Archive for May, 2014
The key message in the Australian Energy Market Commission submission to Dick Warburton’s renewable energy target review panel needs to be read by a wider audience of those engaged in federal and State policy development for one paragraph.
The AEMC, rule-maker for the national electricity market on the east coast, highlights the theme of its submission in this way: “Energy and environmental policy have different objectives and it is important they are developed in a manner where any efficiency trade-off and costs are well understood.
“Environmental policies that are appropriately designed and integrated can achieve their objectives and minimise consumer costs in energy markets.
“Evidence from international markets suggests that, if this does not occur, the impact on the efficacy of price mechanisms, together with uncertainty and policy risk, will likely require government intervention in otherwise well-functioning energy markets, transferring investment risk and costs on to consumers.”
That’s good advice from an independent corner and can be applied to consideration of more than the RET.
The commission adds that three “high level principles” should be pursued in electricity market development.
The first is to accept that competition and market signals lead to better outcomes than central planning.
The second is that rules for market participants should be clear and consistent.
The third is that risk allocation and accountability for investment should rest with parties best placed to manage them.
How much better off we would be today if policymakers had adhered to these principles over at least the past eight years.
So far as the current renewables target is concerned, the AEMC says it is unlikely to be met and therefore the policy is “not sustainable” when you consider the shortfall payments required under a failure scenario.
The commission offers two alternatives to the present set-up.
One is to move the RET to a floating 20 per cent target of 2020 demand, shifting, it asserts, the demand risk from consumers to investors, “who are better placed to manage it and profit from efficient decisions.”
The other step would involve a whole new approach: transitioning the measure to an emissions intensity-based scheme for the electricity sector.
“Such a scheme,” the AEMC contends, “could be designed in a number of ways, including (one) where generators below a defined level create certificates that generators above the level are liable to purchase.”
The commission suggests that retailers and other liable entities under the existing RET scheme should not be able to participate directly in this new arrangement.
It argues the proposed scheme would encourage all lower emissions technology options, not only renewable energy, and therefore meet any target at a lower cost.
“The expected cost,” it adds, “would depend on the size of the target and the type of technologies in the mix.”
AEMC says the scheme could contribute to the policy certainty necessary to provide industry with confidence to go on investing in the energy sector.
In the UK and Europe, where regulatory risk relating to government subsidy decisions is high and future prices are a lottery, the commission adds, investors have been unwilling to finance new plant despite a well-recognized need for new capacity and the British government has been forced to intervene in the market. “As a result UK consumers will be subsidizing the energy industry for the near future.”
Here, it warns, if environmental policy is not integrated efficiently with energy policy, the NEM may reach the point where participants do not have confidence to make investment decisions in response to price signals.
“This is likely to result in a scenario where government intervention is required along with the consequent transfer of investment risk on to consumers and the likelihood of higher costs.”
Such a situation, the commission says, would see a move back to government central planning, “with taxpayers bearing the risk of over- or under-investment in capacity.”
On the other hand, if environmental policies are integrated effectively with energy policy, there is a greater likelihood of consumer costs being minimized.
On the controversial issue of the current cost of the RET to consumers, the commission makes another cogent point: emissions-intensive industries exempt from contributing are benefitting from lower wholesale prices resulting from the pushing of capacity into an over-supplied NEM, but residential customers are paying significant pass-through costs while not necessarily benefitting from lower wholesale prices.
Power station closures resulting from the state of the over-supplied market, the AEMC says, are likely to put upward pressure on wholesale prices, offsetting the merit order effect the green boosters are crowing about at present and “eventually shifting the costs of the RET back to consumers.”
Overall, this is important advice and it hard to see the Warburton panel ignoring it with respect to the RET – whether one can hope for the body politic as a whole to get the messages in the larger context is another matter; for a start it will require the mainstream media to absorb them and communicate them to the broad community in a way that provides an antidote to all the snake oil.
I see we are getting another round of guff about Germany as part of local propaganda on renewable energy.
“Staggering” numbers (to quote one writer) are available on the role of solar and wind in the German power market.
This is based on a report that renewable sources generated 75 per cent of German power demand at midday on Sunday, 11 May.
Time for me to trot out the Flinders Street rag trade joke: never mind the quality, feel the width.
This is a different story in the depths of winter as boosters very well know.
For example, production of solar power in July (summer) last year in Germany was 5.1 terawatt hours – but in January (winter) it was 0.35 TWh.
Pointing out that, say, solar power provided 50 per cent of Germany’s electricity demand one sunny Sunday is actually pretty meaningless.
The number that matters is annual supply and this is nearer five per cent.
In the real world, wind and solar combined delivered about 23 per cent of German electricity sent out in 2013, but the actual daily output varied between 10 per cent and 50 per cent.
That’s fine when you have conventional power sources to come forward to fill the (rather unpredictable) gaps but the boosters, of course, are promoting a nirvana where solar and wind are the main sources – and they have set Germany up as a symbol of the 100 per cent green state that is to come for us all (if we are wealthy enough to afford it).
Official figures for German electricity supply for the first quarter of this year, which was a relatively mild winter up there, show that demand was down 5.4 per cent over 2013 (that would be less freezing weather combined with a continuing response to very high power bills).
The breakdown of production (that’s power sent out, not consumption, before line losses) for the quarter was: black and brown coal 63.7 terawatt hours, gas 10.8 TWh, nuclear 24.8 TWh, hydro power 4.1 TWh, biomass 13 TWh, wind 17 TWh and solar 5.7 TWh.
So fossil fuels accounted for 74.5 TWh of German power supply in first quarter 2014 versus 22.7 TWh for solar and wind.
When one factors in hydro power and nuclear energy, conventional generation delivered 104.5 TWh, more than four times the contribution of solar and wind.
For all 2013, German power stations produced some 280 TWh of fossil-fuelled electricity versus 74 TWh for solar and wind versus 80 TWh for nuclear.
Last year, in fact, German coal-fired power production rose three per cent. Wind generation also went up three per cent and solar 6.3 per cent – the big losers were the country’s modern gas-fired plants, with production down 21 per cent.
Another point is that German generators have built 32,500 megawatts of wind capacity and it delivered 47.2 TWh in 2013. The average capacity factor for wind in Germany is 18 per cent, quite a lot lower than in Britain, for example, where it is about 29 per cent.
Why the difference? It’s windier in Britain.
By the way, most German wind farms are in the country’s north but most energy-consuming industry is in the south, creating a transmission issue – and more than a little pushback from citizens who don’t want new high voltage lines anywhere near them.
It is estimated that meeting the current 2020 renewables target will require a $27 billion investment in new and upgraded power lines.
Also, let’s not forget that, thanks to green power support policies, Germany today has some of the world’s highest electricity prices.
(You might be interested to know that the feed-in tariff for solar power in Germany all by itself is equal to 60 per cent of the average American residential rate!)
There’s another set of stats that are worth a passing glance as well.
Thanks to over-the-top support, Germany has been installing 7,500 megawatts of solar arrays annually.
Now the government is pulling hard on the reins and this is expected to fall to 2,500 MW annually.
But Germany also has plans to build 10,700 MW of new coal plant – and it will take two to three decades of installing solar at the lower capacity to match the production from these plants.
The International Energy Agency tells us that it expects, if current policies are pursued, solar and wind power will be providing 38 per cent of German electricity needs by 2030, but one only has to read the German media to see that the political commitment on renewables is wobbling in the face of its huge cost.
The real news about German energy policy is that “energiewende” is another very messy story (cf Grattan Institute).
Germans are now paying energy bills roughly twice as high as the average between 2000 and 2010 but the country’s carbon emissions are two per cent higher than they were before. Energy poverty has now entered the country’s public debate lexicon.
Subsidies for green generation are now running at 21 billion euros (roughly $32 billion) a year, handing the German mass market the highest power bills in Europe. If maintained at the 2013 level, which they won’t be, the subsidy costs would reach $40 billion annually by 2020.
(I see one report claiming that the total cost since 2005 to residential and small businesses consumers of Angela Merkel’s green game is $140 billion.)
As well, the European Commission is on Merkel’s case because of the (unlawful under EU rules) protection against these costs her government has given high-employing heavy industry.
Even with this protection, Germany has the second-highest (after Italy) industrial power bills in Europe, so any change forced by Brussels could create real problems for factory owners.
The Cologne Institute for Economic Research says there has been a “marked decline” in the willingness of industrialists to invest in Germany since 2000.
Meanwhile, the renewables set-up has seriously undermined the financial standing of the major German electricity supply businesses and the new Merkel government is wrestling with reform to find a way to prop them up and ward off risks to power security.
And then there is the small fact that, under her regime, Germany has become critically dependent on gas from Russia for cooking, heating and industrial needs. (Germany has a large shale gas resource but pandering to green opposition to fracking prevents its exploitation.)
Shortly after Merkel was re-elected in September, she was handed a report by a committee she set up herself saying that the present “energiewende” approach is uneconomic and an inefficient way to cut carbon emissions.
Her own energy minister (who is also the economy minister and leader of her coalition partner) says continuing on the present path risks “de-industrialisation” in Germany.
In the light of all this, the line our renewables boosters, aided by parrots in the Australian media, are pursuing about the recent German green generation numbers would make a Flinders Street rag trader of a bygone era blush.
The truth is that “energiewende” has very little value here as a blueprint.
The dilemma in producing this blog is never that there isn’t anything about which to write, always that there is an over-supply of news and views on which to focus.
Today, for example, the Web and the media continue to throw up more claims about renewable energy while the ongoing New South Wales coal seam gas imbroglio demands yet more attention – and merely putting “coal” in to Google News delivers a veritable deluge of material on international assertions and counter-assertions about its place and prospects.
A half century ago, when I was a lowly sub-editor on the morning newspaper in my South African home town, the “chief sub,” a cranky Yorkshireman, could be relied on to complain at least once a night about the problems of “fitting a gallon in to a pint pot” as the telex machines delivered the local, national and world news to the horseshoe-shaped table around which we worked to produce the next day’s edition.
Telex machines have gone to join other museum pieces of a bygone age, but the distillation problem remains ever-present in assessing the news flow.
For those with ideologies to purvey, of course, modern communications are a boon: rant away and press “send.”
For those trying a bit harder to grapple with the complexities, it is not so easy.
I am struck today by these paragraphs in the Australian Industry Group submission to the federal RET review: “While the large majority of our members (numbering 60,000 businesses employing a million people) have no firm views on the RET, some are strongly opposed to it. They view it as an unnecessarily expensive and ineffective policy and would like to see it abolished or significantly scaled back.
“Others argue that the RET plays an important role in helping to transform our electricity generation mix to cleaner and more diverse sources in addition to supporting growth and employment in the sector.
“Despite the disparity of positions in our membership regarding the RET, (they) are nearly always underpinned by the same over-arching concerns: that future energy is affordable and secure – and that climate and energy policy is stable, predictable and credible, minimizing the potential for sovereign risk.
“These concerns should be essential components of any consideration of policy.”
How sensible is that?
A pity, therefore, that the mass media readers/viewers/listeners don’t get it put before them.
It is a perspective that can be applied with equal force to the NSW gas supply situation – where the State’s Independent Pricing & Regulatory Tribunal is pointing out that escalating cost (with prices set to rise 17.6 per cent from 1 July, only the start of the upward ride under present circumstances) is eroding the fuel’s local advantage over electricity where they compete.
And a policy situation, I’d add, where the events of the past 12-18 months are well on their way to making this State a graveyard for resources investment with consequences that can only be a matter for speculation today but are very likely to deliver considerable community pain before we are much older.
The IPART gas price determination means typical bills for householders in the State will be $150 to $225 higher in 2014-15 and, of course, signals a great deal more budget stress for business.
IPART says “there is still considerable uncertainty about how fast wholesale gas prices will rise and at what level they will peak.”
It should be blindingly obvious that a greater supply of gas on the east coast will help to alleviate this uncertainty and to mitigate cost and reliability issues in NSW – but the combined efforts of a radical minority opposed to fossil fuels, farmers unconvinced about environmental safety, media feasting on the drama and a State government all too clearly out of its depth in formulating an efficient policy approach are working towards delivering the worst outcomes for the “sensible middle” of the community.
The Australian Industry Group, in its RET submission, expresses “strong concerns about the lack of certainty surrounding climate and energy policy and the impacts (of this) on investment.”
The lobby group points to (1) a sustained period of particularly difficult trading conditions for many in business, in part the consequence of rising energy costs, (2) the policy uncertainty factor, (3) the east coast wholesale electricity market conditions that are unlikely to drive substantial investment in large-scale generation over the next decade, and (4) slower than expected investment in large-scale renewable energy generation.
To all of which can be added the gas supply issues, contributing to what the Grattan Institute calls “a very messy story.”
I have referred here before to the good advice for a small Orchison of my dear and long-departed grandmother that there are consequences for everything we do and don’t do.
The point is not made less potent by repetition and it is going to be driven home in spades in the energy space in Australia, and perhaps especially NSW, in the months and years ahead.
Just how tangled the policy web can become is illustrated by AiG in its RET submission. “We consider the costs of either increasing the target or completely abolishing it to be unacceptably high,” the association says. “An about-turn would have major implications for international investment due to perceptions of increased sovereign risk.”
However, it adds, “no-one benefits from having a target that cannot be practically achieved, not the renewables sector, not energy users, not the community, not government.”
Extrapolate these thoughts to the broader energy scene, and especially to the CSG saga, and they hold good as a warning that “messy” can turn to hurtful for most concerned in relatively short order.
The Grattan Institute has titled a policy forum it is holding n Brisbane next week “Energy in 2014: more mines than field.”
That is clever – and right – and we are all standing in this minefield.
As Marvin the Martian, a cartoon character of my childhood, used to say “Where’s the kaboom?”
When I wrote “The RET-go-round” post on this site yesterday I had not yet seen the AGL Energy submission to the Abbott government task force chaired by Dick Warburton. Now that I have, I would like to canvass its thrust, too.
In just two pages, written by the company’s head of economic policy and sustainability, Tim Nelson, AGL has nailed a number of important issues for the Warburton review.
The back story here is that the company has invested more than $3 billion in renewable power since the RET was introduced and asserts that it remains a supporter of increasing the proportion of green energy in electricity supply.
It is the “however” aspects of the submission that are important.
AGL argues that the large-scale 2020 target (as opposed to the part of the scheme giving handouts to solar PVs) “cannot be achieved” because of “a convergence of factors making future investment intractable.”
These factors are policy uncertainty and the associated barriers to generator exit from the NEM, the design of the energy-only market and ongoing falls in electricity demand.
As things stand now, AGL says, investment in new renewable energy projects cannot be justified economically.
The company points out that older emissions-intensive generation is not being shuttered permanently despite the demand slump and continuing (renewable) capacity additions.
In this situation, AGL believes renewables policy needs to be considered in two timeframes.
First, it says, there is little point in pushing on with a high target if the underlying factors deter investment, but those (like it) who have invested under the scheme must be protected.
Second, it adds, renewable energy policy for the medium term needs to be part of the broader efforts to reform energy market design. This, it points out, is not just an Australian issue — similar activity is under way elsewhere around the world. Here, it says,the reforms should include incentives for older, inefficient plant to be retired.
Turning to the RET aspects covering small-scale solar power, AGL argues that there is no longer a need to subsidise household PVs as investment reaches an aggregate 4,000 megawatts (what it was designed to do) — and residential investors got their RET credits upfront so there is no sovereign risk issue here.,
The big over-riding issue, not just for the RET but energy policy overall, says AGL, is that the revised approach should be “co-ordinated, long term and evidence-based.”
Some readers have indicated that they are finding the current efforts on this issue by the green movement’s running patterers — the mid-19th century criers of news in the streets of London — rather repetitive and tedious, to which I think the only realistic response is live with it or turn your eyes away ; they will be in full voice through the winter.
Having been involved with this issue since John Howard brought the idea back from a White House lunch with Bill Clinton and Al Gore in the late 1990s, having been more or less industry lead negotiator with Environment Minister Robert Hill in the MRET’s formative stage and having led again for the ESAA membership during the Tambling review in 2003, I think I have heard most angles on it many times — but I did see one new one this week: one of the green boosters accused AGL of “going over to the dark side.” Michael Fraser as Darth Vader? Nah, it doesn’t work for me.
Speaking of dark, few organisations have a darker view of the policy than the Australian Chamber of Commerce & Industry. I see the association is having a some more shots in the autumn issue of its house journal.
The ACCI view is that the Abbott government has “shown strong leadership in putting the issue on the table and staring down an army of green lobbyists.”
In the chamber’s opinion, “unwinding the RET gifts the Coalition the opportunity to deliver a good policy outcome that is an easy political sell; it wouldn’t cost the budget a cent yet will deliver substantial electricity price relief to users. In these days of constrained budget positions, it is a rare combination.”
In this context, one notes that the Federal Parliamentary Library has produced a “quick guide” to the RET in which it draws attention to Australian Energy Market Commission estimates that the direct cost of the RET to households amounts, on average across the country, to 1.38 cents out of 27.11 cents per kilowatt hour or 5.1 per cent.
ACCI and others argue that the RET imposed a direct cost on the economy as whole of $1.6 billion in 2012 and that this will rise, if the program remains unchanged, to $5 billion a year by 2020.
The chamber says that the RET cost is “particularly insidious” because is is “largely hidden” from voters with no transparency in the federal budget about “the burden on consumers.”
The Rudd/Gillard government, it adds, never revealed the costs imposed “by dramatically expanding the RET” and consequently never provided compensation to households.
ACCI points to the 2012 Climate Change Authority review which, it points outs, “admitted that the RET is not the first best approach to reducing emissions.” It adds that, reading between the lines, this was code for saying that CCA couldn’t justify it as emissions abatement policy, “given that it is highly inefficient.”
The great fear of the green lobby is that the Warburton task force is far more likely to take on board the views of ACCI and fellow travellers than supporters of the RET — which is probably correct.
The AGL Energy submission can be read as an attempt to bring some balance to the argument, acknowledging the market problems but seeking an outcome that retains the concept while bringing it within the ambit of the broader issue of NEM reform.
Meanwhile, the Grattan Institute, I see it reported, is suggesting “a carefully-crafted expansion of the RET to include non-renewable sources of energy.” The lack of bipartisan support for clear policies to address global warming, it adds, makes it difficult to justify further investment in renewables, arguing that at present investors face “unmanageable risk.”
The institute says existing arrangements should be preserved to protect contracts and investment, underlining the AGL point.
In passing, spruiking a forum it is holding in Brisbane on 28 May (titled “Energy in 2014: more mines than field”), the institute provides this neat capsule of the domestic energy environment: “Electricity demand is falling, yet prices are still rising. Traditional generators are in trouble and the future of renewable energy is highly uncertain. Gas prices are increasing sharply and flowing through to businesses and households. And uncertainty on climate change policy completes a perfect storm for consumers and suppliers alike.”
Pity about the “perfect storm” cliche, but otherwise as good a summary as you are going to get.
Joe Hockey got a helluva lot of coverage for his small outburst to Alan Jones on wind farms – “a blight on the landscape” and “utterly offensive” – and it really wouldn’t matter except that he will be sitting at the federal cabinet table at some stage this year, contributing to the judgment on the renewable energy target review, for which submissions closed last Friday.
I gather the report from Warburton and his panel will be delivered “towards the end of June,” which means after the energy green paper appears (allegedly 28 May).
If I was out and about boosting the case for the existing RET (which I am not), I’d be suggesting that the Treasurer might care to visit the south-west of Victoria and specifically Ararat.
I see it reported from Warrnambool that a $200 million wind farm, scheduled for completion in October, has paused work and three others mooted for this corner of Victoria are now up in the air, so to speak.
Their development has local economic value.
In Ararat, local government leaders are trying to get a meeting with Hockey’s colleague, Environment Minister Greg Hunt, a Victorian MP, to explain that the prospect of the RET being much reduced or uprooted altogether (something I think unlikely although the green commentariat is playing the ‘threat’ like a violin) would mean a loss of $22 million in expenditure in their neck of the woods during the construction phase of a $450 million, 75 turbine development.
The project will make RES Australia their largest ratepayer by a long way and see $75,000 a year contributed to local clubs by the firm.
Of course, this is not the “big pitcher,” as one of Hockey’s more famous modern predecessor’s was wont to say, but it just goes to demonstrate that what one politician says when trying to make nice to a radio shock jock is rather easily countered from other perspectives.
The overall context is multi-layered and pretty darned complex.
The Warburton panel report is far from the last word and the political context is already made more complicated by the reactions to Hockey’s budget and assertions of government deceit in the last election campaign.
There are plenty of quotes from Hunt and others from the run-up to last September’s poll that can be used to underline the charge of duplicity from a fresh angle.
And there is the tricky path through the Senate woods post 1 July for the government to negotiate in achieving any changes to the RET legislation.
I see the Prime Minister already tip-toeing away from double dissolution threats related to the budget’s parliamentary passage in media interviews this weekend.
Abbott claims we should expect the next election in “mid-2016.”
All this said, there is a large amount of effort going in to the more serious submissions to the RET review – papers that will be disseminated far more widely in the political arena than Warburton and his three panelists.
(I differentiate these from the multitude of parroted submissions from the green army that flood in to each and every review of carbon policies and are essentially ignored by the recipients. “Never mind the quality, feel the width” is the game for these lobby groups and it is well past its use-by date.)
At the mature end of the scale you will find submissions from the Clean Energy Council (27 pages) and the manufacturing lobbies (who bear the brunt of RET costs rather than the mass market, whose weekly burden is more less the price of a middy of beer, to use the Treasurer’s apparent metaphor of choice.
(New South Wales readers will understand a middy, which is 285 millilitres; Melburnian barmaids will only understand your order if you ask for “a pot” and I gather it has other names elsewhere. The average Australian price is $3.74.)
Players in the electricity market are in there pitching, too, raising the wide range of concerns they have about how the RET impacts on the viability of the NEM (or helps improve it, according to renewables supporters).
Hence the CEC’s 27 pages as it stretches to cover all bases from its particular angle.
Rather far removed from the casual observer’s eyes but well worth reading if you are deeply interested in the topic is a quite lengthy commentary on the WattClarity website by GLOBAL-ROAM managing director Paul McArdle.
(You can find it by putting “A few thoughts on the RET review process” in to Google Search.)
McArdle makes an observation that certainly resonates with me: “I have to wonder about the way in which market modelling seems to have developed its own mystique to the point where the results of exercises are increasingly used to ‘prove’ a particular party’s point of view (which often-times seems to be predetermined). This seems to be devolving in to Consultants at 20 Paces.”
And he adds a thought that I also share and that keeps me reading this stuff: “The fact that the outputs of (such) modelling are almost guaranteed to be wrong does not mean the process is worthless. (It) can be enormously valuable.”
McArdle suggests that what Warburton & Co could do usefully is to invest in a project to collate and evaluate the material published to date from established modelling firms “so that we can actually learn from them and not start from square 1 again and again and again.”
Unless, of course, as he points out, the market and policy settings have changed so much to make all this stuff invalid……..
You may recall former Prime Minister Fraser, who seems to have spent his retirement recanting everything conservative he ever espoused, once lecturing us that “life is not meant to be easy.”
McArdle’s further point is that, as the energy landscape continues to shift and remains so unclear today, it follows that current modelling purporting to stretch out to 2030 may be a vain exercise.
Which, of course, should bring one, at least in my book, to the thought that responsible governance in this environment should be to set the ground but not seek to dictate the play.
In what may turn out to be the shortest submission to Warburton et al, the Energy Policy Institute has written a five-paragraph letter urging it (and the Abbott government) to adopt three key principles:
First, technology neutrality is a fundamental principle of energy policy and all energy production options should be able to compete on a level playing field with predictable rules.
Second, all discriminatory and market-distorting measures should be eliminated.
Third, the lowest-cost carbon emission reductions should be delivered by an efficient market mechanism on a technology-neutral basis.
The multi-billion dollar question is how to embrace this without materially disadvantaging investment made in good faith up until now?
Grandfathering and drawing a line, I guess, but, as just one example, given that rewriting the network tariffs rules is an imperative, there is no escaping that there will be significant losers in this game – eg the two million or so voters who have jumped at all the solar PV program populism of recent years and invested billions of dollars in arrays on more than a million roofs.
(In passing, for the love of your nominated deity, could “journalists” on the ABC and elsewhere per-lease stop writing “rooves” – it is, for me at least, the single most irritating aspect of the modern media. Well, second most irritating: smart-arse, tin-eared headline writers are a greater bane, a classic new example being the “Sydney Morning Herald” greeting Hockey’s budget with a banner “A world of pain.”)
The real estate mantra is “location, location” and much the same can be said for Australia when it comes to the LNG market.
While the opportunity of being in proximity to China, Taiwan, Japan and Korea — and having a very large gas resource on which to draw — is known now even to the proverbial person in the street, the follow-up opportunity that geography has dealt us is not.
Just round the corner, so to speak, is South Asia, consisting of India, Pakistan, Bangladesh and Sri Lanka, with a combined population of 1.5 billion but at this point a pretty small footprint in the global gas market. In fact, only India at present is importing LNG (about 14 million tonnes a year versus about 80 Mt by Japan).
The problems presented in developing this market are only too obvious but the potential tends to be rather ignored, although not in the circle of big LNG developers when they are looking to the medium long-term future.
It’s a topic I hope to see explored in Brisbane next month when Quest Events stages its Australian Gas Export Outlook conference. The event is going to help to underline the fact that, no matter the ferment in the world-wide energy business, the big upside area for Australia is its current, immediately prospective and long-term role in the LNG trade.
In federal budget week, it is worth underlining that, as economists and the national policymakers fret about where adequate government revenue will be found over the next decade, the direct and indirect flow of tax income from the gas business is one of the big plusses.
While the tax booty to be garnered from the existing LNG developments and the projects now under construction is one thing, the extent to which further opportunities can be captured depends both on overcoming local barriers to investment and on how the overseas marketplace expands.
The prospects, the problems and the players are all going to be explored at the Quest AGEO forum, which I will be co-chairing along with Bill Tinapple, one of the best-known and most experienced figures on our resources scene, from 24 to 26 June.
There is always a lot of homework to be done if you wish to make a good fist of chairing such events and, in pursuing this, I have been struck by just how great the LNG opportunities and challenges are in South Asia, where meeting the needs for energy supply and grappling with some of the world’s worst poverty go hand in hand and where a poor investment climate is no secret.
India, of course, is the perennial “new China,” its massive potential for economic growth much anticipated and much frustrated by domestic politics, which are again in flux this month as this enormous democracy votes in national elections that seem likely to bring about a major regime change.
Those who bellyache about the slow pace of policy management of the climate change issue should welcome the prospect of converting India from dependency on coal through major expansion of its use of gas, but they tend not to do so — as witness a new rant against the LNG industry from a Friends of the Earth type on the ABC, airing a view that allowing the Australian developments will be too large a burden on the global “carbon budget” the environmental movement and its scientific fellow travellers have contrived.
Elsewhere, notably America, the green brigade are furious with Peabody Coal and others in that industry for highlighting the fuel’s potential to alleviate energy poverty and reduce the high death total from lack of access to electricity and gas. How dare the energy industry point to a different “great moral challenge of our times”?
In the real world, LNG is crucial for bridging the Indian energy gap, with drivers to be found in the fertiliser industry, power generation, the broader industrial sector and also household and transport needs. At present coal meets 59 per cent of Indian electricity supply versus just nine per cent for gas.
The bulk of India’s LNG at present comes from Qatar. There have been a number of proposals for long pipelines to bring Iranian gas to India — and even one to link Turkmenistan, Afghanistan, Pakistan and India, but just to list these countries highlights the political and security issues that dog such developments.
Just India alone represents a huge opportunity for Australian LNG businesses — its demand at present is only six per cent of global trade — and the additional market potential of Pakistan, Sri Lanka and Bangladesh is obviously heady stuff. But there is more at stake here than the economic benefits for Australia and returns for shareholders in the big LNG businesses — being able to play a role in addressing the energy and poverty problems of South Asia has a greater value for this country than just money, not that you would appreciate this through reading the local green commentariat or the mainstream media.
Hopefully, AGEO in Brisbane is going to provide an opportunity for painting the bigger picture for Australian LNG.
Some of you may remember that joke about the Pom, lost in southern Ireland, who asks a local yokel, leaning on a rural stone wall, “My man, how do I get from here to Cork?” To which the yokel responds: “Well, sir, if I was you, I wouldn’t start from here.”
It’s a line that must have some resonance with many executives and their boards in the energy sector at present.
I recalled it today in reading a paper consultants PricewaterhouseCoopers presented to a private session at the Energy Networks Association biennial conference in Melbourne at the end of April.
The commentary – titled “Utility of the future: A customer-led shift in the electricity sector” – is to be found on the PwC website.
It’s a product of the consultants’ power utilities team led by former Origin Energy manager Mark Coughlin.
The PwC perspective is that today’s utilities are “outdated and struggling to meet the needs of their customers” – and that the survivors of the forecast shift will be “energy enablers” rather than lords of the supply chain controlling the electrons.
Coughlin reckons this role is “on its last legs” and says this has major implications for current heavyweight players, investors, regulators and governments (especially those currently still owning electricity assets – who, he believes, will find this role “unviable.”)
A non-trivial question, I suggest, is the time frame for the shift the consultants postulate – is it the end of this decade or, perhaps, some undefined point in the ‘Twenties?
This point is not tackled in the present paper but the commentary is a preliminary foray and we can expect to see further material in the months ahead.
A great deal of the PwC thesis relies on decentralising power generation – not least through the further rise of solar PVs – and a smart grid superseding the present, decades-old network system.
Coughlin is of the view that, even with government subsidies removed, take-up of PVs will continue to burgeon.
Only a mug would argue that this transformation can’t or won’t take place, but the time factor to create a new environment, rewrite regulation, persuade the householders to take up smart meters and take control of their energy-using lives as well as to reconfigure the regulatory system – not to mention the arrival of a myriad of new service businesses, development of joint ventures and facilitation of telcos getting in to the energy space (as PwC envisages) – means this shift is not going to happen overnight, no matter what you read in the writings of the green commentariat for whom Candide’s Dr Pangloss is a patron saint.
I have written here recently about the need to radically change the tariff regime to deal with the cross-subsidies between millions of mass market customers and those other millions who have taken up solar PVs and air-conditioning. The Energy Supply Association, talking its members’ book, says this transformation is “urgent,” but who expects energy ministers and their advisors to leap in to action?
The value of the paper PwC has produced lies in it focussing the minds of key industry and official stakeholders on the changes that may well be inevitable and of advocates for customers (aka voters) on the fact that they are now able to at least think about being in the box seat.
Just how much voters/consumers are concerned about their general situation can be readily judged by going on to the Essential Research polling site.
Recent interaction between the pollsters and the people has thrown up all sorts of interesting information.
For example, what most concerns respondents about economic issues is far and away the cost of living (56 per cent versus 11 per cent fretting about unemplyment and seven per cent about house prices).
Fifty-four per cent of those polled see economic management as the most important issue deciding how they will vote next time, 50 per cent are bothered about health system management, 17 per cent about housing affordability – and just 10 per cent about climate change policies, notwithstanding the media avalanche of coverage of the latter.
When interviewed, 62 per cent of respondents point out that they are paying a lot more for electricity and gas than 2-3 years ago and 56 per cent that this also applies to petrol (a topic that will get a lot more airing after Budget night). Other household budget pains lie in more expensive fresh food (cited by 36 per cent of respondents), higher insurance costs (also 36 per cent), bigger water bills (40 per cent), rising medical expenses (32 per cent) and higher mortgages and rents (24 per cent).
(By the way, the poll throws up that 13 per cent of the group think the current 2020 RET goal is too high, 25 per cent say too low, 39 per cent “about right” and 23 per cent respond “dunno.”)
Coming back to the PwC paper, which at 16 printed pages can’t be done justice here, I’m struck by two comments in particular.
First, it suggests that a key aspect of the shift will be whether distributors and retailers “face off and compete for customer wallet share” or whether the current value chain separation will continue?
Second, PwC contends, “the battle for home services is yet to play out” in an environment where “telcos want to own the home” and even insurance companies want to provide services.
“Customers,” say Coughlin and his team, “rely on ‘trust’ and ‘referral’ when it comes to service providers – and utility players who are able to translate this trust to other adjacent services will create new customer and shareholder value.”
Put another way, after decades of being cock of this particular walk, the members of the electricity supply chain are confronted by a new set of competitors as well as technological developments and, assert PwC,the arbiters of whose business model succeeds appears destined to be customers judging who is meeting their needs best.
As they say, shift happens — and we just need to get our heads around a time frame.
As we drift uneasily on a sea of media blather about the 2014 federal budget, none are probably more queasy than those with renewable energy interests, expecting, as they do, that Tuesday evening’s announcements by the Treasurer will contain harbingers of worse to come.
The next waves heading our way after the budget is delivered are the energy green paper, to be expected close to the end of the month, I am told, and the RET review.
Like the recent Commission of Audit, which is a Business Council wish list as much as anything, the RET report from Dick Warburton and his fellow panelists will be no more than advice; what the Abbott government does may be to take up some of the recommendations and to use it as a backdrop for pursuing a rather different path.
The green commentariat, huddled around their solar panels, alternate between telling themselves scare stories and waving any propaganda that comes to hand to claim the government’s actions will harm the public weal.
One symbol just grabbed is the announcement by Barack Obama that solar panels will be re-installed on the White House roof – they were originally put there by Jimmy Carter (now seen by more than a few as Obama’s doppelganger as the most ineffectual US president of the past half century) and later removed.
What the local solar boosters don’t say is that the solar PVs Obama is planning to deploy will produce enough power a day (when the sun is shining) to operate just a score of light bulbs.
Even a casual visitor to the White House (which I have been) knows that it uses rather more energy than this – and who knows what the power needs actually are for the HQ of the free world when all the gizmos installed there are taken in to account?
Of rather more moment is the claim by investment bankers UBS that, even if the Abbott government dumps the RET provisions affecting solar power, the rooftop PVs’ momentum is unstoppable and we are on our way to having half of the nation’s households using the technology (versus 1.1 million out of just over 10 million homes across the country today).
This leads the bolder (or something) of the green commentariat to assert that we will see a large number of households disconnecting entirely from the power grid by “as soon as 2018.”
My reaction is a five-letter word beginning with “b.”
(The one Jim Hacker bowdlerized by writing “round objects” in the margin of advice, leading Sir Humphrey, in turn, to enquire “Who is Round and why does he object?”)
All of which is by way of preface to asserting that two of the key challenges for the RET review and the eventual white paper, from where I sit, are a really decent evaluation of solar power and the need for us to embark on a radical overhaul of network charges to cope with the different supply environment created by PVs and air-conditioners.
One of the most significant failures of the past decade in national policymaking – and, let’s face it, this is a wide and well-populated field – has been, on the one hand, an inability by all concerned until just recently to appreciate that the network pricing regime is no longer wholly fit for purpose (even though much of the past 10 years has been spent playing around with network regulation) and, on the other, the cockamamie approach to solar power pursued by the Rudd/Gillard regime and every State government in the land.
All of which has helped to land us in a situation where power prices are unacceptably high, wholesale generation is dangerously unviable and network costs are no longer imposed equitably – while we have a large new pool of voters with a vested interest who are not going to be happy with the appropriate reforms plus a radical environmental movement whose goal is the demise of the fossil-fuelled power sector, an end to which they will strive regardless of commonsense.
It says a lot about this situation that, at the same time, no-one in authority seems prepared to speak up for the fact that one facet of policy, the pursuit of energy efficiency, which has had bipartisan support, is now delivering a reduction in power demand and savings for consumers (in the sense that they are paying less than they would have done without appliance MEPs and so forth).
We laud a stuffed-up situation and barely acknowledge a success story.
Some in the green commentariat choose to focus on the tariff “can of worms” (as one has described it) as being solely an attempt to punish those who have taken up PVs.
In fact, the need is for development of grid tariff structures that are cost-effective and avoid cross-subsidies between customers.
A really worthwhile green (and subsequently white) paper will take up this issue in its full context and a genuinely pro-active Council of Australian Governments, using its Energy Council as the delivery vehicle, will pursue the necessary reform with speed, efficiency and a high-quality communications program.
This task can only succeed if both the Coalition and Labor are prepared to embrace the necessary changes.
The only party leader to focus on this issue (and then only in part and for egregious political gain) in the past six years has been Julia Gillard, who probably made things worse by waving her “big stick” at new Coalition State governments.
The recent AECOM report on the issue to the Energy Supply Association proposes three steps towards achieving a sensible outcome here: (1) prioritise consumer participation in the reform, (2) pursue tariff simplicity, and (3) don’t copycat what is going on overseas (where this is also an important issue in a number of countries) but develop an approach appropriate for local conditions.
The line offered by ESAA’s Matthew Warren in launching the AECOM study seems right to me: “electricity prices must reflect the real cost of supply, sending a better signal to consumers and encouraging them to take control of how much energy they use, when they use it and how much they pay.”
The Greens and their fellow travellers would be doing much more for Australian consumers if they embraced this view, too, rather than pursuing their version of “Animal Farm”: solar good, fossil fuels bad.
This, however, is not going to happen and it is in the national interest for the Coalition, via the green/white papers for starters, and Labor to embrace a policy for the long term that delivers energy security, market stability, efficient pricing and consumer benefits.
If you put ”stranded assets” plus “global warming” in to Google Search, you will get 32,200 entries, an indicator of the extra-ordinary amount of fuss the great green commentariat (and others) are making about the perception that a major change in global policy to attempt to manage global warming will have a big, bad effect on fossil fuel investments.
Like so much of the debate in this space, Stranded Assets is the progeny of mating Climate Alarm with Wishful Thinking; it’s a horse that personally I have some difficulty seeing proving a winner in any time frame that is capable of current policymaking impact.
I have been more than a little interested, therefore, to catch up this week with a presentation made by my friend Chris Greig, a University of Queensland professor who is director of the UQ Energy Initiative, at the start of April.
I missed this because early April was my time for being immersed in the APPEA annual conference in far-away Perth but I am pleased to have it drawn to my attention as it is an exceptionally good and remarkably brief encapsulation of the issue. (If you seek a copy, may I suggest an email to email@example.com.)
Greig spoke in a Brisbane Southbank academic debate to the question of whether the concept of “stranded carbon assets” are an answer to climate change or an activist diversion?
He started with a bit of vital context:
First, where are we today?
We have 3.5 billion people living in cities around the world and global per capita GDP stands at $12,500. Sixty-six per cent of global energy is used in cities and half of the overall total in the OECD nations. Carbon dioxide emissions globally now total 33 billion tonnes a year.
Where are we going?
Greig says to a world in 2045 where global per capita GDP will have reached $25,000 with 6.5 billion people living in cities — where 80 per cent of global energy will be consumed, with 70 per cent of all energy demand outside the OECD.
Global carbon dioxide emissions? Well, that depends, doesn’t it, but there is much arguing about the world’s need to adopt a “carbon budget.”
The urban infrastructure investment needed to get us all from here to there, Greig adds, is about $350 trillion.
Now, will we meet this “carbon budget”?
Greig makes three critical points: (1) Energy demand growth makes the scale of transition from fossil fuels to renewables far too large; (2) Global supply chains cannot meet such a transition in just three decades; and (3) politics and economic interests will not allow investments to be stranded.
The world today, he observes, consumes about 12.5 billion tonnes (in oil equivalent numbers) of energy.
Fossil fuels are used for power generation, transport and industrial production of such vital goods as cement, steel, plastics and fertiliser.
Between 1995 and 2012, coal’s share of the energy mix rose more than three per cent to 29.9 per cent of global energy, the gas share rose some 1.5 per cent to 23.94 per cent, hydro-electric and nuclear generation fall back slightly to 11.25 per cent and new forms of renewable power almost quadrupled its share — but only to 1.68 per cent of the total.
Despite this, some three billion people still have little or no access to the modern forms of energy we take for granted in countries like Australia.
Developing countries are expected to cause global energy demand to increase 25 per cent in the next 15 years alone.
“Morally,” says Greig, “we cannot deny those in poverty access to modern energy and an improved standard of living.”
And here comes the rub.
Greig points out that going down the non-carbon road would require replacing the equivalent of around 15 billion tonnes of oil equivalent fossil energy with a mix of wind, solar, biofuels and nuclear by 2030. He argues that nuclear cannot make a significant contribution to this greener portfolio in this time frame because it takes at least five to 10 years (and more in some jurisdictions) for permitting and construction of reactors.
Time for some maths.
Greig notes that 30,000 terawatt hours of power are produced annually by fossil-fuelled generators. (Our contribution in Australia is about 220 TWh a year to provide some local colour.)
Worldwide, this calls on the resources of more than four million megawatts of fossil-fuelled generator capacity.
To swap this for solar and wind, says Greig, you will need 13.7 million megawatts of solar plant org 10.4 million megawatts of wind farms, backed up by 1.7 million megawatts of dispatchable storage.
Now, we start with the great green dream: the world’s leaders (including prime minister Christine Milne or Adam Bandt of Australia?) agree to stop fossil fuel use from 2030 to keep within the “carbon budget” of 500 billion tonnes of carbon dioxide before, we are told, the wheels fall off our climate bus.
Can we build all of the above infrastructure, asks Greig?
How much carbon will be emitted in the manufacturing process? (And bear in mind, this just deals with power generation, not industrial applications and transport needs.)
Start with wind power.
Greig notes that challenge requires 35 times more wind capacity than is currently installed and and a much bigger deployment rate than is currently the case; it would take 230 years to roll out wind farms at the present level of construction.
We are talking about installing 630 three-megawatt wind turbines per day.
To point to just one ingredient: the aggregate task would need 70.6 million tonnes of fibreglass.
What about solar?
Greig says the task would require 100 times more solar PV capacity than is installed worldwide today. At the current rate of deployment, meeting the 2030 challenge would see it rise 20 times.
The task would require 95,900 square kilometres of solar panels (that’s 1.5 Tasmanias). And, to name just one ingredient, 110 million tonnes of silicon.
And then there is the small matter of storage because these technologies are intermittent — or variable as, for some reason, green persons prefer to say.
In today’s world, 99 per cent of large storage capability is provided by dams and, says Greig, the new clean, green world would need 13 times as many dams as we have today, installing six large scale pumped-storage hydro dams every week.
But wait, there’s more — as that steak knives TV advert says.
Greig points out the awkward problem that 70 per of the world’s oil reserves are not owned by those rapacious investor-run oil companies the green persons love to hate but by businesses owned by governments.
As well, more than 70 per cent of coal-fired power plants are also state-owned.
Here’s how Greig summed up his Southbank presentation: “There is certainly a scientific imperative to reduce carbon emissions but a global commitment to do so seems far away.
“Even if we had such a commitment, energy demand growth, technology limits and renewable energy manufacturing supply chain limits are unlikely to deliver the necessary assets before the ‘carbon budget’ is exceeded.
“Political and economic interests, especially in state-owned fossil fuel companies, will not allow assets to be stranded.”
And he posed this question: “Is it helpful to demonise fossil fuel companies or (should we) harness their balance sheets to drive technological innovation and the low carbon transition?”
Someone who was at this debate tells me that the high point (for him) was Greenpeace and Lock The Gate people in the audience acknowledging that Chris Greig’s argument is “depressing but convincing.”
Given all this, you would expect, in the interests of balance, for the green commentariat to write up this debate and give appropriate space to the Greig argument — silly you: the 32,200 Google Search items do not throw up any such report.
Which is why you are reading it here.
Better late than never.
There is so much media dross masquerading as energy news and views today that it is almost a shock to come on a genuine piece of insightful thinking.
The source is the May/June edition of the excellent American magazine “Foreign Affairs” – see www.foreignaffairs.com, which is paywalled or you can lash out $20 for a hard copy at our better news agencies.
The issue features a 35-page set of commentaries gathered under “What will fuel the future” that I, at least, found well worth reading.
There’s Citi’s global head of commodities research, Edward Morse, explaining why the US-led focus on shale gas will “drive a fundamental change in global energy markets” along with a piece by an American industry CEO on why pursuing the shale opportunities are going to be harder outside his country.
And a leading American environmentalist, Fred Krupp, writing intelligently, if probably not wholly to the taste of the upstream petroleum industry, on how natural gas can turn out to be “a net environmental benefit” if perceived problems associated with its production can be addressed.
There’s also University of Minnesota professor David M. Levinson canvassing what is needed to make zero-emission cars go mainstream and a trio of academics canvassing why nuclear power stalled and how to restart it.
And there is an interesting piece by US federal bureaucrat Sharon Burke on how the single largest consumer of fuel in America, the Department of Defence, works to ensure that it is not caught short in terms of energy by being “a major incubator of cutting-edge technologies.”
One doesn’t have to agree with all the opinions put forward in order to appreciate that these are people who are thinking seriously about issues and listening to them can help refine our own views.
Reading well-reasoned views that go against the grain of our own opinion is good for us, but so much of what I see locally these days, especially in the electronic media devoted to green energy issues, is a tedious regurgitation of ideological prejudice or the product of shallow and naïve thinking
Speaking at the APPEA conference in Perth last month, Industry Minister Ian Macfarlane observed that people in New South Wales with genuine concerns about coal seam gas and questions about long-term sustainability of farmland have been “swamped by small interest groups and, in some cases, anarchists.”
Speaking at the same event, Queensland Gasfields Commission chairman John Cotter made the point that one of the key factors enabling the development of his State’s gas resources “has been strong political leadership.”
This is strong as in effective, not as in strong arm – as in the notorious Noonkanbah incident in Western Australia in 1980 when a frustrated State government sent armed police to escort a drilling rig in to an Aboriginal community, an affair in which I was subsequently caught up as the new CEO of APPEA’s forerunner.
One of the real fears I have about the goings on in northern NSW is that the ingredients of a situation getting dangerously out of control are now all there, thanks in no small part to a dithering administration in Sydney.
Here’s Cotter again: “A lot of the angst and anger around coal seam gas and other resource developments on prime agricultural land has been due to a lack of upfront planning.”
In a thrust that should not be lost as the APPEA conference fades in to the background, Cotter added: “The onshore gas industry talks proudly about its safety culture; I look forward to the day when the industry can talk more confidently and consistently about its community engagement or social culture.”
The point here is that it takes two sides to polarise a debate.
Central to all this is context, as I have said more than once before here and elsewhere, and central to context is people talking intelligently about the very broad environment for resource development.
Which is why I value material like the latest “Foreign Affairs” coverage of energy issues and fervently wish we could see this level of debate emulated in Australia more frequently, rather than various parts of the media taking sides – or playing the faux balance game, a frequent ABC trick, in which strident opinion is juxtaposed with reaction to it.
This is not informing the community, it is throwing more brands on the fire while pretending to be helpful.
A really insightful energy white paper could be useful at this time – we have the green paper imminent and the RET paper to come – but one has to wonder if what is slouching towards us ca live up to this need, given the state of political debate?
In parenthesis, one of the ingredients of strong government is strong opposition. Poor would be a charitable epithet for the present federal Labor effort, a point driven home by the reaction of voters to the party in the recent WA Senate by-election.
Coming back to “Foreign Affairs,” it is interesting to see Citi’s Morse asserting that it is “highly likely” Australia, China, Mexico, Russia, Saudi Arabia and the UK “will see meaningful production” of shale resources “before the end of this decade.”
If this happens, he adds, there will be a “dramatic disruption” of the conventional global trade in energy.
Locally, this would change the energy scene, too.
However, as the NSW imbroglio, and sideshows elsewhere, including Victoria, are demonstrating, the extent to which the Australian economy, the community and the resources sector can benefit from such a disruption depends not just on technological innovation, which is highly important, but also on good governance and community acceptance of the new energy path.
There is a great deal to be done before we can feel confident that Australia – and its largest region of population and the economy, NSW – is making good progress on this path.
The situation, as the “Foreign Affairs” editors put it, “calls for hedgehogs rather than foxes.”