Coolibah Commentary

Issue 189, January 2021

What’s in store for 2021? That’s a question on all our minds for so many reasons as we leave behind 12 deeply-upsetting months. While progress (health, social and economic) in dealing with the pandemic remains the most important issue for YBT (Year Beyond Trump), 2021 is also a new stepping stone for the global climate change debate, with its ramifications for Australia’s energy sector and for national politics in the broad as commitments by governments and companies to pursue a net-zero emissions target by 2050 are ramping up ahead of this November’s UN climate summit. In theory, 2021 should as well be a year when meaningful progress is made in reforming the east coast power market and addressing domestic electricity and gas supply security – but we seem to have been saying that annually since the middle of the past decade. The latest “Health of the NEM” report brings home (to quote Kerry Schott) the repercussions of rapid change in the market and the “absolute urgency” of addressing them as well as of the States “all going at different speeds.” As well, after some seven years of uncertainty, how gas supply augmentation will evolve on the southern coast still remains an issue throwing up more questions than immediately obvious answers, continuing the stress for manufacturers in particular.

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Quotes

“We can all agree 2020 has been quite the year” – ABC broadcaster Damien Beaumont.

“Twenty twenty defies summation. All of us tried. No words seem to capture the whole” – columnist Peggy Noonan in the Wall Street Journal.

“We are not all in the same boat. We are all in the same storm” – US writer Damian Barr.

“Operational conditions for summer are looking favorable” – Australian Energy Market Operator’s Michael Gatt, chief operations officer. “But there still remains prominent risk over the period.”

“It appears we have a National Electricity Market in name only because (State) jurisdictions are increasingly doing their own thing” – Andrew Richards, head of the Energy Users Association of Australia.

“You need confidence in the market playing field before investors can commit to major investments that will be around for a long time” – Sarah McNamara, CEO, Australian Energy Council.

“Just maybe policymakers will take 2021 as an opportunity to reconcile political fears with economic fears and answer one of the most tortuous and important policy issues of our time: how to deliver reliable, low-emissions energy at lowest cost” – Tony Wood, Grattan Institute.

Three Cs of 2020

Graeme Bethune, CEO of EnergyQuest, says the stand-out themes of 2020 are “the three Cs – Covid, China and climate.”

The impact of the pandemic looks “set to wreak havoc” well in to 2021, he opines, and the second bothersome theme is the politicization of trade, “most obviously now with China,” but he sees “no hint or suggestion” that ongoing tensions will impact on Australia’s LNG exports.

Bethune also highlights “the rush to adopt net-zero targets by most companies in the Australian energy industry.” He notes that utilities like AGL Energy, Origin Energy and Energy Australia have already transitioned to a portfolio of sources including renewables but sees the move as likely to be a lot harder for upstream petroleum producers.

Emerging risks

The Australian Energy Market Commission has emerging risks to the power system high on its agenda going in to 2021.

The market rule-maker is seeking stakeholder feedback by late February on a proposed framework to deal with “extreme events.”

The commission comments: “In the past few decades, the main challenge to power security has been keeping the system going when a single piece of equipment fails. However, as power plants on the grid change and weather events become more intense and frequent, indistinct events are emerging as a risk to the grid.”

It cites major storms, fire storms and cyber attacks as example of the challenges now being faced, adding that changes in the generation mix from synchronous to inverter-based technology are adding to the east coast grid’s susceptibility.

Net zero view

A poll by JWS Research, commissioned by the Australian Petroleum Production & Exploration Association, finds six in 10 people favor a low emissions future, reinforcing a view that “it is now safe to pursue clean energy” – but barely one in eight favor a target of net-zero emissions by 2050, a policy being widely and fiercely pursued by many here and overseas ahead of the next UN climate change summit in Glasgow in November.

State governments have embraced the target but the Morrison federal government has so far resisted doing so although there are expectations is some quarters that it will “pivot slowly” in this direction in what may prove to be an election year.

JWS Research polled 1,500 Australians and found 44 per cent of respondents said they are very concerned about climate change, down from 50 per cent during the 2019-20 summer bushfires.

The survey found that just over one in 10 of those polled are generally in favor of a net-zero target and 13 per cent of a 2050 date for achieving it.

The survey also found that 47 per cent supported exploration and development of new gas reserves versus 16 per cent in opposition, with the highest support in Western Australia and South Australia.

Recommit ‘now’

Kerry Schott, chair of the Energy Security Board, is calling for State and Territory governments to recommit to the power market agreement underpinning the NEM that binds them to a nationally-consistent approach to energy policy.

In a media interview, Schott said “now would be a good time” for the governments to take up this recommendation of the 2017 Finkel review.

A new discussion, she added, would address whether governments “basically wish to be separate” and the extent to which they want to continue to support the NEM – “which certainly the ESB and much of industry would want to happen.”

Grattan Institute energy program director Tony Wood comments that the governments created the ESB as a vehicle to lead a national approach for the electricity sector and federal and State actions are now “cutting across the work.”

The Energy Security Board is currently charged by governments collectively with working on a post-2025 design for the NEM, a report scheduled for delivery this year.

In the first week of January the ESB released a new “Health of the NEM” report. In a statement, Schott said “real progress” had been made in improving the market’s reliability, in reducing its carbon emissions, in increasing competition between participants and in network investment – but she highlighted system security and investor confidence as critical issues needing urgent attention.

In a newspaper op-ed, she pointed to two noticeable things about the current state of play: first, the reluctance by some stakeholders to recognize the pace of change and “the need to embrace holistic change in the sector” and, second, the “diminishing patience” of State governments to wait for a NEM-wide solution.

“We cannot afford to lose sight of the importance of keeping the national market national,” she said.

Federal Energy Minister Angus Taylor, in a TV interview, added to this: “We need State governments working with us through the National Cabinet to make sure we don’t have (them) running off doing things which are at odds with the over-riding framework.”

Taylor also told journalists Australians should not be worried about their power supply, adding “but it is clear from the report that there is more work to be done if we are to eliminate risks we see on the horizon.”

Meanwhile, a report from the Australian Energy Regulator has highlighted a lack of confidence among electricity generation investors, not least because of government intervention in the NEM and also because of “significant uncertainty” about the timing of coal-fired power station closures.

The AER says “a range of market participants (have) highlighted concerns with government investment and intervention” as well as “various schemes governments are putting in place to underwrite generation investment.”

AER chair Clare Savage says the process being run by the Energy Security Board to reform the NEM for post-2025 conditions is “critical” to the market’s future, “”recognizing that governments will continue to pursue their policy objectives.”

Renewables boast

Angus Taylor is boasting that, on a per person basis, Australia is a world leader in renewables adoption – claiming that the per capita take-up of green generation technology is 25 per cent faster than in Europe’s four largest economies (Germany, the UK, France and Italy) combined.

Taylor says the government expects that there will be $18 billion in the “next generation” of energy technologies, guided by its technology investment roadmap, over the next 10 years. This includes $1 billion to be contributed via the “grid reliability fund.”

Faster

The Australian Energy Market Operator says it intends to model a scenario for an energy transition to net-zero greenhouse gas emissions by 2040 rather than 2050.

The operator says it is reacting to feedback from market stakeholders.

Meanwhile, the Energy Security Board, in its annual review of the NEM, reports that market emissions are about 25 per cent lower now than in 2005. On present trends, it says, emissions would be between 40 and 60 per cent lower in 2030 than in 2005.

The ESB also records that “security remains the most concerning issue in the NEM.” It says that maintaining the system within the required parameters for frequency, voltage, inertia and system strength is becoming harder as variable renewable energy “increases its presence.”

ESB chair Kerry Schott adds: “The technology- and renewables-driven transformation of the market is no longer an if or when proposition, it is here and now – the pace of change is accelerating and Band-aid solutions are no longer viable. The current set of systems, tools, market arrangements and regulatory frameworks is no longer entirely fit for purpose.”

The Australian Energy Council, representing gentailers, has commented in response to the ESB views that “key issues remain investment in dispatchable generation as more renewables come in to the grid as well as ensuring there is an orderly exit of older thermal plant and encouraging the right overall mix of resources and system services.”

Elephant in room

Hugh Grossman, research director of energy and climate change consultancy Reputex, is calling for more focus on emissions from beyond the electricity sector in Australia’s approach to abatement.

In an interview with the Australian Financial Review, Grossman says a target of net-zero by 2050 looks “very hard since nothing is projected to happen outside power generation.”

He points to projected increases between 2020 and 2030 in stationary energy in sectors such as mining, forestry and agriculture as well as in the transport sector, in manufacturing and in fugitive emissions related to industries such as LNG production while electricity generation emissions fall back.

Grossman told the Financial Review: “There is an elephant in the room. Australia needs to do more to reduce carbon emissions across the whole economy. That is the biggest issue Australia faces with respect to a net zero target.”

Green cap

The energy and utilities research unit of analysts UBS is asserting that the roll-out of renewable energy across Australia will see wholesale electricity prices capped at $70 per megawatt hour by 2030, starting a decline in real terms (that is, rising slower than inflation) as a result of this “strong penetration.”

UBS expects 4,000 megawatts of large-scale renewable capacity to be in operation by 2023 – and this development to triple by the end of the decade as transmission bottlenecks are addressed.

It adds that this trend should “sound the alarm for incumbent owners of coal-fired plants.”

Going down

The Australian Energy Market Commission forecasts that east coast wholesale power prices, which make up a third of consumer retail bills, will continue to fall out to 2022-23.

In its latest report on NEM residential electricity prices, the market rule-maker declares that household bills will go down by 8.7 per cent over the next three financial years – but may rise “slightly” after Liddell power station in New South Wales closes in 2023.

The increase is “by no means certain,” says the commission and will depend on generation developments in the State. Meanwhile, it is predicting that the average annual residential bills for NSW and Victoria – the largest populated areas in the country – will then be $29 and $172 lower respectively than in 2019-20.

The AEMC notes that there are commitments to build 2,580 megawatts of wind farms and 1,667 MW of solar farms over the review period.

The Australian Energy Council says the commission’s report “reinforces that the market is competitive with committed new generation continuing to push down wholesale prices even without recently-announced government plans to underwrite more capacity.”

Must be April

Energy Minister Angus Taylor insists that April is the deadline for the private sector to commit to building a gas-fired power plant to help deal with the Liddell station closure.

“April is the last date from which the timing would work,” he said in a radio interview, referring to the time-line for a new plant to be ready when the 50-year-old Hunter Valley station is scheduled to be taken off line.

The federal government says it will have Snowy Hydro, which it now wholly owns, build the plant if the private sector does not move to match lost Liddell capacity.

In December, the NSW government gave the proposal by Snowy Hydro for a 1,000 MW gas-fired power station at Kurri Kurri “critical infrastructure” status.

More positive

The Australian Energy Market Operator, despite problems with the ageing Liddell power station, has declared that the NEM is “in a more positive supply/demand position” heading in to the 2020/21 summer, “primarily driven,” it says, “by up to 3,400 MW of new wind and solar generation added since last year.”

Nonetheless, the operator has taken expressions of interest in providing 1,900 MW of additional supply at short notice through the reliability and emergency reserve trader mechanism for four States – NSW, Queensland, Victoria and South Australia.

One of the four units at the Liddell power station operated by AGL Energy in the Hunter Valley will be out of use until March after a mid-December transformer fire while the company expects another unit at the plant and a third at its neighbor, Bayswater, to be back in service after maintenance outages by the end of 2020.

SA example

South Australia continues to be held up as the flag bearer for efforts to decarbonize electricity supply on the eastern seaboard. The latest to laud the State situation is the Australian Energy Market Operator – which asserts that under some of its NEM scenarios minimum daytime grid demand there could be “approaching zero” by 2024-25.

The operator says a high penetration of distributed solar photovoltaic systems (with one in three homes having rooftop power) is driving the fall in SA operational demand – and is also “creating operational challenges related to security of the grid, managing voltage and having enough system strength and inertia.”

AEMO notes that the number of embedded batteries in SA rose to 17,000 in 2019-20 and is forecast to almost triple in the next five years, representing a fifth of all batteries expected to be installed market-wide in this time.

Consumers installed 288 megawatts of rooftop capacity last financial year, increasing installations to 1,417 MW and contributing an estimated 1,692 GWh to State power consumption in 2019-20. Overall annual consumption in SA (including rooftop power) was 11,890 GWh for the period.

The operator also notes that, despite the penetration of renewable energy and storage, “gas-powered generation remains a critical source of firming supply,” at times meeting almost 100 per cent of SA demand and averaging 43 per cent for the last financial year from just over 800 MW of installed capacity – with wind providing the roughly the same share from 3,620 MW of capacity.

Companies have committed development of 296 MW of new wind farms and 87 MW of new solar farms for development completion by March next year.

Shared path

The Tasmanian and federal governments signed a memorandum of understanding in mid-December to progress what they describe as a “shared path” for the development of 1,500 MW Marinus Link across Bass Strait, a key part of the State’s “battery of the nation” plan.

Hydro Tasmania CEO Evangelista Albertini says the MoU along with the choice of Lake Cethana as a substantial pumped hydro site are important steps towards progressing the concept, with two 750 MW transmission cables under consideration as well as upgrading the utility’s existing infrastructure.

Albertini adds that having a portfolio of opportunities places Hydro Tasmania “in a great place to respond to the future capacity and storage needs of the NEM.”

Tasmanian Premier Peter Gutwein says the latest planning developments will help his government achieve its ambition to double the State’s generation to 200 per cent of its needs by 2040, with the extra transmission improving market security and helping to put downward pressure on electricity prices.

The MoU includes a federal commitment of a further $93.9 million towards advancing Marinus Link on top of the $95 million committed jointly to date.

Targeting 2022

Andrew Forrest’s Squadron Energy is aiming to have an LNG import terminal for New South Wales operating by the end of next year.

Squadron CEO Stuart Johnston says early work at the terminal site at Port Kembla is already underway, the company is “at an advanced stage” of negotiations with gas customers and major construction is scheduled to start in April.

The $250 million project is seen as an important step in shoring up NSW gas supply as the onshore Narrabri development continues to run in to activist opposition to its going ahead, the latest being a legal challenge against it being given regulatory approval on the grounds that the State Independent Planning Commission did not consider “the impact on climate change.”

In Victoria, AGL Energy expects to hear in March if the State government will approve development of its Westernport Bay LNG import terminal.

‘Green bank’ critiqued

Dubbed “Gillard’s green bank” when it was launched almost a decade ago as part of a Labor/Australian Greens federal pact, and widely attacked at the time on the conservative side of politics, the Clean Energy Finance Corporation is again in critics’ sights after a review of its activities by the National Audit Office.

The Australian newspaper, following up the audit in an editorial, declares that the “$10 billion green bank experiment illustrates why picking business winners is no place for government.”

The focus of new criticism is the ANAO’s finding that the corporation has not met government-mandated benchmarks for investment returns and does not have a strategy to do so within the decade ahead. The CEFC has responded that it does not accept it should be guided by profits in all its investments – while it “operates with an objective of financial sustainability, profit maximizing is not our primary objective.”

The CEFC declares that government-back investment of $8.2 billion since 2012 has unlocked energy sector spending commitments of $24.3 billion since 2012. In a response to the auditor, it claims “an exceptional track record” with no material losses in its investment portfolio.

The Grattan Institute’s Tony Wood comments that the CEFC is “conflicted because it is neither fish nor fowl – it is a financial institution freelancing as a venture capitalist with modest expectations.”

Last word

Right here, at the start of 2021, it’s pretty darned clear that, in the Australian energy arena, the dilemmas, questions and ideas that will be discussed in the new year are most unlikely to be different from those that swirled around in the old one or, for that matter, in 2018 and 2019.

The emphases may change, but the issues are the same.

The key point as the new year opens is whether any real progress can be made, especially if we are heading in to the political fog of another federal election – which may well occur in the early part of next summer.

That 2021, like 2020, will be dominated nationally (and worldwide) by Covid-19 is obvious – and it may be next year before we see a more clear path out of this plague thanks to vaccine success (still up in the air at this point), social commonsense and economic recovery – but resolving the long-running domestic energy challenges is no sideshow for Australians because electricity in particular is critical to society’s wellbeing.

To digress just slightly, perhaps one of the key themes we are seeing emerge, both in terms of health and energy issues, is the resurgence of Australian federalism – and the jury is out in both areas as to whether this is to the national benefit.

Conventional wisdom since the turn of the century was, until recent months, that the States were increasingly being forced in to subservience to Canberra – but the Covid response has the pundits thinking again and it has come on the back of eastern State governments striking out on their own electricity paths, mostly for climate change reasons but also, of course, in pursuit of political advantage.

In the case of electricity supply, one of a half dozen critical factors for life as we know it in Australia, a big issue is where State activism leaves the so-called national market (the NEM) – which is why the work being done by the Energy Security Board on the post-2025 market structure is so important.

The ESB’s report is due for inter-government consideration in the middle of this year and how far politics plays a role in the final outcome, given the afore-mentioned prospect of a federal election, is also not to be ignored.

As luck would have it, the pandemic has seen the 2020 UN climate summit abandoned and replaced with a meeting in Scotland this coming November, interestingly timed for Australian politics if my speculation about a late-year federal election is on the money.

This, in turn, brings the net-zero emissions hobby horse to the front of the field here. Emotion over the issue can be expected to be ratcheted up and up as the months go by.

That the public are more dubious about net-zero than activists, vested interest with VRE and storage ambitions, some media commentators and a growing swag of politicians can be seen in the JWS Research report that is referenced in this newsletter.

In a reprise of the carbon pricing frenzy of a decade ago, this situation will only serve to put protagonists and antagonists more on heat.

Grattan Institute energy program director Tony Wood made an important point in a newspaper op-ed in December: the next federal election and the Glasgow summit will determine whether the Morrison government maintains its steady-as-she-goes position on emissions reduction or moves to fundamentally address climate change.

“Naked, practical politics will determine how far the Prime Minister is prepared to go,” he asserted.

Wood is arguing for Scott Morrison to announce that the government has a “strategic objective” of achieving net-zero emissions by 2050 – and that he should complement his technology focus with a commitment to deliver “an economy-wide investment framework to deploy these technologies with legislated milestones.”

The ESB’s Kerry Schott has observed that, under pressure on this issue, the Morrison government is softening its language. She thinks it is moving towards net-zero without actually saying so.

Accepting this perspective, it seems to me, still leaves open the biggest challenge: delivery of the net-zero approach requires rigorous assessment upfront of its costs and impact on the economy.

To quote one of the intellectual giants of the global energy scene, Vaclav Smil, the global transition from supply dominated by fossil fuels to a world relying on non-fossil fuels is “both desirable and inevitable, but it is imperative to realize that the process will be considerably more difficult” than is commonly appreciated – and, he adds, neither the transition’s pace nor its compositional and operational details are clear.

Nowhere is a well-researched picture of the Australia process towards this target available from any local proponents, whether governments or boosters-at-large.

No-one is more hyperbolic in this respect than NSW Energy & Environment Minister Matt Kean, who told Sky News last month that the country’s big renewables plans, including sending power to Singapore by undersea cable and exporting “green hydrogen,” will set up Australia “not only to be an energy superpower but an economic superpower.”

Be still my beating heart.

Right now, it would be good example to others, as well as reassurance for the Berejiklian government’s constituents, if Kean would table the modeling behind NSW’s ambitions and allow it to be scrutinized by independent experts.

Keith Orchison

4 January 2021

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