Archive for April, 2013
To everything there is a season – and that includes politics as well as religion.
This line and the following one – “a time to every purpose” – rose to global fame, as opposed to being well known to Christian churchgoers (it’s from the Book of Ecclesiastes in the Old Testament), in the 1960s and again in the 1980s as a song hit for The Byrds and then Dolly Parton.
The melodies at least have lingered on.
The deeper thought embodied in the Bible exhortation is pretty apt here at present as the federal election season arrives and non-religious Julia Gillard encounters the truth of the lines “a time to sow and a time to reap.”
However, for energy suppliers, this should be also a time to look beyond the gore and the goring in the political arena because the consumers will still be there after 14 September and the issues worrying them, and causing political angst, will not have gone away.
In the spirit of “to everything there is a season,” one should recall that this time last winter the issue of power prices was politically “white hot” – as one leader put it – and the Prime Minister was front and centre, promising comfort to unhappy voters.
The party line right now is that, after years of pain, relief is in sight on power prices, with the latest increase in New South Wales held to “only three per cent” – on average; actually it is 4.3 per cent for the most populous areas of Sydney – and promises there of less to come.
Across the border in Queensland, however, the current “price pain” persists in the form of a proposed 21 per cent increase for that State for 2013-14.
All over the east coast, as well, the prospect of price spikes for gas is the new pain provider for several million consumers.
The point is that, while it is the federal Budget that is all the rage in the media right now, it is the householders’ budgets that will be occupying the minds of millions of Australians as the winter ends and the new, higher-priced bills land in the letter boxes.
The community has been conditioned by recent events to know that yelling at politicians is a possible way to ameliorate their problem, so expect more media attention on the issue at the very least in the new year.
Coming to terms with where energy prices, and especially power bills, are going, the problems of providing appropriate aid to vulnerable customers (perhaps a couple of million households on the east coast when struggling families with rent or mortgage hassles are included), the ongoing push to deregulate the retail end of electricity supply and the need to introduce “smart” technology and time-of-use charges are just some of the issues with which policymakers, regulators, suppliers and consumer groups are going to continue to grapple when 15 September comes round and the federal political landscape has changed.
It’s with this in mind that Quest Events’ Jamie Turmanis and I set out several months ago to put together a forum to consider pricing issues going forward.
With this event now looming – it will be held in Sydney on 22-23 May – it seems to me that it is especially well-timed for stakeholders wanting to get their heads around the next tranche of the “price wars,” as I recall one tabloid dubbing them.
Both Chris Hartcher, the NSW Resources & Energy Minister, and Ian Macfarlane, due to retake the resources and energy portfolio in an Abbott government, have accepted invitations to speak.
We have also engaged the participation of Jonathan O’Dea, chairman of the Public Accounts Committee of the NSW Legislative Assembly, a body that has taken a strong interest in the pricing issue.
What I see as the heavy hitting in this event, however, will come from two other quarters.
First, there is a need to get our heads around where prices may be going out to 2020 – Port Jackson Partners’ Edwin O’Young has been enlisted to set this scene – and the factors influencing it (network charges, wholesale prices, the murky future of the carbon tax) and, second, there is a need to focus on the intersection of energy policy, social policy and retail pricing, for which we have engaged the participation of ombudsman Clare Petre, St Vincent de Paul’s Gavin Dufty, AGL Energy’s Tim Nelson and the Public Interest Advocacy Centre, among others.
The latter focus goes to one of the critical issues for 2013-14 in regulation, something that will not vanish with the battered Gillard government: the need to have a stronger consumer voice in the regulatory arena.
As with the coal seam gas industry and its hassles in regional areas and the outskirts of Sydney, if you can’t carry the community with you – the so-called “social licence” – then you are doomed to travel a vale of fears and tears.
This is especially important for the power sector as it tries to push through deregulation, “smart meters” and tariff changes.
In this respect, I am personally looking forward to the contribution at “Power Pricing 2013” of Ron Ben-David, chairman of Victoria’s Essential Services Commission.
I have drawn attention on this blog previously to Ben-David’s speeches on regulation and the long-term interest of consumers – you can find them on the ESC website – and his views on the nexus between economic efficiency and community needs go to the heart of what I at least think this debate is about.
One of the features of power policy management that has gone quiet of late is the issue of peak demand.
Back in 2011 it was causing enough concern for the Australian Energy Market Commission to hold an inquiry about it – the “Power of Choice” review – and it hasn’t gone away even though demand for electricity at present is muted
The conference has a set of presentations in this space, including a review by Mitch Anderson, chief executive of ERM Power Retail, of the outlook to 2020, a point I suggest where the current goings-on about generation investment will be heading towards a whole new topic for concern.
As I said to someone the other day, security of supply is an issue that never goes away, it just subsides below the radar from time to time only to emerge and send alarm bells ringing at inopportune moments.
Most of energy events of this type have households and big business high on their agenda.
I am particularly pleased that “Power Pricing 2013” has snared Innes Willox, chief executive of Australian Industry Group, to canvass the concerns of what I consider to be the forgotten people of the energy debate: small business.
There are more than 330,000 small businesses in Australia, employing 1.7 million of us, and they, to name one issue, have not been offered a cent of compensation for the effects of the Gillard government carbon price.
Energy input costs are one of the life-or-death issues small business people face all the time.
The other sleeper in the energy debate tends to be end-use efficiency.
It’s like motherhood; we are all in favour of it but the old dear tends to be neglected a lot of the time.
This conference will provide a special focus on the issue, including a presentation by the Energy Efficiency Council’s CEO, Rob Murray-Leach.
To finish where I started, the Biblical “to everything there is a season” has a special point for energy suppliers here in the autumn of 2013.
The Budget with a big “B” may be the political and media commentariat issue du jour but a large number of the 10 million budgets with a small “b” will continue to be a key issue when the present shouting and posturing dies down.
That’s what the supply community needs to be prepared for – and hopefully our May forum will help with this.
It’s notable that Greg Combet, who fires out media statements non-stop on carbon issues, has not chosen to publish one to herald the modelling exercise on the 100 per cent use of renewable energy that he forced on the Australian Energy Market Operator at the behest of the Greens.
There is nothing on the “splash page” of the website of his department (which is Industry, Innovation, Climate Change,Science, Research & Tertiary Education, surely a portfolio record for a federal government) drawing eager readers’ attention to this exercise – for which the government wrote the rules of engagement.
At the time of writing this post, the mainstream media – except for the “Australian Financial Review,” which clearly got the AEMO report leaked to it – has yet to offer a perspective on the study, so the green commentariat are left to mumbling among themselves about how positive it all is.
Late today, even the ABC, usually so keen to sing the green power siren song, has nothing on its website.
No Clean Energy Council media statement has been rushed out to welcome it.
AEMO’s caveats in the report need careful reading, not least the one that says: “our findings are tightly linked to the underlying assumptions and constraints within which the study was carried out.”
The report notes some things that should not be overlooked:
(1) The results indicate that a 100 per cent renewable system will require much higher capacity reserves than a conventional system.
(2) Bioneregy is a critical facet of this concept (or should I call it “conceit”) and this “may present some challenges” – including competing uses. Bioenergy requires fuel that is costly to collect and, in the case of biogas, costly to convert.
(3) The hypothetical cost of a 100 per cent green system lies between $200 billion and $332 billion, depending on assumptions. And this is for the east coast market, not nationally. Also, buried in the executive summary of the report is this thought: “The costs are hypothetical – in practice, the cost of building a 100 per cent renewable generation system would be substantially higher.”
(4) To cover these hypothetical costs, the “NEM” wholesale energy price would need to be around $111 per megawatt hour in 2030 – double what it is now in today’s money values.
(5) Going down this road also will require acquisition of up to 5,000 square kilometres of land – that’s about three times the geographical area of Adelaide; at what cost is the question that leaps to mind.
(6) You can’t pursue this course, with considerable use of rooftop solar PV and demand-side participation, without upgrades to the existing distribution system, not costed by AEMO – and a big use of solar would turn the “NEM” in to a winter peaking market, the opposite of today. Distribution costs could be “significant.”
(7) As well, many of the best sites for new renewable generation are remote from the existing transmission grid – in other words, at least a score of $billions will need to be spent on linking these resources to the load centres.
(8) The study was carried out, by direction, without any comparative modelling of the cost of nuclear power, gas generation and new coal technology, including carbon capture and storage.
(9) One of the best caveats: “No consideration has been given to costs of government policies needed to drive this transition” – that is, the carbon price needed to drive it is not included.
This exercise was undertaken as part of the deal the Gillard government struck with the Greens and the independents over the carbon tax.
It’s a form of blackmail – or greenmail if you prefer.
It tells us that it is theoretically possible to run an electricity system like the “NEM” using only renewable energy, but not what more practical alternatives would cost and not what the impact would be on business end-users or what carbon price burden the community would need to wear.
Was AEMO’s journey really necessary – other than for Combet, Julia Gillard and Christine Milne?
Today marks the start of a new project for me: I have teamed up with leading corporate design and communications company ArmstrongQ to launch OnPower, an on-line and print venture focussing on east coast electricity supply.
To be clear, this is in addition to Coolibah website — and it sets out to offers a considerable amount extra in industry coverage.
ArmstrongQ works with many of Australia’s leading companies on their annual reports, corporate videos, photography, branding and custom books. The company’s skills are well on view with OnPower.
Working with it, I am offering a subscription-based site to help keep time-poor stakeholders up to speed with information and opinion about the electricity supply chain and policies affecting it, combined with free information in a number of areas.
An important part of the offering will be a new yearbook on electricity issues, the first of which will appear around September.
In pursuing this venture, I am very pleased to be teaming up again with Jaqui Lane with whom I worked to publish the “Powering Australia” yearbook in past years.
Good communication is a critical issue for power managers in the high-profile debate on electricity supply and an essential ingredient, I think, is access to good information for the communicators. This has been the driving force for much of my activity since retiring from ESAA at the end of 2003 and I look forward to creating a new dimension for the task with OnPower.
You can see the new venture by visiting www.onpower.com.au.
Giving evidence to the Senate environment and communications legislation committee earlier this month, a manager for the QGC gas export project in Queensland made a point that deserves highlighting and should be taken up by the gas industry more broadly as it struggles to deal with radical opposition to development on the east coast.
The Senate committee is looking at the proposed amendments to the Environmental Protection & Biodiversity Conservation Act, introduced by the federal Environment Minister, Tony Burke, as a blatant political ploy en route to the 14 September poll.
At the committee hearing in Canberra, QGC’s Rob Millhouse told senators some basic information about his company’s LNG development.
The project today employs 9,000 people.
By the time exports begin in 2014 QGC will have spent $14 million every day for four years.
And then the point that caught my eye – at peak production, QGC expects to pay $1 billion a year in State and federal taxes and royalties, enough, Millhouse said, to fund 20 primary schools or about 1,000 hospital beds annually.
There are two other LNG projects in Queensland with similar numbers.
How many east coast Australians do you suppose appreciate the real-life rewards that flow back to the community for this industry activity?
Very few, in my opinion – and the responsibility for that falls squarely on the companies and the upstream petroleum industry as a whole for not engaging in a more effective communications effort.
The critical word here is “effective.”
There’s plenty of information sloshing around in media releases and on industry websites, and there are lots of headlines and contention in the media, but this is not getting to the community in ways to which they can relate.
The QGC metaphor is exactly the point: how many people can relate to a billion dollars? But they can all relate to the value of a steady stream of money for schools and hospitals.
If you extrapolate the QGC numbers to the upstream petroleum industry as a whole, the $13 billion annual payout in taxes annually by the end of this decade equates to funding 260 primary schools and 13,000 hospital beds each year.
There is a heap of other examples available of the translation of this money in to the real lives of ordinary Australians, but this information is not breaking through the fog of propaganda from activists, politicians and journalists with their own ideological axes to grind plus those in the media who simply report the latest attack and counter-attack by the industry and its critics.
I was moved to write this piece by finding on the ABC’s “The Drum” site today a commentary by an Australia Institute economist shouting back at the coal seam gas sector because of a media statement issued by the Australian Petroleum Production & Exploration Association in the wake of the regulatory decision to increase gas prices for some 800,000 households and small businesses in the major NSW urban areas by 9.2 per cent for 2013-14 with the near-inevitability of more rises to come as the present supply contracts roll off in 2015-17.
The APPEA line is that “the tsunami of misinformation and myth peddled by the Greens and their ilk has effectively stopped any meaningful CSG exploration or development in NSW.”
The association warns of “even more dramatic price hikes in the future.”
The Australia Institute retort, paraphrased, is that there would not be an east coast shortage if the greedy companies were not pursuing profits by selling gas overseas – and that “concerned Australians” have every right to be worried about the impact of CSG activities near their houses and farms.
This approach begs so many questions that it would take a lot more than the space I have here to rebut it all.
The following can suffice:
First, ownership of the coal seam gas in Queensland is vested in Queenslanders and, if they see benefit in pursuing the highest community returns (in terms of jobs, local business income, a new source of revenue for farmers and the flow-through benefits of taxes and royalties), then no-one in New South Wales has the right to complain.
Second, most of the gas flowing in to NSW today comes from South Australia and Victoria – the ultimate owners are South Australians and Victorians, who are also entitled to the maximum level of the aforesaid community benefits.
Third, the CSG developments proposed for NSW are aimed at the domestic State market and the activists working against them are not competing with greedy exporters but against the needs of householders and businesses (including almost 500 large commercial and industrial companies with thousands of employees).
All this being as it may, I come back to my starting point: the equation of billions of dollars of tax benefits with on-the-ground activities in suburban Sydney or Brisbane, or wherever, is simply not being communicated in a way that has captured the understanding of Australians.
How much, for example, in the way of subsidies for after-school care of kids or for pre-school centres is going to be notionally covered by the billions flowing from the east coast LNG developments from mid-decade?
The other aspect that strikes me strongly is the disconnect in the community’s minds between the gigajoules of gas and the tonnes of coal flowing overseas and what actually happens to this energy in terms of making life better for real people living in China, Japan, South Korea and so forth.
Prime ministers and their entourages can swan round overseas capitals and inspect honor guards all they like, but what really cements our relationships with the Asian nations is our role as a reliable supplier of resources they need.
Today is ANZAC day and, as the son and grandson of soldiers, I am reluctant to drag their service (let alone the sacrifice of so many of their comrades) in to this debate, but the harsh reality is that many conflicts – and not least the activity of Japan in the 1930s and 1940s – relate to countries seeking to harvest the resources they need at the expense of others.
Our commodities (and other) exports are one of the greatest ways of bolstering world peace that are available to us – and yes, of course, companies and their shareholders profit from this trade, but so does the community at large through all the benefits I have described above.
I think the Australia Institute commentary on the ABC’s website is about as wrongheaded as it is possible to get.
Gas prices on the east coast are going to rise under all circumstances because of the internationalisation of the business but they will rise much higher in NSW because politicians, the resources sector and the rural community have been unable to reach a working understanding for CSG development despite evidence across the Tweed River of how this can be done.
As I have pointed out on this site and as was clear at the “Australian Domestic Gas Outlook” conference I recently helped to run, the gas supply situation in NSW has crossed a divide – this week’s IPART pricing decision is merely the harbinger of the cost of a failure of policy, of planning and of good communication.
NSW households and businesses will now literally pay the price of this failure.
The key question is for how long?
A broader question, nationally but especially on the east coast, is how the upstream petroleum industry and governments (who have a strong vested interest) can better explain to ordinary Australians how they benefit from these developments – as well as how those responsible as regulators and developers are doing a good job in protecting the physical environment or can do a better one if evidence emerges that they should.
The media headline from today’s regulatory decisions about energy prices in New South Wales is undoubtedly the end of the years of grim news for consumers of double-digit increases in their power bills, but the storm signals in the gas segment will be a worry for most of the State’s million users and especially for the business sector.
For electricity customers, the Independent Pricing & Regulatory Tribunal is delivering another price rise for 2013-14 – but this is “only” of the order of three percent as network cost pressures abate and green scheme burdens don’t increase.
The news in the gas sector is less sanguine.
AGL Energy wanted a price rise of 10.7 per cent for 2013-14 for its residential and small business gas customers, who make up 80 per cent of the State market, but IPART wouldn’t come at this – it has set the increase at 9.2 per cent.
When the smaller price rises it has granted ActewAGL and Origin Energy for rural and regional areas are factored in, the State average is 8.6 per cent – which is what IPART has chosen to highlight in its media statement.
This is the second year running for large gas price rises and the cause is not yet soaring wholesale costs. Rather, it relates to what the energy retailers must pay to have gas delivered through the low pressure distribution network to homes and businesses.
These costs, like power network charges, are regulated by the Australian Energy Regulator and they make up 50 per cent of the final bill.
While declining to indicate prices for the period mid-2014 to mid-2016 owing to market uncertainties, IPART wants to send a message to consumers:
“We consider it likely,” it says, “that regulated retail prices will rise further, driven by sustained increases in gas network costs under determinations already in place and the structural changes likely to emerge in the wholesale gas market.
“The domestic market will be increasingly influenced by the international market (for LNG).”
Wholesale gas costs make up about 30 per cent of the final consumer bill, so a 50 per cent increase will flow through to users as a 15 per cent rise in their payments and a 100 per cent increase will deliver a 30 per cent rise.
The IPART take on the east coast wholesale gas market makes interesting reading.
“Higher international prices for gas have altered the expectations of some gas producers,” it says. “But the precise timing of many LNG projects in Australia is not known and the limited export capacity may mean that there is limited scope for the producers to access (these) prices.
“In addition,” it says, “expectations of higher international prices may provide incentives for further development of supplies – however, the availability, cost and timing of coal seam gas developments are uncertain.”
In the long term, the regulator adds, it expects the State’s gas prices to rise towards international levels, but this is unlikely to be a smooth process, creating an environment for market uncertainty in the medium term.
One of the key factors impacting on local gas prices is how much of the fuel will be demanded by power generators on the east coast.
The regulator’s consultants, ACIL Tasman (now ACIL Allen Consulting) remark that the introduction of carbon pricing had been expected to deliver the gas sector strong growth prospects, but the outlook has changed considerably as a result of declining power demand, uncertainty over the future of carbon pricing and the continuing policy push for strong investment in renewable energy, essentially wind farms.
“Little growth in gas demand for electricity generation is now expected before 2020,” say ACIL.
Meanwhile IPART actually would like to get out of the business of regulating gas prices in NSW.
It says competition in the State market is sufficient to protect customers as well as offering choices and better price and service outcomes.
Only a third of smaller customers in the State remain on regulated prices – although the determinations influence what the retailers charge the rest – and other east coast States are content to leave matters to the market.
Overall, it’s a messy state of affairs for energy suppliers and consumers.
The new IPART determination really contains no surprises and small and medium businesses will not greet it cheerily.
Looking at the next 12 months, and especially as they anticipate a cold winter, NSW householders, who are facing gas prices $171 higher than two years ago and power bills $587 higher, will not be especially pleased either.
And they get to vote on 14 September.
Given the fierce debate in the energy market over current issues, this may be “Mission Impossible” — the Australian Energy Market Commission has set off in pursuit of a consensus among stakeholders for strategic priorities.
It tried this first in 2011 – since when the federal government has introduced a carbon price which the Coalition now plans to junk as fast as it can after 14 September, the slump in electricity demand has been confirmed as a trend not a blip, the renewable energy target has been re-affirmed at a higher than originally planned level (and the Coalition clearly intends to look at reducing it to a true 20 per cent), an energy white paper has been published (and the Coalition plans to re-do the exercise next year), two State governments (Queensland and New South Wales) have set out to rein in network developments and a different set of rules for regulating “NEM” networks have been devised (although not yet confirmed).
As the AEMC observes, it has “become very challenging” to forecast future east coast demand for electricity and gas.
This alone is making formulating energy policy a tad hard before the political shenanigans are taken in to account – and the reaction of generation businesses in mothballing plants is an added twist.
On top of all this, the east coast gas supply situation has descended in to a major brawl over coal seam methane projects and the NSW outlook is more for a price crisis than a near-term solution.
No wonder, then, that the AEMC chairman, John Pierce, says in his introduction to the discussion paper on energy market priorities that we are “in a period in which the energy sector is subject to almost unprecedented interest and attention.”
As Pierce notes, the landscape is not just about network charges and gas prices.
“The role of consumers,” he says, “is changing.
“Many have taken advantage of the RET and the State FiTs to install PV technology.
“(Take-up of smart meters) is encouraging consumers to engage more actively in how much and when (to use power).
“Switching rates and engagement in the retail market is high (compared with other countries).”
The discussion paper is available on the AEMC website and runs to some 50 pages, so it is not going to get paraphrased here.
The core thread of the paper, however, can be said to be the need to keep open a “consistent pipeline” of investment to maintain a secure supply of energy, something that the “national” electricity market serving the east coast has done for 15 years, although not without the occasional hiccup.
As the AEMC notes, the nature of the investment in electricity supply is also changing.
The commission believes there is going to be a greater role for embedded generation and investments in products and services that give consumers greater control over how they use (or don’t use) electricity.
It says that a significant challenge is going to be attracting investments that minimise costs for consumers – which is not at all the same as suppressing expenditure (the recipe du jour for the Newman and O’Farrell governments in wrestling with network costs), especially when, as the AEMC points out, both the national economy and our population are forecast to grow strongly, pushing up overall demand and peak demand irrespective of whether per capita consumption stabilises or declines.
As well, just finding sources of funds to refinance investment in generation and networks in the post-GFC environment is not a minor issue (and I wrote about the paper produced by KPMG and the Energy Policy Institute of Australia, see “Meanwhile in the real world (2)” on this site on 23 March, warning of the money-raising challenges confronting the industry) – while maintaining the RET at a target of 45,000 gigawatt hours a year from 2020 will require “significant investment,” says the commission.
The regulatory processes impacting on all this are not only those the AEMC is piloting for networks and NSW and Queensland governments may or may not pursue for energy retailing but also the “green tape” confronting new developments, above all those producing coal seam gas and developing wind power.
It is perhaps an under-statement for the AEMC to note that “how the gas sector develops in Australia and interacts with the electricity sector is uncertain.”
It adds: “The nature of future investment (overall) is inherently uncertain so that it is important (for) market arrangements (to) facilitate options without creating barriers or distortions.”
Some of us will think that, in the period since 2011, rather too much of the policymakers’ (ie politicians’) activity has been directed towards distortions than the long-term interests of both shareholders and energy sector investors.
The AEMC, however, is right, I think, in observing that the future is likely to be less about the quantity of investment (which to some extent dominated the energy white paper) and more about putting in place a framework to provide incentives for the most efficient investment options – but the word missing here ahead of framework is “durable.”
You don’t have to be an irate coal seam gas developer in NSW to have had a bellyful of politicians twisting and turning, including U-turning, in the energy policy arena.
Finally, so far as this post is concerned, there is a sobering warning tucked away in the middle of the AEMC discussion paper about an issue that tends to get little attention but could be a major supply problem should it ever occur.
The commission describes it thus: “The electricity market is characterised by significant inter-dependence among participants (and) has so far proven reasonably robust. However, there is concern that (existing) mechanisms to ensure continuity of supply when a retailer gets in to financial distress may be ineffective in some circumstances.”
The nasty word overhanging this prospect is “contagion.”
To date, the few instances of retailing tiddlers going bust have not sent ripples too far – but, says the AEMC, “the failure of a large retailer is possible and could be caused by a wide range of factors.
“If it did occur, the potential consequences could be severe.”
Another way of putting this, as a warning to policymakers and their army of advisers (not a few of whom have political rather than practical jobs), is that, if you meddle sufficiently with this marketplace, you could set off something you will find very hard to handle – to the huge detriment of consumers.
(Offstage whisper: “California.”)
The commission is kicking off its review process with stakeholder workshops (the first in Sydney on Wednesday, then in Brisbane next week and in Melbourne on 1 May) and is looking for written submissions by 27 May.
The divide here between those who can see no wrong in an all-out green power revolution and those who fret about the implications seems to grow wider by the day.
At least part of the problem in coming to terms with the issues from an Australian perspective is that the local media debate tends to the all-white or all-black approach, with (in soccer parlance) armchair referees waving red cards at every turn.
As an example, I first read this weekend a local website declaiming “Renewable Germany: the very model of a new energy order” and then a story in the “New York Times” headlined “Europe faces a crisis in energy costs” and another in the London “Financial Times” headlined “Europe wobbles on green energy costs.”
The latter notes that for two decades the global epicentre of renewable power has been located in Europe, notably countries like Germany and Spain.
But now, it says, the “jitters are growing” over the costs involved.
The financially-strapped Iberians and Italians have already wound back renewable subsidies and now, as a federal election looms, the German government wants to freeze subsidies for two years and limit them thereafter.
As well, the Swedish government has termed the German “energiewende” unrealistic and its environment minister has predicted Germany will need to rely more on coal-fired power as it decommissions nuclear.
(The Swedes abjured nuclear a decade ago, then did a U-turn in 2009.)
Plus the Czechs and the Poles are growling at the Merkel government for making such an important decision for EU electricity supply without consulting them and others.
German voters, who consistently tell opinion polls how green-oriented they are, now also say that the limit they are willing to shell out for the N-turn is an extra 50 euros a year while the actual cost is estimated to be an extra 185 to 250 euros annually over this decade for the second-largest household power bills in the EU.
(That Germans are perfectly happy to pay more for green power is a constant meme in our local media coverage.)
The current surcharge to support renewable power for German households amounts to 14 to 18 per cent of the bill and it will rise again in 2013-14.
The German environment minister has estimated that the overall economic cost of the “energiewende” by 2030 will be a trillion euros, a thought loudly denounced by the greens as “impossible.”
The current renewables surcharge falls on households and small business but the European Commission is now challenging the German ploy of exempting major industries from the cost – if this is ruled unlawful, the debate in Germany will turn to job losses, with America waiting with open arms to welcome manufacturing investment attracted by its “shale gale.”
Leaving aside what’s happening in China and India with growth in coal and gas consumption, one wonders how the movement of factories using nuclear-powered electricity in Germany to new plants using gas-fired power in the US contributes to “saving the planet”?
Closer to home, in one sense, although far away geographically, is the case of Ontario.
The largest Canadian province is the nearest thing you will find to New South Wales in North America (with Toronto equalling Sydney in many respects), providing you leave aside the weather differences.
(It is especially “interesting” to depart Sydney in February with a temperature of 35 degrees Celsius and to disembark in Toronto with a temperature of minus 35 when the wind chill factor is included.)
Our greens like to point to Ontario, when they are not excited about the bigger examples of Germany, because the Canadian equivalent of the Labor Party – called the Liberals just to confuse us – in the province has been engaged in a decade-long exercise to kick the coal power habit and embrace renewables (easier to do when you also have recourse to nuclear and hydro power).
Ontario’s Green Energy Act has just been the butt of a ferocious review by economics professor Ian McKitrick of the Fraser Institute and Guelph University.
You can find the whole document on the institute’s website (“Environmental and Economic Consequences of Ontario’s Green Energy Act”).
In summary, McKitrick blasts the Ontario government’s claims that its green initiative will create 50,000 jobs, asserts that the emission reductions of the GEA could have been achieved at a fraction of the cost through other means while impacting much less heavily on manufacturing industries and claims that the province’s power bills (among the highest in North America) will rise by another 40 to 50 per cent in large part as a result of additional GEA costs.
McKitrick says the Ontario plan is 10 times more costly than installing air pollution controls on the coal plants – their impact on the local environment has literally been an irritant for Ontarians for a long time.
He is especially savage on wind developments, asserting that “wind power has proved particularly wasteful because it is rarely available when needed and often has to be unloaded on other jursdictions (in the US) at a financial loss to (Canadian) ratepayers.”
Coming back to Germany, here is a cautionary tale of two days:
Day one was a not especially pleasant 19 March, which saw the German load at 47,600 megawatts – of which 20,000 MW was brown coal plant, 15,500 MW black coal plant and 12,100 MW nuclear reactors.
It was day on which 6,000 MW of wind made some contribution and 7,000 MW of solar power was used for approximately two hours.
Day two was a warm 16 April (the day the European Parliament cratered EU carbon prices by rejecting a proposal to cut the CO2 allowances that have been issued).
It saw a German load of 42,000 MW of which wind capacity reached 14,000 MW and between 11,000 and 20,000 MW of solar power was in use (the latter capacity during the afternoon peak demand period).
Go figure, as they say.
That “New York Times” story to which I referred above says in part: “Europe is lurching through an energy crisis that in many respects parallels its seemingly unending economic crisis.
“Across Europe, consumer groups, governments and manufacturers are asking how their future energy needs can be met affordably and responsibly.
“European policies were conceived in a very different era,” it adds, “when economic growth was robust and there seemed lots of leeway to add a few euros on to the cost of electricity if it might help combat climate change.
“Europe is going to achieve its objective of cutting emissions 20 per cent from 1990 levels by 2020 – mainly because the recession has cut industrial production.”
The story quotes an IHS CERA consultant: “We are in the realpolitiek of climate change now – where costs and competitiveness do matter.”
And it quotes a British consumer group executive: “Our whole energy policy needs to be rethought. We don’t need to go hell for leather in one go to meet (carbon) targets.”
Britain’s annual average household energy bill has doubled since 2006.
Next month is going to be a busy one in the public arena of the energy business.
Two conferences dominate my personal schedule: the “Power Pricing 2013” event I am helping Jamie Turmanis & Co to organise on 22-23 May in Sydney and the annual conference of the Australian Petroleum Production & Exploration Association in Brisbane from 26 to 29 May.
The latter is always a very large milepost on Australia’s energy path, but recent events will see it loom still larger: the continuing row over coal seam gas development on the east coast, the specific drama of gas supply for New South Wales and, most recently, the issues raised by the Woodside decision not to proceed with onshore development of a $45 billion project.
The APPEA conference will figure the Queensland Deputy Premier, Jeff Seeney, as a keynote speaker and he and his government’s views will be well spotlighted by the media as it wrestles with the impacts of energy policy on the State community.
The “Power Pricing 2013” forum will take place within weeks of the Independent Pricing & Regulatory Tribunal announcing its draft determination on regulated power bills for NSW – it is scheduled for next Monday (22 April) – and the week before the Queensland Competition Authority makes its final determination (scheduled for 31 May) on that State’s regulated electricity charges.
NSW Resources & Energy Minister Chris Hartcher and Coalition federal energy spokesman Ian Macfarlane have committed to speaking at the conference.
I chaired the panel that worked on the agenda for this event (and will co-chair the conference) and it seemed at least to me that the topics picked themselves. Their relevance is borne out by the top-flight list of speakers attracted to participate.
The power price outlook (especially on the east coast) is a dominant feature of any discussion by energy professionals these days and I am looking forward to Edwin O’Young of Port Jackson Partners tackling both the issue of demand in the “NEM” this decade and his estimates of the price trajectory as the opening scene-setter for the event.
The ramifications of this outlook have as many points as an echidna and we have lined up a particularly interesting panel to discuss this with Edwin and me: Jonathan O’Dea MP, chairman of the NSW Legislative Assembly Public Accounts Committee, the Energy Supply Association’s Matthew Warren, and the NSW energy and water ombudsman, Clare Petre, fresh from a national forum in Canberra on energy affordability.
Warren will also present a paper on “the need for a sensible debate on power prices,” which seems to me to be one of the key requirements for 2013 after the frenzied carrying-on of 2012 – for which the poster child is a headline in “The Age” referring to “shock, horror” over a story of a price adjustment that is costing Victorians less than 70 cents a day – and David Green, the Clean Energy Council CEO, will tackle the issue of the impact on consumer prices of carbon policies and other renewable energy schemes.
Unquestionably the most vehement part of the 2012 media coverage of the energy debate was the vilification of the electricity networks for “gold-plating” and all the rest of it.
I am particularly pleased to see George Maltabarow, the former AusGrid chief executive and former chairman of the Energy Networks Association, now chairman of the Australian Energy Research Institute at the University of NSW, agreeing to give a paper on “speaking frankly about network costs.”
This is an issue that is not going to go away simply because of recent political decisions in NSW and Queensland to require substantial cuts in network capex against budgets approved by the Australian Energy Regulator.
An especially interesting aspect of the timing of the conference is that it could coincide with the Gillard government’s release of the Productivity Commission report on networks.
The draft report by the commission was the platform for Julia Gillard’s pledge to the community last December that a $250 a year cut in power costs would follow implementation of the reform program being pursued by the Council of Australian Governments (which is meeting on Friday).
I have written more than once about how and why I think the Prime Minister and her advisers played with an aspect of the draft report for political ends.
The final report by the commission was delivered on 9 April and the federal government is legally required to to table it within 25 sitting days of receipt.
The parliamentary schedule is such that the government could delay releasing the report until August – but that will only engender the question of what is it trying to hide?
Smarter perhaps to table it in Budget week in mid-May when the Press Gallery will be obsessing about Wayne Swan’s latest pea-and-thimble tricks.
A critical element in the whole power pricing debate is the issue of retail deregulation and the “Power Prices 2013” conference is going to focus on this in a substantial way.
This includes a paper on the issue by Kate Farrar, managing director of Qenergy, and a panel discussion about what end users can and should expect from this move, involving her, Simon Draper of IPART, Brian Parmenter of ACIL Allen Consulting, a former chairman of the QCA, Clare Petre, and Mark Brownfield, AGL Energy’s general manager marketing and retail sales.
Two other valuable contributions on the consumer side of all this – which is what energy supply is all about – will come from AGL Energy’s Tim Nelson (focussing on the intersection of deregulation, social policy and energy policy) and Ron Ben-David, chairman of Victoria’s Essential Services Commission, whose paper will include dealing with the question “does promoting the long-term interest of consumers equate to the regulators’ pursuit of economic efficiency?”
Driving this issue further, we have lined up a panel discussion on the affordability of energy for vulnerable consumers featuring Lynne Chester of the University of Sydney (and a fellow participant last year with me in the energy white paper reference group), Gavin Duffy, policy director of St Vincent de Paul, and Edward Santow, CEO of the Public Interest Advocacy Centre.
All up, May is promising to be a really interesting month for players in the energy patch, but politically these interesting times are to be seen more in the Confucian sense for incumbent governments.
The one certainty of any election campaign – let alone the long-running trudge to the federal polls on 14 September – is that politicians and axe-grinders of all descriptions will play with words and facts to suit their own convenience.
For Climate Change Minister Greg Combet, this means taking every opportunity, including a recent visit to China as part of the Prime Minister’s entourage, to dog whistle about threats to the RET.
Outside the government, some environmental activists go further, asserting that an Abbott government will wreck the renewable energy target or that its pledge to abandon a carbon tax will lead to a cessation of investment in wind energy.
Combet and the Gillard government have met two of the green movement’s wish list this year by endorsing the Climate Change Authority’s recommendations to maintain the large-scale RET at 41,000 gigawatt hours annually in 2020, rather than 20 per cent of actual demand, and to push out the next review of the scheme to 2016 instead of 2014 as agreed between the government and the Coalition when the current legislation was negotiated.
The Gillard government, which has just five sitting weeks of federal parliament left, will need to legislate to alter the RET review year.
Tony Abbott has thrown fuel on the greens’ fire by saying in a media interview that the RET “needs a serious review” due to its impact on electricity prices, translated immediately to “Abbott is threatening the RET.”
Combet, with typical chutzpah, is piously declaring that renewables investors “need certainty” – quite a claim from a minister whose government has made a pretzel out of its carbon policy, messed with solar schemes to the detriment of the mainstream RET, played musical chairs with green energy subsidy schemes generally and gone out of its way to make life uncertain for coal seam gas investors.
However, it does seem pretty certain that the Coalition will win office in September and that it will require a RET review in 2014.
Greg Hunt has also confirmed that the Climate Change Authority will be scrapped by a new government, so it remains to be seen what would constitute a promised independent review.
How fast this review could be concluded is another question.
The Coalition does not especially help itself when environment spokesman Hunt responds to Combet by saying suggestions his government would cut the RET are “completely wrong” while energy spokesman Ian Macfarlane is making it clear that the 41,000 GWh target will be part of the review because it may not be “sustainable” in an environment of declining power demand.
Hunt said in a speech in March that the Coalition “has no plans to change the RET arrangements,” but the implication of Macfarlane’s remarks is a return to an actual 20 per cent target, which, on present demand trends, would reset the goal to about 27,000 GWh in 2020, rising, of course, if and when consumption resumes growth in the next decade.
(The RET runs until 2030 under the present scheme.)
Meanwhile the green movement is insisting that a 2014 review will “bring the wind industry to a halt” and endanger meeting the 2020 target but a 2016 review will not do so, a position open to a raised eyebrow, I suggest.
It implies that there will be a rush of investment in the rest of 2013 and in 2014 and 2015, but one wonders how this could come about, given that the final say really lies with financial institutions and retailers entering power purchase agreements.
Ever helpful, the Australian Conservation Foundation has welcomed the Gillard government’s stance by praising it for resisting pressure from “dirty polluters” to change the RET, terminology that must resonate well with large retailers with green footprints.
In this context, the mainstream opinion of large industrial and commercial companies, as represented by the Business Council, may be worth recounting.
The BCA told the CCA it believes the present target is “materially out of line with the stated objective” of the renewables policy because it will deliver 26 per cent of foreshadowed consumption in 2020.
It wants a new fixed target at a lower level.
Finally, on the subject of the cost of renewable energy, I have found an interesting paper, published in February, by Malcolm Keay at the Oxford Institute of Energy Studies. (Its title is “Renewable energy targets: the importance of system and resource costs.”)
Keay says a key problem is the polarised nature of the renewables debate, as is certainly true here.
“On the one hand, renewables advocates argue the costs are falling, that many are now more or less competitive, that in future they are likely to be below the cost of conventional generation,” he writes.
“On the other hand, opponents have argued that the cost of renewables support is rising, that they are unlikely ever to be competitive and that they represent an expensive and efficient way of reducing emissions.”
Can both these positions be true, Keay asks?
“Yes,” he answers.
The critical point, he says, is that there really is no such thing as the cost of renewable power.
Instead, there are different costs of particular sources in particular locations at particular times and within particular electricity systems.
The cost of a CCGT plant, Keay adds, is broadly similar anywhere but the cost of renewables is strongly influenced by their dependence on natural forces.
In particular, he rejects the use of so-called levelised costs – which are the average per unit over the lifetime of a plant, seeking to encapsulate all relevant costs in a single number.
In principle, Keay argues, it is more accurate to look at incremental system costs – how the costs of a power system as a whole are affected by the addition of a given increment of generation
Keay’s views are contained in a 10-page paper and I can’t do them justice here, but his bottom line is this: generic statements about the competitiveness of particular renewable sources do not give a realistic picture of the costs involved in meeting a country’s renewables targets.
This is a torpedo amidships for the local green fleet and its noisy crew and can be argued as a good reason for a genuinely independent review of the RET – which is not how some people would characterise the CCA exercise.
Anyway, the odds are now on there being another major exercise in tilting at windmills here within the next 12 months.
Late last Wednesday at the Australian domestic gas outlook conference in Sydney, moderating the day’s final panel discussion, I tossed a question and got a reply that, on reflection, puts all the rest of the forum’s to-ing and fro-ing in context.
I said to Mike Moraza, group general manager of upstream energy at AGL Energy, “Look, today’s discussion has gone a number of times to this issue of problems of gas supply for New South Wales – my question is whether this is a crisis still to come or is it already a crisis?”
Moraza’s reply was: “This is a crisis now. That’s a fact. We have run out of time (in NSW). We are not going to be able to fill the supply gaps that will emerge at the end of 2016.”
Also sitting on the panel, Robbert de Weijer,CEO of Dart Energy’s Australian operations until its decision to suspend its NSW operations, added that he believes the State’s end-user gas prices will be very high as a result of the supply problems and a number of large users, not able to afford them, will be “driven out of the State.”
More support for the “crisis now” perspective can be sourced to a comment NSW Resources & Energy Minister Chris Hartcher made in question time at the “Energy State of the Nation” conference organised by the Energy Policy Institute of Australia in late March.
Hartcher volunteered the fact that he was in negotiation with a large industrial company, “with 500 employees and thousands more indirectly employed as a result of its activities,” that was considering relocating overseas because of the prospect of much higher gas prices.
At last week’s gas outlook conference, Hartcher grasped the lifeline offered by Santos, whose senior executive James Baulderstone told participants that his company could produce a quarter of what NSW needs each year from its licence area in the Pilliga forest near Narrabri.
Three points need to be made about the Pilliga opportunity.
The first is that its is a critical resource for NSW gas users in this supply environment.
The second is that the “Lock the Gate” movement is already hastening to attack development in the Pilliga. The activists threaten a “massive community backlash” against the Santos plan.
The third is the time it will take to bring the Pilliga resources to market.
In this latter context, AGL’s Moraza said talk of 2016 production from the field is “a very ambitious timetable.”
Hartcher, when he spoke at the conference, said his government welcomes Santos’s plans but the proposal has yet to be put forward formally.
Santos, of course, has to negotiate its way under a federal environmental approvals regime that is being changed on the run ahead of the September election to pander to the anti-CSG brigade – and it, like the rest of us, has yet to see the report on CSG impacts currently being completed by NSW chief scientist Mary O’Kane.
The Pilliga development will need hundreds of wells and a new pipeline to link the field to the Moomba-to-Sydney line that brings gas from the Cooper Basin to NSW.
Moraza’s remarks and the broad tenor of discussions at the domestic gas outlook conference drive home that the State government and the State’s 450 large business users of gas – as well as the million-plus households and small businesses consuming the fuel – are now between a rock and a hard place.
The rock is the cessation of a large part of the contracts for supply of gas from interstate – representing 95 per cent of demand with 77 petajoules a year coming from Victoria up the eastern gas pipeline and 69 PJ from South Australia and Queensland via the Moomba line – at the end of 2016 and 2017.
The hard place is the price for supplies that retailers like AGL will have to pay to meet customers’ needs.
The company has acknowledged publicly that it is already engaged in legal arm-wrestling with existing major contract holders over their proposals to double the price of wholesale gas.
Media reports claim that suppliers are looking for prices of $6 to $9 a gigajoule versus the average of about $4 of the past three years.
There has also been media speculation that the recently-announced deal between Origin Energy, a major AGL retail rival, and Beach Energy for supply of gas from the Cooper Basin is at the upper end of the $9 ballpark.
The “crisis now” atmosphere will very likely thicken when the NSW Independent Pricing & Regulatory Tribunal announces its draft determination later this month for gas prices from mid-2013 to June 2016 – or perhaps only for next financial year because of the market uncertainty.
I frequently make the point in commentaries and presentations that three four-letter words lie at the core of the energy debate: risk, cost and time.
The current brouhaha over the cancellation of the onshore development of the Browse basin LNG project in Western Australia by Woodside and its partners is a classic example of this: the time taken to sort out the official approvals for this project, the rising costs and the greater risk as the global market changes have led to the “shock” decision, which will not have surprised many professional observers of the local LNG scene.
Time, cost and risk are the key factors in the NSW coal seam gas imbroglio, too.
Apart from the Pillaga development, it may well be possible, for example, to bring new gas supplies from Victoria by “looping” – ie doubling – the coastal pipeline.
But over what time and at what cost for a delivered product?
And what risk does this impose for retailers and consumers?
Business angst over the situation has again been expressed by the Australian Industry Group (which has 60,000 corporate members nationally, many of them in NSW).
AiG has been fretting publicly this month about higher gas prices and an impending “supply crunch” that, it says, will hit jobs and household budgets in Sydney, Melbourne and Adelaide among other places.
(By the way, gas consumption in NSW is far from just a Sydney issue – the metropolitan area requires some 92 PJ a year while Wollongong takes 27 PJ, Newcastle 16 PJ and other regional centres, including Canberra, consume 15 PJ.)
AiG, in its recent statement, notes that “Many industries depend on gas. It is an essential feedstock for many basic chemical products that underpin other industries and everyday life.”
Gas supply, says the lobby group, is “far more fragile and important than many people realise.”
Which is why the crisis that is now enveloping New South Wales is no minor matter – and what is bad for NSW will be bad for the country as the impacts ripple out through the economy.
Our Prime Minister was extra-ordinarily vocal about power prices late last year but she is notably mute about the gas issue today – except for approving her Environment Minister adding to the problem by playing with the Environmental Protection & Biodiversity Act.
Is she likely, one wonders, to have a chat about the issue with other first ministers when she chairs the Council of Australian Governments at the end of the week?