”

Yes, quite, but the body politic is locked in to intervention mode even, as illustrated by Liberal Party shenanigans, while it is deeply split by political attitudes.

Should one perceive what is going on overall as creative or destructive?

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Keith Orchison
28 July 2017