Coolibah Commentary

Issue 149, September 2017

The ACCC chairman, whose organization is to give its preliminary take on the retail power price controversy to the federal government this month, sees the high-level current focus on electricity affordability as “terrific,” saying that for way too long this aspect has “not been considered at all” as policies have been introduced to deal with a range of other issues. Affordability, reliability and sustainability all need their own focus, says Rod Sims, and eastern Australia has “a huge affordability problem” as a result of the doubling of prices after inflation over the past decade. The commission’s analysis of the problem in late September (ahead of a final report next June) is likely to set the scene for public debate for the rest of 2017 and in to 2018-19, a critical election period on the east coast and nationally – just as political argument over Australia’s carbon abatement targets is set to re-ignite.

East/West divide

The Australian Competition & Consumer Commission chairman, Rod Sims, has used a CEDA forum in Perth to highlight the differences between consumer energy costs in Western Australia and the eastern States.

Sims says the current furore over high electricity bills is not a sudden shock. It has been growing for a while. While the east coast has seen some benefits from a deregulated retail market, he adds, “they have not extended far enough.”

In Sydney, he points out, power bills for typical four-person households range from $2,029 a year to $4,039 – while they average $2,276 in Perth. The median Sydney bills are $2,561 (market) and $2,703 (standing offer), both higher than the regulated south-west WA costs.

With gas supply, he notes that gas can be negotiated in WA at present for $4 per gigajoule for a three-year contract, a “stark contrast” to the eastern Australian experience.

While some attribute WA’s current plentiful supply and lower prices to the State’s gas reservation policy, Sims says, “the State government has not put in place blanket moratoriums and other regulations that prevent exploration and development.” This has not closed off the ability of gas producers or new market entrants to respond to high price signals by bringing on more supply.

‘If you want to fix bills’

Ahead of yet another meeting on power bills in late August between retailers and the Prime Minister, the Australian Energy Council is pushing the suppliers’ argument that policy is the problem rather than market behavior.

“If you want to fix power bills,” says AEC chief executive Matthew Warren,” you have to (deal with the fact that) the current spike is the result of a shortage of supply in the wholesale market.”

New generation investment, he argues, is “stalled as a result of a decade of national climate and energy policy uncertainty.”

The AEC says the “urgent policy breakthrough” needed if for the Turnbull government to embrace the clean energy target recommended by the Finkel review. “Competitive retail markets are not the root cause of the current problem.”

Shortfall challenge

A new transmission planning report published by TransGrid highlights the big challenge facing the New South Wales government and suppliers in meeting the next decade’s peak power requirements in the largest region of the NEM.

The company (privatized on a 99-year lease in 2015) warns that further retirement of coal-burning baseload power stations “will reduce firm generation capacity in NSW and put the power system under pressure to reliably meet the State’s maximum demand.”

The NSW plants expected to close before 2030 are Liddell (slated by AGL Energy to shut in 2022) and Vales Point, which reaches its 50-year life in 2028.

TransGrid says the State’s peak summer demand, which has risen over the past three years, is expected to continue to grow, driven by a bigger population, expansion of industry and hotter temperatures.

More than half the existing baseload supply is expected to reach the end of its designed life in this period, the network business adds, and will need to be met by investment in new generation capacity, transmission, storage and demand management.

The company says the best NSW wind and solar resources are “generally not near existing generation plant and are in areas with limited transmission capacity.” It is looking at present at the network needs of some 8,000 MW of new renewable generation.

“When replacing baseload generation with (intermittent renewables),” TransGrid says, “around two to three times the installed capacity is required due to the variability of wind and solar resources.” It estimates that about 10,000 megawatts of new generation will be required over the next 10 years.

‘Just plain stupid’

The retiring chief executive of one of Australia’s largest electricity users, BlueScope Steel’s Paul O’Malley, says “every bit” of energy policy over the past 10 years has been aimed at penalizing baseload power generation – and he would like to see a transition plan to a national clean energy target that makes more gas available and includes “positive incentives” for baseload plants to be maintained and operated.

O’Malley has told media that “incentivizing baseload to shut is just plain stupid,” adding that the economic cost of “getting our baseload incentives wrong has been awful.”

BlueScope estimates that its electricity and gas bills in 2017-18 will be $145 million, O’Malley saying that they will increase by 75 per cent for the company’s major sites between 2015-16 and the financial year now under way. He says the increases threaten to undermine the trade-exposed company’s cost and productivity improvements.

Consumer paradox

The Australian Energy Market Commission’s latest review of retail energy competition throws up the paradox that most eastern States’ households are aware they have choices but their knowledge of the contract they are on is limited.

The AEMC says 80 per cent of bill-paying consumers surveyed for the review say they actively chose the plan they are on but 30 per cent don’t know the details.

The finding highlights the core issue in the national furore about the prices households are paying for power: in the words of an old joke, you can take a horse to water but how do you make it swim?

The Turnbull government’s choice, as evinced by the summit with key energy retailers in August, is to push the onus on to suppliers to give consumers information in a bid to ensure they pursue the best deals they can get, saving at least hundreds of millions of dollars in aggregate annually and taking some of the heat out of an issue for the beleaguered Coalition. But what if they are still not able, for whatever reason, to achieve the outcome most in their interest?

The solution that seems to appeal to some politicians, most particularly the Victorian government, is to re-regulate the market to force most consumers on to a uniformly low price chosen by a regulator – which raises the issue of the impact over time on retailer innovation.

The AEMC says its survey shows that a growing number of mass market consumers are opting to take up new technology – 20 per cent now have solar panels and 21 per cent are interested in taking up battery storage in the next two years.

Another paradox is that, despite the furious public debate about energy prices, 74 per cent of consumers surveyed are satisfied with their current electricity retailer and 71 per cent are satisfied with the level of service they receive. Sixty-one per cent of households in the survey say they are getting value for money. Only 48 per cent of small businesses think their supply is value for money.

Pushing prices

The Australian Energy Market Commission says retail electricity spikes are the consequence of higher wholesale energy market costs and are “largely driven by factors outside the retail sector.”

In its review of retail energy competition, the AEMC says the factors driving up wholesale prices include rising costs of hedging contracts “which is the a result of a lack of an emissions reduction policy properly integrated with the energy market, generator retirements and higher gas prices.

The NEM rule-maker warns that a sustained high price for hedge contracts creates the potential for some retailers to exit the market because they are unable to remain competitive or unwilling to bear the risks associated with not being fully hedged.

Back to future

The focus of the Andrews government on re-regulating retail electricity prices in Victoria has the supply industry on high alert.

The Labor regime, which when previously in office forced consumers to pay for an outlay of $2.2 billion on smart meters on a promise that the move would reduce power costs, is now using a report from a review panel it set up this year to consider a regulated “no frills” retail price for households, a major U-turn for the State that led the way on the introduction of power supply competition.

The Grattan Institute has reacted by warning that “setting a regulated price isn’t easy – too low and retailers will topple over, too high and consumers will pay more.” In addition, says the institute, re-regulation risks quashing innovation, which is particularly important now when consumer choice can help to drive power system change.

Speaking for energy retailers, the Australian Energy Council declares that a move to re-regulate will “fail to address the key issue,” which it says is “sustained national policy uncertainty, government interference and the resulting closure of old, large power stations.”

In Victoria, says the AEC, “deregulation has not driven up power prices – the sharp increase over the past 12 months is because of the reduction in firm supply (in the State).”

The council says the panel report “misunderstands the role of energy retailers and the fundamentals of the market.” It argues that “implementation of all the panel’s recommendations – some of which it labels as “positive” – will result in “disastrous and unintended consequences for the market and by extension its customers.”

Meanwhile the Labor leader in New South Wales, Luke Foley, has pledged to pursue re-regulation if he wins the March 2019 State election – and the Greens have called for NEM-wide end-user price regulation under the Australian Energy Regulator.

Back to future 2

A political brawl has broken out in North Queensland over a large hydro-electric project that was last controversial decades ago and was shelved after a row over environmental impacts.

The Tully Millstream project was first mooted by the Queensland Electricity Commission in 1988 and raised again in the mid-1990s. It would involve a system with 600 megawatt generation capacity near the Atherton Tablelands. A new approach is now supported by local government in the area, State MP Andrew Cripps and federal MP Warren Entsch but it is vehemently opposed by independent federal MP Bob Katter.

Deputy Prime Minister Barnaby Joyce was expected to announce a feasibility study of the proposal in mid-August but, according to Entsch, the step was derailed by the fuss over the citizenship saga that has engulfed federal parliament.

Drop GST

Independent senator David Leyonhjelm claims average Australian household bills could be cut by about $200 a year if the federal government excluded power from the goods and services tax.

Leyonhjelm argues that electricity is as much an essential service as water, which is GST free. The impost is a federal measure, he adds, and changing it does not require agreement from the States, who currently, he estimates, receive $2 billion annually from GST on power revenues.

Consultants GLOBAL-ROAM say Australian households consumed 60,000 gigawatt hours of electricity (versus 130,000 GWh by business) in calendar 2016.

Direct effect

Federal Treasurer Scott Morrison says the availability – “or perhaps more correctly the unavailability” – of gas in the domestic market is having a direct bearing on power bills.

In a Liberal Party talk in the NSW Southern Highlands, he said the Turnbull government had little choice about intervening on gas exports because of the impact of the fuel’s cost on the east coast market’s wholesale power prices.

Speaking to the Australian Industry Group in Adelaide, Morrison said gas costs set the price of east coast power around 10 per cent of the time in 2015. “Now, as coal plants retire, it is setting the price as much as 25 per cent of the time.”

“Recalcitrant States, needlessly locking up their gas supplies” are exacerbating the problem of the rise in the cost of the fuel, he added. “The solution is under their heels. In Victoria there is 40 years’ worth of gas in the Gippsland basin – but they, like the Northern Territory government, which has an onshore gas resource that could last for 180 years, are refusing to unlock it and pour vital supply in to the market.”

Morrison declared that the Turnbull government is “not in to showbiz energy policy,” having a go at the South Australian government’s engagement with Elon Musk to install battery storage. The “world’s largest battery,” he said, would have 129 megawatt hours of storage – but the federal government’s proposed Snowy 2.0 project would make 350,000 MWh available.

“When a gale is blowing in from the Great Australian Bight,” he added, SA wind farms could generate around 13,000 MWh in a day – but the Tesla battery “could only store one per cent of this power.”

With coal power, Morrison said, “the best thing we can do is simply to ensure that current power stations stay open, remain economic and work longer in to the future. We need to sweat these assets for longer (to) buy important time as other energy technologies are developed and can be evolved to match the stability of more traditional power sources.”

He urged a “get real” debate on HELE coal plants. “These plants would produce energy at an estimated two-and-a-half times the cost of existing coal plants. They would take up to seven years to set up. We shouldn’t kid ourselves a new HELE plant would bring down electricity prices any time soon.”

Morrison told the AiG forum that “delivering a fair outcome on energy policy that puts downward pressure on electricity prices” is arguably the most important task for the coming year. “Australians are sick and tired of political parties fighting over the right energy solution,” he said. “The States played a large role in creating this problem. The last thing we need is for (them) to continue to go it alone and to try to be heroes.”

Not a gas crisis

Peter Coates, chairman of petroleum company Santos, which is at the centre of the ongoing controversy over eastern Australia’s gas supply, says “We haven’t got a gas crisis; we have a policy crisis.”

Coates says there is no shortage of gas, “but there is an absolute shortage of uniform government recognition, commitment and support for the ongoing orderly development of adequate supply to the east coast market.”

He dismisses widespread claims that the Gladstone LNG export businesses are depriving Australians of supply. “Not one of the three Queensland LNG projects could have been sanctioned on the basis of domestic demand,” he declares. Without access to the export opportunity, there was no viable commercial case for any of the Queensland coalbed methane fields or pipelines to be developed. In simple terms, without the LNG projects, the gas would still be sitting in the ground.”

Meanwhile former federal minister Martin Ferguson, speaking as chairman of the Australian Petroleum Production & Exploration Association advisory board at an industry forum in Darwin, has urged the Northern Territory government to sanction development of onshore gasfields.

Ferguson says the NT governments stands to earn up to half a billion dollars a year from the onshore industry and calls creation of a science-based regulatory environment for drilling “the need of the hour.”

He adds that it looks likely Origin Energy has discovered a world-class shale gas resource in the Beetaloo sub-basin near Daly Waters.

Step change sought

Can energy regulation keep pace with new transforming technologies? Energy Networks Australia says substantial reform is needed to encourage innovation by its members.

CEO John Bradley, who is departing the association to become a departmental head in the Victorian government, has released a discussion paper seeking input on how regulation can be changed to help deliver a “step change in innovation for the benefit of customers.”

Bradley says just one per cent of spending on energy research goes in to electricity grid although the system represents up to half the cost of an average household power bill and a quarter of forecast expenditure on systems between now and 2050.

“Australia’s research focus does not line up with the best international experience. For instance, the UK invests three times more on energy networks innovation per capita despite being much more densely populated.”

He points to the Finkel review as highlighting an urgent need to ensure market rules and frameworks enable the introduction of new technology and support the ability to test it.

Bradley says three transformational technologies – biogas, hydrogen and carbon capture and storage – can provide low emission and zero emission fuels to deliver energy to Australian homes, businesses and vehicles using the existing distribution network.

Battery brawl

A months-long brawl between boosters of solar power and Standards Australia over regulation of lithium-ion battery storage in homes remains far from resolution as the sector forecasts 30,000 units could be installed this year and many more by the end of the decade.

An important issue for householders is how insurance companies view the risks and how this translates in to premium pricing.

The imbroglio has seen the Australian Energy Market Commission comment – in a new discussion paper on “distributed energy” services – that the Clean Energy Council should consider seeking accreditation for a body to develop standards not already covered by existing arrangements.

Standards Australia was deluged with solar industry submissions – 2,917 were delivered – after it drafted a rule that the solar sector denounced as “draconian” and “overkill,” declaring the proposed safety requirements would add thousands of dollars to storage system costs and was “potentially industry crippling.”

Standards Australia has now acknowledged that it can’t achieve consensus – and says its technical committee “is not the appropriate forum to resolve the public policy tensions related to public safety, clean energy and minimum residential construction requirements.” Governments should resolve the policy issues before the standard is progressed, it adds.

The Clean Energy Council has responded by saying that, while changes to the draft standard are essential, it is also important to ensure consumers are protected.

The key sticking point has been what was seen as a draft requirement for storage batteries to be sited outside homes and not in garages. Critics have pointed to the irony that householders can park electric vehicles containing batteries three times bigger than Powerwall units in their garages as well as cars holding 60 litres of petrol.

Standards Australia issued a statement in February saying that “speculation” about a ban on on-site storage was “inaccurate and misleading” – but the solar industry campaign rolled on.

Reacting to the mid-August “pause” decision by Standards Australia, CEC says: “As long as home energy storage units meet strong international standards and are installed by accredited professionals to clear guidelines, requiring (outside installation) is unnecessarily restrictive.” The organization says it is working on an industry guide for battery energy storage safety.

Tassie the battery

Prime Minister Malcolm Turnbull has told a Liberal party meeting in Hobart that a study of at least nine pumped hydro storage projects across Tasmania, funded through the Australian Renewable Energy Agency, will be completed before the end of 2017.

Turnbull declares that Tasmania has a chance to become the “renewable energy battery of the nation” through its hydro system and utilizing “the best wind resource.” ARENA, he adds, is continuing to examine Basslink 2 as well. 

“Tasmania can play a massive role in the (east coast) electricity market,” he says.

Meanwhile the Liberal State government has declared its aim to make Tasmania 100 per cent self-sufficient, adding 1,000 gigawatt hours of new renewable energy supply a year by 2022, with the State Greens declaring they are “so happy the Liberals have ripped off our policy.”

‘Consumer is king’

The Australian Energy Market Commission report on a “distributed energy” market has been heralded by the Australian Energy Council, representing energy retailers, as a harbinger of the consumer being “king in a new competitive energy market.”

The council’s CEO, Matthew Warren, says the report underscores the importance of open and competitive markets as consumers play an expanding role in supplying both energy and services to stabilize the power grid.

The publication is clearly seen by the generation and retailer body as an opportunity to push back against the re-regulation mood in the current energy debate. “The report highlights the importance of allowing consumers to work with competing energy service providers,” says Warren, citing the AEMC view that “centrally-co-ordinated orchestration of such a market is likely to result in inefficient and costly outcomes.”

The commission document, he adds, is “an important blueprint that should be heeded by all governments to deliver a more efficient 21st Century grid and real savings for consumers.”

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Last word

The electricity supply sector has moved a long way from the early 1990s when talk of customer focus by government-owned utilities could be dissed as just meaning “we know where you live.”

However, as is so often the case in a market transformation, the opportunities (for suppliers and customers) of pursuing perceived benefits of competition and innovation are running head-on in to both widespread angst about service costs and the fact that not all households can or want to move at speed to take advantage of a new supply order.

Read and view the mainstream media and it appears that consumers en masse are up in arms about both service and power bills. Read the latest Australian Energy Market Commission consumer survey (reported in this newsletter) and a large number of electricity consumers are simultaneously making positive noises about the value for money of power supply and expressing confusion about how to pursue the best deals they can get.

Depending on whose arithmetic one uses, it is apparent that households in eastern Australia are wasting hundreds of millions of dollars each year – and perhaps billions – by not wringing the best deals out of electricity retailers at a time when other circumstances (not least the gas supply fiasco) are putting strong upward pressure on end-user bills. An August Essential Report poll shows that 59 per cent of respondents say they are paying a lot more for energy than two or three years ago versus 25 per cent paying a little more and 12 per cent about the same.

In a society hooked on scapegoating, the hunt is on for who to blame – and, inevitably, the political and media inclination is to point the finger for this state of affairs at the retailers, three of whom hold 70 per cent of the east coast market.

The fever pitch of media noise has spooked the federal government in to setting its watchdog, the Australian Competition & Consumer Commission, on to energy retailers. The ACCC preliminary report, due on 27 September, will be a seminal moment in current energy politics, coming on the heels of a growing movement in favor of re-regulation given impetus in August by a Victorian review that invites the Andrews government to pursue a form of price fixing.

The ACCC has a strong track record in favor of competition but every word of criticism of retailers in its report will provide ammunition for those wanting a return to more government controls for this essential service.

The degree of concern among retailers about having the impetus of further market reform baulked, if not actually derailed, is only too clear from the tone of commentary by their industry bodies (also reported in this newsletter) and some of their executives. Their fears can only be exacerbated by each Newspoll that shows the Turnbull Coalition on the path to a hiding at the next federal election – and by plentiful evidence that, in today’s political environment, populism, strongly pursued by Labor and its leadership, is working as well in the community as it ever has.

Keith Orchison
29 August 2017                          

 

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