Coolibah Commentary

Issue 186, October 2020

After months of lying fairly dormant in the Australian media and in political debate as the nation wrestled with the Covid-19 crisis, energy leapt back in to the limelight in the last days of September, showing that, while the long-running row has changed in some respects, it is far from reaching a point of broad mainstream agreement. The federal government’s more rational opponents are pleased it seems to now acknowledge a strong future role for renewable energy but activists are aggrieved that its “roadmap” includes support for technologies that leave the door open for ongoing use of fossil fuels, especially gas. More fundamentally, its September statements demonstrate that the Coalition government is now as supportive, in its own way, of interference in the east coast electricity market as its Labor opponents. Less obvious, but interesting, is the view in some quarters that the direction the Coalition is now taking leads towards the need for a carbon price, a policy the Liberals and Nationals thought they had buried in the wake of defeating Labor at the turn of the past decade. Meanwhile the decade-long saga of the Narrabri gas development in New South Wales rolls on – as does the horse-trading in Victoria over whether a power deal can be struck to keep open the Portland smelter.

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Quotes

“Australia can’t, and shouldn’t, damage its economy to reduce carbon emissions” – federal Minister for Energy & Emissions Reduction Angus Taylor.

“We don’t believe we’ve put Australia in a position where we have to choose between meeting standards and sensible targets and surrendering people’s jobs” – Prime Minister Scott Morrison.

“Getting the technologies of the future right will support 130,000 jobs by 2030 and avoid in the order of 250 million tonnes of emissions in Australia by 2040” – the federal government’s low emissions technology statement.

“The nation’s long-term future lies in renewable energy sources” – federal Labor leader Anthony Albanese, adding “the right plans will create hundreds of thousands of jobs in new industries whilst also reducing power prices.”

“The cheapest new sources of generation are solar and wind but their variability requires flexible support to ensure system reliability and that means a role for storage and gas” – Australian Energy Council CEO Sarah McNamara.

“Achieving deep emissions cuts in electricity generation and road transport is now clearly vastly cheaper than we thought just a decade ago” – Australian Industry Group CEO Innes Willox.

“A genuine, independent, market-based emissions trading scheme would give the technology roadmap the substance it lacks” – John Hewson, chair, Business Council for Sustainable Development.

“The goal is renewal of our energy, industrial and agricultural economy. What is needed is government policy to drive private sector investment. Putting a price on emissions is, and will remain, the best way” – ANU professor Frank Jotzo.

Liddell saga

Although the starting point for the current round of argument about electricity supply in New South Wales (and more broadly the NEM), the implications of Liddell power station being closed in 2022-23 have faded to the background (as witness the Morrison government sitting on its task force report from its delivery in April until the September technology statements) – but the state of play when the closure happens also includes a rise in contributions of other coal-burning generators in NSW.

The task force report points out that before the Liddell exit other NSW plants could be operating below 60 per cent capacity “and could increase their output if other sources of new generation are not available and there are appropriate commercial incentives to do so,” a point lost in the argy-bargy about gas-versus-renewables now flaring in the media and elsewhere.

The contributions of other coal generators will be helped by a 100 megawatt upgrade to Liddell’s neighbouring plant, Bayswater, and a planned 60 MW upgrade to the Mt Piper station near Lithgow.

A factor in the ongoing contribution of coal power will be the wholesale price of electricity in NSW – and the report includes modelling suggesting this could rise from the low $60s per megawatt hour in 2022 to between $75 and $80 in 2023-24, depending on market response to the closure.

On the contentious issue of system reliability, the task force report points out that Liddell’s current “significant amount of consistent output” can be substituted by proposed transmission upgrades plus Bayswater/Mt Piper upgrades and “probable projects” that

include four 50MW batteries, EnergyAustralia’s Tallawarra B gas peaking plant and additions of wind and solar capacity under the Berejiklian government’s renewable energy zone program. This, the report asserts, would be “more than sufficient to maintain a high level of reliability” after Liddell closes.

The time of closure is also potentially open to change, the report indicates. The task force “has been informed” that “it may be possible to extend (operation) of two Liddell units” to 2026, bridging any gap that may occur if the Snowy 2.0 development is delayed. It notes that government support is “likely” to be needed to enable the extension.

Narrabri saga

One of the longest-running and most cantankerous energy debates in modern Australian history – whether or not to produce gas near Narrabri in New South Wales – may have taken a significant step with the State’s Independent Planning Commission delivering conditional approval on the last day of September, 13 years after the proponent, Santos, started its efforts to develop the project.

The commission has concluded after receiving 23,000 submissions (most organized by activist bodies) and holding seven days of public hearings that “the project is in the public interest and any negative impacts can be effectively mitigated with strict conditions.” It imposed 134 conditions on development, including a requirement that all greenhouse gas emissions from it be offset.

The decision came on the heels of the Coalition State government’s Energy and Environment Minister, Matt Kean, declaring “gas has no future in NSW.” The project is supported by both his own government and the Coalition federal government – the Prime Minister called earlier in September for development at Narrabri to be “accelerated.”

The ball now bounces in to the court of the Santos board, which needs to decide if the $3.6 billion project, as now approved, is financially viable. Commentators reacting to the IPC announcement are suggesting a key problem for the board is the uncertainty being created by government intervention in energy markets. The final investment decision may take until 2023 when the IPC conditions are factored in.

The company has said in promoting the Narrabri field that it can deliver up to 70 petajoules of gas for domestic use annually for 20 years, some 50 per cent of State needs.

Welcoming the IPC decision, the Australian Petroleum Production & Exploration Association says the approval is “acknowledgement of the already-proven track record of the onshore gas industry in Queensland – where thousands of jobs have been created, billions of dollars invested in regional communities and hundreds of millions of dollars paid to farmers with no significant environmental impacts and over 66,000 gigalitres of water returned to farmers or injected in to aquifers.”

Labor stance

The federal ALP is considering a draft policy for the next election that commits it, in government, to back “responsible” and “environmentally sustainable” development of gas, including from coal seams, subject to “rigorous, science-based” approval processes. The draft commits the party to “work with industry, workers and States” to ensure affordable gas supplies for households, power generation and industry.

Cost-cutting

In a new report, the Australian Energy Regulator says consumers are getting cheaper and more reliable electricity supply from networks.

The first AER annual review of network performance in the NEM since 2015 (and also now covering the Northern Territory) says a reduction in allowed rates of return for the companies is a key driver of the better outcomes after their overall outlays hit a peak in 2012. The RoR allowance makes up about half of the company returns.

However, there were more frequent network outages in 2019 than in 2018.

Energy Networks Australia, lobbyist for the grid companies, says the AER report has missed issues affecting investment and warns the regulator against “complacency.” ENA identifies impediments to householders exporting rooftop solar production to the grid as a key issue needing attention. It also claims that a more than halving in real regulated returns on network investment is “unsustainable” and risks “poor customer consequences.”

The AER report shows that NEM distribution revenues in 2019 were $9.6 billion from 10.36 million customers and the DBs spent $4.39 billion in capital outlays for the east coast systems.

Transmission businesses garnered $2.14 billion in revenue on an asset base of almost $21 billion and delivered 177,693 gigawatt hours to the NEM.

AEMO & governance

A research paper commissioned by the Australian Energy Council and Energy Networks Australia has suggested that the governance framework for the Australian Energy Market Operator needs revisiting.

“In particular,” say consultants Cambridge Economic Policy Associates, given AEMO’s evolution since it was established in 2009 and the “crucial and growing” role it now has in the east coast electricity market, “we consider there is a case for reconsidering the strength of (its) accountability mechanisms,” pointing to the level of scrutiny that is applied to system and market operators elsewhere in the world.

The report argues that, while the operator is formally accountable to its members, “there are questions about the extent to which they are well enough informed or able to address issues.”

It references the 2015 Vertigan report for the CoAG Energy Council that suggested AEMO should focus on operating the market and leave policy development and market design to the rule-maker, the Australian Energy Market Commission.

The exercise has raised the ire of lobbyists for greater use of wind and solar power, who are strong supporters of AEMO’s integrated system plan, described by one as “a roadmap to the world’s fastest energy transition.” Another declares that the CEPA report is “an attempt by the incumbent fossil fuel industry to clip the wings of the only institutional body bold enough to lay a clear path to a clean energy transition.”

‘Phenomenal’

The Australian Energy Market Operator’s chief system design officer, Alex Wonhas, has told a forum organized by the Australian National University that the rate of change required to achieve AEMO’s integrated system plan is “phenomenal” – with 27,000 megawatts of power capacity seen as exiting the NEM in 10 to 15 years, 22,000 MW of it coal-fired generation.

He added that “with the careful modelling AEMO has done, you don’t need a lot of baseload power.”

Meanwhile, the lead architect of the ISP, the market operator’s chief executive, Audrey Zibelman, has announced she will be leaving the organization at the end of 2020.

Covid adds pressure

While the Australian Energy Market Operator has expressed confidence that the NEM will be able to cope with the coming summer’s demand for power, others are asking whether the large number of people working from home, with a much bigger use of air-conditioning, may throw strain on the system?

They point to Roy Morgan research that claims more than 4.3 million Australians have been working from home this year as a result of lockdowns and other impacts of the pandemic.

Up on the roof

The Clean Energy Regulator has increased its estimate of how much rooftop solar PV capacity will be installed nationally in 2020, now forecasting 2,900 megawatts instead of 2,700 MW if the momentum experienced in the second quarter is maintained. The 2019 total was just under 2,200 MW.

Key drivers of this growth, it says, include large numbers of people working from home, increased spending on home improvements and the current low interest rates for loans.

CER believes 2,800 jobs have been added in the solar sector in the first six months of 2020 at a time when employment elsewhere is contracting because of the impact of the pandemic.

Total installed rooftop capacity is now 12,000 MW, it adds, with 42 per cent of suitable dwellings having the technology in Queensland 40 per cent in South Australia – and, it says, “as the penetration of solar PV increases, operation of Australia’s electricity grids becomes significantly more complex.” A key question, it declares, is whether changes to distribution networks and to technical standards and other rules can occur fast enough to keep up with record investment.

Residential use of solar PV is now a feature for more than 2.4 million homes, with a combined capacity of 9,700 MW and estimated annual use of 12,000 GWh.

CER says it accredited more than 2,000 MW of large-scale renewable projects in the first half of this year and expects the 2020 total to reach 3,400 MW. It forecasts that the current fleet of wind and solar power stations will generate more than 41,000 gigawatt hours in 2021 when operating at full capacity.

Gas use growth

A new report claims that connections to natural gas networks in Australia are growing at 100,000 a year – and there are now 5.2 million. It estimates that there are more than 12 million household appliances using gas.

The ‘Gas Vision 2050” report was published in September by six industry associations. It points out that, while coal before the pandemic was providing more than 1,960 petajoules of primary energy in Australia, gas was delivering 1,555 PJ, with 39 per cent used for power generation and the remainder going to direct end-use. The latter, it adds, at 943 PJ exceeds Australia’s total end-use of electricity at 835 PJ.

The report pokes a stick at the popular showcasing of South Australia as the national renewable energy success story, pointing out that gas provides almost 50 per cent of the State’s power generation.

The publication also notes that LNG is now Australia’s second-largest export after iron ore, earning $51 billion in revenue in 2018-19 and $47 billion in 2019-20.

‘Not one big bang’

Following federal, State and Territory governments agreeing to keep the Energy Security Board at work in the marketplace, the body is embarked on a review aimed at ensuring that the NEM is fit for purpose beyond 2025. It is now seeking stakeholder response to a paper considering a “comprehensive redesign” of the market.

ESB chair Kerry Schott says seven proposed market development steps “consider almost all aspects of how electricity is generated and dispatched, how consumers can access the services they want and how investment can avoid unnecessary costs.”

Schott adds: “It is clear that the market framework and rules need to evolve to keep up with the accelerating pace of change – which is leading to security and reliability challenges and less than ideal outcomes for consumers.”

She says some parts of the transformation roadmap can be implemented now, others before 2025 and some beyond then. “It is not one big bang reform process.”

The paper the board has tabled includes “an ageing thermal generation strategy” to manage the closure of existing coal and gas generation over the next two decades, including steps to avoid premature, unplanned exits. .

The ESB intends to deliver its initial recommendations to energy ministers by the end of 2020. A deadline of 19 October has been set for stakeholder responses to the discussion paper. The ESB intends to provide its final recommendations by mid-2021.

Who will build?

The role of government in the NEM – designed in the 1990s as a market where politicians kept their hands off power supply after decades of state control left business consumers deeply unhappy – is once again being cast in the foreground of the public debate.

The Prime Minister’s promise (or threat) that, if adequate dispatchable generation in New South Wales is not provided well before the closure of Liddell power station, the government (via its wholly-owned Snowy Hydro) will build a gas-fired plant in the Hunter Valley is described by senior journalist John Durie (of The Australian) as “playing a game of bluff with big energy” – meaning AGL, Liddell’s owners, and EnergyAustralia, both of which have talked about building new gas capacity but have made no commitment to do so.

The latest intervention from Canberra has led EnergyAustralia CEO Catherine Tanna to tell journalists “governments should enable the future energy system; they don’t have to build it.”

Tanna says her company’s 400 MW Tallawarra B gas generation project is “the most advanced gas power project in New South Wales” and claims it is the only one that can be ready in 2023 when Liddell closes.

She was followed by the Australian Energy Council CEO, Sarah McNamara, warning that the Coalition’s plan “risks deterring the very investments it is attempting to encourage. She added: “Government interventions, or even discussion and threats of intervention, act as a deterrent.”

Scott Morrison has retorted in a television interview that “a lot of people can talk projects but they have got to be built in time.” In the case of the mooted Snowy generator, he declared, “it won’t be on the wish list, it will be on the done list.”

In a media statement in mid-September, the Prime Minister said his government wants the private sector “to step up and make timely investments in the gas market” – and added “if the sector fails to act, the government will step in, as it has done for electricity transmission, to back projects through streamlining approvals, underwriting projects or establishment of a special purpose vehicle with a capped contribution.”

Oligopoly

In a newspaper interview in the midst of the new public row over what should replace the Liddell power station, Paul Broad, CEO of federal government-owned Snowy Hydro, has argued for the need to get more competition in to the NEM to counter the “oligopoly” of major electricity suppliers.

“Stand back and look at it from the consumer perspective,” Broad told the Australian Financial Review. “Would they be worse off having a robust competitor in the marketplace really breaking through the oligopolies?”

He also pointed to the ongoing problem of fuel supplies for NSW gas generation, saying Snowy Hydro wanted to run its 667 megawatt Colongra plant on the State’s Central Coast at a higher rate but couldn’t source sufficient gas.

A deal for Portland?

While most of the public debate this year has been about southern States manufacturers’ need for affordable, reliable gas supplies, one of the biggest question marks hangs over whether Alcoa’s Portland aluminium smelter can strike a deal with one or more power generators to enable it to keep operating in the new decade.

The gas and electricity supply concerns are the local expression of a global fight for survival by the aluminium sector with competitive pricing the main theme.

Australian Miles Prosser, head of the International Aluminium Institute, has told a trade magazine that electricity prices are a key determinant of how competitive a smelter is – “and Australia is very much at the high end at the moment.”

In the case of the Portland smelter, a four-year financial support deal provided by the Victorian government expires in August 2021 and efforts to find a new electricity supplier at a viable price – the contract is held by AGL at present, providing brown coal-based power – have dragged on for months.

NEM mix

Coal-fired generation contributed 71.5 per cent of power sent to the east coast grid in 2019-20, according to the latest EnergyQuarterly report published by analysts EnergyQuest.

Leaving aside estimated use of rooftop solar power (up from 9,168 GWh in 2018-19 to 11,817 GWh last financial year), the NEM generation mix in the year ending June 2020 totalled 189,930 GWh – and the black and brown coal generation contribution was 135,922 GWh.

The other contributors were: gas plants 16,492 GWh, wind farms 17,588 GWh, hydro power 14,122 GWh and solar farms 5,791 GWh.

Variable renewable energy (wind and solar farms) provided 12.3 per cent of the power sent to the NEM grid. Fossil fuels (coal, gas and a small diesel generation contribution) together provided 80.25 per cent.

Meanwhile, Rystad Energy analysts, in a review of Australian electricity production nation-wide published in mid-September, assert that coal-fired generation will drop back to 145.67 terawatt hours in 2020, 2.6 per cent less than in 2019, and will dip below 100 TWh by 2025.

The consultants say national gas-fired generation was 54.36 TWh in 2019 and they predict it will fall back to 45.64 TWh this year.

Rystad reckon that total Australian power output this year will be 263.88 TWh, down from 265.23 TWh last year, as a consequence of the pandemic.

The analysts also say that they expect just over 42 million tonnes of brown coal to be provided for power generation this year and 48.7 million tonnes of black coal, forecasting that this will fall to total coal-for-power production of 28 million tonnes annually by 2040.

Greens path

The Greens have unveiled a new national program that would require $700 billion to be invested, they say, to achieve 100 per cent renewable generation in electricity supply by 2030. It includes “prioritizing the construction of a publicly-owned transmission network” and a goal to “export our wind and sunlight to the world.”

Nuclear?

It’s hardly a Damascene development, but the Morrison government, which until now has publicly ducked and weaved on nuclear power for Australia, has acknowledged that, as part of its “technology roadmap” process, it will include small modular nuclear reactors among the emerging technologies it will be monitoring.

Energy Minister Angus Taylor, in a National Press Club address, has said that the government will maintain “a watching brief” on development of SMRs.

The discussion paper on the roadmap issued by the government says emerging nuclear technologies “have potential but require R&D and identified deployment pathways.” The paper adds that social acceptability of nuclear power in Australia “remains a key determinant.”

Commenting on the “roadmap,” Tania Constable, CEO of the Minerals Council of Australia, says the inclusion of SMRs on the government’s watching brief list is “commendable, given the emergence of this leading-edge technology in North America and Europe in readiness for commercial deployment in the next decade.”

Last word

Not surprisingly, as we are plagued by Covid-19 and its health, social and economic consequences, there has not been a lot of room in public debate in most of 2020 for energy supply issues – but the past month has seen a coincidence of a lull in pandemic problems (except in Victoria) and an upwelling of argument about both electricity and gas policies on the east coast. Inevitably, this has also provided activists with the opportunity to make a grab for community attention, aided by international focus on the US version of severe wildfires (book-ending the year’s opening fuss about bushfires in southern Australia).

Whether a society with so many of its members forced to work from home is having more time to look at energy and climate matters is open to debate – does this stuff compete with Netflix? – but for politicians it is both an opportunity to set out their wares again and/or to shore up support for the edges of the spectrum where they draw most following.

Politicking, of course, is the bane of Australia’s energy debate and has been for a quarter century; the state of the NEM (in terms of its efficiency as a marketplace) is testimony to this. One outcome is that the Coalition federal government keeps reaching for new advisory bodies to shore up its positions – the latest being a Technology Investment Advisory Council.

On one hand the TIAC is quite a good idea, but the weakness is that we are running out of time to resolve the NEM governance and investment issues – by the middle of this decade we could easily be wrestling with a market-wide version of the South Australian mess that was such a feature of the last years of the past decade with consequences in particular for manufacturing and the sector’s service industries.

A notable feature of September developments is that the Morrison government has swung towards an emphasis on gas generation, and gas supply more generally – but this needs to be read against the warning only weeks earlier from the Australian Competition & Consumer Commission that the southern States are at risk of a gas supply shortfall in mid-decade unless there is a substantial improvement in development, a victim of politics and activism for the past 10 years at least and mired in endless approval processes.

In this respect, EnergyQuest’s Graeme Bethune, in his latest EnergyQuarterly report, draws attention to an interesting point. As he says, one of the tactics of anti-development activists is to create an impression that the majority of Australians are opposed to gas exploration and production. Prior to the recent Northern Territory election – in a region with major potential for new supply – Lock the Gate published a poll claiming 86 per cent of Territorians oppose hydraulic fracturing. However, as Bethune writes, in the only poll that counts Michael Gunner’s Labor government, with ambitious plans for large-scale gas, won.

The mainstream media, mostly scrabbling to ward off the inroads of social media where the activists are at frenzied work, tend to give this sort of propaganda much attention with consequent political tap-dancing – but their readers, apparently, not so much. How this will play out as we emerge, as we will eventually, from the travails of the pandemic in to what may well be still more troublesome times for electricity and gas consumers remains to be seen.

What should be obvious here and now is that the piecemeal approach to both energy and climate change-related policies that has plagued the supply sector (and its consumers) all this century must come at a cost.

What that cost will be and where most of the pain will fall can be debated, but that Australia is shambling nearer this denouement, and that it will be in a weaker state to deal with the outcome because of Covid-19, is becoming ever-harder to deny.

Keith Orchison

30 September 2020

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