Archive for August, 2013

Telling it like it is

You really should read Friday’s extended interview with Origin Energy managing director Grant King on the “Renew Economy” website, but perhaps not for the reasons the publisher would most like.

King, who has been CEO of Origin, a $13 billion business and one of this country’s largest integrated energy companies, since 2000, puts himself about in speeches and interviews rather more than most in his position and he is never less than interesting.

I have written here and elsewhere during this year about some of his views, notably on the renewable energy target and, in particular, his concerns that government and its advisers, like the Climate Change Authority, have failed to adequately assess the true cost of such schemes.

The latest interview contains a number of assertions that are well worth reading, perhaps the most important of all being King’s view that we are suffering from “a complete lack of bipartisanship and certainty about energy policy” over the past six years.

While the outcome of next Saturday’s federal election is now seen across the media as a foregone conclusion – seemingly the only debating point this weekend is the size of the Coalition majority in the House of Representatives – it does not follow that we are now tacking in to a new age of certainty, the more so if the poll for the Senate delivers a set-up where an Abbott government will struggle to pass carbon-related legislation.

In the interview, King makes a strong point about the double-barrelled RET.

“There’s a carbon price in the RET scheme,” he points out, “and it is extra-ordinarily high.

“In our view it is $40 to $60 a tonne and, for the small-scale (part of the) scheme, it is $120, depending on what you think is being displaced.”

En passant, he touches on one of my favourite complaints about the mooted future when renewable technologies will be competitive with fossil fuels, arguing that one recent report (which received a lot of media coverage) is premised on a carbon price of $60 per tonne.

This goes to the heart of my complaint that the media have given Christine Milne and her tribe a sleigh ride with their propaganda about 100 per cent renewables (or 80 or 90 per cent) and claims that a recent report by the Australian Energy Market Operator demonstrates this is economically viable (which it actually doesn’t, by the way).

Contained in this aspect of the interview is something that should get much greater attention.

Criticising the “argument of convenience” by those who boast that the RET has helped cut wholesale power prices, King points out that the objective of the scheme was never anything to do with the wholesale cost of energy and that the effect the RET is now having logically has a consequence where power businesses continue to withdraw capacity from the east coast market, pushing the price back up again.

The objective of the “NEM,” he reminds us, is to deliver a reliable and competitively-priced supply of energy and part of this process is to have the cheapest capacity built, not the most expensive.

Another interesting facet of the interview is King’s thoughts on the much-hyped rooftop solar schemes.

Heavily paraphrased, his points are (1) we have had “ridiculously big” subsidies for PV and consumers are now paying a locked-in price, in the case of Queensland, for example, about $2.6 billion extra over 15 years, (2) it is inevitable that distribution network services will need to be repriced to overcome solar’s current “free ride,” and (3) the ongoing hoopla about PV costs is overlooking the role of silicon prices, which have fallen from $400 per kilogram to $18. What is to say that the Chinese, who dominate the supply market, will keep them there?

Also in passing, King makes a very neat point about the complexities of the carbon emissions chain and the simplistic views people take.

Producing silicon for PVs is an energy-intensive process, he notes, largely based on brown coal generation in western China.

“I find a certain irony in our subsidising the installation of PVs probably made from brown coal-fired power stations in China,” he says. “”I kind of puzzle over that!”

In the same practical vein, King poses a question about the Holy Grail of renewables boosters: energy storage.

“No-one asks, well how many battery factories does that mean there are going to be,” he says, “and what we will do with all the dead batteries, all of the products and chemicals, or whether there is enough lithium in the world to have that number of batteries.”

There’s a lot more, all of it coming down to the need for policymakers to have a sound understanding of key factors, and an interesting chunk of the interview relates to the current east coast gas debate. But you can read it all for yourselves.

The interview ends with a killer point that applies to so much of the energy debate.

“You’re entitled to your own opinions,” says King, “but not your own facts!”

It’s getting those facts on the table that’s the hard part in an environment where propaganda and populism command so much media attention and digging to ascertain the facts is too much hard work.

Not of this world

If you want to know how other-worldly The Greens are, read their coal seam gas policy for the federal election.

This is what it says: “Unconventional gas like CSG is a resource Australia does not need for domestic use.

“Australia’s energy use is declining thanks to improving energy efficiency and rapid update (yes, it says “update”; they mean “uptake”) of rooftop solar.

“The real driver of CSG expansion is the attraction of lucrative overseas markets. Profit, not necessity, is driving the proliferation of the industry that threatens the long-term viability of Australian farmlands.”

The Greens want no new CSG project approvals and “no new gas ports along the Great Barrier Reef” (no, I don’t know what that means, either).

Now this stuff goes down a treat in the streets of Sydney’s Marrickville – where there are many bumper stickers, often on SUVs, proclaiming “You can’t eat coal seam gas” – and similar areas in other east coast cities.

The link between gas and, say, fertiliser manufacture and what most Australians eat is lost, obviously.

So, too, is an understanding of the other uses of gas.

Take New South Wales – because it is the warm centre of the anti-CSG campaign and the issue is red-hot in a few regional seats at the federal election (apart from inner suburbs of Sydney).

It’s obvious from reading The Greens propaganda that, in their minds, gas use equates to residential use (or the cooking arrangements in their favourite restaurants) and can be eliminated by recourse to wind, solar and wave power (that’s the three power sources the party talks up in other election material).

I wonder how many Greens can tell us how gas is used in NSW – which is rapidly nearing the point where existing interstate supply contracts for 95 per cent of its needs will run out and the new sources are problematical in terms of volumes and cost?

Consumption in the State is not as high as in Victoria or Queensland – which may be a reason that there is a less than adequate community understanding of the fuel’s role – but it does run at around 140 petajoules a year.

Who uses it?

My Energy Supply Association data files show that household demand is around 20.5 PJ a year and power stations take another 19.5 PJ.

The commercial sector and services (eg hospitals) use 9.6 PJ.

So where is the balance going?

Well, 88.7 PJ – that’s 63 per cent of supply – is being used in manufacturing.

Now the problem with statistics is that they are, so to speak, inhuman.

People read the number above and, like my grandsons say so often, go “whatever.”

This is why the upstream petroleum industry is so keen to draw attention to the contribution its activities are making to the community at large through paying royalties and taxes.

The campaign currently being run by the Australian Petroleum Production & Exploration Association to coincide with the federal election – you can find it on – highlights the fact that so far this year its members have contributed $5.7 billion “to fund schools, hospitals and infrastructure.”

That The Greens – literally – ignore the value of this kind of contribution in their railing against resources development is part of my accusation that they are other worldly.

That they are unwilling to confront the real costs of their mania for renewable energy and the impacts it has on taxpayers, investors (many of them not big business) and employers – my post here yesterday on “The pain in Spain” highlights just how dangerous this can be – is yet more evidence.

But back to NSW and the 88 PJ of gas required by manufacturing.

How many people in the State do you think actually know much about the role of manufacturing?

How many of The Greens ideologues (as opposed to supporters with broad environmental concerns) know or care?

Combine the Sydney basin with the Hunter Valley area and manufacturing employs almost 250,000 NSW people – roughly the same as Melbourne and almost twice as many as Brisbane.

This is close to the population of Canberra.

And there are perhaps another half million people in a wide range of other sectors serving the manufacturers’ needs.

The Greens like to use the one million solar rooftops number to claim that 2.5 million Australians now use PVs – in the same vein, about half the population of NSW is dependent on the health of the State’s factory sector.

And, by joining the dots, dependent on a secure and affordable energy supply for manufacturers.

More than 90 per cent of NSW manufacturing employment is concentrated in Sydney, the Hunter and the Illawarra. (At any given time there are also some 9,000 young people doing apprenticeships in the sector.)

Barely four per cent of factory jobs are to be found in the Richmond/Tweed and Mid-North Coast areas where the anti-CSG campaign is “red hot.”

Manufacturing is the second-largest contributor to the NSW economy.

We’re talking fabricated metal product production, machinery and equipment making, plastics and chemicals, textiles, clothing and footwear, food and drink production and furniture making – 15 factory sectors in all.

The secure supply of energy and its cost is a critical input for all of them.

Our collective community concern about factory closures is highlighted – literally – by the television crews descending on every one that lays off workers and by TV news headlining the loss.

You can go on to the NSW Business Chamber website and read at length about how tough conditions are for State manufacturers and how concerned they are about electricity and gas bills.

This is the real world, the one on which The Greens seek to impose, through their anti-CSG campaigning, a whole new source of pain.

And let’s not let the more mainstream politicians off the hook.

An example of this breed is the NSW Minister for the North Coast, Don Page, whose boast to the ABC last week – as that medium played up the delivery of 13,000 signatures on an anti-CSG petition to State parliament – was that it was Labor that issued the gas licences for the north coast and his Coalition government that had “put everything on hold for 18 months while we work out a better regulatory regime.”

And this is a source of pride?

But this election will pass.

The odds that there will be a new federal regime after 7 September are high and the Coalition says it intends the States to be the decision takers in resource project approvals.

Don Page’s government doesn’t have to go to the polls until March 2015.

But, for he and his cabinet colleagues, the NSW gas problem isn’t going to go away when the election posters are torn down next month.

It’s going to loom ever larger – with 1.1 million consumers (20,000 of them manufacturing businesses, large, medium and small) in the firing line.

By March 2015 it could be a crisis not a problem.

The Greens represent the noisy, other-worldly fringe of politics.

Part of the reason that federal Labor is now in so much trouble is that Julia Gillard, desperate to govern, gave Brown, Milne and Co far too much influence.

After 7 September, the CSG ball will be inescapably at the feet of the Coalition – in Canberra and in Sydney.

The question for the O’Farrell State government is whether it is capable of delivering a real-world resolution that works for farmers, energy suppliers and consumers, not least for the beleagured manufacturers and their quarter million direct employees?

The pain in Spain

The law of unintended consequences is a dangerous beast: its claws are sharp, its teeth are long, its breath is foul and its bite is hard to heal.

Ask the Spanish.

Go back 2-3 years and we were being force-fed – in the mainstream media as well as the green-oriented Web sites – the new Spanish Revolution: this was the way to a world of renewable energy.

Spain (and Germany) were showing us all how to pursue progressive renewable energy development.

Now that it has become only too apparent just how horribly wrong the Spanish policymaking has been, the same media outlets are focussed on the “poor bugger me” stories of dudded renewables promoters.

There is a lot more to this tale, however.

Start with the poor Spanish sods who saw green energy as the great employment opportunity in their lives.

The solar PV sector in Spain is said (by one of the renewable associations) to have now shed 50,000 of the 60,000 jobs created since 2008. (The employment opportunities for Australia have been a favourite song of the great green choir for years.)

The wind turbine manufacturing sector is reported to have lost a further 20,000 jobs.

The retrospective action taken by the Spanish government to stem the budget bleeding resulting from insanely generous renewable energy schemes now has the country’s overall standing as a magnet for investment being called in to question.

International investment funds, a number of them American-based, are taking the government to legal arbitration.

An organisation representing 55,000 Spanish investors, including small savers, farmers, professionals and small business, who put their savings in to the solar industry because of their government’s approach, says its clients are now “ruined.”

I have been reading up on this situation on the same day I have been looking at The Greens “100% Clean Energy Roadmap” propaganda for our federal election – which, it says, sets out “a framework to build an Australia powered by wind, sun and waves.”

(Which makes me wonder what has happened to geothermal, something on which both the Greens and the Rudd/Gillard governments have been rather keen to hang their hats over the past 3-4 years?)

That four-letter word “cost” is missing from this hype – cost for households, small businesses and large, energy-intensive industries (an area where the sector lobbyists are fretting aloud about 200,000 jobs being lost if the cost of gas on the east coast gets too high, a cost nowhere near what 100 per cent renewables would deliver.)

“Bungled” and “over-ambitious” are the epithets “The Economist” of London has applied to a story on the Spanish green horror show.

The Spanish experience, the paper observes, “shows that good intentions are not enough – if the policies are wrong, the benefits are wasted, the jobs disappear (but) the costs remain (and) business investors bear the brunt.”

We are all familiar with how Spain set out on a spectacular pursuit of green energy technology.

We have been fed the data about Spain becoming the world’s fourth-largest solar PV and solar thermal nation until some of us have indigestion.

The problem, of course, is that the subsidy costs exploded, too.

Subsidies for solar energy in Spain rose 18-fold in six years and, since the government was unwilling to pass the full costs to consumers, the cumulative taxpayer debt has reached 26 billion euros, hitting eight billions euros (or one per cent of Spanish GDP) in 2012.

This, as “The Economist” says, would be unaffordable at the best of times, but Spain and its people are being crucified by the euro crisis.

The policy about-face that has been undertaken is slashing billions off the subsidies and sending renewable generation companies with 30 billion euros of debt to the brink of the corporate abyss.

Their share prices, of course, have plummeted – more small investors victimised.

What’s more, 20 billion euros of the renewable companies’ debt – that’s $US26.6 billion in current exchange values – is held by Spanish banks, who have enough problems without this looming bad debt.

“The Economist” comments: “The Spanish government failed to cut subsidies when renewables were booming,so the cuts (now) have to be draconian.

“It imposed no cap on new capacity and stood by while this grew uncontrollably (as it has done in Germany). But, because projects have received subsidies for up to 20 years, the costs remain – even after the cuts, subsidies are running at (up to) eight billion euros a year.”

Contrast all this, says Bjorn Lomborg, in a column in the “Financial Times” of London, with what has happened in America: “The US government has spent $10 billion in subsidies over three decades on innovation that has opened up huge resources of previously inaccessible gas. Despite some legitimate concerns about safety, it is hard to overstate the benefits: US consumers are saving $US125 billion annually on cheaper gas and the switch from coal to gas has reduced American carbon emissions by twice as much as the EU and the rest of the world have managed.”

The Greens here and elsewhere, of course, don’t want to hear any of this: abetted by a compliant and lazy mainstream media and loyal boosters in the electronic media, they are selling a line to the Australian community that may seem attractive but, in reality, is a minefield for the most of the population.

The message for Australians from Spain’s experience is that the law of unintended consequences is ever-ready to spring.

Of course, Spanish carbon emissions are falling – but this is because the pain-wracked economy is forcing a drop in electricity consumption, falling in 2013 for the third year in a row, as high levels of unemployment and austerity measures slash consumer spending.

And here’s the bitter bit (if you are a greenie): Spanish imports of gas from Algeria are forecast to grow steadily from now to 2022 as an increasing amount of electricity is produced from gas generation to meet the needs of a rising population. (There are expected to be three million more people living in Spain in 2022 than in 2012.)

Last word?

I thought a partner in an international management consultancy captured the situation neatly late last month when he wrote: “Spain tried to have it both ways: it set out to transform its electricity supply but failed to establish a credible system to pay for it.”

This is the false promise of our Greens: come with us to a green and pleasant land and don’t worry about what it costs.

What I worry about is why the major political parties and the mainstream media can’t be bothered to call the Greens out on this guff.

Another federal election

Our’s is not the only federal election taking place in September and the other one has an even higher focus on energy and the environment.

The odds are that the other election – in Germany on 22 September – will see Angela Merkel given another term of office, but not necessarily in the same coalition, just as Tony Abbott takes on the task of his life as our new Prime Minister.

While our election is past its mid-point, with a consensus growing at least in the media that a resurrected Rudd cannot repeat his 2007 achievement, the German politicians are just getting warmed up.

One of the quirks of our local debate is that Merkel’s “energiewende” policy keeps on being thrown up as a golden example of the sort of thinking we need here, with our green-tinged media happy to toss around commentaries about how wonderful the German experiment is – but in Germany the local media just as frequently carry material lamenting the effects of the policy and not least the costs it is imposing on households and business.

You don’t read locally, for example, about what over there is considered by some to be the real poster child of the Merkel policy: the idling turbine blades of the Riffgat wind farm off the North Sea island of Borkum.

The 108 megawatt project is using mainland, fossil-fuelled energy to keep the blades rotating because construction of the necessary new transmission line to carry wind power on shore is in limbo: the sea floor having turned out to be littered with unexploded World War 2 munitions.

A competitor for the role of poster child, perhaps, could be the 1,600 MW Moorburg power station being built outside Hamburg. When completed, it will be fed 12,000 tonnes of American coal a day from freighters moored in the nearby Elbe river. (Coal imports from the US are relatively cheap because the American shale gale has blown up an export boom.)

You also don’t read here about how German environmentalists, led by their version of the Friends of the Earth, are campaigning furiously against a critical aspect of “energiewende:” the need to build four “super highway” transmission corridors running north (where most green generation is or will be) to south (where the major load is) across Germany, involving 3,800 klometres of high voltage cabling.

You also don’t read about the largest bloc of current electricity development in Germany: construction of 4,000 megawatts of coal-fired power plant, including an upgrade of giant utility RWE’s Hamm power station involving two 800 MW units that are claimed to be the world’s most efficient hard coal generators.

RWE says they will have an efficiency rating of 46 per cent (versus 35 to 38 per cent for older German coal plants), requiring 20 per cent less fuel and cutting each unit’s emissions by 2.5 million tonnes a year.

You were told a lot last month about the World Bank turning its back on funding new coal-fired power stations in developing countries except in special circumstances, but nowt about the US Export-Import Bank saying it will lend the Czech Republic $US10 billion to build two nuclear reactors at Temelin on the border with Germany if Westinghouse gets the construction contract (and not the Russians).

Germany’s much-touted “nuclear free” revolution will be that much easier for the Germans if Temelin goes ahead, but it is hard to see what comfort it offers the catastrophe mongers.

(In passing, Germany is now nuclear free, right? Nope, 16 per cent of its current power stream comes from its own reactors (compared with 17.2 per cent in 2011 when the Fukushima-ignited policy was announced and compared with 11.9 per cent from its wind turbines.) Coal? Brown coal generation there is slightly higher now (at 25.6 per cent) than in 2012 and black coal power production is just over 19 per cent. Or to put it another way, more than 60 per cent of the electricity Germans use today comes from plants they purport to fear.)

The other thing you don’t read about here is the unrest in Germany over the “energiewende” costs.

Merkel is holding off increasing the “umlage” – the surcharge payment to enable renewable generators to receive a guaranteed price rather than their product’s market value – until next year when it will reach six US cents per kilowatt hour.

It would take far too much space to describe the “umlage” game – suffice to say here that the average German household pays today close to 25.6 US cents per kWh while 2,300 energy-intensive firms pay no more than six cents.

The trouble with this game is that the European Commission has blown the whistle on the opt-outs granted to large business and has launched an investigation in Brussels to establish whether this breaches EU policy (which competitors in the rest of Europe insist it does). Of course, this review is carefully parked until after the election – the EC would prefer not to lose Frau Merkel; she is their cornerstone in the current efforts to escape from economic strife.

One of the wonders of this dodge is that the only criterion for being allowed to pay five times less for power than householders and smaller businesses is the quantity of electricity the big firms use – ie the system is, in effect, designed to encourage consumption by large users.

On top of all this, and again there isn’t room to go in to the detail, poor Germans pay more than double the “umlage” – in terms of disposable income – than the rich.

Not surprisingly, the joys of “energiewende” are somewhat lost on quite a lot of Germans.

However, just as it is here, some three-quarters of them support the drive for renewable energy while at the same time belly-aching about the cost of their power bills.

To give you another idea, in closing, about the split personality of the Germans in this space, let’s go back to that Moorburg plant at Hamburg.

It’s going to be 1.5 per cent less efficient than it could be because the environmental movement has got a court to agree the operators can’t draw water from the Elbe for cooling – and the opportunity to increase its efficiency to 61 per cent by transporting its waste heat to 180,000 households has been lost because this would have required cutting down trees in a municipal park.

Manufacturing a myth

It’s both interesting and disturbing how misleading ideas can lodge in the minds of our fellow citizens.

Examples abound, not least in the energy sector.

Some are fuelled by blatant politicking – the assertion that the arrival of the carbon price in July 2012 caused a big cut in carbon emissions and a big rise in the use of renewable generation is a case in point.

I run in to another one regularly, often in the form of an accusatory question: “Why should we pay as much for our gas as the Japanese?”

It was old Winston Churchill who said (during the Second World War) that “a lie gets halfway around the world before the truth has a chance to get its pants on.”

In the case of the “paying Japanese gas prices” furphy, this perception has travelled far and wide domestically.

I have had it asserted to me over time from Adelaide to Brisbane.

It is not uncommon currency in conversations among business people, politicians and their advisers in circles in Sydney in which I mix.

This belief has now been kicked along again by Andrew Liveris, the Australian-born global chief executive of Dow Chemical.

Liveris has led the crusade here and in America for part of our both countries’ wealth of gas resources to be sequestered for domestic consumption, specifically for use by manufacturing.

An interview he gave the “New York Times” in his Michigan office in the past week has been picked up and re-run in the “Australian Financial Review” – see “The campaign against US gas exports” (16 August).

While the main thrust of the story is that Liveris and Dow are having as little success in the US as they are here in persuading legislators to restrict exports of gas, the interview also quotes his assertion that the manufacturing sector has “collapsed” in Australia because we are paying Japanese energy prices despite being gas rich.

Reading this, I threw a question to the Australian Petroleum Production & Exploration Association – not for a repeat of its determined opposition to any form of intervention in the gas market but for actual gas prices.

Using data from Adelaide-based consultants EnergyQuest, APPEA has provided me with global gas prices in $Australia per gigajoule for the March quarter of this year.

The average cost of LNG delivered in Japan (including gas from Australia) for this period was $14.80 per GJ.

Australian LNG sales internationally averaged $10.83 per GJ in this quarter, an indication of the competitiveness of the global market.

Meanwhile east coast Australian gas prices for domestic customers varied between as little as $3.29 (for long-life contracts, some close to expiry) and $7.09 per GJ.

In Western Australia, “domgas” prices varied between $4.29 and $4.48.

US prices, of course, are really low: the EnergyQuest data show they averaged $3.17 (in our money) per GJ for the Henry Hub in the March quarter.

Not surprisingly, this is fuelling a major improvement in the American economy and attracting overseas investment in manufacturing (including Incitec Pivot opting to build its next fertiliser factory in Louisiana rather than New South Wales.)

The gas prices for elsewhere are interesting, too:

UK buyers in the March quarter were shelling out $6.88 per GJ for gas coming from Norway and $15.45 for LNG shipped in from Trinidad & Tobago. The average cost was $8.49.

China was paying an average of $10.83, including giving Yemen $17.58 for LNG.

The average for Taiwan was $12.95.

The Thais were paying an average of $12.67.

The average LNG price for South Korea in the March quarter was $13.71.

The bottom line, APPEA asserts, if you leave the Americans aside, is that international gas prices are two to three times higher than domestic Australian prices “under historic contracts.”

Now, one of the attributes of the “Australian Financial Review,” is that, although its paid hard copy circulation is relatively low, it is an exceptionally well-read newspaper.

Those of us in the communications game know that one of the problems with the populist newspapers (and still more so with populist TV, where most viewers are only half-listening at best) is that readers skim headlines and opening paras and move on.

The “Fin” is different.

Having been reading it for more than 40 years and dealing with people in business and politics who read it, I know that its audience tends to be far more diligent than those of, say, the News Limited tabloids.

As a lobbyist over a quarter of a century for APPEA and then the Electricity Supply Association, I knew darned well that you were silly to make a foray in to Canberra without having read the day’s “Fin” from front to back – the chances of being caught out because an MP, a minister or an adviser had read something buried in a story that you didn’t know about were uncomfortably high.

I doubt that the emergence of Internet media has changed this situation a great deal.

Therefore, I suspect I will now be running in to still more people telling me that we are paying “Japanese prices” for our east coast gas because the Liveris quote will stick.

But it’s a myth.

Damian Dwyer, APPEA economics director, says that average March quarter gas prices domestically were $4.96 per GJ in Sydney, $5.07 in Adelaide and $5.77 in Brisbane, well below the Japanese LNG prices.

This doesn’t tell the whole story.

The Australian Industry Group, in releasing its “Energy shock – the gas crunch is here” report late last month, noted that east coast businesses in the first half of 2013 were being offered an average of $5.12 per GJ for short-term contracts – “a sizable uplift from historic prices of $3 to $4,” it said – and claimed that those seeking longer contracts faced offers averaging $8.72 per GJ.

AiG’s concern is that the “gas crunch” will hit consumers four times harder than the carbon tax.

But the solution, as AiG acknowledges, is not a gas reservation policy; it lies in increasing the production of gas.

As for manufacturing in Australia “collapsing” because of high energy prices, there is no argument that the large spikes in power bills over the past five years have contributed to the current factory malaise, but this is far from the only issue.

The impact of a very high Australian dollar on manufacturing’s capacity to compete internationally has been a big factor as have comparatively high labor costs and the burden of red and green tape that all industry here has to wear.

The combined impact of the carbon price and the RET have helped not one whit.

And myths like “Japanese prices” will not help create an environment for sensible policymaking on domestic gas supply.

Always carry a towel

I recommend reading John Pierce’s speech to a lunch in Sydney earlier this month organised by law firm Maddocks.

You can find the talk on the Australian Energy Market Commission website under the quirky title: “The Hitchhiker’s Guide to the NEM: What was the question again?”

In brief, the AEMC chairman’s point is this:

For most of its 15 year history, the east coast market has performed well against a range of measures, including price, timely investment, reliability, safety and security.

Now,however, after several years of sharply-rising retail prices, falling demand, low average but volatile wholesale spot prices and other developments, this performance is coming under question.

Some industry participants, Pierce points out, now want the design of the “NEM” reconsidered and others are suggesting that the broader electricity supply structure is not working and want a full-scale review of the industry.

To deal with this, he suggests, we need to return to what we set out to have the market do and how we regulate and otherwise manage what it’s doing.

Pierce’s key question today is still the fundamental one that informed the original “NEM” designers: “How do you want risks to be allocated?”

“(Today’s) policy and regulatory decisions,” Pierce avers, “should be guided less by projections of the future and perhaps more by how you want the risks to be allocated.”

(This goes to the heart of Orchison’s own beef with the ideologues, political pole dancers and other meretricious players of our times who are so focussed on their own games that they continuously overlook why we are on this energy playing field.

(In this season of politicking, their approach is exemplified by one of the burdens Rudd bears from his past stint as Prime Minister: the Pink Batts affair where both householders and innocent tradies came to wear the risk of the government’s loose decisionmaking.)

In thinking about the “NEM,” Pierce finds it useful to divide it in to three parts: (1) competitive retail and generation, (2) regulated networks and (3) external policy decisions.

All three are affected by “Pierce’s consistency theorem” – which he defines like this: “If change is going to meet its objectives and not set you on a course of putting Bandaids on Bandaids, economic or policy implications, commercial and financial impacts and technical and operational aspects need to be aligned or consistent with one another.”

He has come up with a line that – as with Clinton’s “It’s the economy, stupid” – should be pinned to walls: “Market design, policies and regulatory frameworks should not be dependent on a particular forecast or bet as to the future.”

Especially walls in ministerial offices.

All of which carries Pierce to this conclusion:

A Hitchhiker’s Guide to the NEM would read:

When assessing changes to competitive, regulation or policy sectors, know the question you are trying to answer so that you know what to do with the answer.

Always carry a towel with “How are risks allocated?” written on it.

Manage the change process in a way that takes your fellow travellers with you – or at least leaves them with some idea of where you are going.

Remember consumers are the centre of the universe, not waiting in a restaurant at the end of it.

PS: If you have never read “HG2G” by the lamentably late Douglas Adams, part of a “five-part trilogy” that had sold 14 million copies the last time I looked, you are probably as confused as Arthur Dent by now, but fear not: Pierce’s points stand up entirely well in their own right.

What’s more, they reprise a question I kept putting to the “National Grid Management Council” chairman and managers in the early 1990s when the “NEM” was being designed and I was a very new CEO of the Electricity Supply Association: “What are you trying to do?”

With hindsight, the answer was design a market that works tolerably well in the good times but creaks and groans today in an environment that the designers did not (could not) envision.

What Pierce’s homily to the lawyers’ lunch brings home is the great care that needs to be taken in embarking on a new voyage.

The “NEM” may have sprung some leaks, but running it on to the rocks is not a solution in the long-term interest of consumers or the economy as a whole.

Black holes & ballots

It’s hardly news that you can demonstrate just about any jolly thing with statistics, so the media headline “Abbott’s $4 billion carbon black hole” today is just one more example of the genre.

Context is all-important here as in almost any other area one can consider – and, as I have written many times before, it is the one on which the media commentariat falters continuously.

I suggested to some folk yesterday that an interesting opinion poll question right now would be “Have you already made up your mind which way to vote and are you tuning out the election campaign?”

I suspect the answer for at least two-thirds of the community would be “Yes.”

The other bit of context that shouldn’t be ignored, when people are going on about arcane global warming stuff, is what level of importance the community places on this issue.

Recent Essential Report polling indicates that just 11 per cent of respondents say management of climate change policies are among the top three issues affecting how they will vote.

The top three issues by a country mile – and it is no surprise – are the economy (45 per cent), health (42 per cent) and jobs (39 per cent).

So it also isn’t a surprise to see that 44 per cent of respondents to this Essential Report poll answered “don’t know” or “see no difference” when asked whether they trust Rudd or Abbott on the climate change issue.

(Rudd lags Abbott by 32 to 35 per cent on trust about economic management while leading by 35 to 21 on climate issues management.)

If an election is close, the vox populi on issues such as climate change starts to become important in marginal seats, but, if a party (in this case the Coalition) appears to be in a winning position mid-campaign, then noise about carbon policy (except for abolition of the carbon price) is just that.

(Some political hardheads I know think the best Rudd can do is to win 66 House of Representatives seats. While this is considerably better than the fate that was thought to await Gillard, it would put Abbott in control of government with the sort of majority Howard had in 1998.)

The source of the “$4 billion black hole” story is The Climate Institute, which has presented modelling claiming that the Coalition would need to spend this much more than it has budgetted to achieve the bipartisan target of five per cent below 2000 levels in 2020 for emissions.

Needless to say, the Coalition rejects the conclusion and Greg Hunt has attacked the Climate Institute for refusing to release its full modelling and for taking a “confused, unprofessional and partisan process.”

For the institute, the “ultimate test” of political decisionmaking on the emissions issue is whether policies are scalable to enable reductions of 25 per cent by 2020 and 60 per cent by 2030 – which brings us back to the Ross Garnaut assertions on the 2020 target to which I drew attention here and in “Business Spectator” in the past week.

(In passing, Alan Kohler included a link to the This is Power post in his widely-read “Eureka Report” Saturday email and this drew almost 3,000 visitors to this site over the weekend.)

It says volumes about the standards of media coverage of the election that millions of words can be expended on the (rather foolish) aside from Abbott about the physical charms of one of his candidates and not a syllable about whether Labor, if re-elected, would be attracted to Garnaut’s proposition of an “honest” 16 per cent abatement target for 2020.

The former comment, to use a metaphor from another time, is already wrapping fish and chips, while the latter, which would materially affect the lives of all Australians, is not worthy of discussion.

Coming back to tors, the real black hole is the continuing inability of both the federal government and the Coalition to come up with a holistic energy policy that takes in to account the long-term interests of consumers – and of creating a mechanism to deliver policy decisions without continuous diversions as knees jerk in response to various stimuli.

Whether we are talking emissions targets, renewable energy targets, energy regulation, support for carbon sequestration, the use of nuclear power or any other aspect, we do not have a decision-making environment that encourages investors or gives consumers confidence.

CLP Holdings – always China Light & Power to old-fashioned me – describes the east coast Australian marketplace, in which it operates as EnergyAustralia, as “extremely challenging” in a report to shareholders released this month.

CLP frets about “unprecedented structural change” taking place here “at a rapid rate.”

Where the rubber really hits the road in all this – and it goes to the key concerns of voters as set out in Essential Report – is the interaction between the economy and energy supply.

CLP says: “Commercial and industrial demand has been impacted materially by a difficult manufacturing environment, in part due to rising energy costs, a highly valued Australian dollar and a slowing global economy.”

This, too, I suggest is a black hole and a rather more important one for most of us than whether or not there is an accounting error in the Coalition’s carbon policy.

Renewables’ rocky road

There’s a paragraph in a new commentary by Deloitte Touche Tohmatsu, published in North America late in July and now being released here, that puts a lot of the local green hype in perspective.

In particular, if I can hark back to a previous post on this site (“The super issue for gas users,” 1 August), it is a further backhander for the claim by the Greens’ Larissa Waters that “The end of the fossil fuel era is not the time to start a new fossil fuel industry.”

(She was dissing coal seam gas.)

This is what Deloitte say: “Renewable energy today, though growing, only accounts for less than 20 per cent of global electricity generation, fully 16 per cent of which comes from hydro.

“This isn’t negligible, but, meanwhile, coal (the ‘dirtiest’ energy source) is just over 40 per cent while natural gas is at around 22 per cent and nuclear 13 per cent. The final five per cent is made up of crude oil.”

All this is set by the paper’s authors in the context of the International Energy Agency’s warning that “the world is still failing to put the global energy system on to a more sustainable path,” but I dare say the numbers above would come as a bit of a surprise to the casual followers of our local media who essentially note headlines and opening paragraphs of green-leaning coverage and move on.

For example, Australians did not read (because no local media bothered to report it) about Ernest Moniz, Barack Obama’s Secretary for Energy and former head of the Massachusetts Institute of Technology’s energy initiative, recently saying “Coal and other fossil fuels will be a major part of our energy future for decades.”

“Any serious effort to protect our kids from the worst effects of climate change,” added Moniz, “must also include developing, demonstrating and deploying the technologies to use our abundant fossil fuel resources as cleanly as possible.”

Moniz is informed by the US Energy Information Administration’s latest perspective (also published in late July) that looks out to 2040, sees energy consumption globally rising 56 per cent and forecasts the renewables share of total energy use then will be 15 per cent with nuclear power contributing another seven per cent.

It also projects that 80 per cent of the increase in renewables power output will come from hydro-electric schemes.

Economic growth in developing nations fuelled by reliance on fossil fuels accounts for most of the 46 per cent rise in carbon emissions that the US EIA foresees for 2040.

Set this against a local green website recently headlining another polemic: “Coal industry must wake up – renewables are the future.”

Coming back to the Deloitte paper, in some ways it is a masterclass in how even smart people struggle to square their desire to see investment in alternative energy in over-drive with the enduring economic importance of fossil fuels.

The need to justify enormous capital outlays and high taxpayer support for alternative energy leads to banging on about fossil fuel subsidies in papers such as this, but it is a point that is not nearly so clear-cut as some would have it.

One of the big applause lines in Obama’s Georgetown climate action speech was his allusion to $US4 billion in American taxpayers’ annual subsidies for “big oil.”

However, $US2.5 billion of this sum is taken up by measures relating to maintenance of America’s strategic petroleum reserve, tax exemptions for farm fuel use and the low-income energy assistance program.

By contrast, the top three “big oil” companies in the US alone paid $US59 billion in income taxes in 2012.

The Deloitte paper is chiefly focussed on how the renewable energy sector can navigate what the writers perceive to be the rough terrain of the immediate years ahead as economics and fossil fuel technological development create further barriers.

The paper remarks: “The current low cost of natural gas in North America and the hope of this dynamic spreading globally will also suppress investment in renewables for the short term, but this expected to ease as gas prices correct with rising demand.”

In one of those sentences that always induce a shift in my eyebrows, the Deloitte authors add: “Though the need for centralized energy generation is not about to disappear overnight, forward-thinking utilities, investors and developers will see the opportunities to be had in smaller scale, decentralised power production from renewable sources and will adjust their strategies accordingly.”

And, therefore, what?

Especially in the context of the EIA outlook.

Take hydro-electricity out of the renewables generation output data and the assertion that renewables are “becoming less and less alternative and more and more mainstream” is still a stretch looking forward, let alone today.

This commentary, of course, has a strong American slant and needs to be read in the broader energy context, which includes the “Oil & Gas Reality Check 2013” report also from Deloitte.

That says this: “Global demand for LNG will likely double, with Asia accounting for over 60 per cent of demand. Fifty-six regasification terminals are under construction, planned or proposed across 20 countries, adding a potential 166 million tonnes a year in capacity. “

Does this sound like “the end of the fossil fuel era” to you?

As I read on a website overseas not so long ago, the environmental movement’s MO is to attempt to race fossil fuels out of the energy market by convincing public opinion that energy efficiency and renewables have the global warming answers in a climate crisis situation and are rapidly making inroads in to power supply.

Rather wishful thinking, as the blog writer observed.

Garnaut’s new carbon bombshell

The Grattan Institute is never less than interesting on energy issues and I recommend the transcript of a forum Tony Wood recently chaired on the topic of “Australia and California: the climate action conversation.”

(The pdf is to be found on the institute’s website and Wood also had a short commentary on the event on “Business Spectator” on 2 August.)

What Wood didn’t highlight in his precis and what has caught my eye are comments from one of the two forum speakers, Ross Garnaut.

(The other was Mary Nicholls, chairman of the California Air Resources Board, a lawyer nominated by “Time” magazine this year as one of the world’s 100 most influential people.)

The important Garnaut assertion in my paraphrase is this:

First, it’s clear the US is on track to meet its carbon abatement target of having emissions 17 per cent below 2005 levels by 2020.

Second, it will be “very hard for Australia honestly, after review of the targets, to do less than America.”

Third, this means a 2020 target for us of 16 per cent below 2000 levels instead of the current bipartisan level of five per cent.

It seems to me that this is not a minor issue for a federal election which some claim to have climate change policies as an important aspect.

Garnaut, after all, was Kevin Rudd’s handpicked guru on climate change policy.

Does our once-and-again Prime Minister support this view of how the target should change?

If not, why not?

If he does, what’s the trajectory to get there?

It’s not going to be a $6 per tonne link to the European Union carbon price.

As for Greg Hunt and Tony Abbott, where does the Coalition stand on this?

We know the Coalition view on a carbon price and the emission trading scheme — but will they wear a higher 2020 target?

I am endlessly fascinated, and repelled, by the way the media cover federal politics and especially the coverage of this election.

There’s a commentary in the current issue of “The Spectator Australia” magazine (“A political melodrama” by David Martin Jones) that goes right to the heart of this, complaining about “media man (living) in a one-dimensional world in which memory is short term, truth is information and the media presents fragmented factual propositions describing constantly changing aspects of life for maximum emotional impact.”

Jones adds: “An endless flow of information flattens understanding. The public live in a permanent present, craving only stimulation. The media respond, presenting policy in terms of praise or blame, triumph or disaster.”

Or, I would add, simply ignoring issues and points as they career along on the election buses, living for the moment and letting the politicians dictate the path and the pace.

In the case of Garnaut at the Grattan Institute forum, here is someone the media placed on a pedestal in the opening years of the first Rudd government, hanging on his every word about carbon policy, and who is now raising a point that is absolutely crucial to how a re-elected Labor government might pursue abatement matters – with the Climate Change Authority lurking in the administration’s wings to leap in to action to provide the case for changing the target and, thereby, changing the local economic environment quite profoundly.

Garnaut put it to the institute forum that it is important for the third of the trio of carbon-intensive (developed) countries – he is referring to the US, Canada and us – to stay in the global (abatement action) tent.

“I think it is very important for Australia, the US and Canada to keep close on these issues and make sure that none of us is a laggard,” he said.

With respect to what Obama is up to, having been baulked on a US carbon price, Garnaut revealed that the president’s first energy secretary, Steven Chu had explained to him in 2011 that the administration, stoppped by Congress from pursuing abatement via an efficient and low-cost emissions trading scheme, “will get there in a less efficient and higher cost way” through regulatory action – which is what is now happening.

Garnaut noted that the Obama limits on emissions per megawatt hour are effectively a ban on new, coal-fired generation without CCS and can be expected to be “progressively introduced for established generation.”

Garnaut also shared with the institute audience his view that we are seeing “quite rapid decarbonisation” in Australian power production at present because of “lots of energy efficiency improvements, reduction in energy use and the RET forcing a certain quanta of zero emissions energy in to a shrinking market.”

His expectation is that the link with the EU carbon market will deliver in the mid-20s a carbon price of $30 or $40 – which will enable the RET to “drop away” in importance.

What he didn’t say is that a big factor in the fall in emissions in the east coast electricity market, starting well before 1 July last year, is the contracting manufacturing base and that its dimunition as energy prices stay high will be a key social and economic issue down this decade.

Manufacturing Australia lobby group claims that 200,000 jobs and $28 billion in lost economic value is at stake in the present (and impending) energy price environment.

To my way of thinking, the Garnaut comments at the Grattan Institute forum raise critical issues that should be debated in the federal election campaign.

We know where Christine Milne and the Greens stand – but what about Kevin Rudd and Tony Abbott and Greg Hunt?

Given a peg like Garnaut’s comments, why do the media political commentariat think this is something to be not just glossed over but wholly ignored?

Breakfast in Brisbane

Flying back to Sydney yesterday after the Energy Exchange series breakfast in Brisbane, I found one sentence from keynote speaker Randa Fahmy Hudome was stuck in my mind.

“To some, energy independence (for the United States) is an elusive, politically motivated goal,” she told 260 attendees,” and, for others, it is a realistic and achievable prospect.”

Substitute use of renewables for oil supply – which was Fahy Hudome’s point – and the quote holds good for the local debate about energy, even to the extent that the pursuit of 100 per cent renewables generation for power supply is part of the current federal election debate.

As I reported earlier (see “Tapping US energy perspectives,” 29 July), Fahmy Hudome is going to be further pursuing her topic in Sydney this afternoon at a forum hosted by the Energy Policy Institute.

(The Energy Exchange breakfasts, by the way, have become something of a fixture on the Brisbane calendar. Hosted by Rio Tinto, the University of Queensland and the EPIA, they are booked out within days of the initial emails announcing a new event being sent out. We could do with something similar in Sydney and Melbourne.)

Gas supply and the issue of hydraulic fracturing – “fracking” as it is now familiarly called by every galah in the pet shop – are part of Fahmy Hudome’s presentation and she is likely to find the Sydney audience more focussed on this than in Brisbane, I imagine, where the success of the coal seam gas industry is more likely to be praised than pelted with abuse.

The Sydney/Brisbane divide will not surprise Fahmy Hudome, who talked to us yesterday about a similar split in views between New York State (where fracking is feared and attacked) and neighbouring Pennsylvania, where it is contributing to a state economic revival.

I thought Rio Tinto Energy’s chief commercial officer, Simon Wensley, one of the panellists for the Brisbane breakfast, also made a good point. “There’s still no free lunch and no silver bullets,” he told us. “The recently-announced downward revisions to US shale asset values by a number of major companies remind us that finding and extracting energy resources will not be cheap and easy in the future.””

This, too, is a thought that needs to be applied with more rigor to the local debate about renewables versus fossil fuels – a big difference between here and the US and some other regions (including the Middle East, Fahmy Rudome pointed out) being that nuclear makes up the third leg of a debate triangle overseas.

Wensley articulated this point in discussion time: “Coal, along with nuclear power, will continue to play a vital role in anchoring the energy mix and delivering affordable and reliable baseload supplies to rapidly growing cities in the Asian region.”

As it happens, the next Energy Exchange breakfast forum in Brisbane (on 14 November) is going to feature Markus Kerber, director-general of the Federation of German Industries, as the keynote speaker.

Germany is a poster child for both sides of the debate locally about the energy supply triangle.

My final take-away from yesterday’s breakfast was Fahmy Hudome holding up the book of energy policy actions that she helped the George W.Bush administration prepare as one of the first domestic priorities of his presidency.

It contained more than 100 actions, she pointed out to us, and, by 2003 when she left the administration, the Department of Energy (of which she was associate deputy secretary) had implemented more than 80.

An Abbott administration here, if we are to see a change of government on 7 September, should take a leaf out of this book – in fact seize on the whole idea of the book: early presentation of a clear set of energy actions for Australia for the rest of the decade would be balm for many jangled nerves in the energy investment community.

Closer to home, for me, it would be an excellent idea for the O’Farrell government in New South Wales, too.