The CoAG conundrum

A critical question flowing from the “South Australian energy crisis” is whether the entity charged with co-ordinating our federal system of government, the Council of Australian Governments, is up to the job of co-ordinating any kind of major policy reform?

This is about more than the agenda, governance and calibre of the CoAG Energy Council; it is also about the capability of the nine governments overall to achieve anything meaningful in an important area, in this case the orderly, long-term decarbonization of our electricity system.

In thinking about this over the past week, I delved back in to my files and pulled out an interview Tom Parry gave “The Australian” late last year that is germane to the problems so much in the spotlight at the moment.

Parry, chairman of the Australian Energy Market Operator from its creation in 2009 until November 2015, was prescient in telling the paper that “there is a policy debate we’re just not having” about the issue of the impact of intermittent renewable energy on the grid and the market.

Reading this interview also sent me back to the inquiry a panel chaired by Michael Vertigan carried out for the Energy Council last year.

The Vertigan review amounted to a “can do better” report for the nine governments but was so lengthy and so couched in the convoluted language of public service that it whizzed past the attention of even the “serious” media.

Central to this report was the observation that “the council and (its advising) senior officers appear to lack a focus on strategic direction and are therefore not providing effective and active policy leadership to the energy sector.”

Since hearing from Vertigan & Co, the Energy Council has gone through the motions of preparing to do a better job and has specifically committed to integration of energy and low-carbon policy – but, as I keep pointing out, without top-level (first minsters) endorsement of this pledge, it is hard to see what can be delivered. Indeed, Victoria and Queensland seem determined to go their own way on the crucial issue of how much wind and solar power to tip in to their regional systems.

The Grattan Institute energy team, Tony Wood and David Blowers, tackled the “blame game” flowing from the South Australian experience in a commentary in “The Guardian” newspaper last Thursday. They said that, when the “agitated state” of politicians, other commentators and renewables advocates are set aside, the SA “crisis” is what happens when climate change policy and energy policy are not aligned.

With respect to the Energy Council, Wood and Blowers declared that it needs to be made to work properly.

“States can no longer go off in their own direction without considering the consequences of their actions on all States and consumers.”

East coast States, they added, have been “parochial in their approach to energy policy for too long” – they need to make decisions with the NEM in mind.

Anyone who has ever run an organization or a company can tell you that it is not enough to tell an erring sub-entity to get its act together – leadership from the top is required to set the direction and the measures of required improvement and to stand over those responsible until they deliver.

When the issue is policy (or in this case inter-linked policies) with a material impact on the national economy, on jobs, on mass market bills and on the country’s standing in the lower carbon transition effort internationally, expecting relatively junior ministers to go it alone is simply not acceptable.

Until now what we have seen is top-level focus on carbon issues (a political football), intervention from on high in the NEM without proper understanding of impacts (populism rampant) and an on-again/off-again approach to energy issues depending on the political heat being generated by specific problems – eg network pricing and now the SA “crisis”.

A real risk in the current situation is that the highest echelon of policymaking – first ministers – will throw their weight behind something like grid interconnection as a means of encouraging renewables development (a populist cause) without addressing all the other problems that also need resolution to make the “machine” (the NEM) work well again.

Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, someone who has had experience as a federal ministerial adviser and as chair of a State regulatory body, made the point in “The Australian” on Friday that “reducing carbon intensity is more complicated than just force-feeding more renewable capacity in to a flat market.”

He added: “Treating power generation as a zero-sum game between popular and unpopular technology is not sensible policy. Reducing emissions is essential but ensuring reliable supply is equally important.”

As he rightly also said, the problem at hand is not just about electricity. In part, it is about some States compounding the integration challenge by preventing the development of new gas reserves. Here again, a resolution is not just a matter for junior ministers – it falls to government leaders and this needs to include the Prime Minister.

It is not beyond imagination that, having had the SA “energy crisis” because of power generation problems this winter, we could face a NSW crisis next winter or the one after because of a lack of gas at a time of peak demand – if that isn’t of national importance, what would be?

The SA “energy crisis” hasn’t struck without warning. As newspapers have been pointing out, AEMO and economic consultants were identifying this risk at least two years ago.

The big issue arising out of the SA experience is not, as the Clean Energy Council is complaining, that renewable energy is being made a scapegoat but, as the Grattan Institute and others are saying, our national inability to resolve “the dismal debate” we have been having about carbon and energy policies over a decade.

The effectiveness – or should that be the ineffectiveness? – of CoAG is perhaps the still bigger issue because it impacts on much more than energy.

Is this the national issue par excellence that we are unable to comprehend because stakeholders are in “an agitated state” about their own particular concerns?

We have an electoral system that requires us all to vote – and even then hundreds of thousands of us vote “informal” – but, as we have just demonstrated again, this can produce outcomes that do not necessarily drive good government.

It’s salutary to think that Turnbull and the Coalition would now be back in Canberra with 79 seats and a workable majority, authority dented but intact, if it were not for a fringe political party that garnered less than 12,000 votes in Tasmania, threw its preference support to Labor and cost the Liberals three MHRs they did not expect to lose.

A less weakened federal government, however, would not give us integrated carbon and energy policies. In this game, it takes nine to tango and we are a long way today from a dance – it’s still mostly a scrum.

As with all problems, a resolution is unlikely unless the issue is acknowledged – and is it not time to acknowledge that CoAG overall, and certainly in energy and carbon policy integration, is not doing a good enough job?

The main game

Interesting though the “SA energy crisis” is (to use the popular media tag), and colourful though some of the exchanges have been, the bigger game is east of South Australia with the bulk of supply and consumers located in Victoria, New South Wales and Queensland — the regions where over-capacity is a serious problem and two of the trio (Victoria and Queensland) have renewables development ambitions that are now the largest in the country, Bill Shorten’s grand plan having been drowned in the whirlpool of the federal election.

The Minerals Council has been highlighting the fact that at dawn on Wednesday in these three States, the load was being borne by black and brown coal — accounting for 91.8 per cent of requirements in NSW and Queensland at a point in time (6.30am) and 98.3 per cent in Victoria — with the mainland NEM States collectively relying on 97.9 per cent fossil fuels.

The MCA’s message: access to coal-fired power is essential to ensure households, businesses, heavy industry, schools, hospitals and train networks (among other things) can operate reliably and efficiently around the clock.  The council emphasises that the present South Australian situation (41 per cent intermittent generation) may not be replicated in the other States, but it “highlights what can happen with imprudent, politically-driven energy policy.”

On the wider canvas, this has been a few days when reasons for some optimism as well as the urge to throw hands in the air over the banality of parts of the energy “debate” have both been on prominent display.

Malcolm Turnbull’s decision to merge the environment and energy portfolios has met with commendation across an interesting spectrum of advocacy.

Malcolm Roberts of the Australian Petroleum Production & Exploration Association has hailed the move as delivering “the Holy Grail” of energy and carbon policy integration and the Climate Council sees it as a “lynch pin” of economic policy, doing away with “warring ministries at the cabinet table.” The Australian Conservation Foundation also welcomes the single portfolio even as it calls for a “quick” shift in energy systems “from dirty to clean.” The Clean Energy Council sees the change as “a smart step” towards addressing the policy relationship between the energy sector and Australia’s abatement commitments

On Planet Greenpeace, of course, Josh Frydenberg’s appointment to run the new department is “a blow to the Great Barrier Reef” and “a show of contempt for the Australian public.”  And the Green Godfather, Bob Brown, sees it as “burying Australia’s environmental hopes and aspirations.” They would say something like that, wouldn’t they?

(In passing, after a decade of campaigning, the kindliest media coverage from Fairfax Media and the ABC/SBS networks and massive social media support, Brown’s Greens still struggle to muster a million votes — out of 15.3 million — at a federal election.)

Whether or not the state of South Australia’s electricity arrangements is a “train wreck” (Brickworks CEO Lindsay Partridge), the mood in the current public debate is for Frydenberg and his CoAG Energy Council colleagues to demonstrate policymakers and regulators can keep up with technology developments while ensuring power remains affordable (for large users as well as the mass market) and pressing on with the transition to a lower-carbon economy. They are also being urged to “take a cold shower” (Partridge again) in considering the integration of renewables in to a chronically over-stuffed NEM.

Let’s not forget the issue is inextricably linked with the failure of east coast governments to properly address domestic gas supply. APPEA’s Roberts is calling for a “more pragmatic” approach to pursuit of a lower-carbon economy in which there is a role for gas-fired generation as well as solar and wind power.

Grattan Institute’s Tony Wood raises the thought that governments may have to consider paying subsidies to ensure support generation sources, such as gas plants, are available when intermittent supply is in strife.

Wood has told “The Australian Financial Review” today that moves by Victoria’s and Queensland’s Labor government to pursue 40 and 50 per cent renewables in State power mixes could increase market volatility and consumer prices on the east coast. “Each of the States is just doing its own thing,” he says. “However you look at it, (this) is a bad idea when it is supposed to be a national market.” He points to a possible outcome of the Victorian policy that results in neighbouring NSW burning more black coal.

Frydenberg, whose new department of the Environment and Energy has been approved by the Governor-General and is in the process of hiving off from the Department of Industry, says calling the next CoAG Energy Council meeting is “a top priority.”

He attributes the SA “energy crisis” to a combination of weather, a (transmission) maintenance issue and a higher reliance in the State on intermittent capacity. The NEM issue is a lot bigger (and more complex) than that — and a sample of this is the current Minerals Council push for adoption of a four-point plan that requires a technology-neutral approach to power supply, creating an environment where nuclear energy can be considered on its commercial and abatement merits, Australia sticking to the Coalition’s existing 2030 national abatement target and allowance of the use of international carbon permits here.

To which, as Ernst & Young’s Matt Rennie pointed out in a commentary last month, can be added the fact that the existing electricity legislative and regulatory system is designed around a central generation model and “simply isn’t equipped to adapt to the dynamic and evolving technological environment.”

Turned in to political-speak, you can hear this resonating in the latest comments of Tom Koutsantonis, the SA Treasurer and Minister for Energy. “You have to ask yourself whether the market is structured properly to be able to deal with the old energies not coping with the new energies,” he declares.

Read that against the Australian Energy Council calling again for “an integrated policy process to drive the transition of the energy system to a lower-carbon future rather than relying on State-based targets and intrusive regulation.”

Meanwhile Senate power broker Nick Xenephon, his standing enhanced by the federal election, is calling for an upper house inquiry in to renewable energy when Parliament resumes at the end of next month.

Senate forays in to the electricity arena over the past several years have been less than useful and another one is not a promising prospect, especially if it is designed to push the special interests of South Australia, but it’s probably going to happen, so we should gird ourselves for the usual suspects to climb once more on the merry-go-round.

Among the many commenting this week, the Energy Networks Association’s John Bradley observes that the current situation is “an enormous opportunity to achieve true integration of policy at a time of dynamic change” and warning that the NEM “could drown under the weight of competing federal and State policies.”

I remain to be convinced that the present bout of waving is not really another sign of drowning, but there’s no denying that “lifeguard” Frydenberg has a real opportunity right now to launch a rescue operation.

The next few months could be very interesting in addressing this situation, “could” being the operative word.

 

A leadership opportunity beckons

I had barely put up my post on the South Australian electricity issue at the weekend (“Tomorrow’s problem today”) when I discovered that the State Treasurer and Energy Minister had given an astonishing interview to “The Australian” newspaper.

In it Tom Koutsantonis is quoted as “vowing to smash the national electricity market in to a thousand pieces and start again.”

He reportedly warned other east coast States that “the energy crisis is coming to get them – every jurisdiction is facing what we’re facing now.”

Perhaps most remarkably, Koutsantonis blamed the federal government – and presumably he means this in a non-partisan way – for “encouraging South Australia, which has the best conditions for wind, to chase the energy source as part of the RET.”

To which he added: “Wind is paid by the Commonwealth to produce power. If you are going to pay wind farms to produce electricity regardless of demand, you better make sure that it is distributed equally across the country because you can’t have a national policy implicating just one State.”

Koutsantonis is reported as calling on Malcolm Turnbull to schedule an urgent meeting of federal and State energy ministers “to undertake energy market reform,” saying “if you want a true national electricity market, you really need all of the States interconnected” – by which he means the eastern States.

“What we have,” he said, “is a series of State-based markets with very poor interconnection between them.”

The NEM, he declared, “is not a national electricity market.”

These comments follow a statement by Premier Jay Weatherill at the time of the SA Budget in mid-June, when the attention of the nation and the media was focused on the federal election, that “we need a true national energy market that supports renewable energy and doesn’t punish it.”

It is important, Weatherill said, that “as a nation we create an energy network that allows greater access for consumers to South Australia’s renewable energy endowment.” He fired off a letter to Malcolm Turnbull and to Bill Shorten seeking “immediate and unqualified commitment” to greater grid interconnection.

The Koutsantonis outburst at the weekend has been followed, according to “The Australian Financial Review,” by the Northern Territory Chief Minister, Adam Giles, calling for a “national summit to deal with issues arising from the crisis in South Australia caused by the State’s over-reliance on renewables.”

Giles is reported as wanting the summit to include a focus on the Northern Territory gas pipeline to the southern and eastern States and also on connecting the NT to the NEM.

The SA situation, he said, “transcends State or Territory borders.”

The “Financial Review” story also quotes Australia’s Dow Chemical CEO, Tony Frencham, as describing today’s eastern States’ energy situation as “a train wreck that has been unfolding for three years.”

Frencham linked LNG developments in Queensland and moratoriums on drilling for gas in Victoria and New South Wales as helping to create “a triple whammy” for energy-intensive industries.

The “Australian Financial Review” has followed this up with an editorial (“SA energy madness”) in which it accuses South Australia of “particular indulgence” in “demanding massive handouts to sustain uncompetitive manufacturing industries while at the same time indulging in a subsidized green energy push that makes the same industries even more uncompetitive.”

Now the NEM is a complex construct – physically one of the world’s biggest “machines” – and it is fertile ground for a multitude of views and claims as well, as it has turned out since about 2007, for major interventions by politicians pursuing their own agendas.

Those of a more serious mindset should, I suggest, read a new paper recently published in Elsevier’s “The Electricity Journal” under the title “Climate and electricity policy integration: Is the South Australian electricity market the canary in the coalmine?”

Written by AGL Energy economists Tim Nelson and Fiona Orton, it runs to six double-column printed pages, so I’m not going to do it justice in a few words here – but I think, in the context of the political hollering of recent days, it is worth drawing attention to the authors’ concluding paragraph:

“The current trajectory of climate and electricity policy puts Australia on a long-term collision course with real world financing constraints and customer expectations in relation to stable pricing outcomes being unmet. If Australia persists with an energy-only market, it is likely that aspects of the South Australian experience may be replicated in other regions with the market price cap in the NEM needing to lift to between $60,000 and $80,000 per MWh. In a practical sense, this means that new electricity generators will receive little revenue for most of the year, with their high fixed costs recovered through a handful of extreme pricing periods. Investors would likely balk at investments with such extreme pricing risk, causing new investment to become intractable. This would result in the compromising of public policy goals in relation to affordability, reliability and improved environmental outcomes. Accordingly, it is desirable that further reform of the NEM occur.”

Leaving aside all other aspects of the public hoo-ha of the past 10 days, and the risibility of SA politicians blaming federal governments for their current fix, the scenario painted by Nelson and Orton is, to put it mildly, highly undesirable.

The need for the integration of climate change and energy policies is a high-level imperative for Australia, one to which the jurisdictions have been paying lip service through relatively junior ministers without the high-level attention the issue demands.

By putting the heat on Canberra, and specifically Malcolm Turnbull, Weatherill, Koutsantonis and Giles are doing the country a favour, however parochial their interests.

The Prime Minister has shown no sign over the past seven months of seeing the energy/climate policy integration issue as requiring his attention.

In the present political environment, he might be pleased to have an issue to deflect attention from his other hassles.

He has a letter from Weatherill and a call from Giles demanding action.

My advice to him is carpe diem – seize the day.

Tomorrow’s problem today

As the week ends, the (Adelaide) hills and other places are alive with the sound of chin music over what the national financial newspaper describes as “turmoil in South Australia’s heavily wind-reliant energy market.”

The State’s power problems became national headline news when SA Treasurer and Energy Minister Tom Koutsantonis took what he calls “the extraordinary step” of requesting that mothballed Pelican Point gas power station be switched on to assuage the supply cost fears of “alarmed” manufacturers.

These events have brought all the trolls out from under their bridges, including those blaming the situation on privatization and others calling for yet another public inquiry (in to the cost and reliability of the State’s electricity supply) – as well, naturally, as the deep green boosters, who see developments as a sinister plot by incumbent fossil-fueled suppliers and another effort to reinforce “skewed attacks” on greater use of renewable energy.

It seems to me that the latest happenings reinforce a point made by the Australian Energy Council two months ago when it described South Australia as an “accidental experiment” – a test case of global interest of what happens when a large amount of intermittent generation replaces 24/7 but high emissions power stations.

The situation has led energy commentator Ben Heard to say “there are few worse advertisements for clean energy than the current market in South Australia,” adding that, while renewable developments are not alone in wearing blame, “the Pollyanna group-think that no line can ever be drawn to the obvious shortcomings of variable generators is starting to positively stink.”

Meanwhile Hugh Saddler, Australian National University academic and Pitt & Sherry consultant, opines this week that “the real reason wholesale electricity prices in SA are higher than in the three eastern States is that the cost of conventional generation is higher because SA does not have access to large low-cost coal resources, (being) low-quality and expensive compared with coal in Victoria, New South Wales and Queensland.”

He argues that there is “no relationship” between the share of wind generation and wholesale prices in SA and that the key drivers of the problem are high wholesale gas prices and a lack of competition between conventional generators in the State.

Saddler speaks up for a NEM rule change currently being considered by the Australian Energy Market Commission: settling market wholesale over a much shorter time than is currently the case to drive more competition.

It must be noted that another immediate cause of “turmoil” in SA power supply is that the cold blasts of winter on the southern coast have coincided with maintenance under way on the high voltage interconnector between the State and Victoria, which is the conduit for a (relatively) substantial supply of Latrobe Valley brown coal power helping to sustain the local market (contrary to that noise about SA being able to operate on “zero coal” these days).

As well, of course, this is another twist in eastern Australia’s whacky experiment with simultaneously linking its gas supply to the global market (via the Gladstone LNG developments) and failing to resolve the impediments to development of abundant additional resources for domestic use because of an ideological scare campaign about the environmental impacts of the gas industry at a time of mainstream political instability.

While all this is going on, the AEMC has announced that it has initiated a review of system security in the NEM.

This is different from reliability of supply and refers to technical management of power quality, one of those big ticket issues that never trouble the lives of consumers because it is secret engineers’ business – until it goes wrong.

As the commission explains, in order to sustain power supply in a satisfactory state for users, the security of the system “must be maintained within a tight operational range,” which is a great deal easier to do with conventional generation (eg coal, gas and hydro) than with wind and solar. In the case of South Australia, as the AEMC notes, the get-out-of-jail card in a situation where large amounts of wind and solar are being added to the system is recourse to the interconnector and the synchronous (brown coal) generation on the other side of the border.

“Where there is an outage of this interconnector, risks to system security (in SA) increase significantly.”

Higher risk and higher cost, as all should know, are the Siamese twins of electricity supply.

The Australian Energy Council points out in a website explainer this week, amusingly headlined “Power quality, the dark side of the Moon,” that a critical issue here is FCAS, which is not some joke acronym (you know, like FCUK that the hip only recently displayed on T-shirts) but “frequency control ancillary services.”

The nature of the NEM in the past has seen a very low cost of FCAS because of the availability of conventional, synchronous generation. A big trick in today’s market transition, with a growing volume of intermittent renewables capacity and inadequate high voltage interconnection (the SA situation), is to ensure that FCAS remains fit for purpose – and this raises the issue of cost and who pays.

The AEC commentary (you’ll find it at www.energycouncil.com.au/analysis/power-quality-the-dark-side-of-the-moon/) asks whether a new, larger FCAS requirement can be achieved through market signals or whether, yet again, a problem will see government intervention.

As the association darkly observes, “if the past decade of reactive government policy decisions is any guide, there is no guarantee that these (imposed) ‘solutions’ will be either fully effective or efficient.”

A big further challenge, I suggest, is getting the mass market to understand even the true bare bones of the SA issue – rather than the stuff fed to them by mainstream and social media – because, as we know too well, in our modern political environment, the role of government leaders is to follow popular sentiment, which, in a vicious cycle, is fuelled by the shock jocks, ideologists, trolls and vested interests.

Why this is vital, I’d argue, is because South Australia’s current problems are a pointer to the wider east coast issues that can (and probably will) flow tomorrow from a national “dog’s breakfast” policy and regulatory approach to the transition to a low-carbon economy.

One big question

Millions of Australians have been told this week by the News Limited tabloids, whose owners are shareholders in the One Big Switch bulk-buying business, that they are “paying the highest power prices in the world.”

The consultants’ report for One Big Switch on which that claim is based, comes to this conclusion via using money market exchange rates and excluding taxes.

Also contained in the report, but not the focus of News attention, is a comparison using estimated power purchasing parity (PPP) rates of exchange and including the taxes imposed on electricity purchases in various countries.

(PPP is used to adjust data to exchange rate differences and ensures a like-for-like comparison when purchasing the equivalent quantity of goods or services in all countries surveyed.

(A website commentary by the Australian Energy Council back in April declared that, on a PPP basis, “electricity for household consumers was the most expensive in Germany, Portugal, and Poland, while it was cheapest in the United States, Canada and Norway.” There was a significant gap of around 29 US c/kWh between the least and most expensive power prices. AEC said Australians, on average, have among the best affordability ratings on a ladder of 30 OECD countries.

(Sydney’s “Daily Telegraph,” however, now tells its readers that “more than a million NSW households are paying more for electricity than any other developed nation.”)

What the One Big Switch consultants find, on a PPP basis and including taxes, using Australian cents per kilowatt hour, is that electricity mass market costs in Portugal, Germany, Italy, Denmark and Greece are all higher than the standing tariff costs in Victoria and South Australia – the most expensive in this country.

They are also more expensive in Ireland, Japan, Belgium and Austria when Victorian and South Australian electricity market offers are taken in to account.

In New South Wales, which the “Daily Telegraph” says has “the highest power prices in the world,” all the above countries are more costly on the PPP-plus-taxes basis for householders than the State’s standing tariff rate. Residential customers in the Netherlands and Britain pay more when the market rate is the comparison.

The Quensland market rate is cheaper than in the UK, Netherlands, Austria, Belgium, Japan, Ireland, Greece, Denmark, Italy, Germany and Portugal (in ascending order).

On the PPP-plus-taxes basis, as well, households in Western Australia pay less than all these countries plus France and New Zealand – and those in Tasmania pay less than all the above plus Finland and Luxembourg.

The issue here is not the utility of a bulk-buying service – there are apparently some 600,000 Australians who find this a convenient way to pursue lower costs in a range of services, including electricity – but mass market media telling the community something that is misleading at best when the critical factor is what consumers actually pay on a like-for-like basis,.

This whole game is the more peculiar when you take in to account that the taxes excluded to help support the “highest in the world” line relate in part to efforts to boost renewable energy – which in turn is what the media and opinion polls tell us the community most favor.

As I noted in a previous post, the German Energiewende taxes, for example, add 200 euros a year to household bills.

How we are expected to have an “adult debate” about energy issues in a media environment of this nature is a big question indeed.

The challenge of getting more Australians to shop around for their power is a real one and the extent to which bulk buyers can facilitate this is surely to be supported but demonising suppliers in the media to pursue a commercial outcome should not be allowed through to the keeper without comment.

The Australian Energy Market Commission, in its latest review of the energy retail scene, notes that there are now 22 retailers in each of Victoria and New South Wales, that nine out of 10 consumers it surveyed know they can choose who supplies them and that 30 per cent of those polled were “actively investigating” options at the time.

Across the NEM, the commission found, the proportion of consumers expressing satisfaction with their power retailer stands at 73 per cent this year (up from 66 per cent in 2014) with seven per cent dissatisfied. “Being happy with their current retailer is the number one reason consumers give for not shopping around,” it observes.

The benefits of doing so, however, are real.

In NSW for example, the average residential bill in the Ausgrid network area is $1,308 annually and shopping around can see this cut $256.

And now what?

Bar a great deal of posturing and opinion-mongering, the federal election is almost over and the Turnbull government will continue in office, wounded but still functional although conventional wisdom is that the Prime Minister’s authority has been undermined.

The big issue (still) is how far the Turnbull government can pursue its policies in the face of a turbulent Senate?

What is already apparent is that we should not expect to see energy policy as a top-of-mind issue in however long the Coalition keeps the 45th Parliament soldiering on. (The Labor leader asserts we will be back at the polls within a year but I’m prepared to bet he is wrong. Whether we will be back at polls in 2018 is another matter.)

Perhaps the most important lesson to be learned from the poll is strong reinforcement of the view that the Australian vote is fragmenting and unlikely to return to a dominant central party focus. (There is a good analysis of this on “The Conversation” today by a University of Melbourne fellow, Nicholas Reece. He points to 23 per cent of the recent primary vote for the House going to minor parties and raises the somewhat alarming thought — for business — that minority government may become Australia’s “new normal.”)

The more credible media pundits this week see health and education funding as key issues for attention in the life of this parliament along, of course, with budget management, superannuation policy, taxation and border protection.

Energy (and especially electricity costs, which were so high on the agenda in 2013) has faded in to the background in the run to the 2016 winning post and it is a big question how much time we can expect a Turnbull cabinet to devote to what should have been a key promise of 2015-16 (although I doubt it ever had high-level attention): integrating climate and energy policies to deliver a lower-carbon economy at “least cost to the community.”

The key words here, as I keep pointing out, are “integrating” and “least cost.”

After a decade of international euphoria on the renewables front (centred mainly in Europe and some parts of the US), governments are confronted with the problems of the passions. In Germany this month, for example, the Merkel government has belatedly intervened to shake up the way renewables are supported — after creating a situation where Germans, via surcharges, now pay some of Europe’s (and the world’s) highest power prices. (This now amounts to about 200 euros per four-person German household.)

Here in Australia, the leading media/political promotion of renewables seems to be on the grounds that they are “vastly popular.”

Federal Energy Minister Josh Frydenberg told last month’s Australian Energy Week conference in Melbourne that “no only do consumers want safe and reliable energy, they want affordable energy and increasingly they want to know that renewables are growing as a share of the overall mix.” He didn’t mention the “integrating at least cost” commitment despite being chair of the CoAG Energy Council that has made the pledge.

(The council has put off its Darwin meeting, scheduled for early in July, to a date to be determined.)

One aspect of east coast energy policy that may now get some federal priority — because of politics: the calamitous election outcome for the Liberals in Tasmania and the market problems in South Australia — is the augmentation of high voltage transmission on the east coast, notably a possible Basslink 2 and further links from SA to Victoria and New South Wales. How far these developments will be pursued with an eye to good governance in the NEM and how much they will depend on playing populist games remains to be seen. As does who would pay for the developments.

The paradox here is that, even as governments talk up more interconnectedness (in the integrated policy sense), they are increasingly going their own way in terms of NEM interventions (cf Queensland, Victoria and South Australia).

What authority can be wielded by the federal government (through CoAG in particular) in the wake of the election is open to question.

The “Re-powering New South Wales” conference that Quest Events and I are staging in Sydney in mid-October is an important opportunity to focus on this situation. (The details are at www.questevents.com.au/re-powering-nsw-2016. The conference agenda has resonance beyond NSW’s borders, too.)

In chairing the first day of the Australian Energy Week conference, I found myself challenged to sum things up in an opening comment and this is what I told our audience of 400 people, including the Victorian and federal energy ministers:

“The energy system is changing. The issues are how fast and how? The status quo system is still secure but it is increasingly stressed. It is relatively cheap by international standards but it is ageing and the ground is shifting under it.

“We know change is upon us — in technology, in society, in official policies and in business strategies. The need for action is clear but deploying solutions because they are popular may come back to bite us.

“Finding the most efficient energy system for the next quarter century is not as easy as a lot of public debate assumes.

“Integrating renewables capacity in to physical and financial systems not designed for this purpose is a global challenge and the template is unfinished business everywhere, not just in the NEM.

“Policy risk and energy security risk in electricity supply today is real. Whether it is high is a matter of opinion.

“We need a carefully planned pathway for this transition, for addressing a trilemma: designing a highly reliable different system, one that delivers a low-carbon economy, and does so at the lowest possible total system cost.”

If anything, the outcome of the federal election underlines the challenge.

The problem before the election was whether the CoAG pledge could be delivered; the issue post the election is how much top-down attention is likely to be given to the task over the next 2-3 years, bearing in mind that energy ministers on their own are incapable of delivering on this commitment?

 

 

Hanging on

Right now we’re all just hanging on.

The Coalition and Labor are hanging on to see what the federal election postal vote count delivers. Liberal sources claim that the outcome will be 77 seats for the Coalition in the House of Representatives.

The political vultures of the commentariat are hanging on to see if the Liberal party splits over the campaign debacle. My guess is it won’t because that route is suicidal.

The business community, and not least the resources and energy sector, is hanging on to see whether there is any prospect of sensible, durable policymaking in the next Parliament. My short answer: no.

Extraordinarily, with the vote count not near completion, thoughts are turning to the next federal election – which notionally will be for the House and half the Senate. When? You can speculate all you like but this is almost impossible to pick. If the Parliament proves wholly unwieldy, it could be as early as next year – but this assumes that the Coalition, if re-elected, cannot find sufficient support among the new fringe-dwellers to hobble along in to at least 2018.

The problem for business goes beyond the obvious parliamentary instability issue.

As a commentator in “The Australian Financial Review” points out today, it seems Labor currently sees political mileage in being anti-business.

Certainly, the energy sector has not seen much to comfort it in Labor attitudes at federal, State and Territory levels in the past year or two.

Looking around at present, one remembers Emperor Hirohito’s surrender speech 70 years ago with its line that the situation has developed “not necessarily to our advantage.”

How business picks itself up from here and progresses its agenda is quite a question. What the agenda should be in the light of the tilting of the playing field is a substantial question in itself.

Just before the poll the Australian Petroleum Production & Exploration Association urged the community to “vote for progress, not protest,” arguing that a vote for independent candidates and minor parties opposing responsible development of gas “is a vote for insecurity and higher energy costs for families and businesses.”

The Minerals Council CEO, Brendan Pearson, wrote a newspaper op-ed observing that one of the few things on which Turnbull and Shorten agreed is the need for a new plan to manage the economy after the resources boom.

The MCA and APPEA then joined forces in another statement urging appreciation that the boom “is far from over,” that, by some benchmarks, it is only just beginning as the country receives the benefit of $400 billion in investment in terms of export revenue and long-term, highly-paid jobs, sustaining a large supply chain in services and manufacturing.

“We have resources, infrastructure and expertise” is the thrust of their message but, as this election makes so clear, today’s politicking does not focus on policies needed to sustain investment, wealth creation and economic growth in the knowledge that, without them, social benefits and good environmental management are almost impossible to deliver.

Australia’s political culture, the associations’ argument goes, seems incapable of rational discussion about much-needed economic reform.

This should be joined, I think, to comment on the ABC’s Q&A program last night by the editor-at-large of “The Australian,” Paul Kelly.

Our society, Kelly observed, is becoming more fragmented and consensus about fundamental ideas and values is “disintegrating in a way we haven’t seen for a long period of time.” Since the late 1970s, I’d suggest, and it took all the 1980s and well in to the 1990s to recreate a wider new consensus – only to see it collapse again in the past 8-9 years.

Turnbull’s attempt to sell a positive message has failed to cut through in areas of economic transition and pressure, Kelly added – such as Tasmania, northern and regional Queensland, Western Sydney and South Australia.

There was also comment from Holly Ransom, entrepreneur and youth advocate, who told Q&A’s audience that today’s community view is that globalization has not improved our quality of life.

“I think we’ve all been caught off guard by the degree of unrest in the community,” she added.

Being caught off guard would seem to be clearly true for the Coalition in 2016 – but perception and reality are not the same thing; both mainstream politicians and business leaders surely can do a lot more to persuade the community that, overall and over time, globalization is a better bet than protectionism and subsidies.

It’s true, as commentator Jennifer Hewett said in “The Australian Financial Review” in mid-June, that “the politics and economics of energy (keep getting) more complicated.” The key question is what can and will the resources sector, with $400 billion of skin in the game, contribute from here forward to digging us out of this winter of our discontent?

And what will the business community at large do? Hand-wringing (or bed-wetting) is not a strategy.

After the ball is over

There was a popular 1890s song that still used to be played on radio when I was a kid (six decades ago).

The lines everyone knew went like this: “After the ball is over, after the break of morn/After the dancers’ leaving, after the stars are gone/Many a heart is aching/Many the hopes that have vanished after the ball.”

Following the aftermath of the Brexit vote, it seems an appropriate dirge for the times — unless you are Malcolm Turnbull and the Coalition, who are inclined clearly to think the British upheaval provides the perfect stake in the heart of Labor hopes in the run-up to 2 July.

As is only too obvious, the politicians of Britain have no follow-up plan to the “leave” vote and I suspect that, long after they have blundered their way to what they hope is a safe harbour after the shipwreck, one of the prices they will pay is terminal (further) damage to their standing with their electorate.

It has been interesting (to me) over the past two days to follow the reaction to Brexit from energy stakeholders over there, not the least of which has been opinion in some quarters that the development could throw a spanner in the works of European efforts to pursue the Paris climate accord.

Britain, for example, has the world’s largest offshore wind industry and many of its projects are funded by big European utilities, aided by EU support.

The country is also a key part of the effort to create an internal energy market in western Europe, a project that has looked in better shape recently after almost 20 years of tortoise-like progress. An EU-wide grid is critical to the market and Europe without its third-largest energy market is a different set-up.

Angus MacNeil MP, chair of the House of Commons energy and climate change committee, says what Brexit means for the UK energy industry is an open question because the “Leave” campaigners have no idea, not even the skeleton of a plan. The UK has managed to look small-minded and distrustful of others, he adds, and this may prove quite a deterrent for future investment in the sector — with consequences for energy prices.

One of the biggest of those investors, Electricite de France (EdF), has produced a Gallic shrug and a comment that, really, whoever turns out to be in charge in the UK, the decarbonisation plan has to be pursued and the nuclear option is the only viable card on the table. (EdF is building a major new nuclear power station at Hinkley Point in Somerset.)

Needless to say, there are all sorts of other energy-related views being thrown up in the wake of the Brexit vote.

Leaving the single market could open the UK to new import taxes, adding cost to equipment such as foundations for offshore wind farms or parts for the Hinkley Point project, some suggest. But it would also eliminate the EU’s trade duties on Chinese solar equipment imports, exposing domestic companies to much cheaper panels and modules, according to Bloomberg New Energy Finance.

Richard Black, director of the Energy & Climate Intelligence Unit in London, echoes the view that Brexit poses an early challenge to energy prices due to reduced investor confidence. Affordability and security of supply, he adds, have been enhanced for Britain by increasing gas and power connections with the EU.

On the perceived threat to climate change policy, with some already arguing that the green agenda needs to be deprioritized while UK business “goes in to fire-fighting mode,” Black is dismissive: there would be a strong cross-party majority in the Commons and the Lords defending existing legislation, he argues.

Others fret that the UK leaving the EU will mean the pro-market voice in the climate change discussions in Brussels will be weakened and the proponents of statist schemes will get a boost.

Questions are also being raised about how a Euro-sceptic government in London will approach the commitments made at the UN’s Paris summit on climate change.

One possibility is that a new British government could promise a post-Brexit elimination of the 15 per cent GST required by EU membership, allowing a solid cut in gas and electricity bills.

The requirement to pursue 20 per cent renewable energy in the UK by 2020, another product of EU membership, claimed by its critics to be likely to cost Britons almost five billion pounds a year next decade, could also be in play

Rather a lot depends on who the Conservatives choose to be Prime Minister following the self-defenestration of David Cameron.

The widespread supposition in the media that it is likely to be Boris Johnson — “Donald Trump with a Thesaurus,” one of his political critics called him in the Brexit campaign — may turn out to be wide of the mark. Whoever it is will probably need to call a new general election, which could well coincide with the American presidential election.

Given what else has gone on in the first six months of 2016, you would have to think hard about a year of more geo-political uncertainty in the world post the fall of the Soviet Union.

Locally, we have to get over the hump of 2 July’s double dissolution election and an ensuing joint sitting of Parliament (assuming a Coalition victory, which I believe is probable) before things settle down here.

The future for Australian energy policy is going to be a work in progress for a fair while yet — with all that implies for local investor confidence.

Verily, we live in interesting times.

We need leadership

Ian Hunter put his finger on the core issue when he spoke on the closing day of Australian Energy Week in Melbourne.

Hunter, South Australia’s Minister for Sustainability, Environment and Conservation, said: “Regardless of who wins (federal) government on 2 July, Australia needs national leadership on climate change and energy policy. We also need long-term policy stability.”

How far this thought will be on the table in a practical sense when the nation’s energy ministers meet in Darwin soon after the election under the umbrella of the CoAG Energy Council remains to be seen.

Their pledge at the previous meeting on 4 December on working to integrate energy and climate policy was immediately followed by Victoria going it alone in embracing a State-oriented, much higher RET approach, whereas Queensland Productivity Commission for one — its chair, Kim Wood, spoke at Energy Week yesterday, too — is urging jurisdictions to act nationally rather than regionally.

Wood’s commission, by the way, delivered its final report on electricity pricing to the Queensland’s Treasurer, Curtis Pitt, on 31 May. Pitt could take until almost the year-end to release the report to public scrutiny under the enabling legislation for the commission but I suggest that it is in the interests of both his own constituency and the broader national one to put this document in the public arena asap.

In chairing the final day’s forum at Energy Week, I made the point that such discussions constantly raise new issues or cast existing ones in a different light, but the “trilemma” facing our national leadership remains the same: deliver all of a low-carbon economy, continuing security and quality of electricity supply and lowest-possible total system costs.

Hunter told the final day’s audience that his government continues to support a market mechanism at the national level to reduce power sector emissions and will continue to “advocate for a plan to modernize our electricity sector.”

Another speaker, AGL Energy’s Fiona Orton, argued that we must redesign our 20th Century electricity market regulatory system to match 21st Century technology.

The Centre for International Economics’ Saleem Mazouz  provided a strong articulation of the need for a market mechanism to facilitate the exit of the highest-emitting generation plant.

South Australia’s Hunter again spoke out on the importance of a new inter-government focus on east coast electricity interconnection.

“Energy generation should occur where the best resources are located,” he said, pointing out that his State has large, high-quality renewable energy resources (ie wind and solar) that exceed local needs and can meet requirements for zero carbon power resources in neighboring jurisdictions (ie Victoria and New South Wales).

“But what’s the point of growing our (SA’s) renewable energy output if we can’t export the excess to the rest of the NEM?”

He told us that the SA Premier has written to both Malcolm Turnbull and Bill Shorten seeking support for a plan to increase high voltage links between the State and its neighbors, arguing that this will put downward pressure of prices — by which, of course, he means reducing the expense of recourse to wind and solar as low-cost brown coal plant in particular is squeezed out by climate change policy — and improve security of supply.

South Australia, as I have reported on this blog previously, is putting funds in to a exercise by private sector ElectraNet to explore options for greater interconnection with the eastern States while Turnbull has the federal government engaged in reviewing the case for Basslink 2.

Hunter’s argument at Energy Week was that the NEM “was an excellent piece of market reform in the 1990s, but its rules and design reflect that time — not the world of today or the world of tomorrow.”

This, he added, is not to suggest dismantling the NEM, but improving it.

In particular, and the self-interest of South Australia is obvious here, his government wants market rules changed to enable power to be traded across country “more flexibly” and to allow States to “develop and leverage renewable resources.”

It also seeks a change to the market objectives to insert the aim of pursuing net zero emissions — Hunter arguing that Australia’s electricity sector must (his emphasis) be “decarbonized by the middle of this century.”

It wasn’t really surprising that both he and Mazouz encountered audience questions about who bears the cost of (a) strong expansion of links and (b) any scheme to ease higher-emitting coal plant out of the east coast market.

Ultimately, I suggest, it has to be either the consumers (75 per cent of whom by volume of consumption are businesses) or the taxpayers.

All of which is reinforcement of the case being put forward by Hunter — and many others at Australian Energy Week and elsewhere — for national leadership in this broad arena.

It was Keating, Goss and Greiner who came together, despite their political differences (two Labor, one Liberal), to drive CoAG’s predecessor to grasp the market reform nettles of the 1990s. They didn’t leave this to their energy ministers.

Will 2016-17 be the (financial) year where, after 2 July, the Prime Minister — and I still see persuasive (to me) evidence this will be Turnbull although one can argue endlessly about the margin of victory — turns to his State counterparts and pursues the leadership needed?

Meanwhile, I can tell you, pursuing our “energy outlook” agenda, Quest Events and I are now aiming to present a “Re-powering New South Wales” conference in Sydney in October.

As the saying goes, there’s no show without Punch, and the size of this State’s economy and electricity sector, as well as size of the decarbonization challenge in NSW, make such a forum an obvious next step in facilitating the national discussion. The last such focus was a “NSW Energy Summit” called by the Coalition government in late 2011 and it is fair to say that there is a lot of unfinished business flowing from that talkfest.

Australian Energy Week

From a mainstream media perspective, the big news from this week’s Australian Energy Week conference (see www.questevents.com.au) that I am co-chairing in (cold,wet, windy) Melbourne — where at mid-afternoon today brown coal generation was contributing 4,725 megawatts of supply capacity and hydro 568 MW versus 83 MW for rooftop solar and 783 MW for wind — has been Andy Vesey’s announcement that, from November, his AGL Energy will offer customers owning electric cars a $365-a-year deal for unlimited charging.

This was just one of a large range of interesting contributions canvassed in more than 40 keynote presentations and 10 panel discussions for some 400 attendees in the opening two days — a veritable waterfall of information illustrating the considerable range of current Australian energy (especially electricity) issues and contention.

From the perspective of long-term impact on energy demand, I think probably one the mores  important contribution has come from federal Resources & Energy Minister, Josh Frydenberg, who has committed the Coalition, if re-elected on 2 July, to further steps to promote the energy efficiency of commercial buildings.

The changes will add another 1,000 buildings to the list of those needing to report energy performance when they are sold or leased — currently there are about 5,000 — and Frydenberg claims this will deliver $50 million in bill savings and  3.5 million tonnes of abatement over five years. Not a huge step, but another necessary to pursue energy productivity in a country that is at best rather a plodder in this regard by international standards.  More than 60 per cent of our commercial buildings today have B,C or D efficiency ratings.

Not surprisingly, quite a lot of the conference discussion flowed around the elephant in the NEM — the large amount of over-capacity in the east coast market — and the threats this poses  to generation business operations.

Miles George of Infigen Energy, the wind farm developer, proposed that government should impose a plan to reduce over-capacity by 1,500 megawatts a year of energy-intensive, ageing coal plant. Vesey urged “an ongoing conversation” between industry and government to produce an orderly culling arrangement. Jon Stretch of ERM Power expressed concern that another review process is not the answer. Greg Everett of Delta Electricity commented that there is “a rough ride” ahead before the market finds “a safe harbor.” Paul Broad of Snowy Hydro opined that the east coast wholesale market is a “shadow” of what was envisaged in the 1990s when it was set up and called for an “adult debate” about over-supply and the over-arching issue of government intervention in the NEM. Industry, he said, needs to “step up and state strongly what it needs.”

The long and short of this situation is that there is no obvious solution to shifting the elephant — or its twin, the ongoing penchant of politicians to pick winners in electricity supply.

One wonders what the CoAG Energy Council might be saying on all this when it meets next month. I hear that it has yet another working group poring over its promise from 4 December to integrate carbon and energy policies. Much more, I have suggested before, could be achieved by first ministers specifically discussing this pledge and ordering ways to pursue it.

Quite a lot of discussion has focused on the South Australian situation and whether or not it is a harbinger of wonderful things to come in the NEM as a whole or an indication of substantial issues in both energy security and power quality maintenance.

In a forum where so much has been said about the future for renewables, the Minerals Council’s Greg Evans stood out in urging consideration of upgrading existing coal-burning plants to higher-effeciency, lower-emissions standards on energy security and reliability grounds.

He also suggested a further iteration of the energy white paper process — which has irritated and frustrated so many stakeholders in its past two federal attempts (2012 and 2014). A new version, he said, should engaged the States and Territories in the process.

The Australian Energy Council’s Matthew Warren observed that, overall, the policy process remains “in dangerous territory.” Governments need a “considered, strategic approach,” he said, but their cabinets tended to be obsessed with constraining consumer prices, keeping the lights on and being seen to be green.

We’re not done yet. Thursday I get to chair a policy forum which will include a focus on the role of market regulation, Ian Hunter, South Australia’s Environment Minister, on the role of State governments in climate change policy and security of power supply, reviews of what is happening in New South Wales, Queensland and Western Australia — and discussion of ways to facilitate the integration of renewables in to electricity supply.

The conference isn’t about to — and never was going to — solve the problems of our local energy world but, as an exercise in sharing opinions and concerns from a number of corners of the ring and enlightening stakeholders about other perspectives, I think it has been quite useful.

The big question hanging over an event like this, and over the whole debate, is whether, once the federal election is done and dusted, the “safe harbor” to which Greg Everett refers can at least be identified and a course laid to reach it?