Coolibah Commentary

Issue 175, November 2019

November is shaping to be an in-between month: with the October media fireworks over energy policies behind it and the important CoAG Energy Council meeting towards its end, the first and last for the year. How the federal government and the State regimes play politics at that gathering may well shape what happens in 2020, always supposing east coast market problems next summer don’t put a bomb under them all. Speaking of bombs, the fate of Portland aluminium smelter in Victoria, with the portents a decision about its future may have for the NEM as well as the manufacturing sector, is now as potent an issue for energy policy as the fate of Hazelwood was less than two years ago. Meanwhile the energy market agencies continue to beaver away on more than a dozen programs to grease the transition’s wheels.

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Quotes

“The only consensus on Australia’s energy policy and markets is that currently both are a mess” – lawyers Gilbert+Tobin.

“Energy policy has polarized politics in Australia for most of this century” -- federal Energy Minister Angus Taylor.

“Record investments in renewables are associated with failing reliability and rising prices” – Angus Taylor.

“There are two major things going on that are driving everything – the variable renewables of large scale entering the system and a huge increase in rooftop solar, which is quite unprecedented” – Energy Security Board chair Kerry Schott.

“(East coast) electricity prices have increased by nearly 50 per cent in real terms over the past 10 years” – Rod Sims, chairman, Australian Competition & Consumer Commission. “Energy prices quite simply are way too high in Australia.”

“The (CoAG) meeting in Perth on 22 November will be important to progress key priorities of accountability, transparency and reliability in the grid” – Angus Taylor.

“We run the risk of hunting for a silver bullet that does not exist” – ACCC’s Rod Sims.

“Government interventions to both cap prices and effectively subsidize certain generation projects will not encourage the considerable new investment and innovation that is needed” – ESB’s Kerry Schott.

“We are unfortunately at the point where we need to start questioning market design and whether government needs to take more responsibility for investment, something we haven’t needed in the past 21 years of the NEM” – Origin Energy CEO Frank Calabria.

“The Andrews government has requested an exemption from the Australian Energy Market Commission to allow it to negotiate for longer-term deals for emergency back-up power supply contracts” – Victorian Energy Minister Lily D’Ambrosio.

Desperate

Origin Energy chief executive Frank Calabria has told the Committee for the Development of Australia that there is “a desperate need” for a strong signal to invest in east coast power generation. “Unfortunately,” he said at a CEDA forum in Sydney in late October, “the situation is becoming more and more urgent with the next tranche of generation exiting the market in 2022 and 2023.”

He added: “It is very hard to argue that the NEM is working well right now with prices and reliability a real concern each summer. Market participants are very worried the rules could change at any time.”

Calabria said a decade of “inertia” on energy and climate policies have made it “difficult” for corporate boards to approve major investments in generation “needed to fill the gaps between wind and solar.”

He added that there is a need to recognize that “coal is the wrong type of generation to firm renewables,” declaring that extending the life of existing coal-burning plants “without a strong carbon signal” will “extend the uncertainty.”

Calabria said it is “critical” for policymakers to think about long-term solutions “rather than quick fixes.”

Meanwhile Audrey Zibelman, CEO of the Australian Energy Market Operator, has told a conference in Melbourne: “We can’t talk about the energy system as transitioning. The system has transitioned. (It) is (now) a combination of multiple systems that all need to work together. (These are) challenges we have to start managing now.”

Knee jerk

The Grattan Institute, in a commentary on energy policy published in October, says about $150 billion needs to be invested in new power generation over the next 30 years but investors are being scared off by the federal government “bashing big companies” and intervening in the NEM with “knee-jerk policies” such as the Snowy 2.0 pumped hydro project and its “underwriting new generation investments” program.

Grattan energy director Tony Wood has called on the States to work together to fill a “climate policy vacuum.” He says: “The States’ (existing) policies have added to the mess, using different mechanisms to try to meet different emissions reduction targets.

“The upshot has been growing frustration for investors and higher energy prices for consumers.”

The institute argues that the States should abandon their uncoordinated policies and instead implement a nation-wide emissions reduction plan through legislation passed in each jurisdiction. “A States-based policy would be far superior to no policy at all,” Wood says. “It would resolve a key element of uncertainty and it would ultimately lead to lower bills and increased reliability.”

‘Wicked problem’

The Public Interest Advocacy Centre says developing a framework that fairly and effectively shares the risks and benefits of establishing renewable energy zones is “a wicked problem” that requires rethinking of “how we plan, invest and pay for network assets.” Its comment comes in reaction to the Australian Energy Market Commission publishing a discussion paper on encouraging efficient REZ transmission investment in advance of generation – which the rule-maker describes as a bid to start future-proofing network access,

The plan, described by some as “radical,” includes a proposal for wind and solar farm developers to pay some of the costs of their connection to the market grid. AEMC chairman John Pierce says the reforms being considered would apply to all new power stations and would encourage investors to build in the more cost-effective parts of the grid. “Regardless of what happens in the future,” he adds, “these reforms need to be in place so new generation can have grid access in the cheapest way possible.”

Pierce says that some 50,000 megawatts of new generation, roughly equivalent to the current capacity of the NEM, may require connection to the system in the next decade.

He says the commission is now offering a reform package to “address both the costs and risks of integrating new generation into the grid in a holistic, comprehensive way.” And he warns: “Anything less than comprehensive reform risks a continuation of short-term, piecemeal changes that are likely to result in higher prices and less reliability in the long term.”

The Clean Energy Council has responded to the AEMC papers by warning the proposals are “extremely complex” and that reform “should not be rushed.”

Federal Energy Minister Angus Taylor has flagged the issue as a key part of the agenda for November’s CoAG Energy Council meeting, declaring that “transmission and other enabling services fundamental to the successful evolution of the NEM have been largely ignored in policy discussions.”

Portland problem

Concerns that Alcoa’s aluminium smelter at Portland in Victoria may close have raised fears that this could flow on to an earlier closure for the State’s Yallourn power station and have a ripple effect in to the NEM’s operations.

EnergyAustralia CEO Catherine Tanna told a conference in mid-October that a key concern for power station owners and operators is that they have no control over the “disappearance” of large slabs of demand load. To which the company’s markets executive, Ross Edwards, has added that “taking any large form of demand out of the system naturally has implications for all forms of generation.”

The Portland smelter accounts for 10 per cent of Victoria’s power needs and is the recipient of large federal and State financial support that is due to end in 2021.

Federal Energy Minister Angus Taylor reacted to news of the Alcoa review of its global smelter operations by reminding the Andrews government in Melbourne to prioritize the affordability and reliability of State power supply “and to ensure that their thermal generators stay in the market, running at full tilt.”

Energy analysts are suggesting that the shutdown of Portland smelter could accentuate the hollowing out of Victorian wholesale power prices during daytime because of the impact of rooftop solar use, undermining the economics of brown coal power stations and bringing forward the closure of Yallourn, leading to a repeat of the price issues that followed the sudden exit of Hazelwood in March 2017.

EnergyAustralia’s current plan is to operate Yallourn until 2032 – or “as long as policy and regulations permit.”

The fuss about Portland follows Jean-Sebastien Jacques, Rio Tinto chief executive, declaring earlier that the company’s smelter operations at Gladstone and Newcastle are “on thin ice” because of spiraling east coast energy costs at a time of weak aluminium prices.

“Australians should have a cheap, reliable, globally competitive source of energy. Today it’s not the case,” says Jacques.

The Tomago smelter CEO, Matt Howell, has pointed out in a newspaper interview that, rather than being a drain on the power grid, the energy-intensive plants act like “a big battery” to help stabilize the system because they are large interruptible loads.

Critical threshold

Federal Energy Minister Angus Taylor says Victoria and South Australia are at a “critical threshold” where dispatchable power can be below peak demand.

In a speech to an energy conference, Taylor said this does not apply to New South Wales “while Liddell is still open” or Queensland, nor to Tasmania “as long as they don’t have a drought.”

He added “if there is one message for industry participants and investors, it is that we must ensure there is a strong incentive to invest in dispatchable capacity, particularly in markets where reliable capacity is dangerously low.”

He said Victoria and South Australia lack the generation needed to consistently meet demand and to contain electricity prices – “although SA is working very, very hard to address this.”

Taylor said: “Some think that the answer is to double down on more aggressive renewable energy targets or emissions targets and associated subsidies. I think that can only be described as policy insanity.”

He asserted that “retaining and attracting on-demand dispatchable capacity is absolutely crucial.”

Taylor told the conference that batteries, hydrogen, carbon sequestration, biofuels “or even new nuclear technologies” all have potential, “but we shouldn’t pretend any one of them is a silver bullet at this point.”

Falling

Two Australian National University researchers – professor Andrew Blakers and research fellow Matthew Stocks – say they are confident Australian carbon emissions from the electricity sector will fall in 2020, 2021 and “probably” 2022 because 16 to 17 gigawatts of wind and solar power is “locked in for deployment” in 2018-20, leading to annual abatement of 10 million tonnes.
However, they caution that insufficient investment in transmission and energy storage on the east coast may impede renewable energy development.

They note that the federal government believes emissions from other sectors will rise by about three million tonnes a year over the next decade.

In another commentary, The Australia Institute’s Hugh Saddler says that national energy productivity has increased very little since 2015 – when a national plan was introduced by the federal government.

Saddler argues that Australia is falling behind the main aim of the national energy productivity plan: to achieve a 40 per cent improvement in primary energy productivity by 2030.

Energy combustion emissions here are rising against the trend in most OECD countries, he says, with only Turkey, South Korea and Mexico having a worse record since 2005. The increased emissions, he adds, come predominantly from transport and from manufacturing, mining and petroleum production. The exception is electricity generation emissions, which peaked in 2009 and have fallen since with the closure of coal-fired power stations, the growth of solar and wind farm capacity plus a fall in consumer demand.

Saddler adds that there has been a steady fall in NEM carbon emissions over 10 years.

Nuclear evolution

The Minerals Council has told a federal parliament inquiry that the evolution of small nuclear reactors could see them providing the cheapest zero-emission 24/7 power for Australia.

In a submission to the House of Representatives standing committee on environment and energy, the MCA says that nuclear power must be considered to deal with the problem that rising prices and falling supply reliability are forcing businesses to invest overseas. – and that SMRs especially “can go a long way” to ensuring clean, reliable and lower-cost energy.

The MCA adds that, once manufacturing of SMRs is established internationally, the levelized cost of electricity from the technology could be as low as $60 per megawatt hour and “on a system cost basis, SMRs will be even cheaper than technologies based on intermittent sources” because they will not require additional storage support, can be integrated with the existing transmission networks and “provide the full range of ancillary services critical for modern grids.”

Repealing the current legislated ban on nuclear energy in Australia is “critical,” the association declares. “Australia is short-changing itself by not allowing nuclear power.”

The MCA says, if a regulatory framework can be pursued now, a practical framework for SMRs being rolled out in Australia is 10-15 years.

In evidence to a meeting of the committee in Brisbane, Australia’s longest-serving energy minister, Ian Macfarlane, now CEO of the Queensland Resources Council, told MPs that nuclear power should be considered as part of the electricity supply mix to help curb carbon emissions and to bolster the use of intermittent renewable energy.

Macfarlane also declared that the current ban on uranium mining in Queensland, re-introduced by the State Labor government four years ago, was “ideological,” not based on science and was costing the State $10 billion in potential export earnings.

In another submission to the parliamentary committee, the Australian Energy Council, representing large gentailers, has argued the fact that existing nuclear technology is currently commercially unviable in this country does not support the maintenance of ban on its use – “the government should set in place a conducive regulatory and safety framework so that, if the market deems (nuclear power) has value in the future, it is an available option.”

The Australian Energy Market Operator has told the committee that, given its expectations for the lead time for development and deployment of SMRs of 15 years, the technology may be an option for replacement of the Bayswater and Tarong coal-burning power stations over the next two decades – providing it can compete economically with firmed renewable energy to fill these NEM gaps.

Nuke opinion

A new Roy Morgan opinion poll indicates a rise in Australian public support for use of nuclear power.

Roy Morgan say 51 per cent of poll respondents agree Australia should use nuclear energy domestically to reduce national carbon emissions – versus 34 per cent who oppose this. The poll was taken in September.

Fifty per cent of respondents support Australia exporting uranium for peaceful purposes versus 27 per cent who oppose it – and those polled were evenly split at 41 per cent over whether uranium should be exported for use in other countries’ nuclear power stations (with 18 per cent voting “don’t know.”)

Roy Morgan comment that there is “a massive gender split” in Australia over use of nuclear energy here to enhance carbon abatement – with 65 per cent of men polled supporting this versus 38 per cent support among female respondents.

Gary Morgan, chairman of the polling company, says Australian views on nuclear power have changed significantly over the past eight years – support for the technology to tackle emissions has grown 16 per cent since 2011. However, he adds, the latest poll “shows issues surrounding nuclear power are incredibly divisive – even within households.”

The poll shows support for nuclear-fuelled electricity in Australia varies by age group: 47 per cent of those aged 18 to 24 oppose the move versus 37 per cent supporting, 43 per cent of people aged 25 to 34 support it versus 36 per cent opposed, 45 per cent of those aged 35 to 49 oppose it versus 41 per cent in support and 55 per cent of respondents over 50 support it versus 34 per cent opposed.

However, when the issue of reducing carbon emissions is introduced in to the question there is majority support in all four age groups – including 52 per cent among those aged 18 to 24.

Gary Morgan says results of the special survey suggest any government looking to see nuclear plants developed in Australia “must do much more work to convince the public of the benefits of the technology.”

No to wind farm

The New South Wales Independent Planning Commission has knocked back a plan to build a wind farm near Goulburn.

The commission says its decision on the 23-turbine, $120 million Crookwell 3 project, while acknowledging the public benefits of renewable energy, recognizes “significant community concerns” that the cumulative effect of wind farms at Crookwell “will transform the landscape from an attractive rural (one) to an industrial landscape.”

The existing turbines in the Crookwell area are among seven operational wind farms in the NSW Southern and Central Tablelands region.

Needing copper

Queensland Resources Council CEO Ian Macfarlane says renewable energy can provide an important new source for demand growth for the State’s mining sector.

Solar power, which is booming globally, he points out, requires five kilograms of copper for every kilowatt of capacity while coal-burning plants need 2kg.

‘Broken’

The east coast domestic gas market is “broken” and a stronger measure than the federal government’s gas security mechanism, which allows export restrictions, is needed, according to Deakin University professor Samantha Hepburn, director of the Deakin Law School.

The current situation points to “a dramatic failure of management and regulation,” she asserts, “with households struggling with soaring bills and the future of the manufacturing sector at risk.”

Hepburn is calling for “the crisis to be de-escalated with stronger export controls and a regulatory regime more focused on the public interest.”

West to east

The Australian Workers’ Union has declared support for construction of a gas pipeline from Western Australia to Moomba in South Australia..

However federal Resources Minister Matthew Canavan has told journalists a pipeline that accessed the WA Canning basin, the Beetaloo basin in the Northern Territory and fields in Queensland’s Galilee basin “would make a lot more sense.”

The west/east concept, originally and still promoted by former WA premier Colin Barnett, has support from the manufacturing sector but there is opposition in the upstream petroleum industry from companies with interest in eastern States and it has been criticized by some energy analysts.

‘Powering economy’

The Australian Petroleum Production & Exploration Association says a new report demonstrates how “natural gas is powering the Queensland economy.”

APPEA points to the report by Lawrence Consulting finding that the gas industry contributed $55 billion to Queensland’s economy over seven years – including $5 billion in wages and $50 billion in buying goods and services locally plus spending on royalties, stamp duty and tax.

APPEA Queensland director Georgy Mayo says “the industry has helped offset some of the hardship of one of the worst droughts on record with jobs, economic development and a new source of water for landowners.”

‘Materially detrimental’

The Australian Industry Group, the main lobby organization for the national C&I sector, has come out strongly against the “big stick” legislation being progressed through federal parliament.

AiG chief executive Innes Willox declares that “disproportionate intervention in the electricity market will have an adverse impact on sustainable and effective investment in the sector, thereby harming the long-term interests of consumers.”

Willox says: “AiG strongly believes that, given the existing level of uncertainty in the energy sector, measures to force  business entities to restructure or divest some or all of their assets risks having a materially detrimental impact on their existing commercial operations and investment strategies.

“These risks apply to all private participants in the generation sector not just large incumbents. More generally, creating a power to break up energy businesses will set a poor precedent for disproportionate government intervention in the wider economy.”

Network revenue

The Australian Energy Regulator has decided that the largest electricity network business, Ausgrid, can recover $7.7 billion from its customers between July 2019 and mid-2024.

The regulator says this means the bills will be around 9.1 per cent lower on average by 2024 for network users in a large part of Sydney, the NSW Central Coast and the Hunter Valley – an area where these charges represent 36 per cent of total power bills.

Ausgrid recovered $10.97 billion from its customers in 2009-14 and $9.47 billion in 2014-19.

The regulator has also approved a $2.6 billion capital expenditure outlay for the network for 2019-24.

The decision follows an AER draft determination that SA Power Networks can recover $3.9 billion from customers for 2020-25, $309 million less than the business had proposed.

The ruling has drawn criticism from Spark Infrastructure, which owns 49 per cent of the SA network, that the rate of return being allowed by AER is “insufficient to ensure the long-term sustainability and reliability of Australia’s electricity infrastructure.”

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Last word

November is either going to be noteworthy for some progress made at an unconscionably delayed CoAG Energy Council meeting or for the opposite: a widening and deepening of the rift between Canberra and the State governments over policy.

The 22 November meeting in Perth should have been convened months ago. It is not to federal minister Angus Taylor’s credit that it wasn’t.

This council discussion will not provide a solution, of course. Defining “solution” in this situation is, all by itself, a considerable challenge.

There’s a great deal of colour and movement in the energy space at the moment but not a great deal of light being shed on how to extricate Australia from its present domestic doom and gloom.

To quote lawyers Gilbert + Tobin, the only consensus available on energy policy and markets is that they are both in a mess.

The Australian Financial Review, in an editorial following its October conference on energy issues, averred that “the failure of successive governments over the past decade to come clean” on the costs of the much-touted system transition is the root cause of the “national debacle of climate change and energy policy.”

The newspaper asserted that the sums needing to be spent on power generation to transform the system between now and 2050 will be “ruinous” for taxpayers if private investment cannot be mustered to accommodate the “anarchy of widely-dispersed and unreliable renewables” – and emphasized achieving this will depend on a well-functioning market to attract huge amounts of risk capital.

As one of the chief executives with whom I worked during 24 years of running national energy industry associations was fond of saying at this point in discussions, “and, therefore, what?”

Lawyer Robert Pritchard (ResourcesLaw International), in a commentary submitted to the Energy Security Board with regard to its post-2025 NEM design project, stresses that the key theme in managing Australia’s future energy security needs to be diversity. “There is no single path on which we should rely,” he says. This should be obvious to the key players in policymaking but it manifestly isn’t.”

Seeking to provide context, Pritchard observes: “The overall challenge for Australia is, first, to continue exporting energy security to its main customers, who will be dismayed if they find their supply choked off by political or market disruptions – and, second, to reduce its own high level of dependence on importing oil while not exposing the power system to the vagaries of the weather.

“Energy security,” he says, “therefore is an increasingly complex challenge with multiple stakeholders interacting on multiple fronts in different ways and with different levels of intensity.”

Accepting that the key strategic response needs to be diversity, he goes on, a range of options need to be kept available along with the flexibility to switch between them.

Among the options he puts forward to the ESB are heavy investment in emissions reduction technologies, including carbon capture storage and use, and use of a portfolio of interchangeable supply sources, including renewables, fossil fuels, hydrogen and nuclear power – as well as building interconnections to reduce vulnerability to system failure and fuel shortages plus reducing the energy intensity of the economy.

With respect to the post-2025 project, Pritchard also declares that the main obstacle to progress, apart from its sheer complexity, is “the involvement of too many cooks.” He argues the project needs to be streamlined and pursued in close partnership with industry.

Pritchard calls for board of the ESB to be changed. Drop the Australian Energy Regulator and Australian Energy Market Commission representatives, he suggests, replace them with industry people and allocate the board the resources it needs to complete the entire exercise in six months.

His ideas resonate with me. Whether they will with politicians is another matter entirely.

Others, of course, have opinions in this regard, too – but the critical point (in what Angus Taylor, talking about the need in southern States for adequate firm power supply, has labeled “dire circumstances”) is to cut through the “mess” and pursue a new approach as speedily as possible while relying on market competition and not governments picking winners (at which they are notoriously bad here and everywhere).

Keith Orchison
28 October 2019