Archive for January, 2014
Notwithstanding the heatwave-driven spikes in electricity demand – and summer may yet have more to deliver in this respect – the east coast is still enmeshed in a situation where power consumption continues to trend down and no-one seems to have a handle on when this decline might bottom out.
The Climate Institute has published a 73-page commentary by Hugh Saddler, a distinguished analyst of energy issues and now a research associate at the Centre for Climate Economics and Policy at Australian National University, under the title “Power Down” that canvasses the changes and is well worth reading.
Saddler’s core point, I think, is that “although growth in consumption may resume in the next few years, it will be at a much lower annual rate than prevailed for more than a century up to about 2004.”
He also throws in this interesting note: if east coast demand had continued to grow from 2005 at the same rate as in the previous 20 years, it would now be 37,000 gigawatt hours more than it actually is – the output in round terms of 5,000 megawatts of baseload generation.
However, as he says, eastern Australian power demand in 2012-13 was almost 8,000 GWh (or 4.3 per cent) lower than it was in the peak consumption year of 2008-09.
Saddler attributes the present position to three key factors: (1) the impact of mainly regulated energy efficiency programs, (2) structural changes in the economy away from electricity-intensive industries and (3) the response since 2010 of customers, especially householders, to much higher power bills.
In the latter case, he argues that 2009-10 was the year when the impact of the carbon price on bills became a major political issue, with strident attention also being paid to to the rapid increases in power costs overall (heavily influened by rising network charges) and this persuaded consumers to look more closely at their use of electricity.
I particularly like his knocking the “obsessive emphasis” in the public debate on the price per unit of electricity rather than the cost to households of buying what they need.
“One might, if being provocative,” he says, “suggest that households know better and have more sense than the politicians they elect.”
One might indeed!
This said, he observes, it is possible that reduced household outlays on power have been at the cost of personal comfort and amenity.
If this is so, he adds, then consumption could be expected to start growing again when price increases moderate or reverse.
To which, I’d add, or when householders shake off the effects of media and political hysteria and work out for themselves how to better manage their budgets.
Then, quite sensibly, Saddler points out that there are two other hypotheses that shouldn’t be overlooked.
One is that households have now got a better handle on behavioural changes they can make without loss of amenity (such as turning down air-conditioning) and these steps will be permanent – and the other is that consumers are responding to higher prices by bringing forward buying new equipment and appliances which are more efficient.
As the worn cliché says, time will tell.
Saddler also calculates that regulated energy efficiency measures have accounted for 37 per cent of the decline, about 13,000 GWh.
Another 10 per cent of the decline, he notes, flows from the closure of the Port Kembla steelworks, the Kurri Kurri aluminium smelter and the Clyde oil refinery, all in New South Wales, removing some 3,600 GWh a year from consumption.
And he attributes a broadly similar impact to the growth in output of rooftop solar PV arrays and other small, distributed generation.
In the context of the present fuss over heatwaves, Saddler asserts that “there is no evidence to support an argument that declining consumption has been caused by consistently milder seasonal weather.” Per capita use, he says, has been steadily declining.
Saddler won’t wear suggestions that a general collapse in manufacturing output is also a substantial contributor to falling power consumption. Apart from the big three closures in NSW, he says, total demand from the 100 largest businesses (other than power stations) reported to the federal government rose by 4-5 per cent between 2009-10 and 2011-12.
The mining sector has grown strongly, of course, but, as he says, it is not especially energy-intensive and is less so than such sectors as food processing, beverage production and cigarette-making.
Finally, Saddler makes an interesting point in his summary that many leaders in power supply, and in politics, assumed until recently that there is “a direct, simple and unchanging relationship between economic growth and demand for electricity” and this mould now appears broken.
The implications of this are considerable and still not specially well understood and certainly quite poorly reflected in the public debate.
What I particularly like about “Power Down” is that Saddler demonstrates not a skerrick of ideology. This is a mature piece of work that delves in a serious way in to a phenomenon of our times – and makes no attempt to gaze in to a crystal ball to pontificate on future demand.
Credit to him for the effort and to the Climate Institute for publishing the study.
This post began with my reading a commentary on superannuation fees – an issue of interest to this septuagenarian superannuant – in Fairfax’s “Sun-Herald” newspaper over a weekend cup of coffee in a café.
“The annual fees we pay to financial planners,” declaimed writer Peter Martin, “are so big they rival electricity bills.”
On the one hand, just a throw-away line.
On the other, the Martin metaphor is typical of a media perspective these days about electricity bills that is feeding the ire of those members of the community who are ever ready to believe they are hard done by.
Today’s Twitter-style perception is that power bills have gone up because electricity suppliers are greedy, gouging gold-platers, a view vigorously promoted by the media, some politicians and those who for one reason or another stand to make a buck out of playing this riff.
One of the significant communications problems about power bills is the many variables – from State to State, within States (rural versus metropolitan), between types of household customers and depending on what appliances are in use.
Plus there are a lot of differing factors impacting on a final bill – wholesale power costs, network costs, retailer charges, “green schemes” and so on.
Basically, these prices are free range territory for the tendentious, who can assert practically anything and find some means of supporting it, and for a generalised media smear on those involved in the power supply chain.
A further problem is that the aggregate numbers are large – whether it is an anti-RET politician citing his estimate of the cumulative cost of the scheme or even a learned critic talking up a particular change to, say, network regulation.
An east coast saving of, say, $400 million a year sounds enormous to the unlettered – divided by nine million east Australian households, it is $40-ish annually or 85 cents a week.
Applied to an average $1,800 household bill, this is doesn’t actually come across to the payer as Christmas redux.
For the sake of this post, let’s take New South Wales (because the “Sun-Herald” readers mostly live in it and because the numbers are easy to access through the Independent Pricing & Regulatory Tribunal).
Even within this State, analysis is not straightforward because consumption varies between where people live (metropolitan versus rural, breeze-cooled coastal versus Sydney’s hot and humid western suburbs) and their MO in terms of energy supply (eg all-electric versus dual fuel).
IPART says a “typical” NSW householder uses 6,500 kilowatt hours of power a year but this number masks consumption that ranges from 2,000 kWh to more than 10,000 kWh.
Whatever, as the kids say, all of NSW annual bills are influenced, in round numbers, to the tune of 25 per cent by generation costs, eight per cent by the carbon price, seven per cent by other “green schemes,” 50 per cent by network charges and 10 per cent by retailer costs.
The annual cost of the carbon price and the “green schemes” at present is about $332 versus around $900 for network charges (which get vigorous media condemnation until the temperature and humidity hit extreme levels and consumers are praying that the power won’t fail, which it rarely does).
A lot of the grumbling about bills relates to the increases over a relatively short time: the “typical” NSW householder, according to IPART, has seen his or her annual bill rise by $1,060 between 2007-08 and 2013-14.
IPART reports that this increase is made up of a rise of $55 over the period in energy costs (the competitive market price), $172 for the carbon price (the “Gillard tax”), $82 for other “green schemes” (like Keneally’s madcap solar bonus scheme), $166 in retail charges and $580 in network charges.
(In passing, there’s a Roy Morgan Research media statement out at the moment which, inter alia, states that on average Origin Energy customers are paying almost 50 per cent more than five years ago and AGL Energy customers are paying a third more. The two companies account for about 32 per cent of east coast residential power customers, according to the research.)
Let’s suppose for the sake of the argument that the extra network component in NSW is twice as high as it should be – a number plucked from the sky.
Without this “gouged” or “greedy” or “gold-plated” sum, average NSW power bills would be $1,783 a year, an increase over seven financial years of 76 per cent.
My mythical saving represents $5.50 a week, not quite enough to buy an account holder and partner a decent flat white coffee every Saturday morning. (Which is exactly the argument the greenies use to defend the carbon price, the RET and other such schemes.)
The real power bill (averaging $2,073, remember) represents $5.60 a day – see the coffee calculation again.
Does the present bill represent an outrageous charge on Mr or Ms Average NSW for the service represented by electricity supply?
How you feel depends in part on whether you fall in to the median category of Sydney income earners getting more than $120,000 a year or those on $40,000 or even less (for whom, by the way, there are various welfare payments to help with things like power bills).
Which is not to decry the worth of $290 to, say, a family with three kids – this represents the cost of their shoes for a new school year.
I have travelled a fair distance from a throw-away line in the “Sun-Herald” but my core point is why use electricity as a negative metaphor ?
And, if we can’t have a sensible debate about price, how can we hope to achieve a sensible strategy for our electricity future?
The present state of debate results from it being fashionable in the media to run with “electricity shocks” and this, in turn, is because politicians and various others have made a meal of household bills over the past two years.
And, yes, making sure the component costs of supply are kept to a sensible minimum is a good thing for the economy and all Australians – my beef is the hysteria that has succeeded in demonising a service two-thirds of the world would love to have.
The issue of electricity as an input cost for business has to come in to any discussion, of course, but there’s a large chunk of the business community whose dilatory approach to energy efficiency needs to be taken in to account, too. (And the sore point for energy-intensive industry relates to a fair degree to the carbon tax and the RET as well as network charges.)
In closing: my flat white coffee and an apple slice on my weekend visit to the cafe cost me $8.20. The “Sun-Herald” cost $2.50.
In my household, the all-up cost of this outing is equal to two days’ power supply.
The network share of this is $5 and, in the dog days of summer, I can’t get by without air-conditioning (set to a sensible 24 degrees before you ask).
Until I got a Seniors Card, it cost me almost $7 for a day return train ticket to the CBD.
A bit of perspective is needed, don’t you think?
One of the perennial dilemmas for both policymakers and investors in the energy space is how long is long-term.
This is very much an issue right now as the Abbott government wrestles with its version of an energy white paper, its review of the renewable energy target and the review of east coast gas markets it inherited from the Gillard government via a survey initiated by Gary Gray last May.
As it happens, these activities are running in parallel to an effort by the Newman government to develop a 30-year Queensland electricity strategy with a rolling five-year outlook.
I am taken with the structure of the Queensland study, although I think having an horizon around 2044 is several bridges too far – one only has to look at what has happened in that State and elsewhere in Australian energy developments since 1984 to understand why.
It’s worth remembering that the first energy white paper – the one initiated by Gareth Evans in late 1985 and handed down by Peter Cook in September 1988 – had a far more modest outlook, embodied in its title,”Energy 2000.”
The second white paper, produced by John Howard, was titled “Securing Australia’s energy future” – and look at how much our situation has altered since that appeared in mid-2004.
When the Gillard government in 2011 threw itself in to a politicised effort, in tandem with the Greens, to sell a carbon tax, Wayne Swan and Greg Combet published a Treasury review entitled “Strong growth, low pollution,” which was based on modelling undertaken in 2008 and updated, purporting to predict the national generation mix in 2050.
As well, the Bureau of Resources & Energy Economics (in December 2011) chose 2034-35 as the horizon for specific projections about the mix – but, just a year later, BREE felt confident enough to upgrade this work and now offer forecasts to both 2034-35 and 2049-50.
In the space of 12 months the bureau downgraded the future of brown coal generation in 2034-45 from 40 terawatt hours to zero and upgraded the contribution of solar and geothermal from 18 TWh to 42 TWh………..
I think the Queensland government discussion paper got it right when it opined: “It is impossible to precisely define the likely future of the electricity supply sector in 2042 – the only certainty is that the sector is unlikely to look like it does today.”
All of which leads me to suggest that the Abbott government should take a leaf from Gareth Evans’s playbook and produce a white paper later this year titled “Energy 2025.”
I’d also like it to take this stuff out of the hands of the politicians to the greatest extent possible from here on.
With the agreement of the Council of Australian Governments, let’s charge the Australian Energy Market Commission with the task of producing rolling five-year reviews of the strategy, delivering one in 2019 and another in 2024 – right ahead of a white paper (published by the governing politicians of the day, of course) entitled “Energy 2035.”
Not adventurous enough?
Believe me, most energy investors have seen enough policy adventurism in the past 6-7 years to last them a lifetime.
A clear horizon, an independent review of progress and a commitment to shift sights in 2025 to 2035 – allied with a root and branch cleansing asap of the energy policy stables at State and federal levels – would do wonders for investor confidence.
Let me digress, but only to an extent, to illustrate why it makes sense to take such measured steps.
Today I have been reading a Canadian commentary on the future of global LNG trade.
The Canadians are busting to join the Asia Pacific great gas game – you only have to read the new BP Energy Outlook, published a week ago but so far ignored by Australian media, to understand why – and they have Japan in their sights.
The commentary quotes the Tokyo-based Institute of Energy Economics to this effect: Natural gas import bills are hurting Japan so much, it is possible the government will approve the restarting of 16 nuclear reactors over time. If this happens, Japanese LNG demand will decline just as world supply soars. So many companies are competing to build new plants that, if all are constructed, there could be a 50 per cent over-supply of LNG by 2025.
Now such forecasts and $4 will buy you a decent flat white coffee in Sydney, but, should the IEE’s views be even directionally right, might we discover that our poor old domestic “golden age of gas” is not deceased, just deferred, because there is an abundance of relatively cheap gas in the middle of the next decade?
That’s not a forecast and my point is that one should not take such predictions as gospel or those of other political alchemists, academic soothsayers and hopeful entrepreneurs.
Instead, we should work with what we have at hand to enhance strengths and opportunities, to reduce or remove weaknesses and to better understand threats so we can prepare for them.
There’s a word for it: “resilience.”
In this context, I like some advice EnergyAustralia has offered the Queensland government (in a submission last month on the 30-year electricity strategy): “Energy policy need to be flexible and to adapt to change.
“Uncertainty will continue.
“Governments’ role is to ensure market structures remain sustainable (to) support what is likely to be a complex transition and to manage endogenous shocks effectively.”
The submission underscores the need for stable and predictable policy and regulatory frameworks to facilitate efficient investment and sustainable market growth.
“Appropriate policy settings,” the company adds, “are critical enablers of investment.”
It concludes: “The role of the strategy should be to define a vision to steer the policy context over the shorter to medium term.”
This is true for the national approach, too.
Finally, and in passing, I also spotted today an energy-intensive users’ comment in a submission to the Queensland government, made in early December, that said: “The current scenario sees an evolution of declining energy consumption and softening peak demand which means it is no longer an issue.”
How well does that read after the south-eastern Australian heatwave?
It is interesting today to juxtapose two statements – one is an opinion piece in the “Australian Financial Review” by the Clean Energy Council deputy CEO and the other a media release by Graeme Bethune, chief executive of market research business EnergyQuest.
First, one of the key thrusts of the comments by CEC’s Kane Thornton are that commentators claiming that “renewable energy was no help” in dealing with the electricity demand created by last week’s heatwave are wrong.
This is something of a straw man: a number of commentators, including me, have pointed out that the contribution of solar power in particular should not be over-stated.
Some with renewables axes to grind – in a year when the future of the renewable energy target is an important issue – were quick to harp on the fact that, at the height of the crisis, a day of dead calm deprived Victoria of wind power.
In what is rapidly becoming a somewhat banal game, the CEC and others of a green persuasion are now pointing to one of the units at Loy Yang Power suffering a mechanical defect in the same time frame.
The obvious retort is that (a) AGL Energy engineers raced to fix the problem and within 24 hours the Latrobe Valley complex was again running flat out, (b) the failure was in one unit of four at the power station and (c) such plants don’t rely on the wind blowing, which it sometimes doesn’t in extreme weather.
Whatever, my particular generation point is that the really meaningful renewables contribution during four days of searing heat in South Australia and Victoria was old faithful: the hydro-electric system.
And the vast bulk of supply in the southern States, as usual, was from conventional sources – which it will still be in 2020 and beyond even if the campaigners for keeping the RET at its present target win Senate support (which is the deciding factor by the way).
Now comes Bethune, a highly respected independent analyst.
You can find the full EnergyQuest media statement on the firm’s website (ww.energyquest.com.au).
The gist of Bethune’s views is that analysis of electricity supply in the heatwave highlights “the importance of traditional energy sources, particularly gas.”
He adds: “Without ready access to gas supplies, pipelines and gas-power generation, peak demand could not have been met.”
EnergyQuest reports that total generation in Victoria over the five days of the heatwave was 19 per cent higher than in the same time of summer 2013 and it was 32 per cent higher in South Australia. Peak generation in Victoria was 67 per cent higher than in 2013 and it was double the South Australian summer average.
(As has been pointed out by some, including me, this critical peak demand came within a whisker of the record set in the even more horrid January of 2009.)
On the matter of wind, Bethune notes that the turbines met 19 per cent of power demand in South Australia during the heatwave but only five per cent of the increased need. In Victoria wind generation fell back.
As for solar PV power, Bethune records that its contribution rose 10 per cent in the two States and contributed 11 per cent of peak demand in South Australia and five per cent in Victoria – but only one per cent of increased generation across the States.
The “heavy lifting,” he says, was done by coal, gas and hydro power in Victoria and by gas in South Australia.
In Victoria, gas met 46 per cent of the increased supply, hydro contributed 28 per cent and coal 26 per cent. As a result, brown coal generation’s overall share of supply in the State during the heatwave dropped back from 85 per cent in normal conditions to 76 per cent.
In South Australia, gas supplied 91 per cent of the increased generation requirement.
Even as wholesale electricity prices soared to $9,829 per megawatt hour in Victoria and $10,027 in South Australia, Bethune adds, short-term wholesale gas prices “appear to have remained at moderate levels.”
Summing up in his statement, Bethune calls for the federal government’s RET review, still the subject of somewhat confusing messages out of Canberra, to “consider the role of gas in the generation mix.”
As he says, development of new gas-fired generation on the east coast is at a standstill as a result of falling overall electricity demand and renewable energy policy.
This dispassionate analysis should still some of the more raucous voices in the post-heatwave debate. It won’t, of course, and I suggest the power suppliers need to do a bit more to ensure that what really happened last week is communicated.
The popular media, especially radio, have a critical role to play in a crisis and an objective opinion, I think, would be that they performed their main tasks – keeping people informed of hour-to-hour developments and driving home the need to be careful with power use – pretty reasonably.
My nomination for the least helpful headline of the week goes to “The Age” for “Meltdown as heatwave cripples state’s power” on 15 January – while “Solar power saves the day during Australia’s record heatwave” in “PV Magazine” deserves an honorable mention.
Top spot, however, should go to the tabloid “Herald Sun” for an editorial on 16 January that set some sort of lead (that’s as in the metal) standard for populism and ignorance. You can find it on Google under “Some lessons are still unlearned.”
So what’s the bottom line?
Bethune’s EnergyQuest analysis provides it, I think, and hype from both edges of the ideological divide should be given the elbow it merits.
CEC’s Thornton is worth quoting in conclusion: “The electricity system performed admirably in difficult conditions.”
So it did but suppliers needn’t expect this to be remembered for long unless they speak up strongly for themselves. The next pricing announcements and the next bout of aggro from critics are not far away.
You can rely on extreme weather to bring out all the hobby horse riders in the energy paddock – and the neighboring one on global warming.
It would be tedious in the extreme to address all (or even some of) the views that have been ridden through the media in the past few days – but there are a few points worth addressing.
I sought to do this myself in a commentary in this weekend’s “Australian Financial Review” (see “Wilting in the heated debate over peak power”) in which I addressed the urgent need for governments moving to lop the top off consumption in extreme weather.
In an editorial (“The right policy for a big hot land”), the paper has some tough things to say itself about policymaking.
The Energy Supply Association CEO, Matthew Warren, is another who has bought in to the discussion, commenting that “the demise of rising summer peak loads has been greatly exaggerated.”
I have lost count of the number of hobby horse jockeys who have lectured us through a relatively short period of mild weather on how the big peaks have gone and the big money spent on augmenting network infrastructure is Waste with a capital “W.”
The billions of dollars spent on this augmentation – about $21.3 billion in all – can now be “appreciated as a prudent investment” (Warren) after several seasons of strident bad-mouthing by a conga line of politicians and meretricious players.
Of course it is valid to question whether the regulatory system has been as rigorous as it might be and whether taxpayer-owned utilities are as productive as those in the private sector.
Of course, it is also true that State governments have pandered to the trade union movement in past years by ramping up reliability requirements for networks to the point where the costs probably outweigh benefits.
An objective view of the past decade might be that federal and east coast State governments have not served us especially well by zig-zagging from shaping the rules to drive a high level of investment and then, panicking at the inevitable impact on end-user prices (exacerbated by the impact of the GFC and the local decline of manufacturing), reshaping them to “moderate” costs.
Equally, how well have we been served by ill-disciplined interventions in the market to drive building of wind farms and installation of residential rooftop solar systems?
Warren observes that “Even with more solar panels around now, the increased use of air-conditioners means record electricity demand (in the heatwave) is a real possibility.”
He says the use of solar power has made a “small contribution” to management of the southern States’ heatwave.
According to ESAA, electricity demand in Victoria and South Australia on the afternoon of 16 January peaked at 13,589 megawatts, the second highest on record for these contiguous States that tend to share weather patterns.
(The record was set on 29 January 2009 when the two-State load reached 13,716 MW.)
The rooftop solar PV contribution to meeting the latest bout of extreme demand, the association says, represented four per cent of total consumption in South Australia and two per cent in Victoria.
In due time, I will be interested to learn what contribution Basslink (providing mainly hydro-power) and Snowy Hydro brought to the situation; my understanding is that the interconnector, having had hiccups at the start of the heatwave, was the conduit from Tasmania for about five per cent of Victoria’s needs on 16 and 17 January.
The jawboning by solar players this weekend – they accuse ESAA of underplaying PV’s role in the past week – needless to say has not made any mention of the helping hand of hydro, a rather more substantial contributor.
For my money, and as I explained in the “Australian Financial Review” today, the real heat should be applied to the politicians to face up to the fact that, even with a steady rise in installation of solar PVs, which could be a quarter of Aussie rooftops by 2020 or early in the next decade, air-conditioning is already in 75 per cent of homes and will be in a lot more over the next few years.
Governments and their advisors were somewhat focussed on peak power around 2010-11 and then the momentum slipped as a result of declining overall electricity demand and mild summers.
The tools of choice in addressing this situation are year round time-of-use tariffs, critical peak prices or direct load controls.
As others have pointed out, these steps add complexity and risk in to an already complex power market for many consumers, they present issues for low-income households and, for some, add potential health risks if they push people to ration their heating or cooling in extreme weather.
However, resolving such problems is what we employ politicians – and, yes, they are our collective employees and fairly well remunerated – to address.
Decisions need to be made, programs need to be planned and implemented and really good government communication needs to be pursued.
The current heatwave and the prospect of more – which is what the “warmists” are wishing on us with vim while their northern hemisphere confreres are using extreme cold and rain to gee up their target audiences – are a harbinger of ongoing critical peak power issues.
The Council of Australian Governments process has a habit of being “tardy” – a word used by the Productivity Commission to describe its management of network reform – and the footdragging in this space is political because the remedies are awkward to implement and open to any amount of media manic behaviour (just think back to the stuff thrown at us during the GST debate 15 years ago).
Few things better became John Howard and Peter Costello during their long time at the ship of state’s helm than the way they pursued the GST in to law, even sacrificing a large parliamentary majority to achieve their goal.
What we need now is some firm decision-making and timely and efficient implementation of the necessary peak power management steps.
And let’s be clear that both elements are important: we only have to consider Battgate, the NBN saga or the Bracks/Brumby government’s smart meters debacle in Victoria, as well as all the nonsense inflicted on us by solar bonus schemes, to appreciate this point.
Right now, when generating and delivering electricity is in the headlines as a critical service, the heat is naturally on the suppliers, but it is really the policymakers who should be feeling it and the current experience should be the springboard for politicians to finally get serious about addressing peak power issues.
This requires a bipartisan approach and getting it in the present poisonous “blame game” political environment is much easier to say than to do.
However, if it doesn’t happen, there is a price to pay.
I don’t do much reading of newspapers in newsprint format these days — about 90 per cent of my media scanning is via the Web — after going through five or six, and often more, every weekday and at least two every weekend for more than 30 years, but “The Weekend Australian” is an exception, landing on the lawn on a Saturday morning as part of my package subscription deal.
Today’s edition happens to have all sorts of things in it of interest, not least of which is some polling data (courtesy of Malcolm Mackerras) that confirms my view the political writers in the media have seriously under done just how badly the Greens fared at last September’s federal election.
Think about it: this is a populist party that is almost never out of the media limelight and it is supported by a wide range of radical environmental groups, between them constantly banging on about contentious issues such as coal seam gas development, plus it was to all intents and purposes part of the Gillard government — and in September its vote in the Senate went backwards from 1,667,315 votes at the 2010 election to 1,159,588 at the latest poll. Dropped by a third in other words, garnering a little more than a twelfth of the 13.4 million votes cast in the Senate election.
You wouldn’t know it from the way the ABC, the TV stations, Fairfax and so forth cover every Green utterance, would you? If the Coalition vote had fallen by a third, you’d never hear the end of it.
There’s a whole lot of other stuff in this Weekend Oz of interest to me, not least a story that well and truly nails any hopes that the Snowy Hydro business, thought to be worth $5 billion if privatised, might be put up for sale. “The Weekend Australian” reports that ministers in all three governments owning the Snowy — federal, New South Wales and Victoria — tell it they have no plans to reprise the sales move the Howard and NSW regimes considered eight years ago.
I note that no-one seems to have canvassed the Kiwi option — the New Zealand government is following a semi-privatisation path for its power assets in which it retains a 51 per cent holding. There’s quite a lot the cash-strapped trio of local governments could do with between $2 billion and $3 billion.
The third item to catch my eye is the claim that there is a “Cabinet rift” in the Abbott government over whether or not to scrap the renewable energy target. The Weekend Oz asserts that only Environment Minister Greg Hunt and Industry Minister Ian Macfarlane support the RET.
Any suggestion that the government might scrap the scheme seems to me to be far-fetched, given its election promise not to do this.
Having made such a meal of Gillard dishonesty with the voters over the carbon tax, Abbott is not going to let himself be labeled a liar over a policy that the opinion polls say has about 70 per cent public support.
He would be handing the Greens a red-hot opportunity to revive their fortunes, not to mention it being a gift to “Electricity Bill” Shorten.
Personally, I have no idea why the government wants to go on messing around with another review of the RET before making a decision on its future except in one respect — to have a genuinely independent assessment made of what the scheme is costing consumers now and what it would cost if allowed to stick at the target of 41,500 gigawatt hours in 2020.
The Weekend Oz reports Nationals senator Ron Boswell, a full-throated critic of the RET, as claiming that it “will cost Australians $5 billion by 2020.”
I assume Boswell is playing with sums related to the 10 billion residential customers, none of whom are particularly stung by the direct cost of the scheme on an individual basis (it’s about two cups of coffee a month). The real issues with the RET are the way going for the full target will mess with the east coast wholesale power market, cramming much more capacity in to an over-crowded system, and what it costs the large manufacturers, who have so many input problems bothering them.
I’d get an assessment done of the real costs all round and announce that the RET is reverting to a true 20 per cent of consumption by 2020.
That would still leave the small matter of amendments to the legislation to be negotiated through the Senate, something that I think is probably do-able.
Finally, the Weekend Oz caught my attention with a large feature carrying on about the continuing high use of coal internationally. (“Green dream on ice in coal frenzy” is the headline writer’s offering.)
Readers will know that I tend to bang on a bit myself about the “energiewende” problems in Germany and the general nonsense in the media about the “death of coal.” This Oz feature is in that vein.
As it happens, I read this after just noting that the International Energy Agency is now forecasting that global coal demand growth will run at 2.3 per cent in the rest of this decade, taking total consumption to nine billion tonnes by 2018, with Indonesian and Australian miners leading the pack to take advantage of higher demand — and China, of course, accounting for about 60 per cent of the increased consumption.
The “death of coal” chatter — and the unquestioning way this is repeated by so many in the media — flies in the face of Germany building a medium-sized new fleet of coal plant (some fuelled by lignite, i.e. brown coal) and by the Chinese having added a fleet of 600 gigawatts of new coal plant in seven years, twice the level of coal generation the Americans spent 70 years constructing.
Every time someone in the green media rushes out another breathless piece about the growth of solar and wind power in China just remind yourself that the country expects that well more than half its power will sill be generated by coal plants in 2035.
This does put in to perspective the local carry-on about how important it will be to have 41,500 GWh of electricity coming from RET wind farms (mainly) in 2020 instead of 25,000 GWh if the Abbott government screws the target back down to a true 20 per cent.
The value of next month’s Australian Domestic Gas Outlook conference in Sydney has been highlighted by the federal government’s new eastern Australian gas market study just released.
Reading the report against the conference agenda, the synergies are marked and I have no doubt it is going to be a reference point for speaker after speaker on 26-27 February.
A particular conference value, I think, lies in bringing together government ministers from several States, industry lobby group leaders across the spectrum from production and pipelining to manufacturing, senior company executives and key figures from the market, including the Australian Energy Market Commission (which has its own inquiry running) and the Australian Energy Market Operator.
The new federal study lays bare the biggest risk the east coast market faces: the prospect for gas prices to spike beyond export netback prices until there is sufficient supply or information available to readjust the situation.
Part of the warning – the report has been written by the federal Department of Industry working with the Bureau of Resources & Energy Economics – is that any transition to a better place may take longer than it should because “of the potential for the exercise of market power and a lack of transparency.”
The writers note that, if they had confidence that the market was fully efficient, the risk would be seen as low.
The main voice of suppliers, the Australian Petroleum Production & Exploration Association, whose CEO, David Byers, is a keynote speaker at ADGO, has reacted to publication of the study by arguing that the market is working to meet domestic and export needs.
Byers says: “Australia has more than enough gas to supply both markets for decades to come. (But) this study highlights the duplicative and multiple layers of red and green tape that projects must navigate to unlock the economic benefits from these resources.”
On the one hand, APPEA welcomes the study’s emphasis on gas supply impediments in New South Wales and Victoria and particularly its detailed dismissal of ongoing calls for government intervention on behalf of large gas users – but, on the other, it is dismissive of the need to increase market information.
“The (domestic) market has abundant information available to it,” Byers says, pointing to nine major gas supply agreements struck over the past 12 months, “suggesting that there is more than enough information to allow contracts to be concluded between willing buyers and sellers.”
Representatives from the Energy Users Association, the Plastics & Chemicals Industry Association, the Australian Industry Group, Brickworks and the Australian Aluminium Council will all have opportunities to put their side of the story at the outlook conference.
The epicentre of concern about domestic gas supply, of course, remains New South Wales, with its key contracts running down and the State government seemingly unable to find a way for timely unlocking of the coal seam gas resources within its borders.
Three corporate presentations at ADGO are going to be especially interesting in this respect – coming from Mark Collette, group executive manager (energy markets) of major retailer EnergyAustralia, Paul Adams, managing director of transmission business Jemena, and Kelvin Askew, chief executive of ERM Gas.
Equally germane, perhaps, will be the panel discussion which my conference co-chair, Jim McDonald, will moderate on experiences from rural communities in areas that have seen gas development established.
This is the side of the situation that does not get enough exposure in the public debate, I think, and the senior community and farming figures involved will be valuable contributors to the event.
Returning to where I began this post, the new federal government report is a very useful launching pad for a conference, which could scarcely be better timed as a tool for exchanges between the stakeholders.
The report runs to 133 pages, which is a lot for busy people to read, but I can provide a nifty short cut for those who want a shorthand version: go to pages 113 to 115 of the study where the writers deliver what seems to me an insightful synopsis. (The report is on the departmental website.)
The writers make a point that I think I may use to kick things off when I chair the opening day of ADGO on 26 February: “With change also comes challenge, particularly for those who have to adapt quickly to a new market dynamic of massive new demand and supply uncertainty. This does not mean that the market is ‘failing’ nor that there is cause for government intervention. It is somewhat paradoxical that calls for intervention in the market are expressed enthusiastically alongside calls for more transparency and competition. In many ways, this is an environment in which governments should act with caution and where short-term solutions may be undesirable and worsen an already difficult situation.”
To which the writers add: “Australia has substantial conventional and unconventional gas reserves and significant resources that are yet to be explored. The rapidity and efficiency of a supply response will depend in large part on clear market signals and effective government regulation.”
Yes, I think this report is fertile ground for the ADGO conference, not least because the participants’ perspectives can also provide useful input to preparation of the energy policy green paper that the federal government is promising for May.
And between ADGO in late February and that green paper target date will come the APPEA annual conference in Perth from 6 to 9 April, expected to draw 4,000 delegates from 30 countries – where the emphasis will be on LNG, but the big domestic issues will get another going over.
Never a dull moment in this game!
First cab off the rank in the 2014 fleet of reviews related to energy supply is a relict of the previous federal government: the eastern Australian domestic gas market study initiated by Gary Gray last May. Considering the importance of the topic, it has received remarkably little media coverage even after a somewhat growly media statement about it from the Australian Petroleum Production & Exploration Association.
APPEA notes that the report “follows a long line of previous reviews,” including the “comprehensive” 2012 energy white paper (“itself five years in gestation”) and says it shows that this country “has more than enough gas to supply both domestic and export markets for decades to come.”
APPEA adds that the report highlights “the duplicative and multiple layers of red and green tape that projects must navigate” and runs again with its core refrain of recent months: “Australia needs more gas production not more regulation.”
While pleased with the report’s dissing of the manufacturing sector’s lobbying for a national gas reservation policy, of which more in a moment, APPEA is not sitting still for a suggestion that there needs to be an industry-led initiative to provide more information to the gas market. “The market already has abundant information available to it,” the association retorts. “The range of contracts struck over the past 12 months suggests there is enough information available to allow contracts to be concluded between willing buyers and sellers.”
APPEA isn’t amused either with the report suggestion that a further review is needed of the competitive nature of the gas market. “Unnecessary” to add to the profusion of reviews to which the market has been subjected, it snaps.
No doubt, as other industry lobby groups settle in to their seats after the year-end break, we will soon hear some different voices but the gas reservation gang will struggle to find any comfort in this report.
The review, conducted within what is now the Department of Industry, working with the Bureau of Resources & Energy Economics, is unyielding in its disdain for the reservation concept.
“All users,” it says, “need to adjust to gas prices being set in a more dynamic and higher cost environment, particularly users who have had to adapt after decades of fairly steady market fundamentals.”
Gas users, it adds, “may need to adjust their contracting strategies to secure supply.”
It takes until page 107 of a 133-page report for the writers to say it clearly, but finally we get this: “The desired market response to a tightening in supply and associated higher gas prices is an increase in exploration, development and production. A reservation policy acts contrary to this goal by creating a perverse signal to the upstream sector which diminishes incentives for bringing on new supply and potentially creates conditions for tightness in the market to persist.”
There is a chink of light for the reservationists. The report adds that federal government rejection of this policy option does not necessarily stop State and Territory governments from pursuing acreage reservation for only domestic consumption because they retain the title to onshore resources. “However,” the report adds,” reservation should only apply to the release of new acreage to avoid sovereign risk.”
There is also another point in the study’s conclusions that is worth underlining.
The fact that users have to adapt quickly to a new dynamic of massive extra demand (that’s the LNG projects) and supply uncertainty, it says, does not mean that the market is failing or that there is cause for government intervention.
“It is somewhat paradoxical,” it adds, “that calls for intervention in the market are expressed enthusiastically alongside calls for more transparency and competition.” Short-term solutions, it observes, “may be undesirable and worsen an already difficult situation.”
An additional comment resonates at least with this reader. “This is largely uncharted territory,” says the report. “No country has tried to deliver this many LNG trains from CSG resources in such a short period.”
And then there is this: “Under all the scenarios modelled for this report, future gas prices remain high relative to historical levels due to higher production costs and linking to the LNG netback price. It is therefore unsustainable for government to support major users whose economic viability depends on low prices. All users need to accept that gas prices will be set in a more dynamic price environment. The link to international markets has been coming for a number of years.”
Policy actions, the report declares, must engender a certain and predictable regulatory and investment environment. And “government should also increase capabilities to monitor and enforce established areas of regulation.”
And there is a sad little message for politicians. “Implicit in the terms of reference for this study was the intention that it would provide greater clarity about (future prices). (However) no single reference price could be established. This is not surprising, given the nature of the gas markets and the range of possible scenarios confronting it. It is perhaps inappropriate for the government to seek to give an ‘authoritative’ view of price.”
Plus this gem: “Reform for reform’s sake is inconsistent with building a certain regulatory environment for investment and improving market signals.”
Can we have this spray-painted on a few MPs’ walls in Canberra and the State capitals?
All in all, this is pretty useful document — and a key challenge now is to get the core messages out in to the public debate.
That the media has ignored the report at the height of the “silly season” speaks volumes for what can be expected from this quarter; others will have to do the hard yards in ensuring the community gets the message.
Here we go again. My best wishes to all readers for 2014 although I wonder how many of you will have your desires fulfilled?
The Christmas/New Year break, as the Queen pointed out in her annual message, should be a time for reflection and that’s surely what the local electricity supply sector needs from those who decide its fate as it transits from 2013 to 2014.
Some will argue that suppliers have had all the reflection they can take with reviews galore over the past 2-3 years and still more to come.
They have a point.
However, stakeholders, and in particular our elected representatives, really need to reflect on what an over-arching, comprehensive and prioritised power plan should look like rather than continuing to play with a jigsaw for which they don’t have a picture.
From my vantage point (in an armchair in The Hills district of Sydney!), the state of affairs today results to a significant extent from the electricity sector being used as a catspaw by so many for their own reasons and also by the body politic, overly influenced by focus groups, kowtowing to too many interests.
As a result, energy supply has become a sort of Christmas tree covered with ornaments for each special interest.
A critical lesson from the fading last years of the Howard Government and the (thankfully relatively brief) lifespan of the Rudd/Gillard Labor regimes is that it is highly risky to pursue transformative power policies without the benefit of a cohesive design.
That’s how we reached this point.
Now we are embarking on a new year in which a new federal government is seeking to write a fresh energy white paper in one area of its operations and also to conduct a review of the renewable energy target in another area while killing off carbon pricing and designing “direct action” carbon abatement plus simultaneously meandering along with State governments down the path of retail deregulation, pursuit of “smart” technology and introduction of time-of-use charges.
Joining the dots is the challenge for policymakers, especially when they are in thrall to a 24/7 public debate where bits and pieces of the supply chain are suddenly “white hot” for the media and politicians.
However, a genuine effort to develop an holistic approach is essential to really addressing the big picture.
Anything less than this simply will throw up a fresh set of hassles.
The fact that this situation is not unique to Australia – cf Britain,the US, Germany, Spain etcetera – is not the point: resolving our own challenge(s) is something only we can do.
At a minium, this requires really thinking issues through, not throwing out soundbites – “cheaper prices” – and then hurling blame in all directions.
To cite an example, how much reflection is needed for politicians to appreciate that we can’t have “cheap” service from an infrastructure system on which tens of billions of dollars have been invested as a deliberate policy step by their predecessors?
How can power supply be “cheap” in present circumstances when one of its key objectives (and highest cost drivers) is to serve the levels of demand reached at a few times of extreme weather, not average consumption or the peaks of periods of mild weather.
The recent heatwave, which has seen east coast electricity requirements peak above 30,000 megawatts for the first time in several years, shows up the shallowness of many months of jawboning about “goldplating” – but the point is being comprehensively ignored.
The logical position is that the costs must reflect the required service and consumers should be charged the true price.
Evasive action doesn’t work except to deflect the headline writers momentarily.
In Western Australia, for example, where successive governments have run from providing power at cost, taxpayers have footed a large subsidy bill, amounting to about $350 million a year, funds that could and should be spent on other public services.
In Queensland, meanwhile, the government is now spending more than $600 million a year to ensure that rural and regional communities are charged the same for electricity as those living in the populous south-east corner – money that depends on the State Treasury raking in large sums in profits from its power supply assets
There and elsewhere, the power bill is also loaded to deliver social welfare to those in need (instead of being provided from government’s central revenue), adding to the input burdens of small and large business.
So far no real attempt has been made to to create an environment where all this can be better managed.
Nor can power service be “cheap” when it is bent to meet political ambitions – such as pursuing lower levels of greenhouse gas emissions.
(This isn’t an argument against abatement policies per se – just against the notion you can embark on them without an honest, all-embracing evaluation of the costs involved.)
The record shows that politicians, egged on by the conservation movement in an electoral environment where many parliamentary seats are now marginal and vulnerable to green populism, have created a policy framework (including the RET and subsidies for rooftop solar power) that has helped to deliver substantial over-capacity in the east coast wholesale market to the extent where serious commentators are debating who should bear the burden of stranded assets.
For the radicals, at heart anti-capitalist, this is easy to answer: companies that built fossil-fuelled plant or expanded networks in good faith to meet demand (and its perceived upward trend at the time decisions were made) should be punished for their wickedness.
The idea that this is going to be cost-less to consumers should be a joke
These are early days for the Abbott government.
A less than surefooted opening performance – still receiving the full derogatory treatment of media mainly empathetic to the other side of politics and, in some quarters, most empathetic to the Greens – is not necessarily a harbinger of more in the vein of Rudd/Gillard, but it is not especially comforting either.
Given what has gone before in the arena of energy policymaking and regulation, it is concerning as we enter 2014 to view the new federal government’s early forays on strategy in this space against the critical need for comprehensive planning to co-ordinate all facets.
The political heat in energy (and especially electricity) costs today is due in no small way to the ineptitude of policy development over 10 years – and no major political party can escape the odium for this failure.
To make things much better, the blame game has to stop.
The Catholic rite of confession requires not just regret for sins but acknowledgement of the causes of failure and, importantly, a firm purpose of amendment.
Applied to the national energy scene today, this requires an acknowledgement by both mainstream sides of politics (in all jurisdictions) of how poorly they have performed and of the need for a collective intention to do better in the national interest.
And that’s the easy part!