Coolibah Commentary

Issue 180, April 2020

To semi-steal a phrase, a month can be a long time in politics: where media readers/viewers were inundated in February with noise about bushfires linked to climate change linked to sources of power generation, now everything takes a distant second place to coronavirus and the health, economic and social effects of the pandemic – while the key electricity concern is to ensure that supply problems, regardless of source, don’t make a bad situation even worse. The big pandemic picture is a journey in to uncertainty and the first uncertainty is how long this crisis will last. For the Australian energy sector, the big certainty, however long this may be, is that its success in handling the impact of the pandemic on reliability of supply is of critical national importance. Truly resilient power and telecoms systems are totally essential to management of one of Australia’s worst crises since the First World War and its influenza aftermath – with another GFC thrown in to make things interesting. As energy ministers said in a late-March CoAG communiqué, this has been one of the most challenging summers on record in Australia – and there is no reason to suppose this autumn and the winter ahead will be much less so. Then will come a new summer after the power sector has kept outages for maintenance to the bare minimum for most of 2020………….

Quotes

“It is critically important to keep energy prices down and to maintain reliability in the system ahead of next summer” – CoAG Energy Council.

“Energy companies have undertaken a range of measure in response to this pandemic to ensure their workforce, assets and energy supply are protected” – Sarah McNamara, CEO Australian Energy Council.

“Every part of the energy supply chain will face challenges” – Andrew Dillon, CEO Energy Networks Australia. “Our plans are to ensure the lights stay on and the gas keeps flowing.”

“Grid operators will be confronted with an unprecedented challenge over the next six months” – federal Energy Minister Angus Taylor.
“The threat of infection to workers with critical skills remains a key risk for the energy sector” – Matthew Rennie, power and utilities leader, Ernst & Young Australia. “While a very large amount of functional activity is automated, a large degree of human involvement is required. The critical risk in a pandemic environment is people.”

“Access to energy and communications isn’t just important now, for many it is a lifeline” – Craig Memery, head of energy and water policy, Public Interest Advocacy Centre.

“In times of crisis it is incumbent on companies providing essential services to put people first” – Cassandra Goldie, CEO, Australia Council of Social Service.

“We are in unchartered conditions due to the pandemic and the resulting global recession” – Tim Buckley, director energy finance studies, Institute of Energy Economics & Financial Analysis.

CoAG meeting

Governments and industry are kicking off closer co-ordination in reaction to the pandemic, bringing together (by tele-conferencing) senior executives on a weekly basis to oversee the situation, probably the most important outcome of the Energy Council talks on 20 March.

Reporting the meeting, the Australian Energy Daily website comments: “National co-operation is the new normal for energy policy, for now.”

It is clear from the meeting communiqué that, while efforts will continue to be made to pursue an orderly long-term transition of the east coast market, the big focus will be immediate needs to deal with the impact of COVID-19 followed by working to achieve price management and system reliability ahead of next summer.

Ministers agreed that the Energy Security Board will coordinate action across market bodies on “interim measures to improve visibility of, and confidence in, system security services while more fundamental reforms are designed and implemented.”

Meanwhile, promoters of variable renewable energy generation are unhappy that their push for the CoAG Energy Council to initiate a further review of marginal loss factor rules – the system dealing with electricity losses along transmission lines – “did not get a look in,” to quote a solar website.

The sector was hoping for ministers to support garnering a second opinion on MLF arrangements, which it claims are “severely and often unpredictably impacting revenues of wind and solar generators,” after the Australian Energy Market Commission recently refused to change current calculation methods.

‘Fully activated’

The Australian Energy Market Operator has moved to re-assure governments, energy suppliers and stakeholders generally that it has “fully activated” its pandemic response and business continuity plans, “establishing additional layers of protection for critical operations.”

AEMO says it is “in conversation” as well with grid operators across Europe, the Americas and Asia to benefit Australian systems from international experience in dealing with pandemic management.

Most of the operator’s 900 staff are now working from home except for control room operators and key support workers. AEMO has four control rooms across the country.

‘Above & beyond’

The Australian Energy Regulator says it is not calling for an amnesty on utility bill payments and encourages consumers who can pay on time to continue to do so – but it wants service providers to go “above and beyond to support customers doing it tough.”

AER chair Claire Savage declares: “At times like this it is vital (energy) businesses remember their broader social obligations.”

Federal Energy Minister Angus Taylor adds: “We expect energy companies to keep their customers connected and waive additional fees and charges. We expect them to pass on the huge price drops we are seeing in the wholesale market.”
The Australian Energy Council has responded to the AER announcement by emphasizing its members’ commitment to help customers in distress – and noting that the regulator has recognized that the viability of retailers must also be protected.

Before the AER announcement, Australian community service organizations had called on companies providing essential services such as energy, water, finance, rental housing and telecommunications, to take additional steps to support customers during the COVID-19 crisis, going beyond hardship obligations required under law or industry codes.

The bodies said there are three steps to be pursued as a matter of urgency to provide customer relief:

The organizations called for co-ordinated, industry-wide “commitments to do the right thing.”

Meanwhile St Vincent de Paul Society has expressed concern that household power bill increases – due to many more people being at home – may be a problem for those whose incomes are affected by the pandemic’s impact. Policy manager Gavin Dufty, looking at Victoria, says energy bills in the State “are likely to increase substantially.”

Generation mix

The latest issue of EnergyQuarterly, published by EnergyQuest,reports that power delivered to the NEM grid in 2019 (that is, excluding the estimated use of rooftop PVs) totalled 193,110 gigawatts hours – versus 194,184 GWh in 2018.

By a long way, the dominant generation source in the market remains coal even though dispatch to the grid fell between last year and 2018: from 146,296 GWh to 140,064 GWh (with both brown coal in Victoria and black coal in New South Wales and Queensland dropping back). Even so, the coal-burning power units provided 72.5 per cent of the system’s power last calendar year.

Graeme Bethune, principal of EnergyQuest, notes that “confounding predictions of its demise, east coast gas-fired generation bounced back strongly in 2019.”  He says NEM gas plants generated 18 terawatt hours last year, up from 15.5 TWh in 2018, using 167 petajoules of fuel.

Fossil fuels in 2019 delivered 81.8 per cent of NEM supply, highlighting the size of the transition’s carbon quest (not least in Victoria, NSW and Queensland, representing 90 per cent of the east coast market).

Despite a decade’s multi-billion dollar drive to achieve change via wind and solar, in 2019 the former contributed 16,884 GWh and large solar units 4,859 GWh. Even when the role of rooftop solar (estimated to have seen 10,654 GWh used in 2019) is added, the variables share of electricity in the NEM came to 12 per cent. Throw in hydro (13,319 GWh) and all renewables are a long way from the role green power promoters foresee for them by 2030.

Total 2019 supply to the West Australian grid, the SWIS, reports EnergyQuarterly, was 17,537 GWh (slightly down on 2018) and this was again heavily met by coal (7,953 GWh) and gas (7,334 GWh) – 87.1 per cent.

Bethune points out that “just about every State premier likes to claim that their jurisdiction is a world leader in renewables and every one can be a winner or at least a silver or bronze medalist if they cherry-pick the numbers carefully.” As his data shows, last year (including rooftop solar but not hydro power) NSW led (8.6 terawatt hours), just ahead of Victoria (8 TWh) and South Australia (7.7 TWh) with the minor placings going to Queensland (6.6 TWh), WA (3.8 TWh) and Tasmania (1.5 TWh).

A month

There have been few months like March in Australian history – so what did east coast electricity supply look like during this time?

The OpenNEM widget shows that, between 26 February and 26 March, when the pandemic storm broke across the country, the market grid received 15,289 gigawatt hours of supply. (This does not include an estimated 1,082 GWh of rooftop solar use.)

Contributors to this grid mix were: New South Wales and Queensland black coal units 8,149 GWh (53.3 per cent), Victoria’s brown coal generation 2,912 GWh (19 per cent), gas generation 1,226 GWh (8 per cent), hydro power 986 GWh (6.4 per cent), wind power 1,488 GWh (9.7 per cent) and large-scale solar power 516 GWh (3.4 per cent).

Rooftop solar

Data published by the Clean Energy Regulator shows that rooftop solar installations by households and commercial businesses rose 40 per cent last year compared with 2018, totaling 2,400 megawatts in 2019. There are now more than two million rooftop PV systems installed across Australia.

Renewables outlook

Speculation is rife about how variable renewable energy development in Australia will fare as a result of the pandemic’s impact; the favored view is that there will be a substantial slowing in rolling out new capacity in the NEM.

In their latest review of the international scene, consultants Rystad Energy assert that “no stand-alone wind farms are likely to reach financial close in Australia this year.”

World-wide, the analysts say, “we expect macro-economic knock-on effects will reach in to 2021 and beyond.”

For Australia, they say, the major fall in the value of the dollar (at a 17-year low by the end of March) “decreases the likelihood that renewable asset components will be procured from abroad in the near term.” 

Rystad Energy add that the situation has “reduced the likelihood that Australia will achieve its goal of 1,800 megawatts of utility-scale solar PV capacity coming on line in 2021.” However, given the longer lead times for wind farms, they speculate that the 4,500 MW of committed capacity may still reach development between this year and 2021.

Australian market analysts Global-ROAM have also mooted a curtailment of the pace of renewable energy developments, noting that travel and other restrictions are among the pandemic-related issues for project proponents.

‘Major rethink’

Reforming the way generators access the east coast grid is critical to the market’s future and is “the cheapest, fastest and fairest path” towards a low-emissions energy sector, according to the Australian Energy Market Commission.

Releasing an update on its workload at the end of March, the AEMC says the reforms it is considering are designed to integrate new technologies in to the grid “in a way that’s reliable, secure and works in consumers’ best interests.”

The work, it adds, is “a major rethink of the NEM.”

Commission chairman John Pierce says the transmission challenges facing the grid have a two-part solution: first to action AEMO’s “integrated system plan” and, second, to implement access reform so that investment in networks is effective over the long term.

“If you do the first and not the second,” he adds, “you pay billions to defer, not remove, current deficiencies in the system.”

Big wind deal

International energy and engineering company Acciona and Queensland government-owned generator CleanCo have reached an agreement to bring about development of the 1,026 MW MacIntyre wind farm at a total cost of $1.96 billion – with the utility securing the right to include a 100 MW operation within the complex and agreeing to buy production from another 400 MW of capacity for 10 years.

Development of the project on the Darling Downs in south-east Queensland is intended to start in the middle of next year and scheduled to be completed in 2024. It will involve 180 German-manufactured turbines being placed on 36,000 hectares of sheep country near Warwick.

Long road

It would have been a major talking point at the 2020 Australian Domestic Gas Outlook conference in mid-March but that event was postponed, along with a raft of other energy sector forums, including the annual conference of the Australian Petroleum Production & Exploration Association, because of the virus crisis.

Nonetheless, the decision of the Victorian government – after an investigation that dragged on for three years – to end its moratorium on pursuit of new conventional gas supplies onshore in the State from mid-2021 is a signal, albeit relatively small, move to mitigate the problems of southern manufacturers.

The Australian Industry Group describes the decision as “a sensible step on a long road,” warning that “no-one should expect immediate impacts.”

The association adds that there is likely to be “a significant but not game-changing” volume of new gas resources recoverable in western and eastern Victoria through conventional means. It says: “The environmental context is now very well understood and the risks are extremely low and manageable with good practice and good regulation.”

It is claimed there could be 830 petajoules of gas in the onshore Otway and Gippsland basins. Victoria’s annual gas need is 220 PJ.

AiG, which represent thousands of Australian businesses for gas as a production input or who provide services to manufacturers, comments that “a future supply crunch is in no-one’s interest.”

However, it points out, exploration to find new reserves will take years “in the best case – and development years more.”

The Australian Energy Market Operator has forecast shortfalls in Victorian gas supply as soon as 2024 – or earlier if there is high winter demand – without development of new resources. AEMO says there has been no improvement in southern gas supply prospects since last year.

AGL Energy has responded to the Andrews government decision by saying it changes nothing about the need for LNG imports for Victoria. The company has been struggling to get approval for an LNG terminal in Melbourne’s Westernport Bay and it says the seven to 10 years needed to develop greenfield gas supply means the import project must go ahead.

Steve Bell, CEO of plastics manufacturer Qenos, says “anything that brings more gas in to the market is a good thing” while explosives manufacturer Orica declares the move is welcome but “simply doesn’t go far enough.”

The Energy Users’ Association has urged the federal and State government to move more quickly to accelerate development of conventional gas resources in Victoria.

Predictably, the Victorian government decision has been attacked by the environmental movement and green politicians – with the State branch of the Greens arguing it is “terrible for farmers, the environment and the climate.”

Meanwhile, AEMO is starting to acknowledge that its ambitious “integrated system plan” – with proposals for 30,000 to 47,000 MW of new renewable energy capacity by 2040 – may be complicated or undermined by the need to build additional gas generation in the pandemic environment and its aftermath to ensure integrity of power supply. The market operator expresses concern that there could be a gas supply issue in southern States when coal plants (as presently proposed) start being shuttered from 2022-23.

Cost the killer?

Although environmental activists were quick to claim the credit for state-owned Norwegian company Equinor dropping plans to explore in the Great Australian Bight, the petroleum firm’s Australian manager, Jone Stangeland, says what contractors wanted to charge for the drilling rig, the South Australian supply base and helicopter services were too much.

However, analysts EnergyQuest point out that these costs “have not changed in any material way” since Equinor took up the exploration licence after BP and then Chevron had earlier walked away from the Bight.

EnergyQuest highlight Equinor’s recent decision to pursue reducing emissions from its activity by at least 50 per cent by 2050. The analysts add: “We can’t be sure whether carbon led the decision (but) a tougher climate target automatically means a higher investment hurdle for a deepwater frontier oil project.”

Outages

Energy Networks Australia has told consumers planned outages on distribution systems will need to continue where critical preventative maintenance has to be pursued to avoid “potentially catastrophic” faults.

ENA chief executive Andrew Dillon says utilities recognize the inconvenience the outages cause, especially during the pandemic crisis, “but critical maintenance must continue to ensure customers are able to continue to have power.”

Noting that restrictions relating to COVID 19 are likely to continue for several months, Dillon says networks are doing everything they can to minimize disruption. “For some work, power will be disrupted for a few hours.”

Last word

Energy supply is the most critical element of a modern society. Name one other important facet of modern Australian life that can function for the community at large without it.

It follows that the principal challenge here and now for the power and gas sectors is to keep supply going; politics dictate that Angus Taylor & Co have to append “affordably” to this, but the truth is much closer to “at all costs.”

Given the skill set involved for industry workers and technical managers, the personnel threat posed by the virus is a major concern – hence the comments by industry representatives reported elsewhere in this newsletter.

The situation is made the more complicated by the fact that, given the aforesaid critical role of supply, especially electricity, in the economy and the community at large, what comes after is no less important – and, of course, there will be “after” because the pandemic is not the end of the world, only an especially unpleasant chapter of modern history.

Part of the “after” for southern Australian States is ensuring adequate power and gas supplies. As the market operator’s CEO has said, “as the energy industry transforms, the growing linkages between the gas and electricity sectors means that events occurring in one could have strong impacts on the other.”

Audrey Zibelman elaborated: “Any delays to projects identified in AEMO’s integrated system plan, a further reduction in the coal-fired fleet, earlier than forecast depletion of gasfields, long-term changes in industrial activity, changes to global LNG markets or the ongoing effects of COVID-19 could all heavily impact current forecasts.”

The New South Wales government especially, with its one-eyed focus on renewable energy zones, inability to resolve the State’s gas needs and apparent insouciance about the seriousness of energy-related issues already confronting large manufacturers within its borders, should dwell on this statement.

The International Energy Agency’s Fatih Birol has taken the pandemic opportunity to point out that “the coronavirus crisis reminds us of electricity’s indispensable role in our lives” and to emphasize that, in a world where variable renewable power is being pushed hard in to grids, “firm capacity, including nuclear power in countries that have chosen to retain it as an option, is a crucial element.”  Policymakers, says the IEA executive director, need to design markets that reward different systems for their contributions to electricity security in order to enable suppliers themselves to remain viable.

This means viable “after” as well and not just now.

The IEA estimates that economies pursuing strong confinement measures to resist the spread of Corvid 19 are seeing a fall in power demand of around 15 per cent, largely as a result of industry and commerce ceasing operations. (The Australian situation in this respect has still to play out.)

Such a reduction can lead to the market shares of wind and solar becoming higher, Birol notes, but grids (like the NEM and the SWIS) need to maintain flexibility in order to ramp up other generation sources when required.

“People,” he adds, “typically think of power outages as happening when demand overwhelms supply – however, some of the most high-profile blackouts of recent times have taken place in periods of low demand.”

The point is that simplistic thinking about electric supply mixes, so often on display here in the media when the virus crisis wasn’t centre stage, is an ongoing risk factor and will be returning to the public agenda when the present problems abate (whenever that may be).
 
The green machine is still at work, when it can get a word in edgeways with mainstream media as well as preaching to its own chorus on social media, seeking to sow new seeds to stimulate government support for wind, solar and storage – while remembering to badmouth use of new nuclear technology in Australia as well as investments in gas projects.

This PR should not over-run commonsense: investment in new power supply needs to address all the challenges faced by a market like the NEM and not just carbon emissions abatement. It should be technology neutral – and it should be at the lowest possible total system cost.

Well out of public view just now, the federal Department of Industry, Science, Energy & Resources has public servants working on the “technology investment roadmap” project it announced before the pandemic struck. The department has set up a new division (for International Climate Change & Energy Innovation) and it has inaugurated a task force to work on the “roadmap.” How far this work will focus on emissions reduction rather than also on power market resilience, reliability and costs remains to be seen.

Meanwhile, for a helicopter international perspective on the global situation, I recommend reading this commentary by Oxford University’s profess or economic policy, Dieter Helm:

http://www.dieterhelm.co.uk/publications/september-2020-and-march-2021-the-temporary-and-the-permanent-impacts-of-coronavirus/

Helm mulls the very considerable point of “what comes afterwards when the virus is tamed but probably never eliminated” and what will be the temporary and, more importantly, permanent effects once the current emergency is over?

The immediate role of governments in this situation is obvious (and exceedingly onerous) but relevant ministers and their public servants also need to have ongoing focus on the sound policy needed for when some form of normalcy returns and for the medium to longer term – when the issues that were top of mind in January will still need to be resolved.

Keith Orchison
29 March 2020