Archive for February, 2014
Surfacing from the Australian domestic gas outlook conference in Sydney this week, one is immediately greeted by all sorts of guff floating around in the media, including a scare campaign kicked off by the NRMA about our imports of transport fuels, leading to it wanting to curb the LNG export business.
One does have to wonder what some of these people sprinkle on their hand-cut muesli and yoghurt of a morning.
The standard of presentation and debate at ADGO was of a far higher standard, although offering a wide set of views that at least some there felt only added to their sense of confusion and frustration at the present situation.
Catching up on what had been in the media and on the Web while I was ensconced in the ADGO hotel venue, I find a wholly sensible and straightforward synopsis of a key part of the situation on the APPEA website in the shape of a guest blog from AGL Energy’s Tim Nelson.
It makes an effective antidote for some of the conspiracy-laden ranting the “Sydney Morning Herald” continues to publish.
Nelson notes that concern about future gas supplies for New South Wales is justified – but one needs to understand who will cop the hit.
“Household supplies,” he says, “are likely to be unaffected. Most of the impact in terms of physical supply and pricing will be felt by large energy-intensive businesses.”
Overlaying this, of course, is the fact that said households are going to cop increases of about a fifth in their gas bills in the new financial year and the price rises won’t stop there.
One of the points of discussion at ADGO was what the householders will do when they don’t like the gas price pain – shift to reverse cycle air-conditioning for their heating at least?
All the blather we are getting in the media at the moment can’t change the basic problem for NSW.
As Nelson explains, gas from South Australia that has been available to the State in the past is almost certainly going to flow north to the LNG trains at Gladstone – an entirely natural seller reaction to where the best sales value can be realised.
Do the large number of Cooper Basin company shareholders domiciled in Sydney think this should not be the case?
This leaves NSW reliant on a single source – Victoria.
Nelson, speaking for one of the largest gas retailers, says the Eastern Gas Pipeline does not have sufficient capacity to meet NSW peak demand, even with the recently-announced expansion work.
Without more gas production within the NSW borders, and its availability before 2018 is pretty unlikely, there may come times in the winters ahead where shortfall regulations have to be applied – and it is the large industrial users who feel this ahead of hospitals and households.
The State Resources & Energy Minister, Anthony Roberts, acknowledged at ADGO on Wednesday that, without these new supplies, load-shedding may need to be used – and he noted that 500 commercial customers in NSW account for 75 per cent of the gas demand. (The 1.3 million householders on gas account for 10 per cent.)
As the ADGO presentations indicated, there are a large suite of market developments that can be pursued for the longer term benefit of east coast gas customers – the challenge for policymakers is to choose what is to be done and engage in timely and efficient rolling out of the necessary official steps.
That there are considerable opportunities to provide additional benefits to the national economy and to Australians generally through getting this process right is obvious to all – except the radical environmentalists for whom the game’s name is saying and doing anything to impede fossil fuel use.
There are others in the rural community, as speakers at ADGO also made clear, with a significant need for better information and confidence in regulation before they can wear coal seam gas developments on their land or close to where they live.
To me, the need for a NSW equivalent of the Queensland Gas Fields Commission is crystal clear, but there doesn’t seem to be any impetus for it to be created.
The contrast between Queensland and NSW in this environment grows ever more stark.
Indeed, it was highly notable that ministers and senior officials from western and northern Australia speaking at the conference spent most of their time dwelling on the opportunities that can be unlocked – like the shale resources in WA, the Northern Territory and the Cooper Basin stretching across the South Australian and Queensland border – than on the problems to be resolved.
Queensland Energy Minister Mark McArdle told the ADGO audience: “NSW, and Victoria, will have to accept the consequences (of their policy approaches).”
Just so – and painting the NSW situation as a conspiracy of the big, bad fossil fuel business, as continues to happen, won’t alleviate these consequences one whit.
In summing up at the end of ADGO, I suggested that we all know we are on a journey in the domestic gas markets but we are still having great trouble in agreeing on the destination, our mode of transportr and on navigation.
For NSW in particular the critical question is how much time is left to sort things out before the wheels fall off the cart?
It would be generous to say “not much.”
The cold reality is that the winters of discontent for NSW are just ahead and the community deserves to be told by those in authority exactly where things lie.
If the Australian Domestic Gas Outlook forum, which starts in Sydney tomorrow, is turning in to a Beemer in commercial conference terms, then the annual APPEA conference is the Bentley.
APPEA, as all readers here know, stands for the Australian Petroleum Production & Exploration Association, an organisation I had the pleasure and privilege of managing from 1980 to 1991 and with which I have been closely associated now for more than three decades.
ADGO tomorrow and Thursday will have more than 220 gas stakeholders in attendance and that it a very good turn-out responding to a quality program; the APPEA conference (to be held at the start of April) has just passed the 2,000 registrations mark and may well reach 4,000 by the time we all roll up at the Perth Convention Centre.
I often say to folk that the real dipstick check of Australia’s upstream petroleum engine is not the thousands of attendees at the APPEA conference but the number of companies they represent (expected to be about 850 this year) and the size of the associated exhibition – with 200 stands likely to be booked this year.
When I launched the APPEA exhibition at the 1991 conference (in Melbourne) we secured 41 stands – a 500 per cent increase (or near enough) is a mark of the upstream petroleum industry’s success over the past two decades and of its contribution to the economy.
Tens of thousands of direct jobs, umpteen billion dollars in goods and services purchases here and billions more in payments of royalties and taxes to federal, State and Northern Territory coffers are the product of this success.
One of the big questions is how much further this can be expanded – the other, of course, is how eastern Australia in particular handles the domestic gas supply and cost issues that have arisen as result of the LNG export industry springing up in Queensland?
Huge amounts are being written in Australia about the domestic imbroglio – I have contributed a bit more this morning with a new commentary on “Business Spectator – but the export story is world news and what the global market wants to know is just how far can the Australians go?
Roy Krzywosinski, the head of Chevron Australia, which is leading delivery of $80 billion worth of investment in local gas projects, will be a keynote speaker at the April APPEA conference.
He is going to pose the question: “Is the second LNG wave of development starting to slip from our grasp?”
In the abstract of his paper – one of 16 keynote addresses at the APPEA conference, which will also deliver more than seven dozen papers and 50 poster presentations on the whole gamut of issues relating to the upstream petroleum business – Krzywosinski points out that the huge capital costs and the complexity of LNG projects require a stable and predictable investment environment.
“It’s not enough,” he says, “to have an abundant resource and proximity to established markets.”
Krzywosinski says Australian governments and the industry itself have to be “adaptable and realistic” if the second wave of LNG developments, reckoned to add $180 billion to the $200 billion of capital now being spent, are to be realised.
This isn’t some “game of thrones” affair for huge multinational companies operating on a different plane to us down here in the ‘burbs and the streets.
Modelling done by McKinsey & Co shows that an extra 150,000 jobs and a multi-billion dollar addition to tax payments could flow from realising the greater gas ambition.
It says something about the national mood, at least as portrayed in the media and by a fair few political types, that there can be so much public focus on jobs being lost (car-making, fruit-canning, metals production) and so little on what the energy sector (gas, coal, uranium) is actually delivering and on its further potential.
(Just the upstream petroleum industry is going to increase its corporate and production tax payments from $8.8 billion in 2012 to $13 billion annually by the decade’s end.)
Krzywosinki’s case is that companies need still greater technological and operating innovation – “work smarter, more efficiently, more competitively” – and government policy must be “conducive to driving up productivity and driving down high costs” if additional projects are not to be stifled and investors lured away, for example to the eastern Mediterranean and Africa, where there have been major gas plays identified in the past five years.
The game is not just about development; exploration remains a critical factor and it has been the raison d’etre of APPEA for almost 60 years.
Andrew Latham, head of exploration research at Wood Mackenzie, one of the major global energy analyst businesses, another keynote speaker at the Perth conference, will tell the APPEA audience that exploration here remains an attractive opportunity, even though higher discovery and development costs in Australia are a bugbear.
As Latham will point out, the draw for the global oil and gas search business – the key word being global; the world is its oyster – is that, even as explorers have made new oil field discoveries of more than 120 billion barrels, replacing a third of production, in the past 10 years, Australia has been easily the most important home for international gas plays, with 50 trillion cubic feet discovered in the decade.
Latham says the global petroleum majors still have a big appetite for “frontier” exploration – pursuing oil and gas in basins where discoveries have yet to be made – and Australia still offers “intriguing high-impact plays” that “hold potential for a bright future.”
The fact that there will be delegates from 29 countries (apart from Australia) at the Perth conference underlines Latham’s point.
It is also why a room will be crowded when the federal government uses the conference to unveil new acreage and crowded again when the Petroleum Exploration Society presents its annual reviews of exploration and production.
The stakeholders attending the conference will include Ian Macfarlane, the Industry Minister, reprising a regular role as keynote speaker he undertook between 2001 and 2007 in the Howard government.
His takes on the energy white paper – the green version is due in May – and on the domestic gas situation will be closely observed and analysed, not least by the five dozen or so specialist writers on resources who turn up for this event from around Australia and overseas, another pointer to it’s weight.
Continuing to trawl through the submissions to the federal government on the energy white paper, I am finding lots of stuff of interest and I don’t envy the Department of Industry bureaucrats who have to synthesize it all in to a “green paper” for Ian Macfarlane soon after Easter.
A lot of the commentary is not new, of course, and a lot follows themes with which we have grown familiar over the past 2-3 years – when the debate on energy has been at its most intense for the past 30 years.
The bureaucratic, and eventually Abbott cabinet, challenge is to put forward a plan to integrate the policies and programs for energy security, reliability, efficiency and affordability while contributing to abatement of greenhouse gas emissions.
Where we are today has been brutally summed up by the Energy Policy Institute, in its white paper submission, like this: “Energy policy in Australia has been rendered irrelevant to investors (because) it is no long reliable or predictable.”
To which I would add “and rendered incomprehensible to most consumers” for the same reason.
The Grattan Institute’s Tony Wood, in his submission, poses the challenge in another word: “durability.”
How will the white paper stand the test of usage, he asks.
“Will it have to be discarded or heavily modified because it has failed to foresee some potent force which has compromised it?”
AGL Energy’s Tim Nelson, in the company’s preamble to its submission, reminds Macfarlane and his department that “this is an opportunity to have an entirely holistic view of the energy sector and to devise strategies that work cohesively towards central objectives.”
He adds: “Above all, (this is the opportunity for) the government to articulate over-arching policy objectives for the energy sector and to provide strategic direction for its various components.”
A critical aspect of this whole exercise is energy prices.
Prime Minister Tony Abbott and senior Coalition figures have set themselves up for this by their focus on the price issue, both in opposition and since coming to government. (Abbott is doing it right now by harping just on the consumer costs of the renewable energy target.)
Today I was already juggling my need to keep reading the EWP submissions with a wish to pore over a new EPIA paper titled “The economic impact of high energy prices in Australia,” written by Jim Snow of Oakley Greenwood, when I spotted something that really gives an edge to this particular aspect.
Buried in the EWP submission from Stanwell Corporation, the generator owned by the Queensland government, is an illustration of international electricity price comparisons sourced from NUS Consulting Group, the US-based analysts very well known to the international energy industry.
This throws the relevance of our price problems in to stark relief.
Every year NUS produces a table of industrial power charges in 18 selected countries.
The list is selective – it doesn’t include South Korea, Japan or Brazil and nor does it cover developing economies, often the biggest competitors for Australian businesses – but it is still a valuable guide to how we are travelling.
Stanwell have produced a chart that tracks the NUS comparisons from 2009 to 2013.
At the top (that is the highest cost) are – no surprise – Italy, Germany and Spain, as they have been for the past five years.
At the bottom (lowest cost) are Sweden, Canada and Finland – no surprise either.
It’s the Australian performance trend that Stanwell wants to highlight.
Back in 2009 we were down in the power cost basement, vying with the Canadians, South Africans and Scandinavians for best prices.
South Africa has shot up to 11th on the table as it struggles to deal with supply security and system reliability issues – and we have risen from 13th to fifth.
Only the Italians, Germans, Spanish and Brits are now pricier than we are.
There is another angle to to this. One that Stanwell hasn’t tackled.
If you go in to the NUS review of domestic gas prices for industry, you find the analysts still have us at 16th, bettered only by Canada and the United States, with South Africa (its gas prices have doubled in a year), Sweden, Finland and the Germans at the wrong end of the table.
Given what is going on on our east coast, where we will be on this list by 2018?
Which brings me to Jim Snow’s analysis for EPIA.
He kicks off by reminding us where we were: relatively low electricity and gas prices for decades plus productivity gains from competition policy reform enabled many of our industries to trade off other higher costs (labor, the dollar value etc) to stay internationally competitive.
“This,” says Snow, “also underpinned the affordability of energy through access to low-prices for households, competitively-priced goods and jobs.”
Today – “in the absence of a cogent overall energy policy,” as he puts it – we are “witnessing the rapid restructuring of the more energy-intensive or energy cost-exposed businesses, driving many to move production abroad.”
Snow adds: “Many cannot manage multiple changes in costs and have lost the edge that low-priced energy gave them to remain competitive.”
And, he asserts,” this is also driving the restructuring of investments in key parts of the energy supply sector in a way that is not largely reflective of an open, competitive market.”
Further, he argues, high energy prices are “propelling many on low or fixed incomes in to energy poverty – which may eventually result in restructuring of welfare benefits and the way people accommodate themselves.”
Not least, “it has also left our energy supply industry in free fall domestically as demand declines.”
Snow snaps at those mouthing off about the need for Australia to remain internationally competitive and the need to ensure the allocation of resources is market-driven.
“This is somewhat hollow rhetoric,” he says, “when policy decisions have been a major driver of energy price rises.”
The price rises, he notes (and a point that I try at every opportunity to underline), are largely attributable to policy and regulatory interventions – and particularly to network regulation and “the application of a myriad of greenhouse gas mitigation measures.”
I can’t do Snow justice in a post and recommend you read his seven-page paper on the EPIA website (www.energypolicyinstitute.com.au).
There’s a lot more grist in the EWP submissions mill for more commentaries.
I just need to get through this coming week’s Australian Domestic Gas Outlook conference (which now has 185 paying delegates) and I will draw some more from them for your attention.
Meanwhile the Snow/NUS/Stanwell points could hardly do more to highlight the uphill battle the white paper framers face and why there is no more time to waste in joining the energy policy dots to real effect.
A good start right now would be for the Prime Minister to be properly briefed on this stuff and for him to start talking to the nation about the big picture (beloved of his predecessor Paul Keating) rather than bits he thinks he can push for short-term political advantage.
Ditto for the Leader of the Opposition, whose affliction with soundbite fever is seemingly starting to wear thin in Voterland.
You only have to glance at the submissions to the federal government’s energy white paper process on the Department of Industry website to see that our cup runneth over with contention and assertion with respect to coal, nuclear, gas and electricity — but the problem is that everyone is talking past everyone else. Where do we go for opportunities for dialogue on the issues, bypassing those who don’t want social intercourse because they just want to shout?
One such opportunity is next week’s Australian Domestic Gas Outlook conference in Sydney.
As ADGO co-chair, I am party to the email exchanges now starting up in earnest between the panellists, who are numerous and drawn from across the demand/supply spectrum, and the interest in discussion beyond the standard fare of press releases and media soundbites is obvious.
My biggest concern is the perennial energy conference chairman’s one of squeezing a gallon in to a pint pot. (This metaphor does not have a metric equivalent!)
The other event that offers an interesting opportunity for dialogue, and with which I am also involved (this time as a panellist myself) is the “Energy State of the Nation” conference being staged in Sydney on 21 March by the Energy Policy Institute of Australia under the baton of its executive director, lawyer Robert Pritchard.
Compacted in to just one day, ESON has been attracting stellar speakers lists for several years because it is non-partisan (as is ADGO) and targets actual outcomes rather than being a ventilation pipe for those with axes to grind.
In promoting the event, Bob Pritchard has drawn up a list of questions covered by the speakers this year that cuts through the bombardment of news and views to the chase.
They include: how do we control energy costs, how do we reconcile our energy and climate policies, what are the economic and environmental effects in the long term of the dash for gas, will Direct Action and the Emissions Reductions Fund work, which technologies can we afford, is Australia in danger of de-industrialisation and is nuclear energy a serious option?
That latter point, which This is Power has canvassed more than a few times, includes a presentation by Peter Lyons, assistant secretary for nuclear energy in the US Department of Energy, juxtaposed with one on the role of solar power by Sheldon Kimber, chief operating officer of Recurrent Energy, and followed up with a panel discussion featuring Adi Paterson, chief executive of ANSTO, Harry Kenyon-Slaney, CEO Energy of Rio Tinto, Rod Johannessen, GM strategy and service delivery of the APA Group, and Kerrie-Anne Lanigan, gas and power marketing director, Esso Australia.
This segment is going to be followed by a review of “energy policy in prospect and retrospect” by Martin Ferguson, which in my book will be worth the entry money all on its own.
Kenyon-Slaney is also presenting a perspective on energy exports and two other valuable opportunities for inserting some context in to the loose maul that passes for current energy debate will be provided by Jim Snow of Oakley Greenwood (“The economic impact of high energy prices”) and professor Chris Greig, director of the University of Queensland Energy Initiative, addressing what needs to be done to deliver a low-carbon energy sector in Australia.
The final set piece speaker for the day will be CSIRO’s Peta Ashworth (Science & Society Group) to address the vexed issue of community participation in the energy debate — a red hot topic for Sydney and New South Wales as we draw ever nearer to the gas supply and price brink, an issue being brought home to those of us who live in “the premier State” this week by the opening of the new round of regulatory review of State gas prices.
Ashworth will be engaging also with a panel consisting of the redoubtable Jennifer Hewett of the “Australian Financial Review,” Kathy Jones of The newDemocracy Foundation and yours truly.
I’m looking forward to the whole day but perhaps most of all to the final session, which is going to be kicked off by John Ryan of the federal Department of Industry, looking at the issues and themes of the government’s energy green paper (due in May as a precursor to the white paper towards the end of 2014) and then an open debate, chaired by Andy Lloyd, EPIA chairman, on the central issues and themes emerging from those submissions that have been rolling in to Canberra.
It’s a helluva program for one day but it encapsulates (at least for me) the central point of the present debate: where are we going, what will happen along the road to getting there and what does it mean for the community and the economy?
The current green thesis (perhaps I should write greenie thesis because only the radical fringe of those concerned about environmental issues espouse such views — a squint at how many votes the Greens get in elections versus opinion poll expressions of concern will tell you this) is that everything except solar and wind power (and whatever other bits of renewable generation come to mind so long as they don’t involve building big dams) is bad for the environment, threatens us with vague (but dramatic) dooms, is the cause of whatever bit of bad weather is plaguing us right now and, worst of all perhaps, is being brought upon us by companies seeking profits.
The inevitability of the “profits are a bad thing” line appearing in just about every issue the greenies find of interest — and it is very much part of their ranting against coal seam gas and LNG exports — sits oddly with their hand-wringing over the current manufacturing malaise. Why exactly, I wonder, do they think that automotive manufacturers, aluminium businesses and fruit canners are packing up their operations?
With respect to energy policy, the EPIA line (set out in the institute’s submission to the white paper process and which I have written about on this blog and earlier this week in “Business Spectator”) is that the body politic is failing to really get to grips with the key requirements of a timely and effective strategy and we should consider setting up a National Energy Commission to take on the task.
This, too, will be among the questions for debate at ESON.
The real news about the renewable energy target review announced today by the federal government, I think, is contained in the last sentence of the terms of reference.
The panel undertaking the review, it says, will be “supported by a secretariat in the Department of Prime Minister & Cabinet” and will “report to the Prime Minister, the Treasurer and the ministers for Industry and Environment” by the middle of the year.
In other words, the controversial process is to be under Tony Abbott’s thumb from the get-go.
Make of that what you will.
The panel appointed to do the job is to be chaired by industrialist Dick Warburton and has been instantly labelled by the ABC as “providing cover” for a plot to “kill the RET,” a view attributed to “a senior Liberal,” unnamed of course.
Warburton will chair a committee “including” (the term used in the statement) Matt Zema, the head of the Australian Energy Market Operator, Shirley In’t Veld (managing director of West Australian generator Verve Energy between 2007 and 2012 and a member of the CSIRO board), and Brian Fisher (former head of ABARE).
The Abbott government has carefully directed the panel to focus on two main things:
First, the economic, environmental and social impacts of the scheme, especially its impact on power prices, energy markets, the renewables sector itself, manufacturing and households.
Second, the interaction of the RET with other federal, State and Territory policies and regulations, bearing in mind the government’s commitment to cut business costs and cost of living pressures as well as to cut red and green tape.
The key questions, as I interpret them, on which the government is seeking advice are (1) whether the target is still appropriate, (2) its pricing impact and (3) how to avoid a sovereign risk issue by cutting it (some $18.5 billion has been invested, mainly in wind farms, to date on a scheme with a 2030 support horizon)?
Industry Minister Ian Macfarlane, who announced the move along with Environment Minister Greg Hunt, was careful to make the point that the RET has to be considered in the context of current over-supply of capacity in the east coast market.
We can now expect, of course, the floodgates of rhetoric to be opened by proponents of renewables and those who would like to see the RET curtailed if not killed (an unlikely prospect, no matter how much the green prophets of doom will play this up).
“Bring it on,” declares the Clean Energy Council, announcing that it “relishes the opportunity” to demonstrate the value of the $18.5 billion investment to date and asserting that it adds three to five per cent to electricity bills.
There are going to be millions more words expended on this topic between now and mid-2014 and, probably, millions more once the recommendations are handed in.
In seems a fair bet, given Warburton’s appointment, that the cost the RET imposes on energy-intensive industry is going to be given much attention by the panel.
Last month the major users, via Phil Barresi, the former MP now head of the Energy Users Association, laid down their marker on the issue.
“We recognise that renewables have a positive broad public appeal,” said Barresi, “but at what real cost?”
His argument is that renewables costs, including the lingering burden of the Labor solar subsidy schemes, fall disproportionately on industrial and commercial energy users.
Federal and state governments “have been too cavalier” in the formulation of renewables policy, he adds. In this review, “the interests of energy users must have much greater importance than in the past.”
The proponents of the RET have their own propaganda to hand.
Only last week I saw a Melbourne Energy Institute academic posing the (rather tendentious) question “does $15 a year sound like a pretty significant cost to you?” – asserting that this is the measure’s impact.
This is based on the last RET review by the Climate Change Authority and its claim in 2012 that “all the average Australian household will save if we scrap the scheme is $15 annually.”
The same institute commentary then goes on to note that today a typical residential customer with an $1,800 to $2,200 annual bill is paying “about $50 to $70 a year.”
I can’t find a syllable in this piece about the cost impacts on business.
An Australian Industry Greenhouse Network commentary on the issue late last year used economic consultants’ modelling to assert that the RET’s costs today are $20 million to $50 million annually for food processors, $20 million to $40 million for the wood products and paper industry, around $120 million for the iron, steel and aluminium industries and around $50 million a year for “other manufacturing.”
It is argued that, if the RET is allowed to reach its 2020 level under the current scheme, the total annual compliance cost will be around the $2 billion mark for all consumers of power.
My perception of the critics’ case is that the RET can’t be considered an efficient measure in a policy environment aiming to minimise carbon abatement costs.
The Manufacturing Australia lobby group, of which Warburton was the foundation chairman, has called for the RET to be “a percentage not an absolute number” to bring it back in to line with its original intent.
In passing, exactly why the green brigade think it will work to their advantage to play the man rather than the ball – the vitriol against Warburton as a “climate change denier” is already overflowing – escapes me.
The other side of the coin is that the ultra-conservative line being run by some in the business lobbies – one argument being mounted today is that manufacturers’ power bills rose 60 per cent between 2003 and 2013, solar subsidies and the RET are imposing an “inequitable burden” on business and, so long as Australia holds on to them, companies will bypass us for countries that haven’t crippled themselves with high power prices, so it has to go – seems unlikely to carry any real political traction.
Personally, I will be surprised if the federal government axes the RET but I think it is a fair bet that this review will be used to support an attempt to scale it back from the present level – and the government will then need to pilot legislation through Federal Parliament to give effect to whatever changes it chooses.
Which means that this debate is going to run for the rest of 2014 and mesh at some point with the energy white paper process.
Until it is all played out, the clouds of uncertainty for generation investors and players in the wholesale electricity market on the east coast will not roll away.
It’s stating the blindingly obvious, but it needs to be said over and over again – and the Business Council is the latest to remake the point.
“For too long,” says the BCA submission to the federal government on the energy white paper, “energy and climate change mitigation policy have tended to be developed in isolation of one another, rather than as part of an over-arching policy framework.”
It goes on: “This fragmentation means policies are developed to meet conflicting objectives, which leads to inefficiency which creates higher costs to consumers.”
The government, says the BCA, should use the white paper process to remove or at least minimise inefficient interventions in the market pushing up costs.
The council throws its weight behind an Australian Industry Greenhouse Network claim last November that the overall cost of abatement achieved by the renewable energy target ranges from $30 to $290 per tonne of emissions, “by no means a least-cost measure.”
The gripe about fragmentation of policy is not being treated as news by the mainstream media or the fringe green-tinged media and yet this is at the heart of the three-pronged power price imbroglio that has been high on the national agenda now for three years.
(A CSIRO poll of 5,000 respondents, recently released, has them placing electricity costs seventh on a list of the key issues bothering them.)
The second prong, of course, is the vexed issue of network charges which is bound up in a complex debate about what is a prudent level of capital outlays on assets, the efficiency of State-owned network businesses (half of 12 DBs on the east coast) and the competency of regulation (which was reworked by politicians in the middle of the past decade).
The third prong is the urgency of pursuing tariff restructuring, so-called dynamic pricing (high in heatwaves for example), the introduction of smart meter technology and the the need for governments to properly identify and manage support for the hardship sector of the community.
The BCA wrap on all this, I suppose, is the recommendation that the white paper should “adopt an energy policy framework that builds market resilience, promotes competition, provides stable and predictable guidance for investors and delivers efficient outcomes for consumers.”
Hard to argue with this although I bet every politician reading it will mumble to himself or herself “easy to say, not so easy to do.”
To which the obvious retort is “Well, you don’t have to make it harder for yourselves by embracing incompetence in policymaking and inefficiency in program development” followed by a litany of examples drawn from the past decade.
The 12 commandments (well, recommendations) that the BCA proffers the Abbott government on energy policy are all sensible (and one can imagine the careful negotiation that went on within the council’s hundredweight of CEOs with contending positions to reach this point).
There would be much more pressure on politicians to listen (and the legislating audience is wider than the Abbott cabinet) if the media thought this stuff interesting enough to give it prominence – but they don’t, not even in their own editorial points of view.
Coming back to the issue of fragmentation, the core BCA point is that “environmentally responsible development of energy resources should be supported by efficient and streamlined energy policies, regulation and processes.”
Do you suppose we could have a Senate select committee to discuss this point? Or a Productivity Commission report to address how east coast governments (and the mob in WA) fail in so many ways to live up to the challenge? Or an ABC Q&A on the subject – or Radio National to stage a major discussion? Or Fairfax and the News Ltd tabloids to pay any attention at all?
Nah, why get engaged in that when there is so much else to attract populist media attention or pollie point-scoring?
Here’s the BCA again: “Policy interventions through measures such as the RET, as well as subsidies for distributed generation, are impacting on the efficient operation of the market and need to be properly understood?”
Sure they do – but where is this attempt to develop understanding taking place?
Which is more important – whether a canning business run by an international conglomerate should be subsidised by taxpayers because it can’t stand the heat in the global kitchen or whether the energy supply system, which is the backbone of the economy and essential to the health, comfort and wellbeing of Australians should continue to be strained by of inefficient and ineffective policymaking?
Well, read the media and the answer is clear: a stoush over give-aways (whether to car makers, fruit canners or sweets producers) is of far more interest.
What did the old Greeks say? Those whom the gods wish to destroy, they first make delusionary? Something like that.
There has been a certain amount of seizing on the BCA comments on the RET – first because it lends itself to the media penchant for a bit of biff and second because the Greens etcetera and their busy media supporters will run and run and run with it.
The central BCA point on this is: “The NEM is currently over-supplied due to the decline in electricity demand and this over-supply is being exacerbated by the RET, which continues to mandate additional amounts of supply irrespective of demand.”
The council observes, rightly in my book: “This distorts the market and its ability to deliver efficient outcomes,” pointing also to the need to really assess the implications of more baseload generation exiting the market and more volatile supply entering it.
I also think the BCA is spot on when it adds: “This highlights the problems (of) expected outcomes from intervention being dependent on forecasts of the future.”
As it says, “when future prices, technology and demand turn out to be different, so do the impacts of intervention – that’s why these decisions are best left to the market.”
Where I think the council has wimped out is that it doesn’t tell the Abbott government loud and clear that a review of the RET must be part and parcel of the energy white paper process, not two separate exercises run by different portfolios, particular as what the federal government is doing directly contradicts the BCA’s prime point of the need to ensure all the energy and global warming policy dots are joined.
The Department of Industry’s website is now providing a harvest of opinion about the east coast’s gas issues as it starts to publish the submissions it has received on the review it put out early in January.
I canvassed the Australian Petroleum Production & Exploration Association’s views in my last post on this site (“Harness not hinder”).
The upstream industry argument essentially is that the greatest economic benefits will be achieved by allowing gas to flow to the highest value uses and that non-market intervention will distort market signals, lead to under-investment and defer delivery of needed new gas supplies.
Reading these submissions, a big point at issue obviously revolves around just what sort of market exists and whether it actually works.
Origin Energy says in its submission that there are sufficient “2P” – proved and probable – uncontracted reserves on the east coast to cover the region’s domestic gas demand for 20 years.
“The market has more than adequate options in the short,medium and long terms,” it avers, adding that “there is a flexible transport market able to facilitate flows around the system to allow gas to reach the highest value end users.”
Bottom line: “We do not consider fundamental reform to the gas industry is necessary.”
To which it adds this zinger: “A market that is free of distortions, allows efficient signals and is characterised by effective competition and a clear and coherent regulatory framework is most likely to encourage investment.”
CSR Limited, on the other hand, wants the federal government to “look at improved means to develop a truly functioning domestic gas market,” arguing that the current set-up is “far from being a market.”
Sugar Australia acknowledges the “enormous contribution” the LNG industry can make to the economy, but argues that the issue of available and affordable gas to value add to the domestic economy is a separate matter that is being overlooked.
And Australian Paper comments that the east coast gas market has developed along the lines of bilateral contracts and limited publicly-available information.
“This does not easily translate in to an efficient and functioning open market,” it says, asserting that the reality today is that “competitive tendering no longer exists and prices have jumped almost overnight to $8 to $12 per gigajoule.”
The firm argues that “confusion reigns” in the current market.
It wants a transition process over a fixed number of years that will allow producers, wholesalers, consumers and infrastructure providers to “move in to a new paradigm.”
Lobby group Manufacturing Australia continues to argue that present policies will see the LNG export business now being constructed in Queensland “causing structural damage in the broader economy that could outweigh its benefits.”
It asserts that the present policy steps mooted in the departmental study “will not take effect quickly enough to mitigate the current price spike and stop structural damage.”
Meanwhile AGL Energy sees unfolding events as being associated with “industry fundamentals and government policy issues” rather than market design.
It, too, doesn’t see much to be gained in reviewing the trading market.
The fundamental problem, it argues, is the barrier that government policy presents for attempts to bring on new gas supplies.
It renews its warning that failure to achieve this in New South Wales will have serious consequences for industrial gas customers, including outages during peak periods in the short term and insufficient supplies being available to meet State demand by mid-2018.
Any outcome of this kind, it says would have “hugely disruptive impacts” economically and socially for NSW.
You can’t overcome a physical gas shortage with infrastructure augmentation or revised access arrangements, it notes.
Its way forward is via a holistic federal and State assessment of priority gas projects.
The company provides a summary paragraph that I think deserves much better appreciation in the current debate:
“The unprecedented nature of (this) situation,” it says, “unfortunately seems to have led to a reluctance among policymakers to act quickly and pro-actively to address the serious supply side issues that are emerging.
“This is not assisted by the numerous, frequently divergent, viewpoints being put forward by different stakeholders.
“While such debate generally is part of a healthy process of market assessment, continued failure to address this predicament is going to make the situation worse – and gas supply shortages will be more extreme when they occur.”
And, finally, in this scamper around the submissions table, there is a concern ERM Power raises that a number of people have also put to me: how will the white paper on which the Abbott government is now embarked and the federal gas supply strategy recommendations interact with the NSW Chief Scientists’s report on coal seam gas for the O’Farrell government?
“How,” adds ERM, “will State governments be obligated (if at all) to implement policies identified by the (federal) gas study and in what time frame?”
That this question even has to be asked in 2014 says a lot about how poorly this situation is being managed.
There are more submissions to the Department of industry than I have canvassed here.
I have also cherry-picked commentary from those selected but the picture that emerges reinforces my view that the necessary circuit-breaker here is government action to bring on new gas resources in a viable social framework – and my perception remains that this is a darned long way short of happening in an environment where time is not in over-supply.
Reading about gas issues is taking up a lot of my time just now because I am co-chairing the Australian Domestic Gas Outlook conference in Sydney at the end of the month and this is an ever-shifting environment.
There’s plenty to read because gas, to quote the “Sydney Morning Herald,” remains a hot topic.
The latest perspective to lob on my computer – I’m old enough to instinctively want to write “land on my desk” – is the response by the Australian Petroleum Production & Exploration Association to the eastern Australian domestic gas market study produced by the federal Department of Industry.
It has an opening line that I rather like in the context of all the other stuff going on (electricity as well as gas) just now.
The gas industry, says APPEA, should be harnessed not hindered – and this approach should apply across the economic board, it adds, for example to coal, iron ore, wheat or wine.
This is a perspective supported, I see, by the Grattan Institute, which says in its submission to the energy white paper that “with more than $160 billion forecast to be invested in LNG production, the gas export industry is good for the economy.”
Up front in APPEA’s submission is a statistic that I reckon should be routinely included in media reports, especially those that pick up the hinderers’ arguments and run with them: taxes paid by the upstream petroleum industry are en route to rise from $8.8 billion in 2012 to $13 billion annually by 2020.
Given how much political debate and media space is currently devoted to canvassing federal spending, and the feared cuts in the next Budget, this is not a set of numbers that should be treated lightly – and nor is the prospect that, if further sectoral developments can be brought on, there is more taxation to be had, in addition to employment and other community benefits.
It would be interesting to see what the floundering motor manufacturing industry could deliver in community returns between now and 2030 if it was propped up, as the federal ALP apparently wants to happen.
Getting the harnessing done in the gas business, of course, requires a lot of work to reverse the recent track record of cost blow-outs and project delays as well as to get beyond the opposition to onshore coal seam gas operations by green campaigners and at least some rural communities– and not least to change the behaviour of some political weathervanes.
APPEA obviously is talking its own book – and there is a good deal done and not done by companies and governments in the second half of the past decade that I imagine they would be quite pleased to have avoided with hindsight – but you have to be especially blinkered (and quite a few are) not to appreciate that harnessing the gas resource is in the best long-term interests of the Australian community.
It’s not a one-way street, of course, and it’s the role of governments to ensure that the pay-off has been comprehensively assessed in terms of public benefits.
The APPEA perspective can essentially be summed up in two sentences from its submission:
First, governments must work together through CoAG to remove regulatory and other barriers to allow more gas to flow in to the market.
Second, the New South Wales and Victorian governments in particular have to get their acts together “to create a safe and efficient onshore gas industry underpinned by leading practice regulation and community engagement.”
There’s another aspect of the APPEA commentary that resonates with me.
The Department of Industry study is not alone in asserting that, before the present era, eastern Australia’s gas market was “relatively stable and self-sufficient” whereas, in fact, there have been periods, as the association terms it, of “significant uncertainty and change.”
So much so that concern about falling gas reserves first led to the investigation of importing gas through a pipeline from Papua New Guinea and then, in a political volte face in Queensland, to government intervention to drive production of coal seam gas.
It is always interesting to observe the perspectives people adopt in difficult situations.
As is well known, a big chunk of major gas users (but not all) want large-scale new intervention to ensure fuel is reserved for local consumption with the assumption that this will drive down the prices they have to pay.
The Grattan Institute, on the other hand, warns that protectionism “ultimately leads to higher prices and damages the economy.”
The APPEA view, in total opposition to reservation and any other market interference, is that “industrial gas demand in eastern Australia is significantly concentrated in a small number of industries” and “growth in gas consumption for industrial purposes has been declining steadily over time.”
My eye is also caught by APPEA chipping the federal department for not taking the “low gas production” modelling done by government consultants in to the main body of the study.
This scenario, APPEA avers, is actually likely to be the “reference case” unless NSW and Victoria move away from existing restrictions imposed on the industry and, it says, the federal bureaucrats have missed an opportunity to highlight the “adverse economic consequences” of not doing so.
Modelling commissioned by APPEA last year from ACIL Allen Consulting – the “CSG freeze scenario” – paints a long-term picture for NSW of substantially higher gas prices, a noticeceable hit for the State economy and a whack to royalty and payroll tax income for the State government.
On the other hand, the association welcomes the finding by the government modeller, IES, that there is sufficient conventional gas and CSG resources on the east coast to meet both domestic gas demand the needs of the Gladstone LNG trains from now to 2022-23.
This, says APPEA, underscores the importance of removing barriers to efficient and timely pursuit of a supply-side response to the gas challenge.
The government study, it adds, “usefully highlights the duplicative and multiple layers of red and green tape that projects must navigate” to bring the gas to market.
The APPEA chief executive, David Byers, is coming to the end-February ADGO conference, along with executives from the industry, to put all this and more to the audience. Other speakers will include representatives of the manufacturing sector, pipeliners, rural communities and State governments.
From there we move to Perth for the annual APPEA Conference, mooted to attract up to 4,000 delegates from 30 countries, where gas is guaranteed to be the main item on the agenda and where Industry Minister Ian Macfarlane will put out his tent on the topic .
Then in May we are supposed to see the energy green paper followed by the white version “late” in the year.
Punctuating this will be the Victorian State election – due in November but possibly happening earlier – and, before you know it, we will be in 2015 and heading for the NSW State election.
Which begs the question of when the hindering stops and the harnessing begins?
If you follow energy commentary on the Web you know how little of it is of real value and how much is emission of ideology, self-interest, ignorance, sensationalism or conventional wisdom.
The fog of confusion, bile and wishing that so often envelops the local Web debate is exacerbated by regurgitation of selective borrowing from the overseas comment and claims.
How far Australians – the 22 million not actually engaged in supply or large-scale energy use or ideologically motivated – take in this stuff is an open question.
I reckon it is mainly in the form of general impressions for the vast majority, salted by attitudes to energy prices.
The degree of national support for the main activists, the Greens, for example, remains fairly limited and is in inverse proportion to their media coverage, a situation that owes a lot to the ABC and the Fairfax network.
As I write this, I see that the Coalition candidate in the Griffith by-election – a poll to fill the vacancy left by Kevin Rudd – is insisting he will wait until 10,000 absentee and postal votes are counted before conceding defeat, asserted as a given by his opponent and the media.
My particular interest has been to go to the details of voting by the almost 70,000 people in Griffith who went to polling booth on Saturday.
Three things strike me:
On a first past the post basis for these votes, the Coalition candidate streeted the Labor one – by slightly more than 3,000 votes – yet this is being interpreted already as “sending a message to the government.”
Labor and the Coalition together picked up nearly 83 per cent of primary votes cast and the latter increased its share by 1.3 per cent over the general election result five months ago.
The Greens, despite creating quite a hullabaloo in Queensland via the media in recent weeks, have only garnered 10 per cent, roughly what they got last time, although this is an inner-urban constituency.
All of this vote is thrown to Labor in two-party preferred terms. Our system gives considerable weight to a fragment of the population.
I also come to this having just read a CSIRO opinion poll, conducted annually, where an unchanging 70 per cent of respondents say they are concerned about climate change, but 47 per cent think global warming is being caused by human activity and 39 per cent attribute it to natural variations.
What’s interesting is that, when those polled are asked to rank their key concerns about public issues, climate change falls away towards the bottom of the list of 16 issues provided by CSIRO versus seventh for electricity prices.
Which brings us to the “so what?” test – and the core issue, so far as I am concerned, is the evidence about how the current mainstream political crew are wedded to reacting to focus groups and opinion polls.
There is a good example available in Sydney this weekend.
The O’Farrell government is practically doing itself a physical mischief to assure New South Wales voters – and we are told that it is those living in the city’s western suburbs that are of particular concern – that, no matter what the business community thinks and no matter the large problems of finding enough money for urgent public infrastructure development, the Coalition will not even take privatisation of its transmission and distribution firms to next year’s State election (to be held at the end of March 2015).
The NSW Premier’s mantra since mid-2011 has been that he will not attempt to privatise the four businesses without express electorate approval.
Now he is not even going to ask the question.
The merits of privatisation can wait for another day and another post.
This government pose is about what residents of western Sydney are believed to think.
This points again to populism really mattering to our current breed of political “leaders” and, for me, to the question of how far the populi react to what they glean from the media?
For example, even a mention of privatisation brings the trade union movement out in spots and the media happily run with all the unionists’ hype despite the fact that power bills are a high public concern and a pretty good case can be made for asserting that the private sector will be more efficient operators of the businesses.
There are, in fact, a myriad of examples of the nexus between government issues management, media hyperbole (aided and abetted by radical Web ranting and localised agitation) and the public mindset as portrayed by the polls.
Garnish this with the many examples of poor program management by governments (eg solar PV feed-in schemes) plus bureaucratic ineptitude (which I would assert is frequently a result of a lack of clear direction from cabinet and ministers) and what you get a great deal of the time is outcomes that the community eventually find startling, bewildering and costly.
A classic current example of what voters hear through the media is the combined issue of pricing carbon emissions, market interventions that are creating all sorts of problems and the kneejerking and backflipping associated with each new manifestation of “unintended consequences.”
How far off the rails such political monkey business can go is to be seen, writ large, in the European Union, where the dominant political class pursue world leadership on carbon abatement and where their policies are increasing the share of electricity being generated by coal, with cleaner gas plant being shuttered, and the mess weighing more and more on the EU’s industrial base.
The common theme between there and here is the plague of incoherence in energy policy dealing with supply security, reliability and affordability and carbon abatement.
The effects of the resulting lack of certainty for investors – in energy supply and in businesses that are large energy users and therefore large employers directly and indirectly – are to be seen locally and internationally.
Eventually they impact on consumers who are voters and then political knees jerk anew.
Is there a cure?
Pessimists will say No, but we should at least continue to canvass the best way forward.
I am not Robinson Crusoe in thinking the cure for the energy policy plague is to create a level playing field where every supply source competes on efficiency and cost rather than favoritism, where governments keep the ring and don’t own supply assets, where regulatory decisions are driven by facts and science, not how much fuss activists can make, and where decisions are not altered or reversed under the hammer of screaming headlines or demos.
Achieving this In a federal system is not just down to central government , although it has a very important role, but also to the other jurisdictions.
The current eastern Australia gas imbroglio is a good example of why this is so.
Another ingredient for a cure for this plague is a disciplined media willing to investigate issues for themselves and committed to presenting facts and context, not just shovelling out the latest assertions.
We should not hold our breath for this to happen.
As an example, we are now being treated to publication of fresh claims about the significant impact of the Gillard carbon tax on power station emissions when those who actually know the facts understand that the measure has done very little in terms of abatement because of uncertainty about its future, uncertainty about the price and its lame status, as configured, to drive new generation investment.
Mostly this sort of thing makes one shrug but perhaps we all should be shuddering. Plagues are not good for us.
For the past 25 years the underlying mantra for energy policy in Australia has been “cooperative federalism.”
The launching pad was the Hawke era energy white paper, entitled “Energy 2000,” initiated by Gareth Evans and overseen to completion by Peter Cook.
The latter told the Senate on 28 April 1988 that the white paper was the product of close consultation with the States and the Northern Territory as well as with industry.
“The energy industries expect both stability and pragmatism in government policies – and they have a right to do so,” Cook said.
It took a further 16 years for “cooperative federalism” to be formally embraced by Australia’s governments through the 2004 Australian Energy Market Agreement.
A quarter century since “Energy 2000” appeared, the cold, hard truth is that the nine jurisdictions, tucked under the umbrella of the Council of Australian Governments, have not delivered the necessary stability and pragmatism – and the investment climate for the energy industry is becoming increasingly unattractive unless you are a business with its nose in the handout trough and even then you have good grounds today for being uneasy.
The Energy Policy Institute of Australia has decided to take the opportunity of the new white paper – for which initial submissions to the Abbott government close today – to shine a spotlight on “cooperative federalism” and it does not like what it sees.
The EPIA submission is now on its website and it is worth reading in full (it runs to 27 pages). The institute proposes to open its paper and its 26 recommendations to debate at its “Energy State of the Nation” conference in Sydney on 21 March.
My paraphrase of what the institute has to say goes like this:
As the Hawke government acknowledged 26 years ago, the energy industry has the right to expect “investment grade” policy but the current arrangements fall well short.
If politicians across the spectrum want to know why this is so, they should look in the mirror.
Their sin, says EPIA, is an “excessive level” of politicisation of energy issues, an accusation I’d argue is beyond debate.
As the institute puts it, “the politicisation of climate change and environmental issues has spilled over in to the energy sector.”
The result, as EPIA says, is discriminatory policy treatment of competing energy technologies, the picking of winners and losers, unpredictable rules and fracturing of the energy sector in to rival interests competing for subsidies or other favourable treatment.
To which I would add the warping of the “national” – ie east coast – electricity market to the point where its resilience down this decade and in to the ‘Twenties is in question while billions of dollars of investment in existing projects and possible new ones are up in the air.
What we have, despite all the earnest rhetoric and good intentions of past years, and especially the past 5-6 years, is, to quote EPIA, “a level of sovereign risk that is a significant disincentive to development.”
Most of us are familiar with how an infected tooth can impact on our health beyond just the immediate pain effects. The rotten tooth in the national energy entity, it seems both EPIA and me, is the Council of Australian Governments.
The institute is harsh in its criticisms of CoAG, patted on the wrist last year by the Productivity Commission for being “tardy” in its energy networks reform activity.
EPIA describes CoAG thus:
It has no institutional identity and a low level of transparency.
It isn’t accountable to anyone except itself.
Its decision-making is excessively political and protracted; its agendas concerned only with the most pressing (political) issues of the time.
It has no permanent secretariat or resources of its own.
In energy matters, the institute adds, CoAG has pursued a process of fits and starts.
“It has noticeably lagged in recent years, most manifestly in electricity network regulation and in gas supply.”
And, it points out, CoAG has set up an east coast market regulatory process – involving the AER, the ACCC and the AEMC – with inevitable overlap and areas of ambiguity.
EPIA notes that, under the new leadership of Tony Abbott, CoAG acknowledged last December that it was enmeshed in too much bureaucracy and red tape. It spoke of streamlining itself “over the next 12-18 months.”
However, the institute asks, can the Council resources and energy ministerial committee really be reformed and streamlined?
“We strongly doubt this,” says EPIA. Is it appropriate to have the problem sorted out by government officials behind closed doors, it asks?
The major theme of the institute submission is that now is the time to move energy policy out from under the CoAG umbrella – to create a national institution, accountable to not only the jurisdictions but the stakeholders, to formulate, implement and review policy and energy market reforms.
EPIA asserts that the federal government has powers under the Australian constitution to pursue this radical step.
The big question, of course, is whether the government has the will to do so?
Bear in mind that it will be September, at best, before we see the energy white paper.
Then we progress into State elections in 2015 in New South Wales and Queensland, two of the most bolshie States when it comes to energy issues.
And at some point in 2016, the Abbott government will itself go to the polls – while the steps EPIA propose require approval by federal Parliament as a whole.
This is not an argument against the need for action.
It is simply an observation about how difficult it will be to get politicians to behave in a way where their self-interest is subsumed to the national interest.
In this respect, EPIA makes an interesting observation.
The public, the institute argues, is now very wary of having the wool pulled over its eyes by governments.
It is far better educated about politics than it was a decade ago.
It wants to avoid second-best political outcomes, EPIA claims, in which it has played no effective part.
To all this must be added the issue of affordability of energy.
As EPIA points out, higher prices are forcing energy-intensive and energy cost-exposed business to re-assess their futures.
This is an environment in which thousands of jobs are at stake, as virtually every day’s media reports are now sheeting home to the community, but, given the blame game going on and the ever-rising fuss about ever-growing subsidies and bail-outs, is it an environment in which a strong focus on efficient operation of competitive energy markets (as EPIA advocates) is going to carry the public debate?
That well-worn saying “when you are in a hole, stop digging” really applies to this situation, but how many in public life adhere to such advice?
I think EPIA are directionally right, but turning its proposal in to a major shift in energy policy management in this environment is a helluva big task.