Archive for December, 2012

And in conclusion

It’s hard to know where to start in considering 2012, let alone where to finish.

In one sense, it doesn’t matter now – it’s over, done with and what’s happened can’t easily be changed.

The lesson is the same as in any other year. Courtesy of my beloved maternal granny, it is that there are consequences for everything – what you do and what you don’t do.

Which is why we should take note of the Productivity Commission.

In one of the many pieces of unfinished energy business of 2012 – the PC report on electricity networks is a draft, with the final version to reach the federal government on or before 9 April next year – the commission says this (I have pulled comments together): “Electricity prices have risen by more than 50 per cent in real terms over five years, Spiralling network costs are the main contributor, partly driven by industry inefficiencies and flaws in the regulatory environment. The over-arching objective of the regulatory regime (must be) the long-term interests of consumers. This objective has lost its primacy as the main consideration for regulatory and policy decisions.”

(Its proposed solutions, contained in an 800-page draft that has attracted 54 detailed responses so far, themselves running to about another 1,000 pages, are another matter: suffice to say there are many views.)

Ideologues, green campaigners, economists and self-interested persons of all shapes and hues have their own views on what steps should be pursued.

Even the question “Who are the consumers” is not straightforward.

Forty per cent of them (by use) are the 250 largest companies in the nation.

In all, 70 per cent of them are in a business sector that embraces everything from street corner convenience stores to schools and hospitals to shopping malls to smelters.

Many of these are small businesses and manufacturers beleagured by a lot more than their utility costs.

Households account holders number more than nine million, spread across six States and two Territories in widely differing environments.

{To state the bleeding obvious,Tasmania is a lot different to the Northern Territory.

{In Victoria gas holds a higher proportion of domestic energy use than in New South Wales for historical and political reasons.

{Isolated Western Australia has different issues compared with the populous, interconnected east coast.

{Rural consumers and urban households don’t share all concerns.

{The issues are also not identical for households opting to remain on price-regulated standing contracts and those who “churn” in the competitive retail marketplace.}

A critical question for politicians and suppliers is what proportion of the household sector freaks out every time a power bill arrives?

Estimates vary from 10 to 15 to 20 per cent.

These are people who dread the arrival of every bill because of the choices it poses and because each bill places them on the precipice of potential disconnection.

Trying to understand just what these consumers want – or perhaps, better, what they need – is migraine territory for politicians and regulators as well as network service providers and energy retailers.

In this context, as a New Year’s present, I commend readers to the speeches of Ron Ben-David, chairman of Victoria’s Essential Services Commission. (Just put his name and ESC in to Google Search.)

Not only are they well written, they are insightful. (The two don’t necessarilg go together!)

It doesn’t matter that some are about water, nor that they tend to focus on Victoria.

Their running theme of the challenge of meeting consumer needs is well worth reading.

Thus Ben-David on politicians: “The act of policy-making involves a three-sided trade-off between reflecting community values, guiding community values and the pursuit (or retainment) of power.”

This is particularly apt in 2013 for the federal political environment.

A paper he gave in May entitled “Climate change and the importance of shouting, context and economics” should be read by every MP or would-be MP in a marginal seat at the coming poll (and by the rest for their education). And political commentators in the media, too.

In it, he is especially interesting about statements such as “energy prices only represent about three per cent of the average household’s total expenditure.”

This is, he says, a “downright misrepresentation” of what happens at the margin for what the Prime Minister calls “Australian families.”

In a lot of homes, Ben-David points out, the priorities are paying for rent, transport, food and debt – and energy bills, along with other utility expenses, are met from what is left over.

His point is that the true impact of rising energy prices should be measured in terms of their impact after all “vital expenditures” have been settled.

The awkward thing for Julia Gillard, Wayne Swan and their team is that the compensation provided for the reviled carbon tax is spent as it arrives in bank accounts – and then, weeks or months later, the power bill arrives; it is higher than ever and struggling households now have no extra money to pay it.

The net consequence is that the carbon program increases financial stress in these homes. It would have been far better to provide low-income households with a concessional subsidy on their energy bills.

Elsewhere,and more broadly, Ben-David harps on the same point the Productivity Commission is underlining: “We have allowed ourselves to become too distracted for too long with matters of regulatory minutiae. We have all been focussing so intently on the regulatory framework (that we have failed to notice) it is meant to be supporting the long-term interests of consumers.”

The thread through all this debate is something about which economists love to argue: elasticity of demand.

Broadly, in the case of electricity, there is a view that high prices result in a less than proportionate decrease in consumption.

That’s poison for politicians in the present situation, the more so when policymakers and their advisers over-estimate the ability of domestic consumers to deal with and understand everything required to respond to energy price signals.

Clare Petre, the NSW energy and water ombudsman, in a submission to IPART, now examining the State’s power prices for the next three years, says this: “There are a number of reforms occurring in energy including better regulation of network prices, a review of reliability standards and a raft of new initiatives proposed through the (AEMC) power of choice review. All of these will provide benefits for customers as a whole. However there also needs to be policy development to address the issue of energy affordability for customers on low incomes who are using more energy than they can afford.”

That’s the point, I suggest.

Of all the unfinished business being carried from 2012 to 2013, the twin issues of energy affordability and energy use management arguably are the most important – and politicians at federal and State levels have yet to get on top of this.

The danger for suppliers, both networks and retailers, is that they become the butt of the ensuing blame game (again) in 2013.

That’s the troll beneath the bridge for the industry as we cross over from one year to the next.

Shining a light on prices

Appearing shortly before Christmas, the sixth annual report of the Australian Energy Regulator was only going to get cursory attention in the national media, but it deserves more scrutiny than this.

It covers a large amount of ground.

Today, let’s focus on the power prices issue in the context of network charges.

A highlight – or lowlight – of the past year has been the blame game over these costs pursued by the media and a raft of politicians, led by the Prime Minister since her intervention in August.

The main cause of retail bills rising is higher network charges – it is the reason this is happening that has attracted the blame game, with “gold-plating” the epithet of choice.

Interesting, then, to read what the AER says:

A number of factors have driven higher network charges over the past five years, it says.

Some – forecast growth in peak energy demand, the need to replace ageing equipment and higher financing costs due to conditions in global markets – were “largely unavoidable.”

Another source of cost pressure, it notes, has been the stricter reliability standards that some State and Territory governments imposed over the past decade.

Other cost pressures are difficult to justify, it asserts.

In particular, the rules drafted in 2006 limiting the extent to which (the AER) can amend the revenue proposals put forward by networks.

“While the rules reflect policy concerns at the time about the adequacy of network investment, they (have) led to unnecessarily high revenue streams for network businesses.”

Thanks to a lot of coverage on the point, most seem to know now that investment to meet peak demand accounts for about a quarter of current network charges – but they don’t also seem to appreciate that replacement of aged assets accounts for about the same again or that the bulk of the higher outlays are “largely unavoidable.”

That doesn’t trip off the political or tabloid tongue in quite the same way as “gold-plating,” does it?

The rise in network charges, of course, has varied from State to State over the current regulatory period (which runs from mid-2009 to mid-2014).

The AER says it has averaged more than 20 per cent in New South Wales and South Australia, up to 15 per cent in Victoria and 9-10 per cent in Queensland.

In one of those nonchalant lines that tend to slip under the radar, the regulator adds: “These estimates include costs associated with solar feed-in tariffs.”

Now when the Prime Minister chose on 7 August to attack the Coalition governments in Sydney and Brisbane for the network costs imbroglio, she also chose to inject politics in to this debate – so she has to cop the fact that it was Labor State governments, with the Howard federal government, that approved the 2006 rule changes and Labor governments that imposed the costly State reliability standards.

And Labor governments, including her own, that introduced silly solar subsidies.

The rules these governments imposed through CoAG also dictated the appeals process before the Australian Competition Tribunal which saw networks successfully challenge AER decisions from 2008 to 2012 – at a cost, the regulator says, of $3.3 billion in additional charges over five years.

{One of the tawdry debating tricks of 2012, by the way, has been to shine a positive light on criticised but “worthy” policies such as the renewable energy target by pointing to how little it costs per household customer – barely a dollar a week – and to aggregate the costs of things like the appeals process to present a large and scary number.

{In fact, the $3.3 billion, when dissected, comes out as $1.60 per week for residential customers. Orwell would be impressed, one imagines.}

Pursuing the political point, in the case of New South Wales, it was also a Labor regime that designed the dividend stream from government-owned network businesses about which Julia Gillard complained so loudly.

Taken it all together, it seems to me, the AER report helps further to bell the smelly political cat that Julia Gillard (and others) threw in to the 2012 debate.

Looking forward, Gillard goes in to 2013 carrying the baggage of a promise to cut household bills by $250.

Reading the AER report, it is hard to see any near-term delivery on this pledge.

Its true meaning, as readers will understand, is that household bills could be $250 less over time than they would be without the promised policy changes – not a “cut” but a reduced higher bill.

But even this requires implementation of policies to drive more efficient consumption by households.

The rather fuzzy outcome of this month’s CoAG meeting is for time-varying network charges to start being phased in on the east coast (beyond Victoria) from July 2014 — that’s 18 months from now.

And how long will implementation of a voluntary roll-out of smart meters and the introduction of these charges take?

How many years?

Will Queensland ever embrace time-of-use tariffs?

And what will the meter costs be?

In the Sydney Morning Herald on Boxing Day, economics writer Ross Gittins, in another context, comments that “I’m learning progress can be a tricky beast. Sometimes it involves moving away from the practices of the past as far and as quickly as possible. But occasionally we discover we need to retrace our steps.”

Part of the process of discovery in this power supply situation may be to separate the issues of reducing people’s bills and of reducing the growth of demand spikes.

As the AER report points out, any residential customer can cut his or her bill by opting for a market contract rather than living with the regulated standing offer charges.

A very large number still haven’t taken this step.

The average discount for “churners” in Queensland, NSW and South Australia in August was 5.5 per cent, with offers as high as 15 per cent, the regulator reports.

In Victoria the average was eight per cent with some retailers offering 25 per cent.

However, understanding these contracts is notoriously difficult for your average householder, so the regulator has launched an online price comparison service – to be found at www.energymadeeasy.gov.au.

How many more households would be using this service, do you suppose, if Julia Gillard had used the status of her office to promote it – perhaps she could have devoted the time she took to participating in a spoof “end of the world” TV appearance to do so?

Year of the snake

After a year in which “unprecedented” has cropped up a lot in the energy debate — not least with respect to the level of public discussion on prices and network regulation — the focus in 2013 is going to be on how successful policymakers and regulators have been in their efforts to mitigate cost pressures.

In Chinese zodiac terms, 2013 is the year of the snake, considered by some to be a sign of good fortune — people born under this sign are thought to be self-confident; the downside is that they may be prone to not listening to advice.

In Australia, the added edge for the new year is supplied by 2013 being a federal election year with a “referendum” on power prices seen by the Coalition at least as an integral part of the political argument.

The backdrop to it all, as set out by the Australian Energy Regulator in its latest “State of the Energy Market” report, published in the week before Christmas, has been a 66 per cent rise in power bills (in “real” terms) and a 40 per cent increase in gas bills over the past five years.

After a long period (two decades) where power bills fell in inflation-adjusted terms, since 2008 they have risen by more than 10 per cent year on year while inflation has been below three per cent.

They have contributed to cost of living pressures, especially for families, and the politicians are feeling the heat.

Our current crop of government leaders have hung their collective hat on changing this trend and, thanks to the interventions of the Prime Minister, there is now a public expectation of an imminent, substantial fall in energy price pressures.

While the political rhetoric may pick up a variety of claims, the particular policy focus emerging from the past year is (1) changing the regulatory rules to suppress network capex outlays and (2) curbing peak power demand.

The former will get most of the attention as the new rules are rolled out in the year ahead but it is the latter that really matters as the decade wears on.

This year’s Productivity Commission report on energy networks — the one the Prime Minister keeps citing in making her promises to the electorate — estimates that about a quarter of the current electricity bills are created by the capex needs of meeting some 40 hours of critical peak demand each year.

Despite the nonsense about “gold-plating” of networks, this did not happen capriciously: in the past decade underlying east coast power demand has risen by about 15 per cent while peak demand — which varies by region — has gone up as much as 38 per cent.

The growth in underlying energy consumption may be at its weakest in a long while, but the demand spikes continue to grow.

What needs to be factored in to any consideration of what comes next is that, in the biggest load centres of Melbourne and Sydney, the summer weather has been quite moderate in the recent past.

Searing heat and high humidity in late spring and early summer at present suggest that the weather cycle may be turning again.

The big challenge to policymakers and regulators is to maintain reliable power supply and to curb costs if peak demand continues on its present trend.

(The issue here is not just the cost of new infrastructure. It is also how reliable really old assets will be in extreme conditions. Higher prices make the public restless; failures of supply make them still more unhappy.)

The eye of the power price storm is likely to be 2014-15 when the new regulatory determinations start to take effect under a different set of rules and the rate of network charge rises declines, but the tail of the present set of price spikes will wag in 2013.

Not the least of the problems for politicians down the track is that other factors (eg the impact of much higher domestic gas prices, with $7 per gigajoule a not unlikely prospect, double today’s average) will kick in to affect the power bills — and this is going to become more apparent in 2013.

For the Coalition, if it wins the federal election, an immediate focus will be on the carbon tax and the present government’s green schemes and big-spending “clean energy” agencies. How this plays out will be big news in 2013-14, but eventually the new policymakers will have to deal with the lingering problem of peak demand.

Which is where smart meters and time-of-use charges come in.

The current mood at State and federal levels is to eschew the mandatory roll-out of smart meters by networks, as has occurred in Victoria, in favour of a voluntary take-up of the technology in a competitive environment. Not the least question this approach raises is how long it will take to introduce an effective new system? Five years? Longer?

Meanwhile, riding along in the dickie seat of the electricity car — you may need to be my age to understand the analogy — is the “gentailer” issue, which gets a mention again from the AER in its 2012 report.

The new review notes that, while the “gentailer” approach makes sense for companies trying to manage market volatility, it “affects energy costs for independent retailers and may pose a barrier to entry and expansion for independent generators and retailers.”

The AER points out that three retailers now jointly supply 76 per cent of electricity retail customers and 85 per cent of gas consumers in eastern Australia.

Watch for more hissing as 2013 wends on and the political, media and consumer group perpetrators of the blame game look for new targets in an environment where energy prices are continuing to rise and where the New South Wales privatisation process has intensified this point.

“Gold-plating” may have been the epithet du jour of the year of the dragon; will “market power” replace it in the year of the snake?

RET fretting rolls on

The ink is barely dry on the Climate Change Authority’s final report on the renewable energy target – if such a metaphor is still usable in the electronic age – and the green sector is out and about fretting over whether the big tick for the current 41,000 gigawatt hour in 2020 goal is going to be sustainable.

A shorthand version of their concerns is that (a) two of the three largest energy retailers, who oppose the current RET level, will sit on their hands and wait for the next federal election, and (b) no matter what it says now, the Coalition will move after winning the poll next year to limit the RET to a “true 20 per cent.”

The CCA chairman, Bernie Fraser, has waded in to the political waters by saying, according to a report in one green-oriented newsletter, that “I expect that the Coalition parties will be swayed by the lobbying (to cut the RET back to a “true 20 per cent”) to reduce the figure.”

Fraser says he expects the lobbying on this that was directed to the CCA “by fossil fuel generators and some other groups” will impact “pretty powerfully” on the Coalition.

These and other comments reported in the media have the Coalition accusing him of “naked partisan political activity.”

Certainly, one of the largest energy supply businesses, Energy Australia (aka TRUenergy) has been blunt about the CCA decision.

Managing director Richard McIndoe says the decision is a “missed opportunity” and will lead to the RET delivering “unnecessary new energy projects in to an over-supplied market at a significant cost to households.”

His company, he says, supports a RET, “but it must be a sensible design that balances delivering cleaner energy projects with the costs to consumers.”

To which the National Generators Forum has added the view that modelling undertaken by consultants shows the current RET “will cost the economy $20 billion over the next 18 years.”

Origin Energy is also reported by the media as renewing its call for a full review of the merits, costs and impacts of the RET, preferably by the Productivity Commission.

GDF Suez Australia (aka International Power) has repeated its concern that the wholesale power market may not be able to cope with a large-scale, new incursion of wind power.

To reinforce the green fears, one can segue from here to the latest statement from the Coalition shadow minister for climate action and the environment, Greg Hunt, who declares that the new year’s election will be a referendum on the federal government’s carbon tax and the influence of its programs on electricity prices.

In a speech earlier in the month Hunt harped on the point that the Gillard government’s carbon policies don’t work because Australian carbon dioxide emissions are en route to rising to 637 million tonnes in 2020 from 560 Mt in 2010.

“In addition,” he said, “we will have to buy almost 100 Mt of emissions reductions from overseas at a cost of about $3.7 billion each year by 2020.”

On the RET this week, all he will say is that the Coalition will “consider the CCA review over coming weeks and consult on its recommendations.”

Meanwhile, the Energy Networks Association, which doesn’t represent fossil fuel generators, has also labelled the CCA report a “missed opportunity.”

CEO Malcolm Roberts says the RET subsidises solar hot water systems and heat pumps at the expense of gas systems that are more affordable. He claims that gas systems can deliver 70 per cent of the emissions savings (versus traditional electric hot water systems) for a fraction of the present subsidy.

The Energy Supply Association is also pointing out that the small end of the RET is driving up electricity prices for households.

CEO Matthew Warren says that that the “SRES” – small-scale renewable energy scheme – has only been in place since 2011 “but the combined effect of the solar multiplier, generous State government feed-in tariffs and falling solar panel costs means it accounts for a disproportionately high share of RET costs flowing to power bills.”

His point is that customers should not have to pay for an uncapped scheme that has a history of cost blow-outs – and the CCA has not done enough to tackle the distortions.

The Business Council is unhappy about the whole deal.

Chief executive Jeniffer Westacott says the “failure” of the CCA to recommend adjusting the RET will “impose additional, unnecessary costs on the economy.”

Westacott comments that “adjusting the RET to reflect a true 20 per cent contribution to power supplies is not about reducing the capacity to meet the national 2020 greenhouse gas emissions target – it’s about reducing the costs on the economy while meeting the target.”

In a line that the Coalition could be expected to embrace, Westacott adds: “We acknowledge that electricity prices are driven by a range of factors including capital investment, but, at a time when households and businesses are under serious cost pressures, we should not be pursuing policies which add unnecessarily to electricity costs.”

Meanwhile, the Clean Energy Council is helping to lead the push for the Coalition to back the CCA recommendations.

The council sees the RET outlays required by the scheme reaching $35 billion “if it is left to work as designed.”

The Climate Institute puts the investment figure to 2020 at $18 billion.

The more strident voice of the greens is to be heard from the Australian Conservation Foundation which wants Greg Combet to reject the CCA recommendations, too – but because they are “weak.”

The ACF says: “We recognise the CCA has resisted pressure to lower or scrap the RET, but as you were is no longer acceptable.”

What would be?

According to the Conservation Foundation, a target of 60 per cent by 2030.

As for Combet, he says the federal government will respond to the CCA recommendations “early next year.”

Long-winded debate

When it comes to energy policy argument, the mandatory renewable energy target has been a long-lasting contender and today’s Climate Change Authority recommendations are far from the last word on the topic even though the agency is recommending that a further review be delayed until 2016.

MRET got its start in Australia as far back as 1997 when John Howard returned from a White House lunch with Bill Clinton and Al Gore determined to introduce the program here as an Australian first in the carbon abatement game – which he succeeded in doing in 2001.

Since then the concept has undergone five policy reviews and two legislative amendments, not exactly the recipe for the sort of stable policy setting investors and their financiers demand.

This year’s CCA review, in some senses, has been a dialogue of the deaf.

One side of the argument, led by the Australian Coal Association, wants the scheme abandoned, with existing property rights “grandfathered” or compensated.

The green movement, when it is not frolicking off to the bottom of the garden to wax lyrical about how all power production should be renewable, wants the existing arrangements to stay in place – delivering, on present, indications about 26 per cent of Australian consumption.

(“What we actually need,” says Greens leader Christine Milne,”is a shift to 100 per cent renewable energy as soon as possible, so we should set a minimum goal of 50 per cent by 2030.” Perhaps the Gillard government could be helpful and have the Productivity Commission cost this aspiration so that voters are better informed before they go to the polls next year – after all, it is Labor that has inner-city seats threatened by the Greens.)

The semi-middle ground wants a “true 20 per cent” target, tailored to the continuing decline in power demand across the east coast.

The protagonists have spent their time this year talking past each other.

As was entirely predictable, the CCA has interpreted its brief as ensuring that there is policy stability for renewable energy investors, essentially the wind power business. It bases its case for staying with the 41,000 GWh target on the fact that the direct benefit to households from shifting to a “true 20 per cent” would be tiny. 

I notice various reports recenelty that the CCA received 8,700 submissions responding to its issues paper, “demonstrating the importance of the review.”

Actually, it received more than 8,500 copies of the same submission organised by green campaigners and about 170 from stakeholders, including lobbying organisations, which is about the same number the Senate select committee on electricity prices garnered earlier this year.

The $64,000 (and a lot more) question about the RET is the medium-term impact it will have on the east coast wholesale power market.

Personally, I have been taken by the GDF Suez Australian Energy (aka International Power) submission to the CCA which asserts that “to seek investment certainty for one group of technologies by maintaining a market distortion for another group (incumbent generators) undermines the broad (market) policy requirement (to deliver) the assets needed to change the carbon intensity of Australian electricity production.”

The company’s argument is, while there may superficially be appeal in the downward pressure the RET is exerting on wholesale power prices and the flow-on effect to retail prices, the benefit to consumers is likely to be transient because the long-term effect will be to harm investment -–and because we all have to pay for the distortion to be implemented.

(In New South Wales, IPART has reckoned the cost of the RET scheme for households at $102 a year all up.)

GDF Suez warns that the end game is either for generation investment to dry up over time or for financing costs to rise to compensate for the additional risks confronting investors.

Pointing to recent mothballing of conventional plant in an over-supplied market, it asserts that the RET is satisfying one policy objective while undermining another (generation productivity improvement).

This, it says, will lead to “economic inefficiencies due to idle plant being maintained and skilled staff retained (to run the mothballed units should they be needed)” and creates investment risk because investors and their bankers will be only too aware that these generators can be called back in to supply, cutting them off mid-project.

(I see the Melbourne Energy Institute forecasting that there will be a further fall in average load in New South Wales in 2013, dropping by another 300 MW – on top of the 300 to 400 MW decline that has already occurred – and, if this proves correct, the RET impact on the sub-market that is the largest consumption and supply area in the country will be greater still.)

What this says to me is that the big flaw in the CCA review is that its focus is on the RET per se – on what changes could be made to improve the scheme in the government-created current policy environment – and not on the measure’s impact on the energy market overall.

The immediate effect of the CCA recommendations is to give the green light to an extra 2,500 wind turbines across Australia, most them in the southern States, at a capital cost of about $12.7 billion.

Holding the scheme at 41,000 gigawatt hours a year by 2020 – instead of the “true 20 per cent” target – does not encourage diversity in generation investment and it will do very little for local manufacturing. As I understand the numbers, more than 70 per cent of wind farm capex will be spent on buying equipment offshore – that’s a cost of almost $9 billion, none of it encouraging local technology improvement.

The latter task falls to the Clean Energy Finance Corporation, which the Gillard government has working towards throwing about $10 billion (initially) at non-wind renewable technology – and not a cent of this fund is going to carbon capture and storage, which the government touts highly in its “clean energy future” policy.

In this context, the Australian Coal Association CEO, Nikki Williams, in the organisation’s latest fusillade at the RET, ammunitioned by modelling from the Centre for International Economics, says that a particular failing of the scheme is that it is ineffectual in encouraging R,D&D on carbon dioxide abatement and acting as a support for the government’s carbon tax.

All up, this is another contribution to the “it seemed a good idea at the time” genre and, as with the current breastbeating over government decisions on network regulation just 5-7 years ago, will we be staring at the market wreckage in 2020 and asking plaintively how this could have been allowed to happen?

What you may expect

Some things are entirely predictable for 2013.

The federal election, for one – but you can then spend hours playing with all the variables, one of which is whether, despite what she says, the Prime Minister will make a lunge for the polls before the parliamentary term expires.

My take on this is that it all depends on how far the Labor MPs become spooked about their prospects under Julia Gillard’s leadership – if she gets a hint that the party wants to do to her what she did to Rudd, she will be off to the G-G to ask for an election, I reckon.

If you focus on the opinion poll primary vote trend and not all the confectionery about popularity etc, she’s a goner whenever the election is held.

My thoughts on 2013 predictability, however, are focussed more today on other matters.

The ongoing furore over coal seam gas development on the east coast, for example.

The manufacturers will keep calling for a reservation policy even though neither the federal government nor the Coalition is willing to give it to them.

And in New South Wales in particular the State government will remain caught between a rock and a hard place over pursuing CSG development within its borders.

The rock is the continuing vigorous opposition to CSG from some in the rural community, aided by the environment movement.

The hard place is the looming problem of gas supply for the State when the 95 per cent of contracts for delivery to 1.1 million customers expire mid-decade.

It is also entirely predictable that the political and media furore over energy prices will flare up again, not least because of impending increases for electricity and gas in NSW.

One can imagine a nervous minder in Gillard’s office having both March and May already circled on the new calendar, not because that is when she could pull an election but because these are the months for the draft and final regulatory determinations on new price regimes in that State – and also in Queensland, where the Newman government’s jerking knee remains an issue.

It is also predictable that we will see ongoing to-ing and fro-ing between Canberra and the State governments over network regulation, smart metering, flexible tariffs and all the rest of it, not least deregulation of retail prices.

Martin Ferguson’s committee of national energy ministers met in Hobart on Friday and published a lengthy communique about progress on market reform negotiations.

It says something about the media silly season that, so far as I can see, nobody has written anything about the statement so far.

The most notable point about the communique, I think, is that Queensland has reserved its position on the package of reforms being pursued by the ministerial committee and CoAG – on the grounds that it is engaged in its own electricity sector review.

Something that has emerged from the Hobart meeting is that the much-publicised CoAG meeting earlier in the month has put the Australian Energy Regulator on notice.

“Concerns continue to be held by some governments,” the communique says, “that the structure of the AER within the ACCC could be limiting its ability to perform its operations effectively. Accordingly, CoAG (has) agreed to an independent review of the AER in 18 months, including its structural arrangements.”

Moving on, it is reasonable to assume that there will be another burst of debate in 2013 over the renewable energy target – the Climate Change Authority will produce a final report on its review on Wednesday but there is no reason to believe this will be the last word.

The Energy Retailers Association put its finger on a key reason why the RET debate will rumble on in a submission to the CCA last month: “As the cost of the RET is passed through to consumers, it is essential that regulators ensure tariffs accurately reflect the costs of purchasing certificates as well as the cost of retailers’ compliance.

“Recent changes to price setting methodologies in some States may have placed the ability of retailers to pass through these costs to consumers at risk. If this has occurred, there is a risk that investment in renewable technologies will decrease as a result.”

For sure, the slanging match between the Coalition and Gillard, the Greens and others about carbon pricing will continue right up to the election.

The debate over carbon capture and storage will roll on, too.

The radical environment movement hates the technology – and the Greens succeeded in getting the Gillard government to prevent it from benefitting via the Clean Energy Finance Corporation’s multi-billion support system even though the “clean energy future” plan places a lot on CCS being available in mid-century.

Martin Ferguson has come up in the past week with an extra $13 million for the $206 million Callide Oxyfuel project in Queensland – which involves retrofitting a 30MW segment of a mothballed power station to achieve capture.

The biggest steps on CCS can be expected to come in 2013 from overseas developments, but it is a long road and the “now or never” brigade, who want a breakthrough immediately or governments to stop “faffing around” (to quote a local greenie) with research support, need a long, cold shower.

So, too, do the local “gold-plating” brigade, led of course by the Prime Minister.

Energy Networks Association CEO Malcolm Roberts says “gold-plating” is the great cliché of the energy debate in 2012 and he may well be right – although “clean energy” runs it’s a close second.

It is a not unreasonable bet that “energy market reform” will vie for the title of the cliché of 2013.

Along perhaps with “strengthening consumer advocacy” or “a stronger national consumer voice.”

And “empowering consumers to make better choices” will get a run for sure as governments try to figure out how to get voters to embrace smart meters and “flexible prices.”

A glance at the communique from Hobart will provide a long list of issues that will need to be tackled. Fourteen in all.

The next CoAG first ministers meeting will be in June, not especially well positioned for a Prime Minister who has spent recent months waving her “big stick” on these issues.

Perhaps we should all be reminded of what the French say: “Plus ça change, plus c’est la même chose.” (The more things change, the more they stay the same.)

Please have a safe and happy Christmas.

Power, prices and ‘premier State’

Julia Gillard should put a ring around March and May next year.

Not as possible dates for a federal election. She is insisting that federal Parliament will run its full term.

No, March and May are months when her $250 power price cut promise may come back to bite her – at least in New South Wales, which still likes to style itself “the Premier State” and is home to a third of the Australian population and some three million households out of eight million on the east coast.

March is when the NSW Independent Pricing & Regulatory Tribunal will produce its draft report on regulated electricity prices for three years to 2016 – and May is when it will deliver its final determination.

What’s more, its determination on gas prices for the next three years will be made in the same time frame – and AGL Energy, the retailer for Sydney, the Hunter Valley, the Illawarra and the Central Coast, is seeking a 10.4 per cent increase.

AS IPART chairman Peter Boxall says, the price setting review will look at what regulated electricity prices need to be to “recover the efficient costs of supply, facilitate competition and support the long-term interests of customers.”

There is no chance that the determination will deliver Gillard’s promised $250 cut in annual power bills and, with Western Sydney, where cost of living issues are perceived as biting particularly hard, containing a number of the “battleground seats” – where a change of allegiance will do most to cost Labor federal office – the size of the increases will not go unnoticed.

Watch how “no more than necessary” becomes the phrase du jour for the impending price rises rather than the PM’s promised cut.

(Gillard was already starting to hedge her pledge by the time the recent CoAG meeting was over but she is stuck with the tabloid Sunday newspaper headline she instigated in the week before the first ministers got together – that, and such iterations as the ABC reporting “Today the Prime Minister outlined her plan to save Australians $250 a year off their electricity prices,” are what will be remembered.

(In a radio interview just before the CoAG meeting, she also managed to slip in the point that $250 wasn’t her figure, it was the Productivity Commission’s figure – which is simply misleading; the commission in a draft report on networks has suggested that customers could gain $100 to $250 from critical peak pricing after the cost of the meters has been met.)

IPART acknowledges that it isn’t clear today just which policy and regulatory settings will apply over the next three years, but “the steep price rises that have occurred over the past five years are unlikely to continue at the same rate.”

Put at its baldest, while how Queensland votes may or may not deliver the Coalition and Tony Abbott a landslide, as it did for John Howard in defeating Paul Keating in 1996, the Western Sydney seats are the litmus test for winning federal office.

Political spinning over the IPART determinations can be expected to be hard and loud, catching up Gillard, anxious to point a finger elsewhere, the State O’Farrell government, which will face calls to ease consumer pain by reducing the dividends it takes from the government-owned network businesses, and the federal Coalition, determined to make the most out of the impact of the carbon price.

IPART notes that the cost of compliance with green schemes is contributing around $316 a year at present to an average NSW household power bill, of which the carbon price accounts for about $170 and the renewable energy target about $102.

The key set of numbers for consumers is how average residential NSW bills have risen (in nominal terms) since 2007-08. As IPART says in the issues paper launching the discussion on setting new prices, back then the bill was $1,100 and now it is $2,230.

Nominally this a doubling in cost and few customers will take any comfort from the economists in our midst pointing out that it is “only” a 79 per cent increase in “real” terms, that is when inflation is taken in to account.

This has been reached by an 18 per cent rise in regulated prices from 1 July this year preceded by 17 per cent in 2011 and 10 per cent in 2010, a three-card trick that triggered the current public emotion.

As the whole petshop knows, the biggest price rise contributor has been network charges (which have risen $654) with higher wholesale energy costs adding $140, the carbon price $167, “other green schemes” $76 and higher retail charges $94.

As the regulator says, at least some of the network charge increases are attributable to policy settings making prices higher than necessary.

Pursuing cost savings isn’t simple.

“There is a paradox here,” IPART declares, looking at how to push customers towards better power deals. Despite the price surge, only about half of residential customers in NSW are on market contracts – and the half who are not include many who are struggling to pay them.

(By comparison, only 30 per cent of NSW residential gas customers are still on regulated prices.)

“Concerns over electricity price increases,” says IPART, “are not always reflected in action to get discounts,” which it currently estimates as being worth up to 16 per cent off bills. That’s a saving over $359 a year.

The regulator sees the complexity of churn arrangements, lack of interest or awarness and lack of trust and confidence as key factors in why households don’t pursue these gains.

My own take on this is that an additional factor is that politicians and the media have managed to create an atmosphere where the fault lies with “gold-plating” networks and the public expects someone else to fix the problem.

IPART’s view is that customer assistance is too fragmented across retailers, networks, consumer groups, State governments and the federal government

It suggests that energy retailers can do more to help customers gain confidence in the competitive market by “taking ownership of their pricing decisions and better understanding their bills.”

The regulator reports a rise in recent years of complaints to it from customers who “simply cannot understand their bills or why they are increasing or what they can do about it.”

Shorn of the blame game, which Gillard, some consumer groups and the media have played to the nth degree over the past 12-18 months, a significant step down this road can come with deregulation of prices, time-of-use pricing and associated technology, stronger consumer protection and a major communications effort.

Via the CoAG energy ministers committee and its attendant agencies (the Australian Energy Market Commission in particular), this is being pursued but it is hardly rocket science to observe that progress has been well and truly outstripped by the political backlash against price rises – aided and abbetted by the Coalition campaign against the carbon price.

Or that the willingness of State governments (outside of Victoria on the east coast) to embrace the structure of change is still a very long way from actually setting up the necessary environment.

Gillard has not helped the process by giving the impression that the changes are all done and dusted at a federal level and the blame for not getting on with things rests with the States. As the NSW government tartly pointed out last month, the federal evaluation of smart metering, including understanding of customer benefits, is not due for completion until September next year.

The immediate political bottom line?

Beware the Ides of March and May, Prime Minister.

Never mind benefits, kill the trade

Associate professor Peter Christoff teaches climate policy at the University of Melbourne.

In both The Age in Melbourne and the Sydney Morning Herald today he has a polemic calling for the federal government to “immediately cap” coal exports and plan for the industry to be phased out within a decade.

(You can find Christoff’s comments on the Fairfax media website under the heading “End Old King Coal’s reign now or wait for a perfect storm to hit the planet.”)

It’s clear from his approach that, post-coal, he would like to see an end to the LNG exports as well.

The easy part of a response is to point out that every tonne of coal or LNG we choose not to export will be immediately replaced by resource developers in other countries.

The harder part, at least so it appears from the efforts of the industries to date, is to get public understanding of the community benefits of the coal business and the upstream oil and gas industry.

My personal view, and it is one I have held for many years and tried without a huge amount of success to push when I ran industry associations, is that the sectors’ companies ought to be willing to dig deeper in their pockets to enable really effective advertising of some core facts about these benefits.

I sought some data on the benefits over the past week – before, in fact, Christoff’s commentary appeared.

My question was what overall tax contribution the coal industry would make to the Australian community between now and 2025-26?

The answer, based on conservative assumptions about production and an anticipated fall in the long-term price of coal, is of the order of $50 billion to $55 billion (in net present value terms).

From the upstream petroleum side, on modelling undertaken by Deloitte Access Economics, the current round of oil and gas developments will deliver around $94 billion in tax revenue between now and 2025. (Also, of course, in NPV terms.)

In the case of petroleum, the gains from current project activity are only part of the story because the $200 billion worth of LNG projects can be followed, if the local developers are sufficiently competitive, with $100 billion more.

Readers don’t need me to harp on about what our federal, State and Territory governments, all of them in strife trying to deliver essential services such as health care to the community, can do with about $150 billion worth of tax revenue.

Maybe, if eschewing this income really could “save the planet,” we noble Australians might “screw our courage to the sticking place” – although that’s Lady Macbeth and she was anything but noble,at least in character – and give it all away, but this is a nonsense argument because, as we very well know, the overseas consumers will turn to others pleased to meet their needs.

I find it interesting to watch a company like Fairfax present this sort of argument – and Christoff is far from alone in finding space within the columns of The Age and The Herald – while the business is struggling to survive because of the economic climate.

We are where we are today – among the least-damaged of the world’s economies in the wake of the global financial crisis – in part because of the contributions (plural intended) of the energy industries.

Elsewhere in the media, journalists and editors are obsessed with the loss of jobs of each and every manufacturing and retailing business running in to trouble.

Television cameras are sent to factory gates to focus on the stunned faces of laid-off workers.

All the media are obsessing at this time of year about Christmas retail sales.

To state the blindingly obvious, the buyers need income – and a large contributor to their income is the resources sector plus the “dirty” energy-intensive industries like aluminium, plastics and chemicals, petroleum refining, cement, steel-making and so on.

The current upstream petroleum industry activity alone, using Deloitte data, is increasing Australian GDP by up to 2.2 per cent a year and requires a construction workforce peaking at more than 100,000 jobs.

Last month the New South Wales Minerals Council produced a survey of 21 mining companies in the State that shows they spent $2.6 billion on wages over the previous financial year – plus more than $6.5 billion on goods, services and community contributions in NSW.

The association claims that, when indirect spending is taken in to account, these mining companies (most of them in the coal business) added $18.8 billion to the NSW economy in 2011-12.

Of this, $9.3 billion in direct corporate spending in NSW, on modelling undertaken by Lawrence Consulting and the University of Newcastle, generated additional supply chain and consumption effects of 103,000 full-time jobs and $17.3 billion in aggregate spending.

This is in addition to the almost 22,000 direct jobs in the NSW mining industry.

Meanwhile, according to the Queensland Resources Council, in a statement released three weeks ago, the State’s resources industries – coal, metals, gas,alumina and aluminium, mineral sands, electricity and liquid fuels – spent $28 billion directly in 2011-12 on goods and services from local suppliers and paid $8 billion to 64,300 direct workers.

QRC claims that the resources sector’s activities in Queensland support and create another 416,000 jobs.

In 2011-12, the sector paid $14.2 billion in royalties and taxes to State and federal governments.

And this is happening during a period of downturn in coal mining because of the flow-on effects of the great floods and of the global economic woes.

The willingness and the ability of 194 global governments to tackle the global warming issues has been on display at Doha, Qatar, for the past fortnight.

“Insipid” is a barely adequate adjective to describe the negotiations.

Writing in the Australian Financial Review this morning, the Grattan Institute’s Tony Wood argues that the world’s governments, despite the frustrations of Doha (and Durban, Cancun and Copenhagen earlier), should keep alive their efforts to achieve a global approach.

“We should build and strengthen our carbon pricing market mechanisms,” he argues, “and implement a set of multilateral and bilateral agreements that provide the path to the longer-term goal.”

How Australia shooting itself in the economic foot by unilaterally cruelling its resources export industries will aid this effort is wholly lost on me.

Perhaps the Fairfax newspaper editors could take editorial time and space to explain it to us.

It’s on the news; must be true

What does it take, I wonder, for the media to get their collective head around the fact that a research project is just that and not the harbinger of massive change just down the road?

A current example is the way in which both the ABC and the Newcastle Herald newspaper have reported the “Future Grid Forum” exercise being pursued by CSIRO.

The national broadcaster told listeners and viewers today that the forum will bring together generators, distributors, consumer groups and regulators to “help guide an EXPECTED $240 billion investment” in electricity supply “over the next 20 years.”

The Herald says the same thing.

Given how much effort the media have given to shrieking about power prices, how, one wonders, does it not occur to these journalists and their editors to ask what impact such investment would have on consumer bills?

As well,given that both media outlets say this, one must ask how were they briefed by CSIRO?

Most people connected with the industry, of course, will shrug and say that this stuff is par for the media course – but what drives journalists and their editors to feed the public so much gibberish?

In a big part, the answer lies in the incapacity of the media to get the power scene in sensible context.

Now the background paper on the proposed forum produced by the CSIRO starts by saying: “Australia’s energy system is expected to undergo a major transformation over the coming decades.”

And Alex Wonhas, director of the CSIRO Energy Technology Transformed Flagship, says in the media statement about the project that “the industry will be very different in 50 years’ time” and that the role of the forum is to “inform decisions we need to make today to shape future supply, prices and carbon emissions.”

Absolutely nothing wrong with these statements – but how do they get to be shaped by the ABC and the Herald in to telling their audiences that this exercise will lead to an “expected $240 billion investment over the next 20 years”?

There is also nothing controversial about the direction the forum is seeking to take – it is exactly what the federal government, through its “clean energy future” policy, and reinforced by repetition in the recent energy white paper, is saying.

The policy suggests that by mid-century Australian power supply could be about half-sourced from renewables and the rest from fossil fuels, with the bulk of the latter coal and gas plants using carbon capture and storage.

The consultants employed by federal Treasury to advise the government in 2010-11 produced reports suggesting that 2030 supply could be based on fossil fuels (black and brown coal and gas) to the tune of about 70 to 80 percent.

The University of Adelaide’s professor Barry Brook, in a review of the white paper on his “Brave New Climate” website, notes: “(It) shows a gradual phase out of traditional coal (to be replaced by carbon-capture and storage variants after about 2035) and a ramp-up of combined cycle gas (both CCS and non-CCS). Up to half of electricity is coming from wind, solar thermal, solar PV and engineered geothermal by 2050. The estimated cost is more than $200 billion in new generation investment.”

There are really only three controversial aspects to this outlook.

One is whether or not “hot rock” geothermal energy can be brought in to the mix over the next two decades.

By 2050, the consultants believe that it could be delivering an eighth to a fifth of overall power supply.

CSIRO Energy Transformed Flagship itself, in a submission to the New South Wales Legislative Assembly Public Accounts Committee power generation inquiry five months ago, said of geothermal that the technology “still has significant technical and commercial risks associated with it.”

The second issue is whether or not CCS will become commercially viable for power generation.

The same CSIRO submission to the PAC concedes that there are particular challenges for CCS in NSW, the largest power production and consumption area in the country, because it is difficult to find suitable geological locations anywhere near the existing black coal power stations for sequestration.

The third controversial point is the political decision that nuclear energy should not be considered by the consultants or policymakers.

As Brook has said, and I reported in a post here in August: “Nuclear energy at present is uniquely a proven fit-for-service, low-carbon “plug-in” alternative for coal that is commercially available, widely deployed in some countries, highly scalable and comes with a half-century’s operational experience. It indisputably has its own problems, but so do all of our other electricity options. There is no such thing as an electrical free lunch.”

Just so, but the ABC and the Newcastle newspaper feel free to impose a perspective on their audiences that ignores all this stuff.

Meanwhile, the CSIRO, in the forum background paper distributed to the media, says that the project will “complement and build upon” the energy white paper.

So a quarter of a trillion dollar revolution over 20 years is not the starting point.

In passing, I noted Richard Aldous, CEO, Co-operative Research Centre for Greenhouse Technologies, make this point in a recent edition of The Conversation website: “Currently in Australia we have some $30-50 billion of support going into renewable energy and only $3-5 billion going in to CCS, despite the continuing high growth in fossil fuel use globally.”

He adds: “We will increasingly hear calls for urgent action and the deployment of renewable energy. But there must also be calls for a pragmatic approach that deals with growing fossil fuel use and the massive existing fossil fuel burning infrastructure. This approach includes CCS.”

The nuclear energy proponents, of course, make the same point about the need for a “pragmatic approach” to including reactors in the Australian mix.

You could build a lot of them for $240 billion between now and 2030!

What’s the score?

After a fortnight of fluttering around the higher reaches of politics, the electricity reform debate is being brought back to earth today by a scorecard released by the Energy Supply Association.

ESAA asserts – correctly, I think – that the reform agenda has stalled.

A great deal of reviewing is going on – but, when you really get down to it, not a heap of change is actually happening.

Nor, for all the noise of the past fortnight and earlier, are there real grounds for anticipating that the key changes needed will happen any time soon.

ESAA sums up the situation like this: “Governments’ commitment to reform has weakened as they respond to short-term political pressures with more heavy-handed regulation.”

It adds: “Sustained rises in the cost of energy for households have exposed some of the consequences of deferring market reform. More public scrutiny has revealed that inefficient market design and over-regulation are contributing (to this).”

The solution it offers is one embraced by a lot of us – the problem is that the politicians who have to make the decisions seem to find this all too hard.

Viewed in the cold light of the week after the event, there is not a huge amount coming out of the CoAG meeting to indicate that things will change very fast – or at all in some cases, such as retail price deregulation in Queensland.

The ESAA recipe is: “Give consumers more control over their power bills, enabling them to negotiate favourable deals with retailers, and give them access to technologies that help manage demand.”

Hard to argue with this – unless you are governing one of the States and can find reasons why you don’t want to act or not just now anyway or you only want to do some things and not others.

ESAA has come up with a scorecard to demonstrate how well (or badly) the States are managing energy reform.

On the points system it has concocted – where the top score would be 20 – it dubs Victoria the best (15.5 points) and Queensland the worst (6.5).

It consigns Western Australia (7.5) to the cellar, too – and marks South Australia (11), New South Wales (10.5) and Tasmania (9.5) in the mediocre middle.

ESAA also says South Australia’s planning laws for energy projects are the most rational in the country.

The association adds a good point: a federal system of government works best when the States compete with each other to introduce reforms that improve their competitiveness, attract investment and drive down the cost of doing business.

Instead, as it says, we have seen a race in the other direction lately – with an egregious example the competition to introduce the most generous solar power feed-in tariff.

Here, of course, the former Labor government of NSW wins hands down.

As ESAA points out, NSW customers who grabbed the over-the-top subsidy opportunity are now making substantial profits while the cost of the scheme (which it asserts is $1.8 billion) will be paid in higher power bills by all other State consumers until 2018.

A notable aspect of the ESAA scorecard is that, with respect to electricity tariffs recovering the full cost of supply, only Victoria achieves the maximum two points, with NSW getting 1.5, SA and Tasmania one point, Queensland half a point and WA nowt because the incumbent Barnett government has run out of political steam in trying to reverse the decade-long price freeze posture of its Labor predecessor.

Queensland and WA also rank stone-cold last for political interference in power supply.

Looking at the scene, the association has these comments about the state of play in the three States that accommodate most of the power consumers:

The current O’Farrell government in NSW has “taken some sensible steps on reform, including closing the premium FiT scheme, progressing sale of its generation businesses and commissioning expert reviews of reliability standards and retail competition.”

While Queensland ranks worst in the faltering pace of national reform, the new Newman government deserves credit for initiating a 30-year energy plan “which creates a new opportunity to revitalise the reform process.”

Having observed what the Premier and his Energy Minister have been saying lately, I would add a rider “don’t hold your breathe.”

As ESAA points out, the various actions of the current and past Queensland governments to hold back market reform have done nothing to prevent a sharp rise in power bills over the past five years.

As for Victoria, ESAA notes that it scores well on all criteria for energy reform except project planning – where it ranks last.

The Victorian retail market is claimed to be the world’s most competitive, with a customer switching rate of 26 per cent – but since 2008 it has been regarded “as one of the most challenging States (in which) to get timely development approval for major infrastructure projects.”

Recent steps by the government “directly impede future renewable energy development,” the association says.

ESAA urges the Baillieu government to finish the job on the smart meter rollout and to legislate to embrace the national energy customer framework.

The NECF involves the harmonisation of State-based regulatory frameworks (excluding retail price regulation and community service obligations) for the retail market and energy distribution sector into a single set of national rules.

Its focus is on providing a regulatory framework for the relationship between energy customers and retailers and distributors, including a range of energy-specific consumer protections.

As for as the not-so-golden West (with respect to electricity reform), ESAA acknowledges that the Barnett government deserves some credit for trying to improve things, but “(the government) still owns most of the industry, households cannot shop round for better deals and prices are still set by politicians.”

The message for all State governments that flows from this review and others going on is that the recipe for improving the electricity market is to give customers more choice, to expose them to the true cost of their consumption patterns, to pursue a curb on preak demand and to ensure that those who are at risk for one reason or another when reform takes place are looked after via the welfare system.

The point about the present subsidy approaches for electricity supply is that household customers are either being subsidised or – the vast majority of them – paying for other people’s subsidies.

The ESAA scorecard solves nothing, but it is a useful way of holding up a mirror to governments – especially State governments – and is therefore to be welcomed.

What odds would you give, however, on the scorecard in December 2013 being much different?