Archive for February, 2013
The electricity debate of the past 2-3 years has essentially revolved around the large numbers of us who live in urban areas and around the higher prices we are loathe to pay.
Power supply, however, has numerous facets and one of them involves a segment of the community who are, in turn, also essential to the urban-dwellers: our farmers.
A new report, published this week, should present a useful reminder to policymakers that there is more to the power debate than the extra $3-6 a week in household price spikes that has the tabloid media and others carrying on.
It also says something about our city-oriented media editors that, although the report’s content was spoonfed to them in a statement by the NSW Farmers Association, none could be bothered picking it up.
The only media reference I can find on Google News is to the “Cowra Community News” and a neat, succinct job it did of coverage, too.
Basically, the report, undertaken by Meta Economics (run by Terry Ryan, for a number of years the Canberra manager of the Electricity Supply Association in my days there as CEO), throws up the fact that the power costs concerning farmers are the ones they cop through supply failure down at the end of long, rural connections.
Some farmers suffer up to 100 power outages and voltage drops a year in rural NSW although it would seem that 40 to 60 is a more common figure.
These are numbers that would have your average suburban dweller gibbering and the likes of the “Telegraph” newspapers reaching for 144 point headlines (those are the big, black “shock, horror” ones).
The real point for the farmers is the financial cost of power losses and the impact of even momentary outages on sensitive equipment.
The survey Ryan undertook throws up an average loss of produce cost of $5,190 per outage. Overtime labour costs needed to make up lost production averaged $2,400.
For those living in suburbs, where most service hiccups mean no more than wandering around the house in irritation fixing all the flickering lights on appliances, it is salutary to be told that poultry farmers can suffer losses of $180,000 per serious outage.
The poultry industry has the biggest electricity use in NSW agriculture as a proportion of operating costs, making these farmers the most exposed to power reliability issues.
Part of farming costs, it should be noted, is that many need to have back-up generation.
Dairy farmers are in a similar boat to poultry people, although their losses from outages tend to be product rather than livestock, so their average costs are “only” $13,000.
I spent a few days on a cattle farm in Gloucester shire late last year, so I am a bit more conscious than most living around me of the importance of electric fences to these farmers – Ryan’s study finds that problems with livestock as a result of fence failures have an average cost of $1,973.
The report throws up all sorts of issues that normally wouldn’t occur to us townies.
Been to the flower shop lately?
Ryan notes that horticulturalists are especially vulnerable to outages at harvest times and the loss of power for cool rooms.
One flower grower surveyed lost $50,000 worth of product to a single outage.
The NSW Farmers Association identifies the root cause of power unreliability for its members as technical inefficiencies at the far ends of networks, which become especially difficult to supply at times of peak loads.
“Right now,” says the association’s David Eyre, “this is a lose/lose situation for all parties. Farmers have to invest in back-up supply or risk catastrophic losses and networks have to support infrastructure that is unprofitable and a constant source of complaints.”
NSW Farmers wants to work with the State government, energy retailers and the network operators to find the most economically and environmentally efficient way to meet energy needs in regional and remote locations.
Eyre thinks capex could be re-allocated to longer-term solutions, including greater use of renewable energy, demand management and energy efficiency.
Agriculture is not a large segment of Australian electricity consumption.
On the analysis of the Bureau of Resources & Energy Economics, in 2012 it accounted for 8.3 petajoules of power use compared with 216 PJ for households and 235 PJ for manufacturing.
However, the slings and arrows of power unreliability that hurt the farmers hit us all (as their customers) on the the rebound, richocheting in to the bills for food and other farm goods.
Actual power bills are only a relatively small amount of most farmers’ cash costs, too – it’s the reliability issue that bites them.
There are 43,000 farmers in NSW. Most of the time, they are out of sight and out of mind for the townies – until things go wrong.
The area the farmers “out Bush” inhabit in the State is rather large.
(It needs to be remembered, of course, that more than a few are on the rural fringes of our cities, getting the same standard reliability as the rest of us. This is very true of Greater Sydney and its coastal environs south and north.)
The country network business, Essential Energy (it used to be Country Energy), reports that it has 200,000 kilometres of powerlines, 1.4 million poles and 135,000 sub-stations to serve 800,000 accounts holders (most living in regional towns and rural villages).
This level of infrastructure means that the provision of mains electricity to rural farmers is pretty high cost compared with that to householders, even those in regional NSW, but we all have an interest in it being provided efficiently.
However, we do have to be aware that there is an issue.
Assertions that eastern Australia faces a “looming gas crisis” provide the backdrop to the Energy State of the Nation forum in Sydney on 22 March.
With politicians, upstream energy suppliers and manufacturers locked in a triangular debate over gas supply, especially for the country’s largest sub-market, New South Wales, ESON brings together a strong slate of speakers to focus on the key issues across the energy spectrum.
An important part of the program is a panel discussion on the way ahead for energy supply, featuring Reg Nelson (CEO, Beach Energy, and a former Chairman of APPEA) on the priority concerns of the oil and gas sector, Miles Prosser (Executive Director, Australian Aluminium Council) on the issues for the energy-intensive, trade-exposed industries, Ross Gersbach (Chief Executive Strategy & Development, APA Group) on the priority concerns of infrastructure providers, and Tony Wood (energy program director of the Grattan Institute) on issues for the clean energy sector.
Nelson’s Beach is in the headlines this week because of a deal it has struck with global petroleum major Chevron to further pursuit of a shale gas industry in the Cooper Basin — a move that has implications for both domestic supply (especially to NSW) and further LNG export prospects.
The ESON panel, which will also feature Barry Worthington, Executive Director of the US Energy Association, providing an American perspective on energy developments, will be co-chaired by Martin Hoffman, Deputy Scecretary, Department of Resources, Energy and Tourism, and Andy Lloyd, Chair of the hosts, the Energy Policy Institute of Australia, and chief advisor energy projects of Rio Tinto.
The panel discussion will follow keynote addresses by three key political players in the energy sector: Federal Resources & Energy Minister Martin Ferguson, Federal Opposition resources and energy spokesman Ian Macfarlane and NSW Minister for Resources & Energy, Chris Hartcher.
Other keynote speakers will include Jeff Dimery, CEO of Alinta Energy, Matt Halliday, CFO, Rio Tinto Energy and Quentin Grafton, Chairman of the Bureau of Resources & Energy Economics.
The agenda includes a second panel discussion – on the Australian energy industry’s financing needs, led by Michael Bray, chairman of the energy and natural resources division of KPMG, and featuring Steven Economides, global head of the covereign wealth fund tax group at KPMG, Meg McDonald, CEO of Low Carbon Australia, Jonathan Mirrlees-Black, head of research at RARE International and Didier Van Not, head of infrastructure and utilities at Westpac Institutional Bank.
Looking at the program, some will ask “Why did we spend such time on a energy white paper when there is still so much requiring attention?”
There are two points worthing making in response, I think.
One is that we did need to pursue the EWP, but it’s publication timing ended up being out of whack, not least because of the degree of activity relating to the “clean energy future” program and the cart-before-horse aspect on which I have dwelled before.
We needed the EWP late 2010 or early 2011, not late 2012.
The other is that any energy white paper really has no ending in a world that is continuously changing, both domestically and internationally.
Leave aside the gripe about timing, which is no minor matter, and the present EWP lays the ground for the next.
When that should happen, how it should be pursued and by whom are important questions.
The second point is that it seems to me that this ESON provides a useful opportunity to consider what comes next.
The Energy Policy Institute has adopted this theme for ESON 2013: “The changing energy world: creating robust policies that stand the test of time.”
This is the nub of the whole business and that robustness is still the hare to be pursued.
In passing, this morning I saw a cutting quote in the American energy trade media: “The United States doesn’t have an energy policy,” said Robert Rosner, co-director of the Energy Policy Institute at the University of Chicago, “only an inconsistent collection of policies developed in response to the politics of the moment.”
After being quiescent since before Christmas – when Julia Gillard was out and about promising “Australian families” a $250 a year price cut as a result of reforms being pursued through the CoAG process – the cost of electricity is once again front and centre in the media on opposite sides of the continent.
Over in Western Australia, where the State election will take place on 9 March, Premier Colin Barnett’s knee jerked in the televised debate with the Labor leader, Mark McGowan.
Challenged to defend a 25 per cent increase in power prices over the next three years foreshadowed by last year’s State budget papers, Barnett assured WA voters this wouldn’t happen and that increases will only be by the inflation rate (about three per cent a year at present).
Barnett had been trying to rectify the problems he encountered on coming to office in 2008 after a decade of WA Labor effectively freezing power prices and piling debt on the government-owned suppliers. Left to continue, this would have seen the debt rise towards $3 billion by mid-decade, so his government initiated price spikes totalling 62 per cent over the term now ending.
Even with this, south-west WA household and small businesses electricity bills are still well below being cost-reflective.
“We took a hard decision,” Barnett said during the televised debate, “but we had no choice – and WA still has some of the lowest electricity prices in the country.”
The problem now, of course, is that he has just recreated the debt issue he and his government have sought to manage.
Meanwhile, over east, the Queensland government has reacted like a fly-stung horse to the draft decision of the State Competition Authority for power prices in 2013-14. (The final determination is due in May.)
Both Premier Campbell Newman and Treasurer Tim Nicholls claim to be “shocked” by the QCA decision to increase power bills by $247 a year for a couple using 4,091 kilowatt hours a year, taking the annual bill to $1,390 a year (or $3.80 a day) – by $328 a year (19.7 per cent) for a family of two parents and two children using 6,133 kWh annually, taking the bill to $1,1990 a year ($5.45 a day) – and by $422 a year (18.7 per cent) for the same-sized family with a swimming pool, using 8,490 kWh a year, taking the annual bill to $2,682 (or $7.35 a day).
The QCA attributes the increases to the ongoing impact of network investment (approved by the Australian Energy Regulator), to the impact of the solar bonus scheme introduced by the Bligh Labor government and to increases in wholesale energy costs (which are forecast to rise by nine per cent over 2012-13, a shift that takes in to account the federal carbon price, for which the Gillard government provides most households with compensation).
There is also a carry-over of the increase that should have happened in this financial year but which the Newman government froze for 12 months on coming to office, a move that required a $40 million subsidy in south-east Queensland alone.
“We can’t have double digit increases,” said Newman in reaction to the QCA draft decision. “We might have to subsidise it, in fact we probably will subsidise it, but we’re determined to find a way to ensure people don’t get hit with a double-digit increase.”
His Treasurer applies blame for 50 per cent of the increase to network costs, “controlled by the AER, which is overseen by the Gillard government.”
Inevitably, he drags in network “gold-plating,” a term the ACCC chairman, Rod Sims, might suppose he had finally kicked in to touch last year when he pointedly said in a speech it was one he never used.
The Treasurer accuses the federal government of “being asleep at the wheel or allowing the AER to be asleep at the wheel,” one of those facile political statements that is essentially meaningless but is supposed to sound good as you find someone to blame – the assumption being that blame must be apportioned.
Nicholls adds that a further 20 per cent of the increase is attributable to the “tsunami of solar rebates and green schemes” introduced by federal and State Labor.
He says his government has overseen Energex and Ergon Energy slashing a total of $2.1 billion from their operating and capital outlays for three years.
“But the QCA decision has knocked all our hard work for six.”
As to action options, Nicholls says the State government can ask the distribution network companies to absorb some of the increase, it can reduce the dividends it requires the State-owned energy business pay to his department or it can provide more subsidies.
All this will have to wait on a meeting of State cabinet.
Abolition of the carbon price awaits the federal election.
Meanwhile, Energy Supply Association chief executive Matthew Warren has seized the opportunity to point out that another alternative is to follow the lead of South Australia (and previously Victoria) and deregulate the retail market.
South Australian power consumers are now being offered discounts up to 16 per cent for switching supplier, he says, and “competition (there) has exploded.”
By contrast, he adds, competition in Queensland has “flat-lined” since the Newman imposed its tariff freeze in 2012.
“The only way to to make electricity more affordable for Queensland families is to encourage more competition so that (retailers) have to cut prices to get the business. Competition drives down prices and delivers better services. It works in every other market – from mobile phones to supermarkets.”
Warren estimates the overall cost of the current price freeze to the State’s taxpayers to be $60 million.
Meanwhile, there are two more horse flies in the QCA draft determination.
It notes that it is aiming to have power prices cost-reflective by mid-2015 – and that the Bligh government’s solar bonus scheme costs will peak in 2015-16, “at which time approximately 29.5 per cent of Energex’s network tariffs (as opposed to 9.2 per cent now) will be attributable to this program.”
Also lurking is the prospect of much higher gas prices feeding in to wholesale energy costs in a State where gas generation is growing its market share.
Mid-decade is the point at which the Newman government will be facing the polls again and, if the federal elections are not disrupted by a carbon price-busting double dissolution, an Abbott government will be girding itself for re-election.
In Queensland’s case, this could be the election at which it is seeking a voter mandate to privatise the electricity sector.
Whether in the West or on the east coast (including New South Wales), governments are confronted on electricity policy by that old adage of the boxing ring: “You can run, but you can’t hide.”
The importance of regulators and policymakers for the energy business has been on display this week as the company reporting season throws the hurdles they can create in to sharp relief.
Witness the impact of the Queensland regulator’s power price decision on the Origin Energy returns.
And David Knox of Santos warns that 2013 is a critical year for the gas industry, a reminder to politicians that voter (ie consumer) interests lie beyond the posturing and shape-shifting in which they are engaged in an election year.
There is a corporate chorus at work telling the NSW government something the State policymakers surely know only too well but seem to find extra-ordinarily hard to manage.
“Discussions of moves to restrict the flow of gas or reserve it for domestic markets will stop development and leave much of it in the ground,” Knox says (not for the first time).
“For NSW this is of great concern, as supply challenges are looming for a State so dependent on other States for its gas supplies.”
The Australian Petroleum Production & Exploration Association’s Rick Wilkinson sums the situation up when he comments “The uncertainty around NSW natural gas is now certain.”
Wilkinson contrasts what is happening in NSW with Queensland.
“North of the border (ie the Tweed River),” he says, “rural and regional communities are thriving on the back of a stable natural gas industry. Kids who would normally leave town for the city are staying because they can secure solid, well-paid employment.”
More than 18,000 people are now working in Queensland’s CSG industry.
The reason, Wilkinson adds, is simple: Queensland governments past and present along with community leaders can see beyond the hyperbole and misinformation of the coal seam gas debate.
The upstream petroleum industry’s particular beef now with the O’Farrell government is that last year, after listening to 2,000 submissions and 1,100 people at public forums, NSW embraced a detailed plan, which it described as the most strict in Australia, for CSG exploration and development.
It is worth dwelling on the State government’s trajectory in this.
First, it imposed a 15-month moratorium while it worked out what to do.
Then, after wide consultation, it imposed a tough policy which the petroleum industry accepted as a basis for investment.
Now, without consultation or warning, it has imposed a no-go zone.
It is hard to argue with the APPEA view that, if the government wants to protect certain values, it would be better to specify the outcomes required and give investors the opportunity to demonstrate they can achieve them.
The NSW government has acted for political motives – and equally obviously, sooner or later, it is going to to take another tack when the political pressures of unreliable supply and unacceptable costs hit home.
As it happens, the reason why such behaviour is a bad idea has been illuminated this week by an independent source.
From the perspective of both the gas sector and the wider resources industries, the release by the Reserve Bank of a research paper by two of its staff is more than useful.
This document really drives home the importance of the resources boom to communities across Australia and, in so doing, emphasizes the importance of governments in all jurisdictions getting their act together.
Quite a lot of the political chinwagging of the past 2-3 years, aided and abetted by the media commentariat, has been about how to manhandle rampant resources exploiters in order to look after “Australian working families.”
Now the Reserve Bank paper highlights that the resources boom has created 500,000 jobs across every major industry in the country since the mid-2000s, with more than 9.75 per cent of all workers today dependent on the resources economy either directly or through the creation of jobs in other sectors such as construction and manufacturing.
Percentages like that don’t mean much. What this one translates in to is about 1.1 million jobs. Take in the workers’ families and you are getting towards a population the size of Brisbane.
The real challenge for politicians is how to build on the platform created by resource development not to tear it down or reshape it to fit the concerns of activists who have captured the media’s attention because they offer noise and movement for the 24/7 news cycle.
The trade union side has been quick to respond to the RBA paper by asserting that the boom is destroying jobs as well as creating them – which is one of those Alice in Wonderland statements that decorate our debating landscape.
That the high Australian dollar is inhibiting activity in manufacturing, the retail sector and tourism is obvious, but laying this all at the gate of the resources boom is a bit rich.
Higher energy prices are a factor, too, but, at least not at present, they are not a product of the resources boom.
What east coast LNG exports will do to domestic energy costs remains to be seen, but the boom has not been a factor in the very large spikes in power prices since 2008.
The ACTU reports that 92,000 jobs have been lost in manufacturing in five years but that has been more than countered by the resources sector creating 144,000 jobs in manufacturing in the same period.
The pain of the manufacturing slump would be much greater for Australian families if resource investors had not come to the rescue.
The Australian Chamber of Commerce & Industry has it right, I think, in saying that the entire “spreading the benefits” debate is more about sloganeering and promoting a perception of equity rather than good policymaking.
What politicians, the media and others too readily forget is the crucial factor in the resources boom: the willingness of investors, from here and overseas, to risk their funds in Australia.
There are many other places eager to see the color of their money and they are not encouraged to send it here when governments, such as NSW, switch policies, as has been done over coal seam gas, at virtually the drop of a hat and for political purposes.
The RBA has drawn the clearest of dotted lines between employment and resource investment; an important question is who’s listening?
One notes that the ABC, most of the TV stations and the Fairfax media did not think the bank’s research paper worth much attention.
Neither did the Treasurer of Australia.
But the message will get out. The resources sector will see to that.
On a day when the local febrile political atmosphere is being fuelled by the Greens ditching their marriage of convenience with Labor, there is a cautionary tale available for those tempted by the pretty pictures of how easy it is to change course in electricity supply, as Senator Milne’s little band keep pressing on us.
And it should be salutary, too, for those who point to declining consumption of coal in the developed world as an unalloyed plus.
One of the poster children for the going-for-green argument for most of the past decade has been the Britain of Blair and Brown – but now the birds (more bloody great ostriches than chickens) are coming home to roost in the Old Dart.
They fly in just as ABC Radio’s Tony Eastley, introducing a story on the University of Queensland energy research I wrote about yesterday, told listeners: “It’s news that will please some and horrify others. Coal will need to be a significant part of Australia’s power generation mix for at least another 20 years.”
Segue now to London where the retiring chief executive of the energy regulator (their version of our Australian Energy Regulator and dubbed Ofgem) is unfurling a tale that is horrifying British energy users (whose average household bills have risen 159 per cent since 2004).
Here is Alistair Buchanan on the BBC yesterday: “Effectively what has happened is that we as a country chose to go down a renewables and nuclear pathway. We made these decisions around 2004 to 2008 to create a green and pleasant land to live in.”
The problem is that the Brits have completedly stuffed their energy security planning – the European Union emissions curbs they have embraced are about to cause a lot of their coal and oil-burning power stations to close and Buchanan is forecasting a 10 per cent cut in electricity capacity by April.
The basic arithmetic is that Britain has 28,000 MW of coal-burning capacity today, with 8,000 MW about to shut and only 6,000 MW of what remains cleaned up sufficiently to meet the next tranche of EU carbon restrictions.
The British plan for the short term is to ratchet up gas-fired capacity – striving for it to meet 70 per cent of supply by the end of the decade, double what it is today.
The problem is that nothing is under construction right now and it will take up to four years for a gas plant begun today to be commissioned.
Plus, Buchanan says, Britain is going to be “very tight” for power capacity over three to five years and will have to go shopping for gas for new plants in an unfriendly (Atlantic) marketplace because its own North Sea resources are depleting fast after a long period of near self-sufficiency.
The petroleum industry estimates that what’s left will meet only two years of British demand, so finding new supplies is an imperative.
“It’s horrendous serendipity,” Buchanan laments, “that, just at the time we have a squeeze on our power station capacity and turn to gas, the global markets may have a squeeze on their LNG (availability).”
The “horrendous” energy supply crunch, Buchanan adds, must impact on energy bills, bad news for the estimated six million Brits said to be living in “fuel poverty.”
The leading consumer group’s reaction is alarm about forthcoming “misery.”
“After another winter of inflation-busting price hikes,” it says, “the rising cost of energy is already one of the top concerns for hard-pressed households.”
The fact is, however, that British householders still pay 53 per cent less for their energy than their continental neighbours and it is inevitable that, enmeshed in the European Union environmental requirements, their costs will continue to rise.
The big escape route, claim Buchanan and others, is a massive recourse to greater energy efficiency over the next 6-7 years. He is calling for a “revolution in consumer habits.”
True to form, the renewables boosters, chime in that the real answer is to “get off the fossil fuel hook and accelerate the switch to wind power.”
WWF warns that the dash for gas will jeopardise Britain’s legally-binding climate change goals.
However, Buchanan retorts: “Wind has also been hit by the financial crisis and it will take time to reach a critical mass – while (new) nuclear will not be with us until well after 2020 and carbon capture and storage is still in its infancy.”
He points out that the Blair/Brown commitments to decarbonise the British economy were made before the global financial crisis during which “the cost of capital to build a new generation of green energy has increased considerably and there have also been delays in raising capital.”
It will be 2025 to 2030, he says, before there is enough wind power in the British electricity system to have an impact on end-user prices.
Now, you don’t need to be Einstein to work out that one way of dealing with the immediate problem is for the Cameron government to extend the lives of the coal-burning power stations about to close – but this is in the “too hard” basket because the Liberal Democrat part of the coalition won’t wear it.
Not to put too fine a point on it, this is what you get when governments play politics with an essential service.
Perhaps we should send a working group of our politicians to London to observe the situation……………
Meanwhile, in a fine demonstration of political chutzpah, the British Labor energy spokesperson, whose party is mostly to blame for the mess, has said the answer lies in a “tough new regulator” and an energy market “that delivers fair prices and works in the public interest.”
Honest, it’s a coincidence!
On the same day that I had a commentary published in both “Business Spectator” and “Climate Spectator” pointing out the problems investors face in an environment where the Coalition is set to trounce the Gillard government without a clear energy policy publicly available, the Global Change Institute at the University of Queensland has published the second in its series of papers looking at the resilience of the electricity sector.
Yes, I am on the GCI reference group.
No, I didn’t know their paper was about to appear at this point.
That said, the GCI research raises a heap of questions that need addressing in the context of how well the power system is supporting energy-intensive manufacturing in Australia, something very germane to the present political debate.
Over the period from the 1970s – with its oil crises – to the 1990s, Australian power prices were among the world’s lowest and industries such as aluminium migrated here to take advantage of the situation.
The GCI paper argues that Australia’s share of electricity-intensive metals processing has decreased over the past two decades because our power supply system is not competitive compared with our resource-rich competitors.
My own view is that there have been a number of other contributory factors, including most recently the rise and rise of our dollar, and that input costs overall, not just electricity, are to blame for the present state of affairs.
The GCI research is aimed at establishing what a “resilient” power system looks like and what, in Australia, it could look like over the next two decades.
It’s the sort of stuff our pollies should be reading when they can wrench their attention away from the opinion polls.
GCI’s leaning is strongly towards arguing the case for renewables in a much more carbon-constrained future.
The researchers assert: “The dominant (power) industry view is to replace high-emitting coal-fired power stations with gas turbines. But many prominent voices are calling for nuclear power and carbon capture and storage. If the dominant view is accepted, the power system in 2035 will be only marginally more competitive.”
High on the radar of the researchers is the Gillard government commitment to set Australia on a path to cut its carbon emissions 80 per cent by 2050.
They argue that, apart from the emissions issue (which, as federal government modelling seeks to demonstrate, can be ameliorated by CCS for gas and coal plants), the global price of LNG will need to decline dramatically to enable a gas-based 2035 power system to be internationally competitive.
This is where one needs to point out that the latest modelling from the federal Bureau of Resources & Energy Economics sees the 2035 electricity system relying on 194,000 gigawatt hours of fossil-fuelled generation, 17,000 GWh of hydro-electric power and 177,000 GWh of wind, bioenergy, solar and geothermal power.
BREE sees the Latrobe Valley brown coal generation sector flat on its back (down to 5,000 GWh annual production) with black coal power output holding almost steady (100,000 GWh compared with 109,000 GWh now) and gas-fired generation rising to 85,000 GWh (up from 62,000 GWh now).
The GCI researchers observe that replacing coal with nuclear power and embracing CCS will have a higher infrastructure replacement cost than going for gas, but it will set Australia on a better trajectory for reducing carbon emissions.
They add that, in terms of meeting aggressive carbon abatement targets for mid-century, it is “risky” to ignore nuclear and CCS. “It is logical to keep funding R&D on CCS and to build up Australia’s somewhat depleted nuclear skills,” they say.
The GCI research promotes the view that displacing coal-fired generation with large-scale renewables will double the infrastructure renewal cost but not ratchet up wholesale power prices, an opinion that one can safely say is contentious.
In a sentence, the new paper claims that large-scale renewables and distributed generation is a “useful middle path” to a lower emissions, more cost-competitive future, especially when you take in to account “dramatic reductions” in the costs of deploying renewables.
The elephant in this room, of course, is the impact of junking the present generation set-up and replacing it with widespread renewable units on the power delivery system.
GCI acknowledges that there is a “gap in understanding” the extent of this investment and it calls for an “urgent, in-depth study” of the issue before a long-term policy is embraced.
One doesn’t have to go along with the diagnosis to see a value in research of this sort. Like the recently-published energy white paper, it helps us to evaluate the very wide range of options Australia still has in future power supply.
I’d like to put a plug in here for the upcoming “Energy State of the Nation” forum being held by the Energy Policy Institute of Australia on 21 March. Wrestling with these questions from an independent perspective is EPIA’s bent and the peg on which the institute is hanging next month’s forum is “The changing energy world: creating policies that stand the test of time.”
This is in the mainstream of the debate that has been going on over the past 2-3 years, to which both the GCI stuff and the energy white paper are contributors.
From a political perspective, one of the GCI findings goes to the heart of the Gillard government’s pose on this policy. The GCI asserts that the current set-up does not deliver an Australian power system able to meet a target of cutting our emissions 80 per cent by 2050.
As the researchers say, the Australian stationary energy industry today faces a confluence of environmental, economic and technological challenges.
They argue that infrastructure built in the next few years will influence the shape of the industry in 2035.
This claim is worth further scrutiny in its own right.
I’d argue that a lack of investment this decade, except for a boost in wind farm projects driven by the RET, accompanied by some further closure of older coal plants as the demand levels sag under the erosion of manufacturing, creates a far more insecure supply system than we have been accustomed to for decades.
What are the implications of that, resilience-wise?
Way back in March of 1991 – 22 years ago next month – I found myself in a large hotel suite at Brighton-Le-Sands in southern Sydney with the six heads of the government-owned electricity commissions from across Australia.
The point of the meeting was whether to hire me to create an industry association for the embattled power sector in the image of the upstream petroleum industry association I had managed since 1980.
After a long discussion, George Bates, head of the State Electricity Commission of Victoria and the de facto leader of the pack, said to me: “Keith, this has been very interesting, but what I want to know is what can you do to make people love us?”
My response was: “George, no-one will ever love you lot, but, if you will settle for respect, there is a lot that can be done.”
It was this reply that got me the task of taking the 50-year-old Electricity Supply Association of Australia, which had its then office behind a greasy spoon café in downtown Melbourne, and turning it into a modern industry association, which has metamorphosed in time in to not only the Energy Supply Association but also the Energy Networks Association,the Energy Retailers’ Association, the two generation bodies and Grid Australia, a new constellation of representation I helped to set up before retiring from ESAA at the end of 2003.
Looking at the scene another decade later, I think the challenge for the electricity supply industry, and in particular the networks activities, still comes down to Bates’s question and my answer: people don’t fall in love with such entities, any more than they love the RACV or NRMA, but engendering community respect for them is not only possible, it is arguably critical to their ongoing business prospects.
Reading the media for the past 2-3 years raises the question for electricity suppliers of whether, in today’s environment, they are respected – and perhaps the harder question of whether they deserve to be respected?
It is clear from the criticisms thrown at the industry – from the Prime Minister down to the tabloid media – that there is a widespread antipathy abroad at present to the power sector and, in particular, to the networks operations.
Is this deserved?
I do not believe so and a great deal of what I have written here, in “Business Spectator” and in a set of yearbooks, as well as through conferences I have helped to run, over the past 7-8 years has been in part directed towards why suppliers can and should be seen in a proper context and, where problems do exist, to help make the issues affecting them more understandable.
Any entity engaged in this sort of activity – with 11 million power customers across the country and virtually all 22 million of the population beholden to it for an essential service – is going to be continuously under pressure over security of supply, safety, prices and the efficiency with which it manages these user accounts.
Much more than in the early 1990s, the power sector is also on the front line of the environmental debate because of the fuels it uses to deliver some of the world’s lowest cost and most efficient services.
The hard truth for the electricity sector and its collection of industry associations is that, in 2013, there is a respect problem and they need to do considerably more to address it.
Just taking the east coast, home to most of the customers, most of the demand, most of the fossil-fuelled generation and to most of the recent angst over consumer costs, it is not readily understood by politicians or the community that the power system faces a remarkable challenge.
Stretching from the north of Queensland to the South Australian border and down to the south of Tasmania, the so-called “NEM” – it isn’t national and never will be – is supported by an interconnected network of some 5,000 kilometres, the distance from Moscow to Lisbon.
The big difference is that the various grid systems on the European coast and hinterland serve some 350 million people and our east coast one serves 20 million. There are more people accessing electricity within the M25 orbital motorway that surrounds London than in all of Australia.
The stresses, strains and costs imposed right across the east coast supply chain – from sources of fuel through power stations and high voltage lines down to the network systems dealing with densely populated areas in south-east Queensland, Greater Sydney and Melbourne and its environs – are very considerable and the vagaries of a continental weather system don’t help.
Just in the past decade, eastern Australia has been caught up in long-enduring drought, flooding rains, massive bushfires and wind storms, including cyclones north of the tropic.
The most recent floods in Queensland cut power to 250,000 homes, a crisis addressed by the networks through putting more than 700 line crews to work, often needing to fly them in by helicopter because the ground made road transport impossible.
In the past decade, power demand has peaked and then fallen under the impact, in particular, of the economic crisis for manufacturing and the ripple effects this has on small business.
As a result of a deliberate political decision last decade to improve supply infrastructure by attacting investment in networks through changing the regulatory system, capex (in real terms) has returned to the levels last seen when post-war Australia needed to build itself as a modern economy, power prices have (predictably) spiked sharply and the consumer (and hence political) backlash has reached new heights.
What we have here is an unvirtuous circle: past political and regulatory decisions driving near-record capex, network opex rising as a result, end-user prices pushed higher at a time when the cost of living pressures are troubling households and the federal government is adding costs via the carbon price and the RET, manufacturing falling away under economic pressures, including the high dollar and energy prices, overall power demand declining and tariffs needing to rise because lower consumption requires higher per unit charges to cover investment costs, leading to new political pressure and a piecemeal set of reforms that can’t really reduce costs unless smart meter technology and time-of-use charges are imposed on householders to curb peak demand in extreme weather, in turning threatening even higher prices for many consumers, including the least able to afford even today’s prices.
The situation is bedevilled by the fact that less than half the east coast supply industry has been transferred to the private sector,which is almost by definition more efficient, that government-owned entities are continuously subjected to more self-serving political moves and that the trade union movements is fiercely opposed to privatisation for its own, venal purposes.
In this environment, the need for the businesses that populate the electricity supply chain to revisit the requirements of gaining and holding community respect is as high as it has ever been, the modern communications processes are a problem as well as a potential tool and the industry is even more in the political wind than it was when the power commissioners and I met in that hotel room in 1991.
How the members of the industry and its associations rise to deal with this challenge in the next 2-3 years will be a big factor in how the electricity suppliers are being allowed to operate their businesses in 2021.
Public relations generally has got itself a poor reputation over the past quarter century. This is because of the bad habits of some of its practitioners, the bad ends towards which some businesses and many politicians in government have put it and the badmouthing it now habitually receives from the media, who fear it even while they feed on its products.
Intrinsically, however, public relations is not a bad practice and it is not easy to think of another area of Australian business today that is more in need of effective public relations than the domestic energy supply industry.
Several business sectors, including the coal seam gas industry, can be said to be equally in need, but none more so than electricity supply.
Take one consideration with another, a regulator’s lot is not an ‘appy one.
This is certainly true in the energy sector around Australia because, no matter where the regulators turn, there are more ravines than sunlit uplands.
Reading Chris Hartcher’s letter of last week to the Independent Pricing & Regulatory Tribunal (you can find it on IPART’s website) made me also think that it is debatable whether an energy minister’s lot is any happier these days.
IPART was set up by a New South Wales Coalition government under Nick Greiner as an artful way of removing politicians from the firing line for price increases for a whole raft of State-owned utilities (from ferries to utilities) and it was gladly embraced in time by the Coalition’s Labor successors.
Now, it is an independent barrier to politicians taking populist decisions to suppress charges as well as a buffer between consumers and suppliers, who have their own views of how costs should be recovered.
Just how tricky this situation is politically is well-represented in Hartcher’s letter to Peter Boxall, the IPART chairman.
The regulator has two awkward decisions to make by May – in each case, it is charged with setting household and small business prices for those account holders who choose to shelter in controlled environments rather than chase possible savings in the competitive market.
The price paths are required to be set for mid-2013 to mid-2016 for electricity and gas.
In the case of power, IPART has noted somewhat grumpily that, as another watchdog, the Australian Energy Regulator, sets the network charges and as reform of this process is up in the air at the moment, it is not exactly easy to make a decision about end-user prices.
In the case of the gas determination, the retailers are busy telling IPART that, because no-one knows how supply and wholesale costs will pan out, it will be too risky (for them) to have a three-year price path laid down.
Which brings us to the Hartcher letter and specifically AGL Energy’s proposal that it be permitted to impose an average 10.4 per cent increase in customer bills in 2013-14.
Bear in mind that the O’Farrell government goes back to the polls in March 2015 and, even with a current Legislative Assembly majority bigger than Mt Kosciuszko, it manifestly doesn’t fancy upsetting voters any more than it has to.
“The government,” Hartcher tells IPART, “doesn’t view (the proposed AGL price hike) to be in the best interests of consumers, particularly given the increase will apply to an area containing the largest household market for gas in NSW.”
The political dimensions of the overall problem are illustrated by his next paragraph: “More than 1.1 million households in NSW (nearly half) use reticulated natural gas. Another 300,000 use bottled liquid petroleum gas.”
That’s a lot of voters.
IPART doesn’t set LPG prices, but the ripple effect from gas prices is pretty obvious.
“Unexpected increases in gas prices,” adds Hartcher, “could undermine community support for gas as a fuel source.”
Put another way, this stuation is already a worry for the government and, if lots of gas users start turning to electricity instead, there could be a whole additional supply problem.
Hartcher says that his government “recognises the gas market is likely to experience higher wholesale costs” between 2013 and 2016 – in fact, they will probably double on present modelling – and is “working to ensure that the policy framework for gas supports the long-term interests of consumers in accessing reliable and affordable supply.”
Which is another way of saying that, if we can break through the community and activist opposition to coal seam gas exploitation in the State, there is so much of it available that, even with the booming LNG trade, we should be able to keep price rises to below the “white hot anger” stage they have reached with power bills.
The State government is inclined to go along with energy retailers in pushing for IPART to just produce a single-year determination and then to revisit the issue annually.
One of the problems with this is that business people, and especially small businesses, hate the idea because they see it as adding to their management uncertainty. Their cause is being championed by the NSW Business Chamber, which says half of its member are uptight about what has happened to energy costs.
There’s a heartfelt political plea in Hartcher’s letter. “While the government accepts that retailers should receive an appropriate margin,” he tells IPART, “this should not be excessive and full consideration should be given to consumer impacts.”
Which, really, is as good an argument as you can make for deregulating energy prices and letting the market decide so long as the pollies can be persuaded to allow cost-reflective charging – and lying behind all this is the issue of applying international prices to the domestic market.
IPART itself, in its issues paper, observes that the east coast LNG developments will see large volumes of gas being diverted to the international market – which, without political interference, will result in domestic prices rising towards Asian ones.
(The suppliers hasten to point out that this means a domestic cost for gas of between $6 and $9 per gigajoule. Not the $15 the Japanese are paying for LNG. Even this is not a soothing thought for the battered and bruised manufacturers, as they have made clear.)
Origin Energy, for one, says this is not all the story.
In its submission to IPART, Origin points out that “not only may international prices become an important benchmark, but, in the near term, (local) gas prices are likely to rise as producers bring on higher cost unconventional supplies.”
As the AER has discovered with power network charges, it is one short step from politicians (including the Prime Minister) yelling at businesses to at least some and large users as well demanding the regulator’s head for failing to deal with the problem.
The Coalition States have pushed through CoAG an independent investigation of the AER in the near future.
IPART is now juggling some hot potatoes.
As they say, it is an ill wind that doesn’t blow someone some good.
The current role of gas supply high in the media headlines is not something the upstream petroleum industry or energy retailers can view with any comfort, but it is no doubt a factor in more than 60 people registering in just the past week for the “Australian Domestic Gas Outlook” conference that Quest Events’ Jamie Turmanis and I are organising for 10-11 April.
The timeliness of this forum is underlined, too, by “The Weekend Australian” giving prominence on Saturday to a story that the east coast could be facing an “even more acute” gas shortage because, the paper says, the Australian Energy Market Operator’s December projections of supply did not take in to account landholder access issues impeding New South Wales and Queensland coal seam gas development.
This came only a day after AGL Energy announced that it has requested the NSW Department of Planning & Infrastructure to suspend assessment of the company’s proposed expansion of its Camden CSG operations.
The Camden activity, some 60 kilometres south-west of Sydney, has been under way on a relatively small scale since 2001 and currently meets five per cent of the State’s gas needs.
AGL claims that the expansion can deliver gas to meet the needs of about 580,000 households, half the NSW residential market, most of whom are currently being delivered fuel piped in from Victoria and South Australia under contracts due to expire between 2014 and 2017.
The AGL rationale for the move is that it wants more time to consider community concerns.
The company hasn’t gone far enough for the Greens, who want the project cancelled not postponed, and labeled the announcement a “cynical PR exercise to take the spotlight off coal seam gas during the federal election campaign.”
The Greens are not the only politicians with concerns about CSG development in NSW.
Three south-west Sydney State MPs from the Liberal party have been lobbying against the Camden expansion, the independent federal MP Rob Oakeshott is an outspoken critic of CSG and federal Labor’s Justine Elliot has just given up being parliamentary secretary for trade in the Gillard government because, she says, her demands for a moratorium on development (of what she insists of describing as “gas mining”) conflict with her role.
Richmond has a long history of being held by the National Party, but was wrested away by the ALP and held relatively comfortably at the 2007 and 2010 federal polls.
Like many other of Labor’s federal seats in NSW, it is at risk in the September election. Current conventional wisdom is that the results in NSW alone will be sufficient to bring down the Gillard government.
It is not surprising, then, to see the federal Environment Minister, Tony Burke, playing politics with the issue.
He is demanding the Coalition State government subject CSG projects to greater, independent scientific assessment – to which Premier Barry O’Farrell retorts that NSW has, and Canberra knows it has, the strictest CSG regulations in the country.
In another reaction, the NSW Resources & Energy Minister Chris Hartcher, a keynote speaker at the April outlook conference, is again reminding the community that gas is one of the “pillars” of the State economy.
How well this is actual understood in his State is another matter.
My impression is that NSW is sleepwalking its way in to an energy crisis that is avoidable.
Hartcher is also in the media this weekend decrying the price claims the “standard retailers” have before the Independent Pricing & Regulatory Tribunal, which is required to set charges for 2013-2016 by May.
However, the retailers are prepared to propose prices for only 2013-14, citing the risks associated with future wholesale gas prices and the carbon price as grounds for significant uncertainty.
The Energy Supply Association believes the O’Farrell government can avoid the risks of prices being set too high or too low by removing regulation and allowing the competitive market to find an efficient price.
The Australian Energy Market Commission is currently investigating the state of energy competition in NSW – it is due to deliver a final report in September – but there really is no reason for the O’Farrell government to hang about waiting for its recommendations: the number of retail competitors in both gas and electricity is high and delaying deregulation is more about political dithering than anything else.
Meanwhile, in a new effort to impact on the attitudes of the community in Queensland, Origin Energy, part-owner of the $23 billion Australia Pacific LNG project, has hired rugby league icon Darren Lockyer to star in a series of film presentations on the company website and on YouTube.
Lockyer says in the opening film that, as rugby player, he understands just how much the media can focus on the negatives.
Initially, he says, on the basis of media reports, he had a negative view of CSG but, having gone through the process of making the films, he is now “much more positive.”
You can go on to the APLNG website (www.aplng.com.au) to watch the films and judge for yourself – my reaction is that they do a pretty good job of explaining the issues in (mostly) layman’s language.
Their availability and their gist are getting picked up and passed on in the conventional media because Lockyer has a large following. Fairfax Media, for example, are providing access to the films on their website.
Origin’s campaign targets Queensland and the more critical area now for domestic gas supply is NSW, so what is the industry going to do in that State to take the up its cause in a persuasive way for both rural and urban audiences?
Was the federal energy white paper exercise a waste of time?
I ran in to this assertion in the past week from an industry acquaintance who spotted that I am facilitating a forum on the EWP for the Committee for Economic Development of Australia (CEDA) in Melbourne tomorrow (8 February).
The CEDA panel will be Mark Collette of Energy Australia, Hugh Gleeson of United Energy, David Byers of the Australian Petroleum Production & Exploration Association and David Green of the Clean Energy Council.
More on their views in due course.
I always need to declare an interest when discussing this topic: I sat on the 25-person reference group Martin Ferguson and his department set up as part of the process in 2011-12.
So, was it a waste of time?
No, I don’t think any effort to closely examine our energy environment, policies and strategies can be described as a waste.
I participated in the only two other EWPs (under the Hawke government in the late 1980s and under Howard in 2003-04) and they were useful, too.
I do think that the current effort was finalised too late and took too long.
This was something the Rudd government should have completed in 2009-10 and its findings should have helped to shape the “clean energy future” policies.
Instead, we have had a cart before the horse process.
I find it hard to disagree with the Grattan Institute’s Tony Wood, who argued in a talk to the US-Australia Dialogue on Energy Security in December that “there are more pieces of the puzzle moving around with more uncertainty than in living, or maybe even recorded, memory.”
His verdict that we have “little credible, flexible or predictable policy” is a hard one, but not inaccurate, I feel.
Overall, we have too much promise and too little reality and it is at least questionable whether the EWP offers a viable path towards addressing the challenges for energy affordability, security and sustainability that are only too obviously facing us.
Of course, the situation now isn’t helped by the fact that we have a federal election coming which could (and probably will in my opinion) see the energy policy applecart overturned
Wood raises the question of when do we need to start tackling the next energy white paper?
I think the answer is that it, or an initiative to deal with the over-arching issues, should be pursued as soon as the election is out of the way because there are key points relating to electricity deregulation, to peak demand management, to both electricity and gas affordability, to security of supply (especially gas for New South Wales), to melding renewable energy generation and the orderly operation of the NEM and to innovation (notably ongoing development of CCS and of large-scale solar energy) that cannot be left in some form of limbo until 2016 or 2018 (by which stage, of course, we will have had at least one more federal election).
One of the biggest issues is ensuring that we have genuine co-ordination at the federal and State levels – the present situation is something of a dog’s breakfast, exemplified by the Prime Minister promising consumers power price cuts that can only be delivered if State governments pursue new metering technology and time-of-use tariffs.
My colleague Robert Pritchard argues that we need to establish a National Energy Commission to take charge of all this (see the February issue of the Coolibah monthly newsletter published today) and this is a topic I expect to see taken up at the Energy State of the Nation forum (organised by the Energy Policy Institute of Australia) in Sydney on 21 March – but the key point here seems to me that we can’t go on like this in terms of policy without expecting to see tears before the decade’s end.
Pritchard’s core criticism is directed to the Council of Australian Governments and the manner in which it operates.
Perhaps here is an issue that Tony Abbott and the Coalition could take time to assess and come to conclusions about before, as many of us expect, they take the reins of government in mid-September.
It may seem an esoteric point in the heat of election warfare, but it goes to the heart of how we successfully manage energy policy for the medium and long term.
The effectiveness of CoAG is an area where Kevin Rudd and Julia Gillard have achieved almost nothing over five years and – leaving aside other important areas – we are paying for it in terms of driving the main energy game: decarbonising the electricity sector by mid-century while maintaining security of supply and affordability.
Yes, 2050 is far away, but remember Mao: a journey of 1,000 miles begins with a single step. One could add that it doesn’t begin well if the steps are in a circle.
Here again, I am at one with Grattan Institute’s Wood, who in an earlier series of talks last year averred that there is “great uncertainty regarding policy drivers for low emission demand and technology developments” and called for policy that is “credible, flexible and predictable.”
Not least, I’d add, there needs to be a landing on what will be left to the competitive markets and where government intervention is required.
There is a role for government intervention, but it needs to be restrained, targetted, not ad hoc, and rigorously questioned before it is implemented.
In the energy area, this is one of the big failures of the Rudd/Gillard regime and the fault does not lie with Ferguson but with those who have played politics with “clean energy” since 2008.
Wood’s agenda for the next EWP would see it (1) communicate real choices, (2) address the uncertainties of climate change policy mechanisms, (3) rationalize domestic policies (ie State and federal), (4) reconcile markets and regulation, (5) address the trading of carbon emissions, (6) resolve the “CCS/nuclear conundrum” and (7) determine the rationale and mechanism for any public funding or other policy intervention in demand and energy efficiency.
It occurs to me that a task force drawn from the States and the federal arena chaired by someone of status like Peter Costello might be the circuit-breaker in this situation.
It does not have to be a long drawn-out review – the EWP of 2012 has done a great deal of the ground work.
Its focus would not be the detail but the over-arching strategy and the means of ensuring efficient outcomes for policy decisions – and, above all, ensuring that the gap between federal and State activities is closed.
Thrown in to action before the end of this year with an instruction to report by mid-2014, such a task force could have our feet on a more sensible path before the end of next year.
That may seem a long,long time away – but then the time between when the current EWP was set in train (2008) and now is much, much longer.