Archive for May, 2014

Time for fair go tariffs

It seems to have got nowt in the way of media attention — perhaps not surprisingly, given the national obsession with the federal budget and the political meltdown in New South Wales under the ICAC avalanche — but the new report on electricity tariff reform published by the Energy Supply Association on 1 May is an important contribution to a key issue in the energy debate.

ESAA commissioned consultants AECOM to survey the ways other countries are implementing more fair tariff structures to cope with the uptake of solar panels, air-conditioning and the like. The 58-page “Power Pricing Internationally” report is available on the association website and required reading for policymakers, I suggest.

ESAA’s take on the publication is, first, that many economies similar to Australia have already developed better ways to charge for power based on actual household capacity and network demand. Second, that we are still pricing electricity in this country as we did in the 1970s and urgently need to change this.

ESAA was targeting the Energy Council meeting in Brisbane — the nation’s energy ministers have changed their committee title from the clunky Standing Council on Energy & Resources (SCER). The ministers, who meet under the Council of Australian Governments umbrella, indeed had smart metering and related policies on the agenda, monitoring work the Australian Energy Market Commission has had in train since 2011, but the communique issued after the meeting suggested no sense of urgency on their part.

Last June the Productivity Commission published a report on power network regulation in which it tartly chided the SCER process and its related bureaucracy. Ministers, said the commission, “need to add some urgency to the tardy reform process — SCER needs to accelerate reform which has been bogged down by successive reviews; delays are costing consumers in the NEM hundreds of millions of dollars.”

Queen Elizabeth the First famously told her parliament that it would have to “take in good part her answer answerless” and there is a echo of this in the SCER/Energy Council public reaction to the commission criticism: i.e. none.

Which brings us back round to the ESAA media statement this week.

Paraphrased, the association says we need to move asap to electricity prices that reflect the real cost of supply, send better signals to customers to take control of usage and kill off cross-subsidies.

The AECOM summing up is that “it is important to develop a holistic Australian (i.e. NEM) tariff design with solution appropriate for local market distortions and the interactions between domestic usage and large-scale energy users.”

Translated by ESAA, the message is that “Australian consumers mostly pay for the network service via a simple charge for each unit of electricity they consume, not for how much strain they actually put on the grid.”

The association argues: “This isn’t right. This approach undercharges households with high use at peak times — mostly driven by their use of air-conditioning — and is also distorted by solar panels. This means that households without these technologies end up paying more and more. We need to ensure that everyone is paying their fair share and no-one is getting ripped off.”

This theme was taken up also by the Energy Networks Association via its biennial conference, held in Melbourne, this week.  ENA comments that “most Australians would be surprised to learn that the way they pay for the electricity network bears little relationship to how much it costs to supply them.”

I’d suggest many of the one million households that have taken up solar PV rooftop systems are only to well aware that part of the game is not only getting feed-in tariffs but having a lend of their neighbours to retain the insurance of also being connected to the grid. What the last federal Labor government and State governments around the country have succeeded in doing, with solar policies which rival Battgate for ineptitude, is to create a quite large vested interest that politicians are now skittish about upsetting.

ENA argues that, unless there is a shift towards tariffs that are based on the network cost to serve, cross-subsidies favouring solar households and big users of air-conditioning and other energy-intensive appliances over the rest of the community will continue to create an unfair environment.

The lobbyists have not yet seized on what is to me the obvious punchline: this offends against the deeply-held Australian ethic of the fair go. The cross-subsidies involved seem to be of the order of $350 a year to the disadvantage of consumers not using new technologies (very frequently those who are renters, a large chunk of householders, or low income earners) — if this isn’t fodder for the tabloid media, please tell me what is?

As ENA puts it, “unless network tariffs reflect the cost to supply the service, some customers will pay less than their fair share while others will pay more. These cross-subsidies are hidden when customers pay the same rate under a flat or block tariff regardless of what time of day they use the energy.”

The other aspect of this undesirable situation is that, when you look down the track towards the mass uptake of electric vehicles and the advent of battery storage (which the green commentariat insist is just around the corner), this subsidy problem will just become bigger and harder to remedy as time goes by.

Essentially, we are past due for some straight talk about this situation, not long-winded dissertations by government agencies, engineering speak by suppliers and obfuscation by the green lobby (which screams at every suggestion the solar trough needs emptying) — and most of all discussion by politicians behind closed doors where the dominating ethos is the alleged prayer of a young St Augustine: “Please God, make me good, but not just yet.”

Great global game

It’s not really surprising that most Australians who dwell at all on LNG – some politicians, the business media, environmentalists, manufacturers with sinking feelings, farmers affected by drilling programs and a relatively small number of the urban community – consider it from the local perspective.

We may be a very big island but our perspective is still insular.

However, LNG is far from being just about Australia and the economic advantages we have gained nationally from some very large companies being early movers in this industry over 25 years may not be replicated in the next decade.

If we think about the international gas scene at all here, what is mostly likely to attract our attention is the “shale revolution” in the United States, and the possibility that the Americans may rain on our parade by also starting to export LNG, but this is far from the only angle of what is now a great global game.

Take Canada, for instance.

Australians don’t often think about Canada and certainly don’t think about the country as a competitor – but right now quite a lot of Canadians are thinking about us in the LNG context and are intent on stealing a not insubstantial portion of the next helping of global gas trade from under our noses.

The really big context is that, despite the mouthings of the international green commentariat against fossil fuels, global demand for gas is increasing at a faster rate than oil and is obviously the big energy story for the next 20-25 years.

The Asia-Pacific region is the fastest growing energy market in the world and gas is at the front of the pack. Two years ago the region imported 22 billion cubic feet of LNG a day. By 2025 imports are expected to be 45 bcf/d.

For the Canadians, whose natural industry only has the US as a market today and who have been confronted since 2006 by falling prices as the “shale revolution” has taken a grip south of its borders, and especially for British Columbia, home to major deposits and well positioned to ship resources across the Pacific, this growth in LNG demand is a great opportunity – and they are well aware they will have to clamber over Australia to make a success of it.

The major companies, of course, are agnostic about where they develop.

Not only companies like Shell, but also Woodside, are hard at work pursuing the Canadian opportunity, not least because benchmark prices for gas sold in the Asia-Pacific can be three to five times what they now are in North America. Shipping and liquefaction costs account for a fair part of this difference, but prices in Asia still come a substantial premium.

The Canadian dream is that they will be exporting LNG in fair volumes by 2018 from three west coast terminals and selling 6.5 bcf/d by 2025, making the country one of the world’s top five producers.

Today Canada has no LNG export terminals but our own Gladstone experience tells us how quickly the industry can move if the incentive is there.

There are now seven projects seriously in play for BC gas and the province’s government knows it is at a crossroads, with a unique opportunity to shift the centre of gravity of the Canadian energy industry to the west coast.

The incentive could not be more clear: an Ernst & Young study commissioned by the provincial government estimates that a best-case scenario could see British Columbia garner an aggregate $Can160 billion (in real 2012 currency values) in taxation and royalties over 20 years, starting late this decade.

This is a similar sum to what Australian governments could expect to gather in from five new plants, the consultants say.

And they point out that the soaring costs of Australian developments present an opening for Canada (and other parts of the world, for that matter, including the US).

With a stable regulation and taxation system as well as substantial local oil and gas development experience, Canada does not come flatfooted to this game, but the companies with vested interests as well as independent analysts are all giving BC and the federal government in Ottawa (which must approve exports) hurry up signals to enable a push ahead of further Australian developments as well as projects in Oregon and Louisiana plus the Middle East and Africa.

Ernst & Young sum up the game for Canada like this:

“Canada boasts distinct advantages, including a world-class resource, geopolitical stability and transport proximity to Asian demand markets but factors playing against it include skilled labor shortages, environmental issues and the challenge of dealing with First Nations as well as the speed at which regulatory approvals can be obtained.

“(Meanwhile), customers are seeking to diversify their supply contracts and Canada is well-positioned to benefit.”

And, ominously for us, the consultants add this: “As substantial volumes of lower-cost LNG move in to Asian markets, projects at the high end of the supply curve – namely, many of the Australian projects – will become increasingly vulnerable with situations arising where sellers may be forced to re-open or renegotiate contracts.”

The projects that will proceed, Ernst & Young say, are those whose developers can make their economics work.