Deep decarbonization & the market

Here and in some places overseas we are careering down a path (to quote the chairman of Bloomberg New Energy Finance) to more and more regulatory intervention in the electricity marketplace.

This, says Michael Liebreich, is one of the main products of the ongoing debate about “deep re-regulation required to meet the challenge of providing cheap, clean, reliable power in the face of new technologies, new types of user behavior and the need to address climate change.” (I jib at this use of “cheap,” which is quite widespread. Its users don’t mean much lower cost than now but the lowest cost available from the measures taken to address the “trilemma” in the “transition.” It’s sophistry to talk about “cheap” in an environment where users across the spectrum see their bills continue to rise.)

Put another way, the over-arching issue is whether the rise of politically-pushed subsidized variable renewable energy (or in the case, for example, of New York state, payments to aid struggling old nuclear plants) is causing competitive power markets to misfire and what can be done about it?

America’s Federal Energy Regulatory Commission is examining whether and how government policies supporting generation that suits political purposes are distorting US competitive energy markets – and we will very soon know whether Alan Finkel and his task force have given thought to this issue.

As another BNEF commentator says, it makes all energy market purists wince when policymakers reach for yet more layers of incentives and mechanisms (a prime local example. I guess, being the current goings-on in South Australia) – but, he asks, “how (else) will power markets function as the energy system travels down a path of deeper decarbonization?”

It’s an issue I hope to see well-explored when the Quest Events’ second Australian Energy Week conference is staged in Melbourne from 21 to 23 June, not least in the opening plenary session (which will include a presentation by Finkel) and the “energy policy forum” I am to chair on the final day which will include addresses by Josh Frydenberg and Labor’s Mark Butler.

In this context, it is interesting to read a submission made a few days ago by the Australian Energy Regulator (much in the news at present after the Federal Court ruling largely in favor of power networks) to the House of Representatives standing committee on environment and energy – which is examining modernization of the electricity grid.

The AER says the inquiry “comes at a critical juncture in the evolution of Australia’s energy markets” with technological change putting them under “significant pressure.”

The regulator declares “competitive markets are (still) best placed to deliver new products and services to ensure customers can capture the value of their choices” – and it warns that “the scope for market-based innovation will be limited if (governments) require particular technologies to be adopted or specify in advance how desired objectives and outcomes (are to be) achieved.”

It joins the chorus enjoining governments to opt for policy and regulations that are technology neutral, calling for frameworks under which new products and services are developed to be “enabling” rather than “promoting.”

AER rightly observes that what we are seeing at present is “jostling” by providers of these new products and services to have their wares accepted as “the solution” – which all too often involves the boosters seeking subsidies rather than exposing themselves to market competition. We are best off, the regulator argues, where consumers bear the costs of their choices as well as the benefits and it yet again pushes out the boat for cost-reflective tariffs.

AER also reminds the committee MPs that, when additional power interconnection is talked up (to reduce wholesale power costs in States where they are high), it needs to be understood that such links may increase bills in other regions – and it’s investment that also plays in to network charges.

Another late May submission reaching the standing committee comes from the Business Council and includes a warning to policymakers against “putting all eggs in one basket (in moving away from) emission-intensive generation.”

The BCA says: “Should the cost of solar PV and/or batteries not reduce as expected or if gas is less available and/or more expensive than forecast, (we) may have insufficient electricity supply options in the face of binding emission constraints.”

The Australian Energy Council tells the standing committee it has urged the Finkel task force to appreciate, when considering the NEM, that “policy is the problem, not markets.” It repeats its argument for cost-reflective pricing and user/causer-pays allocation of grid costs plus the removal of barriers to the market-led roll-out of smart meters.

To come back to the BNEF point, Tony Wood of the Grattan Institute, in a recent op-ed in the Australian Financial Review, nails the issue, I think, in asserting that the biggest challenge for politicians, “and one that may determine whether reliability and affordability (in electricity supply) are sustained,” will be the decision on “where we choose to sit on the spectrum between markets and central planning/regulation.”

Wood points to what seems to me to be one of the more serious hurdles facing resolution of this: since appointing the Finkel task force last year, the federal government and several State governments have pre-empted its report with “well-intended but unco-ordinated and potentially counterproductive interventions.”

He writes that policy choices made this year will impact on the ongoing primacy of the market or a shift towards central planning and greater regulation – and argues that it should be a conscious choice, not (my words) another sleepwalk in to future “major regrets.”

This, it may turn out, is the most important aspect in the long run of the whole game.

Approaching Argentinian moment?

Just how much is perceived to be hanging on the Finkel task force report to the Council of Australian Governments is illustrated by a comment to market analysts last week by AusNet Services CEO Nino Ficca, who is also the chairman of Energy Networks Australia. “We see the Finkel Review as a once-in-a-generation reform opportunity. It can deliver an instructive template with a long-term focus,” he said.

No pressure, then!

Seriously, as important as the task force report is, it needs to be remembered that another review is no less so – this is the climate change policy re-assessment being undertaken by the Turnbull government itself. The opportunity for submissions to this have now closed and a report will be published later this year, well after the Finkel report reaches the CoAG leadership early next month.

Law firm Herbert Smith Freehills recently summed up the climate change project like this: “The review reminds us that Australia’s climate change policies and regulations continue to be in a state of flux and the ongoing impact on business is uncertain.”

Something of an understatement, perhaps.

When you take in to account that the media commentariat in Canberra is now starting to talk of the possibility of the next federal election as early as the first half of 2018, the prospect that the body politic can latch on to a long-term focus après Finkel and the climate change review and lead the energy industry and consumers to sunnier uplands (where prices will be acceptable to users) remains very challenging to say the least.

Getting the public debate focused on genuine factors in all this is not exactly easy. To quote AGL Energy CEO Andy Vesey: we’re embarking on “something incredibly complex but the communications environment demands a simple explanation (and) there isn’t one.”

Ficca, whose company operates energy networks in Victoria, qualified his comment by telling analysts that “continuing partisan politics will only exacerbate the very real issues” facing suppliers and consumers. He also made the point that a cohesive national (ie east coast) system will be far stronger than State-by-State attempts to pursue a new policy model.

Ficca’s comments can be read with the reaction of Energy Networks Australia to this month’s federal budget. It welcomed the parts of the budget focusing on energy security with the rider that “widespread federal funding of new energy projects should not be necessary if State and federal governments can rapidly agree on a national energy transition plan.”

The association added: “With stable, national energy and carbon policy, we can return to an environment where investors have the confidence to allocate private capital, avoiding the need for support from the public purse.”

I covered some of this ground in a post on this site on 11 May (“The exam question”) and a trip in the past week to Perth to attend the Australian Petroleum Production & Exploration Association annual conference just laid extra emphasis on the fact that this latter sentiment is widely shared in the energy sector – and that, behind the statements calling for a mature approach to policy, there is considerable disquiet among suppliers across the board about whether our political leaders are up for this task, always assuming that the Finkel report lives up to stakeholder expectations.

Some of the flavor of the situation is conveyed by comments made to Adelaide media by Tom Koutsantonis, the South Australian Treasurer and Energy Minister (who was a participant at the APPEA conference).

Reacting to academic suggestions that the east coast gas shortfall is overblown, Koutsantonis said: “There is absolutely a shortage of affordable gas, created by gas exploration and development bans in Victoria, NSW and the Northern Territory, which are driving up power prices across the NEM.” And he gave the Turnbull government a backhander by adding that its gas export policy “rewards the bad behaviour of other States and does nothing to address the cause of the problem.”

Koutsantonis also reacted to the latest Australian Energy Market Operator report on the reliability of the grid by saying it is “another reminder that the market is broken.”

He blames a lack of policy direction on carbon pricing at the federal level for the “disorderly exit” of coal generation from the NEM because there is no incentive for replacement power.

It’s also notable, I think, that there is a new front opening in the “energy war” in which proponents of renewables are arguing that continuing high gas costs and falling costs for renewables generation and storage technology mean “we have outgrown gas in the electricity sector.”

The upstream petroleum industry’s reply is that “the road to (greater use of) renewables goes via the nation’s gas fields,” arguing that what’s going on here is that energy policies and climate change policies are pulling in opposite directions.

How far the Finkel task force report can address the “pulling” issue is open to question – and, in any event, whatever debate we get on Finkel will run in to the inevitable row about abatement when the Turnbull government comes round to releasing the climate change study.

The Grattan Institute, in a new commentary released this week (and the topic of an op-ed in yesterday’s Australian Financial Review by Tony Wood), makes the point that the transition from centralized power supply based on fossil fuels to low-emissions technology is not being primarily driven by efficient climate change policies but “by a grab-bag of subsidies to support renewable energy,” noting that the failure to integrate intermittent generation in to the existing market system is leading to plant shutdowns and greater dependence on gas just at the time when poor policy has seen the fuel’s price more than double.

Wood asserts that the energy policy choices made in 2017 will determine whether markets have ongoing supply primacy or we embark on a shift to central planning and regulation. This choice, he adds, needs to be made consciously to avoid major regrets later.

Senator Nick Xenephon, always one for a quotable quote, has declared that “Australia is approaching an Argentinian moment” because of bad energy strategic and policy decisions.

Beyond such rhetoric, the prospect that we could sleepwalk in to “major regrets” is real and it’s understandable that players see the Finkel report as a key to avoiding this pitfall.

We just need to remember that it is only part of what is coming down the road this year and all the parts need to mesh.

Sailing in to the wind

It’s a helluva challenge to pick the most interesting topic at the wide-ranging 57th Australian Petroleum Production & Exploration Association conference in Perth this week.

With 2,020 delegates, 165 exhibitors in more than 8,000 square metres of Perth’s cavernous Convention Centre and more than 100 presentations, the event is a big affair and the industry is canvassing a smorgasbord of issues.

The key point, however, is not a new one. APPEA and its members have wrestled with it literally for decades in various forms. It’s politics. “Accumulated policy failures are weighing us down,” says APPEA chairman, Bruce Lake, expressing “alarm” at the pace of reform of areas that impact on his members’ businesses — which include many small and ambitious companies (something not well-recognized in the media) as well as the elephants of exploration and oil and gas production.

Part of the PR problem for the sector is switching communication gears effectively after years of talking up huge gas developments to now win community understanding that the key challenge goes beyond the immediate domestic supply crunch. It extends also to the lowest exploration effort in 30 years, a harbinger of still more supply problems down the track.

Even though upstream petroleum companies found Australia a high cost country over the past two decades, low risk for investors saw some $200 billion invested in pursuing gas development — but mainly for export. Today’s political problem is the domestic situation, which the Prime Minister declares to be in crisis.

More broadly,Lake points out, the big issue is that Australia is on a path to being a high cost, high risk country and there are plenty of other regions when investor dollars can be directed.

In a sentence, Australians can’t expect $50 billion to be invested here in locating new gas and oil resources and bringing them to market by 2030 in an environment that is seen by the industry as being significantly negative.

The inability of the industry, the major gas users in manufacturing and the body politic to secure a “Goldilocks” situation where investor and consumer desires, along with the need for safe environmental management and the concerns of farmers are all being served has delivered what Lake and others now keep calling a “tipping point.”

Some would argue that the “tipping point” actually occurred about two years ago and the political locusts have consumed critical time for remedial action.

The Woodside CEO, Peter Coleman, sums this up by saying that what should be a time of opportunity for the industry, as our markets reach for reliable supplies of affordable, low emissions energy, is instead a period for multiple regrets in which the sector is seen by more and more in the community as creating problems rather than solving them.

The semi-spoken fear of the industry is that, because there can be no quick fixes and because politicians at federal, State and Territory levels keep kneejerking in response to community unhappiness, the operating environment for its members may already be spoiled for a longish time and opportunities will be foregone that cannot be readily recouped (including, for example, the Australian electricity generation market becoming a no-go zone for gas plants where only seven years ago the annual conference was seriously discussing a “golden age” for gas as a transition fuel).

One executive attending the conference laments that “we haven’t really tried to understand what the future might look like and prepare ourselves for a different world — I think we have done a bad job here.”

His focus is on the impending east coast gas shortfall, the prices factory users find unacceptably high and the intervention now being pursued by the Turnbull government — but this stricture can be pursued more broadly for the industry. It’s the qualifier that’s important here — really (that is, effectively) tried as opposed to the various efforts pursued across the broad canvas of energy policy and regulation that, especially in places like Victoria and New South Wales, have not produced outcomes to the industry’s advantage.

“Could have done better” in the time-honored teacher’s scribble on kids’ report cards.

One observer in the international energy trade media sums up the situation as the industry being “under the cosh” across the range of issues affecting its present and future, noting that the key remedial step “trumpeted by the industry” is to develop more gas, but suggesting that a lack of policy support at state level indicates there can be “no easy fix anytime soon.”

APPEA’s chief executive, Malcolm Roberts, prefers a different metaphor, telling another trade magazine that the industry is “buffeted by commercial and political headwinds.”

Victoria, he says, now finds itself stuck in the contradictory position of both depending on gas and prohibiting all onshore exploration and development. “I don’t expect the State government to re-assess its unsustainable position as a free rider for some time yet,” adding that New South Wales claims to be open for business, but this needs to be backed up by action.

The key focus by policymakers, Roberts says, should be on barriers to investment, not least the delays and costs of State regulation.

Meanwhile, Woodside’s Coleman argues that there is little to be gained from “continuing the blame game” and that “it is time for the nature of the conversation to change.”

The devil lies in how and over what time.

Of course, the mainstream media attention in situations like this tends to be grabbed by the “big picture” solutions, in this case the proposal for a “nation-building” coast-to-coast pipeline transporting gas 4,030 kilometres from the North-West Shelf and WA’s Kimberley to meet eastern energy hunger. It’s not seen as a silver bullet by many at the APPEA conference or, indeed, beyond it despite Turnbull being prepared to allocate funds to support a feasibility study. The shorthand for this view is that prohibitive development costs, economies of scale and challenging terrain load the dice against this “artery.”

Hovering in the wings of this conference is the imminent report of the Finkel task force, then the outcome of the federal climate change policy review and how the “animal spirits” of the political jungle will handle the challenges these throw up.

The prospect that the present headwinds will veer round to following ones is, frankly, not high. It’s hard to come away from this event in Perth without a strong sense of uneasiness.

 

 

 

The exam question

The Energy Networks Australia CEO, John Bradley, makes a sound point in the wake of this week’s federal budget.

His association welcomes the steps taken by the Turnbull government – including seeking to boost customer confidence in electricity retail and wholesale gas markets as well as support for new energy sources and pipelines plus money for scientific assessment related to onshore gas development – but emphasizes that “government funding is not the biggest challenge facing the energy system.”

Bradley says “widespread federal funding of new energy projects should not be necessary if governments can rapidly agree on a national energy transition plan” that, he adds, can return investors to an environment where they have confidence in allocating private capital, avoiding calls on the public purse.

Meanwhile, the Australian Petroleum Production & Exploration Association, which is holding its big annual conference in Perth next week, says $50 billion needs to be spent on east coast gas developments over 15 years to meet demand.

CEO Malcolm Roberts adds: “The industry is capable of delivering this provided State governments stop their political games. The only genuine, lasting solution to the tight east coast gas market is more supply (to) boost liquidity and competition, putting downward pressure on prices.”

In a nutshell, Bradley and Roberts, while commending the federal government for its positive approach in the budget, are nailing the ongoing over-arching issue: the willingness of jurisdictions to get real about the weaknesses in the system – and to do so soon.

As an example of the games being played, APPEA points to the (Coalition) NSW government creating an elaborate new regulatory regime for gas development – but failing so far to release acreage for a fresh round of exploration.

The Australian Energy Council’s Matthew Warren made a similar point a week ago. ““More renewables are part of the solution, not the solution itself,” he said. “We still need a durable national energy and climate policy that unlocks all types of energy investment and allows the market to coordinate energy technologies to deliver reliability and lower emissions at the lowest cost to consumers. We are yet to the fix high energy costs and increased reliability risks faced by Australian businesses and households. We are still to address how we will efficiently and reliably integrate higher levels of renewables into the grid.”

Riding back home on a train yesterday from attending an ENA forum in Sydney on “grid edge innovation,” I found a commentary by Catherine Tanna, managing director of EnergyAustralia (one of our three largest producers of electricity), in the new issue of a utility trade magazine – and some of her comments resonate with these budget reactions.

“Any transition,” she writes, “from large, older coal-fired power station to newer technologies will require an orderly, realistic plan and stable energy policy.”

She says: “The staggering thing is that there is no shortage of existing and potential energy supply in Australia. The problem isn’t capacity – it’s planning. We have enough electricity generation capacity – just not where and when it’s needed. There are abundant supplies of gas – but they stay in the ground.”

The exam question, says Tanna, is how to deliver reliable, affordable and cleaner energy for everyone in Australia.

She points out that, when one element in this equation is given priority over the others, you get the situation in which we are mired now: volatile markets, problems with security of supply and rising prices.

The answer, Tanna argues, “isn’t rocket science – it’s giving business confidence to invest,” the point also being made by Bradley, Roberts and Warren (and not a few others). “We get problems when we play favorites out of cleaner energy, reliability and affordability.”

The Grattan Institute’s Tony Wood, offers another, not unreasonable, view that the federal budget contains “modest commitments” to energy security, more gas and better regulation but he questions public funding for further feasibility studies on large-scale developments (like Snowy 2.0, power interconnection and major pipelines). “If the gas crisis can’t galvanize support from companies and consumers for pipelines,” he says, “why should governments reach a different conclusion?”

The Turnbull government may think him harsh, but I feel he’s on the money in declaring that, on energy, the budget is really “small fry” ahead of the outcomes of the Finkel task force review (next month) and climate change policy review (later this year).

The truth of the present situation is that, even as they ask us to perceive them as farsighted, our political leaders (across the board) are still pursuing short term agendas to win headlines, opinion polls and, they hope, “the only poll that matters.”

What will come out of the Council of Australian Governments meeting to be chaired by the Prime Minister on 9 June when confronted by Finkel’s report? Will it be a firm purpose of amendment on the part of governments collectively? Or will it be more rhetoric and game playing?

Among business stakeholders (whether suppliers across the energy spectrum or large-scale consumers) there is consensus that the status quo is unsustainable.

This past week the international resources company Glencore warned that “Australia has drifted past a tipping point of industrial energy demand destruction.” Global coal executive Peter Freyberg told The Australian Financial Review “Australia has to meet its energy needs now, in five years, in 10 years and in 15 years – and can’t rely on blue sky thinking.”

Real solutions are needed, he declared.

This, surely, is the exam question and the policymakers’ answer has to engender confidence on the past of investors (and their financiers) that policies and regulations will not continue to be capriciously adjusted.

Back in March of 2014, chairing a Quest Events conference in its “energy outlook” series, I said that, unless the policy process inculcates a balance of trust, confidence and understanding across investors and the community at large, “we are going to go on digging deeper and deeper holes rather than providing affordable energy with a lower environmental footprint.”

The political leadership’s approach in the past three years has been to launch inquiry after inquiry. The Australian Energy Council says on its website that there are now 25 reviews and assessments under way in the federation arena, “Are we now effectively beginning to see reviews in to reviews,” it asks?

As Glencore asserts, we are now at the very least on the brink of a tipping point – and the ultimate question is how do we avoid falling really hard? It can’t be argued that the federal budget provides the answer, so what must be done?

Evolution, not revolution

It seems that one of the harder things for lay people to get their heads around in the energy debate is that scenarios are not predictions.

I reflect on this having watched some of the coverage (including by “our” ABC) of the Electricity Network Transformation Roadmap produced by CSIRO and Energy Networks Australia with a 2050 horizon.

The Roadmap, the organizations point out, is “informed by an evidence based approach, referencing over 19 reports that summarise expert analyses, scenario analyses and quantitative modelling to 2050.”  Which from my perspective, given that 2050 is 33 years from here (the equivalent of looking at today from 1984) or 11 federal elections, makes the project interesting but not predictive.

There is no allowance for nuclear power, for example, in this work. Given our concerns here about climate change and a whole range of other factors, like the issues bedevilling gas development, would you care to bet that Australia will not buy in to nuclear energy (especially small reactors) in the next three decades? My regret is that I won’t be around to take your money.

Having said this, the CSIRO/ENA project is helpful in considering some pathways towards a different electricity supply mix.

At every turn, the public needs reminding that our immediate challenge in meaningful terms – hopefully being taken up by the Finkel task force, due to report in the near future – is to get to 2025 and 2030 in better shape.

(As an exercise in understatement I rather like this extract from an op-ed by Josh Frydenberg in today’s Australian Financial Review: “Integrating (much more) renewables into the system will present some challenges but with the right planning energy security can be maintained and challenges overcome.” By contrast there is this comment by the Australian Energy Market Commission this week to a South Australian parliamentary committee looking at last year’s blackout: “The widespread deployment of new technologies in the electricity market is having major impacts on the maintenance of power system security.”)

The CSIRO/ENA report asserts that “the next decade to 2027 is likely to see a step change in the rapid adoption of new technologies driven by falling costs and global carbon abatement measures.” CSIRO/ENA go on to declare that “this decade provides a limited window of opportunity to reposition Australia’s electricity system to deliver efficient outcomes to customers.”

Which is not (or shouldn’t be) an invitation to the body politic to plunge ahead with shutting down or curbing existing conventional generation and bidding the farm solely on the exciting future of intermittent renewables and battery storage.

We all need to be conscious, I think, that a transition is an evolution not a revolution.

(And just by the by, when you contemplate 2030, bear in mind that this is the equivalent of standing in 2004 and looking at today. We have had no less than three federal government white papers on energy security since 2004. Did any of them scope, let alone predict, the domestic energy supply shemozzle we have on our hands in 2017?)

Apart from all the stuff about 2050, the CSIRO/ENA modelling shows a scenario where, in 2030, we could be looking at about 181 terawatt hours of generation in the NEM under a carbon price scheme – with 19 TWh from brown coal (45 TWh today with Hazelwood included), 82 TWh of black coal (114 TWh at present), 73 TWh from gas (versus 19 TWh now), 64 TWh of non-hydro renewables (20 TWh now) and a continuing 16 TWh of hydro power (not reflecting the recent Turnbull lunges towards Snowy 2.0 and Hydro Tasmania 2.0).

Even this level of change, which is nothing like the Apocalypse Now for fossil fuels desired by the Greens et al, poses substantial market management challenges.

And it doesn’t take a great deal more thinking to conclude that whatever policymaking delivers us in the next 13 years (along with the developments in technology we actually take up as opposed to talk up and the reactions of the community to what is proposed, including smart meters and cost-reflective network charges) will be big factors influencing what then happens from 2030 to 2050.

All of which, and not for the first time, brings me to point to the report by South Australian nuclear royal commissioner Kevin Scarce, who has urged our federated system to “collaborate on the development of a comprehensive national energy policy that enables all technologies, including nuclear, to contribute to a reliable, low-carbon electricity network at the lowest possible system cost.” Is this what Finkel & Co are pursuing?

Scarce added: “identifying whether a particular generation portfolio will deliver electricity at the lowest possible cost requires analysis of the future cost of the whole system, ie the total costs of generation, transmission and distribution.” And he observed that claims made to date do not take account of the uncertainty surrounding assumed costs reductions in some technologies.

Coming back to the Roadmap, it is postulated on electricity sector carbon abatement reaching 40 per cent by 2030, a lot more than the across-the-board national target of 26 to 28 per cent, something which carries considerable implications for NEM security and the cost of power to consumers.

In the CSIRO/ENA scenario this would involve an investment in solar PVs reaching 29,000 megawatts and in battery storage able to contribute 34,000 megawatt hours a year at the end of the next decade.

Buried in the report (it runs to 116 pages) is a graph showing household electricity bills rising from $1,500 a year (an average) to $1,900 annually in 2030 whether under today’s trends or a system that includes a carbon price. Is this what Us Outdoors think we are hearing from the Coalition and Labor?

Now it’s simply not possible to do justice to the CSIRO/ENA research in 1,100 words.

Their project is an interesting exercise and one they should be complimented for pursuing. It contains many references to the challenges of resilience for a market undergoing fundamental, long-term change. But the risk that the charge of The Green Light Brigade will use the desirable (to them) highlights of the report to run over the more cautious tones of Scarce and others is real. They did that with the AEMO 100 per cent renewables report five years ago.

 

 

Stand and deliver

In my working career I had a long engagement with the twin issues of relationships between the federal government and Australia’s other jurisdictions and between States themselves, both through gigs in manufacturing (way back in the 1970s) and energy (from 1980 to 2007, mostly through industry associations but also through chairing the energy committee of the Critical Infrastructure Advisory Council). Apart from the sterling work done to establish the NEM, this experience has not provided me with huge confidence in the commitment of politicians to co-operative federalism.

As Paul Keating said, and he was quoting his mentor, Jack Lang, in the race of life always back self interest – you can be sure it is trying. This is demonstrated time and again in energy policymaking and especially in the past decade.

The Keating/Lang quote has popped back in to mind in observing the stirrings from the West over the prospect of an intercontinental pipeline being pursued to bring gas to the beleaguered south-east coast, a thought bubble initially floated by defeated WA Premier Colin Barnett and seized on by Malcolm Turnbull and others of his ministers, increasingly desperate to find a way out of the maze of trouble that is the south-eastern gas market (a problem on which I have helped focus over the past five years through the Quest Events Australian Domestic Gas Outlook annual conference – and one where the writing was on the wall from the get-go).

If the federal cabinet thought that a $3 billion to $5 billion pipeline was a get-out-of-jail card for the mess in to which south-eastern State and Northern Territory politicians have dragged the national government, it can now think again.

If they want to take our gas because of policy failures in the East, says new West Australian Premier Mark McGowan, they (ie the federal government) will have to provide a better deal on the goods and services tax (a major irritant for WA policymakers of all stripes and their community for years and years).

And further, declares his Mines Minister, Bill Johnston, if they want our gas in the East, the federal government is going to have to come up with a reservation policy (like Labor introduced in WA when it was last in office). “Let’s understand what would happen (without reservation),” says Johnston. “They’d export our gas from the east coast.”

Former WA Treasurer and now opposition leader, Mike Nahan, is no less trenchant. “We should not focus on exporting our gas to the East but (on) importing jobs and investment to the West,” he says, a slap for Barnett, who has not retired but is still sitting on the Liberal Party backbench.

Being in the position of all care and no responsibility these days, I’m quite looking forward to trekking across the Nullabor in mid-May to observe the next instalment of all this at first hand during the Australian Petroleum Production & Exploration Association annual conference in Perth, billed by the association as a forum for taking a hard look at the issues (of which the east coast imbroglio is but one) in hard times.

It’s a great deal more fun being on the sidelines observing the stress and strain than in the middle as manager of the industry association (a role I held for almost 11 years, mostly in the 1980s) and it is interesting to see how many issues keep coming back to the fore in different guises (like the debate today over the petroleum resource rent tax, initiated in the 1980s by Keating, Bob Hawke and Peter Walsh, and one of the biggest matters with which I got to wrestle on behalf of APPEA members during my time there).

With a dozen keynote addresses, including one by McGowan, and some 90 other presentations, the 2,000 or so attendees expected at the 2017 APPEA conference will be exposed to one of the best opportunities around to be better informed on the challenges energy stakeholders (oil and gas professionals, analysts, politicians, bureaucrats and service and skills providers) face in a time of rapid change and turbulence.

The value of the industry to the economy and to international investors is vibrantly illustrated by the conference’s exhibition – this year featuring 135 exhibitors from two dozen countries occupying 9,000 square metres of the cavernous Perth Convention Centre. In terms of gathering information (“networking” in the jargon), the APPEA exhibition aisles have few peers.

The other illustration of the event’s importance is the way journalists flock to it each year. There have been occasions in recent years when 40 to 50 of them have been on hand for four days – and media news directors don’t let that happen lightly in these straitened times.

My heading on this TiP – “Stand and deliver” – was chosen with the WA Government’s hardline retort to Canberra in mind, but it applies equally to APPEA and its members with respect to the conference. As APPEA chairman Bruce Lake says in the event’s program (which is on the association website) “at times like this (the conference) becomes more important than ever – (this) is our strongest platform for conveying our key messages to politicians, our supplier partners and the media.”

One of those messages this year will need to be, I think, a stronger emphasis on how the recent florid campaign about the alleged failings of the PRRT, arguing for new tax imposts on the industry, just ignores the fact that in 2014-15, despite recording a net loss of $600 million amid the wreckage created by the global oil price collapse, APPEA’s members coughed up $5 billion in various tax payments to the nation’s governments.

The community at large just doesn’t know this. Nor do they get that imposing still higher burdens on oil and gas investors in Australia is no way to help them get reliable and more affordable energy.

In an environment where so much of what drives political decision-making is public opinion, this is not a minor point.

Meanwhile, the West’s pollies know a good card when it is handed to them: if Turnbull & Co want the WA’s gas resources to flow east they will need more than “nation-building” rhetoric – and that’s before the work has been done to establish if the pipeline concept is even commercially viable (not least for the deeply worried manufacturers for whom it is being offered as a lifeline).

As pipeline major APA Group has been saying in recent days, the idea faces “massive logistical and economic hurdles” – and this was before McGowan & Co made the stakes a bit higher.

FOOTNOTE: I wrote this post before waking up on Thursday to news that the Turnbull government proposes to introduce regulations to limit gas exports from the east coast (to quote today’s Australian Financial Review, “if they are emptying domestic reserves to meet overseas contracts.”) This just adds more bite to my “Stand and deliver” headline — and to the timeliness of next month’s APPEA conference in the energy debate. We do indeed live in interesting times.

A matter of perspective

To force or not to force, that is the question – well, actually, a question and probably not the one that really matters at this juncture.

A Senate committee chaired by the Greens’ Peter Whish-Wilson, a Tasmanian, wants the federal government to devise a plan for the “orderly retirement” of coal-fired power stations.

The two Coalition members of the committee, which produced a report just before Easter, retort that forcing the exit of coal power is not the best way to achieve an “effective” – do they mean “efficient”? – transition of the electricity system to a lower carbon footprint.

The two Labor senators on the committee, noting that “coal-fired power generation will continue to play a significant role over coming decades,” point out that achievement of the Queensland government’s 50 per cent renewable energy target for 2030 does not require the early retirement of (State-owned) coal power. They might have added that the last thing their colleagues in government in Victoria want to consider at this point is shutting down the rest of the Latrobe Valley’s generation – or that, if they could have the time over, their colleagues in government in South Australia may well have figured out a way to keep the Northern brown coal plant limping along.

Interestingly (to me), there is no Coalition or Labor dissent from a committee recommendation that the federal government should establish “an energy transition authority with sufficient powers and resources” to plan and co-ordinate a shift in supply sources.

(This was promoted to the committee by the Australian Council of Trade Unions among others. ACTU wants the entity run by a tripartite board representing industry, government and unions.

(The Greens want this, too, and tried a private bill on federal parliament late last year – to create “Renew Australia” with, surprise, surprise, a remit to introduce 90 per cent renewable generation by 2030.)

Meanwhile, not least because the federal government wedged itself in a kneejerk reaction (warding off rumbles from its ultra-conservative members) against a suggestion last year that the Finkel review would opt for an emissions intensity scheme, the majority of the Senate committee (ie Greens plus Labor) wants Turnbull to commit to “fair consideration” of all policy recommendations from the task force, including an EIS, when it reports in the next couple of months.

The committee’s task was to look at the future role of coal power in the NEM and Western Australia’s SWIS market.

Coal generation makes up 78 per cent of the east coast market and half the SWIS supply. In all there are 23 coal plants in operation (Hazelwood having just shut) – of which five are in the West. Ten have shut since mid-2012 and the environmental movement’s contention is that, just to meet the present 2030 national abatement target, “a substantial portion” will need to go by the end of the next decade.

The other plank in the activists’ push is for the national electricity objective to be amended to include a requirement to reduce carbon emissions because – they told the committee – the current NEO is “all about NEM security, supply and cost.”   (The mainstream power supply sector’s response is that activists campaign for this because they see it as a proxy for getting abatement policy “right” at the national level – whereas, it is argued, if you produce a durable, bipartisan climate change, you don’t need to also meddle with the market.)

The Greens’ line, which they have written in to the committee report, is that evidence to its hearings “highlights the need to have coal-fired power retired in the medium term.”  The coal sector’s retort is that, to the contrary, a key aspect of addressing supply security and affordability is to build new high efficiency, low emitting (HELE) plants like those springing up in the rest of Asia.

A core point in all this is (or should be) whether or not to leave investment decisions to investors – whether considering closing existing plant or building new generation. The Greens and fellow travellers naturally want measures to “assist” the process; in other words to force out operating coal generation and “facilitate” more wind and solar power, bolstered by energy storage and more high voltage transmission.

Reading the “committee view” in the report, there are a number of aspects worth noting.

It is hard to disagree with the observation that “ad hoc (recent) pronouncements from both federal and State governments have only added to (public debate) and regulatory confusion without moving the country any closer to a cohesive national plan.”

On the other hand, the report’s declaration that “it is clear the era of coal-fired generation is drawing to a close” – a Green hand obviously at work here – clashes with the real world.

In our south-east Asian neighborhood, for example, there are new coal plants being planned or under construction with a capacity of 125,307 megawatts, part of some 835,000 MW in the pipeline more generally. Whether or not, as one prominent green newsletter put it this month, “it is disturbing that Asia seems to be sheltered from a global drive to less (power) dependence on coal,” pretending this isn’t happening ought to be beneath a federal parliamentary committee.

The question (my emphasis) is not, I think, as posed in the committee view – expressed as “not if coal-fired power stations will close but how quickly and orderly these closures will be and what supporting policies, if any, will be in place to manage the process” – but rather the four issues the Grattan Institute, among others, is urging on the Finkel task force for its “tight focus” —

  • New market rules to manage emerging security challenges and future capacity risks
  • A plan for next summer when (NEM) shortages may arise
  • Requirements for integrating energy and climate policy, and
  • The ability of the NEM to provide the right signals for new investment and what alternative policies may be needed.

Politicians riding their hobby horses are not helping to keep any such “tight focus.”

One of the other Grattan admonitions is also relevant here: “Maintaining flexibility through the transition is critical to ensure we can take advantage of better solutions as they emerge.”

All the fuss of recent months should be underlining the paramount importance of high levels of security and reliability of electricity supply – and the non-stop complaints across the spectrum of consumers about the size of their energy bills should be spurring politicians to elevate this to the top of their consideration, too.

That the Senate committee report has got barely any media coverage – and this dominantly has been about squabbling along party lines among the senators – is no surprise given its tone versus the key issues engaging the mainstream public debate.

Whish-Wilson in a media statement asserts that “the lack of a clear, government-led process to retire coal-fired power stations is fuelling the crisis in the energy system” – which is a pretty one-eyed perspective of what is really going on.

Gas imbroglio

 

Back in 2015 the collective governments of Australia made a promise to energy consumers.

The CoAG Energy Council declared: “(We) have agreed to a national, cooperative effort to better integrate 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.”

One may judge the policymakers’ success so far in pursuit of this pledge against what the Australian Industry Group is saying to the federal government in its submission ahead of the 2017 Budget: “Our energy market designs and policy frameworks fall far short of what is needed to achieve affordability, reliability or sustainability. Reform is needed, and soon.”  AiG adds: “Without nationally coordinated and durable action, price increases and supply risks are likely to intensify. Industry investment and employment are threatened.”

And how hollow that CoAG pledge rings after a week in which the federal government, writhing in the coils of what it acknowledges is an energy crisis, has walked away from another summit meeting with suppliers with only an ACCC monitoring role as cover for the gas imbroglio – while at the same time it has started talking up pursuit of a 40-year-old concept, a west-to-east gas pipeline (that would cost an estimated $5 billion — and how many years? — to build).

It’s been a week for talk of interconnection, with the Prime Minister also slipping down to Tasmania to promote the prospect of expanding the State hydro system as a “battery” for the NEM, a possibility that comes with the need for a second Basslink costing north of a billion dollars.

To which, of course, one has to add some $2 billion to upgrade Snowy Hydro, last month’s throw of the federal dice – along with the network costs of integrating several thousand megawatts of wind power in to the Victorian system as a purported substitute (promoted by the Labor State government) for the shuttered Hazelwood.

Plus whatever eventually comes out of the thrashing about in South Australia.

The charges for all this must be recouped from the mass market, which takes about a quarter of consumption, and from business.

And they will be costs on top of the price rises already in train – of which, AiG, in its Budget submission, says: “The substantial price rises under way for electricity and gas can be softened by good policy but are unlikely to be reversed. Greater efficiency and productivity in the use of energy will be needed to limit the extent to which higher prices translate to higher final costs.”

For its part, the ACCC, via chairman Rod Sims, is telling the media that gas business users on the east coast are now faced with a “worst-case scenario,” adding “I do think companies will go out of business because of this and that’s a crying shame.”

Just how big the gas problem is depends on perspective. AiG, in an open letter to Malcolm Turnbull and Bill Shorten proposing remedial actions (which the upstream petroleum industry has dismissed as “half-baked” and threatening to “shred incentives for investing in new projects”) makes this observation: “There are different views on how big the shortfall is. Some gas suppliers appear to still deny the market is physically short at all. The recent Australian Energy Market Operator Gas Statement of Opportunities finds a gap of 10 to 54 PJ per annum from 2019 to 2024 (unless demand from gas fired electricity generation declines equivalently, which would lead to electricity shortages at critical times) or a cumulative gap of 156 PJ to 2024. We are aware of significantly more pessimistic assessments by gas market observers. EnergyQuest believes the market is a cumulative 172 PJ short by 2020 and 205 PJ short by 2025. Credit Suisse believes the gap is bigger, sooner.”

It goes on: “However short the market is, the price impacts are clearly enormous.”

What follows from this, only too obviously, is that the domestic gas market will self-correct over the next few years through consumers (and especially manufacturers) either going out of business or shifting towards alternative energy sources.

What may surprise some dancing on the periphery of the issue is the extent to which this correction has already bitten in to the market over the past decade. Go back to 2009 – the time of the global financial calamity – and our gas suppliers, then selling 373 petajoules a year to our factories, expected manufacturing demand at the end of this decade to be 509 PJ annually and to continue rising to 537 PJ a year by 2024-25.

The current ElectricityGasAustralia yearbook has 2014-15 factory gas demand at almost 345 PJ and sliding to 302 PJ by 2024-25. (For context residential consumption is 162 PJ and projected to flatline over the next decade while commercial business requirements are 53 PJ annually and expected to stay there over the next 10 years, a time of expected ongoing substantial population growth.)

A huge manufacturing correction manifestly has already taken place (obviously reacting to a lot more than just energy prices) and energy suppliers were already factoring in a further 10 per cent dip in factory gas requirements before the present crisis enveloped all concerned.

Where manufacturing needs are now heading is a large question and one that should be researched (perhaps by the Productivity Commission).

The other big aspect of the forward demand equation is the gas requirement of power generators. Back in 2009 (when electricity requirements exceeded 400 PJ) suppliers expected a rise to about 562 PJ by now and a push towards 630 PJ by the decade’s end.

Today actual demand is more than 10 per cent lower than it was at the close of past decade and, via the yearbook, is forecast to be below 240 PJ by 2019-20, bouncing back a bit to around 270 PJ in 2024-25.

The other side of the generation coin is that gas suppliers today foresee the much-discussed energy transition pushing the need for their product up the curve in the years ahead, projecting more than 350 PJ a year in requirements by the mid-2030s.

Of course green activists don’t want this to happen and the Web resounds with their arguments about why it shouldn’t do so.

The challenge for Turnbull, south-east government leaders and the body politic generally is not just to look around themselves now and react to today’s pressures but to look beyond the present electoral cycle – and not to create more (and perhaps different and bigger) problems down the track by wrongheaded activity today.

Dissent rampant

If you want to peer through a window on to what ails the energy debate in this country at a policymaking level, look no further than the just-released report by a Senate committee in to “the resilience of electricity infrastructure in a warming world.”

This 176-page report purportedly from a committee chaired by the Greens’ senator, Sarah Hanson-Young, includes some 90 pages of dissenting commentaries by member senators from Labor, the Coalition, Nick Xenephon and One Nation.

The Labor dissenters’ bit comments that “this inquiry presented a unique and timely opportunity to articulate a policy vision for Australia’s energy future” which has not been grasped.

Even if you raise an eyebrow at “unique,” it was certainly a timely opportunity for the body politic at a federal level to pursue some commonsense common ground – and it has yet again left the players in a tangled, squabbling heap.

On the other hand, as the Labor dissenting report observes, “almost every witness” at the inquiry agreed that failure to articulate a plan to transition to a low-carbon future is crippling the energy industry.

(This, of course, is the Turnbull government’s fault, the Labor crew assert – to which the only possible response is “look in the mirror.”)

As witnesses from AGL Energy told the committee: “Market participants need time to plan. There are often five to 10 years in a planning horizon and we need some sort of predictability of when to replace assets to avoid the disorderly transition we are experiencing today.”

Whether or not, as Frontier Economics claimed to the committee, the present situation represents an “investment strike,” it is so manifestly untenable that the willingness of politicians to continue to eschew seeking common ground in favor of shouting at each other (literally in some cases, see Weatherill versus Frydenberg) is almost (but not quite because we have seen it all before) beyond belief.

The Turnbull government, via the dissenting comments of the Coalition members of the committee, dismisses the Hanson-Young version of the report as “so biased it could have been written before the inquiry even commenced.”

Interestingly, the government senators comment that it is “beyond (our) comprehension” that South Australia, Victoria (where the Liberals and Nationals are far from blameless) and New South Wales (with the Coalition in office) could impose moratoriums on exploration and extraction of onshore natural gas in their States in the face of supply shortages and rising energy prices.

Accepting that the Coalition’s contribution will have been vetted by the government, and leaving aside the ritual bashing of Labor positions (and vice versa in the Labor contribution), it is perhaps notable that these senators make it clear the Turnbull administration is (a) determined to pursue “technology agnostic” policy, (b) is unwilling to be party to driving coal generation out of the NEM and (c) is depending on the Finkel task force to draft “a long-term national blueprint” for the energy sector. They “refute the (inquiry main report) suggestion that the Finkel review is not focused on the stable supply of electricity in the future.”

They also push the argument that the existing RET “acts as a tax on energy consumers and is causing electricity prices to rise significantly.”

Given his pivotal role (along with other NXT senators) in the make-up of the present Senate, it is also be worse noting Nick Xenephon’s comments in his dissenting report.

In part, he accuses Hanson-Young of “making a fundamental error” in seeking to pit renewable energy against gas generation. The Greens’ approach, he declares, would see “energy prices driven so high and reliability driven so low that it will lead to a damaging de-industrialization of the economy.”

To ensure power affordability, he adds, gas must be used as a transitional energy until renewables can offer the affordability and security that consumers and businesses require and expect – and pursuing this requires embracing a scheme where high emission generators buy credits from low and zero emission power producers.

Part of Xenephon’s approach would see the federal government imposing a public interest test on future new gas exports along with a “use it or lose” approach to corporate gas resources and, in the interim, prohibiting companies with current LNG contracts from buying up further domestic gas supplies to meet export needs.

He also wants “urgent reform” of NEM rules to ensure investment certainty and to drive greater reliability, grid stability and lower prices.

When they are not simply bashing their party’s political drums, the Labor senators want the AER and AEMC “to consider reviewing existing policies” – neither entity is actually in the policy-making business – to give “clear guidance” on “prudent investment” by networks to protect themselves against climate change risks. Perhaps the official ALP spokesman could tell us what this means – and even hazard at guess at the costs that would inevitably flow through to consumers.

The Labor senators also advocate “ongoing support for emerging technologies to overcome technical and regulatory hurdles to entering the market” but say not a word in their recommendations about a 50 per cent renewable energy target in 2030, which is supposedly the federal party platform. Room here, too, for more clarification from Shorten and others.

And they speak up for “stable and consistent policy (such as an emissions intensity scheme)” to support investment in new power infrastructure.

As well, they want a plan for “an orderly exit of ageing generators” from the NEM.

So, yes, the Senate report is another window on the dog’s breakfast that is the policy discussion between politicians and perhaps reinforcement of the necessity of the Finkel inquiry – but the question it underscores is what hope do we have, when Finkel has landed, that the federal government, the State governments and the federal Labor opposition can come to a meaningful agreement on any forward path the task force recommends? Buckley’s on this evidence.

The vision thing

If we have learned nothing else in the energy debate over the past year it is that what really matters to consumers is security of supply and cost.

The former is easy to define: the lights are either on or not.

The latter tends to be a murky pool and one where politicians and businesses seeking to make a buck out of consumer concerns can fish endlessly with the media happy to play along in the “shock, horror” game.

It’s useful, therefore, to find amid the many submissions to the Finkel task force that someone (the Australian Industry Group) has done the core arithmetic.

AiG tell the task force that, when fully passed through, the electricity and gas price rises currently in train will cost users collectively between $10 billion and $12 billion a year (that’s up to $36 billion in 2018-20, not a trivial sum) – with households paying an extra $3.6 billion annually and all forms of business an extra $8.7 billion.

In the latter case, AiG points out, energy-intensive manufacturers will be particularly hard hit, paying up to $4 billion a year more.

Companies in primary metals manufacturing, food, basic chemicals and non-metallic mineral products (including building products) “are particularly exposed to a double hit to their profitability from steep electricity and gas price increases,” the association adds. And, as the media panic demonstrates whenever any such business even looks as if it may close a plant, these are large direct and indirect employers.

The cumulative costs presented by AiG give point to what the politicians are seen to be promising the Mob (as Paul Keating used to describe us voters seven prime ministers ago). However phrased, this is an easing of the energy budget pain.

How this will be achieved is the big question. As AiG says in its Finkel submission, it won’t be easy.

The association comments: “Gas faces international price parity and rising production costs while all new electricity generation looks expensive.”

AiG goes on: “It is very plausible that current steep increases in electricity and gas prices (will) induce more households and businesses to use solar and batteries – but, without reform to the current market structure, they will only face incentives to cut their use of the market, not to install and operate (these) assets to support the market and create value for everyone.”

The goal, the association argues, should be to provide a market framework that will work for society as a whole. “The alternative – continuing paralysis and division over energy and climate policy – is a threat to us all.”

The current “national electricity objective” – the driver of the market’s rules and operation – is at heart “to promote the long-term interests of consumers” and AiG suggests that a starting point for worthwhile action is for the task force to draft a new vision on which there can be broad agreement. Without this, it says, “policy is more likely to be reactive, uncoordinated or hostage to unspoken choices and assumptions” and it adds there is a particular problem in the form of a mindset that it is inevitable Australia will lose its energy-intensive, trade-exposed industries to lower-cost countries.

The association also suggests part of the new vision be along the lines of “Energy should become a source of global competitive advantage for Australia’s trade-exposed industries. Our energy systems should help make Australia an attractive location for energy-intensive industries all the way through the global transition to net zero emissions.”

Of course, AiG acknowledges, any such vision must contain elements relating to the interests of household consumers and other stakeholders; its own push is to get recognition of the importance of energy to industry (and by extension to the economy in which we all live and work).

Thinking about this, I feel there is a fair bit to be said for giving priority to tackling “the vision thing” (as George Bush senior once put it) in pursuit of clarity of the principles that could/should shape a new policy approach on the basis that, for a ship without a rudder (and even worse without a map), navigation becomes near-impossible. Any port will do for politicians in these circumstances as is only too obvious from the present energy melee – and we shouldn’t lose sight for a moment that, whatever Finkel & Co may offer, it is politicians at both federal and State levels who eventually will make the decisions.

The vision thing is also taken up in the submission from the Energy Policy Institute to the task force.

EPIA wants the CoAG Energy Council to be advised to take two immediate steps: first to pursue an agreed national energy vision and to identify the policy priorities that flow from it – and, second, to appoint a “chief planner” with the appropriate mandate, powers and resources to guide implementation of the vision and undertake long-term planning for the power system, including its interaction with the gas system.

The “chief planner,” EPIA adds, should pursue a rolling 30-year horizon in consultation with industry, mass market consumers and other key stakeholders.

The institute notes that going down this road will require an efficient working relationship between the “chief planner” and the trio of NEM institutions (the Australian Energy Regulator, the Energy Market Commission and the Energy Market Operator), suggesting their roles and powers may need to be reviewed.

Beyond this, as is obvious from a slew of submissions to Finkel, lies the question of whether the design of the NEM continues to be fit for purpose. Opinions vary widely – EPIA thinks it is “outmoded,” others have talked of it being “broken” and there is a quite strong mainstream supplier body of thought that pursuing a new market design is not going to work unless and until the issue of long-term emissions policy is resolved on a durable basis.

There is a crucial need to be practical about all this.

The Australian Industry Group, in its Finkel submission, makes this salient comment: “Energy users and suppliers need reasonable confidence about the future direction and detail of energy and climate policy (but) full certainty is not achievable or desirable given the need to evolve and adapt our energy system over time to changing circumstances.”

However, says the association, it is possible to deliver a clear forward pathway and to define processes for shifting it as required in the long term.

This is why, it seems to me, the vision thing is really important. The ways and means of this “pathway” may shift, but the underlying intent shouldn’t change.

We are in a situation today where achieving a political consensus on a technological route is almost impossible (and undesirable, many of us would argue) – but perhaps we can improve things significantly by focusing on a vision of what we (that’s a mainstream “we;” the fringe dwellers want only their own radical way) envisage as a national goal and setting in place a process to pursue it.