Archive for November, 2012

Caught in a rip

Rio Tinto’s Tom Albanese has put his finger on the biggest underlying issue in the energy debate.

“There have been more changes in the global energy landscape over the past few years than we have seen over the past 20 years,” Albanese mused to journalists ahead of the company’s investor briefings.

It is a line that Martin Ferguson could have used to start his energy white paper.

The importance of Albanese’s point is that few countries are more exposed to the shifts in global energy supply and demand than Australia.

As the white paper says, over the next 25 years the government expects our energy production to double, largely due to export growth.

We are the largest coal exporter, the third-largest uranium producer and probably are about to become the second-largest LNG exporter.

Our exports matter to billions of people beyond our borders – and our exporters’ success matters domestically in contributions to the national economy via trade income, services income by companies supporting the exporters, taxes and local employment.

Our role in the global energy patch, along with our activities in agriculture and the metals industries, represents our economic strength and therefore the way we live.

Get it wrong, even partly wrong, and the wheels start wobbling on our national cart.

Paul Keating, as Treasurer and then Prime Minister, liked to remind us to remember the “big picture.”

Notwithstanding the efforts of more than a few people, including Ferguson, too few Australians have a real appreciation of today’s energy big picture.

This is why the split personality displayed by the federal government towards energy issues is a source of concern as we end another turbulent year.

On the one hand, we have been fortunate in a federal resources and energy minister who has done his darndest over five years to support and encourage the energy export sector and more recently to stabilise the domestic supply situation, not least through working with the States.

On the other side, the government has done a major job of muddying the investment environment through its “clean energy future” machinations, so obviously driven by populist intentions and so seldom grounded in a clear understanding of how far and how fast this country can go in carbon abatement – or of the risks this activity could pose for the efficiency of the east coast power market.

This has been obscured in the past 18 months by the understandable concerns about power network regulation – and a “blame game” that wilfully ignores the failure of policy over time that is this problem’s genesis.

Over the past two years the government has pursued a “picking winners” approach to energy technology to an extra-ordinary extent – supporting it with huge sums of money as it panders to the ideological bent of the Greens in order to hang on to office.

State governments have added to the mess with “solar bonus” schemes.

Mix all this with the shenanigans of a federal Treasurer, who chooses to wage a class war on the resources and energy sector for political gain, and a social environment where the agitprop cadres, cleverly using the electronic media revolution, have strong sway over many in the community – not least because most of the conventional media goes along for the ride – and you have grounds for a great deal of unease in the ranks of energy suppliers.

In addition, of course, at State level, we have governments, seemingly regardless of political colour, who play the populist card too often in dealing with the domestic cost of energy for households – even though they have ample evidence that it’s a mug’s game because the short-term political benefits come with longer-term “unfortunate” consequences.

To make things worse, this is all happening when our manufacturing sector is under significant strain – so much so that one of the largest power generation businesses is expressing concern that end-of-decade projections of demand may be wrong because still more of the big manufacturers may go out of business locally.

The need to get a grip on how best to manage our policies and practices could hardly be greater, especially when Albanese’s point is taken in to account – but, for all the review papers produced in the past 12-18 months, it is hard to see that we are even on the fringe of achieving this.

There are key lessons that are still not gaining traction in the debate: that interference in markets has consequences, that spin can’t abate carbon emissions, that our success in global trade may not persevere, that domestic energy security can’t be taken for granted while pursuing ideological whims and market interference, that pandering to the masses and the media rather than imposing cost-reflective prices can’t be pursued with impunity and that, whatever the question, the answer is not more regulation.

The “big picture” is that all this comes with consequences and that we are mugs if we think that we can continue to surf the global energy tide without addressing the big problems back on our beach.

The government, it seems to me, is caught in a rip of its own making.

And the energy sector has manifestly not done enough to communicate effectively with the community or, indeed, some other area of business.

Will things improve in 2013, a federal election year?

Slouching towards the market

Like pretty well everything else to do with electricity supply at the moment, the debate on renewable energy is all over the place – and this past week’s claim by the Climate Commission, led by Tim Flannery, that Australia could meet all its power needs from such sources “in decades” is another example of how the waters get muddied.

Flannery’s unbridled optimism came through in an interview with ABC Radio: “We can now see the emerging inevitability that renewables are going to be running the economy.”

The Grattan Institute’s Tony Wood summed up my own reaction when he told the “Australian Financial Review” that the commission has presented renewable energy in a more positive light than is reasonable.

Wood said: “The report implies you can do it all with renewable energy and that renewables are already affordable – but they are only affordable in some very particular circumstances.”

As he points out, increased use of renewable energy here – and elsewhere – have been driven by “very heavy subsidies.”

Of course, the subsequent announcement by Hydro Tasmania that it is looking at a 600 MW wind farm on King Island will be seen as grist for Flannery’s mill, although it pays to read media statements carefully.

The key line in the Hydro’s statement is not the commitment to consult with the King islanders, which has got a lot of media coverage, but the bit that says: “If approved, the renewable energy produced would be transmitted in to the NEM via a high voltage direct current underwater cable across Bass Strait with a landing point in Victoria.”

They need another $700 million Basslink to make the project work, in other words.

Contrast Flannery’s views with expert opinion that global non-hydro renewable energy, which had a three per cent share of power generation in 2009, will get to 15 per cent by 2035, with much of the increase riding on the back of subsidies and government interventions.

Modelling undertaken last year for the federal Treasury to support the “clean energy future” policies suggested that Australia could see non-hydro renewables contributing between 16 and 30 per cent of generation by the start of the ‘Thirties and, at the higher end, assumed that geothermal energy will overtake hydro power in the mix by then.

You could have an interesting discussion at the moment about whether geothermal energy or carbon capture and storage is currently the longest-price runner in the race to be part of the mix.

Meanwhile, and not surprisingly, the International Energy Agency says electricity prices around the world are expected to rise by 15 per cent on average over the next decade – which some journalists here reported as “up to 15 per cent,” demonstrating a lack of understanding of simple maths in certain quarters.

IEA executive director Maria van der Hoeven, when visiting recently,said that the increases will be “principally due to rising fuel prices and also due to renewable subsidies.”

She added: “Where renewable subsidies are passed onto consumers through electricity prices, the additional tariff component can be substantial.”

Such interventions in a market like the east coast “NEM” can involve more than just the cost of the subsidies.

Some of the submissions going in to the Climate Change Authority in response to its draft report on the renewable energy target are striving to make this point.

(And, in this context, my eye has been caught by a “New York Times” review of British policy which reports that, having led the world in deregulation of energy markets in the 1990s (an initiative that is the parent of our “NEM”), the country is returning to a system of greater market intervention to fulfill what the Cameron government considers to be the more important imperative: greenhouse gas abatement.)

The Macquarie Generation submission to the Climate Change Authority on the target first makes the point that the Australian Energy Market Operator “is still overly conservative on likely demand growth rates, particularly in the outer years of this decade.”

The generator, which is the pearl in the O’Farrell government’s current privatisation process, poses the thought that “the recent falls in (power) demand may be exacerbated by further reductions in manufacturing output, including possible aluminium smelter closures.”

It goes on “no investor is seriously considering large-scale coal or gas plant (development) given the uncertainty about carbon measures, rising gas costs, falling demand and competition from subsidised renewables.”

It says that, if generators retire or mothball existing units (in the face of the full-on RET the Authority favors), “the merit order effect (of wind power) will be less, wholesale prices will be higher and consumers will bear a greater share of RET costs.”

It warns that retirement or mothballing of 1,600 MW to 2,000 MW of existing plant may have “a significant negative effect on the efficient functioning” of the east coast market if government policy continues to force-feed wind farms in to the “NEM.”

In similar vein, Energy Australia (aka TRUenergy) warns the CCA that “NEM” system reliability is “a likely casualty in a system with a growing proportion of non-firm capacity and consequent pool price suppression.”

Origin Energy, in its submission, calls for a Productivity Commission review of the system impacts and full life-cycle costs of the present RET policy.

The shorthand version of all of this is that our policymakers, pursuing political ends, may be sleepwalking us in to an electricity market situation that is substantially distant from the energy white paper commitment to a competitive energy market.

Or to put it another way, when it comes to energy policy, this federal government has a split personality and too often it is Mr Hyde calling the shots.

Combine this with the unwillingness of State governments to embrace sensible and economically efficient retail pricing policy – with its implications for retailers investing in new generation and longer-term consequent impacts on security of supply – and one must ask what rough beast is slouching its way towards the marketplace?

The consequences of market intervention are a point I think worth raising at the upcoming Energy Policy Institute of Australia forum (Sydney, 3 December – see its website) that seeks to look at both the white paper and the recently-released report of the NSW Legislative Assembly Public Accounts Committee on the generation outlook for the State.

EPIA executive director Robert Pritchard has assembled a panel of Tony Wood, State renewable energy parliamentary secretary Rob Stokes and me to discuss the papers with Jonathan O’Dea, the PAC chairman.

Mind the gap

Winston Churchill grumbled that a lie gets halfway around the world before the truth has time to pull on its pants – and he didn’t have to deal with today’s electronic media.

He did wrestle with the tendentious tendencies of the tabloids, however, and that is still one of the banes of our society.

You don’t need to look much further than coverage of the power networks sector these days to see the point.

If you go on to the Ausgrid website, you can find some current examples of the gap between fact and fiction.

The government-owned business, now being folded in to a State-wide networks operation by the O’Farrell government, came under fire last month from the Fairfax stable’s Newcastle tabloid for wasting millions building infrastructure that wasn’t needed.

This is how Ausgrid has responded:

Claim: $40 million was spent on the Charlestown zone substation even though it is not needed and not connected. Fact: the substation was powered up in mid-November to replace one built in 1964. The replacement supplies a new shopping centre and adjacent high-rise residential development with double the demand of the old mall and also defers the need to replace another, nearby substation built in 1953.

Claim: A $25 million substation was built at Warringah that is not cost-effective. Fact: An old substation built in the 1920s and refurbished in 1955 was replaced by one at Balgowlah as the most economical way to reduce load at the Warringah sub-transmission unit.

Claim: Ausgrid is planning to spent another $1 billion over two years on network developments not needed, adding $500 to customer electricity bills. Fact: More than $1 billion has been cut from the capital program for the balance of the 2009-2014 determination period with the aim of keeping network price rises as close as possible to CPI for the next six years.

As the business points out, the Hunter Valley power network contains some of the oldest electricity infrastructure in Australia and it is in the process of commissioning five major substations in the area to ensure supply safety and reliability.

Ausgrid’s new annual report says that the DB’s capex review program has identified $769 million in savings for 2013-14 that can be achieved without affecting reliability of supply.

Its capex for the five years from 2007-08 to 2011-12 totalled $6.8 billion for the 22,275 square kilometre region it serves from Sydney’s south to its west and north to the upper Hunter Valley. (That’s an area a third the size of Tasmania.)

The Ausgrid capex, approved by the Australian Energy Regulator, is $8 billion over five years to 2014 for a region where half the major zone substations were built in the 1960s and 1970s – and another 20 percent in the 1950s or even earlier.

The network in 2011-12 delivered 29,276 gigawatt hours of electricity to 1.6 million customers – about the same amount of power as consumed in South Australia and Western Australia combined.

Its reliability performance was an average of 82.35 minutes without supply per customer, well below the five-year average of 97.71 minutes and was helped by the mild weather of last financial year.

To sustain this service cost $197 million in maintenance outlays in 2011-12 with crews completing on average more than a thousand maintenance tasks a day.

The reliability standards it has to meet were substantially tightened by the ALP State government in the past decade and the business also has to serve continuing peak demand issues.

Ausgrid’s annual report points out that the peak demand on its network in 2011-12 was 5,149 MW on 19 July when the average day-time temperature barely made 10 degrees C.

This was the first time in three years that the peak day was in winter.

The previous financial year the system was required to handle a record demand of 6,072 MW on 3 February 2011 when the maximum temperature pushed past 38 degrees C.

You don’t read about this stuff in the media.

The tabloid trick this past Sunday has been to trawl through the new annual report, find the CEO’s salary and how the package increased over 12 months and compare it with a recent report about State-wide complaints to the energy ombudsman.

(For the record, there were 18,000 State-wide complaints about electricity issues to the NSW energy ombudsman in 2011-12 out of an account-holder total of three million customers and 72 per cent of these related to billing or credit problems or hassles in transferring accounts between retailers. Not networks.)

The point at issue here is not whether businesses like Ausgrid in government hands could be more efficient if privatised – I happen to think that this is one of a raft of reasons why networks no longer need to be in public hands – but whether the blame game unceasingly pursued by the tabloid media is justified by the facts?

Personally, I think there should be a mandatory sign on the populist media. The one you find at railway stations. “Mind the gap.”

There is another aspect, however, that should not go unmentioned – the increasing temptation for some in the supply system to play to the headlines.

The Energy Networks Association chief executive Malcolm Roberts has growled at the Australian Energy Market Operator over this in the past week.

Roberts complains that the the new AEMO economic planning study is “marred by a headline-grabbing claim about $250 million in savings from deferred investment in poles and wires.”

AEMO’s claim that this could be saved if there is no network investment in 2012-13 is “not a realistic proposition,” he says, given the infrastructure development cycle.

It is also another example of bundling together numbers to create an impression.

This putative saving would amount to $28 in the year for households and businesses across the east coast market – versus the $2,000 annual average residential bill.

(By comparison, in Queensland for example, householders next year in the State’s south-east will cop an extra $54 each on their bills to cover the cost of the OTT solar subsidy scheme introduced by the Bligh government before it was thrown out of office.)

I think Roberts has it right when he argues that the public debate about rising electricity prices is often dominated by simplistic arguments which focus on the symptoms rather than the underlying causes of higher costs – and none are more guilty of this than the populist media.

Stepping carefully

After all the fuss the mainstream media have been making about power prices and alleged “gold-plating” of networks, you might expect that the communique from Friday’s “extra-ordinary meeting” of federal, State and Territory energy ministers would rate a fair bit of coverage.

I couldn’t find anything initially until I finally located a short piece in the printed weekend edition of the “Australian Financial Review” — which claims that there is still a split between the federal government and some States over smart meters and also over the location of the regulator.

The communique is notable for the extreme care of its language — and it doesn’t canvass these points. 

One can speculate about what lies behind this, but none of the energy ministers went out overnight and blabbed to their local media – which, in itself, is perhaps notable.

The objective of the meeting was to finalise “an enhanced national (ie east coast) energy market reform package.”

Whatever it is the ministers agreed will now be submitted to Julia Gillard and the premiers and chief ministers when the Council of Australian Governments meets on 7 December.

The extent to which “SCER” – that’s the acronym for the Standing Council on Energy & Resources – is prepared to go right now is to say that the aim of the package is “to reinforce the focus of the market on serving the long-term interests of consumers.”

Note the careful use of “long term.”

Martin Ferguson told an Australian Institute of Energy forum three days before ministers met that householders could expect power bills to “stabilise from mid-2013” as the need eases for infrastructure refurbishment.

The next financial year is the last for most of the present determinations on network expenditure by the Australian Energy Regulator.

The AER and the network businesses have to wait on the outcome of these government meetings before they can begin the long-winded process of determining capex and opex for 2014 to 2019.

Ferguson’s speech included this: “While the network investment cycle appears to be nearing its peak and market forces are reducing the wholesale cost of electricity, further reforms are under way to ensure consumers are not paying more for electricity than is necessary.”

The media question is “When will power bills fall?”

Ferguson’s response is “Unfortunately, there is no quick fix for current prices with a complex range of factors in play.”

When this also emerges as the answer after the CoAG meeting, how will the media treat Julia Gillard, whose August outpourings on this issue provided the tabloids and consumers with an indelible impression that she is targetting price cuts?

As one newspaper has put it in the past week, her intervention was “pure politics,” seeking to lay blame for power prices at the feet of now mainly conservative State governments and to convince voters that the carbon tax is not the main reason for higher bills (which it isn’t, despite Coalition spin).

The SCER communique says the package it will despatch to Gillard and other first ministers has “four broad themes” – strengthening regulation, empowering consumers, enhancing competition and innovations and ensuring balanced network investment.

Energy ministers “welcomed” a report they received on the shortcomings of the merits review regime, the process through which network businesses can take the AER’s decisions to the Australian Competition Tribunal – and where they have been successful most of the time, drawing yells of “cherry picking” from critics.

(Interesting isn’t it that bureaucrats and politicians spend a great chunk of time in the past decade devising a new system and it is the networks, when they use it, who are the villains because an independent arbiter thinks their points of complaint are often valid?)

SCER has been careful to acknowledge that the reform proposals are “technically complex issues with implications for investment decisions and supply reliability.”

Try fitting that in to a 60 point tabloid headline!

(Sixty point is relatively small headline type for inside page headlines – those screamers you see on the tabloid front pages are 144 point.)

The ministers add: “It is important to get the balance right to ensure that Australians continue to enjoy a reliable supply of electricity while at the same time having prices that are not higher than necessary to achieve this.”

That’s stepping carefully.

Finally, the ministers says: “Implementation (of the proposed reforms) will, in some cases, take sustained commitment over time. However, there are also opportunities for early action.”

Just how hard it will be for the State governments to embrace some of the proposals now wending their way to CoAG can be seen from the forays in to the media by the Queensland Energy Minister, Mark McArdle, who has greeted the energy white paper and other recent federal output with a rather high-pitched cry that the $640 million cross-subsidy between consumers in the populous south-east of the State and households in the other 97 per cent are under threat.

This got him a serve from former NSW Premier Nick Greiner, who told the AIE forum that, rather than depicting himself as standing up to “bullying” from Canberra, McArdle should be “worried about Queensland consumers and taxpayers – they are the one who should be bullying his government.”

McArdle also got a jab from Brisbane’s “Courier-Mail” newspaper, which told him in an editorial that political posturing should not be allowed to derail the efforts via CoAG “to fix one of the most painful cost of living pressure points for Queenslanders.”

As the “Courier-Mail” observes, this is a debate that “very quickly becomes technical and self-serving,” noting that the $11 billion spent in the State on distribution and transmission augmentation over the past eight years reflected, among other things, a surge in investment in a blackout-prone and underfunded network following the Somerville report for the Beattie government and not just decisions by the regulator.

The Newman government, by the way, has got round to publishing McArdle’s to-do list, which, for electricity, requires him to finalise a 30-year plan that includes as a priority “retireving value from State-owned assets in an efficient and future-focussed manner in order to maximise outcomes and reduce costs that are ultimately transferred on to Queensland consumers.”

A key feature of this activity are the reports of two entities – an independent review panel and an interdepartmental committee – charged with examining the networks.

They are both required to report next February.

And in further news

The national energy white paper, ongoing reviews of east coast network regulatory issues and the high-level ministerial meetings on market reform are not the only games in town – at least not if your town is Sydney.

Beavering away as well has been the New South Wales Legislative Assembly’s Public Accounts Committee under the chairmanship of Sydney North Shore MLA Jonathan O’Dea.

Nowhere looms larger than NSW when it comes to electricity supply and demand and the PAC has been undertaking a review of issues relating to power production security in the State since November last year.

Its remit includes the potential for sourcing the State’s energy needs interstate and the issues relating to renewable generation.

The Energy Policy Institute of Australia has convened a forum on 3 December to provide a briefing from O’Dea on the PAC’s findings and a discussion on the report in the context of the energy white paper.

The forum, to be chaired by EPIA executive director Robert Pritchard, will include a panel made up of O’Dea, Rob Stokes (the State’s parliamentary secretary for renewable energy), Tony Woods (Grattan Institute) and, to quote a Sunday tabloid celebrity columnist I annoyed a while back, “somebody called Keith Orchison.”

The Institute has produced a commentary on the national white paper as part of a basis for discussion at the forum and this can be found on its website (www.energypolicyinstitute.com.au).

Details of the forum are on the website,too.

The PAC collected 34 submissions across the spectrum of power sector stakeholders late in 2011 and earlier this year and held a series of hearings, too.

Today, the vast majority of the electricity consumed in NSW is generated by black coal power stations. The conventional wisdom is that supply in the State will continue to become more diverse but this begs the questions over what time, at what cost and from what sources?

In a submission to the PAC inquiry, Stokes commented: “While it is sensible to consider the development of energy policy for NSW, it is also important to recognise that the State is part of a wider energy supply and distribution system.”

On a broad reckoning, about $50 billion can be expected to be spent on new generation capacity on the east coast in the next decade.

How much of this will be spent in NSW is a good question – and so is the fate of the older black power stations (eg Liddell, which will be 50 years old in 2022).

If gas generation is the key to a change in the mix of NSW capacity, then the source of the gas is a big question – while it be from the coal seam gas resources the State holds or, in the face of vigorous opposition from rural communities and others, will it need to come from interstate, notably Queensland – where the LNG operations now rule the roost?

What will it cost?

Just who will own the existing government-built capacity and who will build new plant, of course, is yet another substantial issue as the O’Farrell administration presses on with the generation privatisation process involving 6,627 MW of merchant assets and the plants associated with the past “gen-trader” sales (another 5,520 MW).

The State government hopes to raise $3 billion from the sale process – which does not include the Snowy Mountains scheme – and there is much speculation about how the current weak wholesale energy market prices and the uncertainty over carbon pricing will impact on investor appetites and on future developments.

The current Energy Supply Association yearbook’s load forecasts project that the system energy needs of NSW and the ACT could rise to 87,745 gigawatt hours in 2020-21, a fair increase from the book’s expected 2012-13 throughput of 78,300 GWh.

How this may change if the present weakened east coast consumption pattern persists is guesswork and the uncertainty over demand is not going to encourage investors either.

This is all “non-trivial” stuff, to quote a pair of economists I know, and the take on it by O’Dea committee and other stakeholders attending the EPIA forum is going to be very interesting.

Perhaps I will see you there?

Mapping a new landscape

Over the course of the next three weeks our governments will attempt to map a new landscape for electricity supply – first via this Friday’s meeting of resources and energy ministers and then via the Council of Australian Governments meeting under the baton (or big stick) of the Prime Minister on 7 December.

In between these two meetings the Australian Energy Market Commission, the governments’ workhorse on east coast energy market management, will publish its final “power of choice” report on Thursday week (29 November).

This review is exploring what changes can be made to help families, business and industry make informed choices about the way they use electricity and manage their bills.

One may speculate endlessly about what will emerge from the government meetings but, after decades of “Premiers’ conferences,” we should all know that they are unpredictable forums where personalities and politics play as big a role as policies.

How, and to what extent, for example, will the Prime Minister try to make a media meal out of enhancing consumer input to electricity market regulation?

(A clue can be found on page 135 of the Senate select committee established to follow up the Prime Minister’s August rant on power issues with a recommendation for establishment of “a national advocacy body to represent and support consumers in the NEM.”)

It should also be understood that, despite all the hoopla, these two ministerial meetings are dealing with only some of the factors that will map the energy landscape for the rest of the decade.

Politicians and the media have persuaded themselves that, to quote a writer in the Australian Financial Review in the past week, power prices are “one of the most toxic issues in households at the moment.”

(As I canvassed in “Reform and a yawning gap” on this website on 15 November, work by AGL Energy and by the Committee for the Economic Development of Australia has highlighted the pressure imposed by large power bill increases on “working families” – the political phrase – with dependent children, an important cohort of the voting population and perhaps a decisive one at the next federal election.)

Thus, quite a lot of the political spin from the CoAG meeting will be aimed at telling us the federal government has taken important steps towards drawing the prices poison – and premiers in the blue corner, the Coalition-run States, will be on guard against again being cast as villains by a Prime Minister in “whatever it takes” mode.

The outcome of the energy ministers’ meeting can reasonably be expected to draw on the AEMC’s proposed recasting of regulatory arrangements to create a more efficient environment for network capital outlays and operating expenditure.

The networks’ collective issues management body, the Energy Networks Association, is already fretting that the politicians will be using “more hindsight than insight” in reaching their decisions, warning that changing regulatory rules won’t make the underlying causes of capital spending, peak demand and the age of infrastructure, go away.

Ratings agency Standard & Poor’s is also warning that changes may reduce networks’ cash flow predictability and weaken their credit standing.

Of more concern to the energy ministers, and then the first ministers, at this point will be the need to demonstrate that the system delivering half the cause of recent power bill increases has been given a big shake-up.

AEMC chairman John Pierce told journalists last week that the core component of what the commission is recommending is to put the regulatory focus on the outcomes rather than on components of the expenditure.

One of the big ticket items for the politicians is likely to be whether or not to also shake up the Australian Energy Regulator.

The “blue States” would like to see the regulator pulled from under the umbrella of the Australian Competition & Consumer Commission and given its own board, more resources and stronger accountability requirements.

In the horse-trading between first ministers this could happen – to the great displeasure of the ACCC, whose chairman walked the line of political comment in his most recent speech to air his unhappiness with this proposal.

Politically, the decisions made at the two government meetings will rub up against the question highest on the mind of journalists and the community: when will power bills go down?

Speaking at last week’s CEDA forum in Sydney, Martin Ferguson made the careful point that the changes being envisaged will “start to have an impact” from July two years from now (2014) after AER determinations for the five years to 2019.

Decoded: today’s prices are not going down.

Beyond all the network concerns are other influences on the energy landscape.

One is the big issue of security of supply in terms of power production – the present situation may not be dire, but it contains elements that could cause a lot of problems before we are all much older.

As the AEMC’s Pierce said in a recent speech, the combination of a price on carbon and a market environment with falling demand and continued investment in capacity through the RET has increased the costs of production of a coal-fired generator, while decreasing its revenue through lower pool and contract prices.

The effect of this, when taken with the impact on investment of populist State government decisions to put caps on end-user prices, could see a virtual drought in generation investment over the rest of this decade – apart from the policy-forced building of 11,000 MW of wind power.

Meanwhile, what happens to consumption remains both a large area of concern for suppliers and something of a magical mystery tour.

Apart from the impact on business demand of a range of economic factors, the east coast States (other than Victoria) have to come to terms with the roll-out of smart meters and the use of flexible tariffs to, again quoting Pierce,“enable consumers to see and access the value of taking up demand side options by providing them with the appropriate information, incentives and technology to make more efficient choices.”

In other words, the system needs to be quite radically changed to make high use of electricity painful at extreme peak periods.

Pierce is correct in saying that these moves will make it easier for many consumers to make informed decisions in managing their electricity use and provide incentives for them to adopt more efficient consumption behaviours.

It is getting to this point that is politically difficult – and it remains to be seen how far the State governments (other than Victoria) are willing to go.

The issue of customers who will be hurt by any such move is politically fraught and the capacity of governments to find funds for compensation is limited.

Beyond all this, and again with significant implications for generation investment, lies the work the AEMC is doing on, quoting Pierce, “fundamentally transforming the way transmission investment decisions are made and generators access the market.”

As he says, this is important because the efficiency of the electricity market is affected by the capacity of the transmission network to transport electricity from the lowest cost generator to where it is needed.

The AEMC has committed to providing a final report on the transmission changes to the energy ministers committee chaired by Ferguson in the first quarter of the new year.

The over-riding point of all this is that, while the political decisions of this week and early December will be important, they are only part of the landscape shift now in train – or, in some cases, held up by political poses – that will dictate how well electricity is supplied over at least the next decade and probably longer than that.

This is a marathon not a sprint and the difficulty is that too many politicians are driven by their short-term perspectives.

Case of the vanishing SMEs

We all know those “aha” moments when you see, hear or read something that illuminates your understanding of an issue or situation.

I have had one today reading Alan Kohler’s weekend reverie for his “Eureka Report” electronic business news magazine.

Here is the the paragraph that elicited my reaction:

“I was at dinner this week with a banker who said their research was showing the number of small to medium-sized businesses in Australia had fallen steeply because of the exchange rate and the difficulty in getting capital – he said it looked like the number had dropped 20-25 per cent in two years, although the research still has to be finalised.”

Think about this in the context of electricity demand.

When demand peaked in 2008-09 there were about 1.9 million small or medium-sized businesses in Australia – what Kohler’s banker mate is saying is that somewhere around 400,000 to 500,000 of them have fallen by the wayside.

I don’t have a national figure for SME power consumption – I am making an attempt to find out at present — and the calculation is not made any easier because a substantial number of them are sole traders with no employees and working from home.

Their power bills for business are tied in with their domestic account.

Indeed the claimed number for SMEs doesn’t tally with the energy retailers’ numbers for account holders: the 2012 Energy Supply Association yearbook says we had 9,090,907 residential customers at 30 June 2011 versus 1,177,078 business customers.

I do have some figures for Victoria (source the State Chamber of Commerce & Industry) and they show that SMEs there at the peak of the cycle were averaging just over 15,000 kilowatt hours a year in demand versus an average for the State’s residential customers of almost 5,500 kWh.

(This, of course, is skewed by the number operating small factories or other businesses with relatively high demand versus the sole traders whose power bills are not hugely different from their household needs.)

I can tell you something else from the Energy Supply Association yearbook – the power industry’s number of business account holders in Victoria shot up from 200,000 at the turn of the century to more than 300,000 at the demand peak – and it has hovered around the 313,000 to 316,000 mark for the past three financial years.

Trying to get a handle on this stuff requires remembering that 60 per cent of business use of electricity nationally – that is about 40 per cent of total consumption – is in the hands of just 250 large corporations. (This is why the Howard government launched the “Energy Efficiency Opportunities” program in 2006 targetting the big end of town and requiring these companies to conduct energy assessments.)

Something like a Kurri Kurri smelter closing has a far greater individual impact on demand that the closure of lots of SMEs, but the latter adds up

As you know, everybody and their cat has been out there offering their slant on why national power demand has fallen in to a decline since 2008, a period that dovetails with the impact of the global financial crisis – with many of the pundits wanting to attribute the real cause of the slump to suddenly energy-efficient households and to their recent addiction to subsidised solar PVs.

I haven’t seen one to date who has suggested that a chunk of this decline may be due to SMEs falling off their perch in large numbers.

The Australian Industry Group, in a paper on energy efficiency released in mid-year, noted that “many businesses are feeling the energy price squeeze.”

However, there are lots of other factors at play on the business community.

The AiG survey found that just seven per cent of respondents spent the equivalent of more than five per cent of their sales revenue on energy – with 73 per cent spending two per cent or less.

Kohler, in his Saturday commentary for “Eureka Report,” adds that he is told the Reserve Bank “knows all about” the loss of SMEs and is calling it “structural adjustment.”

As Kohler says, the Reserve Bank and the Treasury have been talking about “structural adjustment” for three years.

“Now we know what this means,” he writes, “a huge fall in the number of businesses and the diversity of our industrial base.”

To which, of course, one can add a not insubstantial impact on business demand for electricity.

The energy white paper, just released in final form, says that power demand patterns have changed significantly over the five years the government took to complete the exercise.

The white paper notes that average annual demand in the east coast market (which accounts for 90 per cent of supply and demand) has fallen 3.4 per cent since its peak of 197,900 gigawatt hours in 2009-10.

“Demand,” says the government, “is expected to remain steady at its current level in 2012-13 before returning to growth over the rest of the decade.”

Hmmmm, as I have been known to say before on this blog.

The white paper continues:

“A combination of factors underpins this (decline), including a fall in demand frpm large industrial and manufacturing sector users, consumer responses to sharply rising prices, the impact of energy-efficiency measures and the gradual take-up of distributed solar PV generation in the residential sector.

“How sustained these changes night be is unclear. Much is likely to depend on broader economic conditions, particularly future levels of industrial activity.”

All true – but I would like to know a great deal more about the disappearing SMEs.

This, as some economists I know are wont to say, is a “non-trivial” piece of information.

Reform and a ‘yawning gap’

Media reporters were rather spoiled for choice on Wednesday with another key Martin Ferguson speech on energy policy issues, the release of another energy commentary by the Committee for the Economic Development of Australia, further debate about nuclear energy, annoyed reaction by petroleum explorers to a federal government decision to extract cash bids for some some offshore search areas and a New South Wales government statement on its generation privatisation plans.

However, for my money, the most important immediate point, which I can’t see reported this morning, is that Ferguson has called the vital meeting of State, Territory and national resources and energy ministers to discuss market policy for next Friday (23 November) in Melbourne.

This is where the power sector reform rubber hits the road – the point at which ministers have to decide what to accept from the very large amount of policy review work that has occupied the past year.

They don’t have the last word, of course – that is reserved for the meeting of the Council of Australian Governments under the chairmanship of Julia Gillard. This will take place in mid-December.

The Prime Minister is promising to use “charm and force” to get an outcome on electricity reform and it will be fascinating to see how Coalition State premiers react to her performance since the last CoAG meeting at the end of July.

The immediate heavy lifting falls to the resources and energy ministers.

However, the CEDA review has thrown another major issue in to the debate, as I explain below.

Ferguson, launching the CEDA report in Sydney a week after using the organisation’s Melbourne forum to release his energy white paper, was stepping very carefully yesterday on the east coast energy market decisions.

“A key aspect of this reform package,” he said, “will be supporting the States should they move towards greater competition in retail pricing. The Australian government encourages the States to fulfil their commitments to adopt the national energy customer framework.

“Contrary to some media reports,” he went on, “the energy white paper does not propose a national roll-out of smart meters, but rather supports a market-driven (approach). This is where energy retailers or distributors could seek to offer meters as part of a retail package to consumers.

“Providing consumers with choice, such as the option to move to time-of-use charges, is the best way to ensure that (they) make decisions that are right for them.”

The CEDA approach also eschews the “big stick.”

The organisation would like to see State governments – that’s NSW, Queensland and Tasmania on the east coast – divest themselves of network service business ownership, but, if this is not to happen, it says, the regulatory oversight arrangements need to change.

It is notable that between the draft and final versions, the federal government’s energy white paper muted its language on electricity privatisation.

Since it has appeared, the Newman government in Queensland has said a flat “No,” arguing that it wants world-class management with continuing State ownership. This happens to be the trade union position, too.

CEDA says that, if privatisation is “politically problematic,” then the regulatory arrangements should be adjusted.

“This,” says its commentary, “will involve setting rates of return for State-owned service providers and recognising their receipt of income taxes and competitive neutrality fees in addition to their claim on attributable profits.”

CEDA argues that “the case for politically-independent regulation of government-owned networks is strong.”

It also wants the States to agree to a shorter time frame for regulatory decisions and expanded use of benchmarking for prices, expenditure, asset values, service outcomes and rates of return.

The benchmarking issue awaits further work by the Productivity Commission, which has an 800-page review of the sector on the table for discussion at present.

This is not where next Friday week’s energy ministers meeting will be focussed – essentially it will be dealing with the recommendations of the Australian Energy Market Commission.

Ferguson’s drive is towards improving the existing system. “The (east coast) market ain’t broken!” he said rather fiercely yesterday.”

Politically, the step that works best for the federal and State governments and, in my view, is a sure-fire bet for both CoAG meeting outcomes is a commitment to give consumers a greater say.

As CEDA chief executive Stephen Martin puts it, “making energy consumers more active participants in the market has the benefit of reducing the justification of continued expansion of State and privately-owned infrastructure to meet peak demand.”

He says: “Billions are being invested in infrastructure to manage peak periods – if we can educate consumers about the impact of their use and give them the right price incentives, we can reduce investment and reduce everyone’s power bills.”

CEDA has also raised a highly sensitive political point in its review.

As Martin describes it, “energy hardship concessions, in particular for families, should be top of the agenda for the federal government.”

The research, he says, highlights that families, particularly those with young children, might be at increased risk of energy hardship, but they may not be able to access concessions.

On this point, the CEDA commentary – a joint effort by its chief economist Nathan Taylor and AGL Energy economists Paul Simshauser and Tim Nelson – highlights the fact that demand tends to be high in homes where the principal account holder is between 30 and 55 and has a dependent family.

Given the need for space heating and cooling for young children and “the proliferation of energy-zapping appliances and information technology generally,” this is the customer area where soaring power bills hurt and households are most likely to be at risk of hardship.

The key question, CEDA argues, is how well are electricity-related transfer payments and concessions targeted?

Leaving aside Victoria, concessions in most States are paid as a lump sum without regard to consumption.

“This,” says CEDA, “is poor public policy.”

It is calling for an urgent review of concessions to consider adoption of the Victorian approach (where concessions vary according to consumption).

There is a “yawning gap” in policy, it says, adding that political concern about consumer harship should not be used as an excuse to avoid completing the energy market review process.

This is an important contribution to the “power price shock” debate and, even if it is not addressed on 23 November when energy ministers meet, it would be foolish of the Prime Minister, premiers and chief ministers not to pick it up in mid-December.

As a heads-up call to the body politic it is an excellent example of the role that CEDA often plays in the national debate (and, yes, I must acknowledge here that I am a CEDA trustee and have been involved with the organisation over 30 years).

Needed: generation 2030 roadmap

The Grattan Institute’s Tony Wood made an interesting observation in commenting to the media about the energy white paper.

Energy policymaking, he said, is “like like steering a ship — you don’t wait until you are miles off course before changing direction.”

As Wood argued at a conference I recently co-chaired in Sydney, the long-term challenge we face is to decarbonise Australia’s electricity sector within 40 years while maintaining security of supply and affordability.

“Despite current projections,” he added, “none of the technologies (currently being assessed) can produce power at a scale and at costs similar to today’s electricity.”

For Greens leader Christine Milne and others of her ilk – perhaps one in eight voters – this doesn’t matter.

We should be going all out to replace the present system with renewable energy.

“It is,” says Milne, in a media “grab” that has been seen, heard and read by many, “a tragedy” that the energy white paper presents ”a completely two-faced view of the future in promotion of fossil fuels, rushing for gas and at the same time talking about a clean energy future.”

Sounds profound, but in reality this attitude has a lot in common with the Mississippi – which is four miles wide and less than two feet deep, except for the sinkholes!

Nikki Williams, CEO of the Australian Coal Association, has called for policymakers to prepare a roadmap for carbon capture and storage targetting 2030 – I would go a step further: I think the next step, under CoAG’s umbrella, should be a generation roadmap for 2030, at the very least for the east coast – which represents 90 per cent of present grid-connected electricity production..

The white paper’s view/hope is that, by 2030, at least 40 per cent of national power station output should be from new renewable energy.

If, say, you assume that production in 2030 will be about 330,000 gigawatt hours (or 330 terawatt hours, a third larger than today), this will see about 130 TWh coming from wind and what?

It will require something like $60 billion being spent in the ‘Twenties on wind and solar power – and maybe on geothermal – plus a lot on back-up open cycle gas plant and a large amount on new transmission support.

And it will still see a large number of today’s coal-fired power plants in operation, only a lot older.

The white paper foresees that carbon capture and storage could ”begin to make an important contribution by 2035”, and could boost ”clean energy” generation in 2050 to 80 per cent of total supply.

All of which, of course, is a cue for the proponents of nuclear power to press yet again the point that Australia is shooting itself in the foot by continuing to ignore generation from reactors.

The white paper says that, if it becomes apparent that renewables and CCS will not deliver what is needed to meet the challenge Wood articulates, then the national attitude to nuclear power will need to be re-thought.

Martin Ferguson, appearing on the Channel Ten “Meet the Press” program on Sunday, commented, in answer to questions, that “we are lucky we’ve never needed it; it’s never been cost-competitive in Australia (and) it’s still not competitive.”

Appearing after him on the same program, Ziggy Switkowski said there have been enormous changes in the environment for nuclear energy since he undertook a review of the issue for John Howard six years ago – pointing to the emergence of China and India as big players in this arena as well as to the international reactions to the Fukushima situation.

Switkowski’s view is that, if policy attitudes to nuclear energy here change, it will be 10 to 15 years before the first reactor is commissioned – that’s three to five federal elections, I note – and that thereafter further power plants can be built quite quickly. In this scenario, he suggests there could be 50 reactors added in a further 20 years.

Allowing for construction under way and proposed in China, India, Russia, the Middle East, Central Europe and parts of Latin America, he predicts that close to 1,000 nuclear power stations will be in operation globally by 2050, well more than double the number in production today (allowing that the Japanese have 50 reactors off-line at present).

Asked about Ferguson being “fairly confident about CCS,” Switkowski responded: “One of the difficulties with our energy strategy (is that) it’s based more on hope than on technology judgments.

“I would like carbon capture and also geothermal to succeed,” he added. “But the reality is that there is no hot rocks geothermal (plant) anywhere and CCS is very complicated and very costly.”

The costs will come down, he acknowledged, “but can we be sure that in 2030, 2040 or 2050 they will be at a level where they are going to make a material difference to our emissions.”

Switkowski says the technical community tells him this is very unlikely.

This is all interesting stuff, but I reckon that it is now critically important to develop a policymaking plan – a roadmap – to, say, 2030, and then to put flesh on its bones through taking appropriate action.

We have been having the present discussion across the spectrum of generation options and strategy since the previous white paper was commissioned by the Howard government in 2003 and, to quote Wood, what we have today is a policy framework “dog’s breakfast.”

The white paper devotes a half-page out of 234 pages of the final report to nuclear energy in Australia.

If we want to see deployment of nuclear energy here by 2030 to 2035, it says, “a decision needs to be taken by the later part of this decade” and will require new institutional and regulatory arrangements and the development of a local nuclear engineering skills base.

This serves to underline my view that a decision needs to be made to draw up a “Generation 2030” roadmap.

The present federal government can go down this path as a logical follow-up to the white paper. The Coalition, surely, has no reason to disagree with this route and more than a few reasons,I suggest, for supporting it.

Even the Greens surely can agree with the concept even if they have a very different view of what its outcome should be.

The trick is in setting up the exercise.

Can the politicians rise above themselves and create a panel to address the task in the national interest, with all options on the table, rather than play games and load it with people supporting their views or, even worse, with a couple of reviewers and constrained terms of reference that are both simply a sop to the green Cerberus?

Certainly, in order to get the report out of the vicious maul that will be the next federal election, it needs to be given a reporting date in early 2014 – which basically requires it to be set up in the first quarter of next year.

To whom should it report?

In my view, CoAG because its finding have major implications for the States as well as the nation as a whole.

Thereafter, it may be necessary to pursue legislation – federally as well as in the States – to give effect to recommendations.

Having read it through, and, heaven help me, re-read some parts, I think the energy white paper, which contains much useful information and some admirable positions, falls at the final hurdle with respect to power generation.

It does not answer the crucial question “And therefore, what?” in a way that genuinely takes us forward.

It just seems to me that, if this country is really serious about cutting greenhouse gas emissions, it has to be serious about what policy and market paths to pursue and not rely on spin and broad general comments about 2050 to keep fudging the need for real decisions.

A cow of a carbon debate

Many of the large number of media mentions Climate Change Minister Greg Combet gained for his CarbonExpo speech in Melbourne were for his dismissal of all Opposition Leader Tony Abbott’s carbon tax claims as “complete bullshit.”

The actual news in his speech was the announcement that the federal government is ready to join a second commitment period of the Kyoto Protocol, part of what critics of the state of international abatement efforts denounce as “an illusion of progress” when set against the actual need for the world economy to decarbonise at a rate of five per cent a year over the next four decades to achieve the desired curb on perceived global warming.

It is a government commitment that is heavily qualified, including a requirement that an agreement by 2015, as foreshadowed at the Durban UN meeting on climate issues, needs to encompass “all major emissions sources” – this means countries.

Politicians, of course, gild lilies and stretch points – it is the nature of the business they are in.

They would do it a lot less if the media did more as fact checkers, but that doesn’t suit the info-tainment role so many see as their main business.

Of course, Tony Abbott’s strident claims about the immediate impact of a carbon tax in Australia have laid him wide open to the federal government’s counter-attacks even as they have obviously struck home with many voters.

However, an argument that the carbon tax plus the renewable energy target plus State green schemes plus much higher power network charges all combine to impose pain on many households, all small businesses as well as miners and manufacturers in various degrees – while also hurting taxpayer-owned coal generators in the two largest sub-regions of the east coast electricity market – is no more than a statement of fact.

An argument that many Australians feel misled – see the opinion polls – by a Prime Minister and a Treasurer who said one thing about carbon tax before the 2010 election and did something different in order to win Green and independent support in forming a minority government is also no more than a statement of fact.

An argument that says a number of energy-intensive industries, users of a third of electricity consumed in Australia, notwithstanding various compensatory schemes, are at risk of shrinking or closing because of a combination of the high dollar, the global economic situation and the pressure of local input costs (including labour and energy costs) is a statement of fact, too.

The time over which their dimunition or disappearance may take place is open to debate but it is not a scare tactic to say that the risk is there.

Combet’s strident claim last week that Abbott’s oath to repeal the carbon price is “arrogant, aggressive bravado” that can’t be believed because it cannot be delivered should probably also be filed under “B” in the political debate drawer.

It may take the next election and then a double-dissolution election to be achieved, but “can’t” is simply not true.

Whether abolition should be pursued is a different issue.

To be filed perhaps under “T” – for tendentious – is Combet’s assertion in this speech that there is a link between the introduction of the carbon price on 1 July and a fall in the carbon intensity of electricity generation by eight per cent compared to 2011-12.

What the Australian Energy Market Operator (whom he was quoting) actually says is that, in the period 1 July to 18 October, hydro-electric generation increased its east coast market share from 8.4 per cent to 10.2 per cent while black coal generation slid back from 53 per cent to to 51.1 per cent and brown coal generation from 24.1 per cent to 23.3 per cent.

Why?

The main factors are the impact of the Yallourn power station flood in the Latrobe valley, technical hassles impeding generation at Eraring power station in New South Wales and a 50 per cent jump in hydro-electric output to fill most of the gap after some recent decent rains enabled Hydro Tasmania to hold on to its water until 1 July when it knew the tax would spike the price.

What the carbon tax did do is help push the average “NEM” spot price from just under $37 per MWh to just over $58, a nice bonus for the hydro business.

Rainfall will decide how far hydro generation can continue to play this game, not the carbon tax, but Hydro Tasmania is saying that it is in a position to take advantage of higher than normal storage “for the next few years.”

The drop in demand for electricity in the “NEM” is also playing its part in lowering emissions. This is a feature of the past two years, not the past three months, with the equivalent of about 400 MW of capacity unneeded in NSW and about 600 MW across the “NEM.”

This demand decline is a product of much higher prices, economic circumstances messing with manufacturing and the over-generous solar PV subsidies, not the carbon tax.

Lots of consumers are paying more for Labor’s populist pursuit of solar power even as Combet boasts of the take-up.

Combet’s own constituency is in the Hunter Valley and it will be interesting to see how far his carbon policy (which has treated black coal-fired power stations badly compared with those using brown coal) will militate against the values the O’Farrell government (and State taxpayers) will get for the region’s generators that they are currently trying to sell.

If the carbon regime plus the demand environment helps to knock, say, $2 billion off the asset values, will Combet stand up and cheer for this, too?

Combet also threw in to his speech the fact that there is more than 13,000 MW of wind capacity being considered for development in the “NEM.”

This, of course, has nothing to do with the carbon price and everything to do with the RET – which his political opponents embrace as much as he does, or so they say.

Should one describe a politician who pushes the first part of this point without even referring to the second in the same “colorful” (to quote the ABC) language Combet used about Abbott?

As well, Combet’s claim in the Melbourne speech that the government’s policies will deliver “almost 1.3 billion tonnes of domestic emissions between now and 2030,” when dissected, amounts to national abatement averaging 72 million tonnes a year over almost two decades.

The abatement required to deliver the promised five per cent cut in national emissions by 2020 is now around 150 Mt a year of which the renewable energy target, if maintained in its current set-up, will deliver about 30 Mt.

The media take on the current state of the political debate is perhaps encapsulated by Fairfax Media commentator Lenore Taylor, who wrote at the weekend: “Ever so slowly, Julia Gillard is making up ground in the great fight over electricity prices – the defining battle of this Parliament.”

It seems to me that the critical consumer question here is “when will our prices go down?” and the honest answer, absent abolition of the carbon price, is that they won’t – the size of increases, if the present reworking of network regulation succeeds, will slow, perhaps quite a lot, but prices will not go down.

At some future point, if the States embrace smart meters and time-of-use charges – the roll-out will add to household bills – and if this leads to more efficient patterns of electricity use, many residential bills should be reduced but those for income-constrained homes may very well go up and require compensation.

One way of doing this is to give all pensioners a higher paypacket to compensate for the ToU impact they can’t avoid – but you don’t hear “I have a big stick,” her Treasurer or her Climate Change Minister rushing to pick up this card do you?

How many consumers/voters will have recourse to the B-word and other epithets when power price reality finally dawns on them?

Here, Abbott, while wriggling to get off the hook he fashioned for himself with his carbon price claims, is on safer ground.

As he told a television interviewer last Friday, the most practical way to cut power prices right now is to drop the carbon tax. True. His problem is that, at the same time, he has to abandon the give-aways Gillard, Swan and Combet have provided in compensation to a majority of householders.

No matter how you look at this situation, it is a cow of a problem, is it not? And people in paddocks should be careful about what they throw.