The price is complex

Few things in energy have been more certain in recent times than the federal government sooling the Australian Competition & Consumer Commission on to the vexed issue of retail electricity prices. It was only a question of when – and the answer, for a government under siege in the opinion polls and hampered by its lack of numbers in the Senate, is now.

What the ACCC review won’t resolve for Turnbull’s government is the fact that power bills for trade-exposed industries are painfully high and, when taken with gas bills and other relatively high operating costs in this country, are threatening the viability of manufacturing, one of the biggest of all policy issues for this country today.

Nonetheless, unlike so much else in the public power game, this inquiry is a good idea. There is so much disputation about retail power bills, and so many vested interests at play, that scrutiny by the “consumer watchdog” should pop the festering pimple of populism and posturing.

The ineluctable fact of this issue is that prices for the majority of east coast mass market electricity account holders – located in Greater Sydney, Greater Melbourne, south-east Queensland and Adelaide – increased by about 80 per cent between 2006 and 2014, driven upwards not least by a large increase in network charges and by the controversial Gillard carbon tax. They declined when the tax was removed but the view of the “mob” (as Paul Keating used to describe the community) is that they are still too high.

The most recent Essential Report opinion poll posed the question “Over the last few years have your gas and/or electricity costs increased, decreased or stayed much the same?” Seventy-seven per cent of respondents said they had risen, 13 per cent said they had stayed about the same, two per cent said they had decreased and good old “Don’t know” amounted to seven per cent.

It’s worth pointing out that 32 per cent of the poll’s respondents ticked “increased a lot” and this is quite a large reduction from the 45 per cent when this question was posed by the pollsters in 2012.

In asking those they polled what could solve the problem, Essential Report offered four boxes for ticking. “More government control of power companies” got 29 per cent support as did “more government ownership of energy production” while “more private power companies to increase competition” got 17 per cent – and “Don’t know” recorded 25 per cent.

The problem for energy retailers is that consumer angst and self-interested flag waving is relatively easy to communicate but the explanations of how the market works are not.

The Grattan Institute, whose recent report (titled “Price shock: is the retail electricity market failing consumers?”) is being cited by the government as influencing the inquiry, acknowledges that similar problems are being experienced in Ontario, a number of American states and the UK among others that have tried a competitive market system.

The institute also acknowledges that “numerous” studies have assessed Australian electricity prices “but we still lack consensus on whether there is a problem.”

It asserts that one of the issues is the lack of information about retailers’ cost structures.

Part of the institute’s conclusions that I do not see Turnbull and Treasurer Scott Morrison citing today is this: “There do not appear to be grounds for referring retailers to the ACCC; (they) do not appear to be involved in what would be termed uncompetitive behavior.” However, it adds, prices increases are a cause for public concern and this justification was used to launch the ACCC’s 2015 inquiry in to the east coast gas market (which, after following a long and winding path, seems by general agreement to be leading to a better place).

There is a salutary story to be found in Britain, as Grattan Institute explains in its commentary.

An inquiry by the UK Competition & Markets Authority (their version of the ACCC), recently completed, has wound back regulatory intervention in the retail market and focused on the same problem that bedevils the Australian scene: the disengagement of so many householders from opportunities to pursue better deals with retailers.

The Grattan case, in short, is that energy retailers should be doing far more to shepherd consumers in to better deals – and that they don’t do so because there is a profit to be made out of householders’ apathy or sheer inability to work through the complexities of pursuing a better deal.

The Australian Energy Council, the retailers’ mouthpiece, comments in reply that “competition cannot guarantee the lowest possible price for every customer at any point in time, nor can it guarantee that prices will not rise.”

It adds: “Governments should similarly be aware that it is not possible to regulate for such an outcome, and (regulatory) efforts to do so may have the perverse effect of enabling more generous (retailer) profit margins, as shown by the UK’s recent experience.”

The full AEC response to the Grattan paper is in a commentary titled “The retail electricity market: misunderstood or genuinely failing?” Both are to be found on their authors’ websites.

Included in the association paper is this thought: “Just as market offers are complex, so are customers. There is no universal customer. As with their phone bills and plane tickets, customers have a broad spectrum of engagement preferences. Some are not price sensitive and value no engagement with their retailer as preferable to shopping around for the best deal. Others are highly engaged, because of financial concerns or an interest in extracting the best value deal available.”

Boiled down, the central thrust of the retailers’ case is that “government policy should be directed to ensuring that there are no barriers to customer engagement with the market and that the most vulnerable customers are given specific support to ensure that they receive the most competitive deal appropriate to their circumstances.”

Whatever, as our young ones say, the ball is now in the court of Rod Sims and his “watchdog.” A report is unlikely until mid-2018 – which leaves lots of time for politicking and populist posturing by the many players on this stage.

And nagging away at the retailers’ minds all the while will be this point made by the Grattan Institute: “If competition fails to deliver the promised benefits, then government will have no choice but to return to price regulation.”

Inquiries galore

It says something about our electricity situation that there are four inquiries in to the present state of things and future prospects running at the same time.

One, of course, is the Finkel task force.

Another is the “sister of Finkel,” the energy security task force set up by the New South Wales government (chaired by another chief scientist, Mary O’Kane).

The third is the Senate select committee in to “the resilience of electricity infrastructure in a warming world,” chaired by Greens senator Sarah Hanson-Young.

The fourth, flying pretty well below the radar at present, is an inquiry being pursued by the House of Representatives standing committee on the environment and energy. Using the 2015-16 annual report of the Department of Environment & Energy as a launching pad, this committee, chaired by Victorian National Andrew Broad, is focusing on “modernizing Australia’s electricity grid” and on considering “the critical question of how to safeguard the security and reliability of the electricity system and ensure that the system can facilitate the transition to a lower-emissions economy, all while keeping electricity prices for households and businesses as low as possible.”

But, hold on, that’s what Finkel et Cie are doing. No matter, the Turnbull government apparently also sees value in having a parallel political inquiry. The committee of eight has five Coalition members and three Labor MPs.

“Resilience” is the focus du jour for all these reviews.

O’Kane has been telling media “it is critical that households and industry across NSW have access to a resilient electricity system (and) be fully prepared for any emergencies that might arise,” noting that the State was “very fortunate to get through” the recent run of hot weather in January and February. She adds that her task force will “complement” the work being pursued by Finkel’s inquiry.

In this context, it is worth focusing on a comment to the Finkel review from three professors of the University of Queensland, Simon Bartlett, Chris Greig and Tapan Saha. They say: “The only way that the NEM can truly take advantage of new technologies and business models and remain resilient in the face of uncertainty is for the market to properly value electricity services. This does not mean favoring one technology over another but differentiating the value propositions of technologies depending on their alignment with the power system and customer needs – which can vary significantly with time and location and has different degrees of controllability.”

To me, this pretty well sums up what the whole debate should be about – but there are many people with many barrows all clamoring to get their perceptions and/or needs heard, as evidenced by some 360 submissions to the Finkel inquiry alone. Plus, as I see described in an Australian Financial Review commentary this morning, we have the body politic turning energy markets in to “a sandpit for political adventurism.”

The key to resolution of this situation needs to be the practical, not the populist.

The Finkel submissions include one from Tony Concannon, a leading figure on the electricity stage here for most of this century as boss of International Power and a chairman of the Energy Supply Association. Now CEO of renewables wannabe Reach Solar Energy, which is pursuing development of a 500 megawatt PV farm in South Australia, Concannon observes that “(coal-fired generation) integrity is increasingly difficult and costly to maintain with plant which has exceeded or is approaching its design/ expected life.”

With AEMO, he adds, announcing a number of conventional power plants are planned to close by 2025-2030, “forced outage rates are expected to continue to increase.”

The NEM, he points out, is not going it alone in the complex transition game. “Ireland, New Zealand, Texas and the UK are all implementing and/or exploring options to integrate an increasing proportion of electricity generation from renewables and distributed generation whilst maintaining system security and market incentives which promote competition. It is a highly technical topic which does not lend itself to sound bite discussion.”

This last aspect may be the central dilemma of our situation at the moment. The Prime Minister, some premiers, energy ministers and other politicians are all vying with each other in the sound bite game while responding to opinion polls as well as the ever-louder voices of those affected by current issues (not least manufacturers).

A new Essential Report poll, for example, throws up that 75 per cent of respondents want the federal government to “legislate” that a percentage of gas be reserved for domestic use. However, 25 per cent of them want coal seam gas development “banned completely” and 31 per cent want restrictions of CSG activity on farming land.

A key problem, as the Australian Aluminium Council says to Finkel in its submission, is that, while long-term policy should “prioritize the development of industrial-scale low or zero emissions energy sources,” this has to be done without compromising energy security – and “policy and market design should bring electricity prices down from their current uncompetitive level, not merely minimize future prices rises.”

For my money, the biggest challenge of all is the time factor.

For Australians, whether householders or business people, the short-term threats to system resilience and the pain in their budgets are of paramount concern, but nothing the politicians can propose is a quick fix and each intervention raises new issues.

The Australian Energy Council observes to Finkel that the impact of current price and reliability issues on suppliers, their customers and the economy “is now critical.” This situation, it insists, is not the result of NEM failure but of “sustained policy interference.”

Among the remedies the AEC proposes, two seem to me to be in the immediate grasp of the political class: empowerment of the market operator to manage system security and oversee efficient, flexible management of “contingencies” – and resolution of the domestic gas supply policy and regulation imbroglio.

These are not “the solution” but part of one.

Which leads me to ask whether we actually need wait on long-running inquiries to spur action in these areas? So long as we also bear in mind that they are steps and there is a lot more needed to guide us safely along the lengthy journey to a better (durable, affordable) power environment, the real big picture issue.

Mind the gap

“There’s a frustrating gap between politics and what we need in energy markets in Australia right now” is probably a good summary of all that has been said and done in the past week.

The quote comes from a radio interview given by Matthew Warren, CEO of the Australian Energy Council.

Elsewhere a media commentator has opined that energy users “are angry and frustrated at the inability of the political class to get its act together.”

Another has declared that the “tortured” energy policy debate is entering a new destructive phase “at the precise moment when leadership for the common good is most urgently needed.”

As for energy investors, it is not surprising (to me) to see in Brisbane’s Courier Mail newspaper an unnamed power industry executive reported as saying “We don’t know what the

f— the rules will be next month, let alone in 10 years, and that makes it nearly impossible to make investment commitments.”

As a metaphor for the political state of play it would be hard to go past South Australian Premier Jay Weatherill gatecrashing a federal government/AGL Energy $20 million “virtual power plant” launch in Adelaide this week – his administration has not contributed to it – to abuse Josh Frydenberg in front of TV cameras over their relationship.

This was apparently payback for federal criticism of the SA government plan to spend $550 million plugging gaps in local supply through embracing battery storage, building a new gas-fired generator with taxpayers’ money, bringing in back-up diesel plants, instructing retailers on the level of electricity they must source from within the State and legislating to give itself greater power to intervene in the market (a move which may contravene the current NEM arrangements).

In turn, Weatherill is eager to pour cold water on Prime Minister Malcolm Turnbull’s plan to expand the Snowy hydro system by 2,000 megawatts, a development that will take a number of years to come to fruition, including the period needed for environmental impact assessment.

(I note one former State energy minister this week describing it as a plan to use cheaper coal power to pump water uphill so you can later run it downhill as more expensive hydro electricity.)

The situation has moved ERM Power chief executive Jon Stretch to tell the PricewaterhouseCoopers/Australian Financial Review energy roundtable in Melbourne that “if this stupid anxiety between the States and the feds doesn’t stop, we are in deep trouble.”

Stretch says the energy industry is “screaming” for enduring national policy.

Others are expressing concern that the chance of fashioning such policy from the Finkel task force review of NEM security is being lost even before the report lands because of politics.

PwC’s energy and utilities partner, Mark Coughlin, adds the thought that now governments are intervening in the electricity market as investors and regulators. He asks: “What role is government trying to play? Where is all this going?”

As well, the upstream petroleum industry continues to point out, there is no viable plan for dealing with the closure of large coal-fired generation if gas is not permitted to play its expected role as a transition fuel, an issue that occupied not a little of this week’s Australian Domestic Gas Outlook conference discussion.

Looking at the SA plan, the Grattan Institute’s Tony Wood warns that it risks replicating the problems created by the national renewable energy target through working outside the NEM. On the other hand, Wood thinks the Weatherill government has no political choice but to act on its domestic issues, especially, he argues, when the Turnbull government “has no credible climate change policy.”

The Financial Review is moved to comment in an editorial this weekend that, a week after a national energy crisis was declared by the Prime Minister, “politicians are falling over each other with bigger and more eye-opening responses,” yet the core problems remain unresolved and the political bickering that got us in to this situation has “been ratcheted up to another level.”

Of the new Snowy development, the newspaper complains that it is “another big infrastructure project announced without proper assessment.”

All of which gives point to the Australian Energy Council reaction to the Weatherill’s plan. It tackles symptoms and not the cause, complains Matthew Warren, saying the “radical intervention only highlights the urgent need for an effective national strategy.”

Warren asserts that the SA electricity problems flow from poorly-designed government intervention in the NEM and subsidies, not the design of the market itself, a contradiction of the various voices declaring the NEM is “broken.”

(The National Farmers Federation in a submission to the Finkel review says the “broken” NEM needs fixing because reliability and affordability are key for agricultural producers in a situation where wholesale price spikes and outages “can destroy annual returns for some farmers in a few hours.”)

Many features of the Weatherill plan, Warren adds, “would be made redundant by effective national energy policy reform.”

And, perhaps curiously, given what it is up to, Queensland’s Labor government is also telling the Finkel review that “without coordinated national action to integrate energy and climate policy, the energy sector will continue to have sub-optimal outcomes and investment uncertainty.”

If anything, the gap to be minded in the energy space seems wider after the past week.

Apres ADGO

Writing in the Australian Financial Review’s “Chanticleer” column today, Tony Boyd, says of the proposed $4 billion acquisition of Alinta that “the Cheng family is coming to Australia at a time when all the factors are pointing to higher retail energy prices over the longer term – the higher prices will be a function of the lack of forward (policy) planning and the need to pay for the construction of expensive new generation and transmission infrastructure.”

There, in a nutshell, is why the manufacturers attending this week’s fifth Australian Domestic Gas Outlook conference in Sydney – among an audience of 300 stakeholders – went home no happier than they arrived despite all the goings on in Canberra and Adelaide (and the intransigence in Melbourne) on the part of politicians.

Reinforcement can be found in the Australian Energy Market Operator’s last word in its presentation to ADGO yesterday: “Maintaining system security is becoming more challenging, increasing the risk of supply shortfalls in both gas and electricity markets. Continued upward pressure on gas and electricity prices may threaten the financial viability of some commercial and industrial customers.

I limit myself to just on 1,000 words in each of these This is Power posts; I could produce five times as much today on the contributions to ADGO that said, in effect, “what’s killing us is the cost of energy and we see no enduring alleviation around the corner.”

“Manufacturing” like “farming” is a tag that covers many things (and very many members of the Australian community through direct and indirect employment).

In the context of this issue, let’s boil manufacturing down to the 35,000 New South Wales companies especially dependent on gas employing 200,000 people directly (the State government’s figures from presentations at ADGO).

Today 95 per cent of gas used in NSW comes from over its borders and that source if fast depleting. The controversial Narrabri development could lift local supply to 50 per cent – but it has many hurdles still to negotiate, no-one at ADGO was offering a date for development completion and, although the cost of the fuel plus delivery remains speculative, it cannot be “low.” And, at best, it would be half what the State needs.

The outcome of the Prime Minister’s much-hyped “crisis” meeting with energy companies and the Australian Petroleum Production & Exploration Association in Canberra is that the upstream industry, to quote APPEA, “will work with the federal government to ensure sufficient gas is available to meet peak demand in the NEM” despite State and Territory governments making this task “difficult” through restrictions on onshore projects.

From a factory (and more general consumer) perspective the key questions is “at what price”?

The Financial Review in the aftermath of the Canberra meeting quotes the managing director of Brickworks, a large energy user, as saying it is considering moving operations out of Australia after seeing its east coast gas costs surge 76 per cent in recent years. Another manufacturer declared his business would be “ecstatic” if it could source gas at $8 to $10 per gigajoule, paying at the moment $12/GJ.

It appears clear that what the Prime Minister’s meeting is signalling is an understanding gas trading reform and expansion of pipeline capacity will help in due time when producers are honoring their promise to make more of the fuel available for domestic use – but, as I told the ADGO audience in launching this week’s event, two four-letter words (“time” and “cost”) are dominant factors.

As part of considering the breadth of this issue, I recommend reading the comments of federal Labor MP Joel Fitzgibbon, as published in The Australian yesterday. In short “get the gas out of the ground” in order to avoid a crisis for factories and generation supply. The mood on the floor of the ADGO forum this week was very much tuned to this.

The other thought that occurs to me as I read media coverage this week is that those railing against “shipping our gas overseas” seem to be getting a fresh lease of life.

With another federal election perhaps two years away and Labor led by a populist whose key union supporters still want gas reservation, the local LNG industry leaders must be aware that they are nowhere near being out of the woods in this regard.

The next big gas conference is the giant APPEA annual event – this time in Perth in mid-May – and one does not need to be Old Moore to predict that this issue will loom over proceedings there.

Federal Resources Minister Matt Canavan, who arrived in Sydney on a “red eye” flight from Tokyo and detoured to speak at ADGO before jetting on to the Prime Minister’s meeting in Canberra, put the equation succinctly: “There is no pathway forward for long-term, sustainable and affordable gas in this country unless the States pull their finger out and start developing their gas.”

Development of the gas needed from onshore resources, he added, is a State responsibility, not a federal one.

Another presentation – from David Maxwell, CEO of Cooper Energy – urged on all governments the need for a willingness to take “a balanced, holistic approach” to resource development reflecting a balance of all stakeholder interests (“not just the loudest”) to meet the community’s benefit as a whole.

Without this, said Maxwell, “there will be more volatility and turmoil, a few winners and many losers.”

At the end of a turbulent fortnight, one can only question how far events, especially of the past few days, have moved to lessen this risk of “many losers”?

Tony Wood, the Grattan Institute energy policy director, who spoke at ADGO yesterday, in an op-ed in the Australian Financial Review this morning declares that “Australia’s energy system is surely too important for this petty politicking” – a reaction to the extra-ordinary public row between the South Australian Premier and Josh Frydenberg.

One of the underlying themes of this week’s ADGO conference, as it has been at the previous four, is that “politicking” continues to erode efforts to forge a durable approach to gas and electricity security.

Wild water

The monsoon of media coverage of energy issues over the past 10 days must be making it pretty hard for the community at large to understand what’s going on.

Probably the word that has stuck is “crisis” because no less than the Prime Minister says we have one.

Such is the momentum of the debate today, as a colleague said in an email to me this week, one must wonder if the Finkel task force in to NEM security is being rendered irrelevant by the political forces now at work. It’s a question of timing — and also of political parties taking up positions long before the review’s final report will be delivered.

From a purely personal perspective, what’s going on could actually hardly be better timed.

The Australian Domestic Gas Outlook conference I am co-chairing kicks off in Sydney tomorrow (14 March) with almost 300 attendees. It has a smorgasbord of papers relevant to the drama over the fuel’s availability and price.

Then the second Quest Events Australian Energy Week conference will be held in Melbourne from 21 to 23 June.

Its large slate of speakers drawn from across the spectrum of the energy supply business, customers,the regulatory sphere, NGOs and analysts also includes three ministers — Queensland’s Mark Bailey, Victoria’s Lily D’Ambrosio and the federal government’s Josh Frydenberg — plus federal Labor’s shadow minister Mark Butler and Alan Finkel. The inaugural version of this event last year drew 400 people.

Apart from anything else, the amount of information updating and networking opportunities available from these conferences is a valuable reservoir on which to draw for the rest of the year.

The problem for most of us at present is not the availability of information — it is arriving in torrents from every quarter — but the challenge of drawing meaningful direction from it all.

I was struck this morning by the abstract of a new academic journal article that AGL’s Tim Nelson and colleagues have just had published.

Entitled “The changing nature of the Australian electricity industry” (putting this in to Google will give you all the publication details), it says: “The electricity supply industry has historically offered a homogenous good supplied via economically regulated transmission and distribution networks. Competition was introduced into the contestable generation and retail supply chain components as part of the 1990s Hilmer reform process. After a century of incremental technological developments, the industry is now being transformed by new distributed energy technologies and a global focus on reducing anthropogenic greenhouse gas emissions. Policymakers did not anticipate these changes. A number of key reforms are likely to be required.”

The authors go on to argue that, given the partial substitution of grid-based power in the NEM, policymakers need to consider whether write-downs of regulated asset bases of monopoly network providers is necessary and what is the appropriate role of monopolists and competitive markets in delivering distributed energy resources (ie wind and solar).

As a synopsis of a fair chunk of the current challenges, I think that’s pretty good — although the headline writer in me (and I realized over the weekend that it is now 58 years since I started my communications career as a newspaper reporter) would be inclined to caption this commentary something like “Riding the power sector’s wild waters.”

If you want another insight in to the rapids and whirlpools of all this, you could visit the Senate’s Hansard for the reports of the hearings a select committee has been holding in to “the resilience of electricity infrastructure in a warming world.”

The committee’s three public hearings have thrown up all sorts of energy debate debris, not least because the transcripts give me the impression some South Australian senators are on a witch-hunt to identify the guilty party or parties for their State’s recent power woes.

If only it were that easy. Too often politicians generally give the impression that they just can’t get their heads around the considerable complexity of providing electricity to a modern society even without the complications of emissions abatement and are constantly stretching to pick winners and push barrows in their hunt for votes.

Every reader of the Senate transcripts will find his or her own particular areas of interest. Cherrypicking my way through the Hansard for the latest hearing in Melbourne this month, I noted these:

• “If the NEM architecture is not updated, distributed generation and storage has the potential to become more reliant on policy-based subsidies rather than market mechanisms” (Douglas Jackson, AGL’s executive general manager, group operations)

• “In South Australia, people are pointing to a failure of the NEM. I would claim there is a fair dysfunction in the gas market (that) has created most of the systemic problems we are seeing in SA” (Richard Wrightson, AGL’s general manager wholesale markets)

• “The market participants need time to plan; there are often five to 10 years in planning horizons — and we need some sort of predictability to avoid the disorderly transition we are experiencing today” (Jackson again)

• “Overall I would characterize it (the political debate,KO) as being incoherent. Without coherence we are not going to get a low-cost and secure path to the low-emissions electricity system of the future” (Ross Garnaut)

• “Power system security and reliability (are) visibly deteriorating. It is often said there is some form of market failure causing this. I am confident that it is not the market; it is a political failure to have a national plan for a way in which the market should operate. Investors simply cannot respond to the uncertainty we see in the market. They are basically caught between a rock and a hard place. So they are doing what is completely rational — and that is sitting on their hands.” (consultant Danny Price)

• “What we should be thinking about is what we need to change in the NEM rules to accommodate intermittent generation because it is going to happen anyway” (Price again)

• “If you have a thermal generator connected to the market, you have to bring certain technical characteristics to provide system security. There is no reason at all why intermittent generation should not have the same requirement.” (Price)

• “Energy is a political commodity and, in its technical nature, very complex” (consultant Bruce Mountain).

A random set of thoughts but there is a thread running through them that the body politic has yet to demonstrate it can grasp.

Boiled frogs

Three months is a very long time in politics.

At this point in December the Prime Minister and the State and Territory leaders held a Council of Australian Governments meeting and this is what their communiqué said about energy: “COAG agreed that governments must prioritise energy security, reliability and affordability as the electricity sector transitions to low emissions technologies. As the electricity sector accounts for 35 per cent of Australia’s carbon emissions, leaders agreed it has an important role to play in meeting Australia’s commitments under the Paris Agreement. Leaders noted the technical challenges to be overcome to successfully manage this transition and asked the COAG Energy Council to make it easier to expedite changes to frameworks, technical standards and rules that will assist in managing this transition and to accelerate proof of concept projects in relation to new technologies and infrastructure enhancements. Leaders committed to urgently progress work on broader solutions to provide certainty to industry, drawing on the outcomes of Dr Finkel’s final review.”

Can you spot the missing word? It’s “crisis” – as in Malcolm Turnbull declaring this week “we are facing an energy crisis.”

The COAG statement in December was mostly about carbon-related issues – where the vote-chasing politicians’ attention was focused. Even after the wake-up call that was events in late 2016 in South Australia. Until now.

The truth of the matter is that Turnbull, Tony Abbott and Julia Gillard (let’s not bother about the brief re-appearance of Kevin Rudd) have been faced since 2012 with mounting evidence of the security and affordability risks of not resolving energy policy, not least when it comes to gas supply, but they have been more interested in the “carbon war” and surfing the waves of popular sentiment favouring renewable energy.

Now we are suddenly discovering secure, cost-efficient electricity and readily-available, cost-efficient gas are “inextricably linked” (that’s the Australian Energy Market Operator). Well, duh!

The issues fuelling this week’s “crisis” talk have been in evidence, for example, at each of the past four annual Australian Domestic Gas Outlook conferences – and will be again next week when the latest ADGO is held in Sydney with an audience approaching 300 concerned people from across the stakeholder spectrum.

What we have here is a classic “boiling frog” scenario; only now, with the publication of an alarming AEMO statement in the wake of blackouts, load-shedding, price rises and ever-more-shrill cries from embattled manufacturers, are our political frogs prepared to acknowledge the perils of the hot water – with the added twist that, collectively, they are the ones who lit the fire.

There are in essence two issues here today.

One is the Bandaid solution the politicians inevitably will seek to apply to deal with the immediate risk – the consequences of AEMO’s prediction of gas supply shortfalls within two years in the southern States and the resulting threat to adequate power generation.

The other is the long-term resolution of the transition to a much-changed energy market. The price of failure in this respect, to quote Turnbull again, is that Australian economic investment will be impacted and jobs will be lost (in their many thousands, although he did not say that).

As the Energy Networks Australia CEO, John Bradley, has commented today, AEMO’s warning highlights the need for governments collectively to provide an integrated energy plan, given that secure electricity is dependent on secure gas supply.

And, as Australian Energy Council CEO, Matthew Warren, has put it in a letter to Alan Finkel despatching the association’s submission to his inquiry, “policy is the problem, not markets.” Recent price and reliability issues, Warren asserts, are “not the result of the NEM failing but (of) sustained policy interference and arbitrary constraints.”

Certainly Grant King, now Business Council president, is right when he says we are reaping the consequences of bad policy and of short-term populism. And he’s right to point out that “It’s hard to get out of this problem, given there is a three-to-five year gap in the development cycle.”

Maybe the Grattan Institute’s Tony Wood has put his finger on the real sore point. “Both sides of politics,” he says, “need to admit that reducing emissions under any policy or technology will lead to higher costs than the power we have today.”

And a ray of hope: EnergyAustralia CEO Catherine Tanna has told the Australian Financial Review, reacting to Turnbull’s “crisis” talk, “the situation is salvageable” even if we are “in for a couple of years of challenging times.”

She adds: “We can make certain improvements but we shouldn’t pretend all is broken.”

Quite an important question in this respect is whether the political frogs can cope with more heat?

Giving the message

There’s a clear coincidence of diagnosis about the east coast electricity market emerging for Alan Finkel’s task force as stakeholder submissions start to trickle in to the public arena.

What matters, of course, is the remedy Finkel et Cie put forward to the federal, State and Territory governments – and whether the body politic can actually bring itself to pursue the advice. And how fast it can act.

For example, we have collected environmental activists – 12 bodies, including Greenpeace and the Australian Conservation Foundation, plus the City of Sydney – declaring that “once one accepts the inevitability of decarbonization, the question becomes how to achieve it while maintaining high levels of reliability and affordability” and urging acceptance that “the NEM is in deep trouble” because of “the failure of the regulatory framework to internalize the environmental consequences of investment and operational decisions is central to the market’s failure to respond to extreme weather events in a way that supports decarbonization while also ensuring high levels of reliability and affordability.”

They want a national energy objective that “explicitly recognizes the energy trilemma.”

We have the Energy Policy Institute (EPIA) pointing out that it has been “saying for ages that there has been too much short-term thinking and false hope about system security.”

EPIA considers that “system security is very much a national long-term planning issue that cannot be dealt with by political solutions” and it urges the appointment of a “chief planner” to take over where the Finkel task force leaves off to guide the NEM for “at least 30 years into the future on an ongoing basis, paying close attention to the three imperatives of energy security, energy affordability and emissions reduction, whilst undertaking wide consultation with industry, consumers and other key stakeholders.”

In EPIA’s opinion, “there is no place for party politics or ideologies in the contest between technologies.” All network and generation options, both large- and small- scale, including smart grids, micro-grids, new and old renewables, storage systems, low-emissions coal and gas, CCS, nuclear power and fuel cells, should compete with each other. In particular,

EPIA says that domestic barriers to the supply of natural gas should be lowered and the ban on nuclear power should be lifted.

And today the Australian Energy Market Commission has delivered a magisterial rebuke to politicians collectively in its submission to the task force, declaring that “the Australian energy sector has suffered from a long vacuum around national, co-ordinated policy decisions.”

This, says AEMC chairman John Pierce, has resulted in “pervasive uncertainty which makes it difficult for business and consumers to invest – and undermines the reliability of power supply.”

The commission adds that “without clear, national, co-ordinated policy objectives and credible mechanisms that reinforce one another both business and consumers find it difficult to invest – which undermines the reliability of supply.”

Overall, it says, given rapid changes in technology and consumer behaviour, it is important for national energy policy to be clear and acted upon consistently – and the “time-critical nature of energy market reform means it is imperative that development is not frustrated” through the CoAG Energy Council by “duplicative, time-consuming processes and delayed decisions.”

Given that the original design of the UK power market was the template to a considerable extent for the NEM, it is notable that the AEMC now cites the more recent British experience as a “cautionary tale” showing how incompatible mechanisms targeted at emissions reduction and energy objectives now threaten reliability and increased prices.

In the context of all this, I have been struck by a commentary on responsibility for energy security included in EnergyQuarterly, published by Graeme Bethune’s EnergyQuest consultancy.

Bethune opines in the new edition that “if the electricity market is national (or at least covers the five eastern States), surely energy security is the responsibility of the federal government.”

He adds: “While the NEM operates under national laws and is operated by bodies with Commonwealth-appointed directors and management, (it) is actually a patchwork of State-based generation and distribution assets that are beholden to State legislation.”

Bethune says “the toxic state” of national politics means there has been no consistent over-arching policy for the NEM for most of the past decade and “therefore very little investment in new generation or even the upkeep of existing assets.”

Most of this part of the EnergyQuarterly commentary is directed to the South Australian situation, but its underscoring of the state of new capital development of power plant and the maintenance of existing generation is something that the Finkel task force needs to have at top of mind — and its view that the federal government ultimately has the responsibility for sorting out this mess is a point likely to resonate with the community at large.

John Bradley, CEO of Energy Networks Australia, has put out a statement highlighting the fact that there is “a groundswell of support for a carbon policy circuit breaker.”

Bradley says there is “an overwhelming consensus of stakeholders supporting market-based carbon policy” and argues that “the energy industry, unions, social welfare bodies, environmental advocates and, most importantly, customers are ready to work with governments to resolve the impasse.”

He asserts that the goal should be a “pragmatic agreement on market-based carbon policies which are technology neutral.”

The frustration that I think is going to grow even more strongly in the community than it has to date will come when all the above is taken in to account and the realisation dawns that  we still have many months to go while the Finkel task force wends its way to a conclusion and the federal government produces it climate policy review (and meanwhile the Punch and Judy show of federal politics careers on, seemingly on another plane to the world in which we have to live).

A very big issue for Malcolm Turnbull and his cabinet committee on energy is whether they and the Coalition government can afford to wait until some time late this year – or more likely early 2018 – before the impasse is addressed.

Problems in energy security in the winter ahead, and perhaps next summer, as well as the mutinous state of big business over energy prices (read “Manufacturers slugged by power price hikes” in yesterday’s Australian Financial Review) suggest to me that the federal government and the Labor party may not have the luxury of many more months to use the Finkel’s review as a shield.

The arrival of householders’ power bills for the summer just ended may soon turn out to be the next weapon for public cudgelling of politicians’ backs in the energy debate.

To quote both Shakespeare (“Henry V”) and Sherlock Holmes, “the game’s afoot” and, while the Finkel process is usefully throwing up the deep concerns of stakeholders over security and affordability of energy, the Prime Minister and premiers may be running out of time to reach the consensus being urged on them faster than they imagine today (or at least are prepared to acknowledge publicly).

ADGO 2017

This is one way of putting it: “The faint odor of gas that began wafting through the Australian energy debate has now become a major stink.”

Thus a tabloid newspaper reporter this month, yet one more indication that the discussion, and not infrequently the shouting match, about domestic gas supply over the past five years has started to reach broader public awareness.

The problem and the debating points are not news to the main stakeholders in the gas industry, whether suppliers, pipeliners or large consumers – and the current state of play will again be the substance of Quest Events’ Australian Domestic Gas Outlook conference, the fifth of its ilk starting in Sydney next week (on Tuesday 14 March).

As co-chairs, University of Queensland professor Andrew Garnett and I, will not be struggling to keep a large audience engaged over three days; rather, our challenge will be to enable the many points at issue to get an adequate hearing, so broad is the canvas of this saga.

The hard part of developing a forum like this is that the program must perforce be arranged well in advance and this is shifting ground; the key is to bring together people who can provide important updates and those whose knowledge and experience provide acute insights in the light of current developments.

ADGO 2017 does just this, I believe.

Speakers include Warwick King, the new CEO of Australia Pacific LNG, David Maxwell, managing director of Cooper Energy, Paul Adams, managing director of Jemena, Rod Sims, chairman of the ACCC, John Pierce, chairman of the AEMC, Richard Cottee, managing director of Central Petroleum, Rob Wheals, a senior executive of APA Group, David Baker, managing director of Strike Energy, Mark Collette, a senior executive of EnergyAustralia, Tony Mahar, CEO of the National Farmers Federation, Michael Thomson, CEO of the NT’s Power & Water Corporation, David Rynne, chief economist of Queensland’s Department of Natural Resources & Mines, Anthony Fowler, CEO of Lochard Energy, Tony Wood, energy director of the Grattan Institute, and Jim Snow of Oakley Greenwood.

My own favorite time at these Quest Events “energy outlook” conferences is the Q&A sessions and ADGO 2017 includes three especially promising offerings:

  • “Is there a way out of the triple whammy that has hit the domestic market?” – featuring APPEA’s Malcolm Roberts, AiG’s Tennant Reed, Senex Energy MD Ian Davies, Mike Lawson, deputy secretary of the Federal Industry Department, and also Bruce Wilson, head of the department’s resources division.
  • “How can the gas market operate more efficiently than it is today?” – featuring Paul Adams, Rosemary Sinclair, CEO of Energy Consumers Australia, Peter Dobney of Orora Group and Rob Wheals.
  • “Gas in the broader context of the transition to a lower-emissions economy with secure, affordable energy supply” – featuring two former federal ministers, Martin Ferguson and Ian Macfarlane, who is now CEO of the Queensland Resources Council.

If anything, over the five years of ADGO forums, we have seen the difficulties growing of achieving the core challenge of the eastern gas market – getting more gas to the market – and, not surprisingly, the consequences of this not happening in the final years of this decade have become of increasing concern, not least to the nation’s trade-exposed manufacturers.

Just days ago APPEA’s Malcolm Roberts warned a supply shortfall, under present circumstances, looms in 2019 – that’s just 800 days away if winter is the time of maximum concern.

Graeme Bethune’s highly-respected EnergyQuarterly publication, in the latest issue just published, makes this observation: “Demand destruction is evident as a consequence of higher gas prices combined with high power prices leading to business closures or output reductions, as are reflected in the broad assumptions of AEMO’s (most recent) demand assumptions. Businesses as diverse as food processors, wool processors, glass manufacturers as well as other energy intensive industries such as concrete, fertiliser and aluminium production are struggling under gas contract prices that have doubled in the past year. Some manufacturers are saying that three out of four gas suppliers are not able to offer gas. Some companies are looking to bio gas/biomass to protect their businesses.”

Crisis is a much over-worked word in Australia’s political debate, but it seems to me this situation probably classifies as one, even if it is relatively slow-moving.

ADGO 2017 can’t deliver solutions but it will provide a spectrum of stakeholders with a fresh opportunity to canvass what these now are.

It’s a very timely event, I think.

 

About the Danes

As we all know, you can demonstrate just about anything with statistics. It depends on how you present the information.

Take for example this media report last month: “Denmark generated enough wind energy to power the entire country’s electricity needs.” Another said: “Wind energy supplied all of Denmark’s power needs on one day.”

(The EU wind lobby described this as “a very impressive feat” and a demonstration that “renewables can truly be a solution to Europe’s needs.”)

Contrast this with a report that in 2016 the technology’s share of Danish electricity production fell because last year was the least windy in six years (after a much-hyped 2015 was the most windy since 1994).

The 2016 wind share was 37.6 per cent, but this, too, needs to be looked at carefully because it is production, not Danish consumption.

The whole Danish power story is interesting – and of interest to us here at present because Denmark is on the visiting list for NEM security inquiry chairman Alan Finkel, who is now overseas exploring international experiences in the context of his domestic task.

More than 40 years ago nine-tenths of Danish power supply was oil-fuelled. The crises of the 1970s not surprisingly made them look to other sources (notably initially coal) and technology development has enabled them in the past 12 years to embrace one of their best home resources: wind. Today Denmark has more than 5,000 megawatts of wind capacity (a bit less than double what we have in Australia as a whole).

I can’t resist interpolating here that the Danes have made full use of their share of North Sea oil and gas while embarking on their energy transition. Denmark today is a net exporter of oil.

That gets no media chatter but the windy stuff gets boosted regularly, especially by those websites of green persuasion (including here some of the mass media outlets). What you usually don’t see mentioned in the same story is that the Danes also rely on 4,200 MW of conventional generation and 2,300 MW of combined heat and power plants in 670 locations (‘cos it’s darned cold in that neck of the woods for long periods). You also don’t get told that a great chunk of the heating energy the Danes rely on comes from wood pellets and wood chips imported from Eastern Europe and Canada. (Nor, to be fair, that, like the Germans, the Danes have gone gangbusters on residential energy efficiency, a means of easing the pain of high costs.)

You certainly don’t get told in most reports that the Danes have two electricity grids and that they are quite poorly interconnected while they have very good links to Norway, Sweden and Germany.

West Denmark is where most of the green generation is located in the most wind-turbined place on the planet but the country’s load isn’t there – so a lot of the wind output leaves the country and the populated areas benefit from those international links.

Without burying you in detail, generation output inside Denmark is around 32,000 gigawatt hours a year (a little more than South Australia and Tasmania combined) and at present some 11,000 GWh comes from coal plants, 2,100 GWh from gas turbines, 5,000 GWh from burning biofuels and waste and 13,000 GWh from wind power.

A big thing is the import/export business. Denmark gets up to 6,600 GWh a year from Sweden (either hydro or nuclear) and around 3,000 GWh from Germany (mostly brown coal generation or nuclear).

Critically, the wind sector in Denmark depends for its domestic utilization efficiency on the link to Norway’s hydro system – which can dispatch promptly when wind isn’t available. When the winds are good, electricity can be sent in to Norway for storage in hydro systems.

The long and the short of the Danish story is that the country exports about 10,000 GWh of power a year (that’s wind) and imports about 13,000 GWh (of which nuclear energy is a quarter to a third). Far from “running on wind power” even on some very windy days, the Danes consume roughly half of their wind farms’ output over a year and they can do so because of the system of which they are (a small) part.

There is another very important angle to this story.

Households in Denmark share with those in Germany the “honor” of having the European Union’s highest residential power bills – 30.7 euro cents per kilowatt hour for the Danes and 29.5 cents for the Germans.

The overall tax share of Danish bills is 57 per cent (not all related to renewables subsidies).

I have seen it reported that Danish householders pay a third more than the country’s average spot price for electricity in the renewables-specific levy included in their suite of government-imposed bill burdens – and also that the wholesale price of the power they use makes up 15 per cent of their bills, with network charges accounting for 18 per cent.

One of the quirks of this set-up is that, while wind generation is heavily subsidized in Denmark, because this production is substantially exported at market spot prices, the subsidies are also exported.

It needs to be mentioned that, thanks to nature and home-grown ingenuity, the Danes have parlayed wind power in to a manufacturing benefit, delivering jobs and economic gains. Denmark is today the world’s largest exporter of wind farm equipment.

How one translates all this in to some form of lesson for Australia – except for the deep green boosters who want to highlight information that supports their cause without the overall context – is a question indeed. We shall have to wait to see what Finkel draws from his visit.

Perhaps he will be talking to DONG Energy, the dominant Danish generator and as recently as a decade ago one of the most coal-intensive utilities in Europe, now aiming to eliminate coal plants from its fleet by 2023. I was struck by this comment in a recent media interview with one of its executives: “Today, there isn’t really a good replacement for coal if you want to produce heat and power at a large scale while complementing wind energy and solar. When it’s not windy, you need something else and sustainable biomass can be that something else.”

The DONG man hastened to point out that the wood with which DONG is replacing coal in its generation “doesn’t come from the Amazon.” It is sourced from around the Baltic Sea and in North America.

I would dearly love to see our local Greens discussing replacing, say, Liddell’s coal with forest residue from Tasmania and the mainland…..or reorganising our system to include nuclear power.

 

 

An awful example

I gather that energy task force supremo Alan Finkel has been visiting Ireland this week and will then venture on to Texas among other places.

Seeing he is out that way, I have another suggestion: call by Toronto and view the Ontario energy shemozzle that makes South Australia’s issues look like rather small beer.

I have written here before about Ontario (the New South Wales of Canada); it is a gift that keeps on giving – so long as you don’t live there – to those of us who see government intervention in energy markets more as devilry than beneficence.

The latest twist in the Ontarian power wheel has Premier Kathleen Wynne (whose Liberal party is roughly equivalent to Labor here) endeavouring, to quote a critic in the Canadian Financial Post (their equivalent of our Australian Financial Review), to sooth “savage” provincial views over “out-of-control electricity rates” with a scheme to “smooth” costs by re-arranging contracts with generators at lower rates but for longer periods.

The Canadian Taxpayers Federation complains that this doesn’t solve the problem, just extends it.

Wynne is also juggling some costs away from consumers and on to the provincial budget, a classic “rob Peter, pay Paul” gambit that is not unknown to politicians in our neck of the woods.

It is all “sleazy sleight of hand, a desperate attempt by Wynne’s party to escape responsibility for shamefully mutilating the once-stable electricity system,” according to the Financial Post writer. “It’s the plan of a government convinced voters are too foolish to realize they’re being hosed yet again and worse than before.”

The message that Finkel could glean in Ontario for the politicians (Coalition and Labor) who have given him the NEM security gig is that intervention in a marketplace inevitably begets more intervention and so on ad infinitum. He needn’t actually travel; he could telephone professor Dieter Helm at Oxford University or even just Google a column he wrote in the London Financial Times in October 2014 (advice I enthusiastically wrote up at the time both on this website and in Business Spectator for which I commentated before it was swallowed by Rupert Murdoch).

Helm’s view is pithy: “When it comes to energy policy, politicians always think they know the answers – and leave consumers paying the price for years after they leave office.

“The lesson is painfully obvious: the energy mix should be the outcome of market processes, not the objective of government policy. (Doing this will) create incentives to test out the options in the fire of the market. Public funds are better spent on basic research than on building capacity using current technology that is not up to the job.”

As Helm observes, removing subsidy schemes is far harder politically than introducing them (something we have done a lot to demonstrate in the NEM since 2008).

Finkel has told those attending a technology experts session he convened in Sydney that he is “looking at a time scale of up to 30 years” for his task force’s report, due to reach CoAG in mid-year. At one level this is fine and dandy, but what proffering jam in a distant tomorrow will do to solve the east coast’s multitude of problems today is the hard question.

Ontario has managed to create a situation where it has run up a public debt of $C125 billion by 2032 via arrangements to fund power purchase deals, green power subsidies and coal generation phase-outs. Under Premier Wynne’s new plan this liability will stretch to mid-century and, to quote the Financial Post, “cost tens of billions more.”

All of this can be traced back to a broad decision in 2010 to provide subsidies and ensure high prices for wind, solar and other renewables players that, Ontario voters, were promised. along with other interventions, would free the province of “dirty coal” and deliver jobs and growth. If this sounds strangely familiar, you must have been reading Bill Shorten’s headland speech on federal Labor’s plans here a few days ago.

In Ontario, the great leap in to the future (aka the unknown) has delivered hundreds of dollars a year more in household power bills, taking them to double what they were in 2005 and the situation to the point where Premier Wynne can’t mention electricity at public meetings without being roundly booed.

Her government has suspended plans to contract for more wind and solar power but that hasn’t made a dent in voter rage (and, of course, it hasn’t pleased environmental activists).

The Ontario auditor-general has estimated that the all-up cost to the provincial economy over 30 years of “going green” will be $C170 billion.

Critics call Ontario energy policymaking “a train wreck in slow motion” and declare the provincial electricity structure “badly broken.” Does this sound familiar in our own milieu?

Here, as in Ontario, we are not even close to having a durable policy regime in place that will return us to rational energy governance and deliver secure and affordable electricity and domestic gas supply as we pursue a lower carbon emissions environment by 2030 (which is 13 years away, not 30, as Finkel may care to note).

There, Ontario’s Society of Professional Engineers has issued a half dozen critical reports in less than a decade on the tendency of the Liberal government in Toronto to let green talk and politicking over-rule sound management. One of the SPE’s former chairmen has bitingly commented: “Because they (the politicians) know how to turn on a light bulb, they (feel secure in) issuing policy statements on the most complex engineering system on the planet.”

Another Toronto critic has summed up the Ontario situation like this: “Through subsidies and feed-in tariffs, the government has promoted a massive expansion of electricity capacity. At the same time, demand for electricity has gone in to decline as economic growth has slowed and the mass market has cut back on electricity needs. Soaring supply, falling demand and mandatory pricing is a recipe for economic chaos.”

Now, to be fair, eastern Australia is not Ontario – any more than New South Wales is South Australia – but there is a trend we all have in common, the one so clearly defined by Dieter Helm.

One last thought: the Ontario auditor-general has estimated that the province’s policies to eliminate coal and go green are, in effect, imposing a carbon abatement cost of $C250 per tonne. What, one wonders, could be the cost of what Shorten (and his State colleagues) propose?

We do not want to find ourselves in 2030 (let alone 2047) with the judgement on our energy and climate policies being the one just delivered in Toronto by one of the provincial government’s fiercest energy policy critics: “The regime is a monumental failure. The costs to consumers are prohibitive and damaging the economy. The environmental and health benefits are debatable. The few jobs created by this policy are mostly temporary, but the high prices foisted on consumers are permanent.”