Coolibah Commentary

Issue 185, September 2020

As we enter the last third of this Covid-plagued year, three large questions hang over energy supply: one is how the east coast electricity system will cope with the summer of 2020-21, the second is whether the next 12 months will see real progress in achieving NEM 2.0 with the Energy Security Board having been given a new (but brief) lease of life – and the third is whether New South Wales can finally get its act together on meeting its gas needs? Proponents of green generation will probably argue that NEM complications impacting new wind and solar farm investment are an equally major issue. For retailers, the pressure is on from the federal government and the national consumer watchdog to ensure that falls in wholesale power costs and in international gas prices are passed on to users in a significant way.

Quotes

“Working with the Energy Security Board to ensure that we achieve a 2025 market design that bakes in substantial wholesale price reductions is a top priority for the Commonwealth” – federal Energy Minister Angus Taylor.

“We must ensure that we do not let the prize of competitively-priced energy escape us” – Rod Sims, chairman, Australian Competition & Consumer Commission.

“With two-thirds of Australia’s coal plants retiring in the next 20 year, we know that a portfolio of large-scale variable renewable resources, rooftop solar, firmed up with storage and fast-start gas plants and supported by targeted, cost-effective network investments, will deliver the most affordable energy future” – Australian Energy Market Operator CEO Audrey Zibelman.

“Australia is transforming its electricity system at world record speed from coal to renewables; yet no-one is in charge. This is neither practical nor sustainable” – author and former Australian Energy Council CEO Matthew Warren.

“It took New South Wales 60 years to build the existing power grid. In the next 15 years four of the five existing power stations will close. These are old pieces of machinery. Replacing (them) in 15 years is huge – and we have fiddled while the whole thing burned” – NSW Energy Minister Matt Kean in a newspaper interview.

“Change is coming and the community relies on us to ensure they get cheap electricity that’s also clean; it would be better if there were a national framework to co-ordinate all of that” – Kean.

“Australia needs to double down on local manufacturing in the wake of the Covid-19 pandemic and this means shoring up the supply of low-cost energy, including gas” – former federal ALP leader Bill Shorten. “You can’t have a manufacturing sector (without) low-price energy.”

“The adoption of more renewable electricity will be faster, more economical and more reliable if gas-fired generation continues to be available in the near to medium term” – Chief Scientist Alan Finkel. “There will be times when supply from renewables will be inadequate to meet demand and occasionally such periods will last many days.”

‘Unique opportunity’

Rod Sims, chairman of the Australian Competition & Consumer Commission, sees a sliver of silver in the Covid-19 clouds – a “unique opportunity to restore energy affordability.”

Sims told an energy users’ conference as August neared its end that the pandemic’s impacts offer room to reset affordability and competition in the energy markets.

He added: “Australia is at a tipping point in terms of achieving competitively-priced gas and electricity and we need to ensure this opportunity is not lost.”

Sims pointed to “the recent dramatic reduction in wholesale electricity prices,” which he notes have fallen by 40 to 50 per cent for reasons unrelated to the pandemic and largely linked to increases in supply, as one of the chances to restore Australia’s international competitiveness – which he said had been affected by a 61 per cent “real” (inflation adjusted) increase per kilowatt hour between 2007-8 and 2018-19 for commercial and industrial businesses.

On gas, he said: “I am still waiting to hear a compelling reason from LNG producers as to why they are selling gas to domestic users at substantially higher prices than buyers in international markets. It is undeniable that, when we have lower gas prices around the world and the Australian market is linked to world gas markets, it is vital our gas users get the benefit.”

Sims declared the ACCC “will take action” where energy retailers do not reduce end-user charges to reflect the fall in international gas prices and the domestic drop in generation wholesale prices.

Meanwhile, as major users continue to press for government action to drive down their gas costs, their lobby group, the Energy Users Association of Australia, says companies have “invested hundreds of millions of dollars” in a range of programs, including energy efficiency, to reduce electricity and gas consumption and also greenhouse gas emissions.

Dipping down

The Australian Energy Regulator reports that NEM wholesale power prices averaged below $85 per megawatt hour in the past financial year in all sub-regions for the first time since 2014-15 and wholesale gas prices dropped below $7.25 per gigajoule in all regions for the first time since 2015-16.

The cheapest power costs were in Queensland and Tasmania (averaging $56) and the highest in Victoria ($84 per MWh).

AER chair Claire Savage says the electricity price reduction relates to lower fuel costs (coal, gas) and rising use of renewable energy in the NEM. She adds that the quarter set records for highest renewable energy output and lowest coal generation since the market was launched in 1998.

Savage says the wholesale reductions are starting to flow through to east coast consumer bills and she expects users’ retail bills will fall further in the year ahead.

Rooftop boom rolls on

The Australian Energy Regulator says almost 2,000 megawatts of rooftop solar capacity was installed in the NEM in 2019-20, a 25 per cent increase over the previous financial year and almost double the level of 2017-18.

Most of the additional capacity was installed in NSW and Queensland, the regulator adds. “Now around 20 per cent of all households in the NEM partly meet their electricity needs through rooftop PV generation.”

AER says it expects the increased use of rooftop solar to continue and the ongoing availability of low-price renewables to result in a further fall in coal-fired plant output.

The Clean Energy Regulator’s latest data shows that cumulative installed PV capacity on households, community centres, schools and small businesses had reached 11,400 megawatts nationally at the end of the second quarter of 2020. In all, 2.46 million arrays have been installed.

Meanwhile, federal Energy Minister Angus Taylor has launched an inquiry, to be undertaken by the Clean Energy Regulator with the support of his department, in to sales and marketing practices in the rooftop PV sector. The review will also look at accreditation of PV retailers and installation standards. Taylor says he wants to ensure public confidence in the sector.

The inquiry is expected to take two months.

The Clean Energy Council has told media: “We are confident the vast majority of solar customers get a good quality system that is safely installed.”

Sudden plunge

The Clean Energy Council says commitments to build large-scale renewable energy projects fell in the second quarter of 2020 to the lowest level since 2017.

Just three developments worth $600 million, with a total of 410 MW capacity, reached financial closure in the quarter. This is more than 50 per cent below the quarterly average for calendar 2019.

The CEC attributes the slump to grid connection problems for wind and solar farms, under-investment in network capacity and the body politics’ failure to produce a national, bipartisan energy and climate policy.

Five months ago, through its annual “Clean Energy Report,” the CEC was heralding 2019 as “a year of extraordinary growth” that saw a 2,200 MW rise in large-scale renewable generation capacity over 2018 – and pointing to $20.4 billion in investment proposals that were under consideration.

Key risk

Spark Infrastructure CEO Rick Francis says curtailment of production by wind and solar farms is “back on the table as a key risk” for investors.

Speaking to media after releasing the company’s half-year financial results, Francis commented that Spark is “treading carefully” in terms of new renewables investments, noting “the market is uncertain and particularly curtailment issues have reared their ugly heads again,” pointing to “big problems” over the past year in north-west Victoria.

Francis says Spark is considering plans to spend $1 billion over five years on new renewables developments

Surprised

The Australian Energy Council, national lobbyist for gentailers, is raising its eyebrows about aspects of the NEM transition plan.

In a commentary on its website, the AEC says the “death of new gas peakers” portrayed in the latest integrated system plan for the market presented by the Australian Energy Market Operator “may yet (turn out to) be greatly exaggerated.”

The association finds it “particularly surprising” that none of the generation scenarios used by AEMO in modeling the market out to 2039-40 include new peaking gas-fired technology.

The plan identifies a need for as much as 11,800 megawatts of new dispatchable capacity at the end of the ‘Thirties and AEC says “a lack of new coal and gas-fired combined cycle technology is to be expected in a high renewable energy future.”

The plan opts for battery storage over gas peaking plant because it will be cheaper than gas at any price and AEC says “this is a surprising claim and at odds with the current market still investing in peaking gas.”

The association adds that, despite AEMO’s “optimistic view,” its modeling expects the existing large gas generation fleet in the NEM to still be in place through the planning period and to increase its production over 2020-21.

AEC declares that “in the end modeling of the forms of dispatchable capacity is just that – a model,” adding that “it will be up to market investors, paying real costs for technologies, to decide what is truly the best way to supply customers during lulls in renewable energy supply.”

The commentary calls for the Australian Energy Regulator to undertake “rigorous assessment” of net benefit claims in the modeling “to ensure the likely market benefits outweigh the cost to consumers.”

Meanwhile, the green activist Climate Council is using the AEMO report to push back against recommendations from the National Covid-19 Coordination Commission for government support to bring more gas to eastern Australia.

The lobby group says AEMO demonstrates that renewable energy is “Australia’s best option for clean, cheap and reliable power.”

It declares the NEM transition to a “renewable-powered grid” does not require “expensive, polluting gas.”

Poll relief

Senator Matt Canavan, a former federal energy minister, has described the late-August outcome of the Northern Territory election as “a great vindication for gas development in Australian.”

The poll, which returned the Territory’s ALP government and gave support to the Country Liberal opposition over minor anti-fracking parties, a 70 per cent return in favor of politicians leaning towards more supply, is seen as a significant boost for development of trillions of cubic feet of gas, potentially an important source of fuel for the southern States.

“I think what the outcome says is that activism equals noise not votes,” comments Andrew McConville, chief executive of the Australian Petroleum Production & Exploration Association.

His view is echoed by Canavan, who has told journalists: “We saw it at the last federal election and we’re seeing it here: there is often a lot of talk by activists about how much opposition there is to coal or gas but it doesn’t translate in a widespread way at the ballot box.”

Three principles

The Grattan Institute think tank has urged adoption of three “strategic principles” to guide an energy-related post-Covid economic stimulus.

Tony Wood, director of the institute’s energy branch, says, first, any government support should be for investments that make sense in “a low-emissions future,” citing widespread take-up of smart meters as an example.

Second, he suggests, “public funding should not support investments that are inconsistent with such a future – for example, coal-fired power plants.”

Third, says Wood, government decisionmakers “must consider the unintended consequences of expanding supply of intermittent electricity technologies in a market already fully supplied.”

According to the institute, ”the best role of government is to reduce or eliminate barriers to economically efficient decisions by investors,” arguing that unclear energy and climate policies, direct intervention in the NEM and “early-move technology risks” are big barriers that should be removed.

Wood recommends that governments “should step up their work on transmission planning and investment because this sits alongside the absence of a clear emissions reduction policy as a barrier to large-scale renewable energy projects.”

Work on

After an unexpectedly drawn-out period of inactivity, the collective energy ministers of the federation, now part of the “National Cabinet” process, have agreed to run the Energy Security Board for another year and to maintain Kerry Schott as its chair.

One of the ESB’s key current tasks is considering, via public consultation, what market planning rules should apply to pursuit of renewable energy zones. The board says in a paper released in August that the REZs should be subject to a special planning regime that takes in to account affected community interests and supports “efficient design of the broader power system” of the NEM.

Federal Energy Minister Angus Taylor says in a statement announcing the ESB extension that it will “advise ministers on changes to the existing market design, or recommend an alternative market design, to enable the provision of the full range of services to customers necessary to deliver a secure, reliable and lower emissions electricity system at least cost.”

Rule change rush

The Australian Energy Market Commission says 2019-20 has seen it need to handle the most rule changes since it was set up – 48, the third consecutive year where it has received more than 30 NEM rule requests.

AEMC chief executive Benn Barr says its workload is “intense” because the energy sector is “at the forefront of technology- and consumer-led change.”

Reliability risks

The Australian Competition & Consumer Commission is again pushing for the affordability of reliability standards to be taken in to account when the redesign of the NEM is being tackled.

ACCC chairman Rod Sims says: “We know only too well that past decisions to enhance reliability of NEM supply have had unintended and enduring impacts on affordability that cannot be easily unwound. What we’re particularly concerned about (now) is the high cost you can incur for a marginal increase in reliability that perhaps people won’t even notice – but they will notice it in their bills.”

Concerns about reliability, he says, have dominated commission conversations about the future of the NEM. “We recently submitted to the Energy Security Board our concern that increasing the reliability standard will have negative affordability implications for all users – and particularly for residential users.”

Qld goes REZ

The Queensland Labor government, facing an election on 31 October, has pledged to spend $145 million to support establishment of renewable energy zones in the State’s southern, central and northern regions.

Premier Annastacia Palaszczuk announced the step as part of a Covid-19 recovery plan, committing to support new transmission infrastructure to aid the development of wind and solar farms.

A substantial focus for the development will be the Fitzroy REZ adjacent to the industrial city of Gladstone where $2 billion is expected to be invested in wind, solar, storage and transmission.

Palaszczuk says: “I don’t want to just deliver renewable energy zones – I want to deliver industrial zones and hydrogen hubs because that means more secuire, full=time manufacturing jobs.”

Queensland’s has 14 per cent of its electricity mix provided by renewable energy today – a long way short of the 50 per cent by 2030 target set by the Palaszczuk government when it came to office.

It is estimated that 5,500 megawatts of large-scale renewable generation capacity would need to be built to take the State towards the target and the government claims that investors have planning approval for as much as 17,000 MW – although most of this was proposed before the pandemic struck the economy.

Grid congestion is seen as a substantial impediment to pursuing this goal. A key feature of the REZ activity currently being put forward by investors is the 1,100 kilometre Copperstring transmission line to connect Mt Isa and the north-west minerals province to the NEM near Townsville at an estimated capital cost of $1.5 billion. A near identical project was shelved in 2012.

Meanwhile the Australian Conservation Foundation has claimed in a new paper that renewable energy projects are on track to provide a third of Queensland’s electricity by 2025. This, it says, would represent a rise for the technologies in the State from seven per cent in 2015 to 35 per cent in mid-decade.

State security

A Legislative Assembly inquiry in to the sustainability of energy supply for New South Wales has heard that increased reliance on interconnectors as part of driving a transition to greater use of wind and solar power comes with risks.

Delta Electricity managing director Greg Everett has told an Assembly environment and planning committee hearing that the State should be “very careful” about “leaving the security we currently enjoy” to move to one less secure in terms of domestic power capability.

Everett, whose company operates the 1,320 MW Vales Point coal-fuelled power station, was speaking to a Delta submission that warns a large-scale shift from the current fossil-fuelled supply base to intermittent renewable energy ignores the high cost of delivery to consumers.

The inquiry has received more than 250 submissions.

NEM mix

The Open NEM widget shows that the 30-day market generation supply from 24 July, a period equating to the depths of winter, saw 16,241 gigawatt hours of power production despatched to the east coast grid – with 11,456 GWh (or just over 70 per cent) of it being provided by plants burning black and brown coal in NSW, Queensland and Victoria.

The widget also shows 2,161 GWh being provided by wind and solar farms – 13.3 per cent of supply – while hydro power delivered 7.4 per cent and gas plants 9.3 per cent.

Estimated use of rooftop solar PV in the NEM in this period was 848 GWh.

Meanwhile analysis from the Australian Energy Market Operator throws up a shift in the NEM generation mix (by average engagement of capacity) between the second quarter of this year and the same period in 2019.

According to AEMO’s “Quarterly Energy Dynamics Report,” the contribution of black coal generation to the east coast grid fell by four per cent between the quarters – from 56 per cent in 2019 to 52 per cent this year – while input from brown coal plants in Victoria rose from 17 per cent in second quarter 2019 to 19 per cent this year.

The market operator also records a fall for gas generation (down one per cent to eight per cent in 2020), a rise for hydro (from eight per cent to nine per cent) with warm farms’ contribution going up two per cent to 10 per cent and solar farms’ input going up to three percent.

F for fail

The Electric Vehicle Council has given the Morrison government an “F” rating for its lack of encouragement of the sector after a survey showed “overwhelming” support for policies to reduce buyers’ costs, establish public fast-charging networks and to reduce the costs of installing home charging. It complains that “every other” developed country has an EV policy and calls for Australia to “go on this journey.”

However, 45 per cent of the survey respondents also say concerns about EV driving ranges are a deterrent to buying a vehicle.

The council claims the survey shows a lot of “latent potential just waiting to be unleashed by a clear green light from government.”

Just 3,226 EVs were sold to Australians in the first half of 2020, the EVC report says, asserting that a lack of a federal policy is restricting manufacturer supply here.

The council also says there is “plenty of room for improvement” among State and Territory governments, with only the ACT scoring a “B” for its policy approach. NSW and Queensland got “C” ratings and Victoria a “D.”

Unsurprisingly, the report shows 68 per cent of survey respondents want federal subsidies to reduce EV purchase costs and 66 per cent want support for home charging installation.

The federal government promised it would finalize an electric vehicle strategy for Australia by mid-2020 but the policy has reportedly been delayed. The Coalition government heavily criticized Labor in the 2019 election campaign for proposing the setting of a national target to have electric cars reach 50 per cent of new vehicle sales by 2030.

Dragging on

The point of decision on the controversial Narrabri gas development in New South Wales – a project that has been under consideration for more than a decade and enmeshed in the State regulatory process for four years – has shifted again.

The State’s Independent Planning Commission has delayed its verdict on planning approval for the $3.6 billion Santos project until the end of September to give itself more time to consider new economic modeling material submitted by the company.

The new material includes a study by consultants ACIL Allen and Core Energy asserting that Sydney gas prices could be four to 12 per cent lower from 2025 onwards if the Narrabri scheme is operating, a critical issue for the State’s 500 heavy industrial plants, 33,000 other businesses, gas-fired power generators and 1.4 million households using the fuel.

The cost savings are disputed by green think tanks and other opponents of the development.

Labor pains

The federal Labor Party is still struggling with its energy and climate policy approach more than a year after its proposals were rejected at the 2019 national election.

To quote a journalist after a fresh outbreak of wrangling on the issue within the ALP during August, “the Labor Party is now at a fork in the road: an ambitious renewable energy platform or protecting jobs while seeing fossil fuels to their demise.”

Frontbencher Chris Bowen, whose Treasury proposals failed to gain traction at the polls in May last year, has told The Guardian newspaper in August that his party has to “reset the national conversation” on climate policy. He says the challenge of transitioning Australia to a low-carbon economy “cannot be dodged” but the ALP also “needs to be for workers in traditional industries.”

Another frontbencher, Joel Fitzgibbon, sent a small tsunami through the party (and media with green leanings) by warning in August that the ALP could split if it did not reconcile its internal divergence on the issue.

Meanwhile, Labor’s energy spokesman, Mark Butler, has put out a statement calling on the Morrison government to focus on new renewable projects and their “massive potential.” Butler declares that, after seven years in office “and 19 energy policy attempts,” the government is “still refusing to capitalize on the huge benefits clean energy can bring to households and businesses.”

Last word

August’s first rolling blackouts in California since its 2001 energy crisis (courtesy Enron) are a stark reminder, says the Bloomberg Green website, that achieving 100 per cent carbon-free energy is harder than it looks. No kidding! Who would have thought………..

Amid the hollering by politicians and the sidelines packed with commentators (expert and otherwise), one thing about California’s unhappy experience, which came in the middle of another bad wildfire event, is obvious: just as with the 2016 South Australian blackout, renewable energy did not cause the problem; a failure to establish a grid set-up capable of handling severe stress did.

Back here, the rolling maul that has been the efforts to reshape the NEM in the wake of 2016’s blackout is far from over – but governments are still plunging down the road of the “transition” before they have the new arrangements properly understood, the market fully remediated and workable plans to deal with full-on stress in place. The guff about Australia “undergoing the fastest transition to renewables on Earth” is a snare and a delusion; the main task is to ensure the NEM is as stress-resistant as possible, consistent with (as Rod Sims points out) having an internationally competitive energy supply system for our C&I businesses.

Matthew Warren, author and former CEO of both the Australian Energy Council and the Clean Energy Council, wrote a newspaper commentary in August in which he asked “Who’s in charge of keeping the lights on?” with respect to the east coast market and averred that “the broken governance of the NEM must be fixed to avoid the high costs of a return to central planning on an epic scale.”

It elicited a retort in another op-ed from Audrey Zibelman, the AEMO chief executive, that, in effect, asserted the answer to all questions is her organisation’s “integrated system plan” and market reform to make it work.

These exchanges have come at a time when the New South Wales government is throwing itself headlong down the road of “renewable energy zones” and Victoria and Queensland are using the same roadmap. The latest iteration of the ISP sees AEMO asserting that, by 2035, there will be periods when nearly 90 per cent of electricity demand could be met by renewables.

However, long infrastructure development lead times, the complexities of meshing of new capacity with existing generation, the ongoing “climate war” over the role of gas-fired plant and the continuing unwillingness of those in government to contemplate the use of modern nuclear technology all offer fertile ground for sudden, large and scary glitches in supply, especially when peak demand stresses the grid – cf California.

The sudden recent hesitancy among investors in renewable generation in the NEM (see other parts of this newsletter), not least because of the threat of the market operator imposing curtailment on wind and solar farm production when the technical strength of the system appears at risk, is a clear warning signal to those governing us – who admittedly are hugely distracted by the need to deal with the pandemic’s health, social and economic impacts – that insouciance in rushing down the green brick road comes with non-trivial risks.

This is not just an Australian issue.

Media coverage of the energy sector these days – beyond the local eager beavers on green social media and reporters in our mainstream who frequently demonstrate their lack of real understanding of the challenges – carries regular reference to “transition” problems being encountered in Europe, the US and also India.

The eager beavers think the impact of negative prices in markets like the NEM on coal-fired and gas-burning generation is hilarious because, hey, it’s another blow against evil fossil fuels, but the reality is that this and other stresses flowing from the “transition” can add up to significant issues for consumers, too, in the fullness of time.

With the Energy Security Board now given a new, albeit short, lease of life, perhaps we will see a hard-nosed look in the months ahead at the east coast state of play.

If not, the “transition” road may turn out to be a slippery slope.

Keith Orchison

28 August 2020