RIP ‘death spiral’

Is it possible that this month’s “Energy Networks 2016” conference in Adelaide has marked the knell of the “death of the grid” carry-on that has been inflicted on us locally for the past three years?

A conga line of speakers at the conference has talked up in one form or another the strong future for the power grid in the transition to a low-carbon, affordable and reliable energy economy.

Which isn’t to say that they were spruiking the status quo or even a diluted version of it; the implicit message being the need to blend “disruptive” technology in to the regulated, currently monopoly system – and, at least to me, this raises the question of whether (and when) we could reach a stage where the distribution business is actually open to competition?

Ben Potter has an epitaph for the doom-laden “spiral” concept in “The Australian Financial Review” that is well worth reading, even if the assertion it quotes from Accenture’s managing director resources for Australasia, Anna Burns, requires us non-maths people to go searching for an interpretation. “This is not a transition,” Burns told the conference. “It’s a point of inflection.”

Look it up. There’s lots of fun stuff about it on the Web, not least about the American presidential election. I like the one about being challenged to turn the Queen Mary around in New York Harbor (or Sydney Harbor, right?).

Burns’s thrust relates to the rubbing together of network operators and energy retailers as “smart technology” changes both their environments – and AGL’s Andy Vesey has added the thought that who competes where is the wrong argument; the right one is how grid businesses and retailers can work together, not something that has been hugely evident in recent years in Australia.

To which one could add the thought contributed by Nigel Barbour, CEO of New Zealand’s PowerCo, who sees the grid becoming “an open-access platform” enabling competition and the trade of services — “some we haven’t even thought of yet” —  between existing and new players.

One of the interesting thoughts thrown to the “Energy Networks 2016” 800 attendees came from Energex CEO Terry Effeney and from Lena Hansen of the US Rocky Mountain’s Institute – they think it should be possible to unlock greater use of hot water storage.

Effeney said the opportunity to increase the benefits of household rooftop solar arrays by using hot water as storage – a “solar soak” – hasn’t received sufficient focus. Hansen agreed there is a need to think differently about resources such as this already on the grid.

Privatized TransGrid’s new boss, Paul Italiano, then put his finger on one of the big issues: “There are economically viable solutions out there, but what’s making them difficult is getting them through the framework we have in place.”

Contrast all this with the torrent of guff inflicted on us in recent years as the green ideologues have ridden the “networks are the enemy” horse for all it is worth (quite a lot in terms of propaganda value, thanks to many gullible journalists) — e.g. Christine Milne, who used a parliamentary inquiry last year to assure us that “the era of centralized power being carried hundreds of kilometres to its customer is coming to a close.”

The “Energy Networks 2016” discussion raises (for me) critical questions about policy and regulatory change in the networks arena. How bold (as opposed to crazy brave) should it be and how fast can it be implemented?  We have had plenty of examples of timidity at jurisdictional levels in recent times and not a few of politicians haring off on “picking winners” paths with their energy illiteracy on display for anyone who really wants to look hard at the offerings.

Josh Frydenberg took a message to Adelaide that he supports a “fuel neutrality” approach but I wonder to what extent this is where his own government as a whole is at (read Greg Hunt’s various comments, for example) – and it certainly isn’t the line being pursued by a number of members of the CoAG Energy Council that he chairs.

Basil Scarsella, formerly an industry leader in Adelaide and now CEO of UK Power Networks (which has the distribution franchise for London among other areas), reinforced my broad point at the conference by underscoring the value of British regulatory reform, including the requirement to lose or gain revenue depending on customer service as well as steps to promote innovation in grid services via government support.

This stuff keeps raising the thought on my part that, with respect to power delivery, we need a 2016 version of the early 1990s Hilmer Report, so seminal in creating the east coast market we have today – but I am also ever-mindful that Hilmer’s ideas would not have worked out without political leaders like Paul Keating, Nick Greiner, Wayne Goss and (subsequently) Jeff Kennett.

Yes, we have a whole mosaic of reviews and the like being created, but the crying need is to pull everything together as quickly as possible in a workable “roadmap” – the catchphrase du jour as you will have noticed – to deliver an approach that can be implemented relatively fast and won’t be changed with electoral cycles or even by a series of opinion polls (which is what drove Julia Gillard’s rather wild intervention in network affairs in 2012-13).

Having this properly in place by even 2020 is a pretty large task when you look at what has taken place since the last big network reforms at the start of the decade and the broader carbon policy “dog’s breakfast” that has been visited on us.

Interring the “death spiral” is at least a step in the right direction, provided the body politic has actually got the message.

Egg and spoon race

Comments by federal Energy Minister Josh Frydenberg at the past week’s Energy Networks 2016 conference in Adelaide deserve far greater exposure than they have got, I think.

Apart from “The Australian Financial Review” with its restricted audience, they have been ignored by the popular media

The one seized on by the power industry is his commitment, if the Coalition is re-elected on 2 July, to develop a “low emissions technology roadmap” in a project led by CSIRO and intended for delivery by the end of 2016.

This, says the Australian Energy Council, is “a step in the right direction” at a time when its members are “increasingly concerned about the risks arising when firm, high emissions generation is simply replaced with intermittent, low-emissions technology like wind and solar power.”

It is not a “like-for-like” change, says the AEC’s Matthew Warren. “To retain confidence in the decarbonization of the Australian grid, we must retain high levels of reliability at the lowest possible cost.”

Needless to say, none of this sits well with the ideological advocates of renewable energy, who expect nothing more or less of governments (and politicians generally) than that everything they say or do should be boosting the technologies of their dreams.

Frydenberg told the networks conference that his government “supports renewables as a growing part of the energy mix” while understanding that “it is our role to ensure there is a responsible transition,” going on to bucket Labor for “inappropriately transplanting” from overseas policies (like a 50 per cent RET) “that don’t account for Australia’s position” – a point also taken up by the AEC: “We cannot look to the rest of the world for answers.”

In this context, it has been interesting to see well-regarded US consultants, the Brattle Group, publish a new report this week about how cleaner energy may be delivered for Texas. In short, the review for the Texas Clean Energy Coalition argues that natural gas and renewables can provide all of the new electric power for the Lone Star State over the next 20 years.

Texas expects to see 12,000 megawatts of relatively old coal-fired generation retired between now and 2035 and Brattle predict 85 percent of the state’s system energy – Texas famously is not inter-connected with any other part of the US – will come from natural gas, wind and solar at the end of the review period, thanks to relatively cheap gas and falling utility-scale solar costs. By 2035, it claims Texas will have 9,000 megawatts of wind farms and 13,000 MW of solar farms.

Now Texas is not the east coast of Australia; it doesn’t have our coal resources (and the coal industry continues to argue hard for HELE generation and CCS here) and we may be on the cusp of embracing nuclear power (Texas has 5,000 MW of reactor stations). But we both have gas, wind and solar potential that can be further utilized and the real issue there and here is the one Frydenberg articulates – “maintaining an affordable and reliable energy system while successfully making the transition to a lower-energy mix.”

This will take differing forms from country to country and region to region and, as the Energy Minister argues, “simplistic comparisons with other countries are typically ill-informed and risk the adoption of misguided policies.”

(A current case in point is the international media fuss about Portugal “running for four days straight on renewable energy.” Portugal (a) has a solid hydro-electric baseload system – meeting a third of its needs as well as some coal and gas plant, (b) good interconnection with Spain to cope when its own resources lag and (c) as a result of building more than 5,000 MW of wind farms, has some of the highest retail power bills in the EU.)

In the general context of the local debate, I thought ENA chief executive John Bradley came up with a neat analogy at the networks conference.

The industry is in “an egg and spoon race” on behalf of consumers, he said. “We must execute a rapid transformation in the energy system without compromising the delicate balance of affordability, sustainability and reliability.”

(For the energy illiterate, “rapid” is 15 to 20 years, not the end of this decade.)

The community, Bradley pointed out, doesn’t appreciate that the energy grid, an investment of scores of billions of dollars, was built for a passive, one-way flow of electricity and will need to be turned in to a “dynamic, actively managed smart grid” to support the transformation now under way.

This is why the roadmap proposed by Frydenberg is prospectively a far greater step on the road than the “pick-a-box” Labor promise of 50 per cent renewables by 2030. Allied with the mooted roadmap is work already initiated by the CoAG Energy Council for an Australian Energy Market Commission review of system security needs in the transition.

None of this appeals to the “I want it now” brigade and the million or so post-materialists in metropolitan Australia whose votes are crucial to Labor in holding off the Greens on one hand and regaining seats from the Liberals on the other. (Their attention is also important to the metropolitan papers in their struggle to avoid an early death and the TV stations in the capital cities.)

That these are the same people who will (and have previously) displayed “white-hot anger” over energy bills and power blackouts is beside the point in the crucible of an election campaign to those desperate for the other sort of power.

Nonetheless, the likelihood of broken eggs in the electricity transition race is not to be discounted – and the cost is potentially significant for the economy and energy consumers.

Conveying this message in the fevered weeks of a poll campaign is a challenge – perhaps the Coalition should ponder on how much more they should have done in the past three years in this regard.

You can find Frydenberg’s speech on his personal website (www.joshfrydenberg.com.au).

In “caretaker” mode during an election, the official government websites don’t publish this stuff.

It’s worth reading – and the media generally obviously have other things to do than impart even the basic thrust of it to the community.

Investment killer

No surprises here: Labor has opted to run in the federal election with the unions-driven gas reservation policy adopted at its national convention and is getting an all-round kicking for its pains.

The Labor announcement was always going to happen despite the policy being decried by our most respected consumer watchdog, the Australian Competition & Consumer Commission, between it being railroaded through the ALP convention and this week.

Perhaps most tellingly for Labor, its energy spokesman until a few days ago, Gary Gray (who is retiring from Parliament), condemned the concept out of hand in 2015 when he spoke at the Australian Domestic Gas Outlook conference I co-chaired in Sydney.

Gray said then: “Experience around the world shows that domestic gas obligations – that is, reservations – discourage investment and exploration, ultimately reducing the amount of gas that is brought to market.”

He added: “Reservation may also increase reliance on subsidized gas and discourage efficiency and technological innovation.”

And he pointed to the International Energy Agency statement that “reservation policies are effectively subsidies that exacerbate demand and inevitably lead to shortages a decade later.”

In his ADGO speech, Gray warned that the gas industry is at a crossroads in Australia. “On the one hand, there are pressures to subsidize our gas prices and on the other we want to resist the technological opportunity to produce it. Neither approach makes economic sense and both effectively will keep gas in the ground.”

Gray is part of a trio of politicians who have oversighted federal energy policy for most of this century – the other two are Ian Macfarlane and Martin Ferguson – and all of them have firm opponents of reservation.

Ferguson, who these days chairs the Australian Petroleum Production & Exploration Association advisory board, has been cutting in his response this week: “Raising the spectre of sovereign risk for short-term political horizons is not what the Labor Party I grew up in was about.”

And he added: “(This) is a policy of a union movement desperate for survival (and) cruelling Labor’s economic credentials.”

Josh Frydenberg, successor to Macfarlane, Ferguson and Gray as federal Energy Minister, has leapt on another Ferguson comment (also at ADGO) – in which he labeled reservation as an “investment killer.”

And Frydenberg points out that the CoAG Energy Council (which he now chairs and includes Labor governments in its membership) rejected the need for government intervention of this kind when it met last December.

APPEA’s chief executive, Malcolm Roberts, has chimed in by commenting that it is “disappointing” federal Labor has “bowed to union demands to introduce a policy that could penalize one of the nation’s most successful export industries.”

One can expect to hear a great deal more on this topic at the APPEA annual conference that opens in Brisbane on 6 June.

Meanwhile, the Grattan Institute’s Tony Wood is talking of “the spectre of old-fashioned protectionism hovering in the air.”

Labor, he says, proposes in effect to tax gas producers to subsidize domestic users. “The result would be to increase the costs of producing gas for export and thus reduce the development of exports and the incentive to develop further supplies.”

Wood argues that a more constructive approach would be to address “the current muddle across jurisdictions,” creating a clear and consistent national regime for unconventional gas development.

It’s worth at this point coming back to the key ACCC finding – its recent inquiry could not identify any market failure on the east coast that could justify a gas reservation policy.

The commission  believes the east coast problems relate to a structural lack of competition in the region and this, it says, can’t be addressed via reservation policy.

In fact, the ACCC makes it clear going down this path would threaten a worsening of the situation by depressing prices in the short term and discouraging investment.

Fingers are also being pointed to the 2014 study by what was then the Bureau of Resources & Energy Economics: it concluded that a reservation policy, including restrictions on exports, was likely to have an adverse impact in such areas as energy efficiency, foreign investment, new gas supply and future government revenues.

All of this adds up to more grist to the mill of Labor opponents, who accuse the current federal leadership of being glove puppets for militant unions.

Meanwhile I am waiting for Bill Shorten or Chris Bowen to explain how it will help to reserve gas on the east coast when Labor is frustrating its development in Victoria, supporting a moratorium on further development in New South Wales and threatening, if elected next year in the Northern Territory, to impose a ban on fracking in the area that is being held out as the lifeline for NSW manufacturers in particular.

Which brings me back to Ferguson, who told the 2016 ADGO conference that “the biggest risk to gas users is not exports; it’s the combination of poor policy, poor regulation and political opportunism.” Quite.

Basslink & beyond

Is the Basslink saga, now in its fifth month, a NEM sideshow?

It is, of course, a big, fat problem for Tasmania. The failure of the high voltage link to Victoria and the difficulties of finding the break under Bass Strait and then fixing it, have presented a rolling crisis for the State government and Hydro Tasmania as well as a substantial inconvenience for large customers.

In the latest twist, bad weather has simultaneously lifted Hydro Tasmania’s dam storage above 20 per cent and prevented the final stages of the repair operation from being tackled.

Any number of politicians and journalists have made local hay of the situation, including recent claims that the bill, which includes the cost of running more than 200 megawatts of diesel generators, will exceed $400 million (a hit to taxpayers). The solvency of Hydro Tasmania has even been questioned.

The government-owned utility denies the bill is anything like $400 million. It says that diesel plant hire is looking to be a bit over $50 million and monthly operating costs are running at $11 million per hundred megawatts. It dismisses talk of insolvency.

It is also increasingly being argued that Tasmania should build wind power capacity in spades and a second Basslink to carry excess power to the mainland. Beyond this lies a still broader agenda for more NEM high voltage interconnection capacity to underpin wind power development in particular.

The Prime Minister has bought in to this by approving a new feasibility study of Basslink 2 at federal cost. (You may have noticed there is an election on; three of the Tasmanian seats are in play and form part of a list of 36 around the nation that, the political pundits argue, will decide the federal government’s fate on 2 July.)

The Tasmanian Energy Minister, Matthew Groom, recently told State Parliament in Hobart that secure and reliable interconnection between the States in the NEM is “essential” if Australia (really the east coast) is to encourage greater renewable energy penetration.

His State’s hydro system should be seen as a national strategic asset, he argued, not just an essential local one. “There’s no doubting Tasmania’s long-term capacity to contribute further to Australia’s clean energy transition.”

With this in mind, Groom declared, expanding the link across Bass Strait should be recognized as a national objective. It seems Malcolm Turnbull agrees.

Groom’s views are echoed by South Australia’s Ian Hunter, Environment Minister, who used a speech in Sydney last month to call for a “real grid” on the east coast – including a “thicker, stronger” link between SA and NSW and a second link between his State and Victoria – to “deliver world-class renewable resources to all of the NEM.”

Interestingly, this thought reflects something the International Energy Agency executive director, Fatih Birol, said in Tokyo four weeks ago to Prime Minister Abe and a meeting of G7 finance ministers: “What is crucial for renewable deployment in many regions is no longer just subsidies such as feed-in tariffs, but system integration.  In most countries, including Japan, there is a regional disparity between wind and solar potential and large demand centres. A strong transmission system is needed to enable a larger scale integration of often very cost-efficient renewable resources as different weather patterns balance out.”

The obvious point is that such major infrastructure development comes at substantial cost and, in Australia,would require significant change to NEM regulatory rules governing high voltage network expansion.

Some, including the Australian Energy Council, are reminding policymakers, in the context of the Tasmanian crisis, of the risks to consumers of over-reaction.

The AEC notes that the New South Wales and Queensland rolling blackouts of 2004 sparked a massive east coast move to give the network system extra capacity – and drove up NEM consumer prices to eye-watering levels with significant consequences for all concerned (including politicians).

“With hindsight, what seemed a good idea at the time ended up being an expensive and unnecessary solution,” says the AEC’s Matthew Warren, who also points to the desalination plants built in South Australia, NSW and Victoria in reaction to the millennium drought. Most have hardly been used since commissioning but their costs figure on consumer bills.

As Warren says, a second Basslink would be a billion dollar venture and it hasn’t been taken up so far because no-one can see how the project can pay for itself.

It should be noted that the major value of Basslink 1 has not been in getting hydro power to the mainland market (although Hydro Tasmania made a pretty penny in doing so when the carbon tax was in operation, laying it open to accusations with hindsight of not husbanding sufficient resources for the inevitable next drought) but in bringing brown coal-fired electricity production to Tasmania, staving off the impact of drought – a boon busted when the cable failed on 20 December.

In passing, also, although there was a flurry of green boosterism (and media fellow travelling) when the closure of the SA Northern brown coal power station was immediately followed by an especially windy day and resulting high wind farm output for a relatively short period, the real news is that imports of brown coal-fuelled power from Victoria reached as high as 600 MW in the aftermath of the shutdown and are now accounting, on average, for about 15 per cent of the State’s supply.

So much for the “SA is now coal-free” line that is being pushed quite vigorously. The almost-completed augmentation of the Heywood interconnector (raising capacity 190 MW) will no doubt reinforce the ability of Latrobe Valley coal plants to send power west.

As for Basslink, the immediate fate of the island’s power future depends on a fix-it ship currently tied to a wharf in Victoria’s Geelong, with its mission temporarily thwarted by Bass Strait bad weather. Two windows, each of six days, of relatively fine weather are needed to complete rejoining of the cable ends.

Scarce & the big picture

As we contemplate 50-plus days of politicking before the federal poll and the way the politicians are seeking to talk up their carbon credentials, it pays to take a moment to read the South Australian nuclear royal commission report – which was published in its final form yesterday.

Not surprisingly, Kevin Scarce’s 344-page report is receiving most media and political attention for its recommendation that the SA government pursue development of a nuclear waste facility, but this is not all it contains and there are aspects of it relating to electricity that really need to be communicated widely in the long-term public interest.

On our national energy future, Scarce writes: “ There can be no doubt that the energy sector in Australia and elsewhere is changing dramatically. Although the major trends of this transformation are increasingly apparent, the extent and pace of change are not. It remains unclear which energy options Australia will embrace. Any of a range of possible scenarios for Australia’s future electricity system remains plausible. Any claim that there is certainty about future outcomes should be treated with caution.”  (The italics are mine.)

And Scarce says: “In developing Australia’s future electricity system there is a need to analyze the elements and operation of the system as a whole and not any single element in isolation.”

This further observation should also not be lost to view: “The present considerable optimism about the future cost of renewable generation and storage does not ensure certainty about these outcomes.”

Scarce recommends that “the SA government promote and collaborate on the development of a comprehensive national energy policy that enables all technologies to contribute to reliable, low-cost, low-carbon (supply) at the lowest possible system cost.”

He adds: “Given the complexity of the issues and cost of transformation, planning must be based on evidence (and it) should focus on a combination of cost, reliability and carbon intensity. It is critically important that long-term decision-making should not rely on what is presently popular.” (My italics again.)

This point also shouldn’t be lost: “Modelling suggests that it is unlikely that Australia could fully decarbonize its electricity sector by 2050 by relying on renewables alone. Combined cycle gas turbines will be required for system stability in the absence of other dispatchable generation.”

Scarce, while making it clear that he thinks electricity market economics plays against the early introduction of nuclear power on the east coast, says that, in the event rapid action is needed on decarbonization here after 2030, “nuclear power might play a useful role.” This can’t happen, he points out, if steps aren’t taken now to plan for that role.

Scarce recommends that the SA government “pursue removal at the federal level of existing prohibitions on nuclear power generation to allow it to contribute to a low-carbon electricity system if required.”

He suggests that, in the case of nuclear power, as new systems are developed around the world, particularly small modular reactors, the costs of this technology may reach the point where it is able to be part of a low-cost, low-carbon energy system in Australia.

He also makes this somewhat tart comment: “The Australian government will formally review its current and future carbon abatement commitments in 2017. This would be an ideal time for scientific rather than politically-led discussions about future options.”

Even so, Scarce acknowledges, “the pace of change will depend on government policy and will not be driven by technology and cost alone” – and it will also be affected, he notes, by consumer behavior and “new pricing models to equitably fund networks among their users.”

And, in words that will be music to the ears of a number of business lobby groups who have been pressing this point, he says “it would be wise to facilitate a technologically-neutral policy for Australia’s future electricity generation.”

All of this is seriously sensible stuff that should be imparted to the wider community at a time when politicians’ rhetoric on energy issues is inevitably more about their self-interest than long-term community interests no matter how they dress it up, the more so because it comes from a respected figure – Scarce is a retired admiral and former SA Governor – with no axe to grind in the carbon wars.

But, if you scan the mainstream media reports, hardly any of the above is being passed on and none of it in a form that would educate public opinion.

This, I think, requires concerted action by the national business lobby groups to ensure that Scarce’s very sensible advice on the big picture in electricity supply is not lost to view.

So much of what the industry lobbyists’ offer is instantly attacked by green ideologists and vested renewable sector interests on the basis of “well, they would say that, wouldn’t they?”

Here is an opportunity, through an impeccable independent source, for the business bodies to highlight the big picture for the community at large. Not to take it would be a sin of omission of no small order in my book.

RET-go-round 23

It’s eight months since I last wrote a commentary in my RET-go-round series but the renewables carousel has been whirling all that time and it is speeding up now with the federal election almost upon us.

Just in the past few weeks we have had:

• The Energy Networks Association arguing the case for technology-neutral policy to allow all low-emission technologies to play a role in meeting national abatement targets.

• The ALP launching its climate change prospectus for the federal election, promising a 50 per cent RET by 2030.

• The Clean Energy Council releasing its “Power Shift” paper arguing for “strong and long-term” RETs that “ensure the steady and continued” deployment of wind and solar power.

• BIS Shrapnel reported in the media as being “highly doubtful” that the current RET can be met by 2020 – with $10 billion of investment (others say $12 billion) needed in an environment where lenders are wary because the policy keeps changing.

• The Greens wanting to see $2.9 billion spent in subsidies over five years to drive take-up of electricity battery storage. The Greens’ target, of course, is 90 per cent renewables by 2030

• The Grattan Institute publishing a “roadmap” for climate change policy and arguing in it that, while existing RET-led investment should be protected, the scheme should not be extended if a “robust intensity baseline scheme” for power generation is put in place.

• The Australian Forest Products Association calling for the RET to be amended to allow wood waste to help “plug the gap” in investment.

David Blowers of Grattan Institute has an interesting commentary, published in mid-April on “The Conversation,” explaining the “roadmap” with a headline that states “One day we won’t need a RET because we’ll have good climate policy.”

Meanwhile the South Australian Labor government, wrestling with the market impacts that the large amount of wind and solar power policy has delivered in the State, is kicking a can down the road for much more investment on the east coast in high voltage transmission – and the Coalition federally, in what is an obvious poll ploy, has agreed to subsidize a feasibility study for a second Basslink in an environment where the failure of the existing link has Tasmanians more than a little unhappy.

The study will be overseen by a former federal minister, Warwick Smith, MHR for Bass for a time, and the Clean Energy Finance Corporation, with a preliminary report to be delivered next month and a final one at the year’s end.

Malcolm Turnbull told a media scrum in Hobart that “there is potential for enormous additional investment in renewable energy in Tasmania.” He asserted that the new link would be commercially viable with private sector support because of the opportunity to sell hydro and wind power to the mainland.

It is less than two years since Hydro Tasmania killed off a project to build a 600 MW wind farm on King Island and link it to Victoria with a new connection because the concept was not commercially viable.

In March this year consultants Pitt & Sherry told media that it would be difficult to demonstrate net market benefit (required by NEM regulations) for Basslink 2 and suggested that the estimated $1 billion price tag would be better spent building more wind farms to complement the State’s hydro-power system.

With respect to the grander scheme of things, Grattan Institute’s Tony Wood told “The Australian” a few days ago that Labor’s plan for half Australia’s electricity to be based on renewable energy by 2030 would require more than 25,000 megawatts of capacity and about $48 billion of capital. If the whole task was dependent on wind power, he added, between 7,000 and 10,000 turbines would need to be installed.

The RET debate revolves endlessly around cost – capital outlays, the wide-ranging non-generation expenses of a major transition (like the cost for land acquisition) and impacts on consumer bills for the mass market and large and small business, a matter of constant controversy – but this is not the only issue.

As the Australian Energy Council puts it: “The integration of high levels of renewable energy into the power grid is a major technical challenge that is still to be solved.”

And, as the Energy Networks Association says, we need a policy framework that doesn’t change every election and can deliver carbon abatement at least cost for consumers while managing energy safety, security and reliability.

ENA rightly adds that renewable energy will play a key role in electricity supply’s transformation “but it’s just one tool in the toolbox (which should also include) demand management, carbon capture and storage and low emission fuels such as gas and carbon capture and storage.”

(As well, the coal industry keeps pointing out that a country with our resources shouldn’t ignore the potential of high efficiency, low emissions plants capable of delivering baseload power with 50 per cent less emissions than the conventional units dominating supply today – and the nuclear advocates keep reminding us of the potential of small modular systems.)

The impending delivery of reports by the South Australian nuclear royal commission and the Queensland Productivity Commission (two reports – one on solar power and the other on electricity pricing) will provide more grist to this mill.

The one certainty is that the RET-go-round is nowhere near running its course – which I suppose is good for commentators like me but hardly much fun for investors and, in the long run, for all of us as consumers.

Tuned for the times

One of the biggest annual conferences in Australia is now only a few weeks away – and events are conspiring to make it highly important in the energy debate.

The forum is the APPEA conference, now in its 56th year and which I oversaw for 11 years last century as executive director of what is now the Australian Petroleum Production & Exploration Association. I will be attending it next month for the 31st time.

The current turbulent state of the petroleum industry and the stringent budget management of stakeholders poses a marketing challenge for the conference managers this year, but the focus the event brings to key issues is still, as it has been over five decades, central to the Australian energy debate.

APPEA chairman Bruce Lake makes an interesting point in the 2016 conference brochure (which you can find at www.appeaconference.com.au), noting that the meeting in Brisbane comes 110 years since the Australia gas industry kicked off with a field discovered at Roma. Today, as he says, Queensland leads the world in coal seam gas production and hosts three substantial LNG projects, the first ever to use CSG as a feedstock.

What this and the resource sector as a whole means for the State is highlighted in the brochure by Premier Annastacia Palaszczuk, who says minerals and energy has contributed $32.9 billion to the Queensland economy last year.

The government, she adds, is keen to work with the resources sector to attract still more investment – a perspective that runs directly counter to the campaigns by activists bedeviling gas activities in neighboring New South Wales and in Victoria.

APPEA chief executive Malcolm Roberts asserts the conference is “tuned for the times.”

As an example of what he means, one of the big ticket plenary segments will see a focus on the future of energy featuring Peter Hartley, who holds chairs in economics at Rice University in Texas and the University of Western Australia, Regina Mayor, the KPMG energy leader in the Americas, John Lyden, managing partner in Australasia for McKinsey & Co, and Peter Coleman, CEO of Woodside Energy.

In the wake of the Paris climate change agreement, this segment alone is worth attendance in my book — although 100 speeches and presentations on the program provide a pretty wide choice.

Coleman made a challenging point at a recent forum in New York when he argued both that renewable energy and gas should be seen as complementary fuel sources and that our federal government should be taking on a greater role in encouraging a sensible policy debate internationally, given this country’s status as a major exporter of energy.

As APPEA observes laconically in the program brochure, “not all see an ongoing role for natural gas in a clean energy future” and a fair bit of this year’s conference is devoted to tackling the ongoing communications challenge the upstream petroleum industry faces.

One of the highlights for me of this part of the program will be an address by Cameron Hepburn, who is professor of environmental economics at Oxford’s Smith School of Enterprise and Environment.

In this context, the event winds up with an interesting focus on stakeholder engagement, to be facilitated by journalist Ellen Fanning, and including Peter Botten, whose leadership of Oil Search Ltd in pursuing petroleum development in Papua New Guinea has been one of the success stories of the past three decades, John Cotter, chairman of the GasFields Commission in Queensland (an agency I have argued for ages should be replicated in NSW), and Seiya Ito, the Australian boss of Japan’s INPEX, which has developed an LNG project on the doorstep of a capital city (Darwin).

Also, with the federal election looming within a month of the conference, a lot of attention is going to be on the three politicians performing at it – federal Energy Minister Josh Frydenberg, his Labor counterpart, Gary Gray, who is retiring from Parliament, and the Queensland Treasurer, Curtis Pitt, who has declared his (and the State government’s) ambition to deliver a “cleaner, greener energy future” for the State.

No doubt Frydenberg will ride hard on the recent east coast gas market report by the ACCC (which APPEA sees as confirming the industry view that more gas and more suppliers are the answer to consumer needs, not moratoriums and domestic gas reservation) but I wonder whether he will also take the opportunity to speak up for the CoAG Energy Council pledge to do a better job of integrating energy and carbon policies?

His leader, Prime Minister Malcolm Turnbull, ignored this important issue when he spoke at the LNG 18 conference in Perth a month ago.

Gray, of course, in his contribution has to carry federal Labor’s climate change policy for the election in to the fossil fuel lion’s den – including its commitment to drive a far higher national abatement target by 2030, a proposal criticized for being made without full understanding of the cost.

His past pragmatism as energy minister for a relatively short time and as an Opposition energy spokesman who has supported gas development have won him resource sector regard. It will be interesting to see how he handles this gig.

The APPEA conference doesn’t do boring – one of the more entertaining tasks of my quarter century as an energy sector lobbyist was overseeing the 1983 event that started a day after the Fraser government was defeated by Bob Hawke – and I have no doubt this one will live up to that reputation for the 2,000 or so attendees at the Brisbane Convention Centre early in June.

Handle with care

It’s not hard to snipe at Labor’s climate plan for the federal election.

In an editorial this morning, the “Australian Financial Review,” for example, condemns it as another example of “the undiminished urge to parade inflated idealism” that keeps crashing upon the reality that the costs of reducing carbon emissions are relatively high for a fossil-fuelled economy such as Australia’s, leaving us with “a sorry mess of contradictory schemes and second-best solutions.”

Labor, the paper says, continues its “tradition of misplaced greenhouse heroism.”

Naturally, the Coalition has been prompt to label Labor’s plan “a carbon tax on steroids” and Treasurer Scott Morrison says “What did they not get about the last election when the country said no to a carbon tax — now they want to bring it back, rebirth it in some other form?”

And, needless to say, the Greens and some of their leading fellow travellers are already out and about saying that Labor’s plan is nowhere strong enough.

The National Farmers Federation, incensed by Labor’s commitment to introduce a “climate trigger” in federal legislation to allow intervention at State level — and specifically to oversee land clearing, is expressing serious concern about this move’s implications for agriculture. The NFF declares the ALP has a history of “doing political deals with extreme green groups.”

But it’s also striking that some key business stakeholder bodies are being careful not to be overly negative in their reactions — although it surprises me that they don’t seem to have woken up to the wider implications of the “climate trigger” ploy.

The incumbent generators and energy retailers, via the Australian Energy Council, have taken the opportunity to point out that the Labor statement “reveals the real challenges ahead for decarbonizing the economy,” welcoming its support for a market-based approach to abatement while underscoring the issue of cost.

The Business Council sees a possible opening for bipartisanship focused on shifting the mix of power production towards low or zero emission technologies while encouraging greater energy efficiency, better managed land use and more fuel-efficient vehicles.

It does also slap at Labor for “taking a gamble” on a 45 per cent emissions reduction target in 2030 without full understanding of the cost.

The Minerals Council welcomes Labor embracing the use of international permits in an emissions trading scheme (this will not be allowed for power generation, I add), less focus on revenue-raising and commitment to consultation in further policy design – but it warns that what is being proposed this week “inevitably poses the risk of significant electricity price rises” with consequences for the economy and especially the export sector.

The MCA points to research by Warwick McKibbin, who found that a 43 per cent abatement target (his modeling level) for 2030 would have close to double the economic impact of the Coalition’s existing 26 per cent goal.

The Australian Industry Group chooses to focus on the degree of difficulty involved in lifting the national abatement target from 26 to 45 per cent, saying the difference represents pulling out the equivalent of a whole year’s emissions and more than doubling the economic impact of a carbon price. At the same time AiG welcomes the prospect of access to purchase of international permits.

The Energy Networks Association welcomes a focus on vehicle emissions standards and emissions trading for the power generation sector so long as the final product “doesn’t change at every election.” And ENA again argues that an enduring policy would be one that is neutral for generation technology.

The Australian Petroleum Production & Exploration Association “looks forward to a continuing dialogue with Labor” and urges it to recognize that our $200 billion LNG industry must not be undermined in “delivering cleaner-burning energy to the world and jobs, economic growth and taxation revenues at home.”

One of the notable things about reactions from green-leaning quarters, both on this occasion and in the general debate, is faith that “clean energy” will get cheaper quickly – but this sidesteps the costs of policy mechanisms to force change as well the overall infrastructure expenditure needed along with all the associated costs (acquiring land, for example) of a huge transition in a short time.

Such assertions keep bringing us back to the fact that we lack credible analysis of what it will take to deliver low-carbon and reliable power supply at the lowest possible system cost.

For my own part, looking at the Labor announcement, I can see some directional positives but also reinforcement of the unwillingness of the Labor leopard to change its populist, interventionist spots.

Yes, a long-term price on carbon emissions is the right way to go (and we would have this policy today if Rudd and Gillard had not badly botched their work after Howard had left the way open for Labor in the 2007 election) but the ALP cannot resist also seeking to pick winners and resorting to “command and control” tactics via a quota (50 per cent renewables), mandatory energy efficiency standards and that “climate trigger.”

(In passing, environment spokesman Mark Butler’s soundbite for the ABC – “We want to get back to the renewable energy superpower we were in 2013” – is as shallow as it gets.)

And, of course, the Labor package comes with another inquiry – this time an “electricity industry modernization review.”

To quote from Casablanca, round up the usual suspects.

As background to all this, you can find an interesting commentary on changing the electricity supply mix attached to the BCA submission to the South Australian nuclear royal commission.

Produced for the council by Bain & Co, it raises the issue of nuclear power as “an insurance policy” if grid-scale solar with large battery storage turns out not to be a viable option and if high domestic prices for gas baulk the fuel’s use as a bridge to a new supply future.

Bain does argue that grid-scale solar PV can reach parity with coal as the cheapest Australian power option by 2030. On this basis, Australia, the consultants assert, can lead the world in embracing solar power.

This is an impressive ambition, but it brings us round again to the issue of total system cost and the capacity of business users (who are three-quarters of demand) to wear the inevitably higher bills as rivals in Asia seek to poach their trading share while building new fossil fuel generation hand over fist.

(In this regard, it pays to point out that the most detailed examination publicly available of a path towards desired global abatement, the paper produced by the International Energy Agency ahead of the Paris summit, postulates world electricity production in 2040 of 4,107 terawatt hours from coal plant, 5,465 TWh from gas, 6,836 TWh from hydro systems, 6,243 TWh from nuclear reactors — along with 5,101 TWh from wind turbines and 3,619 TWh from solar systems. Hardly the intermittent power revolution although it involves many hundreds of billions of dollars in capital outlays on these technologies.)

Reading the Labor plan rhetoric, it seems obvious that climate change moral posturing is back in federal politics and is again operating at a remove from the impact on consumers and especially on the economy as a whole.

As a counter-point, note the recent hysteria over the Whyalla steel plant and the perceived need to keep it going in the face of toughening global competition.

This drew an accusation from the MCA that the Greens, in the forefront of handwringing about the fate of affected workers, are guilty of hypocrisy because of the critical role of coal in steelmaking (every tonne requires 800 kilograms of coking coal).

Let’s also note that the need to handle the integration of carbon and energy policies with care is acknowledged by the CoAG Energy Council, which includes Labor governments, but this does not stop the party from pursuing (as in the latest pitch to voters) a populist line on renewables.

The cynicism of it all is well demonstrated by Victorian Labor (governing on Bill Shorten’s home turf) making a budget decision this month to grab an extra half billion dollars over four years from the brown coal generators through higher mineral royalties – while trying to scare off the power station owners from passing on the costs to consumers.

Jennifer Hewett, writing in in the “Australian Financial Review,” describes the new federal Labor policy as “an attempt to leverage the populist appeal of a bigger boost to renewable energy without being attached to nasty political negatives.”

This seems fair comment to me – and it raises the question of the extent to which Labor can get away with its pose because the carbon/energy debate, as presented in the mass media, remains largely incoherent while the Coalition under Malcolm Turnbull still lacks a clear message on this issue?

 

Cutting through the fog

Easily the most important statement about Australian energy in April has been the consumer watchdog’s much-anticipated report on east coast gas.

After a fortnight’s gestation by governments, the review by the Australian Competition & Consumer Commission has been released and neither its contents nor the stakeholder reactions are all that much of a surprise – but the fact that the findings are now public should place a considerable onus on policymakers to get their act together.

This has been recognized by the federal Resources & Energy Minister, Josh Frydenberg, whose reaction is that the CoAG Energy Council (which he chairs) must work to ensure all jurisdictions co-operate to address supply-side constraints or risk less reliable supply and higher bills for mass market and industry consumers.

The next council meeting is in July – and by then the Victorian government, which is especially in the gun after the report, is expected to have announced a new onshore gas development policy.

Contrary to what mainstream media have been reporting, the ACCC has not called for “bans on coal seam gas projects to be scrapped,” to quote the Fairfax mass market papers.

What the commission says is that (a) it recognizes there are important environmental and social considerations at play in onshore gas exploration and development, (b) blanket bans on such activity are not in the consumers’ interests and (c) governments need to evaluate proposals individually.

The ACCC calls for such project evaluations to take in to account both socio-environmental issues and the costs and benefits for the east coast market (especially, it says, industrial users).

The supply outlook on the east coast, it observes, “remains uncertain” to 2025 and beyond.

Perhaps not surprisingly, the big picture for consumers has been rather lost to view in the media coverage of the report.

In a nutshell it is this:

• There is little prospect of significant increase in production from existing basins in southern Australia, with these traditional sources of supply facing increasing costs and “challenging conditions.”

• In the absence of new investment in these areas, “there is potential for significant reduction in supply” in the Cooper, Otway and Gippsland basins.

• This throws the Northern Territory prospects in to a sharp light because it holds “potentially very large shale gas resources” that could be a major source of east coast supply – provided politicians don’t prevent their development.

To state the blindingly obvious, this situation makes it more important, too, for the Victorian and New South Wales governments to come up with a regulatory approach that allows gas development (CSG and conventional gas) within their borders and not to continue to pander to ideologists for base political gain in marginal seats (most of them in metropolitan areas).

There are, of course, other key aspects of the ACCC report – notoriously the ongoing stoush between the watchdog and the pipeline sector – but the main game is ensuring adequate east coast supply, something the ideologists oppose because they want 100 per cent renewable energy pursued regardless of such issues as consumer costs and economic impacts.

It is worth recording that the Australian Industry Group has included two energy-related issues in its list of 11 key factors during this (federal) election year: markets must deliver reliable supplies of competitively-priced energy and climate policy must be directed to achieving least-cost outcomes.

Reacting to the ACCC report, AiG praises the commission for “cutting through the fog,” summing up the findings as showing “significant risks to supply” with the “competitive dynamics south of Queensland deteriorating considerably.”

It’s reassuring, AiG adds, to be told there are identified gas reserves big enough to meet projected demand “but these reserves have to be brought to market in full and on time.”

The ACCC, the lobby group says, has “clearly listened” to user concerns; now governments should do likewise and pursue the agenda laid out for them.

As for the suppliers, the Australian Petroleum Production & Exploration Association says the report “highlights that the greatest risk to the market is regulatory failure” and warns politicians that they are heading towards creating “an artificial shortage of gas and higher prices.”

For APPEA, the immediate target is Victoria – where, it points out, 40 per cent of gas consumed by industry is feedstock and 77 per cent of households use gas – but it challenges the CoAG Energy Council as a whole to tackle regulatory reform as “an urgent priority,” under the circumstances perhaps an understandable tautology.

The Australian Energy Council, which has the retailers in its tent, observes that the ACCC report confirms what the suppliers have long known: that moratoriums and over-regulation of unconventional gas fields are exacerbating uncertainty and increasing prices.

“What should be an economic success story,” it says, “is being compromised by political decisions that do not reflect the benefits of new gas developments.”

The Energy Networks Association draws attention to the ACCC’s calculation that a $2 per gigajoule rise in wholesale gas prices translates in to a five per cent higher household bill in NSW and 11 per cent in Victoria.

It wants governments to act quickly to ensure that the benefits of projected lower gas network charges in the rest of this decade are not undermined by higher wholesale costs.

In an environment where so much of the media debate is devoted to cost issues and the threat to jobs in various sectors, it is striking, I think, that so little reporting of the ACCC review has focused on this aspect.

Equally striking is (or should be) the fact that the green ideologists and activists think the ACCC has “missed the point,” is “confused” and has failed to understand that the gas industry is “freeloading on the community.”

They have missed, it seems, or chosen to ignore, the commission’s acknowledgement that “there are serious concerns in the community regarding the potential environmental effects of unconventional gas exploration” allied to its advice to politicians that the answer is not moratoriums but recourse to regulatory regimes that allow “management of risks of development on a case-by-case basis.”

Interestingly, in a communiqué to mark receipt of the report, the Energy Council has chosen to remark that the ACCC “rightly” notes even the best-designed market will falter without gas to trade – unless, of course, your aim is to force consumers away from using gas and hang the economic consequences.

What wasn’t said

Our big gas spenders had their wrists slapped at last week’s LNG18 conference in Perth by management consultants Deloitte, who have drawn up this “not again” list for investors:

• eschew getting swept up in ground-swells of enthusiasm and “get it done at all costs” mentalities;

• avoid under-estimating the industry’s collective impact on local markets;

• don’t use legally driven frameworks as primary methods for assuring access to the resource, and;

• don’t go it alone — in other words, LNG developers here could have shared more infrastructure.

To this you could add a firm message from one of the biggest of the players on stage, Ben van Beurden, global head of Shell (now holding 15 per cent of the world LNG market), who has exhorted his colleagues to “get on the front foot,” to be more assertive in talking about economic and environmental benefits of gas development and to grapple with the industry being taken for granted.

An executive who attended the conference has remarked to me on how many big players want to sing the “gas as a bridge to renewables” song – and still more notable that the Chevron boss, John Watson, urged his fellow executives to step away from a “tell them what they want to hear approach” in reaction to the polarized global climate debate.

He called on the gas industry to make delivering affordable energy to consumers its number 1 focus.

“Don’t make energy more expensive,” was Watson’s message; let consumers make decisions.

For my part, I found a key segment of Prime Minister Turnbull’s welcome address at LNG18 somewhat jarring.

This, verbatim, is the extract: “Gas, which can produce 50 per cent less emissions than a typical coal-fired power plant, has a pivotal role in delivering energy with lower carbon emissions, making it a key contributor to global carbon abatement.

“It is also critical fuel stock for peak energy demand.

“We need to support the transition to renewables by providing peaking power and fill the gap from intermittent renewables when the sun is not shining or the wind is not blowing.

“It is all part of our broader aim to ensure our energy security into the future.

“Gas is a critical part of the environmental agenda for the future to a cleaner, greener planet.”

Now, for one thing, two of our largest regions, in energy and economic terms, Victoria and New South Wales, the latter governed by the Coalition and Turnbull’s home State, have made a complete box of managing onshore gas development. Ignoring this is hardly helpful even if, as NSW Chief Scientist Mary O’Kane says, the CSG issue is one of Australia’s “wicked” problems.

One could nitpick other aspects of this part of what the PM said, too, but, to me, what he didn’t say is more important.

Turnbull felt no need to emphasize, or even mention, that all Australia’s governments, through the CoAG Energy Council, whose chair was standing in front of him, have committed to integrating energy and climate policy “with a clear focus on ensuring that consumers and industry have access to low cost, reliable energy as Australia moves towards a lower-emissions economy.”

Surely this is the single most important issue for investors across the business sector and a challenge with which every country represented in the LNG 18 conference room is wrestling, but it was ignored by our national leader.

Let’s remember here that electricity generation in the east coast market (home to most supply in Australia), which is by no means the only area for carbon abatement but the one that gets by far the most attention, is:

• carbon emissions intensive

• predominantly comprising ageing centralized generators that have low operating costs with fully amortized capital costs

• not requiring generation sources to bear the costs of their carbon emissions, and

• subject to government interventions directed at lowering carbon emissions, which are not technology neutral nor have been demonstrated to achieve a low carbon system with the lowest overall cost.

That’s a steal from the draft report of the South Australian royal commissioner. As the report also states, our future national electricity supply system must be designed to be low-carbon and reliable at the lowest possible system cost.

Without doubt, gas has a role in this, but I see the Prime Minister’s words playing more to a green (Greens?) political agenda than to the efficient energy strategy his government should be spearheading.

Not taking such a notable opportunity to speak clearly about the big energy picture to the nation and to consumers does not stand to Malcolm Turnbull’s credit in my book.

In particular, his loose language about the “transition to renewables” goes to political game-playing rather than the serious, top level perspective one expects.

As the Energy Networks Association CEO John Bradley rightly pointed out last month, this country’s carbon policy is at a crossroads.

The federal government that will be in office from later this year will have a major responsibility to ensure we meet our share of the Paris commitments efficiently – which is not code for how far and how fast we can drive wind and solar power.

At its core, this task requires a focus on least-cost abatement while minimizing the impact on consumers (three-quarters of who are businesses).

Where in the PM’s comments (above) is there even a hint that his cabinet is across this requirement and that he wants to drive the point home to the community?