Archive for October, 2012
In a week in which the Climate Change Authority signalled “no change” on the renewable energy target and the chairman of the ACCC demanded “no change” on the housing of the Australian Energy Regulator, the Federal Resources & Energy Minister, Martin Ferguson, gave two speeches in Sydney and two in Perth canvassing the shifting ground for policymakers.
As we start a new week, in which one supposes the Senate select committee on power prices will be scurrying to meet its reporting deadline of Thursday and in which the federal Labor Party is yet again wracked with internal dissension, with some media pundits once more canvassing an early election, Ferguson and his team are putting the finishing touches to the third energy white paper to be produced for Australia since the late 1980s.
Some hints of where the paper may go are to be found in the speech Ferguson delivered to an oil and gas conference in Perth last Tuesday (it and all of last week’s speeches are to be found on his ministerial website).
Global energy demand, said Ferguson, is showing no sign of slowing – which makes the more important Australia’s role in supporting growth and development in the Asia-Pacific through a stable supply of energy.
There is a strong link, he noted, between Australia’s own economic future and global energy demand and economic growth.
The energy white paper, while finding it politically necessary to give a nod to the Gillard government’s 2050 “clean energy future” promises, can be expected to focus most strongly on the period from now to 2035.
Ferguson highlights that global energy demand for this period is forecast by the International Energy Agency to grow by some 40 per cent.
Developing countries, mostly in the Asia Pacific, will account for nine-tenths of this growth, with natural gas rising up to almost equal the role of coal.
As a result LNG is forecast to be Australia’s fastest-growing export over the next 20 years – and you don’t have to be Einstein to understand that this has domestic implications, too, some highly beneficial and some highly controversial (eg rising gas prices).
Where the media, the Greens and their fellow travellers who are fixated on a wholly renewable lifestyle play up the perceived negatives of gas exploration and production, onshore or offshore, Ferguson is unrelenting in holding up the national benefits.
The $60 billion coal seam gas to LNG industry emerging in Queensland, he pointed out on the road in the past week, is creating thousands of jobs.
And he reminded his Perth audience of the role of innovation, spotlighting the Prelude floating LNG project for offshore Western Australia – although dare I suggest to him that “groundbreaking” may not be an apt adjective for this one!
The advent of floating LNG development, Ferguson says, opens the way to exploit “stranded” gas resources here and elsewhere without placing additional strain on onshore infrastructure or the environment.
As well, Santos, Beach Energy and others are striving to unlock Australia’s tight gas and shale resources.
As Ferguson says, gas previously thought to be unreachable is now within grasp and this has profound implications nationally and globally.
However, he points out, the promise of investment, jobs and economic growth is now not enough – “the technology and process of resource development has to be fully explained to the community; industry has a responsibility to gain and maintain a social licence to operate.”
From where I sit, it is pretty hard to underplay this point.
It is not the least bit impossible that our messed-up social milieu could undermine the resources outcomes – and the industries (there are obviously more than one) need to be a helluva lot further on the front foot in this debate than they are today.
“At the very least,” Ferguson says, “those charged with designing and implementing technical aspects of petroleum operations need to bear potential community reaction in mind; projects applying the most advanced and lowest risk technologies stand a good chance of failing if affected communities are not assisted in understanding, appreciating and accepting that what is proposed is the best way forward.”
And he adds: “The social licence to operate is not a static concept. (Even when) gained, it is a constantly evolving process that demands flexible and innovative practice to (keep) holding the licence.”
This is serious stuff and deserves far stronger attention and deployment of corporate resources than I can see happening today.
The test is not whether the industries and their spokespersons think they are making a major effort – it is what is happening in the public arena.
Ground zero here is probably the “shut the gate” battles north of the Murray and especially in New South Wales – where the prospect of a real gas supply crisis creeps closer by the day.
However, the past inability of the electricity supply industry to gain understanding of what has needed to be done in terms of capital outlays for 2009-14 and the diabolical problems of today’s power price rows run this situation a close second.
As TransGrid’s Peter McIntyre has said this week, in the long term the current blame game around prices, if it results in short-sighted decisions (as it has before, I add), may have big implications for security of supply.
Coming east, Ferguson fronted the Energy Users Association of Australia annual forum in Sydney on Thursday, and acknowledged the business driver: to obtain a reliable source of energy at minimal cost to keep down input costs and maximise shareholder returns.
He acknowledged also that price is an issue that “has edged away” in the east coast market (and, of course, in WA, too).
He addressed the nitty gritty: business power bills have risen 33 per cent over the past three years versus 40 per cent for householders. (The stats are Producer Price Index calculations by the Bureau of Statistics.)
And he belled the cat: despite some substantial rises and notwithstanding a propaganda campaign by the EUAA, in terms of purchasing power parity, Australia’s average household bills still sit in the lowest quartile of OECD data.
When he chooses, Ferguson can be as politely deadly as anyone in politics.
“This analysis,” he told the EUAA audience, “has been provided to the Senate inquiry using consistent and comparable data to provide an accurate reflection of Australia’s position.
“I am not saying (the situation) is cause for complacency – I simply wish to correct the record against other, selective analysis conducted earlier this year.”
In the same vein, he noted that the ACCC chairman, Rod Sims, had spoken to the association the day before (a talk given wide but selective media coverage).
“It is good,” said feline Ferguson, “to see (Sims’s) timely engagement in the processes that have been set up by SCER (the nation’s energy ministers meeting under the CoAG umbrella) and are nearing finalisation.”
He then laid out his position on what the Prime Minister has designated one of the biggest issues of these times.
“I have never claimed that there are any quick fixes or easy solutions to electricity prices,” he said. “To the contrary, I have maintained that a package of reforms is needed which TOGETHER (his emphasis) help to ensure that electricity is delivered efficiently.
“Improvements to the Australian Energy Regulator are just one piece of the puzzle.”
And he cited the Productivity Commission report on the AER’s needs for more resourcing, expertise, independence and accountability.
The confidence of governments and industry for any sector, he noted, “rests in an effective enforcement regime and a competent regulator.”
Half the fun here is reading between the lines!
Ferguson also noted that there are criticisms that the reform process is too slow.
“I understand,” he said, “but the energy market is incredibly complex and inter-connected.
“Acting without detailed analysis to implement the best possible solutions will only lead to perverse outcomes with longer-term consequences not in the long-term interests of consumers.”
I don’t have time or space to canvass it here, but Ferguson’s fourth speech for the week to the Citi Australian investment and Asian G10 Rate conference in Sydney, is worth reading, too.
It’s on his website and provides yet more indicators of the tone of the forthcoming white paper.
The problem is that those of you – about 2,000 to 2,500 a month, I reckon – who come on this website will read this stuff but the media are resolute in not canvassing it as they pursue life in the 24/7 goldfish bowl.
Leading political reporter Peter Hartcher from the Fairfax stable has summed up the curse of the current debate in a pungent sentence this weekend: moronic messages, aimed (by politicians) at a public assumed to be morons, is a pathology of modern politics.
Ferguson is one of a relative handful of leading politicians who don’t do moronic messages and it says absolutely everything about today’s mass media that he and they struggle to get a showing.
Battling to catch up with my reading this Saturday – having still to fully digest the Productivity Commission report as well, now, as the report on the RET and a new handful of Martin Ferguson speeches – I saw a sentence in a newspaper report that made me sit up.
There is something of a stoush under way, as you will know, between the Australian Competition & Consumer Commission and the Coalition-run States, especially New South Wales, over the need to rehouse the Australian Energy Regulator.
ACCC chairman Rod Sims has been loud and firm this week that the best home for the AER is where it is: under the wing of his organisation.
NSW Energy Minister Chris Hartcher says it is understandandable “that a big brother would stand up for a little brother,” but the Sims’ comments just reinforce perceptions that the energy regulator is a subsidiary of the ACCC and the States want “a stronger umpire with stronger rules, greater independence and clearer accountability.”
The sentence that jumped out of the newspaper report for me was a comment from veteran regulator Ed Willett supporting Sims: “Mr Willett said that, when the new system was implemented in 2006, the AER warned that it tilted the playing field too far in favour of the electricity companies.”
The AER and ACCC speeches are all kept on website archives.
In 2006, Willett described the final version of the rules for transmission as “overall, a workable package.”
At the end of 2007, as the AER moved towards the determinations that have led to the current crop of much higher power prices, Willett said: “The new legislation aims to achieve a consistent national approach to energy regulation that reduces regulatory costs and uncertainty to (network) business.”
And he added: “The current wave of regulatory reform in the energy sector is progressing smoothly.”
In September 2009, by which time the AER had signed off on a $14 billion expansion of distribution investment for NSW, he commented: “Network services have recently become a significant source of price pressure. The key drivers are substantial increases in capital and operating expenditure.”
He added: “Higher distribution charges will increase the average residential bill for 2009-10 in NSW by $1.40 to $1.50 per week.”
Note the expressions of concern about a tilted playing field, not.
Steve Edwell, the inaugural AER chairman, in a speech in 2009 included this comment: “The energy network sector current faces a number of challenges – the increasing penetration of embedded generation, enhanced licensing and reliability requirements, the relentless growth of peak demand and, for many networks, the problem of aging assets. There are also a range of challenges associated with climate change policies and the introduction of smart meters and grids. The evidence strongly points to significant investment growth in energy networks.”
Note the complaints about the dangers of “gouging” and “gold-plating,” not.
Edwell summed up that “the transition to national regulation is largely complete, bringing much greater transparency and consistency in the regulatory framework.”
There was, he asserted, “ample evidence that the new regulatory framework has been delivering on the substantial investment programs that are needed in some networks. The rate of return review has also delivered good outcomes for the industry in a time of global financial uncertainmty.”
Edwell called on networks to communicate more effectively.
“If rising investment translates in to more secure networks and enhanced reliability, this is a message that needs to be sold. Similarly, the benefits of solutions like demand management and smart meters need to be actively promoted.”
In what was a prescient thought, Edwell wrapped up this talk thus: “The key message, I think, is that the step increases we are seeing in investment will need to translate in to measurable outcomes for consumers. If this fails to materialise, the industry will have some serious questions to answer.”
What all this boils down to is a question as to how the electricity sector has managed to largely lose the communications battle over the past 30 months – but by no stretch of the imagination does any of it support a claim that AER was handed a spoiled set of rules last decade and complained about it in vain.
To do so, to use an old Sydney expression, is to display more front than the Queen Victoria Building.
In a late submission to the Senate select committee on power prices, the O’Farrell government in NSW has acknowledged that, “in hindsight, it is likely that there was insufficient investment in networks during the 1990s.”
It also acknowledges that we are now seeing the “echo effect” of peaks in investment in previous decades, with assets installed in those periods of large-scale expansion of the networks now at the end of their economic life and needing to be replaced.
Not surprisingly, the O’Farrell governments wants to bell the cat: the now-despised mouser of Bob Carr, Morris Iemma, Nathan Rees and Kristina Keneally.
It points to the increased reliability standards imposed in 2005, now seen by the Australian Energy Market Commission as not economically justified and underpinned by legally-binding design planning criteria, driving substantial amounts of investment.
And it also points to increases in labour-related costs, which continue at around six to seven per cent a year.
“Labour productivity,” says the government, “has declined in network businesses because of real wages growth, additional employees to deliver increased capital programs and a lack of capability to initiate and deliver real enterprise reform.”
The permanent workforce in the three NSW distribution businesses has risen by 2,050 people in five years.
The full submission on the Senate committee website is worth reading – and unfortunately neither the major Sydney newspapers nor the radio stations and the ABC have seen fit to pick up this perspective and give it a fair run.
Meanwhile, they all give airplay to the AER telling us that, honest guv, it’s not our fault; we knew all along that these rules were bent and it’s the networks wot really dunnit.
I thought the TransGrid chief executive, Peter McIntyre, wearing his hat as Grid Australia chairman, made a reasonable point when he went to the Energy Users Association annual conference in Sydney.
“The current blame game around electricity prices could lead to short-sighted decisions which may jeopardise long-term power security,” McIntyre warned. “The causes of rising prices are complex but the fact is that much of vital network infrastructure built 40 to 50 years ago needs replacing and these costs are considerable.”
Knee-jerk reactions, said McIntyre, may end up causing costly and dangerous future problems.
And rewriting history, as some regulators, politicians and unionists are now engaged in doing, should not be allowed to happen unanswered because it, too, undermines the effort to understand how we got to this point and to see a viable path out of the woods.
A better set of rules, a shaken-up and rehoused regulator and a fundamental political understanding of what can be changed (eg, our peak power habits) and what cannot be avoided (eg, replacing the old assets) are all central to this.
By this time next week we will know what the Senate committee makes of it all.
The disconnect between the messages the public are hearing about power prices and reality is not small.
The Melbourne “Herald Sun” newspaper, for example, headlined a story a week ago: “Productivity Commission puts forward changes to offer cheaper power deals for reduced air-conditioner use.”
The ABC News website said: “Electricity overhaul could slash bills.”
And so on. The obvious message being that we should stand by for lower electricity bills.
What the Productivity Commission actually says in its 800-page draft report on the electricity supply situation is that, while the gains from the reforms it proposes could be large, “they will not happen overnight.”
The future cost savings the commission suggests are available will come in the form of reducing the growth of power prices, not cutting them below their present levels – which is what the community is hearing.
If you factor in the carbon price, much higher contract costs for coal and gas and the continuing impact of network investment already made and committed out to 2014, the most likely situation late this decade is that power bills (in nominal terms) will be double what they were last year – and these were double what they were around 2001.
The risk suppliers face is that, when this becomes apparent to consumers and they react badly to it, politicians will panic and seek to interfere more with the market through tariff freezes and other interventions
AGL Energy, for one, continues to sound off about the dangers inherent in this approach.
Its chairman, Jeremy Maycock, says that actions in Queensland and South Australia to “simply regulate down retail prices” – a move he describes as “ill-considered” – will end up in significant cost increases for consumers in the long term while damaging market competition and innovation.
Maycock told the company’s annual meeting that this approach runs the risk of making investment in new generation for the “NEM” unviable, and this includes renewable energy.
“When these decisions are added to current policy uncertainty around the future of carbon pricing and the 2020 RET, no-one should be surprised to see new investment evaporate.”
Meanwhile politicians – and consumers who actually hear the message – interpret something other than is intended from a Productivity Commission statement that “the over-arching objective of the regulatory regime is the long-term interests of electricity consumers.”
What this means is not “prices will be cut” but the supply system will be made more efficient – and one of the ways of doing so will be to introduce time-related tariffs that will add substantially to the bills of consumers who don’t exercise great care about when they use electricity.
The commission says that a changed approach to reliability standards could defer some $4 billion in network expenditure – note the verb.
“Defer” not “prevent” or “avoid.”
The commission addresses itself in plain language to the question “are network expenditures inefficient?”
“There is a strong case,” it says, “that the efficiency of some businesses could be improved.”
It believes there are “significant differences” in the performance of networks.
And it observes that some factors are partly outside the control of networks – which is why benchmarking of all relevant regulations should be a key part of assessing network performance.
One of the key things the commission wants to see happen is privatisation of networks still in State hands, a proposal that had the union movement up in arms as soon as it was publicised.
The commission’s thesis is that,while governments have a legitimate role in owning and operating many services, the rationale for State ownership of networks no longer holds.
Sophisticated incentive regulation, it points out, will work best when the networks have strong cost-minimisation and profit motives.
The commission makes the valid point that State governments impose a whole raft of constraints on network businesses that are incompatible with efficient operations. These include social and environmental obligations, requirements that they procure goods and services locally (a hidden cost for consumers) and providing employee benefits and job security that is out of kilter with the rest of the business world.
The commission also points to the incoherent way politicians deal with networks, for example limiting capital spending when governments are worried about State debt levels and pushing capex when there are pressures for greater reliability.
And, of course, governments impose board members on these businesses on what the commission quaintly describes as “a non-merit basis.”
The commission says: “There is no evidence that the productivity, reliability, quality or cost performance of private sector networks is worse than their public sector equivalents.”
To the contrary, there is evidence here and overseas that private sector network businesses are more efficient.
The commission adds another important point: privatisation is not deregulation.
Strong regulation is needed to drive secure, reliable and appropriately-priced services and, it says, “privatisation strengthens incentive regulation.”
In other words, the better regulation the media are touting as providing a better service requires the sale of the businesses.
As they tell us endlessly in railways stations, mind the gap.
As I also noted in a “Business Spectator” commentary (“Consumers forgotten in the electricity debate,” 23 October), the Productivity Commission is at pains to point out in this report that “many sources of inefficiency in networks” are outside the control of the businesses.
Network businesses, it says, do not set reliability standards, feed-in tariffs, demand management incentives or retail price regulations.
If you want to look at management inefficiency, it says, you must also look at the impact of factors the networks must take as given.
All this stuff matters because network costs represent between a third and half of the final residential power bill.
To say that the public debate has been one-sided to date would be a big under-statement.
If this situation is going to be improved – and improvement includes reducing the trajectory of end-user price rises – then the debate needs to be considerably improved,too.
It is easy here to cast nasturtiums at the media – and they deserve a few – but the truth is that the real leaders of a sensible debate must be the politicians and, on this issue, they have been at work for years trying to disprove the boxing ring adage that “you can run but you can’t hide.”
Where the media can help is by really understanding what the Productivity Commission is saying and pushing the pollies towards a serious debate both through more informed questioning and through newspaper editorials.
Martin Ferguson is adamant that the “national” electricity market – serving nine million customers on the east coast – is not broken, a view with which I agree, but the past week’s Sydney conference looking at the NEM from now to 2025 has highlighted just how many areas of the market and the policies impacting on it are in need of attention.
It is going to be more than interesting to see how the final version of the federal energy white paper, which Ferguson is seeking to deliver before October is over, and the Council of Australian Governments process deal with this issue in the weeks ahead.
In addition, of course, we are promised a report by the Senate select committee on power prices by 1 November.
The situation is bedevilled by the current power demand trend and the unresolved question of whether it is a blip or a trend.
Consumption grew strongly from 2005 to 2008 and now, coincident with the global economic crisis, has fallen back – with the madcap solar bonus schemes helping to siphon off demand.
Theories abound on the causes of the slump and on the direction demand will take over the next 5-8 years, but the only sure thing at present seems to be that the earlier belief that requirements would hit 300 terawatt hours nationally (and about 270 TWh on the east coast) by the decade’s end is way off beam.
Speaking to the Sydney “NEM” conference, and supporting the view that the renewable energy target needs to be downscaled to a true 20 per cent in 2020, Mark Collette of Energy Australia (the adopted name of TRUenergy, which has walked away from a 2012 IPO because of the present environment) suggested that we could now be looking at about 210 TWh for the east coast at the decade’s end.
I thought Collette did an interesting job of summing up the present status of the “NEM,” pointing to (1) rising power bills re-igniting the price regulation debate, (2) falling demand depressing the wholesale market, (3) the issue of gas availability and pricing as well as the links to global markets for gas and coal, (4) uncertainty on carbon pricing and the future of the RET and (5) the fact that rising fuel prices with falling demand and low wholesale prices (back at 2000 levels) are leading to temporary or permanent generator shutdowns.
The latter point, of course, has some elements of the commentariat terribly excited, but, remembering Mark Twain, the “death of coal” seems somewhat overdone.
Collette makes a thought-provoking point that the key driver of reduced east coast demand is New South Wales, where the rolling 52 week energy position is declining at a rate equating to an average demand loss of 400 to 500 megawatts. Much, but not all, of this loss, he points out relates to the closure of Kurri Kurri smelter.
The aluminium industry accounts for between 10 and 15 per cent of national power demand and the wobbly state of some other smelters on the east coast, created by relatively high costs here plus our overblown dollar and the metal’s depressed global price, could yet see further impacts on electricity demand this decade.
The Australian Aluminium Council’s Miles Prosser pointed out to the conference that the RET is adding $80 million a year to his industry’s costs at a time when it is running at a collective loss.
Self-interest drives most, if not all, the perspectives of the market and I don’t say this in a pejorative way – shareholders look askance at businesses that don’t put their interests to the forefront.
Thus we heard a strong contrary view on the market situation from wind generator Infigen Energy’s Scott Taylor.
He argued that the “NEM” is no longer fit for purpose because of the distorting effects of a multitude of ad hoc federal and State regulatory interventions.
This thesis, widely held in “clean energy” circles, holds that progress is slow in reshaping the “NEM” because of vested interests and complains that, to quote Taylor, “vast sums are being spent to maintain electricity systems designed decades ago for legacy technologies,” creating the situation where there have been substantial retail prices rises because 60 per cent of the costs are in regulated areas.
The Grattan Institute’s Tony Wood, in another of a series of thought-provoking commentaries he has contributed on this year’s conference circuit, said that much of the current abatement-related policy framework is a “dog’s breakfast,” a view with which I strongly concur.
“There is great uncertainty regarding policy drivers for low-emission demand and technology developments for supply,” Wood told the conference. “The requirements of policy are credibility, flexibility and predictability. Certainty is an illusion.”
The Grattan Institute position that decarbonising the electricity sector must be accomplished while maintaining security of supply and affordability is surely bedrock for this reform process and Wood is right to remind us that, despite current projections, none of the new technologies can produce power at a scale and a cost similar to today’s supply.
This won’t stop the denizens of the media goldfish bowl doing their “Look, there’s a rock!” routine every time some new-ish technology option is touted by vested interests, but it does go to the heart of the current debate – and begs the question I have raised before: “When’s the future?”
Those engaged in seeking to amend “NEM” rules, especially those related to network regulation, are dealing with the here and now, driven by a political and media storm over power prices.
However, these changes are not going to drive price trends in a wholly different direction.
A year ago, at my “Powering Australia” conference in Melbourne, Port Jackson Partners’ Edwin O’Young predicted that east coast electricity prices could double between 2011 and 2017. He participated on a panel at last week’s “NEM” conference and I asked if he stuck by this forecast?
Paraphrased, his answer is “Yes,” although the timing could be a bit different and it needs to be borne in mind that the projection includes carbon pricing.
(How and when an Abbott-led Coalition government can take an axe to the present carbon policy was a topic of lively debate at last week’s conference.)
Put simply, the politics of a doubling in consumer bills this decade – after the furore created over the issue, fuelled by the Prime Minister in recent weeks and due to be re-ignited by her government’s Senate review in the very near future – will give added local edge to the Chinese adage of “May you live in interesting times.”
To take one issue, albeit not a small one, what will this scenario mean for the privatisation of networks in NSW and Queensland, again being strongly urged from a number of quarters, not least by the Productivity Commission in a major report published last week?
Borrowing a quote from Miles Prosser, government intervention needs to be restrained, targeted and rigorously questioned – after all, the current approach to network regulation, now subject to so much criticism, is the product of across-the-board policymakers’ agreement only eight years ago.
And to further steal a quote from Tony Wood, who was talking about carbon policy intervention, the solutions to addressing the “NEM’s” needs must provide a flexible, predictable framework for investors because they are the key to security and affordability of power supply.
“Investment in energy assets is a serious business,” Wood opined.
More than a few of those hurling around opinions and claims should keep this in mind.
Wednesday highlighted yet again the entwined nature of energy and manufacturing policies and underlined the pressures on policymakers to strike a balance between suppliers and big users.
For the electricity industry, which until recently was relying on the manufacturing sector for 30 per cent of its sales and is now seeing its decline contributing to the downward trend in demand, the future of factories is no minor matter.
Manufacturing, in round terms, represents more or less the equivalent for power suppliers of the New South Wales market.
The latest heavy hitting took place down in Canberra.
The global CEO of Dow Chemical, Andrew Liveris, told the National Press Club that Australian manufacturing is at risk of “permanent decline” unless there is a sweeping overhaul of policies.
Placing restrictions on gas exports and developing a plan to encourage ”advanced manufacturing” were two initiatives he put forward to sustain the sector’s viability.
Liveris argued that the success of the resources boom to date has masked
”some serious, covert and bottom-line weaknesses in the economy.
Now “the mask is truly starting to slip.”
He said the manufacturing sector, which has shed 100,000 jobs since the global financial crisis, is ”the canary in the coal mine” for Australia in looking at the health of the economy.
Liveris again singled out the export gas sector and urged government action to reserve supplies for domestic use, a move the federal Minister for Resources & Energy, Martin Ferguson, had rejected on Monday when he spoke to the Australian Pipeline Industry Association conference in Brisbane.
Ferguson acknowledged that exporting coal seam gas as LNG from Queensland was creating concern about the availability of domestic gas, but he declined to support constraining prices or supplies through government intervention.
Ferguson indicated that “an over-arching blueprint” for gas market reform and development is contained in the final version of the federal energy white paper, which, he says, is intended for release later this month.
The other Canberra strike yesterday came from the Australian Industry Group, in cahoots with the Plastics & Chemical Industries Council, releasing a study by the consultants National Institute of Economic & Industry Research, asserting that east coast gas prices may rise to triple the present $3 to $4 per gigajoule level.
Interestingly, PACIA chief executive Margaret Donnan said the associations are “not looking for hasty solutions, not arguing for domestic gas reservations or measures that would harm investors (but) removal of unnecessary barriers to the increased production of gas from unconventional resources.”
The Perth-based DomGas Alliance then weighed in by calling yet again for a national reservation policy similar to that imposed by the Western Australia government to guarantee supply and help put downward pressure on energy prices.
The NIEIR study has raised energy industry eyebrows by claiming that “each petajoule of gas shifted away from industrial use towards exports means giving up $255 million in lost industrial output for a $12 million gain in export output.”
The Australian Petroleum Production & Exploration Association has called for the public release of the modelling and all assumptions underpinning the NIEIR study “as its outcomes contrast not only with current experience but also the raft of reports demonstrating the economy-wide benefit associated with the resources boom.”
APPEA argues back that, rather than “supporting subsidies,” jurisdictions should support development of new gas projects to increase availability of the fuel and to further diversity supply.
The association accuses the NIEIR study of “heroic assumptions.”
Meanwhile, speaking at the Sydney conference on uncertainty in the national electricity market, Miles Prosser, executive director of the Australian Aluminium Council, argued that “a simple free market approach” to the gas availability issue “will fail the interest of the public.”
He said free markets, if completely unrestrained, can produce undesirable outcomes and argued that the WA reservation policy has not put downward pressure on petroleum exploration activity in the West.
Prosser’s members use between 10 and 15 per cent of all electricity consumed in Australia and their alumina operations use 141,000 terajoules of gas annually.
They are currently operating in the red in Australia, not least because of global prices and the impact of the high Australian dollar — and are pointing out to the renewable energy target inquiry, expected to report in November, that an $80 million a year cost to support wind farms is hurting.
Prosser said yesterday that the real current problem on the east coast for industry is not so much the price of gas as actually finding a supplier while the LNG operations take up available resources.
He said a significant hurdle to resolution of the issue is that stakeholders have taken entrenched sides rather than discussing the nature of the problem. ‘This is not a black-and-white debate.”
In a panel discussion on gas issues I chaired at the conference, Port Jackson Partners’ Edwin O’Young said east coast gas prices are likely to rise towards $8 to $10 a gigajoule.
Answering a question, he added that he still saw gas price rises helping to push east coast electricity costs to double their 2011 later this decade.
Built in to this assumption is the ongoing presence of carbon pricing.
I am looking forward to today and tomorrow (17-18 October) at the “Eastern Australia’s Energy Markets 2012-25” conference in Sydney.
The sub-title “managing rising uncertainty in the NEM” could hardly be more appropriate, as is illustrated by this week’s decision by Queensland government-owned Stanwell Corporation to mothball two units of Tarong power station “for at least two years or until wholesale electricity demand improves.”
The withdrawal of 700 megawatts of capacity still leaves Stanwell with 3,300 MW additional generation and will have no impact on power security in an over-supplied market.
For the people of South Burnett shire, where Tarong is located, however, the loss of 64 skilled jobs means $10 million in pay being sliced out of the community.
Stanwell says it decision follows a period where its plants are operating at an average 60 per cent capacity in an east coast market where demand has fallen by just over three per cent over three years.
In its 2012 annual report the company’s board attributed the demand slide to milder weather conditions, increased efficiency in residential and industrial sectors, demand-side management initiatives and increased household use of solar PVs in Queensland.
Meanwhile today’s edition of The Australian reveals that Energy Australia (as TRUenergy now calls itself) will scale back operations at Yallourn power station in the Latrobe Valley,
One of Yallourn’s four units will be mothballed, with the company reportedly citing the impacts of the carbon price on operating costs at a time when both electricity prices and power demand are weak.
It is not all gloom and doom because Energy Australia has also received local council approval to build its Blackstone open cycle gas plant in an industrial park in Ipswich close to where the retired Swanbank B coal-fired generator is sited.
Blackstone is intended to start at 600 MW and be built in stages to a full capacity of 1,500 MW. Work is planned to start next year.
Energy Australia say it will be able to meet 10 per cent of Queensland power supply when fully completed with 85 per cent fewer emissions than Swanbank B.
The touchstone for this development can be found in the Energy Australia statement that it will be built, once planning approval has been received, “when market and regulatory conditions are favourable.”
Blackstone will provide full-time employment to 30 to 50 people.
Behind all this lies the work now going on to change the regulatory environment. The supply industry will have a better idea of where it stands by December when the Council of Australian Governments meeting is held – and by which time the federal government’s energy white paper should be released and analysed to bits.
The Energy Supply Association CEO, Matthew Warren, a participant in the Sydney conference, has a timely Op-Ed in today’s Australian Financial Review reminded all concerned in policymaking that “you can’t regulate away the drivers of rising energy bills any more than you can with other goods and services.”
The industry will be looking to the white paper for strong support for its argument for deregulation of retail prices and the introduction of flexible retail pricing for hosueholders on the east coast.
Warren’s commentary contains a warning that in South Australia, where there is a to-do right now over the State regulator aiming to push down regulated residential prices eight per cent from New Year’s Day, controversially substituting softer wholesale prices rather the long-run marginal cost of supply, there is a risk that a really hot summer could drive bills back up again.
Warren argues that “Instead of pretending they can fix prices by fixing prices, governments should get out of the game and allow a smarter, more efficient system to operate.”
Meanwhile, you can expect another media burst on the gas reservations policy today despite Resources & Energy Minister Martin Ferguson saying this week that the federal government won’t have a bar of the approach.
Andrew Liveris, global CEO of Dow Chemical, will be speaking at the National Press Club in Canberra as the Australian Industry Group and the Plastics & Chemicals Industries Association release research claiming that the Queensland LNG developments are set to drive up east coast gas prices from $4 per gigajoule now to $9 by the end of the decade and still higher in the ‘Twenties.
All this and more in on the agenda at the Sydney conference, which Ralph Craven and I will co-chair.
Watch this space for feedback.
Launching my 2012 Powering Australia yearbook on a rainy night in Canberra this week, Martin Ferguson cut swiftly to the chase in terms of the current debate on electricity supply.
The Federal Resources & Energy Minister, who was kind enough to say that he looked forward each year to the publication of the yearbook, pointed out that, while governments have a role in ensuring that energy investments are at an optimal level – enough to ensure reliability at minimal cost — there are many factors outside the control of policymakers.
Acknowledging that household power bills have risen by an average of more than 40 per cent over three years, with further increases likely in the short term, Ferguson rightly noted that the chief contributing factor has been the significant investment in network infrastructure – and put his finger on a salient point that at least some in our community strive officiously to bypass.
“Australia has one of the world’s largest integrated networks,” he observed, “with roughly the same amount of infrastructure as in Britain, but spread over 30 times the landmass.
“Given the dispersed nature of our population, network charges make up a much larger proportion of our energy bills than in other countries.”
As he added, our community’s increased demand for energy-hungry appliances has compounded the cost of the necessary replacement of network assets mostly built in the 1960s and 1970s.
Plus the household uptake of air-conditioners has doubled in a decade.
Now this may be cat-on-the-mat stuff for those of us steeped in the industry, but it isn’t for most of the community – and the need to balance popular sentiment, fuelled by aggro media coverage of the issue, with reality has reached something of a tipping point with the commissioning of the Senate review of power prices now under way.
Ferguson wants one thing to be very clearly understood: it’s just wrong to suggest that, because power bills have risen sharply in recent years, the “NEM” – the east coast electricity market – is broken.
As he says, markets operating in isolation – and the “NEM” started without Queensland linked to New South Wales or Tasmania to the mainland – would carry far greater supply risk and deliver less efficient allocation of resources than the system we have developed over almost 15 years.
Of course improvements can be and should be made, but, as Ferguson points out, genuine reform requires that many policies complement each other to avoid unintended consequences for suppliers and customers.
This, it seems to me, is the greatest risk the industry and the market face today, a thought I hope to see pursued in more detail at the “Eastern Australia’s Energy Markets 2012-25” conference that begins in Sydney on Wednesday.
Ferguson says that he and the State and Territory energy ministers – meeting as the Standing Council on Energy Resources or SCER – are focussing on four priorities to push reform: (1) strengthening regulation, (2) empowering consumers, (3) enhancing competition and innovation and (4) ensuring balanced network investment.
As he adds,getting the balance right is no easy task.
In reforming regulation, SCER is building on the work of the Australian Energy Market Commission, whose chairman John Pierce will be a key speaker at the Sydney conference next Thursday.
Ferguson says the AEMC review has raised “complex and delicate issues,” which, I feel, is probably an under-statement – and the recent call by some States for the Australian Energy Regulator to be pulled away from the ACCC, a reaction to the Prime Minister’s “big stick” speech in August, is an example of why this whole business needs to be approached with tact and care.
While the impression has been created via the media that the Prime Minister’s intervention, the Senate inquiry that flowed from it and the December meeting of the Council of Australian Governments may represent some sort of “In one leap Julia was free” moment for electricity supply, in the real world important work will go on well into the new year, including key reviews of network reliability, interconnection investment and network efficiency benchmarking.
Ferguson’s Powering Australia launch speech is available in full on the ministerial website and worth reading for the ground it covers.
The other aspect of what he said that I want to mention here is his emphasis on the need for co-operation on reform between the stakeholders, and especially between the jurisdictions.
Ferguson acknowledges that the whole process cannot drag its feet.
Not only can the economy not afford an energy system that is operating less than efficiently but politics dictate that change must happen and be seen to be genuine and to benefit the long-term interests of consumers.
Achieving the change is difficult enough – communicating benefits. when they cannot possibly happen overnight and when so many, including the woefully-informed tabloid media, will be in full cry, will be harder still.
As he has done before, Ferguson summed up the challenge on Thursday night as “ensuring adequate and efficient investment in energy infrastructure while minimising cost pressures for consumers.”
If you want to appreciate the degree of difficulty in achieving these objectives while dealing with the peculiar understanding of the issues by some of the stakeholders, read the Hansards of the hearings of the select committee, and the slant placed on issues by so many appearing before it. (They are on the Senate website.)
The Energy Networks Association sums up the current situation as “a perfect storm” of high capital costs, higher government reliability standards, the need to replaced aged assets and requirements to service peak demand combining to push up network costs.
Engaging customers, ENA says, is now more important than ever for all energy businesses in pursuit of an environment where users will have better control over demand and their costs.
True enough, but, I suggest, this doesn’t go far enough.
As the inquiry demonstrates, there are a host of other stakeholders out here, with opinions sincerely held, axes to grind, ideologies to push, positions to defend, fears to allay and just plain lack of adequate information, all playing on the politicians ultimately making the market decisions – and a great many of the politicians are running scared.
How far the objectives set out by Ferguson will be in place in 2015 and 2020 is anyone’s guess but it will indeed be no easy task to achieve a good outcome.
We will soon know whether the Senate committee has a positive contribution to make or will just add to debate disarray.
This week in a commentary published in both “Business Spectator” and “Climate Spectator” – see “High-voltage misinformation” on their websites – I have sought to address the power price media hype, something on to which the Prime Minister has battened for her own political purposes, leading now to the Senate select committee on the issue.
I invite you to read these commentaries (see www.businessspectator.com.au) for the full thrust of what I had to say – which included my concern that the tabloid media handling of the issue is drowning out sensible debate.
Further reading has tossed up two interesting sets of information.
The most important is a Department of Resources & Energy report to the Senate committee.
It is a response to a question from Senator Nick Xenephon, asking if it is correct that Australians are now paying above OECD average rates for electricity?
The department’s reply, based on purchasing power parity calculations – using PPPs avoids the effect of exchange rate fluctuations in making comparisons between countries, is No.
Using this measure, residential electricity bills in Australia, according to calculations by the Bureau of Resources & Energy Economics, averaged 12.66 American cents in 2010 and 14.2c in 2011.
This sets our prices well below the OECD average of about 21c.
Have you seen the media headlines on this news since the DRET note went up on the Senate website?
No, neither have I.
Claims that we have “the highest power prices in the world” are headline news. Proof that they are not is not news.
It is an interesting slant on “freedom of information,” something our media folk keep banging on about rather loudly.
In 2011, in fact, out of all the OECD countries, only five – Norway (cheapest), the US, South Korea, Israel and Switzerland – had lower household prices than we have here.
Actually, we should be one spot higher – the Canadian numbers for 2011 are not available for some reason and they are the cheapest of the lot and also will pull that OECD average down a bit.
And guess where those solar and wind-loving Germans and Spaniards are on this list?
Germany is the third highest and Spain lies fifth.
Also, as I continue to read through the committee’s submissions (of which there are 104) in addition to the Hansard reports of hearings, I have come across something that helps to sum up the point I am making.
This is from the submission by Engineers Australia to the Senate inquiry:
“Since the formation of the national electricity market in 1998-99, household expenditure on fuel and power (of which electricity is about two-thirds) increased from $17.87 (per week) to $23.59 in 2003-04 and to $32.52 in 2009-10.
“These expenditures were 2.56 per cent, 2.67 per cent and 2.63 of average weekly (household) expenditure respectively.
“For the lowest quintile households, these shares were 3.75 per cent, 4.02 per cent and four per cent respectively.
“Over the same period average adult weekly earnings increased by 5.2 per cent per year.
“The costs cover all fuel and power expenses, with electricity costs accounting for three-quarters of all consumers and the lowest quintile alike.
“These figures demonstrate that, for average households and those in the lowest quintile, incomes have increased sufficiently to maintain expenditure shares on power and fuel at more-or-less constant levels.”
Engineers Australia is urging the select committee to clarify the facts about electricity prices “as a matter of urgency to avoid further community confusion.”
It predicts that further real (ie inflation-adjusted) increases in electricity prices are likely “over coming years.”
You will note in the EA numbers that the cost of electricity per week for households has doubled over a dozen years, and this would be the more so when the rises of the past two years are also factored in, but the costs as a share of household income had gone down by 2009-10. It won’t be hugely different today.
The media screamers, and some politicians, have focussed on the former and ignored – or have been ignorant about – the latter.
The question now is how will the Senate select committee handle this important point?
We won’t have long to wait to find out.
The Senate requires the committee to report by 1 November.
The senators have an opportunity to explain the situation to the nation as well as to their fellow MPs in terms that will help take us forward – or they can play political games.
One thing is clear: the Senate select committee on power prices and the Climate Change Authority review of the renewable energy target have engendered a substantial amount of useful information and opinion on the current electricity supply situation – some 200 submissions in all plus the Senate committee’s hearings in Sydney, Melbourne, Perth and Brisbane to date.
Even for those immersed in the industry, this is a lot of stuff to read and digest.
For laymen, including the senators, it must be like standing under a waterfall with a tin cup in search of a drink.
Even backbench senators are busy people. Their advisers are busy people, too. So who is reading and interpreting this material?
Who will help the senators to a landing over the next four weeks?
Their report is due on 1 November and just what four Labor, one Green and three Coalition senators can make of what they are being told is anyone’s guess.
Are they just going to take views according to their ideological positions and political needs?
The temptation is to be cynical and say of course they are.
But they do have a collective opportunity to say something sensible, both to the parliament (and for that matter State governments) and to the media (on whom the community will depend for hearing about the committee’s outcomes) – which, of course, takes us to another level of interpreting: how well the media will handle the report, assuming there is anything to note, is another open question.
The temptation is to be cynical and say that they, too, will be true to form.
All of us reading the submissions and Hansards will have our own views on what we are seeing/hearing.
The cherrypicking from the electronic cheer squad for the environmental movement is already at work in this respect.
Here, for what it is worth, is a selection of thoughts that I have picked up from submissions and evidence that, I think, goes to the heart of the challenge facing the senators (and, yes, of course it is subjective):
(1) Australian Energy Market Commission: The context in which electricity is produced and consumed has changed significantly over the past 15 years. The economy has grown strongly and the community has seen increased wealth. The size of new houses and the use of air-conditioning, among other factors, has contributed to greater energy and peak demand. Technological change has contributed to increasing use of electrical devices in households and businesses. At the same time concerns about the environment have driven policy initiatives aimed at reducing emissions. These changes, among many others, are affecting the cost to deliver electricity to consumers.
(2) Energy Supply Association: much of Australia’s current generators and distribution networks were built in the 1960s and 1970s and are getting to the end of their useful life. Meeting high reliability standards, particularly in New South Wales and Queensland, and the challenges of meeting peak demand have combined to result in a major increase in (capital) expenditure and led to substantial increases in charges in most States. We urge the (Senate) committee to focus on structural policy responses rather than populist, short-term fixes.
(3) Origin Energy: there are at least eight current or recent consultation processes that should inform the committee’s views. The committee has very limited time to address complex matters relating to investments worth tens of billions of dollars. It should allow the existing policy and regulatory experts to continue their decision-making processes and refrain from further political intervention in the market. The perception of ever-changing policies is driving political risk premiums to be priced in to forward investment costs and this is accentuated by the mixed ownership (government and investors) of energy assets.
(4) Energy Networks Association: governments should concentrate on the real causes of higher network costs rather than crudely imposing more regulation. For many years the reform agenda has been stalled as governments baulk at retail price reforms essential to curbing peak demand. ENA welcomes the Senate inquiry as an opportunity to shift the public debate from a search for scapegoats to overdue, genuine policy reform.
(5) Hydro Tasmania: government interventions that seek to suppress the efficient pass-through of costs will have negative impacts on investment and consequently on supply outcomes.
(6) Energy Retailers Association: environmental schemes such as the Clean Energy Future package, the renewable energy target and State feed-in tariffs increase costs to consumers. This should be explained to consumers by governments who implement these schemes. Stopping necessary price rises is a doomed strategy – properly scrutinising policies and practices that contribute to rises is not.
(7) Greg Watkinson, CEO, Western Australia’s Economic Regulation Authority (evidence): between 1997 and 2007 WA household prices were kept unchanged. Over that time inflation increased by 47 per cent. Since 2008 prices have increased by 57 per cent – the additional 10 per cent addresses such pressures as the higher cost of coal and gas, increases in network operating costs following substantial under-investment, significant increases in the subsidy to (rural and regional supplier) Horizon Power and the cost of complying with renewable energy policies. There is still a 17 per cent increase needed to make residential prices cost-reflective.
(8) NSW Energy & Water Ombudsman: network security and supply without interruption are valued highly by consumers and any over-reaction in response to “gold-plating” concerns may result in a future price shock if there is under-spending on capex needed to ensure energy security.
(9) Unions NSW: Research by the Australian Energy Market Commission suggests increased reliability is an important factor for consumers and one most are willing to pay for – even if standards are reduced, the savings for customers will be around $15 a year and, should they experience extended failure of supply, their losses will far exceed this small gain.
(10) EWON again: alternative technologies are not necessarily cheaper in the short to medium term – smart meter technology alone comes at a significant cost to consumers and a smart grid able to deal in a major way with distributed generation will require substantial re-engineering of networks.
(11) Australian Power & Gas: absent price deregulation, consumers’ ability to make choices about their energy consumption based on the true cost of energy will never be realised – without this, market issues such as peak demand cannot be solved.
(12) Clean Energy Council: as energy consumption declines, distributors are able to recover more of their revenue from a fixed component of the tariff, thus negating any potential benefit to consumers from demand reduction, energy efficiency or embedded generation. In order to achieve efficient outcomes from demand management, the current regulatory environment needs to be reformed to attract investment by distributors, retailers, consumers and other service companies. Unless ever-increasing network costs are tackled by reducing peak demand and enabling networks to develop new and innovative roles, power bills will rise indefinitely.
(13) Origin Energy again: if smart meter roll-outs are seen purely as technology projects and consumer needs are not accounted for, the risk is that they will not engage and the (mooted) benefits will not be realised.
(14) Energetics: except for very recent times when prices have rising rapidly, State and federal politicians and administrators have been more concerned about avoiding blackouts than deferring (network) expenditure. We believe regulatory change is needed to incentivise demand-side participation and create a greater balance between acceptable risk of power constraints and lower network costs.
(15) Victorian distribution businesses: consumers expect an electricity supply which delivers their needs across seasonal extremes and supports an ever-evolving range of electrical appliances and technology. We see scope for incremental improvement in regulatory arrangements but do not believe major change is helpful in ensuring consumers’ long-term interests.
(16) CHOICE: The electricity retail market has undergone a rapid transformation from a low-engagement product to one where consumers are asked to make long-term commitments while lacking basic tools and information to do so. Consumers find it difficult to navigate an increasingly complex market. CHOICE surveyed 1,000 households and found most are very concerned about their electricity expenses relative to their cost of living (but) there is a lack of understanding about the key drivers of these increases past and future.
(17) Total Environment Centre: overall demand is now falling due to lower economic growth, energy efficiency measures, voluntary energy conservation, milder weather and the boom in rooftop PV systems.
(18) Ray Wills, chief adviser, Sustainable Energy Association (evidence): electricity consumption in Australia is falling across industry, business and domestic customers and commerce for a number of reasons, including an improvement in energy efficiency and, for households, self-generation of electricity from solar panels. There are also some economic factors, including a downturn in New South Wales and Victoria through closure of manufacturing, which is not a good thing.
(19) Aluminium Council of Australia (whose members use 13 per cent of all electricity consumed here and employ 17,000 people): it should not be assumed that the current aluminium smelting capacity will be sustained. As a result of the high Australian dollar and low global prices, the Australian industry is currently loss-making.
(20) Business Council of Australia (representing 100 leading chief executives): electricity prices should reflect the efficient cost of provision to end-users. Prices should not be held artificially below efficient costs as this can lead to under-investment, exacerbating price outcomes in the longer term. Networks should be provided with a set of incentives that push them to operate efficiently.
I could readily pick another list of comments as long as this from the submissions and evidence, but the point this set throws up is that the senators should tread warily in adding to community confusion about the power price issue and in suggesting “solutions”.
If the majority – four Labor senators and the Greens leader Christine Milne – succumb to the temptation to play politics and promote ideologies, the three Coalition senators have the opportunity in a minority report to address the issues thrown up in just these points.
Or will they, too, just play politics?
No less importantly, in this situation, media commentators can do more than parrot opportunistic noises from the committee and, should it deliver what she wants, the Prime Minister.
They should do their homework and, in the public interest, cast a critical eye over what is served up to them around 1 November.
The next two months are going to be just about as big as it gets for the electricity supply industry in policy terms.
This is a period that will see a raft of critical developments.
Which is the most important is a subjective judgement.
Is it the publication of the final version of the federal energy white paper, which Martin Ferguson has again said is “due for release” this month?
Ferguson says the paper will “outline a strategic policy framework to meet energy challenges through market-based solutions to ensure a secure, reliable, clean and competitively priced supply to consumers, while building national wealth through the safe and sustainable exploitation of our energy resources.”
A straw in the wind here may be that Ferguson is happy to accept an invitation from the Committee for the Economic Development of Australia to be the keynote speaker at the launching of its own “Australian Energy Options” report in Sydney on 14 November.
It is hard to see him taking on this gig unless he had the government white paper published by then.
But is the most important development perhaps the report of the Senate select committee on power prices – set up by the Gillard government in the wake of her “I have a big stick” speech in August and which, judging by the senators’ questions in two public hearings to date, is more than a little focussed on network business profits and network executives’ pay packets?
The committee is required to report by 1 November.
Politically, the exercise won’t do Labor and the Prime Minister much good if it is perceived as being a big let-down from her August speech on power prices.
What can the senators deliver?
We are also going to discover in the next two months whether the Gillard government will lend its support to the private member’s bill proposed by Ron Oakeshott to shift pricing regulation in to the federal domain.
Ferguson has been scathing about the proposal, but how it fits with the power price agenda the Prime Minister has been running remains to be revealed.
Some will consider that the most important development is going to be the report of the Climate Change Authority review of the renewable energy target, with about $30 billion worth of wind farm investment hanging on continuation of the present arrangements and market hassles impacting on others unless the RET is trimmed down.?
Is the biggest deal the final recommendations on network regulation by the Australian Energy Market Commission and the ensuing discussion by federal, State and territory energy ministers under the Council of Australian Governments umbrella – now rescheduled for November to meet the Prime Minister’s requirement that there is a plan available for signing off by her and the premiers in mid-December?
How far the politicians will go along with the AEMC view – as set out in its draft decision released in August – that there should not be radical changes to the regulatory rules remains to be seen.
For example, the AEMC has not accepted the AER’s proposal that the regulator should have the authority to totally discard network providers’ operating and capital expenditure bids – but we are in political waters here and who knows where poll-driven first ministers may swim?
Some might say the biggest decision of all will be the one about which we won’t get to hear – at least not in the next two months.
During this period will the Prime Minister decide to target March for the next federal election rather than the third quarter of 2013?
An early election and a large Coalition victory would see some fundamental change to the carbon policies being pursued by mid-2013.
The media commentariat dogs are starting to woof on this, but only Julia Gillard and her innermost circle know the answer.
The mere fact that it is being discussed, however, will start to impact on investors – how many will take decisions to hold off project decisions until it becomes clear whether or not an early election is on?
Just how high the stakes are in this energy environment has been set out by consultants AECOM in a submission to the CCA review. It is on the authority’s website – number 009 of 168 received by the end of September – and makes for very interesting reading.
AECOM note that, while energy security has been thought of historically in the context of the threat of abrupt supply disruptions, it can also apply where there is the potential for sudden, unexpected high prices over which there is little domestic control or ability to respond.
The consultants quote the International Energy Agency definition of energy supply being secure if it is adequate, affordable and reliable.
Energy price security, they note, has not been a typical issue for electricity production in Australia, given our abundant domestic fossil fuel resources (ie mainly coal) but the prospect of linking our electricity prices (this is on the east coast) to international gas prices “creates a growing degree of domestic exposure to volatility and uncertainty.”
AECOM argue that sustaining the RET its present level – which is what AGL Energy and an army of environmentalists want and Origin Energy, TRUenergy and others don’t want – will be an insurance policy in this situation because the greater availability of wind power plus peaking gas plant can decouple east coast power prices from the global gas market.
I rather imagine that this is the point at which the black coal power business and the brown coal generators in Victoria look up and point out that, in the environment AECOM envisages, their continuing strong grip on electricity production will be not exactly irrelevant.
One of the interesting things about the power projections of the Bureau of Resources & Energy out to 2035 is that they have an alternative model in which, under really high gas prices, there is a shift to greater use of black and brown coal-fuelled generation rather than more use of wind farms and other renewables.
Meanwhile it will be interesting to see and hear how the NSW government proposes to address the gas supply issue.
The State is front and centre in this debate because it has 95 per cent of its supply contracts – serving 1.1 million household and business customers – expiring between 2014 and 2017.
NSW Energy Minister Chris Hartcher, who has said the State faces an “energy crisis” because of this issue, has decided he wants to speak at mid-October’s conference in Sydney on “Eastern Australia’s energy market’s 2012-25” and there will be plenty of interest in his contribution.
Something that is not on the current political agenda, but should be, I believe, is the call by the NSW energy and water ombudsman, Clare Petre, for a national summit on energy affordability.
Will the Prime Minister, who ignored this call in her “Big Stick” speech and subsequent riot of media appearances on the issue, come to see the advantages of going down this path?
Questions, questions – but, for a while longer, not a lot of clarity about answers.