Hard on the heels of Grattan Institute’s paper on the outlook for gas supply on the east coast comes a decision to push up bills for 80 per cent of regulated small customers in New South Wales by 9.2 per cent from 1 July.
The average increase of 8.5 per cent being reported in the media comes about because the Independent Pricing & Regulatory Tribunal has awarded much lower rises for some rural areas.
However, in the AGL Energy franchise area – which covers Sydney, Wollongong, Newcastle, Dubbo, Orange, Parkes and part of the Riverina – the higher price rises will add $76 per year on average for households and $356 annually for small business.
The individual increases across NSW are not huge sums for many people, but they add to the cumulative cost of living pressures that seven out of 10 voters tell opinion pollsters are a considerable bother.
It’s also worth pointing out also that a large part of the 2013-14 gas price rises flows from higher network charges not higher wholesale costs, which still lie ahead.
On the network bills, distributor Jemena points to the need to refurbish 1970s era NSW gas infrastructure and the costs of meeting new customer needs – 250,000 customers have been added to the system.
(In passing, it’s not unreasonable, I think, to suggest that many of these folk taking up gas supply will be concerned about their electricity bills – opting for dual fuel systems helps them slice about two megawatt hours a year off their power consumption. They are going to be less than impressed when the threatened even larger gas price increases start arriving.)
While politicians and consumers in Queensland are reeling over a 22.6 per cent increase in power bills, IPART has delivered their NSW counterparts one of the lowest electricity price rises in a decade – 3.2 per cent for EnergyAustralia customers (the former AusGrid franchise), 1.3 per cent for Origin Energy users (the former Integral Energy franchise) and just 0.7 per cent for rural households and small business.
The determinations provides an average 1.7 per cent increase for NSW, the figure with which the media are running.
(One of the political problems of this is that some regional media are seizing on the disparity between their rises and the average – as the Newcastle newspaper is doing. In politically sensitive areas like the Hunter Valley, this is headline news for a region where the average residential power bill will now rise above $2,000 per year.)
As an indicator of how uncertain the marketplace is, IPART has declined to set prices for three years to 2016, focussing instead only on 2013-14 while sending out signals that, for electricity at least, it expects increases to fall behind inflation in 2014-15 and to actually fall from 1 July 2015 when the Gillard government’s move to link carbon prices to the European market kicks in.
What the carbon regime will be in 2015, of course, is anyone’s guess.
The prices IPART set apply only directly to customers who have chosen not to take up competitive market offers, which are generally lower than the regulated tariffs. Forty per cent of NSW power users and 30 per cent of gas consumers are still under the regulatory umbrella by choice or because they find it too hard to make the switch.
While the regulator is independent, politics is never very far away in the energy environment.
IPART notes that the O’Farrell government has “requested” it to report specifically on the cost of green schemes – and it duly calculates that the cumulative cost of the carbon price, the renewable energy target and State schemes is $332 on average for households.
The two big ticket items are the Gillard government carbon price (adding $172 a year) and the RET (adding $107).
Somewhat lost in the welter of words that these announcements involve is the salient information that, reacting to much higher bills, average NSW household consumption has dropped from seven megawatt hours a year in 2010 to 6.5 MWh today.
There are almost three million residential customers in NSW (out of an east coast total of roughly eight million).
To put this another way, 59 per cent of east coast residential customers live north of the Murray – where this month’s energy action is.
And almost all their bills are going up, not down, as we move in to 2014, a long way up in the case of 1.8 million Queensland households.
In the case of vulnerable customers – those whose disposable income dictates that every quarterly power bill, and especially the one at the end of winter, is a kitchen table crisis – the pain isn’t lessening, a point the Sydney-based Public Interest Advocacy Centre was not slow to make yesterday, noting 23,000 NSW household electricity disconnections last financial year and warning “the numbers are trending up dramatically.”
PIAC is among those starting to point a finger at energy retailer costs in the power bill mix, expressing concern that customers are “being hit” with “questionable” customer acquisition and retention charges, arguing that, while the benefits of greater competition should be encouraged, there are “artificial incentives” for retailers.
IPART’s Peter Boxall says the main driver of this year’s power bill increase is higher retail operating costs, including the costs of acquiring and retaining customers in an increasingly competitive market. The regulator’s statement on the new regime includes an illustration showing generation costs, including the cost of carbon, falling 3.3 per cent and network charges falling 0.4 per cent while green schemes go up 1.3 per cent and retail billing and metering charges rise 4.1 per cent.
They’re not doing it again.
That is they’re not joining the dots across the spectrum of energy supply to produce an holistic approach to sustaining essential services in the best possible form.
It’s not a new phenomenon.
The whole saga of electricity network regulation is a prime example, still playing out to the dismay of politicians and consumers almost a decade after “reform” began to be pursued – as witness this month’s shenanigans in Queensland.
The renewable energy playing field is another example, with State and federal governments creating such a flawed roadmap that there is almost no telling today where we will be in 2020.
And, of course, the least said about carbon pricing policymaking the better; we are now at a point, again after a decade of to-ing and fro-ing, where investors in Australian resources only have questions about where this process is heading.
The newest example of what happens when the dots are not joined is the east coast gas supply environment – and it is very useful this week to have a commentary on situation published by the Grattan Institute, overseen by Tony Wood.
Anyone – like a certain State Premier for example – wanting a clear, digestible tutorial on where we are with gas supply on the east coast, why we’re here and what might be done to better address the issue can hardly do better than to read the institute’s new paper, “Getting gas right: Australia’s energy challenge.”
It will no doubt prove of value to the various State and federal efforts now under way to examine the entrails of our gas supply problems, including the federal Bureau of Resources & Energy Economics (required to report by the year’s end), a New South Wales parliamentary inquiry and the task force, chaired by former federal minister Peter Reith, which is reviewing the situation for the Victorian government.
The institute’s paper – it is available on Grattan’s website – runs to 44 tightly-written pages and a post like this is not going to do an adequate job of canvassing all the issues it raises.
Wood himself has a commentary in today’s “Australian Financial Review” – see “Future of gas industry needs a fair hand at the pump” – and another on the “Business Spectator” website (see “Gaining a global gas advantage.”)
My snapshot of the paper is this:
First, the price shock saga that has enveloped electricity for the past five years will now embrace gas, too, with Wood suggesting Victorian gas bills could be $170 a year higher in the next couple of years.
Second, while there is no shortage of gas in the ground, infrastructure may be unable to deliver enough gas to meet demand as this decade rolls on. This is a particular issue for New South Wales between 2015 and 2017 on days when demand peaks.
Wood comments: “Our analysis does not imply that gas supplies will necessarily fall short in NSW – only that a shortfall is a real possibility if action is not taken.”
The paper observes: “NSW demand could be met by ramping up coal seam gas production, by increasing Cooper Basin production or by increasing the capacity of the Eastern Gas Pipeline from Victoria.”
Third, industry and government need to do a better job of ending the NSW stalemate on developing coal seam gas as the risks of inappropriate or poorly regulated operations remain of great concern to members of the State community, often because of misinformation.
Fourth, with one practical approach being increasing the flow of gas from Victoria to NSW, a key question is the size of remaining gas reserves in the Gippsland Basin. Are they large enough to justify substantial investment in expanding the gas transmission infrastructure between the two States?
Fifth, there is a whole different outlook for gas fuelling power generation to accepted wisdom a little more than five years ago when Kevin Rudd became Prime Minister.
“The dash for gas isn’t happening,” observes Wood, because power demand is falling (and the best guess outlook for 2020 is not for a recovery), because legislation forcing use of renewable energy has stolen the gas suppliers’ lunch and because much higher gas prices rule out a switch from existing coal plants.
Sixth, Wood and the institute poor cold water on the scary stories about Australians paying Japenese prices for “our gas” before we are much older.
At present, Wood notes, Japanese buyers are prepared to pay about $15 a gigajoule. However, this number includes the cost of converting gas to LNG here, shipping it overseas and converting LNG to gas over there – totalling up to $6 per gigajoule.
Nonetheless, it is to be expected that the currently low domestic gas prices will move closer to export prices – from around $4 to $5 per GJ today to around $8 to $9 later this decade – and, as Wood comments, “this means big increases for households and a big struggle for some industrial gas users to remain competitive.”
The institute paper devotes a fair bit of space to giving the “reservation” forces in manufacturing the elbow. As Dow Chemicals and other maintain their pressure on politicians to go this way, the Grattan commentary is a useful antidote.
One point worth highlighting here: “There is no clear evidence that the reservation policy applied in Western Australia has delivered low prices for gas users, “ Wood observes. “WA prices are higher than those on the east coast – and it is expected that in 2020, after several years of gas exports (from Gladstone), this will still be the case.”
Finally, the institute offers a three-pronged approach to resolving the east coast gas supply imbroglio: (1) end the impasse in NSW; (2) create a more transparent east coast gas market with new trading hubs; and (3) remove barriers to efficient supply by freeing up trading of pipeline capacity and moving towards eliminating joint marketing arrangements as the gas market matures.
As I started out saying, this is all about joining the dots. It requires a mature, efficient approach from the federal and east coast State governments. It requires the supply industry to do a better job of dealing with community concerns. It requires the mainstream media to provide readers and listeners with a better understanding of what is really at stake.
Boiled down, the strategic need to resolve this situation seems so clear.
So, why are we where we are today?
And, even more importantly, is there sufficient time available to address the imminent threat to consumers?
The word “could” is being flung around north of the Murray this weekend in “Can Do” territory.
Stung by his government’s inability to ameliorate the 22.6 per cent increase in power bills being introduced from 1 July, Premier Campbell Newman promised Queenslanders a fortnight ago that he would move swiftly to unveil plans to cut electricity costs.
Today his Energy Minister, Mark McArdle, has announce proposals he says could save “billions of dollars” in future electricity network costs.
As in New South Wales, the Newman government is setting out to bring its distribution businesses under a single company, claiming this will reduce duplication and improve efficiency.
McArdle says this move could achieve savings of $580 million over seven years.
(Distributors Energex and Ergon Energy are thought to have spent $1.2 billion in network capital outlays in the past year and have spent $14 billion in capex since the middle of the past decade.)
The government’s plan is “subject to consultation with employees” and the State division of the Electrical Trades Union has leapt out of the blocks to knock the proposals.
The ETU says it hasn’t been consulted and that the move “could lead to less reliability and more blackouts.”
As well, says the union, it could mean higher electricity prices in the Bush.
And, if the union doesn’t get the level of consultation it wants, it “could be taking the government to court.”
McArdle wants Queenslanders to know that “electricity sector reform can’t be delivered at the flick of a switch” but the establishment of a holding company for Energex and Ergon Energy (which serves the power users in 97 per cent of the State that is not the populous south-east corner) “should make a difference.”
McArdle says that “there is no overnight solution for getting benefits back to customers as soon as possible – but tackling network costs is seen as the most critical issue under the government’s control.”
McArdle explains that an inter-departmental committee the Newman government set up to look at electricity sector reform has reported back that there are two main consumer cost drivers – networks costs that have risen 100 per cent between 2007-08 and 2012-13 and climate change-related policies that will add about 15 per cent to standard residential bills in 2013-14 if the State solar scheme is included.
(This serves in part to address accusations from the ETU when the 22.6 per cent price rise was announced that the Newman government’s “incompetence” was to blame, including a claim that a key component of cost increases was the closure of some baseload generation capacity.)
The report also finds that the impact of these cost drivers has been exacerbated by tariffs that have not kept pace with changes in the supply sector and are not reflective of udnerlying costs — and by a planning framework that does not encourage the most efficient development of new infrastructure.
SINCE I ORIGINALLY POSTED on this issue mid-morning Sunday, quoting from News Limited media stories as well as the government’s media statement, I have had the opportunity to see the full Queensland government response to the interdepartmental committee report and the post has been amended to reflect this.
While, as I reported earlier, the News Limited media are claiming that the long-standing uniform tariff policy for the State may be scrapped from 2015, the IDC report actually recommends development of more effective subsidy arrangements for regional Queensland — and the Newman government says it supports targetting the uniform tariff policy on those consumers in most need.
“The government will not be breaking its election commitment to maintain uniform tariffs.”
As well, News Limited media are claiming that Energex and Ergon “will no longer be required to adhere to prescriptive reliability standards which drive up prices.”
However what the IDC has recommended it that standards should be “more economically derived and outcomes-based, better reflecting customer expectations and values.” The government is going to refer this to its Committee of Audit implementation task force.
Media coverage of retail deregulation was also somewhat mangled.
What the IDC has recommended is the removal of price controls in south-east Queensland if consumer protection is judged to be adequate and to use the Queensland Competition Authority to monitor prices — a position the government conditionally accepts.
One smart meter and associated tariff changes to promote efficient use, the IDC has recommended, and the government accepts, support for national efforts to further these reforms beyond Victoria. The Newman government re-iterates that it does not support a mandatory roll-out of smart meters in Queensland.
Queensland is the third biggest electricity market in Australia in terms of customers, following NSW and Victoria. At last count it had 1.6 million residential customers (about a sixth of the national total) and 200,000 business customers.
The shake-up being announced today by the Newman government will be the biggest in the State since the previous Labor regime introduced retail competition in July 2007.
While rural customers still do not have a choice of supplier, relying on Ergon Energy, which may have its retail operations merged with a generation business as another reform step mooted by the government in earlier comments, there are now nine retailers offering services to people living in south-east Queensland.
The government says its 30-year electricity strategy approach will see a second discussion paper released “in coming months” and a final statement in early 2014.
The IDC report calls on the government to rule out any future State investment in generation except as a last resort — something the government says it will discuss in its strategy document.
The ACIL Allen Consulting report on the problems in New South Wales in developing the State’s coal seam gas bounty is going to be read with close interest by a lot of people, but none more, I imagine, than electricity suppliers.
The reason is that ACIL Allen Consulting have produced a new view of where east coast electricity demand is going over the next two decades.
The consultants’ base case scenario for the “NEM” – in which NSW coal seam gas supply expands steadily, supplanting imports from interstate, providers of 95 per cent of consumption today – sees total energy generated rising from just under 200 terawatt hours in 2012 to just over 250 TWh in 2030.
It sees black coal plant output – serving NSW and Queensland in the main – increasing 23 per cent to about 130 TWh in 2030 while brown coal-fuelled output rises four per cent to 50 TWh.
(For the States north of the Murray, this outlook is not massively different from the one produced by the Bureau of Resources & Energy Economics last December in which the federal agency projected black coal generation at 100 TWh annually by the mid-Thirties. However, BREE thinks the brown coal generators are going to virtually vanish from the scene by 2035.)
Wind energy, the consultants say, grows very strongly – more than five-fold – but its actual contribution to “NEM” production is barely eight per cent or 21.6 TWh, with gas-fired generation coming in at about 38 TWh or 14 per cent of output.
The projection sees growth for gas fuelling power generation mainly in Queensland and Victoria – and the market-wide electricity sector demand rising from 150 petajoules in 2012 to about 250 PJ in 2030.
The outlook, they add, under this scenario is for “NEM” greenhouse gas emissions to rise from 168 million tonnes in 2013 to 196 Mt in 2030.
Greens will swallow hard when they read this and also hear ACIL Allen saying that, in NSW, the base case scenario sees a decline in black coal power production from 88 per cent to 82 per cent, but this actually represents a rise in annual output from 56.8 TWh to 67.4 TWh by 2030.
This is a situation where wind generation in the State reaches 7.9 TWh or almost 10 per cent of production by 2030 while gas generation slips back by almost a quarter to just under 3.2 TWh.
“This,” say the consultants,” reflects the fact that no new gas-fired plant (will be located) in NSW during the projection period while existing gas-fuelled plant sees lower dispatch (because of) rising prices.”
When they model this base case against one in which access to coal seam gas in NSW – where 20 years of exploration has located sufficient gas to meet current State levels of demand for 36 years – is frustrated by politics and regulation, they see wholesale electricity prices generally higher in all regions of eastern Australia and on average 3.5 per cent higher for NSW.
Overall, says the Australian Petroleum Production & Exploration Association, which commissioned the study, NSW businesses and households are threatened with a “rude shock” as a consequence of failure to encourage State’s CSG development.
APPEA has joined forces with the Australian Industry Group and the Australian Workers Union to write to Premier Barry O’Farrell to highlight the consequences of the present political approach in the form of lost jobs, higher consumer prices and lost economic opportunities.
APPEA chief executive David Byers is calling on the O’Farrell government to reconsider “the blanket exclusion of vast tracts of the State from gas development.”
The State’s real income, he adds, on ACIL Allen Consulting’s modelling, will be $24.6 billion lower under a “gas freeze” approach, pushing investment in to other States and denying the government close to $2 billion in lost royalties and taxes – while, on the report’s modelling, also eschewing around $4 billion in capital investment in CSG projects.
The consultants also find that the “gas freeze” approach will lead to prices for the fuel in Sydney being 24 per higher in 2025 to 2035 compared with the base scenario.
Meanwhile, speaking at a conference in Kuala Lumpur this week, Martyn Eames, Santos vice-president Asia Pacific, said the upstream industry has to manage public confidence and land access issues carefully to be able to develop unconventional gas resources.
“Just as this industry seeks to share knowledge on the technical side, it must also draw upon the expertise and best practice that exists globally to engage early with communities and build public confidence,” he said.
The Santos effort to get agreement to develop CSG in the Pillaga forest near Narrabri is seen as a critical step towards overcoming the “freeze” concerning APPEA and its members.
Everyone is struggling to come to terms with the energy supply issues for the east coast, even supplier executives from the feedback I am getting.
This situation would be complicated enough without the political environment. The thought that the present federal horror show will drag on for another three months is doing in corporate heads as much as it is turning off suburban and regional voters across the board.
I find it interesting, therefore, to come upon a briefing that AGL Energy chief economist Paul Simshauser and his colleague Anthony Fowler, GM merchant energy, gave to a forum on the energy market at Victoria’s Falls Creek on the last day of May.
It provides some useful context for considering electricity market matters.
(You can read their lengthy powerpoint presentation on the AGL investor relations site.)
Paraphrased, this is what I take from what they said:
First, looking at power demand and production, they point out that the current contraction in “NEM” electricity demand is a feature of most Western economies and not just Australia.
This is something that tends to be glossed over or ignored by a fair few of my fellow armchair commentators, some of whom take every opportunity to heap derision on local power sector planners.
On the AGL figures, “NEM” power production (between 2007 and 2012) has contracted by 3.6 per cent in aggregate while energy demand has fallen 1.1 per cent. (The difference is driven by the changes in the mix of generation losses and network system losses).
On the demand side, the largest fall has been in the residential sector (which holds a 27.7 per cent share of the market), contracting 5.9 per cent over the five-year period.
Simshauser and Townley say that commercial and industrial demand delivered 1.1 per cent growth in 2012.
All this, they add, has to be seen against the fact that “NEM” energy demand growth rates, as distinct from peak demand, has been falling since 1955 and this, too, is a common characteristic of the developed world economies.
They throw up the interesting point that population growth on the east coast has decelerated in recent times as the mining boom pumps up Western Australian numbers.
To which you can add reactions on the east coast to the price shocks of recent years and a marked contraction in terms of average demand in Queensland (apparently down more than 14 per cent over two years, although one always has to watch such stats as companies eventually get round to tidying up their databases).
As a sidebar, which householders are the largest average users of power?
Not New South Wales or Queensland – everyone knows that Victoria is lower because of the penetration of natural gas, a product of the Henry Bolte-imposed cheap prices of yesteryear.
No, it’s Tasmania, with an average of 8,700 kilowatt hours a year – these are AGL customer numbers – versus a bit less than 8,000 kWh in NSW and under 7,000 kWh north of the Tweed.
Simshauser and Townley say that the output from the controversial solar photovoltaic investment by households is now about 5.5 per cent of total “NEM” residential demand.
“From a power production perspective,” they point out, “solar PV is having a moderate effect by comparison with demand contraction and large-scale renewable energy production.”
And they note that the overall situation is having a marked effect on NSW black coal-fired power station output as the total State load falls back towards 70 terawatt hours a year after looking in 2009 like it would soon breach 80 TWh.
Simshauser and Townley say the upshot of the overall east coast situation is that the “NEM” is “experiencing significant uncertainty” and they attribute this to five key factors: (1) the outlook for future demand growth, (2) the “stagnant electricity forward curve,” (3) uncertain carbon and renewable energy policy settings, (4) increased renewable generation and (5) uncertainty over future gas prices.
On the gas front, they note that the domestic east coast market is “going from being long with declining production capacity to being short as a result of the ‘LNG pull’ with significant price uplift expected.”
They expect gas prices will be highest north of the Murray and this will gradually start to impact Victoria and South Australia “with the potential for prices in NSW to exceed those in Queensland if there is a supply shortage.”
As they say, a higher gas price is likely to both reduce the competitiveness of generation using this fuel and to contribute to overall energy demand reduction.
They expect Cooper Basin gas to flow largely to Queensland from 2015, exacerbating the NSW problems.
To all of this one can add some comments gleaned from an AGL presentation to the Camden Valley community in Sydney’s south-west at an open day in late May.
This underlined that political and social pressures are sterilising the coal seam reserves in NSW that are capable of supplying the State with its gas needs for decades at the current consumption rate.
It pointed out that the manufacturing industries most at risk from a NSW gas price surge are food processing, brick and cement making, and chemical and metal manufacturing, representing almost half the State demand.
And, I add, representing about 25 per cent of NSW electricity demand
The company’s perspective of “how did we get here?” is interesting.
The political cycle has captured CSG as a public issue, the presenters note, with outrage fuelled by misinformation and lack of information. While activist groups use the internet to network and rally opposition to CSG, “industry hasn’t filled the information vacuum.”
The issue here, as Origin Energy CEO Grant King noted some weeks ago, is that energy companies are finding that the traditional ways of communicating with consumers and the community – in an environment where half of them are most likely to turn to Google for energy information versus 15 per cent visiting corporate sites and fewer and fewer rely on newspapers – are not addressing the public disconnection from the facts.
King lamented that “there is little ability to challenge much of the misinformation that exists to appropriately inform the debate” – which, of course, serves to emphasize the need for the companies to do more themselves, to bolster the efforts of their industry associations and to support those independent sources that seek to disseminate facts and context.
The next public wake-up call, I understand, will come on 17 June when the NSW pricing regulator, IPART, brings down its final determination on retail gas prices for 2013-14.
As things stand at present, most of the State’s gas customers can expect a price rise around the 10 per cent mark.
This headline is the roadside placard most seen in Germany today.
Sprouting like mushrooms, the posters seem to have spooked Chancellor Angela Merkel in to shelving plans ahead of her 22 September date with German voters to legislate the use of fracking under “very tight” regulations.
Meanwhile Conservative MPs in England are also running scared from proposals for shale gas exploration in Surrey, their political heartland.
“It’s one thing to have fracking on the vast plains of America,” one Tory told the London Financial Times, “but it’s a whole different matter when people consider gas production in the rolling hills of Surrey.”
What makes this attitude really weird is that the Wessex Basin underlying southern England has seen hundreds of wells drilled, and 500 million barrels of onshore oil located plus gas, over some four decades.
Small beer compared with the North Sea but Wytch Farm is the largest onshore field in Europe.
Such is the power of the “fracking” hysteria that now grips political debate in so many countries.
Both Germany and Britain could really do with their own version of the US “shale gale,” but, as in New South Wales, even an impending supply crisis can’t get the politicians to do more than duck and weave in the face of antagonism to the technology.
There are thousands of stories on this issue to be found on Google News this long weekend – 129,000 of them, in fact – and the reason I am bothering to scan at least some of them is that (a) I will be co-chairing a “Fracking and our Gas Future” conference in Sydney on 15-16 July (you can find the event advertised on this website and also on my OnPower website) and (b) I have recently been attending the Australian Petroleum Production & Exploration Association annual conference in Brisbane where the upstream petroleum industry’s struggle to persuade Australians that “Kein fracking” is not a sensible attitude was front and centre of discussion.
The Australian Greens, of course, are running a “no new coal seam gas” campaign for our 14 September national poll, a move that has led APPEA to accuse them of “having a very loose grip on reality,” given the impact their proposal would have on $60 billion worth of LNG developments in Queensland, projects due to contribute about $3 billion a year in taxes when completed, and on the economy of NSW.
Hydraulic fracturing is hardly new to Australia, no matter what the Greens may think.
Jason Kuchel, chief executive of the South Australian Chamber of Mines & Energy, made the point last week that fracking has been part of the State’s mining scene in its Far North region for decades without incident.
He was followed by Adelaide-headquartered Santos, which has been operating in the Cooper Basin for a half century and says that it has used fracking on 500 conventional gas wells (out of 2,500 drilled in the region) “pretty much non-controversially.”
The upstream petroleum industry wants to talk commonsense about well integrity and so forth while the Greens and their fellow-activists are on about CSG as a threat to “our precious water, valuable farmland and global climate.”
There’s no meeting of minds coming there.
Far more importantly for the industry and the economy is the need for CSG companies to persuade the farming community, especially in NSW, to accept their assurances or to negotiate an approach that is mutually acceptable.
The figure of 3,600 Queensland farmers accepting CSG development on their land versus less than 300 to date in NSW tells its own story.
The farmer backlash is what is bedevilling the O’Farrell government’s attempts to resolve the State’s gas supply problems – that and the Gillard’s government kneejerk regulatory intervention designed to prop up its vote in certain electorates.
The key to resolving this issue is a constructive dialogue between farmer communities, the upstream petroleum industry and government, built around better understanding of concerns, of the technology and the science.
The “Fracking and our Gas Future” conference (see www.questevents.com.au for the agenda) is built around addressing this need.
I couldn’t be asked being associated with a forum for people to shout slogans at each other and this one is carefully designed to go way beyond any such nonsense.
I am particularly interested in hearing the international speaker Quest Events has attracted: Michael Lynch, head of the Boston-based Strategic Energy & Economic Research firm, an adviser to governments and companies on energy strategy, is going to address the international shale situation.
The “shale gale” in the US has changed the energy world and Barack Obama sent a clear signal after his re-election of his perceptions when he appointed Ernest Moniz as Energy Secretary.
Moniz, formerly of the Massachusetts Institute of Technology, is a big supporter of shale gas and of the importance of properly-managed fracking while committed to Obama’s other agenda of continuing to support renewable technology development – the so-called “all of the above” approach to energy security and emissions abatement.
“Natural gas is a boon,” Moniz told DoE staff last month in Washington DC after being sworn in as Secretary. “It is already responsible for lower US CO2 emissions and is a bridge to a very low-carbon future.”
Michael Lynch is an arguer for the “feasibility comes first” approach to energy supply.
“Just being green is not good enough,” he said in a recent talk.
At the fracking forum, Nathan Taylor, chief economist of the Committee for the Economic Development of Australia (CEDA, of which I am a trustee), is going to consider how the gas industry can conciliate and co-operate with rural stakeholders – while Allan Campbell, CEO of A.J.Lucas, will look at the British scene, Grant Blackwell, principal science adviser to the New Zealand Parliamentary Commissioner on the Environment, will explain how the Kiwis are managing the issue and Barry Goldstein, executive director of energy resources for the South Australian government and winner of the 2013 prestigious Lewis G.Weeks gold medal from APPEA for “developing regulatory systems that mesh well with real-life operational best practice,” will also be a speaker.
Groundwater issues are the biggest sore point in this debate and Quest has assembled a raft of well-credentialled figures from government science agencies, academia and agriculture to canvass the situation.
Hopefully, apart from another strong showing of interested stakeholders – Quest attracted 175 registrants to the Australian Domestic Gas Outlook conference earlier this year – this program will catch the interest of the mainstream media.
The community needs far better insights than the “shock, horror” lines it has been fed for so long.
In closing, I am struck by one of the 129,000 entries on Google News: it says that, despite the hullabaloo on fracking from coast to coast in America, a May opinion poll found that 39 per cent of respondents had never heard of the issue and another 13 per cent didn’t know whether they had heard of it – while 58 per cent held no opinion on whether fracking is a good or bad thing.
Makes one wonder what a similar poll would throw up here?
Few things are exercising the minds of energy industry executives more than just what carbon policy regime they will be facing after the expected Coalition thrashing of the Labor government in mid-September.
The least palatable scenario for the energy industry (and energy-intensive manufacturers) is a long-drawn out struggle in the Senate ending in a double dissolution election, possibly only in 2015, and then a Senate where the Greens have renewed status (because they could benefit from the lower quotas needed to be elected in a full Senate poll).
While Tony Abbott is tied to a root-and-branch eradication of the current carbon regime (specifically the Gillard government’s Clean Energy Act), more than a few energy companies plus the Australian Industry Group and the Australian Chamber of Commerce & Industry support an internationally-linked, market-based carbon price as a means to reduce emissions at least cost.
RepuTex, an energy and carbon research firm with offices in Hong Kong and Melbourne, has produced a couple of interesting commentaries on the impending situation, the latest in the past week.
Three key points stand out from its new review:
First, the state of power demand in the east coast electricity market has already seen “NEM” carbon emissions fall eight per cent from last year and, RepuTex forecasts, will result in a further fall of 13 per cent between now and 2020.
This will substantially lower the need for companies to buy emissions permits in 2015-16 when the local carbon trading market is scheduled to open under the Clean Energy Act amendments.
Second, on RepuTex’s reading of the political tea leaves, the mid-September vote for a half-Senate is likely to leave the Coalition two votes shy of upper house dominance and dependent on the votes of senators John Madigan and a re-elected Nick Xenephon.
Third, in these circumstances, rather than bashing away at the Senate to secure the necessary conditions for a double dissolution, the Coalition may be persuaded to come to an understanding with Xenephon which will change the game.
(How can Abbott do this without “losing face’? Dear reader, the short answer is much more easily than the Press Gallery hounds would have you believe.)
As RepuTex sums up its scenario in the latest commentary, “Xenephon’s support for a carbon market mechanism over a tax or the Coalition’s Direct Action approach suggests the vital signs for continuation of a market-driven carbon price are sound.”
To this I’d add my own observation that one of the biggest obstacles for the Coalition in pursuing a Senate play that requires a double dissolution in the first half of 2015 — the likely time line given the rules governing this manouevre — is that the next State election in New South Wales is set in legislative stone for the third Saturday in March 2015.
Dragging NSW voters to the polls twice in short order is not a good idea for the Coalition.
What is less certain under the RepuTex scenario is the timing and structure of a third-time-lucky carbon market.
Riding in favour of an efficient negotiation in a hung Senate is the fact that business across the board is heartily sick of this game — which has been going on since about 2005 when you take in to account the Howard government’s activities and those of the Labor-controlled States (the whole shebang at that time).
Trying to plan long-term investments under such conditions, whether for a power station, costly research like the carbon capture and storage efforts or construction of a new manufacturing project is like wading in a pit of snakes.
So good advice for weary energy managers is that provided by Rafiki, the wise old baboon in “The Lion King” — which parents and grandparents in the readership will recall was “You have to look beyond what you see.”
In this case what you hear and read from the media’s political commentariat.
This advice needs to be borne in mind also when reading Climate Change Minister Greg Combet’s declaration to the National Press Club in Canberra this week that “Tony Abbott cannot and will not repeal the carbon price.”
Some think that Combet will be Leader of the Opposition when what’s left of the ALP returns to Parliament after September and the scenario set out in this post would put him in a position to say “I told you so” somewhere down the track — for all the good that will do Labor facing about nine years in the wilderness if, as even some of its supporters are now publicly discussing, it is reduced to about 35 seats in the House of Representatives on 14 September.
Somewhat laughably, Combet also got himself Dorothy Dixed in the House question time on Thursday so that, among other things, he could declaim that the Coalition’s “threats to remove the carbon price are destroying investment certainty.”
The government’s goings-on since mid-2010, of course, have done wonders for business certainty……………..
We have another 100 days of this dog of an election campaign to live through before we can put ourselves out of our misery.
Meanwhile, on a “look beyond” basis, I think the RepuTex opinions are worth careful consideration.
“Our” ABC has a story today that renewable energy now powers almost four million Australian homes.
That’s not exactly what the new annual review from the Clean Energy Council says. “There was enough electricity generated by renewable sources during 2012 to power the equivalent of more than four million homes,” it reports.
Nitpicking? No, the ABC story conveys the wrong impression to ordinary Australians.
The real bottom line is that 86.68 per cent of electricity generated in Australia last year was fossil-fuelled and 58 per cent of the renewable energy provided came from the long-standing hydro-electric plants in Tasmania and the mainland’s Snowy Mountains system, activities not high on the admiration list of the environmental movement.
The rooftop solar and wind power systems added to supply at a cost approaching $25 billion over the past 12 years last year contributed a little under six per cent of production.
The renewable energy target, which has driven investment mainly in wind power, has underpinned $18.5 billion worth of capital outlays and wind farms in 2012 contributed 3.4 per cent of national power needs.
The CEC expects the RET as presently configured to cause another $18.7 billion worth of investment this decade.
At a time when the cost of electricity is a big barbeque talking point and there is a large amount of surplus capacity, it should not surprise the renewables sector, the Greens or the broader environmental movement that some don’t applaud what’s going on. (For example, the governments in Sydney and Brisbane, who take every available opportunity to point out the cost of “green schemes” and the carbon price.)
One aspect of the CEC report is beyond criticism or dispute in my book: the council’s CEO, David Green, takes the opportunity quite rightly to point out that energy efficiency is an important factor in dealing with both prices and carbon emissions and should be more so.
“The cheapest and cleanest energy is the energy you don’t use,” he says.
This is a message not lost on consumers — in New South Wales, for example, soaring prices have seen average household consumption fall from seven megawatt hours a year to 6.5 MWh in recent times — and the yen for rooftop solar arrays is another result of this.
The CEC says there were 936,810 homes with PV systems in 2012 and it reports that supply and installing these units is providing employment for some 12,000 people.
As is a matter for controversy in Queensland and more generally right now, the dash to solar also comes at a cost to those who don’t want to or can’t join in (eg a large number of renters). This is both in terms of the cost the majority wear in supporting the feed-in tariff subsidies and, as argued by the Energy Supply Association, the additions to these household network charges through greater use of the grid by the solar-istes .
The other aspect that should not be lost to sight is what level of zero-emissions generation would be delivered, and at what cost, if there had been a shift to nuclear power in the past decade and was to be in the next 10 years?
Take the $18.7 billion further capex for the RET and the $10 billion the Gillard government wants to see spent through the Clean Energy Finance Corporation — what would that sum deliver in power production and abatement from small nuclear systems, for example?
The upstream petroleum industry, no doubt, would wish to chip in here to point out that a shift in the generation mix to 30 or 50 per cent gas-fired electricity production by the ‘Thirties would cut current carbon emissions from power stations by a quarter to a half.
The Greens want further work on coal seam gas (and by extension shale gas) completely banned and federal Energy Minister Gary Gray is not alone in damning the idea as “absurd.”
One of the points lost in consideration of a dash to gas is that it would make carbon capture and storage the more important. This is not just an issue for the coal sector — and both it and the gas industry are the losers from Wayne Swan’s recent slash-and-burn job on CCS research support.
For the moment,however, the dominant power supply factor is fossil fuels and the dominant fuels are black and brown coals.
The outlook for at least the next 10-20 years is that this will continue to be the case, with black coal retaining its leadership role in generation.
The prospect that coal and gas plants will be shunted aside for 100 per cent renewable generation is not exactly high — the more sensible environmentalists know this and their agenda is to promote a steady increase in use of renewables.
That requires creating the impression of an inexorable and inevitable take-over of supply by green generation.
The ABC, in delivering a wholly one-sided news report on the CEC review, does not do its broad sweep of listeners a great service and stories like this one serve to reinforce a view that the ideological underskirt of its reporters and editors is showing more and more.
With the federal election looming and the cost of living — and its energy cost component — an important factor, those driving the green propaganda bus might care to contemplate an interesting point buried in the most recent Essential Media opinion poll.
This found that, for people earning under $600 a week, 42 per cent of respondents accept the PC climate change view and 44 per cent don’t. Plus 48 per cent of those earning under $1,000 per week want to see the carbon tax junked and the compensation retained.
The Clean Energy Council report is well worth reading — it is up on the CEC website — and contributes a swag of useful information to contemplation of renewable energy developments; however, it needs to be read in a wider context and “our” ABC could try a little harder to provide context in its energy reporting.
Those of you who followed the “Blackadder” television comedy series – we all have our weaknesses – will remember the frequent use of “I have a cunning plan” as a way out of dire situations.
For some reason, it sprang to mind overnight when I saw the transcript of an ABC TV News segment in which Queensland Premier Campbell Newman declares he has a plan to reduce electricity prices – but is not yet ready to reveal it.
“In the next week to two weeks, the government will release its plan,” he says. “It’s a long-term plan to put serious downward pressure on electricity prices but you will have to wait as it’s being finalised.”
In much the same breath, he also says that Queensland is not the only State with power price problems. “This is a national disgrace and it needs to be dealt with.”
While he is waiting for his put-upon bureaucrats to apply the finishing touches to his government’s “cunning plan,” Newman may care to read the talk Andrew Reeves, chairman of the Australian Energy Regulator, gave to the Energy Users Association in Melbourne late in May.
It’s only three pages long – and you can find it on the AER website.
In it, Reeves reminds his audience of how we came to be where we are today with respect to network costs, the main driver of the spiralling power prices of recent years.
“The rules were developed in 2006,” he said, “following 10 years of strong economic growth and at a time when there were serious concerns about the adequacy of investment in critical infrastructure.
“The rules were deliberately set to create a favorable environment for investment, but, in doing so, the balance of cost and service was not given sufficient attention.
“If the rules were intended to promote investment, they certainly have delivered that – over $7 billion in the current five-year regulatory cycle for transmission, $36 billion for electricity distribution networks and $3 billion for gas networks.”
It is worthwhile pausing here and noting that these rules were devised and approved jointly by a Coalition government in Canberra and Labor governments in the States.
Political pointscoring – the present Queensland government frequently blames the network costs on the federal government’s AER when the body and its rules are federal in a different sense – doesn’t pass the smell test.
Reeves’s argument is that the governments collectively made prescriptive rules that locked the regulator in to determinations that were not sufficiently well balanced for the task of providing efficient investment to deliver reliable and safe energy supply.
This is the risk that we in the community run whenever politicians address issues from their particular perspective rather than there being independent governance of areas such as energy.
(My friend Robert Pritchard of the Energy Policy Institute of Australia has an op-ed on this point in today’s “Australian Financial Review” in which he asserts that public trust in energy industry governance is “pretty much broken.”)
The regulatory reforms now being processed by the Labor federal government and Coalition governments in Brisbane, Sydney and Melbourne plus the remaining State Labor regimes, according to Reeves, will enable the next round of determinations, commencing in early 2014, to be more consumer-focussed.
What he didn’t mention is that the incoming Coalition federal government – the latest Newspoll seems to make a change in September as near inevitable as anything can be in politics although one can be sure that Abbott and his leadership team keep whispering “Remember 1993” to each other – and the Coalition State governments are determined to separate the AER from the Australian Competition & Consumer Commission and make it a stand-alone and better resourced body.
Those professing to be in the know claim that Newman’s promised plan will revolve around two key issues – reducing the returns his government obtains from network businesses and dealing with the costs of “green schemes,” especially the solar PV program inherited from the Bligh government, which is claimed to add $276 to State household bills this year and an aggregate $3 billion over its life to 2028.
Almost a quarter million Queensland homes now have solar PV arrays, adding an estimated $160 million to all residential bills just in the populous south-east corner of the State this financial year.
The impact of these systems on network costs is a contentious issue at present, adding (my guesstimate) another $50-60 million to Queensland residential bills in 2013-14.
Any intervention by the Newman government has to take in to account that it must find $751 million a year at present in electricity subsidies — $615 million for the uniform tariff arrangement and $136 million in support for vulnerable customers – and this is where a large part of its income from the networks is spent.
As I write this, I see on Google News that federal Treasurer Wayne Swan, doomed to personal defeat in September according to the opinion polls, has demanded that the Newman government return dividends from the networks to “families and businesses” to honor the rebate for 2013-14 on which it has reneged.
The befuddled reporter says Swan wants the dividends “returned to taxpayers” but it is, of course, the taxpayers who are benefitting from this income stream, which also goes to fund schools, hospitals, the emergency and law enforcement services and other demands on the Queensland budget.
The rebate on tariffs provided in the current State budget, amounting to $63 million, reduced what Queensland Treasurer Tim Nicholls has had available to spend on these and other services this financial year.
The current fuss has led the Energy Supply Association to issue a media statement this afternoon calling for “no more nasty surprises for Queensland energy customers.”
ESAA argues against claims that “networks should be run at a loss” and says the current cost increases were signalled at the start of the present State regulatory period in 2010 but “consumers were no warned so that they could take steps to manage rising bills.”
Not to put to fine a point on it, Premier Newman’s plan will have to be especially cunning to craft a path out of these woods.
They’re as mad as hell and not wanting to take it any more.
They’re the the nation’s sugar cane growers, congregated in the sub-tropical bits of New South Wales and in Queensland, and they’re on the front line for farmers using irrigation who have reacted unhappily to the record power price rise announced in Brisbane on the last day of May.
Cane growers are far from the only Queenslanders who reeled back yesterday when the State’s Competition Authority delivered its final electricity price determination for 2013-14.
The blow was the harsher for householders, who had every right to expect, after a string of promises in February when the QCA’s initial determination appeared, that the Newman government would again subsidise their bills.
However, as State Treasurer Tim Nicholls has now made clear, the impending Queensland budget simply cannot accommodate more and higher give-aways to ameliorate power price pain.
The tariff freeze imposed when the Newman government came to office is costing taxpayers $63 million for 2012-13 while reducing power price rises by $120 per household. It ends on 30 June.
Even cutting the new round of price increases to 16 per cent – which is a lot higher than the “single digit” rise promised by Campbell Newman, Nicholls and Energy Minister Mark McArdle three months ago – would have added $300 a year to the budget (and, of course, taken it from taxpayers’ wallets).
The QCA made the news worse by putting up the increase for householders on regulated tariffs from the initially-proposed 21.4 per cent to 22.6 per cent, with small businesses copping a 17 per cent increase.
Farmers – and hence the howls from cane growers – face a 20 per cent rise, which, says the Queensland Cane Growers Organisation, represents an average extra cost for irrigating farmers of $7,500 to $30,000 per year.
Their power bills have doubled in seven years, the organisation adds, a development, when taken with rising water bills, that could send hundreds of farmers off the land.
The effect of the price spikes to date, it says, is that some irrigators are converting their pumps to diesel, stranding existing assets, and others are cutting back on irrigation, putting their crops at risk.
The lobby group points to the Newman government’s election promise to double the value of State agricultural production and warns that the higher power bills threaten this.
We are already seeing in NSW – and to a lesser extent in Queensland – just how the rural tail can wag the government dog over coal seam gas development, so it will be interesting to watch how the Newman government reacts to the farmers’ unhappiness.
The biggest canegrowers’ demand is for the power price rises to be limited to CPI and they they are not going to get that for 2013-14.
Their second biggest demand is for the Newman government to stop taking its stream of revenue from the network businesses through dividends and tax equivalent payments, or to severely limit it, and Nicholls can’t afford to agree to this as he pursues a budget surplus by mid-decade.
Cane growers point to the net pecuniary benefit of the State government from its networks rising from $46 million in 2007-08 to $970 million in 2011-12.
(This is calculated on the revenue stream from the networks less the payments from the government to subsidise rural and regional power bills in Queensland.)
In a move with an ominous portent for the O’Farrell government in NSW as well, the farmers argue that, while it is one thing to protect private sector service providers from political opportunism, Newman’s government is free to deprive itself of debt fees and income tax equivalent payments.
Tim Nicholls and Mike Baird, for sure, would beg to differ but it is not hard to see the media shock jocks and tabloid newspaper editors cottoning on to this thought in both States north of the Murray.
The argument is reinforced by the Energy Users Association, representing major companies, which is also pointing to the reliance of the NSW and Queensland governments on revenue from power supply businesses they own.
Other cane growers’ proposals are for the introduction of retail competition in to 95 per cent of Queensland – it is available in the south-east corner only at present – and the introduction of off-peak tariffs for the vast region. (Farmers irrigate at night.)
Meanwhile, as it squirms on the power hook, the Newman government is blaming the carbon tax, other green scheme costs and the federal government-controlled (it says) Australian Energy Regulator for community power price travail.
Mark McArdle says the AER is responsible for 47 per cent of the higher costs through its network determinations while the carbon tax and green schemes add another 15 per cent.
For the renewables sector, and especially the solar businesses, the end-of-May irrits are being reinforced by comments from Origin Energy managing director Grant King at a forum in Sydney.
King points to a rise in the “green part” of the electricity bill from two per cent five years ago to about 15 per cent today and warns that these costs are going to keep rising under the present policy arrangements.
King also reinforces recent comments by the Energy Supply Association that household users of rooftop solar PV systems – the take-up “over-stimulated” by feed-in tariffs, he says – are not paying a fair share of network costs.
The schemes’ impact is even higher for small and medium-sized businesses than for households, he adds.
Analysing NSW electricity prices, he points to the marked change between 2007-08 and 2012-13.
Five years ago wholesale energy costs made up half the residential bill, with network costs at 38 per cent, retail costs at 10 per cent and green schemes at two per cent.
Now the price stack is wholesale prices 26 per cent, network costs 49 per cent, retail costs 10 per cent, the carbon price eight per cent and green schemes seven per cent.
Household bills on average in NSW have risen from $1,100 a year in 2007-08 to $2,230 this financial year, King says – made up of $560 for wholesale costs, $281 for the carbon price and other green schemes, $231 for retail charges and $1,159 for network charges.
Underpinning a rising green component of electricity prices for the rest of the decade, he adds, will be the current policy intention of pushing the RET to 45,000 gigawatt hours rather than 33,000 GWh if a true 20 per cent target is pursued.
Politically, the big circuit breaker is clearly the 14 September election, assuming the Coalition wins and succeeds in eradicating the carbon price and reducing the RET, but one only has to look at the rest of the scene to appreciate that this won’t be a cure for the power price ailment – and that, by clinging to ownership of networks, the Newman and O’Farrell governments will keep themselves centre stage in the ongoing row.
Except in Queensland, the political catchphrase is that price rises are “moderating” but how far smaller increases will satisfy consumers, not least farmers and small businesses, is open to question.