Coolibah Commentary

Issue 151, November 2018

Politics and electricity continue to be a potent mix as 2017 nears its end, writes Keith Orchison. The Queensland State election, to be held on 25 November, is shaping up as a dogfight over power costs, large-scale renewable subsidies and prospects for a new coal-fired generator in the State’s north. The Productivity Commission has sent all governments a stern warning that “the costs of getting the energy system wrong are just too large to contemplate” as early indications of a long, hot east coast summer with implications for supply security jangle the nerves of east coast governments. And the Australian Competition & Consumer Commission has told them there “can be no quick fix” for high energy prices after a decade of policy failure.

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Not DoA

Malcolm Turnbull says his government’s “national energy guarantee” plan will “absolutely not” be dead on arrival in the meeting rooms of the Council of Australian Governments.

There will be a CoAG Energy Council meeting late in November and Turnbull says he “does not preclude” calling a heads of government meeting on the issue, too.

Quizzed by journalists on State government reactions to the NEG, the Prime Minister says he has communicated with premiers and “the private conversations are different to the public rhetoric.”

The federal government, he points out, is acting on the advice of the new Energy Security Board, “an expert group appointed by CoAG,” adding that the plan was written by the ESB “and they were put there by CoAG, by more Labor governments than Coalition ones.”

He forecasts that “a lot more commonsense will emerge from CoAG than some media statements suggest.”

Meanwhile Chief Scientist Alan Finkel has told a Senate estimates hearing that “the States and the electricity sector need to be properly consulted” on the guarantee mechanism. “The ramifications of getting any aspect of the rules wrong are very serious,” he says.

The federal government’s NEG announcement has coincided with release of a new Productivity Commission review of national efficiency, which includes significant criticism of energy policymaking.

The commission says urgent action is needed, calling on CoAG members to give priority to reform co-operation, focusing in particular on “stopping the piecemeal and stop-start approach to emissions reduction” and on clearly articulating the acceptable trade-off between supply reliability and energy costs as well as achieving more efficient prices.

‘Nuts’

Almost on the eve of the Palaszczuk government calling a State election, federal Treasurer Scott Morrison has declared its plan to pursue 50 per cent renewable energy by 2030 “unsustainable.”

He told ABC Radio “It’s nuts because it means many people will have to pay more and it will probably mean they are subsidizing emissions reductions in New South Wales.”

Morrison added that, if Queensland wants to go it alone on addressing national emissions reductions, it would mean other States won’t have to do as much.

Premier Annastacia Palaszczuk has declared her “strong support” for the 50 per cent target in a speech after calling the State election.

West/East

The federal government has commissioned an initial feasibility study of a gas pipeline from Western Australia to the east coast.

Energy Minister Josh Frydenberg and Finance Minister Mathias Cormann declare this is the first step in “powering forward with a plan to deliver an affordable, reliable and responsible energy system to also help meet our international obligations.” Consultants ACIL Allen and GHD are to deliver the opening study next March.

It has been speculated that the project could cost $5 billion. International consultancy Wood Mackenzie said earlier this year that such a pipeline would not be able to send gas to the eastern market at a competitive price without a subsidy. Analysts EnergyQuest have said it would be cheaper and quicker to ship LNG from WA to the southern States.

Reacting to the government announcement, Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, says: “West coast gas is likely to be an expensive solution to east coast supply concerns. Local gas will always be cheaper gas. Customers in Victoria and New South Wales are already paying a 25 per cent premium for importing gas south from Queensland. Transportation charges alone would mean gas travelling across the continent would carry an even greater premium.”

Roberts says developing local gas supply is the logical solution to supply concerns in the eastern Australian market. “Victoria and NSW cannot continue to rely on other States to solve their gas supply issues.”

Meanwhile first gas is expected to flow next year from the $800 million pipeline to connect Northern Territory gas to the east coast via a link from Tennant Creek to Mt Isa.

Four ways forward

The Australian Competition & Consumer Commission has identified four ways to improve power affordability.

In its interim report to the federal government on the causes of electricity price increases – the final version is due for delivery next June – the commission is calling for better competition in both generation and retail markets, lower network charges, making green schemes cost-effective and equitable plus steps to help the mass market (households and small business) to find the best deals.

There is movement on one path: on the urging of the Prime Minister, Australia’s biggest energy retailers have agreed to give the mass market more, improved information and to pay special attention to helping vulnerable customers to get better contracts.

The Grattan Institute comments that residential customers are responding to much higher power bills by reducing their consumption – but, it says, this doesn’t help much because access to supply is the big cost, not the wholesale price of power. “About two-thirds of the bill today is for access to electricity and one-third for actual electricity,” the institute says, “and the service has become more expensive over time because of network over-building.”

Price surprise

The New South Wales mass market is by far the largest in Australia, with more than three million household customers, and the State’s Independent Pricing & Regulatory Tribunal has found they are paying about the same for power today as they were in 2014 before retail price deregulation.

In a review published in mid-October during the media fuss over federal energy policy plans, IPART states that the 14 per cent increase in NSW power bills imposed in July is being driven by rapidly rising wholesale costs – but they have been largely offset by decreases in network charges over two years.

“The net result,” says IPART, “is that on average, residential customers are paying two per cent more since 2013-14 for using the same amount of electricity. This is an (inflation-adjusted) decrease in prices of five per cent (once CPI is accounted for).”

This contrasts with five years of real price rises up to 2013-14 following major outlays on the State’s transmission and distribution networks.

The tribunal says that householders who chase deals in the retail market can access prices around seven per cent lower than they were before they were deregulated.

Beyond schoolyard

Energy Networks Australia is appealing to politicians and other energy stakeholders to “get beyond schoolyard debates” to foster reliability and security in electricity and gas supply.

Acting CEO Andrew Dillon says efforts like the Turnbull government’s proposed “national energy guarantee,” which is already running in to rough water, “can only succeed if they can garner political commitment that goes beyond a single electoral cycle.” We should have learnt the hard way by now, he adds, that no climate-related policy will work if it is in place for only a couple of years.

The Australian Energy Council echoes this view, saying Council of Australian Governments’ support is critical for gaining investor confidence in the NEG.

The Business Council adds that continuing the stop-start policymaking of recent years will further “spook” investors and calls on State and Territory governments to “exercise leadership.”

The Australian Industry Group says the NEG offers “a plausible new direction” but further work will be needed “to help significantly drive down energy prices for hard-pressed users.” CEO Innes Willox says “we are hopeful co-operation is possible – because the alternative is to continue the current pathway of rising carbon emissions, lost competitiveness and declining (supply) reliability.”

The Clean Energy Council refuses to endorse the NEG, saying it is “surprised and disappointed” the federal government has opted to walk away from the Finkel-recommended clean energy target “that attracted support from a broad coalition stakeholders, including the entire energy sector.”

Oliver Yates, former CEO of the Clean Energy Finance Corporation, told the “Powering Queensland” conference in Brisbane that that the NEG undermines prospects for investment in renewables in the State.

The federal government, he adds, seems to have confirmed it will not change the renewable energy target. “This will cause a crash of the price of renewable energy certificates to zero (and) once that happens rooftop solar support could be next on the chopping block.”

Value of reliability

In promoting the federal government’s “national energy guarantee” proposal, which is to be further discussed with CoAG this month, Environment & Energy Minister Josh Frydenberg is not only pushing the measure’s ability to use the market to drive power prices lower but also stressing the NEG’s potential to boost reliability in the east coast market.

“Unfortunately,” he says, “the way our energy market is constructed today does not place any value on generation that delivers reliability.”

Part of the NEG will be a reliability guarantee requiring retailers to use a percentage of electricity from dispatchable resources. It will be based on a standard set by the Australian Energy Market Commission and implemented by the Energy Market Operator with the standard varying in each NEM sub-region because the power mix varies.

“This new obligation,” says Frydenberg, “creates a greater likelihood that coal-fired generation could be upgraded to extend its life or improve its efficiency to meet dispatchability requirements.

“As such, under this mechanism SA’s Northern Power Station would have been unlikely to close without something equivalent in its place as it would have been required to meet the State’s needs in the face of its declining level of dispatchable power.

“The beauty of this (measure),” he adds, “is that it provides maximum flexibility to retailers. They can decide what type of generation they want as long as it meets the need for dispatchability.”

Coming fourth

Rod Sims, chairman of the Australian Competition & Consumer Commission, says affordability should be the dominant factor in electricity supply policy, but in recent years “it has come after several other objectives, including reliability, dividends and sustainability.”

The preliminary ACCC report on electricity prices, commissioned by Federal Treasurer Scott Morrison, caused a media stir in October; its final report will not be published until next June.

Noting that Australian household electricity prices have increased by 63 per cent above inflation since 2007-08, going up from an average $1,177 to $1,691 in 2015-16 with the NEM average $1,524, Sims says the main cause has been a significant rise in network costs. “To a lesser extent green costs and retailer costs have also contributed.”

While the political row over the CET versus the NEG rumbled on, Sims said in a Sky News interview that embracing a clean energy target wouldn’t necessarily put downward pressure on power prices. “It’s pretty tricky to calculate,” he said. “It could lower prices but it might not. While it might bring forward extra investment it would also involve a subsidy smeared across all users. It’s a hard one to call.”

Stakeholder sample

The Energy Policy Institute of Australia has conducted a Web-based survey of energy industry stakeholders.

They were asked to rank the three goals of the “energy trilemma” – 59 per cent put reliability first, 23 per cent affordability and 18 per cent lower emissions.

Asked if Australia was achieving any of these goals under current policy, 98 per cent said “no” on affordability, 77 per cent “no” to achieving reliability and 57 per cent “no” to achieving lower emissions.

EPIA executive director Robert Pritchard says that, nonetheless, “a sizeable 68 per cent” declared support for the Energy Security Board – and “a more sizeable 75 per cent” agreed with the Australian Energy Market Operator’s proposal to establish a strategic reserve in the NEM for the 2017-18 summer. Sixty-four per cent supported the Finkel proposal for a clean energy target – the survey was taken in September for the Turnbull government rejected the CET in favour of a “national energy guarantee” proposed by the Energy Security Board.

On retiring baseload power stations, 55 per cent were in favor of deferring this and 60 per cent of those in favor thought government funding should be involved.

EPIA asked respondents to indicate whether five technologies had a future in Australia – 95 per cent ticked gas-fired generation, 91 per cent supported pumped hydro, 73 per cent supported high efficiency, low emissions coal generation, 64 per cent wanted to see nuclear generation included in the power mix and 62 per cent indicated support for carbon capture and storage. Seventy-seven per cent agreed that all technologies should be “on the table,” Pritchard says.

Stakeholders were equally split over whether the States should keep away from national energy issues.

EPIA declares that “Australia’s complex, awkward and suboptimal institutional structure for governance of its national electricity market remains in need of fundamental review. Consideration needs to be given to replacing what has been established by the nine Australian jurisdictions with a national energy commission.”

Confusion

Public confusion on energy issues is graphically illustrated by an Essential Report poll published on 23 October that shows 47 per cent of those interviewed could not give an opinion on the federal government’s recently-announced national energy plans.

Of the 35 per cent of respondents who approved of the plan, more than half were Coalition voters, a third were Labor supporters and a fifth identified as Greens. Eighteen per cent of respondents disagreed with the plan.

The same poll threw up 35 per cent approval of the Turnbull government’s decision not to include a clean energy target in the new energy approach versus 32 per cent who disapproved – and another 33 per cent who said “don’t know.”

Only 16 per cent of those polled thought the new approach would reduce power prices versus 31 per cent who expect them to rise – and 22 per cent saying “don’t know.”

Essential Research also asked respondents “do you approve or disapprove of the government’s decision to phase out subsidies for renewable energy by 2020?”  The response was split 32 per cent approving, 41 per cent disapproving and 28 per cent saying “don’t know.”

The poll also asked who – the Coalition or Labor – respondents trusted most to reduce power prices? The reply was split 24 per cent to the federal government, 25 per cent to Labor, 37 per cent saying it would make no difference and 14 per cent “don’t know.” There was a similar response to a question on who was trusted more to ensure a reliable power supply.

Can bear it

The South Australian transmission company, ElectraNet, seems to have achieved a Goldilocks moment in bidding for revenue between 2018 and 2023 in the wake of the State’s notorious power blackout.

South Australia has been the epicentre of the national row over renewable energy since the 2016 blackout. ElectraNet’s recent annual planning report reveals that wind and solar power now make up 42 per cent of the State electricity supply

Now the Australian Energy Regulator has made a draft decision in favor of the company recovering $1,588 million over five years, just $149 million less than it sought.

“ElectraNet,” says the AER, “has proposed a modest increase in capital expenditure (13 per cent) in response to the system black event to improve the security of the transmission network and increase its resilience to extreme weather events.”

Overall, it adds, the revenue bid is “reasonable” and follows “an extensive and collaborative” communications process with customers. It should lead to a $22 per year fall in household power bills in the State.

Fair share?

One of the rolling issues in the broader energy debate is what share of national carbon emissions abatement should be borne by the electricity industry?

It is important to green activists because they seek to pursue large-scale use of renewable energy – up to 75 per cent of electricity production – through driving out most coal-burning generation by the end of the next decade.

Confronted with the question at a National Press Club discussion of his latest policy announcement, with a journalist asserting it was cheaper to impose large cuts on the power sector than agriculture, mining or factories, Prime Minister Malcolm Turnbull responded his government is “working on the assumption that electricity will bear its pro rata share.”

Not enough wind up in WA

Western Australia’s government and the dominant State-owned supplier, Synergy, are reported to be wrestling behind the scenes with a RET problem: a likely 250 megawatt shortfall in wind or solar power development by 2020 which could see millions of dollars a year in penalty charges passed through to customers – in an environment where price rises in the south-west integrated system are already a political hot potato.

Part of the problem is that the SWIS already has an over-supply of generation capacity.

Gas saga rolls on

October was another month in which the east coast gas imbroglio just got messier, with the upstream petroleum industry angered by a polls-bound Annastacia Palaszczuk reported to be considering locking explorers and producers out of the State’s part of the Cooper Basin where they have been active for decades.

The Australian Petroleum Production & Exploration Association said Palaszczuk’s government had not consulted the industry about its “pristine rivers” measure even though it appeared to be in an advanced stage of planning. The association accused the government of “attempting to appease foreign-funded activist groups that oppose traditional energy sources” because they are targeting its MPs in Brisbane metropolitan seats at the upcoming State election. APPEA warned this “could inflict on Queensland the sort of energy market chaos so far confined to the southern States.”

The Cooper Basin accounts for 14.5 per cent of current Queensland gas supply.

Meanwhile APPEA and the activist Australia Institute are at loggerheads over economic modelling of the benefits of gas development in the Northern Territory commissioned by the NT government’s independent inquiry in to gas extraction techniques. The Labor government is currently imposing a moratorium on onshore shale gas exploration using hydraulic fracturing.

APPEA says the report by ACIL Allen Consulting, which has modelled a $17.5 billion territory benefit over 25 years as well as more than $5 billion in tax payments to the federal government, is “conservative” but highlights “significant” potential growth for the NT’s economy. The institute argues that, even in the best case, the benefit from lifting the ban is “not outstanding.”

The association’s Matthew Doman retorts “the ACIL Allen report shows there will be more jobs, more revenues and a stronger economy if the Territory government lifts the moratorium.”

He says the report also highlights the gas industry’s “very small environmental footprint” with its largest development scenario suggesting land use covering less than 500 square kilometers, or less than 0.03 per cent of the Territory land mass.

“Until exploration is allowed, we cannot be certain of the size and scale of the development that is most likely, and the benefits that will flow to Territorians.”

APPEA is also promoting the outcome of five CSIRO studies that, it says, “confirm the use of chemicals in the coal seam gas industry pose little risk to the community or the environment.” In the technical papers, CSIRO finds that residual chemicals remaining underground after hydraulic fracturing are unlikely to reach people or ecosystems in concentrations that would cause concern.

The association CEO, Malcolm Roberts, says: “The studies are just the latest independent research that should reassure people that, properly regulated, hydraulic fracturing is safe.”

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Last word

Paul Kelly of The Australian declared recently that the “dismal saga” of energy policy is an “instrument and symptom” of Australia’s transformation over a decade in veering away from trust in market forces to government intervention, public controls and higher taxes. He called it a “decisive shift” in our political culture.

Whether or not you agree with Kelly (or that market forces should be the prime driver of the economy), it is apparent from recent events, underscored by the heightened debate of the past six months, that electricity supply is caught in a rip.

Australians, better than perhaps anyone else on the planet, know the dangers rips pose for swimmers and that the best thing is to identify them from the beach and stay out of them – but, if you get caught in one, remain calm, don’t exhaust yourself thrashing about and never swim against the current.

Having opted over the past decade to go in the water and, in effect, to swim against the current by ignoring the fact that you can’t materially slash carbon emissions without imposing costs and challenging the reliability of the power supply system, federal government (both sides) is exhausting itself thrashing about and is in danger of drowning and dragging down consumers with it.

Also caught in these dangerous waters are the governments of the States and Territories, each out of its depth and increasingly at risk of being pulled under by its own lack of good sense. To make matters worse several are hell bent on drowning the federal Coalition government and, for all the pious talk about co-operative federalism from Canberra, the reverse often also seems true.

The situation is summed up by a media observation that the major energy announcement in October “will set the terms of a fight with Labor likely to run all the way to the next (federal) election.”

An op-ed in Melbourne’s Herald Sun by Ed Shann, one of our leading economic thinkers, goes to the heart of all this.

His wrote: “A rational debate needs good data, not spin, assertions and overblown claims. The energy maze has become very complicated. There are many vested interests and establishing the facts is hard. We currently set out emissions targets without knowing the cost to consumers and industry.”

Shann’s argument is that the transition to renewable energy Australia is pursuing (which, I add, Labor, the Greens and various activists insist is nowhere near rapid enough) is based on a false belief that we can have low-priced, reliable power as well as sharply lower emissions – and that the government needs better data on renewables subsidies and the cost of abatement. He says: “Unfortunately Alan Finkel’s report (has) failed to provide the analysis required for informed decisionmaking.”

In watching the gamut of the recent goings-on via the media, I have been also struck by comments from Gary Banks, the inaugural Productivity Commission chairman. Not only that “one bad policy begets another” – which should be written on the cabinet room walls in Canberra – but also that the public is not being told there is no free lunch in energy policy and that part of the present problem is that we have not only ruled out recourse to nuclear energy but effectively to (adequate supply of) gas as well.

Keith Orchison
31 October 2017

 

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