Archive for August, 2012

Carbon capers

You can call it a carbon backflip with a double pricing pike. Business Spectator’s Alan Kohler did today.

Or a “cruel hoax for consumers.” Coalition environment spokesman Greg Hunt says that.

Or “a positive move in the long term” – that’s Australian Industry Group chief executive Innes Willox, who reminds the Coalition that it “has a whole lot of balls in the air with carbon policy” and business wants certainty.

Or, to quote the headline in The Australian newspaper over an Op-Ed commentary by Henry Ergas, you can perceive it to be “Combet’s cut-price carbon caper,” blowing “a $25 billion black hole” in the federal budget.

In Ergas’s eyes, “the first victim of this double pike with lateral twist (nine points of difficulty)” is the credibility of the government’s budget forecasts.

He presents arithmetic to calculate a $25 billion worsening in the federal revenue position, as projected by the Gillard government, between 2015-16 and 2019-20.

This leads The Australian in a news story to suggest some elements of the business community fear yesterday’s decision to scrap a carbon floor price from 2015 and to link the emissions trading scheme to that of the European Union will see them losing promised compensation over the next three years.

The Business Council accuses Greg Combet and the government of “ignoring the elephant in the room” – the present carbon price of $23 per tonne rising at 2.5 per cent annually in real terms between now and 2015.

This, says the BCA, confronts business with “the world’s highest carbon price” at a time when it is struggling to remain competitive globally.

The story also points out that one of the issues now arising is that the EU scheme does not cover so-called fugitive emissions from coal mines, but the Australian scheme will continue to do so.

The Australian Financial Review in a commentary by a staff writer says that what happens to the Australian price of carbon under the new approach will be determined by the European economy and whether the EU will take steps to bolster their ETS.

Alan Moran, deregulation director of the Institute of Public Affairs, under a headline reading “Somersaults and a belly-flop: carbon tax fails on all counts,” says in an Australian Financial Review Op-Ed commentary that the government has made a “humiliating backdown” and he agrees with Ergas that the latest move leaves a hole in the federal budget estimates.

Moran argues that the government now has a policy that, given low EU permit prices, will mean “hardly an iota of emissions reduction but (will) impose price rises on consumers and industry that will drive many firms offshore and shrink the number of most productive jobs.”

The Financial Review’s Brian Toohey says Combet is making “heroic assumptions” in claiming that there is no need to revise the budget figures.

If European prices stay close to what the carbon futures market expects, he writes, modelling done by the BCA suggests the net cost to the budget will be “well over” $3 billion annually by 2015.

Writers in these media tend to reach a relatively small number of voters, albeit the papers have influential readerships.

In the popular media, the blockbuster commentator Andrew Bolt charges the government today with not thinking through the carbon policy adequately, requiring it to be “dramatically revised just two months after it was introduced.”

“So much for the certainty the government claimed to be offering business,” he adds.

Bolt quotes Moran’s Institute of Public Affairs colleague Tim Wilson: “Emissions trading is a beautiful idea in economic theory, but hopeless in practice because it is so heavily exposed to politics and constant regulatory changes.”

Meanwhile, one of the most-read newspaper columnists, News Limited’s Tim Blair, writes in the Daily Telegraph, the paper most seen on trains and buses in New South Wales, that the carbon tax “has hit chicken growers with a triple-whammy price hike in their electricity, gas and landfill costs” without any form of compensation.

It is this sort of reporting that helps to keep opinion poll views on the carbon scheme more than 60 per cent negative two months after C-day.

Perhaps the two most interesting things I have read today are these:

First, Greens leader Christine Milne, in an interview with Climate Spectator’s Tristan Edis, concedes that the carbon floor price was abandoned here because the European Union, in negotiations unrevealed until now, was not prepared to link its scheme to our’s as long as we had a floor price.

The EU attitude, Milne says, “was largely because of their own domestic politics.”

Second, one of my readers has sent me a commentary circulating overnight among clients from analysts Thomson Reuters Point Carbon – who say that global emissions credit market is expected to be over-supplied by about 900 million tonnes until 2020 and that trading will be one-way traffic between here and Europe this decade.

(This opens up a political point for the scheme’s opponents to the effect that Europeans will benefit from billions of dollars of Australian purchases without any real benefits here and no noticeable impact on efforts to reduce feared global warming.)

There will need to be explicit approval by EU member states before two-way trade can be undertaken and this would only follow European Commission negotiations with the Australian government.

Point Carbon argues that, even if the Coalition wins the next federal election here, it will be “relatively cumbersome” for it to completely revoke the Australian ETS.

Meanwhile, it occurs to me that this might not be the only federal government carbon policy backflip of the year – will the Labor plan to close old, coal-fired power stations be the next to go?

How will this play with voters?

The Gillard government’s “contracts for closure” – intended to begin the phase out of more emissions-intensive generation between 2016 and 2020 – initially had a 30 June deadline for decisions. No new date has been set.

Resources & Energy Minister Martin Ferguson, in a July radio interview, said: “The government has set an envelope of funding and will not enter in to a contract at any cost (but) only where it represents value for money.”

An ABC Environment radio interview with ACIL Tasman CEO Paul Hyslop earlier this month drew the reflection that the parameters for this scheme have changed substantially and the price needed to buy closures is probably now a lot higher than initially anticipated.

Hyslop thought purchasing 2,000 MW of plant closures could now be a billion dollars more expensive than initially estimated.

Just about the only certainty in this game, I reckon, is that the carbon capers will continue until we reach the denouement of a federal election – and then, in all likelihood, they will take off in a whole new direction.

Grid-knocked

While the energy distributors have chosen to take a low-key initial response to the proposed new rules for network regulation, the high voltage transmission sector has made a robust response to the Australian Energy Market Commission draft decision.

The Energy Networks Association’s CEO, Malcom Roberts, has provided a carefully-worded comment to the media: “Network regulation is a delicate balancing act between offering the right right incentives for long-term investment and minimising costs today for customers. ENA will carefully review the proposed rule changes to see how well they meet this test.”

The beneficiary of the AEMC’s proposed decision, the Australian Energy Regulator, touted by the Prime Minister this month as her “big stick” in addressing network charges, has welcomed the commission’s proposals.

AER chairman Andrew Reeves says they will give him “greater scope to reject excessive proposals and to scrutinise investment.”

Media reaction has tended towards judging the changes as giving weight to Julia Gillard’s claims that inefficient over-investment by networks has pushed up power bills.

Australian Associated Press comments “electricity companies won’t be able to profit from over-investing under tough new rules” – “so-called gold-plating will become a thing of the past.”

The commission’s proposed rule changes will be finalised in November in time for the AER to get to work in the new year on the next tranche of network spending – designated for 2014 to 2019.

Energy ministers and first ministers, meeting under the Council of Australian Governments’ banner, will get a chance to review the changes in December – by which time a Senate inquiry in to power prices, launched last week by the Gillard government, will also have reported.

Grid Australia, which represents the six businesses that operate $12 billion worth of high voltage assets on the east coast and in Western Australia, four of them owned by state governments, has responded sharply to the AEMC proposals.

The association’s members spend $2.2 billion a year on capital works.

The bulk of their interests lie in eastern Australia where their annual average capex outlay is about $1.2 billion.

“We form the backbone of the national electricity market,” Grid Australia declares, pointing to $10 billion worth of assets and 40,000 kilometres of lines in South Australia, Tasmania, Victoria, New South Wales and Queensland.

In a statement last week on the AEMC draft proposals, Grid Australia’s chairman, Peter McIntyre, chief executive of NSW’s TransGrid, warns that they could pose risks for the long-term development of the grid.

The transmission businesses are concerned that they are being caught up in efforts to curb the current increases in charges of the “poles and wires” – the distribution system.

“Our role,” says McIntyre,”is quite different to companies that connect directly to households. The integrity of the grid depends on our services.”

Grid Australia is concerned that, empowered by the new rules,the AER may over-react to current political and consumer concerns about “poles and wires” charges and, in doing so, starve the high voltage networks of “vital investment funding.”

Over time, says McIntyre, this could lead to an increased risk of power blackouts.

He adds: “Reduced transmission investment can also increase energy prices as the grid links consumers to the nation’s cheapest and cleanest sources of power generation.”

People need to understand, he says, that it is the watchdog that approved the $35 billion worth of distribution capex for 2009-14 in the first place.

A key part of the Grid Australia thrust is the high voltage industry’s concerns about AER’s capacity to handle the high voltage issues.

“We have argued that the AER has always had the power (to deal with the situation) but not necessarily the skills to undertake its important task,” says McIntyre.

He adds that the new arrangements proposed by the AEMC can work if the AER has adequate skills and funding to be an effective regulator of transmission networks – but it also needs to be held accountable for its decisions.

Meanwhile, of course, media and political chatter continues – with the clear implications for voters/consumers that power bills will go down.

How will they react, I wonder, when this doesn’t happen – as it certainly won’t in the next two years.

Under a headline “Gold-plating of assets to end,” the Fairfax website for Brisbane reports AER’s Reeves as saying that “while network businesses will be rewarded for undertaking efficient and necessary investment, consumers will not be required to foot the bill for inefficient over-spending.

“Clear authority to benchmark network business practices and costs will ensure customers are paying no more than necessary for the services they require.”

Exactly how little some in politics, and worse in government, understand the issues can be found by reading the media statement issued by the new-ish Queensland energy minister, reacting to the AEMC news.

According to Mark McArdle, in the years since the Rudd/Gillard federal government was elected in 2007 Queensland household power bills have increased by about 83 per cent – and “the federal Labor government signed off on this extra pain for struggling households every year for the past five years.”

As the little waiter in “Fawlty Towers” used to say, “What?” (only he said it in Spanish).

McArdle claims that “gold plating” in electricity networks has resulted in billions of dollars spent over-capitalising them.

Someone really should slap the end-2011 Somerville report, commissioned by the Bligh government, down in front of the new minister and take away his training wheels until he has read it.

It only runs to 72 pages.

The central point of Somerville’s findings is that, after spending $12 billion, the Queensland networks are “in a much improved state” compared with 2004 when previous premier Peter Beattie commissioned the panel’s first inquiry at a time of consumer/voter rage over supply reliability.

The outlays, according to Somerville, have improved network reliability 40 per cent.

“While Queensland’s vastness and climate means that there will always be some outages,” says Somerville, “the work undertaken by the network businesses since 2004 means those outages will be significantly less frequent and will be shorter when they do occur.”

Back in 2004, Somerville points out, the networks were facing twin pressures: increasing power demand from a growing population and more rapdily growing peak demand as a result of a rush to install air-conditioners.

Today, it continues, underlying energy demand growth has weakened as a result of the effects of the GFC and consumer reactions to energy efficiency.

“A return to growth will largely be driven (in Queensland) by the strengthened industrial and mining sectors.

“These changes (mean that) significant capital savings are likely due to the weakening of demand growth and that the distribution businesses work on peak demand management is even more important.”

Which enables me to finish by pointing towards comments by ENA chief executive Malcolm Roberts: the rule changes proposed won’t alter the fact that networks will still need the capacity to meet consumer demands in extreme weather, he says.

“Assets past their working lives will still need to be replaced. Businesses will still need to borrow capital at market rates.”

Quite.

The uncertainty factors

The biggest issue for the east coast electricity market, looking down this decade, is uncertainty.

As has been pointed out frequently, the power sector is facing an awkward investment challenge and demands for technological transformation on a scale that have not previously occurred within the “NEM” framework.

As readers know, I am engaged in helping to present a conference in October looking at the market from 2012 to 2025. (The advert for it is on this website and clicking on it will take you to the program.)

Organiser Jamie Turmanis has put together a panel to advise him that includes Ralph Craven, the former chairman of Ergon Energy, Michael Dureau, the deputy chairman of the Warren Centre for Advanced Engineering, Robert Pritchard, executive director of the Energy Policy Institute of Australia, Hugh Outhred, professorial visiting fellow in energy systems at the University of New South Wales, and Paul Balfe, executive director, ACIL Tasman, with myself in the chair.

The agenda resulting from our collaboration, with some 40 speakers, is going to tackle what Turmanis describes as “the seven burning questions” for the market over two days (17-18 October).

An interesting feature of the event is that it is now going to fall smack dab in the middle of the Senate inquiry in to power prices, which is required to report by the start of November.

(You can submit your views to this inquiry by emailing them to electricityprices.sen@aph.gov.au.)

Depending on submission deadlines, it may be that some of the discussion at the conference can be fed back in to the Senate inquiry.

The “Eastern Australia’s Energy Markets” conference is going to be part of a busy 10 days for me because the 2012 edition of my “Powering Australia” yearbook will be launched at Parliament House, Canberra, by federal Resources & Energy Minister Martin Ferguson just before this.

The theme for the yearbook is “Carbon,cost and continuity” – and that readily applies to the conference as well.

A comment that Turmanis has elicited from one of the key speakers, who is front and centre in making decisions that will shape the electricity sector for more than the dozen-year timeframe of the conference, provides a succinct summary of the overall challenge.

John Pierce, chairman of the Australian Energy Market Commission, in the news this week with its draft decision on network regulation changes, says this: “Changes in the nature of consumer demand and incorporation of non-traditional sources in to the generation mix put more demands on networks and the challenge for policymakers and market bodies will be to develop a co-ordinated and competitive approach in response.”

To which Malcolm Roberts, CEO of the Energy Networks Association, adds: “With the energy sector facing a new round of policy and regulatory uncertainty, the industry is confronting a host of difficult choices.”

Earlier, at another conference I chaired, Roberts made the point that, for better or worse, 2012 is a watershed year for energy networks – on reflection, I think I would amend this to 2012-13, allowing for the regulatory determinations on capex and opex out to almost the decade’s end that are soon to come.

Ferguson’s views on these issues, most recently on display when he addressed a Perth forum at the start of the month in the wake of the Prime Minister’s controversial speech on power prices, will be laid out afresh this Wednesday when he is the keynote speaker at a public forum the AEMC is running at UNSW on strategic priorities for energy market development.

In sharp contrast to the colorful language of the tabloid media (sooled on by some in politics and in the lobbying game complaining of “gouging” and “goldplating”), the commission (via its draft paper on network rule changes) is again reminding us all that there is no single cause for the power price increases consumers are experiencing.

Higher network costs, as it says, are the single biggest contributor to these price rises, and, it points out, are driven by investment to meet peak demand, to meet reliability standards, to replace ageing infrastructure and to cover the costs of attracting capital for investment.

Lost to view in the recent debate has been an important AEMC decision: it has taken the view that there is no evidence to support a rule restricting the dispatch offers of generators in the NEM.

In the face of repeated claims about the market power of gencos, the commission has concluded that any such rule change would potentially result in a number of perverse outcomes, including providing a disincentive for new players entering the market, a possible reduction in the long-term reliability of supply and increasing prices if supply fails to keep pace with demand growth.

Meanwhile, the difficulties in getting even the more sober media to convey accurate electricity supply impressions was highlighted in the past week by a headline in the “Australian Financial Review” that read “Blackouts a trade-off for cheap power.”

The report dealt with comments by Andrew Reeves, chairman of the Australian Energy Regulator, in a panel discussion at a forum. Unfortunately, what he actually said is not available on the AER website.

I think, in the current environment, the regulator should consider putting up transcripts of comments as well as speeches, as happens with federal ministers. It is not that hard to arrange.

The “Financial Review” quotes Reeves as saying that the higher reliability standards now in place were imposed before power consumption patterns changed and infrastructure replacement capex sent consumer bills soaring.

Had policymakers and others been mindful of what was coming down the pike, Reeves said, “there would be different reliability settings.”

His point is that consumers could accept lower reliability standards in return for less onerous power bills – which does not mean lower bills, but that the future increases would be less steep, I point out.

This most certainly does not warrant the headline the story got.

In this, as in other aspects of network management on the east coast, the double-handed engagement of government is an issue.

One of the points sure to arise in the “NEM” uncertainty conference is the need to privatise these assets.

As things stand, governments still own the Tasmanian, New South Wales and Queensland networks while investors own those in South Australia and Victoria and part-own the ACT system.

Eminent economist Geoff Carmody has no doubt about what should happen.

Writing in the “Financial Review” in the wake of Julia Gillard’s power price speech, he said: “Gillard’s concern about conflicts of interest between efficient power supply and boosting state budgets can be eliminated without a review.

“All power generation, transmission, distribution and retail assets still in government hands should be privatised.

“Retail price caps, and any restrictions on time-of-day power pricing, should be removed asap.

“Then governments can concentrate on their proper role: facilitating cost-effective power markets, not using power as a milch cow for their budgets.”

There is no doubt that the privatisation issue remains one of the key electricity supply uncertainties for the decade ahead.

On the one hand, the NSW and Queensland governments could expect to receive around $50 billion if they sold the transmission and distribution networks.

On the other, State Labor politicians and the trade unions wage an endless propaganda war on the issue, asserting such sales will lead to yet higher consumer costs.

This issue is a key component of the first of the seven “burning questions” posed by Jamie Turmanis: “How are the dynamics for network businesses changing and what are the implications for the broader energy market?”

Perhaps the hardest task in October is going to be taking in all the debate. It could hardly be a wider canvas.

Chicken Little Day

A miner (albeit the biggest one) decides not to go ahead (for the time being perhaps) with a project (a large one, but technologically challenging) and then the “boom” sky fell in – or did it?

In passing, it says something about how dysfunctional the federal government now is – “Rudderless,” says a friend, who may recover given time and care – that it couldn’t get in a huddle and come up with one statement rather than publicly bickering about whether or not the resources boom is over.

The Olympic Dam project is just one of many multi-billion dollar capital works being pursued here.

Some members of the much maligned electricity network system may be rolling their eyes over the fuss over the decision to delay the $28.6 billion project as they get on with their (not specially popular) $42 billion upgrade of the “poles and wires,” which will deliver a more robust delivery system for an essential service – and as they work on plans for further refurbishment that, I reckon, will probably add up to around another $20-25 billion over the next five years, notwithstanding all the current bluster about regulation.

(I see the Energy Networks Association’s Malcolm Roberts pointing out on Friday that the drivers of network investment, and the higher charges that follow, are still rising peak power demand and the need to replace aged assets.)

You can add to the power sector capex requirements about $20 billion worth of wind farm development between now and 2020 to meet the demands of the Renewable Energy Target and perhaps $5 billion worth of open-cycle gas generation to plug the power supply gaps.

And maybe $3 billion worth of CCGT development to meet a gap created when brown coal plant is closed in Victoria and the LNG trains in Queensland finalise their power arrangements.

And,while Hanrahan is clearing his throat, the export gas industry would like a word – a lot of words,actually, which it has been uttering for some time only to be lost in the media fuss about “fracking,” closing gates and other such stuff.

For example, it would like us to note that eight of the 14 LNG plants currently under construction or firmly committed around the world are Australian projects.

A study undertaken for the industry by Deloitte Access Economics pointed out in May that upstream oil and gas operations would push up its value-added contribution to the Australian economy from $28 billion last year to $66 billion at the decade’s end.

The average capex spend on oil and gas here between 2009 and 2017 is calculated to be $23 billion annually – or, if you like, $6.3 million a day.

If you put this together with the electricity industry capex, these two elements of the energy sector are spending about $12 million a day.

To which you can add the coal sector outlays.

Throw in opex and the energy business is one of the strongest legs of our thriving economy – and there are not many developed nations that can use “thriving” as an adjective for their economies right now.

The Deloitte commentary – it was commissioned by the Australian Petroleum Production & Exploration Association – includes some points that are the more salient in the present public fuss.

The consultants said back in May that bouyant market conditions may not be ending but the growth rates beyond the current phase of investment activity may well be slower.

Deloitte added: “The key is to be able to respond and adapt to changed circumstances.

“A crucial requirement is that (Australia needs to) remain an efficient, low-risk and competitive resources supplier to the world.”

Could the Federal Treasurer perhaps remind us in the week ahead what he is doing at present to meet this “crucial requirement”?

The “Australian Financial Review” summed up the situation for Wayne Swan in an editorial after the Dam news broke.

The federal government, it opined, should understand that mining “super profits” are not guaranteed.

“Australia is in a competition with other resource-rich countries, and the BHP decision is a timely warning that we have allowed our cost base to increase too far and too fast thanks to our overegulated labour market and overbearing environmental regulations.”

In this context, it is interesting to read the transcript of an interview between BHP Billiton CEO Marius Kloppers and British journalists.

In it, he makes two key points:

First, the Olympic Dam decision flows from “an escalation in capex, driven by labour efficiencies, tight labour market, tight supplier market, high exchange rates and high diesel costs, which has made a concept we thought would work unviable.”

Second, looking at coal mine projects on the east coast: “It is very difficult to visualise, given the current set of conditions and outlook, that any mining company can approve new capital in the coal business at this point and get a return.”

Kloppers says the coal industry in Queensland has been very heavily impacted by lower global prices, higher local operating costs, the carbon tax and increased State royalties.

Meanwhile, looking at this week’s political and media hype and halloo-ing, it is worth noting what hasn’t changed:

Australia is still, in the Deloitte report phrase, on the cusp of a major shift in the world’s economic weight from west to east – and this is in an environment where the medium to longer-term outlook for China and commodity prices and volumes remains positive.

This is the largest systemic shift in the world economy in six decades, Deloitte add, and, for Australia, “is being most prominently channelled through strong demand for our mineral and energy resources.”

Perhaps someone should write on a wall “It’s a long haul, stupids.”

And then make Swan write it out several hundred times.

From where I am sitting, the reactions of the past week highlight, yet again, the immaturity of public debate in this country, especially about the energy sector.

This is something to which the behaviour and the rhetoric of the Treasurer have contributed in no small measure.

The capacity to have a well-rounded understanding of our situation(s) seems to be lacking and is not helped by politicians who speak without thinking and commentators (journalists, armchair critics, raucous trade unionists and environmentalists and, yes, a number of business executives) who strive to make short-term points without consideration of long-term issues.

The Deloitte study reminded us that there are $150 billion worth of petroleum projects under construction or where development has just finished and another $60 billion worth in advanced planning stages.

The consultants summed up their contribution like this: “The level of (petroleum) industry investment and the substantial boost in production slated to come on line over the next decade will provide enormous economic benefits.

“To fully harness these gains, there will need to be further adjustments in the allocation of resources within the economy.”

Right now it would help the “national conversation” if more commentators could point out that we have been in – still are in – a several stage “boom.”

The first stage occurred when Asian demand took off and we used existing resources capacity to ride the price rises.

The second stage is now tapering somewhat while we build new capacity to serve a less fevered Asian requirement (and our capacity to do so is affected by others selling more to this market as well).

In terms of public understanding, it is worth making three more points, I think:

(1) Australian LNG exports, now standing at around $12 billion a year, will benefit from a quadrupling of capacity, based on projects under construction, by late this decade.

(2) Meanwhile, our black coal exports continue to rise. While recent price fluctuations on the world market make revenue projections difficult, the Australian Coal Association forecasts that total overseas earnings by this industry should be worth $40 billion in 2017.

(3) The dipstick for future minerals and energy development is always current exploration efforts. Energy ministers, meeting under the CoAG umbrella, understand this and have a “national exploration strategy” under way at the moment. The longevity of resources exploitation depends on getting this right and a greater degree of urgency in this work would be a good idea.

Finally, in the latest numbers available, the combined minerals and energy sectors achieved annual exports worth $180 billion and directly employed 250,000 people.

Note that “directly” – the flow through to service and supply employment is still more considerable.

Context?

The wind energy people tell us that, if we continue to subsidise their operations, they hope to have about 20,000 people working in the sector next decade.

Bottom line?

Is the “boom” sky falling in because digging the big hole at Olympic Dam has been postponed?

Nope.

But how many of our fellow Australians, reading the newspapers, listening to radio and watching TV, now think it is?

More importantly, what are our vote-chasing, focus group-driven politicians thinking?

As those maps used to say, here be dragons.

Senate power price inquiry

Backed by the Greens, the Federal Government is following up Julia Gillard’s recent foray in to energy issues by moving to set up a Senate select committee to examine electricity prices.

The Minister for Finance and Deregulation, Senator Penny Wong, has called for the inquiry in a parliamentary notice of motion published on Wednesday.

Eight senators will make up the committee – four from the government, three from the Federal Opposition and one from the Greens. It will be chaired by a government senator.

Wong proposes that the select committee will have five key tasks:

(1) To identify the key causes of electricity price increases over recent years and “those likely in the future.”

(2) To review the legislative and regulatory drivers of network investments and their impacts on electricity bills “and on the long-term interests of consumers.”

(3) To consider options to reduce peak demand and improve the productivity of the “national electricity system.”

(4) To investigate how households and businesses can reduce their energy costs, and

(5) To investigate “opportunities and barriers to the wider deployment of new and innovative technologies,” including distributed and renewable energy generation, energy efficiency and direct load control.

Included in the proposed work of the select committee is the way in which low income and vulnerable consumers are supported, “in particular relating to the role and extent of dividend redistribution from electricity infrastructure,” a move which follows the Prime Minister’s controversial 7 August speech on the issue and her targeting of the new Coalition government in New South Wales.

How the Senate committee proceedings will interact with a number of other current activities – including the publication of the federal government’s energy white paper, the Australian Energy Market Commission review of peak power demand issues and the AEMC’s consideration of rule changes for the east coast market — remains to be seen.

The committee, judging by past experience, is likely to receive several hundred submissions.

Where and when it will hold public hearings also remains to be seen.

The government proposes that the committee deliver its final report on or before 1 November this year.

(NOTE: The first version of this post has been amended. I misread the date for reporting as 2013. Some changes have been made to this text accordingly.)

A potential political time bomb, however, is the proposal that the committee investigate “the opportunities and possible mechanisms for the wider adoption of technologies to provide consumers with greater information to assist in managing their energy use” – which cannot avoid industry proposals for a national roll-out of smart meters and pressure for the introduction of time-of-use charges.

Resources & Energy Minister Martin Ferguson called for this move in the speech he delivered in Perth three days after Gillard had gazumphed his Sydney speaking engagement.

In an indication of how politically charges the issue is — as demonstrated in Victoria, the canary down this coal mine — was to be found at the last CoAG energy ministers’ meeting Ferguson chaired when other governments (Coalition and Labor) indicated it would be “a few more years” before they put their toes in these waters.

Broadly speaking, while the Federal Government is clearly seeking to build political advantage on Gillard’s “I have a big stick” speech about power prices, there is much to be said for a Senate inquiry of this kind.

It will help to focus more public attention on the key energy issues and provide an avenue for stakeholders to further present their views – and to be open to cross-examination on them by senators.

It also opens the path for the Coalition to set out its wares in this area. Production of a minority report by parliamentary oppositions is part and parcel of these inquiries. One could expect the Greens to want to contribute a minority report, too.

Meanwhile the AEMC moved on Thursday to publish its draft report on one of the issues to be canvassed in the Senate: new rules covering regulation of network capex and opex and ensuing charges for consumers.

The commission intends to have the rules in place by this November.

Key proposals will (1) allow the Australian Energy Regulator to benchmark network businesses against each other, (2) require the regulator to publish an annual benchmarking report and (3) enable the regulator to take past efficiency in to account when determining future spending by networks.

In a statement that the select committee senators may benefit from reading carefully, AEMC chairman John Pierce says: “There is no one single cause of the rising costs of providing electricity and gas network infrastructure.”

He adds: “The revenues required by these network service providers are impacted by the external environment – such as electricity demand, the cost of capital and the reliability standards expected by the community.

“Price outcomes are also impacted by the effectiveness of management and shareholder oversight of network businesses.”

Pierce points out that the AEMC is working in several other areas to improve the efficiency of energy supply, including the “Power of Choice” review of ways consumers can have more control over their electricity use and the prices they pay.

Also in the electricity supply space, the AER chairman, Andrew Reeves, is reported in the media today as suggesting consumers could accept lower reliability standards in return for less onerous power bills.

Reeves’ views are not available on the official AER website because,I am told by his PR staff, they were not delivered in a prepared talk but were comments made in panel discussion at a conference.

He is quoted as saying that the upgraded reliability standards now in place were imposed before power consumption patterns changed and infrastructure replacement sent consumer prices soaring.

“Had policymakers and everyone else been mindful of this combination of drivers, there would be different reliability settings,” he said.

(This got a headline in the “Australian Financial Review” that reads “Blackouts a trade-off for cheap power,” which I venture to suggest is a long,long way from what Reeves was seeking to impart.)

One way and another, it’s going to be a busy few months for the electricity suppliers and other stakeholders – with lots to write about, at least some of it coming from the little people at the bottom of the garden!

Getting to grips with uncertainty

It’s not enough to sit on the sidelines and mutter about rising uncertainty in the east coast market; an effort needs to be made to get more people talking to each other about the the issues.

This is why I have taken up an offer from Jamie Turmanis of Quest Events to help organise and participate in a two-day conference on the topic on 17 and 18 October, which should be good timing because the final version of the energy white paper can’t be far away at that point.

One of the things on which I am particularly keen for conference agendas is bringing together panels of speakers, who can interact with each other and the audience, as well as the standard “stand and deliver” presentations.

The “Eastern Australia’s energy markets 2012-2025” conference, to be held in Sydney and supported by the Energy Supply Association, the Energy Retailers’ Association, the Clean Energy Council and Manufacturing Australia, is going to have a lot of such panels.

They include discussions on:

(1) “Peak power in the ‘NEM’ – where to from here,” a subject I consider to be of paramount importance to policy planning this decade, which will feature Tim Nelson (head of economics, policy and sustainability at AGL Energy), Quentin Grafton (executive director of the Bureau of Resources & Energy Economics), Hugh Outhred (University of New South Wales), Clare Petre (the NSW energy and water ombudsman) and Michael Dureau (deputy chairman of The Warren Centre for Advanced Engineering).

(2) Equity, debt and other financing for the energy sector. Where wannabe developers can get the money they need is a critical aspect of today’s power supply picture and the conference will bring together Jason Steed (executive director, JP Morgan), Sajal Kishore (director, energy and utilities, Fitch Ratings) and Tim Jordan (Deutsche Bank) to share their thoughts.

(3) The rising cost of gas in the domestic market, also of high concern to policymakers, manufacturers and generators. This panel will feature Paul Balfe (executive director, ACIL Tasman), Miles Prosser (executive director, Australian Aluminium Council), Edwin O’Young (Port Jackson Partners) and James Rintel (chief strategy officer at Incitec Pivot).

(4) The longer-term outlook for renewable energy, a session aimed at the era beyond 2020, to be discussed by David Green (the new CEO of the Clean Energy Council), Miles George (CEO, Infigen Energy) and David Mitchell (CEO, X-Energy).

(5) The future of carbon pricing, with or without the carbon tax: this has to be the biggest political issue of the day as we struggle towards a policy denouement via a federal election. This panel will bring together Balfe, Outhred, Tony Wood (Grattan Institute) and lawyer Martin Wilder (head of global environmental markets at Baker & Mckenzie).

(6) The implications of the energy white paper, featuring Robert Pritchard (executive director, Energy Policy Institute), Mark Collette (group executive manager, energy markets, TRUenergy), Tim Nelson, Matthew Warren (CEO, Energy Supply Association), Malcolm Roberts (CEO, Energy Networks Association) and Ramy Soussou (deputy CEO, Energy Retailers Association).

(7) The outlook for energy retailers, with Soussou, Jim Galvin (GM, retail markets, Origin Energy), Kate Farrar (managing director, QEnergy) and James Myatt (CEO, Australian Power & Gas).

(8) Challenges and opportunities for the networks, involving Roberts, Peter McIntyre (managing director, TransGrid, and chairman of Grid Australia), Gustavo Bodini (Transend general manager), X-Energy’s Mitchell and Mike Swanston (Energex GM).

The last of these panels includes discussion of “why smart metering has proved to be a political minefield” and how the east coast roll-out can be achieved, which has to be in the top five issues for electricity policymaking today.

After almost a quarter century of being involved with conferences about electricity here and abroad, I confess it takes a lot to get me really energised about such events, but Turmanis has hit the spot with this set-up, I think, just taking in to account the panel discussions – and there are a swathe of individual speakers lined up, including Ian Macfarlane, the Coalition’s resources and energy spokesman.

I am particularly pleased to see that Quentin Grafton has agreed to give a talk on the implications of reduced electricity demand on the east coast. This is an issue that gets lots of airplay in the media at the moment but not a lot of real understanding and the BREE boss is well-placed to offer an independent perspective.

The opening day, which I will be chairing, with my good friend Ralph Craven (until recently chairman of Ergon Energy) overseeing day two, also features three talks that, together, go right to the heart of one of the biggest overall policy issues in Australia today – the availability and cost of gas for the east coast and the impact of the gas situation on manufacturers.

Paul Balfe and Miles Prosser will deliver two of the papers and the executive chairman of Manufacturing Australia, Dick Warburton, will be the third speaker.

You can find the full details of the conference on Quest Events’ website (www.questevents.com.au).

A dash of reality

While the nation’s attention turned to asylum seekers and people smugglers this week, the debate ignited by the Prime Minister’s “I have a big stick” speech in Sydney on 7 August has rumbled on.

However, the most important development in electricity supply for the month has taken place in virtual obscurity, only reported, so far as I can see, by “The West Australian” newspaper.

The Australian Competition Tribunal has confirmed the WA Economic Regulation Authority’s right to set network charges using the Reserve Bank’s five-year bond rate.

This supports the ERA’s draft decision to reject a bid by WA network business Western Power for an 8.82 per cent rate of return on borrowings to support its proposed $6.5 billion worth of capital expenditure over five years to 2017.

The regulator decreed that the rate should be 4.73 per cent.

In a media interview, ERA chairman Lyndon Rowe says the decision will clip about $1.9 billion in total over five years from Western Power’s consumer charges and he expects this will flow through to regulatory decisions in the eastern States.

Meanwhile, as federal parliament resumed sitting, Julia Gillard used a Dorothy Dix question from her own side to reinforce the line she had taken in her Energy Policy Institute of Australia speech.

She used the question – “Will the Prime Minister update the House on the government’s efforts to reform the electricity market and make sure Australians get a fairer and better deal? – crafted by her own office to re-launch her attack on the O’Farrell government in New South Wales.

The “more than 60 per cent price increase over the past few years has not come with any form of assistance to the community in general,” she told Parliament.

“People have not been supported as prices have sky-rocketed and, at the same time, the dividends being paid by electricity assets to the (State) government have sky-rocketed as well.”

Gillard re-iterated her EPIA forum lines that she is concerned about “dividend gouging by State governments” and by a regulatory arrangement where “if you over-invest in poles and wires, you earn more dividends as you pass that price through to the community.”

And she repeated her threat from the EPIA lunch: “We are determined to see action from the CoAG meeting in December. We would prefer to do that with the co-operation of the States and Territories but, if this co-operation is not forthcoming, we are determined to get this done for Australian families.”

It should be noted that she pursued this line even after it had been pointed out that she had presided over a CoAG meeting in late July in which the other first ministers had joined with her to require the rule changes to be settled before the year’s end.

No doubt to the Prime Minister’s satisfaction (and that of her advisers), the media has now encapsulated her approach as “demanding that the States find solutions to take pressure off household power prices by the end of the year or face market watchdogs with greater authority to enforce changes.”

Meanwhile in Sydney, the NSW leader of the opposition, John Robertson, has been arguing with the State Treasurer, Mike Baird, over the distribution business dividends issue.

The Robertson version is that the State government is taking an extra $120 from each NSW household, with the quantum of DB dividends growing $361 million since it took office (in late March 2011).

Baird’s retort is that the 2011-12 dividends were $820 million not $903 billion as budgetted in the Keneally government’s last gasp – when Robertson was energy minister – and would be $999 million in 2012-13 instead of $1.14 billion, as calculated in forward estimates by his Labor predecessor.

There is no denying that Gillard’s attack on the NSW government is biting with the media, but whether this can over-ride voter antipathy to her broken promise not to introduce a carbon tax remains to be seen.

Writing in the “Australian Financial Review” this weekend, reporter David Bassanese comments that households distrust large new taxes, even if they are part of broader economic reform and compensation is provided.

Household concern is exacerbated, he argues, because the carbon tax affects a budget item that has risen strongly, noting the Australian Bureau of Statistics’ calculation that electricity prices have grown nation-wide at 10 per cent a year over five years. He attributes this mostly “as noted by the Prime Minister, to the persistent greed and neglect of State governments.”

Which brings us to Andrew Reeves, chairman of the Australian Energy Regulator, appearing on the ABC’s “The World Today” radio program.

Reeves points out that about half the cost of the energy bill reaching households is made up of network charges, 40 per cent of wholesale energy costs and the rest “retail charges and other taxes.”

But, says the ABC interviewer, you only have control over “that small section” – this is the 40 per cent represented by network charges – and the rest is determined by the State regulators?

No, responds Reeves, 40 per cent on top of his 40 per cent is set by the competitive wholesale market – and the State regulators set the price for households who have not chosen to take up an energy retailer contract.

On the same program, Matthew Warren, CEO of the Energy Supply Association, makes the point that about half the rising costs of transmission and distribution services come from replacement of assets 40 to 50 years old, a task that is unavoidable.

What could have been avoided, he adds, is crowding this work in to the past four or five years with State governments (all of them Labor, I point out) opting to suppress this spending until it gets to a critical point.

The other two critical factors for network capex, Warren says, are increased reliability standards (politically driven, I add, and by guess who?) and the requirements of meeting peak demand – to which he attributes a quarter of the costs reaching households.

Reeves makes the point in the ABC discussion that today’s service standards were set at a time when end-user prices were more moderate and “there was a view (by politicians, influenced in NSW by trade union lobbying, I add) that consumers would be prepared to pay more for high levels of reliability.”

He says: “There was a need at the time for investments to improve reliability, but there are questions about how the standards were set, whether (they) were too high, and, importantly (how quickly) they were to be met – with (this expenditure) coming at the same time as expenditure for meeting growth in demand and replacement of ageing assets.”

Reeves’ perspective is that network developments need to be scrutinised over a longer time frame (than the present five-year determinations), arguing that consumer concerns are caused by both the level of prices and the rate of the increases.

It’s a view with which Warren concurs, commenting that the “combination punch” of all these factors has driven NSW power costs from below CPI for an extended period to now being way in excess of the inflation index.

All this serves to further highlight that the Prime Minister’s intervention is pretty egregious, and the more so when she refuses to acknowledge that a lot of the damage has been done by her side of politics over more than a decade.

Warren, by the way, makes the point in this interview that all the politicians are speaking the truth on carbon tax – it does account for only nine to 10 per cent of the of today’s power bills and it also accounts for almost half of the increases imposed in the past year.

It’s “relatively imprudent,” he comments, to add the carbon cost to power bills at a time when prices are rising so fast, but the tax is “a second-order cost” when compared with the other shifts in supply charges.

Perhaps the most interesting last word in this interview came from Reeves.

Asked about the Prime Minister’s “big stick” and December deadline, he responded: “The real changes are not going to be a silver bullet.

“There are fundamental reasons why energy prices will continue to go up throughout Australia unless significant action is taken in looking at the way electricity is priced and the way businesses and residential customers are helped to manage their demand.”

That’s a tad long-winded way of saying “smart meters plus time-of-use charges must be pursued and there’s no overnight solution.”

It’s also as clear an indicator as anyone has given in the past fortnight that the Prime Minister is full of it when she pursues her spin on this issue.

But then so are a considerable part of the media when they allow her to do so without properly presenting the picture.

Meanwhile, the Australian Competition Tribunal ruling in the WA case has done more than all the political talk to address one key aspect of the price path – with almost no attention being paid to the decision, which, by the way, was made before Gillard climbed on to her soapbox.

Canberratariat and reality

The contrast could hardly be greater.

On the one hand, a Canberra-based “insiders” newsletter.

On the other an indignant State minister.

In between the Prime Minister’s now notorious Tuesday tirade on electricity at the Energy Policy Institute of Australia’s lunch.

For the newsletter, Gillard’s presentation was “a broadside at greedy State governments overspending on poles and wires so they could rip off customers.”

The Prime Minister, said the newsletter, “hinted at legislation to pull the States in to line.”

To describe this as tosh would be to give it a good name.

“Typical of the Canberratariat,” observes one of my colleagues (and not a networks manager).

Sadly, he is right.

Hence the reported glee of the Prime Minister’s staff as they watched a Sky TV live presentation of her speech in the Canberra Press Gallery last Tuesday.

Many of the writers influenced to think this way work for the mainstream, mostly tabloid, newspapers and they have largely followed the party line, no doubt influencing many casual readers.

“The voters,” observed the newsletter, “are about to receive their biggest electricity bills in living memory and the debate will be all about whether they are being done over by Conservative governments rather than the carbon tax.”

To which the obvious retort is that the debate will be about this only if journalists allow it to be so despite a wealth of information to the contrary.

Far fewer people read the weekday editions of “The Australian” than tabloid papers – where today NSW Energy Minister Chris Hartcher has sallied forth to offer a State government response. More of that in a moment.

Meanwhile, the debate Julia Gillard provoked with her attack on Coalition governments – and on taxpayer-owned network businesses – rolls on, with trade unions now hollering at her Resources & Energy Minister Martin Ferguson for once more raising the issue of privatisation while the extra costs of higher reliability and of higher dividend payments to the NSW Treasury are both revealed as Labor-generated.

Among those helping us to understand the backstory better in the past few days has been former NSW Premier Morris Iemma, brought down by union muscle over electricity privatisation, who went on the ABC to remind viewers that the costly increases in reliability standards – the so-called “gold-plating” that keeps being raised – was forced on the Labor State government through a “long union campaign” and embraced with “reluctance” by cabinet.

Iemma also pointed his finger at the Australian Energy Regulator for its decision to lift the cost of capital networks could claim from 8.5 per cent to 10 per cent.

His biggest target, however, was the unions officials who had “dictated” to the State Labor government over 16 years.

Just what they together have wrought has been brought home by the NSW Commission of Audit, chaired by David Gonski and managed by former Sydney Water CEO Kerry Schott.

The opening paragraph of the 425-page audit says this: “NSW is at a turning point. For many years financial management in NSW has been confusing, lacking in transparency and below the standards expected of efficient and effective government. This situation is not sustainable.”

What a damning indictment of the past government.

How extra-ordinary that not a single media outlet has seen fit to highlight it.

Bias? To an extent, yes, I think. It is no secret where the sympathies of a majority of the Canberra commentariat lie – but it is also in part down to sloth.

How else to account for the fact that the Canberratariat and other media members have also missed an opportunity to reinforce their badmouthing of the electricity networks – because the NSW audit report finds that these businesses, through greater efficiency, could achieve improvements of five to 10 per cent in each of their opex and capex outlays.

This will certaintly not be missed by the O’Farrell government in Sydney.

The drive to chase greater efficiency – through merging the three business businesses – is one of the points Hartcher identifies in his commentary in today’s “The Australian,” but it is only a tip of the effort required, according to the audit.

Hartcher’s 1,000-word riposte can’t be repeated here – you can read it on the paper’s website under “PM’s deceit on power prices” – and it persists with what I think is a misguided piece of return fire: Federal Labor should have reined in the Commonwealth energy regulator.

The Australian Energy Regulator is not in any real sense a Commonwealth body, although it lives under the umbrella of the ACCC and although Gillard made a big fuss of using the two agencies as her “big stick” to chasten the States.

The AER is created by small-F federal legislative arrangements between Canberra and the other governments with the South Australian parliament as the lead legislator.

Hartcher is right in pointing out that, via the CoAG process, work has been under way for some time to amend the rules under which the AER works – he says “to give it more discretion and to restructure the way appeals are heard.”

The appeals process, he says, is “defective.”

Hartcher not unreasonably has a go at Gillard for claiming a week ago that the Coalition government in NSW is “not giving a cent to consumers” to mitigate the State’s power price rises.

As he points out, eligible households (a minority, of course) are getting up to $250 this financial year.

Hartcher also hammers Gillard for claiming that his government is delaying the national customer framework that will hand over energy retail regulation to Canberra.

In fact, he points out, the State has passed the legislation and is working to a starting date of 1 January but is negotiating with Canberra over consumer protection – which it wants strengthened!

Meanwhile Hartcher’s colleague, State Treasurer Mike Baird, has attacked Gillard for claiming that the NSW government is ripping off customers through dividends claimed from the network businesses, one of the most potent of the accusations the Prime Minister levelled at the Coalition.

Baird asserts that his government is delivering on its election promise to cap these dividends and points out that the current projected return is well below what the Keneally government proposed.

On his numbers, Keneally & Co aimed to raise $903 million in 2011-12 and $1,144 million in 2012-13. The actual divided last financial year was $820 million and, says Baird, the return this year will be $999 million, 13 per cent down on what Labor proposed.

Peter van Onselen, writing in “The Australian” late last week, says the speech Gillard gave was designed, according to a Labor insider, to demonstrate to voters that she cares about their problems and about cost of living issues.

Van Onselen repeats the Labor line that the bulk of power price rises have come about because of the significant injections of funding going into upgrading networks in order to “gold plate” them against blackouts during peak usage and because the regulatory structures reward state-owned electricity assets with high dividends when making such investments.

Morris Iemma has dealt (above) with the reliability issue.

As reported on This is Power and elsewhere, Martin Ferguson has made it clear that smart meters and time-of-use charges are the means to attack the peak price issue, something that Labor State governments (outside Victoria) have ducked doing and the new Coalition governments are apparently equally unwilling to embrace.

Mike Baird has dealt with the network dividend issue.

What remains is the claim that the “bulk” of power bill increases are down to higher network charges, a mantra for the Canberratariat and other media commentators.

But, as “The Australian” demonstrates is a news report today, network costs will account for 42.3 per cent of the power bill increases in NSW between 2010-11 and 2013-13 (Australian Energy Market Commission data) versus a total of 57.7 per cent for other higher costs.

These are made up of 38.3 per cent for wholesale power, 12.3 per cent for green schemes and 7.1 per cent for retail charges.

(The impact of the carbon tax is folded in to wholesale power costs.)

In Queensland, the three-year rise is broken down as 46.2 per cent higher network charges, 44.3 per cent higher wholesale costs, 8.4 per cent retail costs and 1.1 per cent green schemes.

In Victoria, on the AEMC estimates, higher wholesale costs will contribute 40.4 per cent and green schemes 12.7 per cent versus 31.5 per cent for retail costs and 15.4 per cent for networks.

This accounts for more than 80 per cent of electricity demand.

An Arab proverb tells us that the dogs bark but the caravan moves on.

We will need to wait a while before we see how far the Prime Minister’s barking has impacted on the power caravan’s travellers, but they would be better informed if the Canberratariat made a greater effort.

Ferguson’s schtick

Federal Resources and Energy Minister Martin Ferguson has finally got to deliver the sort of speech on energy issues that some 100 participants in the Energy Policy Institute of Australia forum on Tuesday in Sydney had been anticipating.

He just got to do it thousands of kilometres to the west at a Committee for the Economic Development of Australia lunch in Perth on Friday.

Ferguson’s place on the EPIA podium was demanded by Prime Minister Julia Gillard so that she could deliver a “I have a big stick” speech as part of an assault on State governments, now mostly in Coalition hands, over rising electricity prices.

Gillard certainly caught the media’s attention – her minders are reported by Canberra Press Gallery sources as being delighted on the day by the waves she was making – but whether she has advanced the cause of electricity market reform is doubtful, to put it politely.

And, ironically, as I explain below, she may have dug a hole for herself.

Those of us who have been closely observing Ferguson since he took up the energy portfolio at the end of 2007 appreciate that his shtick is rather different to that of the Prime Minister.

He is not afraid of telling it like it is to the public, the supply industry, big consumers, the Greens (especially) and other governments, but his main characteristic has been to patiently shepherd all the energy cats towards reform and supply security as well as sustainability while also facilitating the momentous further development of the export LNG business.

Most importantly, he has had the Job-like job of overseeing the development of a new energy white paper while the government in which he serves has been wracked by internal dissent and the market has been riven by international economic conditions, major domestic power price increases and the reaction to them by both householders and manufacturers plus the uncertainties created by decarbonisation policy development.

On Friday in Perth, Ferguson made three points to the CEDA audience that need wide publicity in the context of the main power debate this week.

(His comments to CEDA supporting power sector privatisation are being given prominence in the “Weekend Australian” newspaper today and already have the NSW opposition leader jumping up and down in indignation.)

Ferguson also told CEDA that:

First, delivering efficient electricity prices to consumers (highlighted by Gillard as a national priority) can only be achieved by governments working together.

“A co-operative, ambitious reform process is what will lead to an easing of future price rises over the longer term,” he said. “I firmly believe that the best means of meeting (this) objective is to allow the market to operate and make investment decisions on the basis of the return on investment.

“Retail prices below a level that reflects the cost of production plus a fair return can discourage competition, directing investment to markets with greater returns.”

It is impossible not to contrast Ferguson’s next point with the Prime Minister’s pugnacious approach to the States on Tuesday.

He said: “I welcome closer collaboration with my fellow ministers” in the CoAG energy committee in pursuit of reform.

He noted that the Australian Energy Market Comission will release its proposed rule changes for the economic regulation of power networks in November and that the CoAG energy committee has brought forward a review of the appeals mechanism that sits alongside the rules for a decision before the year’s end.

As well, he said, the review being undertaken by the AEMC in to using the energy system more efficiently to address peak power demands is due to be completed in November.

The findings will be fed in to the next meeting of the CoAG Standing Council on Energy and Resources in December.

(In short, one of the main thrusts of the Prime Minister’s Tuesday barrage against the States – hurry up or I’ll use my big stick – is already being addressed through the CoAG processes, something that would have been noted when first ministers met in Canberra on 25 July under Gillard’s chairmanship.)

Second, on the critical issue of curbing spiralling peak power demand, Ferguson made it clear where he stands: “We need metering and tariff structure to allow consumers to be rewarded for reducing their (peak) demands and to mitigate the need for inefficient (construction of infrastructure).”

Third, Ferguson supported the need to “complete the unfinished business of building consistent regulatory approaches to lower costs for consumers and (of) removing unnecessary and distortionary regulation,” urging the West Australians to come under the umbrella of the national electricity, gas and retail laws.

However, he said, responding to the ongoing media and consumer outcries over network “gold-plating,” we should not forget that underlying factors pushing up power delivery costs include the way we use energy, and more of it, across “an increasingly ancient and geographically-dispersed” system.

Australia, he said, “cannot escape the fact that, in a country our size, network costs will always be a big component of the electricity bill.”

Ferguson finished up his CEDA talk in Perth by addressing what EPIA forum attendees in Sydney had been wanting in particular – insights in to the energy white paper’s final version.

He said that (1) it will urge the States to adopt more open market mechanisms and privatisation of taxpayer-owned assets to promote competition in generation and retail services; (2) it will advocate the separation of policy-making, regulation and operating functions in the energy markets and the adoption of energy laws country-wide; (3) it will highlight the benefits of introducing flexible, time-of-use tariffs; (4) it will call for the scrapping of domestic gas reservations policy; and (5) it will address ways to support the development and deployment of new low emissions technologies and fuel sources.

Meanwhile the chairman of the ACCC, the watchdog the Prime Minister invoked in her “big stick” threat to State governments, was also out and about on Friday, calling, via chairman Rod Sims, for a discussion about the benefits of electricity privatisation in Tasmania, Queensland, NSW and Western Australia.

Sims told a forum in Sydney that “regulation is not a substitute for good governance.”

He said: “The incentives of government shareholders are
unavoidably mixed and complicated by multiple and disparate objectives.

“It is difficult to know what the outcomes would have been had the (electricity) businesses been in private hands in recent years, but perhaps clearer, more commercially disciplined governance and internal expenditure review processes would have assisted in preventing some of the recent significant price increases.”

Sims also queried whether market solutions, driven by pricing signals, are the only method to resolve energy demand issues?

“Market-based solutions require consumers to respond to (these) signals and shift their demand to reduce pressures at peak times or to adopt alternatives such as small scale generation,” he said.

“This will require adoption of smart meters and retail peak pricing. It requires retailers to offer contracts that expose customers to price signals.

“Or,” he asked, “should we also be looking at more direct control approaches, such as load management, to assist customers to reduce load at peak times?”

Given the Prime Minister’s insistence on ministerial (ie political) decisions on the key issues before the year’s end, there is very little time left for advisers, including agencies like the ACCC and the AEMC, to resolve their recommendations.

Gillard, along with other first ministers, will be confronted by some tough political decisions on electricity issues before Christmas.

Did she appreciate this when she rushed the gates on Tuesday?

Her intervention has left her in no position to put public distance between herself and the next tranche of energy market decisions.

She’s now in the same hole she set out to dig for the State governments.

(By the way, if you want to see a wonderful cartoon by Fairfax’s Simon Letch on this topic, type “Power to the people at the lowest price” in to Google Search. It’s a classic.)

A cursed environment

May you live in interesting times is not intended as a benediction.

Whether the Chinese curse is apocryphal or not, it has real meaning at the moment for electricity industry investors and managers – and for consumers.

This has been the week that politics came to Power Town big time.

How the events set in train by Prime Minister Julia Gillard’s intervention in the market reform debate will play out is anyone’s guess.

The Chinese curse is sometimes rendered as “May you come to the attention of important people.”

Hardheads in electricity supply have known for a long time that this is not a good space to be in; politicking and good decisions about the power system do not go hand in hand.

About 100 people signed up for the Energy Policy Institute of Australia lunch in Sydney on Tuesday under the impression they were going to get a review of current power price issues from the well-regarded federal Resources & Energy Minister Martin Ferguson.

Instead they got the Prime Minister on full spin cycle and, by this week’s end, her “I have a big stick” speech is important national news with implications for the government’s standing and the future prospects of the Coalition.

Like a meteorite crashing to earth, Gillard’s power price speech has altered the energy reform landscape but whether for good or bad remains to be seen.

An event like this works at four levels.

One, obviously, is political and the accusations of hypocrisy may hurt Gillard but she will be focussed on the gains to accrue from public opinion polls at a time when her hold on office is influenced by them.

The second is the extent to which her intervention changes either the direction or the timing of decisions about reform.

In this respect, it is possible that she has influenced the managers of a complex process to move more swiftly – although other first ministers will note through gritted teeth that they collectively, with her, sent exactly this message to their energy ministers and the Australian Energy Market Commission from the Council of Australian Governments meeting in Canberra on 25 July.

This is what the CoAG communique said:

“On energy market reform, considerable work is already in train through the Standing Council on Energy and Resources.

“CoAG expresses concern over the recent substantial electricity price increases arising from factors including increases in transmission and distribution charges and requests energy ministers to focus current reviews of market regulation in the interconnected market on achieving efficient future investment which does not result in undue price pressures on consumers and business.

“CoAG notes the taskforce’s advice that the current program of work is consistent with its original vision for an interconnected national electricity market.

“Nonetheless, noting the interest of governments, business and consumers in competitive markets, CoAG asks the taskforce to undertake further work and advise CoAG in late 2012 on any additional action required to deliver a regulatory framework that promotes a competitive retail electricity market, including appropriate support for vulnerable customers, and efficient investment. “

Gillard did not acknowledge this decision one whit on Tuesday and used the EPIA pulpit to berate Coalition governments leaders, and especially the NSW government, for alleged failings – most of which could be laid at the door of the previous Labor administration in NSW and some flow from the poor energy policy management of her Foreign Affairs Minister, former Premier Bob Carr..

As an example of egregious behaviour it will not be forgotten or forgiven by the State premiers and may influence how they deal with the AEMC recommendations.

The third impact of Gillard’s talk is that she offers only rhetoric and spin about the need to address peak power costs and has thrown aside an opportunity to place the influence of her office behind the faltering efforts to introduce smart meters and time-of-use pricing, widely seen in the industry as the only practical route to addressing the problem, but also a can of worms politically.

The Australian Energy Market Operator may be right in asserting, as it did in releasing its new planning paper on Thursday, that the current electricity demand situation is “changing the the energy investment landscape,” but it does not alter the urgency of the need to address the peak power issue through more than words.

AEMO now foresees peak demand at the decade’s end reaching about 45,000 megawatts compared with an expected 39,000 MW this financial year and set against the advice consultants gave the AEMC six months ago that the past trend would take the supply requirement beyond 50,000 MW by 2020.

One can debate this forecast.

The AEMO “statement of opportunities” has proved to be something of a weathervane in recent times rather than a forensic tool.

Factor in a return to drought, high heat and oppressive humidity on the east coast over the next eight years and the new peak could be well above the now-mooted 45,000 MW.

The AEMC consultants, after all, also forecast that another two million air-conditioning units will be bought by householders this decade.

The core issue, however, is that both forecasts are for substantially higher demand, therefore more infrastructure investment and eventually higher consumer costs.

One of the factors not to be overlooked in the alterered energy investment environment is that suppliers will opt for open cycle gas turbines rather than baseload power for new ventures (other than wind farms built to meet the RET) over the rest of the decade.

As Gillard was launching herself in to the headlines with her “big stick” speech, TRUenergy was quietly announcing that it had changed its mind about the plant it wants to build on the Yallourn site in the Latrobe Valley.

Initially this was to be 1,000 MW of combined cycle intended to replace the output of the old, coal-fired power complex which is in play between the company and the Gillard government for closure in the “clean energy future” program.

Now TRUenergy has requested Victorian regulatory approval to amend its development proposal to begin with an OCGT plant with an option to shift to CCGT at a later stage.

There are implications for wholesale power prices in this move – which raises the fourth issue flowing from Gillard’s speech or rather what she didn’t say.

Ferguson has been at pains over the past 12-18 months to argue that State government intervention in regulating retail prices is counter-productive.

The new Queensland government, however, has taken a populist decision to freeze a key household tariff and its State pricing regulator is under legal challenge over its interpretation of wholesale price costs in its latest determination.

Angela Macdonald-Smith reports in today’s “Australian Financial Review” that RBC Capital Markets is warning that the Gillard intervention has increased business risk for energy retailers because retail price regulation is the “least point of resistance” for governments wanting to suppress household costs, something they will be all the more desperate to do when consumers discover, as they will, that, despite this week’s top level tirade, power bills will continue to rise.

Macdonald-Smith quotes RBC as saying the AEMC rule changes – the ones the first ministers want decided asap – are likely to introduce “only modest” alterations and would only apply from 2015.

If Gillard’s “blame game” approach proves to have bite in the political arena, State governments may take actions that, in the long term, impair investment in the east coast market but deliver short-term political benefits.

Consumers (and politicians) should remember the other variant of the Chinese curse: “May your wishes be granted.”