Coolibah Commentary

Issue 188, December 2020

Raise your hand if you are ready for 2021! We can now start gearing up to farewell 2020 with few, if any, regrets; the big question, of course, is what will the new year bring? Of immediate concern in the electricity arena for eastern Australia, there will need to be an early reprise of system watchfulness in a summer of storms, bushfires (although nowhere near as a bad as last time round, hopefully) and demand fluctuations, including those still influenced by the pandemic. Politically, with respect to grid competence, carbon abatement and gas supply, will it be more-of-the-same in 2021? On the present outlook, this seems likely. Further down the road, will there be a free-for-all row in the last quarter of the new year if the Morrison government opts for an early return to the polls at a time when the postponed UN climate summit is scheduled to be held? Meanwhile “energy super power” has become the local catchphrase du jour for promoters of renewables -- being applied by politicians, journalists, lobbyists and others to New South Wales government plans and by supporters of export-oriented projects in Western Australia and the Northern Territory, none of it with much obvious thought to context. At the same time, efforts to talk down the role of natural gas on the east coast are once again gathering momentum as the Narrabri project takes another step towards development.

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Quotes

“For the past decade Australia’s energy industry has been riven by a quietly escalating cold war between national market protectors and central planners. It’s not cold any more” – energy writer Matthew Warren.

“Promoting a gas-led recovery is quite an extra-ordinary step and almost certainly unnecessary” – Tony Wood, energy director, Grattan Institute.

“Gas is actually a very expensive way of generating electricity” – NSW Energy & Environment Minister Matt Kean.

“We know that gas can play an important role in bringing down the cost of energy in this country” – federal Minister for Energy & Emissions Reduction Angus Taylor.

“The challenge for gas in Australia is to get the price down to a competitive level while we wait for batteries to get cheaper” – Audrey Zibelman, outgoing chief executive, Australian Energy Market Operator.

“Today, more than ever, gas is critical to the nation’s energy and economic future for electricity generation as well as supply for manufacturing and domestic consumption” – Australian Energy Market Commission 2020 annual report.

Handbrake

The Australian Energy Market Commission, the NEM rule-maker and adviser on energy policy to federation governments, has defined today’s core electricity challenge as rethinking “how we plan and develop the market so we get investment in the right kit in the right place at the right time to deliver reliable supply to customers.”

The AEMC’s latest annual report acknowledges, in the context of a power system it sees as having to replace most of its current generation stock by 2040, that “decisions on where to locate and how to operate generation are not in lockstep with spare transmission capacity or decisions on where and how much transmission capacity should be built.”

This, the commission says, is slowing the pace of integrating in to the grid renewables and other new technologies and “putting a handbrake” on the energy sector’s ability to reduce carbon emissions.

As well, the AEMC declares, current transmission access arrangements “do not incentivize generators and storage facilities to locate and operate in a way most likely to minimize costs for consumers.”

Adding to this, it notes, “more variable demand from customers and more variable supply from generators make forecasting a challenge and add risks to operational and investment decisions.”

‘Well-placed’

Announcement of the New South Wales “20-year electricity infrastructure roadmap” has inspired a burst of hyperbole from the Berejiklian government’s Energy Minister, Matt Kean, who declares the State is “well-placed to be a clean energy super power” with more green generation built over the next decade than in Queensland and Victoria combined.

State MPs who don’t support the roadmap bill, he adds, are “voting against jobs, cheaper electricity and the nation’s future.”

On a similarly hyperbolic path, Victoria’s Minister for Energy, Environment & Climate Change, Lily D’Ambrosio, is describing the proposed Victoria to NSW “interconnector west” project (nicknamed Keranglink and to be underwritten by $100 million each from her government and the Morrison federal government) as “a renewable energy superhighway creating a wave of new jobs right across the State.”

The link, with 1,800 MW capacity, is “a crucial action to address climate change,” she declares.

The Victorian government is pledging to spend $543 million on supporting six renewable energy zones across, including outlays on upgrading existing transmission lines and adding synchronous condensers to the grid.

Meanwhile, in commending the NSW government for “a thoughtful approach that will do significant good for energy users,” the Australian Industry Group is also warning that its roadmap continues the fragmentation of the NEM along State lines.

CEO Innes Willox says the State approach is understandable, “given the repeated failure of national reform initiatives,” but it comes with “important risks,” pointing to “inconsistent approaches (that) can increase costs and confuse the market.”

Grattan Institute energy director Tony Wood adds it is concerning that the NSW government “seems to have lost confidence in the NEM” and is taking on investment risks that “should be left to energy companies.”

The Australian Energy Council, representing major gentailers, says the NSW plan “has the potential to detract from the national market framework and hinder its ability to deliver efficient outcomes for consumers,” adding that it is “unclear how this plan will impact the business case for proposed interconnectors designed to share spare capacity between regions.”

The Berejiklian government approach maps development of 12,000 megawatts of new capacity and 2,000 MW of energy storage (in addition to 2,000 MW to be provided by the Snowy 2.0 scheme) through three renewable energy zones to support an estimated $32 billion in total investment by 2030 – and aims to provide long-term “energy service agreements” that offer a floor price to developments in line with its strategy.

Kean declares: “Our priority is to keep the lights on and get power prices down.”

In an editorial, the Sydney Morning Herald observes that the State government says, if the guaranteed prices for generation created by the scheme are too high from time to time and it cannot sell contracted power profitably, it could recover some of its losses by imposing network charges on consumers. “The government must be transparent in disclosing how the system will work and costs will be borne.”

Coal-fired generation reportedly provided 77 per cent of NSW’s total electricity generation in 2019 – when the estimated use of rooftop solar power is taken in to account. In financial year 2019-20 the technology contributed 53,794 gigawatt hours of the 64,084 GWh sent to the grid within the State when rooftop PV use is excluded – almost 84 per cent of supply.

The roadmap envisages the State having just one coal power station in 2035.

Bothered by battery

The Australian Energy Council is a critic of the Victorian government decision to support investment in a large energy storage battery at Geelong.

AEC chief executive Sarah McNamara says it is a “bad idea” without independent regulation of costs and will impact on private investment made within the NEM regulatory framework. “Decisions like this unavoidably affect market investments. While it is clear this battery will participate in the NEM, it is not clear who will make decisions on when or how it will be used.”

McNamara adds that the market operator has not identified a shortfall in Victorian power supply for 2021-22 nor the need for the battery in the integrated system plan on which it is working.

The Energy Users Association has also expressed concern over the move. EUAA says that, while understanding the desire of governments to assist the NEM transition and appreciating that “at times some short-term intervention may be justified,” it prefers market participants to take primary responsibility for delivering fit-for-purpose energy supply.

The Victorian government says it wants the lithium-ion battery – of 400 MW capacity with a storage availability of 450 megawatt hours -- located at a critical juncture on the Victorian grid to improve reliability of supply and to help keep power prices down.

The government has contracted with French company Neoen to pay $84 million over 11 years for the use of 250 MW of the battery’s capacity during summers to support increased transmission on the high voltage link with New South Wales.

Green investment

Angus Taylor, federal Minister for Energy & Emissions Reduction, has told federal parliament that $30 billion has been invested in the national renewables sector since 2017.

The outlay includes “an incredible” 6,300 MW of renewables capacity last year – a level, he says, that “looks set to be repeated in 2020.”

Taylor asserts that Australia is investing in the sector at “roughly 10 times the average of industrial countries and four or five times the next highest level of investment.” He accuses the government’s critics of being “ill-informed and misleading” when they claim renewables investment is falling. “This story has been around for a couple of years – but in our view it is not true.”

Renewables up

The Clean Energy Regulator is confident that 3,000 megawatts of large-scale renewable capacity will clear company financial investment hurdles across Australia by the end of 2020 and believes another 2,500 MW will come in 2021.

CER general manager Mark Williamson says wind and solar power at this scale will deliver power to grid systems equivalent to the output of a 1,000 MW coal-fired plant.

The regulator also reports that another record is likely to be set in 2020 for the take-up of rooftop solar power – at 2.9 gigawatts compared with 2.2 GW in 2019. It is forecasting that this capacity could reach 26 gigawatts by mid-decade – despite pandemic restrictions almost halving installation rates.

CER says Australia is deploying new renewable energy capacity 10 times faster than the global average – “on a per person basis.”

Net zero

One of Australia’s largest energy companies, Origin Energy, has declared its determination to maximize the opportunities of investment in renewables, targeting net zero emissions by 2050.

Speaking to market analysts and journalists, CEO Frank Calabria said: “We see an opportunity to work with governments and other parties to invest in generation through the transition.”

Calabria added that the transformation of the market is accelerating faster than industry participants would have forecast even six months ago, urging greater co-ordination between federal and State governments.

Be calm

Energy Security Board chair Kerry Schott has issued a year-end call to east coast market participants to “calm down and get on with it” in a transition that “can’t be stopped and is not going to be stopped.”

She said that the transition to clean energy is well under way and “this is no time for endless argument within the industry.”

Speaking at the Australian Financial Review’s annual forum on energy issues, Schott declared that the NEM is “at the moment absolutely not fit for purpose.”

A key risk, she added, is that older generation plants “are more and more unreliable.”

Canvassing developments that have taken place in the market, Schott said: “The one recommendation in the Finkel review that we haven’t made any progress on is that governments review or revise the national energy market agreement.”

She said: “I think now would be a good time to do that. It would enable discussion about the extent to which governments wish to be basically be separate States or the extent to which they wish to have a national market – which certainly the Energy Security Board, and I am sure much of industry, would want to happen.”

The choice

Outgoing Australian Energy Market Operator CEO Audrey Zibelman says that the NEM needs to be made to work more efficiently or else stakeholders must expect a return to more heavy-handed State-based regimes to do the job.

Speaking at the Australian Financial Review conference, Zibelman declared: “What we can’t afford to do any more is not make a decision and (go on) whinging to each other about not making a decision.”

She pointed to the Energy Security Board, of which she is a member, being set to present a draft design for the NEM post-2025 to the federation’s energy ministers “over the next couple of months.”

According to Zibelman, the Australian energy industry is “at an inflection point with critical decisions looming.” Decisions and actions in 2020 and 2021, she said, “will inform the outcome for this industry for the next several decades.”

She added that, while industry has been frustrated with government inaction, the Energy Security Board has been frustrated with industry. “We have to decide do we want to have a national energy market that’s interconnected and we take advantage of renewables or do we want to have State markets?”

AGL Energy chief executive Brett Redman issued a warning at the conference against more government intervention “muddying up” what technology is already delivering, claiming that companies are “queuing up” to invest but need to understand what the rules of a more centrally-planned market are going to be.

The company told the conference that it had been considering accelerating its NSW development but now “will need to pause until we understand the detail that sits behind the announcement.” It subsequently added that a proposal for building battery storage on the Liddell power station site will also be reviewed.

AGL and NSW Energy Minister Matt Kean clashed at the conference, with Kean calling for “vested interests” to get out of his government’s way.

In a radio interview, federal Energy Minister Angus Taylor voiced concern that the NSW electricity infrastructure roadmap could prompt earlier closure of coal-fired power stations. “What we don’t want to see is premature closure or policies that stop investments in new generators like gas generators. There needs to be a relentless focus on what customers need – affordable, reliable electricity – which means policies to encourage more supply, not driving out supply.

‘Heading down road’

One of Australia’s most experienced business journalists, Tony Boyd, writer of the “Chanticleer” column for the Australian Financial Review, summing up the newspaper’s two-day energy conference, opines that this country is “heading down the road towards having multiple markets with multiple sets of rules – which will only complicate an already complex environment for private sector investment decision-making.”

Boyd says that frustration about lack of energy policy direction in Australia has now been replaced by confusion about too much policy intervention – just the latest in a series of conflicts and stand-offs that have multiplied over the years because of a breakdown in trust between federal and State policymakers and powerful gentailers, who have wanted policy clarity for more than a decade.

Boyd adds that “the creeping abandonment of Australia’s co-ordinated and co-operative approach to managing electricity generation and distribution will probably result in less integration of supply.”

Narrabri

The long-running Narrabri gasfield saga got a kick-along in late November with conditional approval for its development from federal Environment Minister Sussan Ley, clearing the last political hurdle for Santos – but the controversy about the project rolls on.

The company will now undertake a 12 to 18 months appraisal of its plans (estimated to require $3.6 billion in capital outlays) before making a final investment decision – while the leaders of the activist opposition, the Lock the Gate Alliance, declare Ley’s decision only strengthens their resolve to fight the project.

The Climate Council declares: “Australia does not need new gas and a majority of Australians don’t want it.”

Santos has re-iterated its commitment to dedicate all gas produced at Narrabri to domestic use. A critical issue for the beleaguered east coast manufacturing sector will be the price at which they are offered the field’s output.

‘Stand-out’

A report commissioned by the Australian Petroleum Production & Exploration Association from consultants Ernst & Young says the oil and gas industry has been “a stand-out performer” in helping to buttress this country from the economic impact of the Covid-19 pandemic – “which may well be the most disruptive event of our lifetime.”

But, EY adds, the petroleum industry is itself “confronting perhaps the most difficult business conditions it has faced for decades,” pointing to ‘strong headwinds” in the form of protracted low prices for gas globally and a significant asset write-downs.

The consultants expect the industry to focus on a “more modest” investment pipeline, mainly in incremental projects.

APPEA chief executive Andrew McConville comments that the report underlines unlocking new energy resources requires overcoming barriers to investment “and additional interventions being proposed are an even greater disincentive.”

McConville says a decade of regulatory instability and market interventions, coupled with Australia being a relatively high-cost investment destination, has reduced confidence in many industries, including oil and gas.

The EY research claims that more than 220,000 jobs will be created over two decades, with national economic output rising by more than $350 billion, if oil and gas projects now in the Australian pipeline come to fruition – including the Northern Territory’s Beetaloo basin.

‘Far from assured’

The Grattan Institute is arguing that, contrary to the federal government’s interest in a “gas-fired recovery” as part of dealing with the pandemic-caused recession, “the future of natural gas in Australia is far from assured.”

The institute’s energy analysts say the industry “faces serious economic and environmental challenges.”

In a new report, the institute opines that, no matter how efficient the market can be made through reform, “it will not deliver the cheap gas of history – and attempts to drive a gas-led economic recovery through manufacturing will almost certainly fail.”

It adds that, even if it is possible to reduce gas costs for factories, only about 10,000 people are employed in gas-intensive manufacturing and most are located in Western Australia – “which already has low gas prices.”

Tony Wood, director of the institute energy program, says: “Rather than indulging in wishful thinking or living in denial, the federal government, the gas industry and its customers should start planning now for a future without natural gas or at least a drastically reduced role for natural gas.”

In a statement, federal Energy Minister Angus Taylor has responded that his government rejects the Grattan analysis, dismissing its opinion on the impacts on manufacturing as “narrow, over-simplified and not reflecting industry’s own views.”

The Australian Industry Group describes the Grattan paper as “highly contrarian” and says it “highlights the need for a strong demand-side strategy given the risk that the fundamentals of the eastern Australian gas market remain grim for users.”

CEO Innes Willox says the long-term role is uncertain “but most likely to shrink sharply.” However, he adds, “on the way through gas plays a range of important roles in industry, power, households and exports.”

Emissions

A new edition of the national energy emissions report compiled by Hugh Saddler for The Australia Institute records a 4.6 per cent fall over 12 months to the end of July compared with the previous equivalent period.

Saddler attributes 1.6 per cent of the emissions decline to a sharp reduction in the use of aviation fuel and petrol thanks to the pandemic’s impact and 2.5 per cent to the displacement of coal generation in the NEM by wind and solar power (including rooftop PVs).

Looking at east coast electricity generation in the 12 months to September, Saddler says renewables contributed 26.5 per cent – of which grid scale power was 20 per cent.

The contribution of all renewable generation in the three major supply/demand States, he records, was 25 per cent for Victoria, 18.5 per cent for NSW and 15 per cent for Queensland. In September, across the NEM, sent-out renewable generation reached a record 31.5 per cent, he adds.

Nuclear option

Cesar Melham, chair of a Victorian Legislative Council committee that examined a potential role for nuclear energy in a low-carbon environment, writes in the foreword to a 256-page report that priority should be given to security, stability and accessibility of power supply, the need to lower emissions and affordability regardless of technology – but that “much ambiguity and uncertainty remains” over nuclear costs.”

He adds that the committee declined to “take a strong position” on nuclear power as an alternative energy source in Australia.

Reacting to the report, the Minerals Council of Australia says it will be “useful” in moving discussion forward on the role and potential benefits of the technology, and especially of the emerging small modular reactors.

Last word

Read just this issue of Coolibah newsletter, let alone the issues for the whole of 2020, and it becomes clear that, with respect to the Australian energy debate, the more things change the more they stay much the same – at least in terms of providing a settled environment for investment in electricity and gas supply.

Leave aside those who believe all will be for the best in the best of green energy worlds, to be reached via massive expenditure on wind, solar, battery, pumped storage and high voltage transmission outlays in little more than a decade, and Australia’s energy playing fields echo with calls of concern if not outright alarm – much as they did in 2016, 2017, 2018 and 2019.

Urging by the Energy Security Board chair, Kerry Schott, for a calmer approach is well-intended, and certainly wise, being delivered along with a warning that transition reform is not going to be a “big bang” in 2021 or 2025 but incremental – unfortunately it falls on many deaf ears on people whose attitude to huge amounts of renewable energy, storage and new transmission is “we want it now” even when, as an example, there are clear signs that managing the system in an era of large additions of VREs is getting to be more difficult.

The boast by some, including the market operator, that Australia is embarking on the fastest transition to renewables in the world is taken by the green corner as an accolade but should, I think, also be seen as a warning: transition in haste, repent at leisure, to twist an old phrase. In this context, one should note the comment by the departing AEMO chief executive, Audrey Zibelman, that “the transition is happening faster and in a more complex way here than almost anywhere else.” Hmmmm.

The issue is not whether or not there needs to be a transition; except on the fringes of the debate, this is now a given. The issue, as has become even more clear in 2020, is the fragmented approach and the lack of strong modelling of all the factors at play market-wide to provide a fit-for-purpose NEM at the end of the decade.

On the issue of timing, it’s worth pointing out frequently, I feel, that, even under AEMO’s main scenario (not prediction) in its integrated system plan, the horizon is 2042 (further from where we are today than the turn of the century was from now) and the mix would include a 2.5 per cent coal generation share of supply and about the same amount of gas generation – alongside a variable generation share (including rooftop PVs) of 70 per cent. That’s a long, winding and very expensive road, including along it about seven federal elections and lots of polls in Victoria, NSW and Queensland (home to most east coast supply and demand).

For the here and now, Origin Energy CEO Frank Calabria put it succinctly at the Australian Financial Review conference in late November: “Retaining a national approach to energy market design remains critically important to delivering good outcomes – an orderly transition at least cost to customers – while recognizing the differing State preferences.”

The newspaper, in a wrap-up editorial on the event, added: “The challenge is to update the NEM’s complex rules to retain the benefit of a functioning market – with clear and consistent investment signals – amid political pressure to return to more heavy-handed State-based regimes.”

To which can be added the observation by Emma Herd of the Investor Group on Climate Change that the debate is “still captured by combative and jumbled-up policy discussions.”

Importantly, from where I am sitting, the conference discussions, as reported, like so many others, failed to grapple with a pervasive problem in thinking about the NEM transition: the mis-use of the levelized cost of electricity metric as the key factor when the end-cost of power at the overall system level, including the cost of technical services, is what really matters.

Attempts to sell wind and solar to the community as the uncomplicated drivers of the transition to a “net zero” system on the basis of cheap (or cheaper) supply rides roughshod over the truth that decarbonizing the system will be very complex, riddled with risk and hugely capital intensive.

Go back to this time last year and ask, apart from the massive impact of the pandemic with its consequences for all corners of our lives, what has really changed in our energy space?

Keith Orchison
28 November 2020

 

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