Not a sideshow

Settling down to start this post at 7.30pm on a decidedly cold (in Sydney’s Hills district) winter Friday evening, I went to the Open NEM widget to find that power production across the east coast market for the past seven days had been 4,106 gigawatt hours – and 2,986 GWh of it had come from black and brown coal generation versus 259 GWh from wind and 20 GWh from utility-scale solar. The back-up support came from 503 GWh of hydro power and 335 GWh delivered by gas plants.

Switching to the NEM Watch widget, I saw that the current (mid-evening) load in South Australia, the apple of all green eyes, was 2,005 megawatts and just 137 MW of it was being supplied from the State’s wind farms versus 1,794 MW from gas turbines (the balance being sourced over the interconnector).

Meanwhile, the wind contribution in Victoria (load needed 6,722 MW) was 211 MW versus 4,191 MW from brown coal plants, 1,404 MW from hydro and 896 MW from gas.

Tasmania was producing well over its domestic needs thanks to 1,650 MW of hydro power and 259 MW of wind – and a functioning-again Basslink meant it could dispatch power to the mainland.

New South Wales at this point required capacity of 10,635 MW and could provide only 9,039 MW from in-State resources (7,481 MW from black coal generation, 724 MW hydro, 664 MW gas and 169 MW wind) – but succor was at hand from Queensland where 8,643 MW of capacity was operating, well more than was required within State borders. The sources were 7,119 MW of black coal plant, 1,372 MW of gas and 135 MW of hydro.

All these numbers drive home yet again that the backbone of NEM consumption (in Victoria, NSW and Queensland, where most of it by a long way is located) is coal supported by hydro and gas and the interconnection system.

Which really should be underscored in a week where some fuss has been made about a green-boosting Bloomberg New Energy Finance prognostication for Australian generation with a 2050 horizon.

I have made the point here and elsewhere more than a few times that forecasts out to 2050 are just guesswork (try standing in 1986 and conjuring up a scenario for 2018) but my focus on the BNEF material was on 2030 where it believes that (across the whole of Australia) coal, gas and hydro will still be meeting some 160 terawatt hours of a national production to the grids around the 230 TWh mark.

There are so many variables that can affect the level of demand and constituents of supply over even the next 12 years that you can take your pick about what resources will be in play in 2030. Will nuclear take a bow? Will wind and solar fall off the subsidy bandwagon? How will transmission help or hinder things? Etcetera. But, in this time frame, the ongoing roles of conventional generation (coal, gas and hydro) appear obvious – providing you are not in thrall to green enthusiasm.

A particular interest for me just now (and one of the more prominent news stories at the end of this week) is the Australian Energy Market Operator’s “gas statement of opportunities” – notably in my case the punt it is taking on this fuel’s role in NEM power supply out to the end of the next decade (although the media focus, understandably, is on the reversal of the previous year’s forecast of a dire east coast overall outlook).

In shorthand, AEMO opines that “overall utilization of existing gas-powered generation is projected to decline in the next decade as renewable generation sources supply more energy during the day and most existing coal-fired generation remains in service.”

The operator (and I do wish journalists would stop referring to it as a regulator) also comments that the NEM is most at risk of large swings in gas plant output due to a variety of factors, including reduced wind speeds impacting farm output, delays in the installation of new renewable generation, reduced rainfall impacting hydro generation and extended unavailability of coal-fired generation.

The real risk is that gas generation is going to be treated as a sideshow rather than what it is: an ongoing integral part of an efficient NEM on the mainland.

Some context for all this can be found in the EnergyQuarterly report of electricity production for the past calendar year: 21,375 gigawatt hours of gas-fuelled generation compared with 16,183 GWh in 2016 – and then for the March quarter this year when it was 4,837 GWh compared with 5,450 GWh in the same three months of 2017.

It is also notable, in the context of proposed much greater recourse to variable renewables in the NEM, that the largest use of gas generation at present is not in Queensland but South Australia.

Using Graeme Bethune’s data again, this time for the rolling 12 months to the end of March 2018, gas generation was 7,536 GWh in SA (a big jump over the same period 2016-17), a bit reduced in Queensland (6,180 GWh), up by a lot in Victoria post Hazelwood (3,364 GWh) and steady in NSW (2,488 GWh), not forgetting Tasmania (1,195 GWh), giving a total for this 12-month period of 20,762 GWh, up almost 24 per cent on the same 2016-17 period.

What gas-burning plant may we see built in the next 3-4 years? Where? What will fuel these generators – imported LNG, perhaps? What will the gas price be and how will this impact on NEM wholesale prices? Lots of questions, but not much certainty just now.

And this is a reason for focusing on the bit of a joint statement by Josh Frydenberg and Matt Canavan, reacting to the AEMO report, that warns it is still “clear that new gas reserves and resources need to be explored and developed,” re-iterating the Turnbull government’s call on States and Territories to remove blanket bans and moratoriums on conventional gas exploration.

Apart from talking up the more positive tone of the AEMO report, as did the ministers, the Australian Petroleum Production & Exploration Association not surprisingly jumped on the operator’s observation that “further action by both industry and governments can bring even more gas into the east coast domestic gas market” as well as “meeting demand over the period to 2030 will require ongoing industry investment in commercializing existing reserves and resources and finding new sources of supply.”

Of course, the green boosters have another view. As one put it, “the record breaking (current) roll-out of wind and energy actually means less need for gas generation so less pressure on supplies (as well as) falling prices.”

And so it goes. And time continues to fly.

Not confident

Quote of the week: “Everyone has to emote like shrieking banshees to be noticed these days on our cluttered political stage.”

Thank you Katherine Murphy of The Guardian. That nails the situation and the problem in one, not least for the energy sector, exemplified currently by one commentator feeling the need to label the proposed “national energy guarantee” as a “Frankenstein’s monster” for Fairfax media.

So much is going on in the energy space at the moment that it is hard for even those with a special interest to keep up; for householders and those in small business, it must border on the impossible to gain much more than is available from shrieking headlines and tabloid-style reporting.

It is not surprizing, therefore, to see a new Australian Energy Market Commission report recording that, for these consumers, trust in the energy sector has fallen from 50 per cent last year to 39 per cent – and that confidence consumers’ long-term interests are being served is down to 25 per cent despite 25 actions taken by governments and market bodies in the past year aimed to improve user experience in the retail market.

Worryingly for those who want to see the competitive market sustained, the AEMC’s research indicates that 38 per cent of those polled for this report are not confident that NEM is working in their long-term interests versus 25 per cent who still think it is, leaving 37 per cent “neutral.”

AEMC chairman John Pierce says that: “The conduct of retailers is making it difficult for all consumers to access the benefits of competition even though more retailers are operating in the market and more customers are switching plans and accessing new technology. Competition continues to increase, but retailer inertia and a lack of transparency have emerged as significant barriers preventing consumers gaining the maximum benefits in terms of prices and services.”

(It is not at all clear to me why the Australian Financial Review chose to headline its story on this “Fickle consumers lose confidence in energy market.” Fickle? If you want an “F” word, “frustrated” might be appropriate.)

The core accusation against the energy retailers is that they have been “slow to innovate on tariff, pricing and products” and, damningly, householders now rate them lower in delivering value for money than banking, insurance, water utilities and broadband and mobile providers.

Hence the federal government, in the form of Josh Frydenberg, being in the media soon after the AEMC report appeared doing a Julia Gillard – remember “waving a big stick”?

Unless retailers “pick up their act,” Frydenberg declared, “they will see more government intervention.” The politics of this are clear. The pricing issues are imposing severe pressure on government attempts to achieve a long-term improvement in the supply environment through the NEG.

(In passing, there is an overseas object lesson available this month for our pollies across the jurisdictions about just how snarky Them Outdoors can get over power issues: the Canadian province of Ontario – their New South Wales – has been a poster child over the past decade for how to get power supply policy wrong, accompanied by deeply unpopular costs for consumers and taxpayers, and in the past week the community struck back at the polls. The long-serving Liberal government – their Liberals are our Labor – got just 19 per cent of the vote and lost party status in the provincial parliament after an election campaign in which electricity was a hot-button issue.)

The retailers’ lobby group, the Australian Energy Council, has pushed out a statement in the wake of publicity about the AEMC report arguing that “re-regulation of energy prices is not warranted” and declaring that it is clear its members “need to do more top accelerate innovation and improve energy marketing to customers while supporting all measures to bring down the cost of energy – the market needs to evolve faster.”

The big problem for the retailers is that this horse (let’s call it Light-handed Regulation out of Hilmer by Keating) may have bolted and re-corralling it won’t be helped, on all indications, by the Australian Competition & Consumer Commission report due on the last day of this month. Especially in the gun are the “Big Three” gentailers, who have increased their market share in generation from 15 per cent in 2009 to 48 per cent now while holding the accounts of seven out of 10 NEM electricity end-users.

Frydenberg made a point of telling reporters this past week that the Turnbull government is “open to any recommendations for further regulation” that the ACCC may produce on 30 June – and this was followed by a frank acknowledgement from EnergyAustralia CEO Catherine Tanna, who is reported as saying “it’s pretty hard to argue that the market is working as intended in the best interests of customers when the prices go up as they did last year.”

As a long and vocal supporter of both privatization and the competitive market for energy supply, I’d have to say that the present situation makes it pretty damned near impossible to argue this.

The critical issue is what steps can be taken to deliver quite rapid improvement for consumers without driving the market in to a ditch? And, equally importantly politically, to achieve outcomes acceptable to voters without populist steps, driven on by all that fore-mentioned shrieking, that inevitably won’t work long term?

None of this is helped by the ongoing noise about promoting renewables as the sine qua non of policy. As an overseas colleague has put it this weekend in an email, “so many start from the premise that renewables electricity generation is all important and we must adapt the energy system to fit around this rather than recognising that what is important is an affordable, secure low-carbon energy system, however achieved.”

PS: Have you focused on the just-released BP Statistical Review of World Energy? Among many things, it reports that, in 2017, the world needed 25,551 terawatt hours of electricity – to which the NEM provided barely 200 TWh – and had a contribution from coal-burning plants of 9,723 TWh and from gas 5,915 TWh. The next highest inputs were 4,026 TWh from hydro systems and 2,635 TWh from nuclear reactors. The total for other forms of renewables was 2,151 TWh. 

 The non-OECD nations had a 14,538 TWh share (almost 57 per cent) of this production – to which fossil fuels (oil, coal, gas) contributed 10,317 TWh (nearly 71 per cent) and hydro 2,668 TWh. Also there was 679 TWh of nuclear generation and 804 TWh of non-hydro renewables. This is where most of the coal Australia mines and the gas we produce is going. And then there is our uranium production.

Negative on energy

Tucked inside my new, warm dressing gown, which enables me to get by with a single bar on the heater in my work space, I spent a fair bit of the wintry long weekend pondering our energy language.

Many examples can be paraded of language that is florid, inadequate and sometimes designed to mislead. Needless to say, the happenings in New South Wales power supply last week, have seen “crisis” hustled back in to the media headlines, along with “coal chaos” in some greener outlets despite, in the words of a Melbourne University academic, “nothing going wrong, the lights staying on and the market doing what it is supposed to do”.

The latest fuss comes barely three weeks since the Australian Energy Market Operator, under the headline “Positive energy,” felt able to publish an upbeat media statement that “despite the 2017-18 summer being the second-warmest on record, the NEM did not experience any electricity customer supply interruptions due to insufficient generation.”

However, go negative on energy is a selling proposition (“clickbait” in the jargon) for the media at large and negatives on coal or, for some conservatives, renewables is another constant of what we get to read, see and hear, especially focused on the east coast power market.

Weigh this against a comment from an Origin Energy executive published yesterday to the effect that “the NEM is coping pretty well through a period of significant transition, with reliability of supply still high even as coal plants age and close and as we significantly boost supply from renewable sources like wind and solar.”

So what happened in NSW in what the WattClarity analyst Paul McArdle has described as a “shaky week” and made AEMO comment that these events are “a sobering reminder that, even outside of the traditional summer peak periods, there is still a need to ensure adequate resources are available to manage the system”?

First, weather conditions across the Sydney basin had the community seeking warmth big time, contributing to State capacity demand pushing towards 11,000 megawatts against a June peak demand average for NSW of 10,550 MW. (It always pays to remember, of course, that 60 per cent of the total demand is from commerce, public services and industry but the residential reaction to weather can impact on peaks.)

Second, last week’s higher peaks coincided with both substantial planned outages by large State (coal and gas) plants and some 1,400 MW of unplanned outages. At the depth of supply wrestling, according to WattClarity, there was 2,000 MW less coal capacity available than at the same time the previous week. Despite these hassles, actual output from the coal-fired sector during the “shaky” week was running between 130,000 megawatt hours and 160,000 MWh against a daily State need that was around 200,000 MWh. (This supply, of course, does not include coal- and gas-fired power flowing west from Queensland in to NSW.)

Third, the weather militated against wind and solar power production. The former, according to WattClarity, had been “subdued” for a fortnight and fell away three times by 1,000 MW in the “crisis” week when wholesale prices spiked strongly, especially on Friday. And the many Sydney basin rooftop PV arrays weren’t much use in heavily overcast conditions.

Fourth, the Tomago smelter in the Hunter Valley had to take a potline offline for 45 minutes one day and two of them for an hour each two days later, demand response leapt on in the media, not least because the owners are vocally unhappy about needing to interrupt their operations.

There is much more detail than this to what made last week “shaky” in the NEM’s largest regional market – but, for my purposes here, one other thing that the situation threw up was that transmission between NEM regions is yet another issue in strong need of attention as the “transition” is pursued.

WattClarity’s McArdle, summing up, made a worthwhile point, I think: “The NEM is a very complex, integrated piece of machinery.  What follows from this (though less often acknowledged) is that when there is a ‘failure’ (or something that was too close to ‘failure’ for comfort last week in NSW), it’s highly likely that there will multiple factors contributing to the predicament. Even a cursory analysis reveals that there were challenges last week with coal, gas, wind, solar, hydro, interconnection capability, demand forecasting and so on.”

All this said, I do take issue with AEMO claiming in a media statement about the situation that “Australia does not have the energy reserves it once had to lean on in times of need.” Western Australia and Queensland, between them accounting for some 3.3 million of about 10.4 million national residential and business customers, might justifiably ask why they are also thrown in to a stew made by South Australia, Victoria and NSW?

One thing more: Thanks to the latest quarterly report, and its immediate predecessor, from Graeme Bethune’s EnergyQuest advisory firm, it’s possible now to look at the NEM generation performance for the six warm (and sometimes really hot) months of 2017-18 – this being the first such period of modern times without Hazelwood. What emerges is a picture of 91,105 gigawatt hours of power production (not including estimates for rooftop solar electricity) led by 73,571 GWh of coal-fired supply (80.7 per cent), of which 17,525 GWh was brown coal output in Victoria, as well as 10,298 GWh from gas, 5,883 GWh from hydro, 6,002 GWh from wind and 331 GWh from solar farms. The additional rooftop PV output is calculated at 4,266 GWh. The grid’s fossil fuel contribution for these six months was 92 per cent. The VRE contribution (wind and solar farms) was 6.9 per cent. I wonder how many casual readers of the media in the community would come even close to these latter two numbers? Of course, the deep green members know and seeth about them, but the community at large……?

The new EnergyQuarterly report also includes rolling 12-month data for the SWIS (WA’s version of the NEM) that shows, when rooftop solar is excluded, a fall in supply for the year to March 2018 over the same period in 2016-17 – down to 16,340 GWh (excluding solar PVs) from 18,312 GWh. The make-up for the latest 12 months was 8,092 GWh black coal, 6,705 GWh gas, 1,429 GWh wind plus 77 GWh oil and 36 GWh from large solar. The use of rooftop PV rose to 1,269 GWh, up from 1,000 GWh in the previous period.

It’s time?

The Hansard reports of Senate Estimates hearings can at least sometimes make for interesting reading (and just as often serve as a cure for insomnia). I trawl them for energy-related discussion because occasionally they throw up a point worth noting.

One such in May was the quiz of officers of the Department of Environment & Energy with Senator Simon Birmingham (the Education Minister and manager of government business in the Senate) sitting in for Josh Frydenberg (who belongs to the “other place.”)

What caught my eye was an exchange on nuclear power with Liberal senator Eric Abetz wanting to know if anyone in the department was looking at the technology? And, he was quick to add, at high efficiency, low emissions coal generation?

Short answer: no. (Although, officials pointed out, when such issues come up, the minister – Frydenberg – may call for a briefing.)

It needs to be noted here that the government is, of course, engaged in a raft of activities relating to energy supply and climate change policies – but, despite its potential to deliver non-emitting electricity, not nuclear power even though we are the planet’s third-largest producer of uranium.

The last time I saw Frydenberg say anything on the technology was back in January when he answered a newspaper inquiry by stating that pursuing it would require bipartisan support – which doesn’t exist. Last September he told The Australian:Any investigation would need a long-dated timeframe and would unlikely address the more immediate issues of affordability and reliability.”

This short-term outlook at government level – and some will argue it is a short-sighted attitude that should not endure – perhaps can be set alongside the current initiative overseas to promote the use of nuclear by the US, Japan, Canada, Russia, South Africa, the United Arab Emirates, Poland, Argentina and Romania, a clique that doesn’t (at least yet) include France or China. This was launched at last month’s gathering in Copenhagen of the Clean Energy Ministerial – an international talking shop to which Australia belongs and whose 24-nation members plus the European Union are responsible for 75 per cent of global greenhouse gas emissions.

It can also be evaluated alongside an International Energy Agency commentary that notes 33,000 megawatts of new nuclear power has been connected to grids around the world in five years (with China accounting for two-thirds of this) while 18,000 MW has been shut down permanently. The IEA expects the Chinese to approve eight new reactors this year and says it is likely total global capacity will be 438,000 MW by 2020 although more uncertain that this fleet can then be expanded to 490,000 MW by 2025 as was previously being foreseen, largely because of retirements of aged reactors.

(I see reported elsewhere that China has named exporting its nuclear skills as one of 16 national science and technology priorities.)

The IEA also comments on the efforts being made to reduce barriers to nuclear development by cutting back investment risk, increasing safety features and promoting small modular reactors (the generic name for plants of 300 MW or less which offer greater opportunities for factory fabrication).

Five SMRs are under construction around the world at present and May saw GE Hitachi Nuclear Energy announce that it and Dominion Energy (one of the largest US electricity and gas utilities) are to pursue work to commercialize its BWRX-300 reactor, which it declares will be “more efficient, simpler, safer and needing a fraction of the footprint of the current fleet of light water plants.”

GEH asserts that this SMR could require 60 per cent less capital cost per megawatt than other water-cooled designs “which would make it cost-competitive with combined cycle gas and renewables.”

Given the amount of angst here and overseas about nuclear power safety, it is also worth pointing out that SMRs are designed not to melt down; they shut and cool off in an emergency.

The issue at home, it seems to me, is not whether there should be some sudden lunge here to build nuclear plants, of whatever size, but whether there should continue to be a blanket ban on even considering doing so?

Part of the political block against this rests on the belief that there are “deep community objections” to the technology’s use here – but is this really the case? Feedback from colleagues – admittedly interested parties strongly favoring nuclear – suggests there is quite a lot of support in the community for at least considering lifting the ban.

How to test this is an issue for political leaders and they are for the most part missing in action in this space. The question they should be asking themselves is how well the long-term national interest is being addressing by shying away from this debate?

The advice I get is that, if the legislative roadblock is cleared away, the first SMRs could be in operation here by 2030 – which is the time horizon of choice for a whole raft of stakeholders wanting to see Australia on a different carbon emissions path.

Between 2030 and 2035, according to overseas commentaries, global installation of SMRs could lie between 55,000 and 75,000 megawatts.

It’s also being suggested to me that SMRs could be twinned with pumped hydro in Australia in an approach to expand “clean” power as the existing coal-burning fleet reaches closing time.

Whatever, it is surely time for the issue of nuclear energy in Australia to again be given some serious thought at leadership levels rather than to continue to be the plaything of theoretical discussion littered with ideological baggage.

Politics & power

Reading an editorial in the  Australian Financial Review – which was about superannuation – I came on a comment that really resonates with the energy sector: “While the whole system sits on the shifting sands of political contestability, it will never have the requisite stability to give Australians true confidence in its future.” You can say all that again, with even more emphasis, for energy/carbon abatement policies, as almost every day demonstrates at present.

The point is underlined by Catherine Tanna of EnergyAustralia in a media interview in which she asked “Why is Australian energy policy so politicized?” – adding that such politicization is “disproportionate” here; “other countries seems to solve their energy problems far more easily despite differences of approach.”

The impact of this on the community was neatly made by a recent Newspoll survey showing a quarter of respondents don’t know whose energy policies to embrace and the rest are roughly split between Labor and the Turnbull government.

Sadly, the prospects here for taking politics out of energy, especially with elections approaching in Victoria, New South Wales and federally, while electricity and gas prices remain high on the public agenda, seem less than zero.

Tanna also commented that the competition between coal and renewables should be replaced with a focus on integrating fossil fuel power production with the green technologies. I would have liked to hear her add “at the lowest total system cost” to that view – and just as much to have taken the opportunity of highlighting the current considerable reliance of the economy on fossil fuels for electricity with the rider that “fast tracking” change (the catchcry of the activists and their fellow travellers) is not a practical option. (This has just been underlined by the Victorian Labor government officially setting deadlines of 2032 and 2048 for Yallourn and Loy Yang brown coal mines respectively and requiring the power stations owners to give five years’ notice of any intention to shut. All in the name of energy security.)

In the context of all this, it is interesting to read the new Clean Energy Australia annualreport, just published by the Clean Energy Council, mostly for the mountain of statistics it contains. The CEC, of course, like others in the renewables sector, is eager to promote the allegedly irresistible rise of wind and solar power as part of the policy debate.

Its publication, again, coincides with a report in the past week from the International Energy Agency (Status of Power System Transformation) that includes inter alia this thought: “Decreasing costs for both wind and solar energy, and strong government policy support have contributed to (an) impressive story.” Then the Paris-based agency adds: “These renewable power sources also come with a new set of challenges not faced before by power plants, utilities and system operators. The main one is the variability of renewable generation: how to ensure continuous and stable power when the wind is not blowing or when the sun isn’t shining. This creates uncertainties for the security of electricity supply. The challenge of integrating variable renewable energy in daily operations is compounded by other developments, such as the deployment of decentralised energy sources like rooftop solar and smart loads such as electric vehicles, and the spread of digitalization. Faced with such transformations, policymakers and other power sector stakeholders need a co-ordinated and pro-active response to managing these market changes and ensuring electricity security in modern power systems.”

Our Energy Security Board, the Australian Energy Market Commission and Josh Frydenberg may say “Yes, well, this is what we are trying to do,” and they are, but (in an environment where so much of politics is reacting to perceived public opinion) the messaging reaching community tends to lean towards the Green Pollyanna side – when the media are not being hysterical about the risks of blackouts.

In this regard, the CEC report plays up the national role of renewables in a way that (as presented through the media to the public) tends to create an impression that I feel is somewhat misleading.

The claim for the 2017 role of renewables is supply of 38,172 gigawatt hours out of 225,082 GWh across the NEM and Western Australia. My “yes, but” point is that 12,920 GWh of this was hydro power (ie long-established, conventional generation) and another 3,713 GWh was bio-energy (ie sugar cane bagasse and “black liquor” from industrial sources such as papermaking, both also long-established) and also included is 7,723 GWh estimated for rooftop solar power. Separate out grid-connected wind and large-scale solar power and one finds that they contributed 13,781 GWh in 2017. Take out the WA number and the NEM figure is 11,368 GWh.

Context in this respect is that gas-fired generation in 2017 (using EnergyQuest data) provided 21,375 GWh, brown coal plants in Victoria (with Hazelwood withdrawn in March last year) 38,316 GWh and black coal plants in NSW and Queensland 148,334 GWh. (And, in the current first seven days of wintery weather in the NEM, coal and gas provided 82 per cent of grid electricity.)

Bottom line: fossil-fuelled power remains the backbone of the NEM, which in turn is very strongly the backbone of the economy, notwithstanding a high outlay of money on variable renewables over the past decade. Replacing this spine – or even half-replacing it – with VREs would require a very substantial investment in transmission alone through a decade in which there is every prospect that market demand will not grow, raising issues about end-user costs going up rather than down as the politicians keep promising the community.

This is not a message reaching the hoi polloi and, taken with the thoughts of the IEA (and others trying to make a serious point in the debate here), demonstrates that overheated calls on community sentiment to support a faster rush to wind and solar come with risk – for the consumers.

In passing, I spotted something else in the CEC report – which is an interesting compilation of data, well worth reading – that I hadn’t appreciated until now: if you take out WA numbers for installed rooftop PV capacity in 2017, you find that the NEM total is 929.6 megawatts, which is roughly what it was in 2012 (926 MW) after which it dropped.  Rooftop PVs (according to EnergyQuarterly) provided 6,793 GWh in calendar 2017 versus 5,720 GWh in 2016 and 5,046 GWh in 2015. Steady growth, then, rather than going gangbusters, which is the impression some wish to give

The summer that was

That the media – mainstream and social – have become a shouting factory for debate about energy issues is rather beyond argument now, I’d suggest. The result is that facts seldom get presented (even in serious publications) without a loading of opinion and members of the community looking for straightforward information have their work cut out.

A case in point is the current coverage/commentary on a report by the Australian Energy Market Operator about last summer’s east coast power supply – which didn’t fail spectacularly despite all the dire stuff to be found in the media last spring and the season being the second-hottest on record.

(You may recall the ABC’s 7.30 Report asking back in early December “Is the electricity grid up to the summer?” – using the 2016 South Australian blackout for illustration.)

AEMO sums up the summer now ended in 20 words: “The system performed well and no NEM customer experienced interruptions to their electricity due to insufficient supply being available.”

Like the image of a swan on the water, this serenity masks a great deal of paddling below the surface including bringing back three mothballed plants, securing off-market sources through the reliability and emergency reserve trader, better focus on weather trends, rescheduling generation maintenance and a bit of leaning on gas supply to ensure sufficient fuel for Victorian turbines at a crucial time. There was also a significant reduction in unplanned transmission line outages at a time where interstate flows were an especially important factor in sustaining supply.

And buried deep in the report is this riposte to some of the most strident of the media commentariat: “Some media coverage in the summer period highlighted potential reliability concerns with the coal fleet. While there were unplanned unit outages (typical for thermal generators during warmer weather), the NEM coal fleet recorded its fourth-highest summer availability in the past 10 years, with around 250 MW more capacity available than the long-term average for this period.”  (And this, of course, with Hazelwood power station removed from the system for the first time, pulling about 1,000 MW from available capacity. AEMO records that the rest of the NEM coal fleet increased average load by 580 MW compared with the 2016-17 summer.)

Some current media coverage has made a big deal of the fact that there were days when Victorian and South Australian supply looked a bit shaky and AEMO used the “RERT” mechanism twice at a cost of $51.26 million to avert problems. Naturally, this has been headlined as “costly” back-up even as the operator points out that a large power failure of just an hour would have cost a lot more. AEMO chief executive Audrey Zibelman says that, averaged over the number of consumers saved pain, the cost works out as equal to two cups of coffee.

The operator also notes that some coal units in Victoria and New South Wales had “issues” with returning to service after long-term outages (“not uncommon after extensive outages and maintenance periods”) or because of access to adequate coal supplies. “These issues have now largely been resolved,” it says.

In passing, federal Environment & Energy Minister Josh Frydenberg has complimented AEMO on “doing a good job” over the summer; he could, I suggest, have taken the opportunity to say the same to the supply sector, which collectively seems to have performed well in fairly trying circumstances.

At least some of the fossil-fuelled suppliers – those not intent on painting themselves a greener shade of black – would like greater recognition that their contribution remains the backbone of the east coast grid.

As the Minerals Council has been quick to point out, asserting “coal remains Australia’s energy foundation and has a competitive future,” between the beginning of December and the end of April coal-burning generation (both brown and black) produced more than 76 per cent of the NEM’s power (leaving aside estimates of rooftop solar use), the next highest supply being gas at 10 per cent.

In saying this, it needs to be acknowledged, too, that rooftop solar installations hit a record for estimated use in December, according to current analysis by the Australian Energy Council. (It is calculated as 1,124 gigawatt hours for the country as a whole, meaning, I’d guess, about 900 GWh for the NEM – where the black coal plants alone in New South Wales and Queensland are averaging about 10,000 GWh a month, just to provide context.)

The solar statistic does underscore the need to get a better handle on the real impact of PVs, especially in the NEM, in the light of the capacity now installed and the continued rate of growth. AEMO is pointing out that the market can lose (quite suddenly) between 200 and 300 megawatts of capacity when the skies cloud over in a major city and managing this is just one more issue for the operator, one that will be harder to handle after 2022.

PS The past week’s bit of news that will have had the gentailers sitting up and paying attention, I reckon, is not the AEMO summer analysis but Frydenberg’s reported comments to the Coalition government’s party room that he is “worried” about the concentration of ownership in the NEM. With the Australian Competition & Consumer Commission due to produce its next major report on the sector at the end of June – and chairman Rod Sims signaling that he is concerned about market competition – this presages a new headache for the dominant companies, especially with the political need to play to the voter gallery as the next federal election looms. There is more than one reason that the heat will be on again for suppliers by next summer.

Picture ‘remains a poor one’

A speech about the “enormous pain” for consumers in our “complicated and undoubtedly political” energy market by Rod Sims, chairman of the Australian Competition & Consumer Commission, to the Energy Users Association earlier in May deserves more media attention than it got — which is certainly a lot less than the ongoing  stoush between the Coalition federal government and AGL Energy over Liddell, a sideshow for most consumers in the here and now.

Even so, I doubt the big players in the energy sector and their lobbying bodies missed Sims’ tart comment, reinforced in a media statement about the talk, that “the market is working extremely well for energy companies, but is working badly for commercial and industrial users. It is (they) who need us to find solutions; the energy companies don’t have as strong an incentive to fix the problem.”

The commission’s report on electricity at the end of next month will surely stir the pot to a much larger extent, but, in the meantime, his EUAA commentary contains stuff that needs to be better appreciated by the general community, who are not as seized as they should be, I think, of the fact that (as Sims puts it) properly managing energy policy is “one of our defining economic challenges for the century.”

Not surprisingly, given his audience, Sims’ focus for the talk was on “C&I” – commercial and industrial customers, who account for 60 per cent of the east coast power market and half the gas supply share versus 25 per cent for households.

Apart from the obvious large factories, these consumers include small industrial firms, financial services, commercial building services, construction and retail services, public services and agriculture – the “C” element making up 26 per cent of overall demand.

The “C&I” sector is characterized by usage of more than 100 megawatt hours a year and its members copped a 28 per cent rise in “real” (that is, inflation adjusted) power costs over the best part of a decade to 2015-16. Sims is holding on to the latest numbers for his new report but observes that the big jump in wholesale prices in the NEM in the past 18 months has added “significant pain.”

He points out that “business across all sectors has faced even higher increases over the past 12 months, following renegotiation of long term contracts.”  He adds:  “Many of these businesses cannot pass on the increased costs and are considering reducing staff or relocating overseas. Some businesses have even been forced to close. This is a terrible outcome for these companies, their staff and, ultimately, for the country.”

Past over-investment in networks, he says, is “locked in” and will burden all consumers “for decades” without remedial action.

And then there is the “double whammy,” which Sims declares to be unique to Australia, of gas becoming more frequently the marginal (ie price-setting) source of electricity (especially in South Australia and Victoria) at a time of shortages in supply.

There are other factors, too. Sims comments: “The third area (affecting cost increases) is environmental or ‘green’ schemes aimed at achieving sustainability objectives. Over the past decade, various State and Territory-based environmental schemes have been introduced. For example, in most NEM regions early adopters of solar PV were offered stunningly generous feed-in tariffs of up to 60 cents per kWh. These have been of direct benefit to recipients of the feed-in tariff (solar PV customers) but the costs of the schemes have been passed through to all electricity users. Thankfully, these schemes are generally closed to new customers or have ended.”

And then, of course, there are retailer charges, the butt of so much political and media attention in the past year. They are not as important in the “C&I” sphere as they are for householders but you can be sure they will get a large amount of further fuss next month and thereafter.

Naturally, Sims used the EUAA talk to canvass the broad issues affecting the east coast gas problems, noting that they are expected to be “especially acute” for “C&I” users in South Australia, New South Wales, the ACT, Victoria and Tasmania.

“The ACCC,” he says, “does not weigh into the debate about the environmental issues surrounding (gas exploration) restrictions, but it is our job to point out the consequences of blanket bans on projects, including on conventional reserves, in the form of significantly higher gas costs. (They) also prevent exploration to confirm the existence of gas reserves that, on a robust cost-benefit analysis, would improve consumer outcomes.”

The picture, he adds, “remains a poor one” for “C&I” gas users, the southern market is “incredibly tight” and the issue is “critical,” noting that “at present, Australia’s east coast gas market strongly favours those with gas over those who want it – this must change and on many fronts.”

Considering that the “C&I” sector is a huge source of Australian employment, the impacts canvassed by Sims ought to be top of mind in public debate but they tend not to be in the media accessed by the millions. Back in September, for example, comments by the Australian Chamber of Commerce and Industry received passing attention in the business media but not otherwise: “”We risk a double effect,” the chamber said, “with energy prices hitting investment decisions, affecting demand for labor while also putting pressure on margins impacting the affordability of wage rises.”

With important elections lying ahead federally and in Victoria and New South Wales, this stuff, it seems to me, needs to be far higher on the ladder of serious debate (which is not how I would categorize the dominant Punch-and-Judy show) than it is.

PS: In talking to journalists after the EUAA address, Sims said something that should also be highlighted: “The ‘national energy guarantee’ is not the main game. It’s important but it’s not the main game.”  The bigger picture, he added, is also network costs, the cost of green energy schemes and rising generation and retail costs. There are a few walls I’d be inclined to write this on.

 

Taxing times

One happening this week serves to highlight a significant development for business in Australia – and not just for the energy sector. Any presumption of innocence when malpractice claims arise has gone right out the window.

There have been events too numerous to catalogue here as to why this should be so; the ongoing drama of the banking royal commission is a fine example. Such things have opened the door for politicians and media to throw sticks and mud at the corporate sector without restraint.

For the energy networks, assailed as “gold platers” for some years for implementing opex and capex plans that have gone through the regulatory mill, the latest is the accusation that they have been “price gouging” over their tax liabilities.

This claim has been launched by federal Environment & Energy Minister Josh Frydenberg, who has asked the Australian Energy Regulator to examine the allowance networks can include in their charges relating to tax. He points to information from the Taxation Office that there is a discrepancy between what the AER has set for recovery of this element and the amount the networks actually pay to the ATO.

And then the killer punch on which the media has seized as proof of guilt: “It is totally unacceptable for consumers to be charged for corporate tax liabilities that are not actually incurred,” the minister, who is a lawyer, said in his media statement.

A draft report on the issue is being required of the regulator by “the middle of the year,” which is weeks away, with a final report to the CoAG Energy Council in December.

But the media lynch mob are off and running. “Electricity price gouging: government to crack down on networks,” said one headline. Fairfax Media asserts “$400 million a year power price gouge triggers probe.” One of the largest tabloids headlines: “Power companies in gun for gouging consumers over tax liabilities.”

Energy Networks Australia CEO Andrew Dillon denies there is “gouging”.

“The current benchmark approach to tax allowances is set by the AER to avoid customers in different suburbs paying different charges and the risk of sudden price rises when there is a change of ownership,” he says, adding that “many (past) knee-jerk policy decisions have led to poor consumer outcomes.”  This is well-buried in media coverage where it gets a mention at all. The focus is on how can the bastards be made to pay back what they have pinched.

The AER has published a paper calling for submissions on the issue. In it, the regulator reports that its estimate of energy networks’ tax payable in regulatory determinations for 2012-13 to 2016-17 amounted to $5,050.4 million, of which $3,967.3 million accrued to electricity distribution businesses, $743.4 million to high voltage transmission operations and $339.8 million to gas sector networks.   And $3,223.2 million of the AER estimate of tax payable in this time frame related to networks owned by State governments. The regulator also says it is advised by the ATO that energy networks listed on the Stock Exchange or privately owned paid less tax than estimated by the AER – but the government-owned ones paid more than estimated.

The tax segment, the AER notes, represents about four per cent of the revenue the energy networks are permitted to recoup.

And the tax gatherers’ analysis has focused only on the electricity distribution businesses.

AER adds: “The ATO noted that it had to make assumptions and exclusions in undertaking its analysis, but the full details of (these) were not set out in the (whistle-blowing) note.”

It also says that, in pursuing the issue, “we have encountered significant difficulties in obtaining accurate and consistent information in the public domain on actual tax payments and other relevant tax information for the energy networks.”

It goes on to caution that “the ATO note identified a number of potential drivers that could be contributing to the discrepancy between expected tax costs and actual tax payments.” These include factors that can alter the relevant tax rate (ownership structure), interest expense (gearing) and depreciation expense (diminishing value, self-assessed asset lives, low value pools).

“The AER needs to understand these potential drivers and their impact on observed tax payments” before making a report.

Its current activity, it says, is a step in reviewing the regulatory tax approach to ensure this aspect of determinations “serves the long-term interests of consumers.”

The regulator notes that, if it finds grounds to recommend changing the rules, it will put proposals to the Australian Energy Market Commission – which will pursue consultation in its own right.

In short, should there really be an issue, it will be some time next year before any fix is in place.  The lynch mob, of course, will keep running with pejorative language all along this path.

And the political hares are running, too. Victorian Energy Minister Lily D’Ambrosio is telling Fairfax Media that the Coalition federal government has “known for years that consumers were being ripped off by power companies but they did nothing about it.” And Frydenberg is asserting “network rip-offs in the five years from 2013-14 occurred due to rules put in place under federal Labor in 2012; we are cleaning up Labor’s mess yet again.”

As Fairfax have it, D’Ambrosio wrote a letter to Canberra last month claiming that the corporate tax allowance issue “threatens to slug Victorian consumers with an extra $602.2 million in energy costs” between 2016 and 2020.

And – surprise! – Bill Shorten is out and about calling for “energy companies who have been gouging customers by as much as $400 million a year to cover inflated tax liabilities to refund every cent.” And he doesn’t want any waiting about while the regulator pursues a review. “Australians want action” right now by the Turnbull government against “large corporations treating consumers like mushrooms.”

Even Henry the Eighth held show trials before he lopped off heads.

The networks, meanwhile, will need to get their skates on: the return date for submissions to the AER on its paper canvassing the issue is the end of this month.

Complex & ‘simples’

There were 95 speakers and panel participants at the 2018 Australian Energy Week conference that ended on Friday in a wet and windy Melbourne.

They addressed some 360 delegates in plenary and concurrent sessions that scanned the breadth and depth of our transitioning east coast market.

Kicking off proceedings in the chair at the event’s final Energy Policy Forum, I sought to summarize discussion up till then like this: “Most of those attending have wanted to focus on the generation mix for the next decade, the nature of network infrastructure needed to enable this mix, on the vexed problem of consumer costs and, not least, on raising the profile of consumption management in this environment.

“A strong theme in Thursday’s generation mix concurrent session was the vital role of investor confidence in the NEM arrangements now being pursued.

“In this respect, I note that the Australian Energy Regulator has launched its latest newsletter by emphasizing that, notwithstanding the ‘screaming headlines’ in the media, the nuts and bolts work of securing reliable energy at the lowest possible cost goes on every day. My own emphasis would be on the ‘lowest possible cost’ phrase – which is not the same thing as ‘cheap energy,’ the focus of so much public discussion and indeed in focus here this week from manufacturers.

“One cannot listen to the catalogue of investments needed to achieve current market transition plans, let alone more ambitious ones, and not wonder when the community will wake up fully to the point that a substantial part of achieving the desired lower bills will need to come from what users can do for themselves?

“In turn, this raises the issue of energy equity that has been also discussed here.

“Another theme emerging from the conference’s presentations is a concern that getting policy settled is becoming the political goal where the higher issue is making the market really work – with the rider that consumers and investors may not react the way policymakers expect.

“The argument has been put forward here that what investors need is (1) a certain ground, (2) the financial capability to deliver on their plans in an environment where there is a lot of money around but a skittishness about investing here and (3) the benefits of genuine market competition, with one of our CEO speakers adding a fourth “C” – confidence in being able to have economic utilization of infrastructure investment overs its planned life which relates to (2).”

The investment question is not a minor one; modeling commissioned from KPMG by the Australian Energy Council estimates that $23 billion is needed for building NEM generation alone between now and 2030. Conversation with executives during Energy Week suggests the network outlays needed could run to $16-18 billion more. The issue is not a lack of finance availability but bringing it to our market. One executive speaker opined that “there is a wall of money out there – we just have to find a way to attract it.”

By the end of the Energy Policy Forum, I felt I could add to my catalogue a growing view among participants that the CoAG Energy Council is capable of delivering the “national energy guarantee” but also more skittishness about how relatively little it would take at the political level to derail the process.

One of the factors is how political stances feed on community views that, in turn, are influenced by how market players communicate with consumers at large. The Australian Energy Market Commission’s chairman, John Pierce, put his finger on a sore point in the Forum when he described household awareness of the government’s energy-made-easy website as “unacceptably low” and laid the blame on retailers still not doing enough to build public awareness of cost savings and other aspects that could ease user concerns.

New energy entrepreneurs and the incumbent retailers are starting to rise to the challenge, he said, but this is not happening fast enough to alleviate energy bill unhappiness. What the market needs right now, he added, is a disruptor to take the complexity away from retail offers and make bill easier to understand and compare.

The other key factor that he identified as an “oil slick under the wheels of the market” is the failure to date to agree on a mechanism to integrate energy and emissions reduction policies – which brings us round to the “national energy guarantee.”

Pierces argues the NEG is “all about bringing energy policy back to its true focus, the consumer.” It aims, he says, to meet abatement commitments without putting a further cost burden on households and the economy. It is critical, he says, to stay the course on this reform to create a mechanism that can adjust to whatever change the future may bring “at the lowest possible cost.”

That phrase again. What it actually means is costs lower than they will otherwise be if we continue to stumble and bumble through the “transition.” But a change this complex cannot possibly be “cheap.” This will be the more so if the body politic continues to pick technology winners rather than allow investors to use a neutral market to compete for advantage. Which is why going all out to guide consumers, and especially households, towards the best ways to meet their needs is so important. A point that, as the damned meerkat’s catchphrase in the TV adverts has it, should be perceived as “simples” by suppliers.

Pressure cooker

It was written almost 160 years ago but nothing I can think of comes closer to encapsulating the atmosphere of today’s energy debate: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”

As learned readers know, that’s Dickens, still spot on today right down to his reference in the opening of A Tale of Two Cities to “noisy authorities” and comparisons being offered “in the superlative degree.”

The latest example of how old Charles nailed it for us in the here and now (and in many other respects than energy) is to be seen in the past week’s sudden outburst of rowing over whether an investment case can be made to build new coal-fired power stations in Australia.

Mind you, I am not complaining because the ruckus is a great lead-in to the upcoming Australian Energy Week over three days in Melbourne, which includes an Energy Policy Forum I will be chairing next Friday featuring Josh Frydenberg, Kerry Schott, the Australian Energy Market Commission’s John Pierce, Labor’s Mark Butler and the ACT government’s Shane Rattenbury.

Also on the Friday forum program will be Ron Ben-David (Victorian Essential Services Commission), Simon Corbell (former ACT deputy chief minister and now renewable energy advocate for the Victorian government), Matthew Warren (Australian Energy Council) and Mark Williamson (executive GM of the Clean Energy Regulator).

And this will come after two days of plenary and concurrent sessions of Energy Week,including input from the Australian Energy Market Operator’s Audrey Zibelman, Manufacturing Australia’s James Fazzino and a host of CEOs and senior executives from across the spectrum of the power business, not forgetting a panel discussion on the evolving energy mix.

It’s worth reminding ourselves at this point that the Prime Minister (15 months ago in a National Press Club address) has described energy as the “defining debate of this Parliament” – perhaps now limping towards its finale – and declared the Coalition “stands for cheaper energy” and more reliable supply.

For commerce, industry and 10 million household accountholders, this remains the touchstone of the debate. And for those who focus seriously on policy development, the key to long-term success is being faithful to the need to be deliver an over-arching neutral system that allows investors to decide which technology stacks up for their shareholders.

What makes at least some investors twitch is hearing leading participants in the policymaking arena continue to utter statements that promote favored forms of technology, dismiss others and decline to even think about some (e.g. nuclear). Too often, these utterances include claims about the relative costs of technologies. For example, “the cost of coal is always going to be more than the cost of wind and solar.”

As I said to a number of people this past week (and tweeted about it, too), anyone making such claims needs reminding of the sage advice of royal commissioner Kevin Scarce (in his report two years ago) that: “For those planning a future electricity system (and the market in which it will operate), the relevant issue is total systems cost.”

Scarce went on to say:  “In developing Australia’s future electricity system there is a need to analyse the elements and operation of that system as a whole and not any single element in isolation.” (He called in his report to the South Australian government for the development of a “comprehensive national energy policy that enables all technologies, including nuclear, to contribute to a reliable, low-carbon electricity network at the lowest possible system cost.”)

In this context, especially for those wearing green glasses, it is also worth pointing to a recent paper by Simon Bartlett, a former electricity network senior executive now a professor at the University of Queensland, that sums up things this way:

  • Power systems have fundamental needs: load following, flexibility and dynamic response.
  • Increasing intermittent renewable generation in a power system has a “pressure cooker” effect and can involve an unaffordably high level of integration costs.
  • Every power system is different but, in most systems, the practical upper limit for renewables is around 40 per cent of total electricity generated. This may be exceeded but it is likely to require a greater level of interconnection with adjoining power systems, more energy storage, increased recourse to demand-side management and regulatory changes.
  • The scale-up of intermittent renewables not only diminishes the robustness of a particular power system but can also magnify the short and long-term risk of investing in non-renewable generation assets and the power grid itself.

(You can find Bartlett’s paper on the Energy Policy Institute of Australia website.)

As for the Energy Policy Forum on Friday, if I am in need of an introductory comment from the chair, I may just plagiarise one from John Pierce (in the AEMC’s Making Market Transformation Work paper): “The changing mix in generation sources means we have to manage the power system differently and evolve the market. There is no silver bullet. There are many options we could take. But we need to understand how different solutions would interact with the rest of the system: affecting prices, reliability and security. Decisions made today will affect national economic development for decades to come.”

Not as evocative as the one from Dickens with which I started, but very much to the point for those participating in Australian Energy Week and for those wrestling in national leadership with the “energy crisis.”