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Coolibah Commentary

Issue 144, April 2017

As we head in to the last quarter of financial 2016-17, writes Keith Orchison, we have at least established one thing: Australia is in a tight spot – it really needs lower-priced electricity and gas but not at the cost of environmental degradation. There is a lot of talk about managing a “trilemma” – but the challenge has one more side: in addition to energy security, householder affordability and carbon abatement, the clear message from recent debate is that policymakers need to give priority also to the implications of their decisions (or their failure to take timely, effective action) for Australian business – and not just manufacturers. To quote the Woolworths CEO, managing spiraling energy costs is like “trying to outrun a bear.”

Don’t panic

The Australian Energy Market Operator has rushed to allay fears about the impact of the closure of Hazelwood power station – spawned initially by the organization’s comments on the potential for a generation reserve shortfall in Victoria next summer.

Amid widespread media focus on its “blackout warning,” AEMO has published a statement asserting that it has “the necessary authority to ensure the security of the power system.” It says it will work with gas and electricity market participants to “ensure all necessary plans are in place to secure summer reliability.”

The assurances comes as a range of commentators continue to complain that AEMO itself has done a poor job of managing South Australia’s supply in recent months and that overall management of the NEM “sucks,” to quote one critic.

In a submission to the Finkel energy security task force, which is due to report to the Council of Australian Governments in mid-year, the Grattan Institute suggests that AEMO, to ensure emergency reserves are procured when needed, should account for risks more conservatively in its modelling and processes – including extreme weather, variable generation, and demand coming on and off the grid through the day.

“Greater use of emergency reserves will increase costs, but much less so than government investment in new capacity,” the institute adds.

Meanwhile gentailer Snowy Hydro says in its submission that AEMO oversight of “system black” arrangements is flawed. It argues that “long-term security issues have been put at risk in the pursuit of short term cost savings in awarding a sub-optimal number of system restart ancillary service contracts.

For its part, the market operator, publishing a 273 page “final report” on the South Australian blackout last September that spawned the current crisis mode in the energy debate, says: “As the generation mix continues to change across the NEM, it is no longer appropriate to rely solely on synchronous generators to provide essential non-energy system services (such as voltage control, frequency control, inertia, and system strength). Instead, additional means of procuring these services must be considered, from non-synchronous generators (where it is technically feasible), or from network or non-network services (such as demand response and synchronous condensers).

“The technical challenges of the changing generation mix must be managed with the support of efficient and effective regulatory and market mechanisms, to ensure the most cost-effective measures are used in the long-term interest of consumers.”

Elements not working

Prime Minister Malcolm Turnbull says there are elements of the Eastern Australian electricity market that “plainly are not working adequately.”

Speaking to journalists in announcing an Australian Competition & Consumer Commission inquiry in to the retail market, Turnbull said some of the problems are “at a very technical level,” for example “how are we ensuring that we get the frequency of services that we need to keep the network running?”

He added that “a very obvious area of neglect has been the failure to plan for the storage that is required and the backup that is required to support variable sources of energy” at a time when some State governments are pushing higher levels of wind and solar power while allowing baseload generation to close.

Turnbull declares that his government is “determined to ensure Australians get a better deal for their energy.” Retail electricity markets “don’t appear to be operating as effectively as they could.”

ACCC chairman Rod Sims says a special interest for the commission will be whether retailer profit margins are in line with their costs and risks.

Not the problem

Reacting to the decision by the embattled Turnbull government to suddenly launch an ACCC inquiry in to retail competition in electricity supply, the Australian Energy Council, representing gentailers, says it looks forward to the consumer watchdog “busting the myth” about why power prices are rising.

AEC chief executive Matthew Warren  says: ““We don’t need an Inquiry to tell why electricity prices are increasing.  They are increasing because we are running out of electricity.  We are running out of electricity because for the past decade we haven’t had clear, consistent national energy and climate policy. Focusing on the operation of the retail electricity market won’t improve energy security nor will it bring down the rising cost of electricity.”

He adds that the inquiry should not become an impediment to the policymakers’ task of delivering effective and durable national energy policy.

Warren says competition in the NEM retail arena is “cut throat” but it can’t guarantee that prices will not rise overall. Politicians, he adds, “should be aware that it is not possible to regulate for such an outcome.”

The AEC argues that “any measures by which government might seek to control retailers’ behaviour, should be weighed up against the actual value of such intervention to consumers.” 

Meanwhile the Australian Industry Group, welcoming the ACCC review, says “it is no surprise” retail power prices are rising when wholesale prices in the NEM have doubled in a year. “It is wholesale market pressures that are overwhelmingly driving the current price rises,” says AiG chief executive Innes Willox.

"The ACCC review should include the factors behind wholesale price rises rather than only examining the additional factors that apply at the retail level,” he adds. “The elements at play in wholesale prices include the soaring price of gas, an important fuel for electricity generation which is itself in tight supply; the closure of many older power stations; an uptick in electricity demand; an electricity market design that fails to reward all the sources of flexibility and cost control that technology is making available; and an investment drought in the face of overpowering uncertainty about energy and climate policy.”

Willox says: “"We need to build the most transparent and competitive retail markets we can. But without action to fix our policy dysfunction, retail prices will continue to soar. Without action our electricity market will look very different in 12 months from now.”

The ACCC has been asked by the federal government to deliver a preliminary report in September and a final report by 30 June 2018.

Meshing the NEM

Engineers Australia is calling for studies to be undertaken of the value of constructing new electricity interconnectors between east coast market regions.

In its submission to the Finkel task force on NEM security, the peak national body for engineers says the analysis is “critical,” particularly because of announcements of retirement of synchronous generation. “The transmission network plays a critical role by providing a highly reliable energy balance in a wide range of operating conditions and will play a key role in ensuring that power system security can be retained.”

It comments that discussion about energy security in Australia after the South Australian blackout have predominantly focused on the lack of a traditional baseload power production without looking at the issue from a holistic approach. “Too often the discussion about energy security in the context of electricity generation is too narrow and can miss the broader issues.”

In another submission, the Energy Users of Australia tell the task force that “there are good reasons to believe that greater interconnection between the States will improve energy security” but warn that “greater interconnections must not be seen as a panacea and pursued without careful consideration (of other options and their impacts).”

Energy Networks Australia says: “Transmission interconnection is vital to creating a renewable energy future” while the University of Queensland calls for consideration to be given to the system security and market benefits of “meshing the NEM” by forming “a secure, interconnected loop” between east coast mainland regions, including a link between SA and Queensland across central Australia.

The university submission adds that grid infrastructure is “the only flexibility solution that brings a double benefit: the ability to connect distant energy resources and to aggregate their output over larger areas to reduce exposure to diverse weather conditions.”

The UQ paper also declares: “Investment in new interconnectors and hydro pumped storage facilities is nation-building infrastructure that, if done correctly, can secure electricity supplies and lower costs (while enabling) a smooth transition to a sustainable future.”

Meanwhile Flinders University’s professor John Quiggin has published a discussion paper calling for grid renationalization. Quggin argues that “inadequacy” of the NEM high voltage network system and “fragmentation of responsibility” for its resilience requires “a unified, publicly owned National Grid encompassing the ownership of physical transmission networks in each State and interconnectors between States, and responsibility for maintaining security of supply and planning the transition to a sustainable, zero emissions electricity supply industry.”

He declares that “As a starting point, the National Grid should begin with the compulsory acquisition of the most important interconnectors; Heywood (between Victoria and SA) and Basslink (between Tasmania and Victoria).

Quiggin writes: “A publicly owned National Grid might seem unthinkable. Yet it is the only coherent response to the failure of neoliberal electricity reform, just as the establishment of a publicly owned National Broadband Network was the only feasible response to the failure of telecommunications reform. And, in the light of the political upheavals of 2016, the idea that any political possibility should be dismissed as unthinkable appears obsolete.”

Reduce complexity

The Public Interest Advocacy Centre is urging the Finkel task force to accept that “there is an urgent need to deregulate, consolidate and reduce complexity (in the NEM) to enhance competition.”

PIAC says in its submission to the inquiry that the NEM today involves “an inconsistent mix of roles and responsibilities across State and Commonwealth governments, State and Commonwealth laws and regulations (and) public and private operators of generation, networks and retailers.”

It adds that the complexity is compounded by different levels of accountability and customer participation in each jurisdiction.

“Partial changes are unlikely to address systemic weaknesses,” the centre declares, calling for change to include enhanced consumer representation in decision-making and more democratic, transparent and accountable governance arrangements.

Only in theory

The Minerals Council of Australia has accused the Finkel task force of supporting technology-neutral policy settings for the NEM in theory but not in practice.

Reacting to the inquiry’s draft report, the MCA says that technology neutrality means that no energy source a priori should be excluded from the energy mix – but the first Finkel report excludes nuclear energy.

It adds that technology neutrality requires all low emissions energy sources to be treated in a similar manner – but, it says, the draft report fails to provide an assessment of whether the current policy environment is neutral.

MCA also argues that future energy policy in a neutral approach should be even-handed – and it calls for a “clear and unambiguous” statement in the final review report that allows for consideration of carbon capture and storage and development of high efficiency, low emissions coal plants in future planning.

The association says technology neutrality requires no single energy source to be guaranteed market share and calls on the Finkel task force to “explicitly acknowledge” that the rising share of renewables in the NEM is driven by government mandate. The draft report, it asserts, is wrong to claim that this increase is due to consumer preference.

As well, the MCA says, technology neutrality requires additional costs imposed on the energy system by particular sources to be transparent and borne by the provider “not smeared across the system.”  It accuses the task force of being “coy” in the draft report about about how such costs are presently reflected in the supply chain.

Proper value

A University of Queensland submission to the Finkel task force declares that the only way the NEM can truly take advantage of new technologies and business models while remaining resilient in the face of uncertainty is for the market to properly value electricity services.

The paper, prepared by three professors, Simon Bartlett, Chris Greig and Tapan Saha, supports a technology neutral approach in which electricity services are judged on their value proposition in a service driven by the “trilemma” of affordability, security and sustainability requirements.

They say “this approach does not preclude market-based incentives but require them to be applied across all technologies.”

They add: “The existing market mechanisms do not provide appropriate signals and incentives for investment in flexible and responsive generation, energy storage, interconnections, inertia and dynamic voltage response – not are there appropriate locational investment signals.”

Jostling

The Australian Energy Regulator has told the Finkel task force that policy and regulation should not prefer or drive technology solutions; it should be left to the market.

“When innovations are provided through the market, the consumers choose and bear the risk of their choices; where governments financially support particular technologies, the choice to consumers is limited and taxpayers bear the cost.”

The AER adds: “What we are seeing at the moment is a competitive jostling by providers of new products and services to position their products as ‘the solution’ n this space. In some instances, this involves competition to have a particular technology chosen and subsidized rather than competing for customers in the market.”

It says the framework for technology development should be “enabling” rather than “promoting.”

No cheap future

The Australian Industry Group believes there no cheap east coast gas future.

Speaking at the 2017 Australian Domestic Gas Outlook conference – attended by some 300 energy stakeholders – in Sydney in mid-March, AiG’s principal national policy adviser, Tennant Reed, said there is a choice between “epic demand destruction” as manufacturers cut operations in the face of high prices or “apocalyptic government intervention” to increase east coast supply.

Even if State government bans and moratoriums on gas development are lifted, it will be three to five years before a significant supply could enter the market, he added. But, “even if we do all the clever options, we are going to have higher prices than we used to have.”

The situation is economically unsustainable and will drive investment and jobs offshore, he said.

Cost reflective

One of the first steps by the new Western Australian Labor government, which defeated the Coalition in a landslide in March, has been to reveal it is looking at pursuing cost-reflective pricing to address the controversial and expensive subsidy paid to State-owned retailer Synergy.

New State Treasurer Ben Wyatt has told Perth media he wants to pursue a “slow and careful” shift to ease the pressure of the annual subsidy (costing $320 million this financial year) on his budget. Synergy charges householders about 20 per cent less than it pays to acquire power, a long-running arrangement that also troubled the previous Coalition administration.

Wyatt says the WA energy system needs reform. Last year Synergy said that failure to address the tariff structure posed a “significant risk” to the future sustainability of the south-west market’s sustainability.

In November Synergy chief executive Jason Waters claimed the existing tariff system “benefits the rich at the expense of the poor.”

He said the utility’s efficiency drive had reduced the cost of the subsidy by $180 million in two financial years but further savings would be difficult to achieve.

No illusions

The Australian Petroleum Production & Exploration Association says oil and gas industry stakeholders gathering at Perth’s Convention Centre in mid-May for its annual conference should be  “under no illusions about the critical state of Australia’s energy debate.”

APPEA chief executive Malcolm Roberts declares: “Australia urgently needs more gas supply and more gas suppliers to head off a domestic supply shortfall forecast for 2019.”

He says the impending shortfall is driven by a range of issues that have pushed exploration for gas down to its lowest level since 2005. “Australia will only secure its long-term energy future when unnecessary restrictions on natural gas development are removed.”

APPEA chairman Bruce Lake adds that this is “a year of critical importance for energy and climate policies.”

The theme for APPEA 2017 is “energy in transition”.

Meanwhile State and Territory governments have been warned by McKinsey & Co that Eastern Australia’s gas prices are likely to double by 2030 unless urgent action is taken to develop new supplies.

McKinsey says there are sufficient undeveloped resources and user efficiency opportunities to enable future needs to be met – but $50 billion must be invested over the next 15 years to turn these resources in to new supply. In some cases, it adds, project decisions are needed by 2020.

Prompt action, the consultants add, could see future gas prices held to $7 to $8 per gigajoule but failure to act will likely see prices rise to around $12. This represents an extra $2 billion a year in costs for users.

Last word

If you accept that a solution rapide for the NEM is not a goer, what is the next step?

Waiting for Finkel was the answer until March when the federal government introduced Snowy 2.0 as a gambit on the heels of the Weatherill regime throwing up a whole series of manoeuvres as well as a dummy spit.

One immediate focus is a cry for Hazelwood to be kept operating, which just isn’t going to happen because neither the Turnbull nor Andrews governments will dip in to their wallets to bribe Engie, the owners, to delay the impending shutdown.

Yet again, all this leaves the manufacturers as piggy in the middle (which I believe translates as porcin au milieu) with the Australian Industry Group, in calling for an 11th hour reprieve for the power station green activists love to hate, declaring that factory owners are “not convinced the risks to energy users are being managed effectively” as their confidence in the price trajectory being throttled back erodes – not surprising as electricity futures contracts are now on offer at twice their cost a year ago.

Throwing hundreds of millions of dollars at Engie is hardly a cure for what ails the NEM, something AiG more or less acknowledges, saying its members face “an energy crisis with many causes.”

Options AiG says should also be under consideration are:

Just how big a mess is looming for Victoria after Hazelwood closes can be gleaned from comments by Matthew Warren of the Australian Energy Council. He told The Age newspaper that “under high demand conditions, being able to maintain reliable supply without blackouts or load shedding for industrial customers requires a lot of things to go right -- there has to be a lot of available power from Tasmania and Snowy Hydro, and most units (of other conventional generation) will have to function and operate at maximum capacity.”

The inimitable Barnaby Joyce, Deputy Prime Minister, summed up all this by claiming Victoria “is facing an absolute shit sandwich” while the Grattan Institute’s Tony Wood has offered the more moderate view that “we (the institute is based in Melbourne) will get through this” even though the Hazelwood closure reduces Victoria’s buffer of excess generation so long as the market operator (AEMO) ensures available plant is online when required.

The market operator itself, no doubt reeling from the way some commentators leapt on the extreme case scenario it published of 72 days of potential reserve capacity shortfalls over the next two Victorian summers, has hastened out a media statement to.assert that it has “the necessary authority to ensure the security of the system,” assuring consumers (and politicians) that “over the next several months we will work with participants in gas and electricity markets to ensure all necessary plans are in place to secure summer reliability.”

To what extent this will ameliorate the spikes in the power futures market is a key issue – and the hissing sound from the direction of factories is more likely to be frustration than letting out breath in relief, I suspect. They are at one with the late Mr Hardy – “Well, here’s another nice mess you have gotten me into.” Or, as the French say, “Oh, merde, alors!

Allowing that an escape from blackouts and load-shedding in Victoria (which would be a rather larger issue in terms of the people affected and the economic consequences than recent events in South Australia) can be managed, where should attention be directed?

I’m interested to see in the Finkel task force submissions, a suggestion from Origin Energy that what is needed from the nation’s Chief Scientist and his fellow travellers is not a blueprint but, given the large number of uncertainties in policy and introduction of new technologies, a roadmap with a number of decision points identified along the transition route.

Not surprisingly, one of the priorities the company puts forward is the need for some governments to reconsider their restrictions of gas market development (“particularly where there is no sound environmental rationale for these to be in place”) bearing in mind the crucial role of gas generation at periods of high demand.

Reading the multitude of submissions, as well as those to the concurrent Senate committee inquiring in to electricity system resilience, it is noteworthy how often solving the gas supply mess is high on the stakeholders’ agenda.

Keith Orchison

29 March 2017

 

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