Archive for June, 2013
What will the 2013-14 financial year bring?
Obviously, a federal election, although the date is no longer certain – except that it must be by 30 November.
Obviously, too, higher energy prices helping to add to cost of living pressures for households and small business – and contributing to the ongoing dimunition of the nation’s manufacturing base.
And, according to the Australian Energy Market Operator, yet another year in which east demand for electricity slackens, driven in particular by conditions in New South Wales.
There’s a lot more like this that one can canvass and none of it adds up to a happy new financial year for electricity and gas suppliers and consumers.
A few days ago, suppliers could be reasonably confident that a Gillard government was on its way to a thrashing on 14 September and the big question was the outcome of the half-Senate poll, the key to resolution of the Coalition’s intention to kill the carbon policies.
Now, with Gillard swept away, Kevin Rudd keeping his counsel on a voting date and the media in love with a new political game, the opinion polls (reflecting the media) are throwing up the prospect of a much tighter election.
Whether Rudd can find the means to move before the poll to change the carbon price regime is an issue that has to be factored in to consideration of the energy playing field in 2013-14 and beyond.
Carbon policy is Pandora’s box and whether Rudd Redux is game to open it will be an early big question for the new financial year.
He is faced with an immediate challenge on this issue because the Gillard carbon tax rises on 1 July and the Coalition is already calling on Rudd to “show you are fair dinkum” by abandoning the increase.
The other side of the coin is that any carbon price move and the ensuing debate will throw in to early and sharp focus the costs of Abbott’s “Direct Action.”
The latest Essential Report poll, conducted days before the fall of Gillard, threw up that just 32 per cent of respondents thought her carbon tax decision was good for Australia versus 48 per cent who thought it was bad.
I have been reading with interest a Tony Wood commentary on “The Conversation” website in which he makes the case for Rudd moving quickly from a fixed carbon price to a market-priced mechanism with a fixed emissions cap.
It will distinguish Rudd 13 from both old Rudd and the Gillard regime, he writes. It will take the fight up to the Coalition by neutralising its present arguments and open the door to a real debate on “Direct Action” policy. And it could open a constructive dialogue with business. On the other hand, setting an emissions cap will be “politically difficult and hard work.”
It seems to me that Rudd moving on this front in the present parliament – rather than signalling he will do so if re-elected – comes with a fair number of risks and a time problem.
The risks include the public reacting poorly to the election being put off until beyond 14 September to enable parliament to deal with the issue, the cost of recalling parliament and the certainty that Rudd will be personally attacked on his record at full throttle by both the Greens and the Coalition – who could combine to vote down any legislation in the Senate and certainly won’t vote for any quick resolution of amending legislation.
Milne is already hoeing in to Rudd, accusing him of being a serial backflipper on carbon policy and wanting to “brown down” climate action as well as raising the question of whether he will abolish the Climate Change Authority, which is also in Abbott’s sights.
A further complicating factor is that the CCA is intent on delivering a draft recommendation in October (but would it move sooner if the opportunity arose?) on what Australia’s emission abatement target should be, with a final report planned for early next year.
The plus for Rudd is seen in some quarters as the carbon price move allowing him to present himself as a moderate friendly to business with a New Treasurer, Chris Bowen, who, in turn, is seen by some as the new Paul Keating.
Whatever the outcome of all this, the supply sector is also in limbo until it discovers the fate of the renewable energy target.
A Coalition government is highly likely to bring the RET back to a “true 20 per cent” in 2020 and may well seize on the recent Productivity Commission recommendations to cull the small-scale distributed generation support from the program.
The Coalition is promising that, in office, it will move swiftly to re-review the RET and also to set up a new energy white paper inquiry.
(An Essential Report poll in early June found that 33 per cent of respondents thought the present RET is “about right” and 40 per cent thought it is not high enough while 76 per cent of those polled supported wind farm development.)
The whole NEM regulatory reform process is also “work in progress,” with every step in 2013-14 open to challenge.
So are the efforts by the New South Wales and Queensland governments to reduce the costs of network operations.
The fate of the NSW generation privatisation is still to become apparent as are the intentions of the Queensland government with respect to setting its power plants up for sale.
Will the ACCC intervene if the O’Farrell government finds a single buyer for Macquarie Generation and insist on the business being split up? What are the implications of any such move for Queensland?
And then, of course, there is the ongoing saga of coal seam gas development in NSW and the ever-growing concerns about the future of east coast gas supply.
Plus the next stage of the power price saga – with draft regulatory decisions due before next Easter about 2014-15 charges and final steps in May/June.
Will the NSW government make a decision late this year or early next year to deregulate the State’s energy prices?
If it doesn’t act, it can expect a storm of energy retailer protest – if it does, it will be under fire ahead of the 2015 State election for allegedly exposing consumers to more price hikes.
Will there be any movement on smart metering and time-of-use tariffs (beyond Victoria) in 2013-14?
And so it goes – a litany of uncertainty just like the financial year now ending and the one before that and the previous one etcetera, etcetera.
No question, we live in interesting times!
As tonight’s Shakespearan drama has unfolded in Canberra, some of us have spared a moment to pay attention to another matter.
As political knives flashed and ministerial heads and careers rolled, the Productivity Commission report on electricity networks has finally been tabled in Federal Parliament (after reaching the government on 9 April) and has thus been unveiled to us plebs.
Having carped at Prime Minister Julia Gillard’s use of this report to promise a $250 power price cut to households by 2014, my attention immediately went to the first couple of pages of the 356-page report.
There the commission says now that, if carefully managed, critical peak pricing and the east coast roll-out of smart meters could eventually produce average savings of $100 to $200 per household each year after accounting for the costs of the meters.
Perhaps more importantly for the long run, the commission says that the reforms to network regulation brought forward late last year, including improvements to the rules, better resourcing for the Australian Energy Regulator and greater representation of consumers, have only partly addressed the flaws in the regulatory environment – which, with inefficiencies in the industry, it adds, have seen average power bills rise by 70 per cent in inflation-adjusted terms between June 2007 and last December.
The commisison’s final report calls for:
First, modified reliability requirements to promote network efficiency.
Second, improved demand management.
Third, more efficient planning of large transmission investments.
Fourth, removal of State regulatory arrangements by 2015 and the sale of network assets still owned by State governments because “the rationale for government ownership of the businesses no longer holds.
(“Privatisation,” says the commission, “is not a radical move despite some of the political concerns – accompanied by regulation, it will not allow investors to exploit their market power or lower reliability and safety.”)
Fifth, shaking up the reform process, which the commission describes as “tardy,” arguing that delays to implementing change have cost consumers across the “NEM” hundreds of millions of dollars.
Sixth, three fully-funded consumer advocacy bodies in the “NEM” should be amalgamated and funded through an industry levy.
Seventh, in addition to the AER review planned for 2014, the Australian Energy Market Commission, the Australian Energy Market Operator and the new consumer representative body should be reviewed by 2018.
In a rebuff to the “gold-plating” slurs thrown at networks from many quarters in the past 18 months, the commission opines that “it is important not to blame the network businesses for current inefficiencies (because) mostly they are responding to regulatory incentives and structures that impede their efficiency.
The Energy Supply Association has leapt to welcome the Productivity Commission report, notably its endorsement of electricity market deregulation.
ESAA’s Matthew Warren says: “The commission’s verdict is clear: governments need to get out of regulating energy markets. Regulation is stifling competition and innovation – and blocking moves to make the system more efficient.”
The association has also welcomed the PC focus on better metering, tariff reform and enhanced consumer advocacy.
“Uptake of air conditioners and solar photovoltaics has put a huge strain on electricity networks,” says Warren, “ pushing up power bills for those that don’t have them.”
The commisison has found that a household running a two kilowatt reverse cycle air conditioner and using it at peak times receives “an implicit subsidy equivalent of around $350 per years from consumers who don’t do this.”
But it warns that removing the “buried cross-subsidies” and reducing investment in networks and generation to meet peak demands cannot be realistically achieved quickly.
The implementation of critical peak pricing across the “NEM” requires the universal roll-out of smart meters, “entailing high upfront costs.”
The PC favors a more carefully managed and staged approach.
Implicitly, of course, this junks Julia Gillard’s use of the commission draft report to promise householders a $250 price cut by 2014, a point I have been making since December last year when she and her office leapt on the initial study obviously without understanding what it was saying.
The PC points out that future retail electricity prices in the “NEM,” at least partly locked in through regulatory decisions – are projected to rise by 21 per cent from 2011-12 to 2014-15.
Just how tricky it is to convey complicated messages about electricity supply to the media and the community at large is illustrated by a Sky News story today.
“Victorian energy bills hit a 10-year high” is the headline and the story reports that the State’s average bill has increased by almost a third from 2001 to 2012, according to a report commissioned by the five privately-owned distribution businesses operating there.
“Huh?” said Mr Orchison, going in search of the document.
Now here’s what it is about.
The five DBs have commissioned consultants Oakley Greenwood to examine the causes of residential electricity bill increases in Victoria from 2001 to 2012.
The report is couched in inflation-adjusted terms (using 2012 levels) – and already, of course, as I know from long experience in my past lobbying life, a lot of the audience is lost.
What Oakley Greenwood has found is that:
First, after accounting for inflation, 2012 bills for householders using an average of 4,000 kilowatt hours of electricity in Victoria (and not including electric off-peak water heating costs) were 28.4 per cent higher last year than in 2001.
Second, flying in the face of everything in the media for many months, standard “poles and wires” costs in Victoria decreased in this period – when you remove the costs incurred by the Bracks/Brumby governments’ imposition of smart meters and of the scheme to kickstart residential use of solar PVs.
Third, when you factor in the metering and solar-related costs, network charges for the period rose 35.7 per cent.
Fourth, in the same time frame, retailer-related costs – buying electricity from the wholesale market plus processing customer accounts – rose by 25.1 per cent.
Fifth, if you removed the government-imposed costs, the network share of the final bill fell over this period from 33.7 per cent to 27.1 per cent.
Sixth, even when you count in the government-related costs, the network share of the final bill in Victoria is substantially lower than it is in States where the “poles and wires” are still owned by taxpayers – eg 53 per cent in Queensland and 52.1 per cent in New South Wales.
(In South Australia, where networks are also privatised, the share of the final bill is 40.6 per cent.)
Now here is the message the Victorians DBs are seeking to sell – completely ignored by Sky News, the only coverage to be seen mid-Tuesday: “The results of the study illustrate the benefits to customers of privatisation.
“ (In Victoria) distribution businesses have responded to incentives to plan their networks efficiently, using an output-focussed approach to planning and adopting the latest technology choices to maximise system utilisation.”
As well, say the DBs, the Victorian networks have improved reliability of supply to consumers, with their performance exceeding the “NEM” average.
And the punchline: “These findings show Victoria’s privatised electricity distribution businesses are delivering services more cost-effectively than their interstate counterparts and recent claims that the ‘poles and wires’ are driving up bills are inaccurate with respect to the privatised model.”
Well, all that got across pretty well on Sky News, not.
And we shall see what the rest of the media make of it overnight.
Essentially, when it comes to power bills and networks, the media for the most part are in “give the dog a bad name” mode – the challenge for the electricity businesses is how to get their messages over to the community despite this.
PS: The Oakley Greenwood report contains a useful admonition to the media and others about why it isn’t helpful to compare bald average residential annual bill costs between States (as the tabloids are wont to do every now and again).
“Consumers use very different amounts of electricity in different States,” it points out. “This is the product of both climate and the availability of other energy sources.
“For example, in Victoria natural gas is widely available and commonly used for space heating and water heating. In Queensland, where gas is much less available for household uses, higher cooling loads increase average residential electricity consumption.”
Trying to keep track of all the goings-on in east coast energy supply and policy development is rather more than a full-time job.
The number of inquiries under way in to gas production and supply is a case in point, with federal Resources & Energy Minister Gary Gray grabbing attention last month with a sudden decision to launch an inquiry in to the east coast situation and demanding a report by the year-end.
Whether this is in parallel to or over the top of a new review launched by the Australian Energy Market Commission just three weeks earlier under the title “Gas market scoping study” is anyone’s guess.
The work initiated by Gray is to be undertaken by the Bureau of Resources & Energy Economics.
(There are also Victorian government and New South Wales Parliament reviews going on at present.)
The AEMC study is to be delivered to CoAG’s Standing (ministerial) Council on Energy & Resources, which is chaired by Gray.
The political odds are that his government will be history by the time these reports are delivered, but they will be of equal value to an incoming Coalition regime.
The AEMC activity has pulled in only a handful of submissions (the deadline was a week ago) but they are enough to paint a picture of the views of suppliers and users (large ones anyway).
Customer perceptions are captured succinctly in a submission from consultants Energy Action, to whom I am indebted for the headline on this post.
“The limited number of retailers, the similar concentration of upstream gas producers and the short-term inability of users to switch production processes away from gas all act to place businesses in a cul de sac with respect to future supply,” they say.
Energy Action add: “The inevitable outcome appears to be a stark choice of take it or leave it to a much-increased price for gas.”
The consultants claim that it is not uncommon for business users of gas to be able to get supply quotes from only two retailers and in some cases just one.
In a recent media statement, the Energy Users Association sums up the gas purchasing situation like so: “Local manufacturers are being stung and many will consider closing or moving overseas when further gas price hikes hit in 2015-16.”
The Australian Pipeline Industry Association makes a salient point in its submission to the AEMC: the eastern Australian gas market was developed without consideration of LNG exports – which now make gas producers both the primary suppliers and the largest (by far) source of demand.
When the market arrangements were made, it was assumed that eastern Australia would actually become an importer of gas – either from Papua New Guinea or Western Australia, or both.
“As things stand,” says APIA, “the three joint ventures committed to LNG projects in Gladstone will control more than two-thirds of east coast supplies and be the source of about two-thirds of east coast demand.”
The core point, as APIA acknowledges, is that today’s market allows producers to sell gas to the users who value it most highly.
Making efficiency and flexibility adjustments to market arrangements, it argues, will not address the fundamental question of how gas is allocated.
To which, the producers have responded over and over again: leave it to the market – if politicians interfere, the huge value of the LNG trade to the national economy will be put at risk.
In terms of voter understanding, and therefore the position of political knees, the hard selling point here is that the high returns to the community via jobs, taxes and local purchases of goods and services by the LNG producers and gas producers selling to them is not nearly as easily understood as the “we’ll all be rooned” cries of leading manufacturers.
The producers’ answer to current domestic supply concerns is that governments should resolve the impasse over unconventional gas exploitation to ensure that the huge local resource is fully available.
In a submission to the AEMC, GDF Suez Australian Energy (the successor to International Power), operating as a power generator and an energy retailer, points to multiple, State-based market designs that make domestic gas trading complex and inefficient.
It wants a single market design with consistent rules across eastern Australia.
Looking at the gas supply issues, GDF Suez sees the key problems as including lack of competition, especially in Victoria, noting that the 65 per cent ownership of supply in this State would not be acceptable in the power market.
The company wants to see unnecessary barriers to entry in gas production removed, more consistent market terms across the east coast, contract standardisation and “gas producers and pipelines to be more closely aligned with market outcomes.”
Looking more broadly, it points to continually changing regulatory arrangements as an impediment to investment and market participation along with the uncertainty over the federal “clean energy future” legislation.
Origin Energy, one of the key players, does not accept that there are material problems with the functioning of the market that require a fundamental change.
“We consider the current downstream market arrangements to be sufficiently robust to manage the emerging LNG industry while continuing to promote the long-term interest of consumers,” its submission says. “Market developments should focus on incremental improvements.”
Come 2014, with the AEMC report and the BREE review in hand, as well as the State-based studies in Victoria and NSW, how does this situation play out?
To what extent can the national government intervene to create a better environment?
What time frame is involved?
The CoAG ministerial energy council seems the logical place for all this to come together for government consideration, but more than this is required.
The Energy Users Association, whose members have set up a separate Gas Supply Committee to focus on the development and implementation of strategies to improve the availability, cost effectiveness and competitive efficiency of domestic gas supply and transportation, is calling for governments and regulators to bring together producers, retailers and users for “a rational discussion on an emerging crisis.”
That seems to be a reasonable idea, but it will surely need to wait on delivery at least of the AEMC and BREE reports.
“Everyone,” says Phil Barresi, the new chief executive of the EUAA and a former federal MP, “recognises the need for sound policy not based on populism to drive medium to long-term energy supply. Unfortunately, the problem is the here and now, with the industrial sector suffering from the cost of energy on its financial viability.”
To which, I guess, the gas producers will add that the further problem is the inability or unwillingness of government to resolve the current CSG imbroglio.
Time is on no-one’s side here.
If you are my age and were in your 20s in the 1960s, then you can no doubt still recall the Motown song hit “Aquarius,” which became the the theme for the smash musical “Hair” and the rallying cry of the Hippy Generation.
A half-century later, we need a new song, I think, on the theme “This is the Age of Assertion.”
Declarations, seldom with any evidence, are the rage of the age.
When they relate to energy, renewables and carbon, you can rely on “our” ABC, the Fairfax media and the sundry green-boosting websites to spread them far and wide.
Two such at present are “unburnable carbon” and the “carbon bubble.”
The Australian Coal Association has opted to deal with the assertionists by proxy, hiring the services of international trade guru Alan Oxley and a former member of the Industry Commission, Jeff Rae, to produce a 35-page paper dissecting these claims.
The paper is now up on the Coal Association website, containing an assault on the two bubble claims and on the Grantham Institute at the London School of Economics, home base for these assertions.
Oxley also has an Op-Ed in “the Australian Financial Review” today providing a synopsis of what he and Rae have written.
Some of their other comments also catch my eye.
For example, “the contention that the international community has committed to hold global warming to two degrees Celsius considerably overstates the facts.”
The Kyoto Protocol limits have lapsed, the pair point out, and the major economies do not support binding commitments.
And, they add, even if the major emitting nations do accept a binding agreement to pursue the Two Degree target, it does not imply a restriction on the extraction and use of fossil fuels but use of a range of options, including closure of inefficient coal-fired plants and the widespread use of of cleaner technologies, pointing out that the International Energy Agency sees carbon capture and storage as contributing 22 per cent of emission reductions by 2050.
They note that the IEA’s 2035 scenario on the road to the Two Degree target envisages fossil fuels still making up 63 per cent of the global energy mix.
Any transition, they say, will not be an abrupt change but rather a shift that unfolds over considerable time.
This goes to the heart of the propaganda war the radical environmental movement has been waging for more than a decade – for example, the emotional assertions that it was all over for the human species if a global abatement agreement was not reached by 2010 and now 2015 and, after that, no doubt 2020.
Oxley and Rae provide this put-down for the Grantham Institute report: “(it) cannot be regarded as a serious analysis of the financial risks associated with fossil fuel assets; rather, it is an anti-development polemic aimed at pressuring international investors to divest their shareholdings in resource companies even though (doing this) would reduce the financial well-being of their clients.”
Bearing in mind the Greens campaign to stop development of new coal seam gas projects, it is also also worth noting Oxley’s and Rae’s summary of the IEA global outlook: “continued unlocking of unconventional gas resources is expected to result in natural gas coming close to matching coal’s share of the energy mix.”
Even so, they add, the IEA expects coal to “remain the backbone of electricity generation globally” between now and 2035.
As the Australian government does here, I might also interpolate, with its Bureau of Resources & Energy Economics forecasting in the scenario it released six months ago that black coal generation output in 2035 will be around 100,000 gigawatt hours a year with gas contributing 85,000 GWh – in total fossil fuels then will still be 60 percent of power supply.
The core perspective of Oxley and Rae is that attempts to force a massive structural shift away from fossil fuel consumption “will have the undesirable consequence of placing a significant hold on economic growth, resulting in a much more severe (impact) on global financial markets than any perceived carbon bubble.”
In this context, it is worth noting the recent views of Johannes Teyssen, CEO of the giant European utility E.ON: “Germany’s energy turnaround (as instigated by the Merkel government) is in a difficult situation at the moment.
“Apart from an increasingly unbalanced mix in power production, conventional generation, especially gas-fired plant, is coming under ever more economic pressure.
“This problem is due to two completely different energy systems which do not fit together under existing conditions and are weakening each other.”
Angela Merkel herself, also facing the polls in September, has just made a speech advocating reduced subsidies for wind and solar power to “keep Germany economically competitive.”
So much for Germany’s green power miracle, of which the assertionists, and their local media fellow travellers, can never have enough.
Coming back to the Oxley and Rae paper, the last two of its 35 pages are particularly worth reading.
In this appendix, they focus on capital market campaigning by the environmental movement and how NGOs have broadened their activities from lobbying governments to cajoling multi-national companies in to embracing their values by “threatening their reputations and running public smear campaigns.”
Oxley and Rae note that “this approach was dreamed up by two prominent anti-capitalist organisations, Greenpeace and WWF.”
Their verdict is that “encouraging business people to take over the legitimate role of government (in establishing the legal and regulatory framework under which they operate) is likely to encourage inferior economic performance as well as the emergence of a democratic deficit.”
That more of this type of work is needed to provide an antidote to the Age of Assertion is a given, so far as I am concerned, but the issue that remains for industry associations and their members is how to convey these thoughts to the broader, voting public.
Op-Eds in papers like “The Australian Financial Review” are worthwhile, but few voters read “The Fin.” Indeed less than half the population now reads newspapers at all.
The challenge remains for business: how do you package and present the research of the Oxleys and the Raes to reach the wider audience and especially the young urban audience?
That’s where the Age of Assertion has its greatest impact.
Hard on the heels of Grattan Institute’s paper on the outlook for gas supply on the east coast comes a decision to push up bills for 80 per cent of regulated small customers in New South Wales by 9.2 per cent from 1 July.
The average increase of 8.5 per cent being reported in the media comes about because the Independent Pricing & Regulatory Tribunal has awarded much lower rises for some rural areas.
However, in the AGL Energy franchise area – which covers Sydney, Wollongong, Newcastle, Dubbo, Orange, Parkes and part of the Riverina – the higher price rises will add $76 per year on average for households and $356 annually for small business.
The individual increases across NSW are not huge sums for many people, but they add to the cumulative cost of living pressures that seven out of 10 voters tell opinion pollsters are a considerable bother.
It’s also worth pointing out also that a large part of the 2013-14 gas price rises flows from higher network charges not higher wholesale costs, which still lie ahead.
On the network bills, distributor Jemena points to the need to refurbish 1970s era NSW gas infrastructure and the costs of meeting new customer needs – 250,000 customers have been added to the system.
(In passing, it’s not unreasonable, I think, to suggest that many of these folk taking up gas supply will be concerned about their electricity bills – opting for dual fuel systems helps them slice about two megawatt hours a year off their power consumption. They are going to be less than impressed when the threatened even larger gas price increases start arriving.)
While politicians and consumers in Queensland are reeling over a 22.6 per cent increase in power bills, IPART has delivered their NSW counterparts one of the lowest electricity price rises in a decade – 3.2 per cent for EnergyAustralia customers (the former AusGrid franchise), 1.3 per cent for Origin Energy users (the former Integral Energy franchise) and just 0.7 per cent for rural households and small business.
The determinations provides an average 1.7 per cent increase for NSW, the figure with which the media are running.
(One of the political problems of this is that some regional media are seizing on the disparity between their rises and the average – as the Newcastle newspaper is doing. In politically sensitive areas like the Hunter Valley, this is headline news for a region where the average residential power bill will now rise above $2,000 per year.)
As an indicator of how uncertain the marketplace is, IPART has declined to set prices for three years to 2016, focussing instead only on 2013-14 while sending out signals that, for electricity at least, it expects increases to fall behind inflation in 2014-15 and to actually fall from 1 July 2015 when the Gillard government’s move to link carbon prices to the European market kicks in.
What the carbon regime will be in 2015, of course, is anyone’s guess.
The prices IPART set apply only directly to customers who have chosen not to take up competitive market offers, which are generally lower than the regulated tariffs. Forty per cent of NSW power users and 30 per cent of gas consumers are still under the regulatory umbrella by choice or because they find it too hard to make the switch.
While the regulator is independent, politics is never very far away in the energy environment.
IPART notes that the O’Farrell government has “requested” it to report specifically on the cost of green schemes – and it duly calculates that the cumulative cost of the carbon price, the renewable energy target and State schemes is $332 on average for households.
The two big ticket items are the Gillard government carbon price (adding $172 a year) and the RET (adding $107).
Somewhat lost in the welter of words that these announcements involve is the salient information that, reacting to much higher bills, average NSW household consumption has dropped from seven megawatt hours a year in 2010 to 6.5 MWh today.
There are almost three million residential customers in NSW (out of an east coast total of roughly eight million).
To put this another way, 59 per cent of east coast residential customers live north of the Murray – where this month’s energy action is.
And almost all their bills are going up, not down, as we move in to 2014, a long way up in the case of 1.8 million Queensland households.
In the case of vulnerable customers – those whose disposable income dictates that every quarterly power bill, and especially the one at the end of winter, is a kitchen table crisis – the pain isn’t lessening, a point the Sydney-based Public Interest Advocacy Centre was not slow to make yesterday, noting 23,000 NSW household electricity disconnections last financial year and warning “the numbers are trending up dramatically.”
PIAC is among those starting to point a finger at energy retailer costs in the power bill mix, expressing concern that customers are “being hit” with “questionable” customer acquisition and retention charges, arguing that, while the benefits of greater competition should be encouraged, there are “artificial incentives” for retailers.
IPART’s Peter Boxall says the main driver of this year’s power bill increase is higher retail operating costs, including the costs of acquiring and retaining customers in an increasingly competitive market. The regulator’s statement on the new regime includes an illustration showing generation costs, including the cost of carbon, falling 3.3 per cent and network charges falling 0.4 per cent while green schemes go up 1.3 per cent and retail billing and metering charges rise 4.1 per cent.
They’re not doing it again.
That is they’re not joining the dots across the spectrum of energy supply to produce an holistic approach to sustaining essential services in the best possible form.
It’s not a new phenomenon.
The whole saga of electricity network regulation is a prime example, still playing out to the dismay of politicians and consumers almost a decade after “reform” began to be pursued – as witness this month’s shenanigans in Queensland.
The renewable energy playing field is another example, with State and federal governments creating such a flawed roadmap that there is almost no telling today where we will be in 2020.
And, of course, the least said about carbon pricing policymaking the better; we are now at a point, again after a decade of to-ing and fro-ing, where investors in Australian resources only have questions about where this process is heading.
The newest example of what happens when the dots are not joined is the east coast gas supply environment – and it is very useful this week to have a commentary on situation published by the Grattan Institute, overseen by Tony Wood.
Anyone – like a certain State Premier for example – wanting a clear, digestible tutorial on where we are with gas supply on the east coast, why we’re here and what might be done to better address the issue can hardly do better than to read the institute’s new paper, “Getting gas right: Australia’s energy challenge.”
It will no doubt prove of value to the various State and federal efforts now under way to examine the entrails of our gas supply problems, including the federal Bureau of Resources & Energy Economics (required to report by the year’s end), a New South Wales parliamentary inquiry and the task force, chaired by former federal minister Peter Reith, which is reviewing the situation for the Victorian government.
The institute’s paper – it is available on Grattan’s website – runs to 44 tightly-written pages and a post like this is not going to do an adequate job of canvassing all the issues it raises.
Wood himself has a commentary in today’s “Australian Financial Review” – see “Future of gas industry needs a fair hand at the pump” – and another on the “Business Spectator” website (see “Gaining a global gas advantage.”)
My snapshot of the paper is this:
First, the price shock saga that has enveloped electricity for the past five years will now embrace gas, too, with Wood suggesting Victorian gas bills could be $170 a year higher in the next couple of years.
Second, while there is no shortage of gas in the ground, infrastructure may be unable to deliver enough gas to meet demand as this decade rolls on. This is a particular issue for New South Wales between 2015 and 2017 on days when demand peaks.
Wood comments: “Our analysis does not imply that gas supplies will necessarily fall short in NSW – only that a shortfall is a real possibility if action is not taken.”
The paper observes: “NSW demand could be met by ramping up coal seam gas production, by increasing Cooper Basin production or by increasing the capacity of the Eastern Gas Pipeline from Victoria.”
Third, industry and government need to do a better job of ending the NSW stalemate on developing coal seam gas as the risks of inappropriate or poorly regulated operations remain of great concern to members of the State community, often because of misinformation.
Fourth, with one practical approach being increasing the flow of gas from Victoria to NSW, a key question is the size of remaining gas reserves in the Gippsland Basin. Are they large enough to justify substantial investment in expanding the gas transmission infrastructure between the two States?
Fifth, there is a whole different outlook for gas fuelling power generation to accepted wisdom a little more than five years ago when Kevin Rudd became Prime Minister.
“The dash for gas isn’t happening,” observes Wood, because power demand is falling (and the best guess outlook for 2020 is not for a recovery), because legislation forcing use of renewable energy has stolen the gas suppliers’ lunch and because much higher gas prices rule out a switch from existing coal plants.
Sixth, Wood and the institute poor cold water on the scary stories about Australians paying Japenese prices for “our gas” before we are much older.
At present, Wood notes, Japanese buyers are prepared to pay about $15 a gigajoule. However, this number includes the cost of converting gas to LNG here, shipping it overseas and converting LNG to gas over there – totalling up to $6 per gigajoule.
Nonetheless, it is to be expected that the currently low domestic gas prices will move closer to export prices – from around $4 to $5 per GJ today to around $8 to $9 later this decade – and, as Wood comments, “this means big increases for households and a big struggle for some industrial gas users to remain competitive.”
The institute paper devotes a fair bit of space to giving the “reservation” forces in manufacturing the elbow. As Dow Chemicals and other maintain their pressure on politicians to go this way, the Grattan commentary is a useful antidote.
One point worth highlighting here: “There is no clear evidence that the reservation policy applied in Western Australia has delivered low prices for gas users, “ Wood observes. “WA prices are higher than those on the east coast – and it is expected that in 2020, after several years of gas exports (from Gladstone), this will still be the case.”
Finally, the institute offers a three-pronged approach to resolving the east coast gas supply imbroglio: (1) end the impasse in NSW; (2) create a more transparent east coast gas market with new trading hubs; and (3) remove barriers to efficient supply by freeing up trading of pipeline capacity and moving towards eliminating joint marketing arrangements as the gas market matures.
As I started out saying, this is all about joining the dots. It requires a mature, efficient approach from the federal and east coast State governments. It requires the supply industry to do a better job of dealing with community concerns. It requires the mainstream media to provide readers and listeners with a better understanding of what is really at stake.
Boiled down, the strategic need to resolve this situation seems so clear.
So, why are we where we are today?
And, even more importantly, is there sufficient time available to address the imminent threat to consumers?
The word “could” is being flung around north of the Murray this weekend in “Can Do” territory.
Stung by his government’s inability to ameliorate the 22.6 per cent increase in power bills being introduced from 1 July, Premier Campbell Newman promised Queenslanders a fortnight ago that he would move swiftly to unveil plans to cut electricity costs.
Today his Energy Minister, Mark McArdle, has announce proposals he says could save “billions of dollars” in future electricity network costs.
As in New South Wales, the Newman government is setting out to bring its distribution businesses under a single company, claiming this will reduce duplication and improve efficiency.
McArdle says this move could achieve savings of $580 million over seven years.
(Distributors Energex and Ergon Energy are thought to have spent $1.2 billion in network capital outlays in the past year and have spent $14 billion in capex since the middle of the past decade.)
The government’s plan is “subject to consultation with employees” and the State division of the Electrical Trades Union has leapt out of the blocks to knock the proposals.
The ETU says it hasn’t been consulted and that the move “could lead to less reliability and more blackouts.”
As well, says the union, it could mean higher electricity prices in the Bush.
And, if the union doesn’t get the level of consultation it wants, it “could be taking the government to court.”
McArdle wants Queenslanders to know that “electricity sector reform can’t be delivered at the flick of a switch” but the establishment of a holding company for Energex and Ergon Energy (which serves the power users in 97 per cent of the State that is not the populous south-east corner) “should make a difference.”
McArdle says that “there is no overnight solution for getting benefits back to customers as soon as possible – but tackling network costs is seen as the most critical issue under the government’s control.”
McArdle explains that an inter-departmental committee the Newman government set up to look at electricity sector reform has reported back that there are two main consumer cost drivers – networks costs that have risen 100 per cent between 2007-08 and 2012-13 and climate change-related policies that will add about 15 per cent to standard residential bills in 2013-14 if the State solar scheme is included.
(This serves in part to address accusations from the ETU when the 22.6 per cent price rise was announced that the Newman government’s “incompetence” was to blame, including a claim that a key component of cost increases was the closure of some baseload generation capacity.)
The report also finds that the impact of these cost drivers has been exacerbated by tariffs that have not kept pace with changes in the supply sector and are not reflective of udnerlying costs — and by a planning framework that does not encourage the most efficient development of new infrastructure.
SINCE I ORIGINALLY POSTED on this issue mid-morning Sunday, quoting from News Limited media stories as well as the government’s media statement, I have had the opportunity to see the full Queensland government response to the interdepartmental committee report and the post has been amended to reflect this.
While, as I reported earlier, the News Limited media are claiming that the long-standing uniform tariff policy for the State may be scrapped from 2015, the IDC report actually recommends development of more effective subsidy arrangements for regional Queensland — and the Newman government says it supports targetting the uniform tariff policy on those consumers in most need.
“The government will not be breaking its election commitment to maintain uniform tariffs.”
As well, News Limited media are claiming that Energex and Ergon “will no longer be required to adhere to prescriptive reliability standards which drive up prices.”
However what the IDC has recommended it that standards should be “more economically derived and outcomes-based, better reflecting customer expectations and values.” The government is going to refer this to its Committee of Audit implementation task force.
Media coverage of retail deregulation was also somewhat mangled.
What the IDC has recommended is the removal of price controls in south-east Queensland if consumer protection is judged to be adequate and to use the Queensland Competition Authority to monitor prices — a position the government conditionally accepts.
One smart meter and associated tariff changes to promote efficient use, the IDC has recommended, and the government accepts, support for national efforts to further these reforms beyond Victoria. The Newman government re-iterates that it does not support a mandatory roll-out of smart meters in Queensland.
Queensland is the third biggest electricity market in Australia in terms of customers, following NSW and Victoria. At last count it had 1.6 million residential customers (about a sixth of the national total) and 200,000 business customers.
The shake-up being announced today by the Newman government will be the biggest in the State since the previous Labor regime introduced retail competition in July 2007.
While rural customers still do not have a choice of supplier, relying on Ergon Energy, which may have its retail operations merged with a generation business as another reform step mooted by the government in earlier comments, there are now nine retailers offering services to people living in south-east Queensland.
The government says its 30-year electricity strategy approach will see a second discussion paper released “in coming months” and a final statement in early 2014.
The IDC report calls on the government to rule out any future State investment in generation except as a last resort — something the government says it will discuss in its strategy document.
The ACIL Allen Consulting report on the problems in New South Wales in developing the State’s coal seam gas bounty is going to be read with close interest by a lot of people, but none more, I imagine, than electricity suppliers.
The reason is that ACIL Allen Consulting have produced a new view of where east coast electricity demand is going over the next two decades.
The consultants’ base case scenario for the “NEM” – in which NSW coal seam gas supply expands steadily, supplanting imports from interstate, providers of 95 per cent of consumption today – sees total energy generated rising from just under 200 terawatt hours in 2012 to just over 250 TWh in 2030.
It sees black coal plant output – serving NSW and Queensland in the main – increasing 23 per cent to about 130 TWh in 2030 while brown coal-fuelled output rises four per cent to 50 TWh.
(For the States north of the Murray, this outlook is not massively different from the one produced by the Bureau of Resources & Energy Economics last December in which the federal agency projected black coal generation at 100 TWh annually by the mid-Thirties. However, BREE thinks the brown coal generators are going to virtually vanish from the scene by 2035.)
Wind energy, the consultants say, grows very strongly – more than five-fold – but its actual contribution to “NEM” production is barely eight per cent or 21.6 TWh, with gas-fired generation coming in at about 38 TWh or 14 per cent of output.
The projection sees growth for gas fuelling power generation mainly in Queensland and Victoria – and the market-wide electricity sector demand rising from 150 petajoules in 2012 to about 250 PJ in 2030.
The outlook, they add, under this scenario is for “NEM” greenhouse gas emissions to rise from 168 million tonnes in 2013 to 196 Mt in 2030.
Greens will swallow hard when they read this and also hear ACIL Allen saying that, in NSW, the base case scenario sees a decline in black coal power production from 88 per cent to 82 per cent, but this actually represents a rise in annual output from 56.8 TWh to 67.4 TWh by 2030.
This is a situation where wind generation in the State reaches 7.9 TWh or almost 10 per cent of production by 2030 while gas generation slips back by almost a quarter to just under 3.2 TWh.
“This,” say the consultants,” reflects the fact that no new gas-fired plant (will be located) in NSW during the projection period while existing gas-fuelled plant sees lower dispatch (because of) rising prices.”
When they model this base case against one in which access to coal seam gas in NSW – where 20 years of exploration has located sufficient gas to meet current State levels of demand for 36 years – is frustrated by politics and regulation, they see wholesale electricity prices generally higher in all regions of eastern Australia and on average 3.5 per cent higher for NSW.
Overall, says the Australian Petroleum Production & Exploration Association, which commissioned the study, NSW businesses and households are threatened with a “rude shock” as a consequence of failure to encourage State’s CSG development.
APPEA has joined forces with the Australian Industry Group and the Australian Workers Union to write to Premier Barry O’Farrell to highlight the consequences of the present political approach in the form of lost jobs, higher consumer prices and lost economic opportunities.
APPEA chief executive David Byers is calling on the O’Farrell government to reconsider “the blanket exclusion of vast tracts of the State from gas development.”
The State’s real income, he adds, on ACIL Allen Consulting’s modelling, will be $24.6 billion lower under a “gas freeze” approach, pushing investment in to other States and denying the government close to $2 billion in lost royalties and taxes – while, on the report’s modelling, also eschewing around $4 billion in capital investment in CSG projects.
The consultants also find that the “gas freeze” approach will lead to prices for the fuel in Sydney being 24 per higher in 2025 to 2035 compared with the base scenario.
Meanwhile, speaking at a conference in Kuala Lumpur this week, Martyn Eames, Santos vice-president Asia Pacific, said the upstream industry has to manage public confidence and land access issues carefully to be able to develop unconventional gas resources.
“Just as this industry seeks to share knowledge on the technical side, it must also draw upon the expertise and best practice that exists globally to engage early with communities and build public confidence,” he said.
The Santos effort to get agreement to develop CSG in the Pillaga forest near Narrabri is seen as a critical step towards overcoming the “freeze” concerning APPEA and its members.
Everyone is struggling to come to terms with the energy supply issues for the east coast, even supplier executives from the feedback I am getting.
This situation would be complicated enough without the political environment. The thought that the present federal horror show will drag on for another three months is doing in corporate heads as much as it is turning off suburban and regional voters across the board.
I find it interesting, therefore, to come upon a briefing that AGL Energy chief economist Paul Simshauser and his colleague Anthony Fowler, GM merchant energy, gave to a forum on the energy market at Victoria’s Falls Creek on the last day of May.
It provides some useful context for considering electricity market matters.
(You can read their lengthy powerpoint presentation on the AGL investor relations site.)
Paraphrased, this is what I take from what they said:
First, looking at power demand and production, they point out that the current contraction in “NEM” electricity demand is a feature of most Western economies and not just Australia.
This is something that tends to be glossed over or ignored by a fair few of my fellow armchair commentators, some of whom take every opportunity to heap derision on local power sector planners.
On the AGL figures, “NEM” power production (between 2007 and 2012) has contracted by 3.6 per cent in aggregate while energy demand has fallen 1.1 per cent. (The difference is driven by the changes in the mix of generation losses and network system losses).
On the demand side, the largest fall has been in the residential sector (which holds a 27.7 per cent share of the market), contracting 5.9 per cent over the five-year period.
Simshauser and Townley say that commercial and industrial demand delivered 1.1 per cent growth in 2012.
All this, they add, has to be seen against the fact that “NEM” energy demand growth rates, as distinct from peak demand, has been falling since 1955 and this, too, is a common characteristic of the developed world economies.
They throw up the interesting point that population growth on the east coast has decelerated in recent times as the mining boom pumps up Western Australian numbers.
To which you can add reactions on the east coast to the price shocks of recent years and a marked contraction in terms of average demand in Queensland (apparently down more than 14 per cent over two years, although one always has to watch such stats as companies eventually get round to tidying up their databases).
As a sidebar, which householders are the largest average users of power?
Not New South Wales or Queensland – everyone knows that Victoria is lower because of the penetration of natural gas, a product of the Henry Bolte-imposed cheap prices of yesteryear.
No, it’s Tasmania, with an average of 8,700 kilowatt hours a year – these are AGL customer numbers – versus a bit less than 8,000 kWh in NSW and under 7,000 kWh north of the Tweed.
Simshauser and Townley say that the output from the controversial solar photovoltaic investment by households is now about 5.5 per cent of total “NEM” residential demand.
“From a power production perspective,” they point out, “solar PV is having a moderate effect by comparison with demand contraction and large-scale renewable energy production.”
And they note that the overall situation is having a marked effect on NSW black coal-fired power station output as the total State load falls back towards 70 terawatt hours a year after looking in 2009 like it would soon breach 80 TWh.
Simshauser and Townley say the upshot of the overall east coast situation is that the “NEM” is “experiencing significant uncertainty” and they attribute this to five key factors: (1) the outlook for future demand growth, (2) the “stagnant electricity forward curve,” (3) uncertain carbon and renewable energy policy settings, (4) increased renewable generation and (5) uncertainty over future gas prices.
On the gas front, they note that the domestic east coast market is “going from being long with declining production capacity to being short as a result of the ‘LNG pull’ with significant price uplift expected.”
They expect gas prices will be highest north of the Murray and this will gradually start to impact Victoria and South Australia “with the potential for prices in NSW to exceed those in Queensland if there is a supply shortage.”
As they say, a higher gas price is likely to both reduce the competitiveness of generation using this fuel and to contribute to overall energy demand reduction.
They expect Cooper Basin gas to flow largely to Queensland from 2015, exacerbating the NSW problems.
To all of this one can add some comments gleaned from an AGL presentation to the Camden Valley community in Sydney’s south-west at an open day in late May.
This underlined that political and social pressures are sterilising the coal seam reserves in NSW that are capable of supplying the State with its gas needs for decades at the current consumption rate.
It pointed out that the manufacturing industries most at risk from a NSW gas price surge are food processing, brick and cement making, and chemical and metal manufacturing, representing almost half the State demand.
And, I add, representing about 25 per cent of NSW electricity demand
The company’s perspective of “how did we get here?” is interesting.
The political cycle has captured CSG as a public issue, the presenters note, with outrage fuelled by misinformation and lack of information. While activist groups use the internet to network and rally opposition to CSG, “industry hasn’t filled the information vacuum.”
The issue here, as Origin Energy CEO Grant King noted some weeks ago, is that energy companies are finding that the traditional ways of communicating with consumers and the community – in an environment where half of them are most likely to turn to Google for energy information versus 15 per cent visiting corporate sites and fewer and fewer rely on newspapers – are not addressing the public disconnection from the facts.
King lamented that “there is little ability to challenge much of the misinformation that exists to appropriately inform the debate” – which, of course, serves to emphasize the need for the companies to do more themselves, to bolster the efforts of their industry associations and to support those independent sources that seek to disseminate facts and context.
The next public wake-up call, I understand, will come on 17 June when the NSW pricing regulator, IPART, brings down its final determination on retail gas prices for 2013-14.
As things stand at present, most of the State’s gas customers can expect a price rise around the 10 per cent mark.