Archive for June, 2014

A good news story

The media are out of practice with stringing together a sentence that contains “energy” plus “price” plus “New South Wales” plus “good news” so some may have blinked when a media statement from Jemena reached them at the weekend.

The company distributes gas to 1.2 million sites in Sydney, Newcastle, Wollongong, the Central Coast and another 20 regional centres in NSW – and it has just filed a submission with the Australian Energy Regulator proposing to reduce average network charges in the five-year period from July next year to mid-2020.

According to Jemena, it can deliver its customers an aggregate cut in their bills averaging $271 (in inflation-adjusted money terms) over this term.

Given that network-related charges comprise about half the average household gas bill and given that wholesale prices are set to ascend rather sharply in the rest of this decade, this is news worth having, assuming the regulator accepts the proposal.

Jemena managing director Paul Adams says the starting point for this move was feedback from customers about their unhappiness over the trajectory of their bills – an average 17.8 per cent rise in retail costs comes in to effect on 1 July, reflecting the impact of the Gladstone LNG trains and the inability/unwillingness of successive NSW governments to sort out the State’s sources of gas supply as current contracts run out.

The wholesale cost of gas for the State is expected to now rise rapidly, so any downward pressure can only be welcome even if what it represents is a less-high end-user bill rather than a reduction in purchase costs.

Jemena’s Adams says the other part of the message his company got from customers in focus groups and other contact was that they also want current delivery safety and reliability standards to be maintained.

Part of the company’s quiver for 2015-2020 is that the cost of borrowing money is coming down following the end of the global financial crisis and it can pass through the benefit.

The other key element is another “P” word – this time as in productivity.

Adams says his business is chasing in-house productivity improvements but it also needs to be able to spread its network costs across as many customers as possible – and this requires the regulator to retain incentives for it to increase gas penetration in the State.

In other words, it wants to continue to be able to recover the costs of the “Natural Gas, the Natural Choice” marketing campaign which promotes the benefits of the fuel and encourages homes and businesses to connect to the network.

Jemena is also committed to continuing to help vulnerable customers to afford to use gas by helping them to buy new, more efficient appliances to replace their old kit.

Adams adds that, responding again to the feedback from customers, who find energy market stuff too complex, Jemena has simplified it prices and charges.

This corporate approach reflects the admonitions contained in the new PricewaterhouseCoopers commentary on utilities in which the management consultants pointed out that energy suppliers have to recognize they no longer live in a market where households, and to some extent businesses, take the service for granted and think little about it.

In that world electricity and gas were “low involvement” products, but now, as prices rise along with the tenor of the debate on carbon emissions abatement, “almost everyone,” PwC says, “has a view on the energy sector, what it does well and, more importantly, what it doesn’t.”

Now, it adds, most customers are looking for the best and cheapest deal and, increasingly, they want to take control of their energy management.

Utilities, PwC says, need to respond to this changing attitude or risk loss of market share.

Equally, it adds, governments and their regulators need to reshape their thinking on energy and related services to keep pace with customer needs.

Jemena’s Adams says his company knows it must do as much as it can to understand the messages from customer land and to respond to them in ways that retain existing users and bring in new ones.

The jargon for this stuff is customer centricity but, as the PwC report makes clear, it can’t be just playing with words; suppliers need to deliver service and prices that don’t leave users simmering.

The other beneficiaries of developments such as the Jemena proposal are politicians, who continue to feel the heat of energy customer ire as affordability is impaired.

The RET-go-round 6

While Australia’s renewable energy industry is on a cliff edge holding its breath – I am quoting from the headline and opening sentence of one of the electronic green media – and while the Clive Palmer circus is distracting the commentariat, the Warburton review panel is nearing the end of its digestion of views from a spectrum of opinion-holders ahead of its report to Tony Abbott, Joe Hockey, Greg Hunt and Ian Macfarlane in July or perhaps August.

Hunt came out briefly this week to say that the challenge for Warburton & Co is “to find a balance between jobs and investment and removing pressure on electricity prices.”

The advice reaching Warburton’s panel comes from many quarters and any number are diametrically opposed to many others; the task imposed on it, as Hunt makes clear, is not to find a balance between them.

One of the more interesting later submissions to catch my eye when scanning the review’s website comes from the Australian Forest Products Association, the lobby group for the $21 billion turnover forest, wood and paper products companies, making up the eighth-largest manufacturing sector and directly and indirectly employing some 275,000 people.

This is a highly trade-exposed sector – and it isn’t arguing for the RET to be junked.

Rather, AFPA says the policy is inefficient as framed, should be swung to a percentage target and should be expanded to recognize green energy from all forms and notably biofuels.

Its submission, in essence, makes a case for greater attention to woody biomass as a fuel, not only for making electricity but also for providing heating and liquid fuels.

“Despite having a high area of forest per capita amongst developed nations,” AFPA says, “Australia lags behind in the use of bio-energy, (which represents) just 0.9 per cent of electricity production.”

The association asserts that between 3,000 and 5,000 gigawatt hours of renewable energy (up to seven per cent of the existing RET goal) could be produced from available wood-related wastes.

The advantages, it adds, include greater reliability in power supply than other renewables, an ability to provide large-scale generation (such as industrial cogeneration) and small-scale uses (such as community heating plant).

Any and all of this was stymied in November 2011 by the Gillard governments dealing with the Greens, who are utterly opposed to the use of wood waste from native forests as a RET resource. The Abbott government made an election pledge to reinstate native forest waste as an eligible renewable energy source.

As to the size of the target, AFPA joins those who believe it should be set as a proportion of consumption and it also wants the administrative cost burden of the RET assessed and reduced. Like a lot of others who are not from the green side, it wants the small-scale RET (the Rudd-Wong-Gillard-Combet booster mechanism for solar power-cum-sop to the Greens Cerberus) phased out.

It is also interesting to read the AFPA submission alongside the one from the Australian Sugar Milling Council, whose members’ 24 mills are the largest source of biomass-based renewable energy in the country.

Sugar Milling points out that its sector has been producing renewable power for a century to meet its own needs and those of nearby communities.

The industry, it adds, has spent $300 million over the past five years (and $600 million over the life of the RET) to increase power output on the east coast under the program’s arrangements. There is a pipeline of a further $1.3 billion of investment under consideration – and policy certainty, it says, is critical to such development.

At the core of this industry’s power activities is nine million tonnes a year of waste cane fibre (bagasse), containing the energy equivalent of three million tonnes of coal.

(If you have trouble envisaging this, the sugar millers suggest you think of 45 Melbourne Cricket Grounds filled to the depth of 44 metres with the stuff.)

Sugar Milling also claims Australia’s industry as one of the most competitive in the sugar world, despite some rivals being heavily subsidized by their governments. Today, it points out, sugar operations elsewhere are enhancing their energy security by taking advantage of schemes to promote renewables.

In short, it says, leave the RET here as it is because it benefits us – and, it adds, leaping on a point that the ACCC and others are making, it helps diversify a generation environment dominated by three major gentailers (the more so since Rod Sims lost his bid to stymie the AGL take-over of Macquarie Generation this week).

The sugar content of east coast generation is not exactly large but, hey, you grasp any straw in this situation.

What all this goes to demonstrate is that the RET is not just a black-and-white (or indeed a green) debate; changing it has implications across a whole range of things and the views reported here just emphasize how important it is for policymakers to think clearly and act efficiently on all energy-related issues.

In this context, another lobby group, Gas Energy Australia, whose members focus on downstream use of LPG, LNG and compressed natural gas, urges Warburton & Co to seriously consider the virtues of technology neutrality in the review.

GEA’s point is that, because Labor under Gillard and Rudd were obsessed with solar and wind power (in the main), recent policies have excluded carbon abatement that could be achieved at lower cost – eg their products.

(This goes to one of my own hobby horses: the outrageous exclusion of gas-based fuel cells from these Labor/Greens schemes even though the technology is an Australian invention and offers a serious, all-weather alternative to solar PV.)

“The experience with the RET,” argues GEA, “demonstrates that arbitrarily mandating the use of certain technologies and forcing consumers to subsidize their cost results in prices being higher than if all technologies are allowed to compete objectively on the basis of abatement performance and cost.”

This is not a minor point but you don’t hear it being debated.

Perhaps Warburton & Co will elevate it to the level it deserves.

Perhaps even Clive Palmer might think about this now that he has the Prime Minister’s ear — and the PUP-meister might ask the opinion of Al Gore before he jets off elsewhere on his never-ending quest to save the planet.

Rebalancing act

Chairing the opening morning of the Australian Gas Export Outlook conference in Brisbane this week provided a welcome escape from the increasingly bizarre local energy environment on to a global gas scene in which nations and companies are in engaged in a titanic effort to rebalance supply and prices.

It is an environment where Australia is a critical player and where the efforts of other players will have a critical impact on local opportunities to grow a business that did not exist for this country a quarter century ago.

Prominent among the presentations from long-experienced figures in the international LNG markets was one by Shigeki Hirano, the Perth-based chairman of Japan’s Osaka Gas Australia.

He opened it with this eye-catching capsule overview of the global LNG business: “In 2013, 237 million tonnes of LNG was traded using 393 ships on 423 sea routes from 17 exporting countries that have 86 liquefaction trains with a total capacity of 286 million tonnes a year, despatching to 104 receiving terminals in 26 importing countries.”

Through local efforts, Australia is en route to becoming at least the co-leader (with Qatar) of this massive planet-wide effort – for a time anyway.

This was brought home by a further observation from Hirano that “new global liquefaction capacity of at least 130 Mt annually will come on stream by 2020 – in addition a plethora of projects are under development and in planning.”

Some, if not many of these, he added will come to fruition, leading to a total global capacity of more than 500 Mt in 2030.

This, you see, is the mighty rebalancing act under way in global energy supply and use in the first third of the 21st century, a further great step change in what could be described as wholly recasting the world’s energy map in little more than a century to embrace coal, oil, nuclear, gas and, yes, renewables in a way that has changed how we live and work.

In this context, the role today of Australia is substantial; we have made ourselves through the efforts of investors, sometimes with and sometimes despite the efforts of policymakers, in to a respectable light heavyweight in this ring.

As I said to the Gas Outlook audience, how well we understand the full context of what has happened and is now taking place dictates how successful we can be collectively in Australia in maintaining and expanding our share of the energy game.

It is worth pointing out, as well, that we are, despite the local noise, playing our part in the second rebalancing act: the shift in the world’s greenhouse gas emissions from reliance on coal and oil prior to the Second World War to provision of approaching half our global energy needs from lower-emitting gas and non-emitting nuclear and renewables (dominantly hydro-electric power) in this new century.

And, not least, LNG is playing its part in helping to lift hundreds of millions of people (50 to 60 times the population of Melbourne or Sydney) from the debilitating effects of energy poverty.

On the more venal side – in terms of who can grab and hold lucrative shares of the biggest LNG markets – operators here have a special focus on Japan, the world’s largest importer of the fuel.

This is a two-pronged interest just now: partly on how the Japanese sort out their nuclear power hassles as they emerge from the “Great East Japan Earthquake” crisis and partly on what effects the re-emergence of nuclear generation there will have on the broad LNG market, especially in terms of price.

As Hirano explained, the amount of money the Japanese have spent importing LNG has more than doubled since Fukushima. The country’s trade deficit last financial year was the worst since the oil crisis in 1979 and rising energy bills are contributing to driving out the manufacturing sector.

This has had a ripple effect in Japanese society and not in a small way in power production.

In a high gas price environment, plans to build more combined heat and power plants have gone in to cold storage and investment in coal generation has been given a boost.

In passing, it was interesting to see Australia through Japanese eyes in Hirano’s talk.

We are viewed as a favorable nation for supply and investment because of our proximity to Japan, our political and economic stability, our skilled human resources, our access to financial markets, the level of government support for the LNG industry and our strong resource base.

With so much local focus on the negatives, it does no harm, I think, to bring the underlying positives to attention. Others don’t look at us and say “poor buggers” – although one wonders how often they mutter “silly buggers”?

By the way, also, the official Japanese energy approach, as the conference was told, is to “establish a resilient, realistic and multi-layered supply structure where each source can exert its advantage and complement the drawbacks of others.”

Scribes of our energy white paper might care to take note.

The really big ticket issue between us and the Japanese in the LNG arena is price: what we have them paying now and what they hope and expect to pay before too long as large new supply projects come on stream around the world.

A great chunk of the AGEO discussion in Brisbane was devoted to the issue of prospects for new development – will the North Americans get anywhere near their goals; how big a difference will Russian piped gas make in Asian markets; is it really possible to bring on the gas resources offshore Mocambique any time soon; have we shot ourselves in the foot here because of costs structures? – and, like all talk of this type, perspectives depend on where you are standing (and what you are hoping).

As the biggest market for our LNG, Japan’s perspectives are important.

Summed up, they hope to see early realization of exports from the US and perhaps also western Canada, they look forward to diversification of supply impacting on price and they aim to restart a dozen nuclear power plants as soon as possible – plus they are going to rely more on coal generation to help bridge the power supply gaps at a bearable cost.

Shinichi Kihara, a director of resources and energy in the Japanese Ministry of Economic, Trade & Industry, summed up the peg I am using for this post like this: “The shifting balance of supply and demand points to a more globalized energy market with rising supplies of unconventional gas and LNG diversifying trade flows and putting pressure on conventional suppliers and price mechanisms.”

Plus he pointed out something that has a different resonance for us: the Japanese have achieved the highest level of efficiency in the world for coal-based thermal power generation.

You could cut carbon emissions in China, India and the US by 1.5 billion tonnes a year if their coal plants used kit like this.

Low-key PowerQ

How governments and suppliers communicate with voters/users in the present febrile energy environment is a factor in what happens next, so it is more than a little interesting to see how the Newman regime is presenting its 30-year electricity strategy to the Queensland community.

Dubbing the paper “PowerQ,” one of seven strategic direction proposals (others include agriculture, water and tourism), the State government has gone out of its way to present its views in a reader-friendly fashion and a low-key way that has drawn muted cheers of approval from the Chamber of Commerce & Industry but little other reaction in the usually rowdy energy debate.

(You can find the strategy at www.dews.qld.gov.au.)

Premier Campbell Newman and Energy Minister Mark McArdle kick off with an acknowledgement that, by 2004, the State’s power system was so run down that it was in crisis. “The decade of unsustainable price increases that has followed,” they go on, “reflects today’s increasingly high cost of supply, including very big debts that need to be paid, and unnecessarily high operating costs.”

The government also acknowledges that an increasing number of consumers are struggling to cope with (still-rising) prices, reporting that householders seeking hardship relief rose by a third in 34 months to June last year.

However, it is not going to promise more handouts.

The government released the paper on the Sunshine Coast rather than at a big ticket media event in Brisbane featuring the Premier.

McArdle was careful to tell reporters “there is no quick fix,” lambasting Labor (at State and federal levels) for “inept management” over two decades and “economically irresponsible interventions in the market.”

Doing nothing is not an option, he added. The government’s aim is to give customers greater choice, flexibility and control over how they use, and pay for, electricity.

The key message, perhaps, is about “constraining” power prices and the government puts a case for prioritising productivity gains in the supply chain – pointing out that subsidizing bills to keep them one per cent lower per year than they should be will lumber the State with a $10 billion a year burden by the middle of the century.

Productivity improvements of one per cent a year, on the other hand, deliver solid financial gains.

Sensibly, the government has set three time horizons – from now to 2016 (with an election due next year, this is a political necessity), from 2016 to 2026 (tricky to predict but a necessary timeline for today’s policymakers) and from 2026 to 2044 (beyond the predictive skills of anyone today but still within the lifetime of investments made now.)

For the present, it is committing itself to continuing to seek cost efficiencies in network services, to adjusting reliability standards to balance service levels and costs, to relieving cost pressures caused by inherited interventions in the market and to developing tariff reform and smart metering strategies.

“PowerQ” backs the roll-out of advanced electricity meters promoted by CoAG but, bearing in mind the backlash that occurred in Victoria, not least because of a $415 million blow-out in costs in that State, the government is not going to support mandatory deployment. (Neither are other east coast governments outside Victoria.)

The reliability changes, McArdle claims, will save Queenslanders more than $2 billion between 2015 and 2030 while its attack on the State solar bonus scheme will save $110 million in six years.

The immediate focus of “PowerQ” embraces the consumer take-up of energy efficient products with the government putting its trust in pricing structures that show the true cost of supply and encourage more sensible user behavior.

A big step along this road will come with removing price regulation in south-east Queensland, the populous corner of the State covered by Energex, starting next July.

Even when this is done, taxpayers will still be forking out $600 million annually in tariff subsidies for users living in the 95 per cent of the State that is rural and regional.

Re-arranging things to allow competition in the Bush and to relieve at least some of this burden is on the Newman government agenda but in a very “softly softly” way.

Some of the changes needed to improve the Queensland power scene will have to come through the national energy market and the government acknowledges (carefully) the need to make the CoAG processes work more efficiently.

Of course Newman and Co hang their hat in part on the Abbott government delivering on its carbon promises and on reform of the RET.

None of this is rocket science and sensible Queenslanders should be heartened that they are not being promised pots of gold at the feet of rainbows; instead, they are told there will be an economic analysis of where and how improvements can lower costs.

Meanwhile, in a little-noticed step, the State government has taken control of the assessment process for the $380 million Mt Emerald wind farm proposed for the Atherton Tablelands.

The move is a response to a request from the Mareeba shire council, which has declared it lacks the skills to weigh up the proposal.

Deputy Premier Jeff Seeney says a decision can be expected in “late 2014,” allowing the government to also factor in the Warburton report on the RET (now expected in late July or early August) and the Abbott government’s decision on it.

The energy environment being the way it is, the State government’s decision on Mt Emerald may garner it more media headlines than the “PowerQ” paper but it is the broad strategy that offers consumers some relief over time from what really bugs them.

Three horses pull energy cart

If you heard an odd sound around breakfast time today, it may have been a collective choking on steel-cut oats or muesli in certain quarters and the cause would have been the news that the world’s coal consumption has surged back to its 1970s levels and supplied 30 per cent of total global energy demand last calendar year.

One cause, of course, is a policy approach, especially in Europe, that has made the fuel comparatively cheap, all in the name of “saving the planet,” at the same time that the Americans have a lot of coal to sell because of their shale gas revolution.

The news comes from the long-running BP statistical review of world energy, now in its 63rd year of publication, and it demonstrates, as the giant company’s chief executive, Bob Dudley, points out, how the global energy system is able to flex to account for a changing environment..

Imposition of expensive subsidy regimes for renewables in Europe, where economic growth is weak and national budgets are strained, has helped to sustain a three per cent growth in use of coal for electricity production, while the chief driver continues to be non-OECD demand, especially in Asia, where the fuel meets the needs of  economic development.

The production of coal for these markets is still growing, albeit weakly — by just 0.8 per cent in 2013. The much-publicised fall here (Australian output in 2013 dropped 7.3 per cent) was balanced by Indonesia sending its production up 9.4 per cent, highlighting the fact that, when wobbly governments, wild-eyed greens and rising costs hamper operations here, producers in other nations with less rigorous environmental standards, will step in to any trade breach.

Naturally, renewable energy production also continues to rise — big subsidies have results so long as you close your eyes to their other consequences — and green power overall (which includes hydro-electric systems, something that tends to get lost in translation in the hands of the media) continues its own ascent .

Dissect the data, however, and you find that global hydro-electric output grew 2.9 per cent in 2013 and now accounts for 6.7 per cent of the world’s energy supply — while wind energy, solar power and biomass hit 2.7 per cent of production.

You need to bear the comparative numbers in mind when the green boosters laud a 20.7 per cent rise in wind power and 33 per cent rise in solar power in 2013 The bases for these increases are small and their overall market share remains tiny.

Curiously, BP’s review shows that natural gas consumption slowed in 2013 — up 1.4 per cent compared with an average of 2.6 per cent in the past decade — and this was a product of ongoing rises in China and North America being balanced by a substantial fall in India and a major decline in the European Union, where policies militate against the fuel and the level of its consumption is the lowest since 1999.

Even so, gas now accounts for 23.7 per cent of the world’s primary energy consumption versus 2.7 per cent for non-hydro renewables.

As BP’s Dudley told his Moscow audience, where the 2014 review was unveiled at the 21st World Petroleum Conference, everyone is entitled to their own opinion but not their own facts.

The hype and hoopla that accompanies every media report, and especially the electronic versions, relating to renewables tend to obscure for lay readers/listeners/viewers the fact that global economies and standards of living continue to depend on access to fossil fuels (except for, say, a hydro-rich Sweden or a nuclear-dependent France) and the ones immersed in poverty are those who, for various reasons, can’t enjoy this access.

The core story is that, in a world where annual primary energy consumption is pushing up towards 13,000 million tonnes of oil equivalent, having been at 9,000 million tonnes in the late 1980s, coal, oil and gas account for some 10,000 million tonnes.

This is what makes the argument that “we only have X years to save the planet” — with “X” the next symbolic year of choice; I think it is 2025 at present or may be even 2020 — by killing off the use of fossil fuels (and simultaneously shying away from nuclear energy) such a load of cobblers.

One of the biggest challenges to an orderly energy policy, here and internationally, is the histrionic nature of this debate forced on us by radicals and their remora fish followers (it sounds better, I think, than saying jackals, and one gets a little bit of alliteration as a bonus).

We get an awful lot of comment about China thrown in to this debate — some of it complete guff — but, as Bob Dudley told the petroleum conference, the real Godzilla (my metaphor) on this stage is Russia. It is the world’s largest producer of oil and gas combined and the largest exporter.

Its leaders, of course, are going to throw all this away to placate the inhabitants of Balmain and other leading areas of the green world.

Oil, gas and coal, in reality, will continue to be “the three horses driving the global energy cart for at least the next decade,” Dudley said in Moscow. On his company’s own data, one would think this is likely to be the case for rather longer than 2025.

Meanwhile, we can look forward to the long run-up to the UN global warming conference in Paris in 2015 — the one that is supposed to produce a new world plan on the issue. Between then and now the hype will make the run-up to the Copenhagen event in 2009 (the one that helped to bring K.Rudd undone) seem like T.Bear’s picnic.

But, as we travel this road, bear in mind the three horses plodding ahead of our cart despite all the capering around us about the world “undergoing a clean energy revolution.”

The reality, quoting The Economist Intelligence Unit, is that until the allure of gas is enhanced by lower prices, coal will have no challengers in meeting Asia’s ever-rising energy needs — and, to quote yesterday’s “New York Times,” from the Australian Outback to the Argentine Andes, the world’s largest energy companies are on the hunt for unconventional sources of oil and gas, a multi-billion dollar quest for the next tranche of fuel to meet the needs of the world’s fastest-growing economies.

And the two countries with the world’s untapped largest shale resources?  Russia and China.

Giddy-up!

The RET-go-round 5

I have been waiting for this shoe to fall and finally it has; an obvious no-show in the long list of senders of submissions to the RET review has been the Business Council and now it has put its views in circulation.

The BCA kicks off with the observation that producing goods and services in Australia has become increasingly expensive compared with other countries as a result of too much regulation, labor costs and energy bills.

One of the way of improving the situation, it argues, is sorting out our energy and climate change policies “and an immediate priority is to amend the RET.”

If you start from the premise that our plan is to reduce carbon emissions at least cost, the BCA says, then the RET is too expensive even by comparison with the $24.15 a tonne carbon price and significantly more so than international permits trading at present for less than a dollar a tonne.

The Business Council’s judgement is that the RET is poor public policy because (1) it distorts electricity markets and diminishes their ability to deliver efficient outcomes in terms of reliability and price and (2) it adds between 3.9 per cent and 9.6 per cent to the power bills of large users (consumers of more than five gigawatt hours a year), depending on what exemptions may be available.

Its submission also underlines these business users are not just factories — or “the big polluters” always in the sights of the Greens and their fellow travellers, including more than a few media types. They include high rise office buildings, large commercial outlets, large dairy farms and manufacturers not competing with overseas rivals, for all of whom the RET accounts for more than 9 per cent of annual power bills.

Convert these entities to employers and you are talking about quite a lot of workers, with these organisations constantly being asked to take on more folk to help resolve the unemployment problem.

Their burden is not a cost that you will find the green brigade mentioning in their RET propaganda, where the focus is on Mr and Ms Suburb and the few cents a day they are asked to spend to keep the nation clean and save the planet.

Of course the BCA also points to household costs — 2.8 per cent on typical residential bills — because the politics of the debate demands this, but its focus is on the burden borne by its members. For a large metals manufacturer for example, the RET has imposed an annual extra cost averaging $5 million since 2011 — while a large aluminium smelter still has a $20 million RET charge even with the exemptions provided.

This is a wealth transfer from households, businesses and baseload power generators to the renewables sector, it asserts and there is no economic justification for consumers paying for additional capacity in a wholesale electricity market that is over-supplied.

Unlike some in the business corner, the Business Council accepts that the federal government can’t just junk the RET scheme.

Given that you cannot abandon the program without stranding assets and creating sovereign risk issues, it says, the government has to arrange “a smooth transition” by amending the target and ending the scheme in 2030. It wants the 2020 target to represent 20 per cent of actual national consumption.

This approach, it claims, provides a “pragmatic middle way” for dealing with the situation, allowing continued renewables investment to 2020 and ensuring that the benefits of a reduced target are shared equally between business and households.

The 20 per cent target, it adds, should include the contributions of big renewables, almost all wind power, and of  small capacity, mostly solar PV, with the so-called SRES discontinued because the rooftop arrays will go on being installed where their output is commercially viable against retail electricity prices (which is what “grid parity” means).

One of the sideshows of the present inquiry has been a debate about how often the RET should be reviewed. “Well,” says the BCA,” if you go our way, you won’t need any more reviews.”

Looking at the big picture, the Business Council says its expects the downward drift in demand in the east coast’s NEM will continue because “a number of manufacturing operations are scheduled for closure” and rooftop solar will continue to be installed.

It expects national power demand as a result will lie around 230,000 GWh in 2020 rather than the 300,000 GWh anticipated at the start of this decade (and when the present renewables drive was initiated).

Embedded in the BCA’s argument is a call for the return of the NEM to the technology neutral, energy only market it was designed to be when it was launched in the late 1990s.

Some of the BCA’s members are party to grumbles about the NEM in other lobbying quarters but here they collectively agree to acknowledge that the design “has served Australia well” and (until the RET appeared on the scene) “delivered efficient outcomes.”

The bottom line, really, if you follow the BCA argument, is that politicians imposed the RET to absorb expected new demand for electricity, meddling with the core NEM design for political and populist purposes, and the unanticipated U-turn in demand has placed a blooming great cuckoo in the generation nest.

The inflexible nature of the RET as a policy tool, says the big end of town, is now “creating a situation where it is undermining the efficient signalling of electricity markets, ultimately leading to inefficient investment decisions.”

As the BCA opines, where we are now highlights the problems associated with policy interventions dependent on forecasts of the future. When the future ain’t what was expected, the impacts can be (as the economists like to say) non-trivial.

The Business Council dictum for the power system set out in this submission is that “there is no rationale for any energy technology to be subsidised in a market designed to deliver least-cost outcomes to consumers.” The over-arching climate objective, it adds, “should be to reduce emissions at least cost without compromising Australia’s international competitiveness.”

An interesting two-edged question is whether the Abbott government and the federal opposition led by “Electricity Bill” Shorten have what it takes to pause in their shouting match, consider the national interest and agree mutually that these principles should be accepted as the platform for the future?

The rules of federal parliament allow for the day-to-day business to be set aside to allow “matters of public importance” to be debated. I won’t hold my breath waiting but one wonders how much we could gain from a mature debate of these two points?

The RET-go-round 4

There’s so much going on in the energy space at the moment that getting back to the pile of submissions on the renewables target has taken me a while; however, there is still plenty to see in the accumulation of concerns and pleas Dick Warburton and his review panel have received.

A lot of it, of course, is hands-off fare from the green corner – and this is getting plenty of coverage in those realms of the media, and especially the electronic sector, sympathetic to the cause and antipathetic to anything Team Abbott can offer.

(The current carry-on about Abbott personally keeps reminding me of one of the best gags to come out of a US presidential election – when Republican Bob Dole took on Bill Clinton. The American media were so antagonistic that, as the story goes, when Dole bought a new dog and found that it didn’t need to swim across a lake to fetch a stick, but tippy-toed over the water, the vipers of the fourth estate all wrote stories headlined “Bob Dole’s dog can’t swim!”)

My prize for the best and fairest submission I’ve found on the RET playing field goes to Tony Wood of Grattan Institute.

It’s worth reading in full, but just the first sentence captures the mood: “The RET has operated as designed although there is considerable disagreement as to whether this was what the designers intended.”

What will have the basket weavers choking on their lattes is his further view that “a carefully crafted expansion of the RET to include non-renewable sources of emissions reduction could form the basis for a credible, long-term policy with bipartisan support.”

He asserts that we are paying at present for a “rather expensive” abatement scheme that an emissions trading system or more broadly-based climate change policy could deliver at lower cost.

The current RET, he adds, is “seriously flawed and delivers high levels of uncertainty across the energy supply sector.”

Now, dear reader, you are saying to yourself that Orchison likes this because it is his view, too. In brief, yes.

Another perspective – and one that is likely to resonate with Warburton & Co, I suspect – is put forward by the lobby group Major Energy Users.

MEU argues that the RET in its present shape has failed to recognize that efficient outcomes are an essential element of the national electricity law with its a core objective of securing the long-term consumer interest in terms of price, reliability, safety and security of power supply.

The initial new RET policy (20 per cent supply by 2020), MEU says, should not have been changed by regulation by the last Labor government to provide a still greater portion of green power and it shouldn’t include an uncapped element (the solar part) that “has resulted in a market distortion causing considerable harm to consumers.”

Unlike the Grattan Institute, however, the MEU is opposed to changing the RET to include non-renewable sources of electricity. These, it asserts, should get help from the Abbott government’s “direct action” plan.

The RET has also come in for raking fire from north of the Murray from both of the State-owned generation businesses.

I take leave to doubt that these firms would be expressing opinions not also held by the Newman government.

Stanwell Corporation and CS Energy want to see the RET arrangements as they stand today consigned to a dustbin.

CS Energy says that the Clean Energy Council estimate (quoted in the review issues paper) that the RET has seen $18 billion in capex and the creation of 24,000 jobs works out to a capital impost of $750,000 per worker on consumers – and “the vast majority of these jobs are not permanent, relating to the investment phase.”

In an interesting comment, the generator adds that it “realizes the electricity sector is not providing good value to consumers and needs to change.”

It calls on the federal government to target reforms that “have the capacity to reshape the demand profile,” achieving more efficient use of power infrastructure and enabling the market to “provide cheap electricity to the consumer.”

The RET, it says, goes in the opposite direction.

While most of the row in the public domain has been on the cost to householders, Stanwell focuses on large corporate users, for whom it is also a retailer.

A typical large company, it reports, using about 700,000 megawatt hours a year – the average residential account holder uses up to 7MWh – is shelling out some $5 million in RET charges in 2014.

Many of these customers, it adds, are exposed to international rivals who face no such burden.

“The impost of the RET is even higher,” it goes on, “when indirect costs associated with it are considered, including higher network charges.”

Stanwell wants to see all the federal and State environmental schemes collapsed in to the Abbott government’s emissions reduction fund.

Its submission includes a graph drawn from NUS Consulting Group modelling that shows how in just five years Australian has shifted from the second cheapest of the 14 countries reviewed by the consultants to fifth most expensive for this set of industrial users in 2013. (The big driver of this, as we all know, is higher networks charges.)

Another big Queensland company to buy in to the review is QGC, the British BG Group subsidiary leading the development of LNG exports using coal seam gas.

QGC calls for Australia to adopt a single response to abatement at least cost based on market principles plus technology and fuel neutrality.

Allowing for grandfathering of existing RET-related investment, it also would like to see the scheme rolled in to the “direct action” approach.

It and the other two LNG exporters, QGC adds, will need access to 1,050 MW of power generation when fully operational and the RET represents “a significant cost burden” not imposed on their overseas rivals.

Submissions like these serve to explain the miasma of misery enveloping the green elements of the renewables lobby even as they orchestrate more and more (and often more shrill) media assaults on the Abbott government; such views, they fear, and probably correctly, will carry more weight with Warburton’s panel than their own urgings.

Somewhere between now and about September we can expect to discover what the panel makes of it all.

Meanwhile, Warburton & Co could do worse than bear in mind this comment from Grattan’s Wood: the current target, he argues, has “no underpinning policy rationale” so there is no correct answer on what the panel should recommend.

“Strike a balance between investor certainty and consumer cost,” is his advice.

Network jinks

Notwithstanding the agrarian socialists, the trade unions and their muppet on this issue, New South Wales Labor leader (for how long?) John Robertson, the Baird government’s decision yesterday to more or less follow the Kiwi path and sell 49 per cent of three network businesses is a step in the right direction for the State.

There will be time enough between now and the last Saturday in March next year to debate the political pros and cons of the decision.

Suffice for the moment to quote one Michael Costa, secretary of the NSW Labor Council from 1998 to 2001 and State Treasurer in 2006 to 2008.

Writing in the “Daily Telegraph,” which is gung-ho for the sale, Costa noted that the unions have opposed every privatization of the State’s assets. “Their refrain is always the same; prices will increase and jobs will be lost. The evidence is to the contrary.”

My own interest right now lies in the paper the NSW Treasury commissioned from Ernst & Young on long-term trends in distribution network costs (not including high-voltage system charges) in NSW, Victoria, Queensland and South Australia – and which the government handed out to selected media ahead of Tuesday’s important Coalition special caucus meeting in Sydney.

This document shows that “network prices for typical residential customers in Victoria and SA have fallen in real (ie inflation-adjusted) terms since privatization” while these charges in NSW and Queensland “have increased in real terms by more than 100 per cent” in the same timeframe.

Over this period, say Ernst & Young, the privately-owned businesses reduced their real operating costs and kept their spending within the limits imposed by the regulators; the State-owned ones didn’t.

Claims that service levels fell where private businesses run the systems is a furphy, according to the consultants. Some key service measures even improved.

As Ernst & Young note, reforms in NSW and Queensland since the relatively recent changing of the political guard “appear to have significantly reduced” underlying costs in the State networks.

Nonetheless, they add, being in government hands “typically places a variety of constraints or conflicting incentives” on network services “which can lead to higher operating and capital costs.”

The consultants are careful to point out that these findings need to be read with the understanding that there are various factors affecting them, including where price levels started in the review period, the age of the assets and service standard requirements. They also note that the Victorian networks are approaching the point where the asset life cycle may require big capex outlays – and the same could apply in South Australia.

The other issue they acknowledge is that comparisons of end-user residential bills are complicated by full retail contestability and the retailers not being free with market information in a fiercely competitive environment. Ernst & Young have had to weave some modelling magic to compensate for this.

Taking one thing with another, however, they calculate that retail prices between 1996-97 and 2012-13 (again in real terms) have risen 83 per cent in NSW, 57 per cent in Queensland and 28 per cent in Victoria – while the SA prices rose 23 per cent between 1998-99 and 2010-11.

For the first three, network charges for the period reviewed went up by 122 and 140 per cent in NSW and Queensland and down by 18 per cent in Victoria.

When all the cost pressures, including green schemes, are taken in to account, the average NSW householder is paying $1,180 more for power, Queensland $932 and Victorians $743 – of which the network charge shares are $726, $619 and $227 respectively.

In NSW and Queensland, Ernst & Young sum up, the DBs “increased their underlying operating costs per unit of energy distributed” in inflation-adjusted terms while the privateers in the other two States have done the opposite.

On the face of it, as the lawyers say, this report makes a case for the private sector being more cost-efficient while not letting service standards slip, not exactly what Mr Muppet and his union friends are asserting will happen if Mike Baird wins voter support for his plan.

Michael Costa describes the Robertson/ETU stance as “disingenuous.” One could think of harsher terms.

(If you want to see Robertson in action on this issue, go to the ABC’s “The World Today” radio program for Tuesday and read the transcript of an interview with him – “Labor vows to oppose NSW power sell-off” will find it on Google News. Anyone with a gram of real knowledge of the facts can see straight through him, but that doesn’t include most listeners, of course.)

The test for Baird and his part-fractured Coalition is to craft a sales pitch that the electors find convincing.

The link to a raft of much-needed infrastructure developments is good politics, but, just as with the GST in 1998, the other side will dredge the gutter for mud to throw.

The counter trick for Baird and his supporters is to convince what Paul Howes, another trade unionist, describes as the “sensible middle.”

In Baird’s shoes, I’d not be singing the “prices will fall” hymn.

It rings hollow in this context – Us Outdoors in NSW know that any falls will come from political decisions about the carbon price, the RET and so forth; we have to go on paying for the multi-billion dollar investment in networks of the past 10 years and we have to negotiate retail price deregulation (which is highly necessary but many won’t find contract details easy) and network tariff reform, too.

My former Canberra manager at the Electricity Supply Association, Paula Matthewson, in a well-argued commentary on the ABC’s “The Drum” website this week, quoted John Howard, also her former boss, as warning today’s politicians against failing to respect the ability of Australians to absorb a detailed argument.

Howard emphasized that the community will respond to an argument for change and reform “if it’s in the national (or State) interest and fundamentally fair.”

That’s the “smell test” that Baird has to pass in the next nine months and material like the Ernst & Young report can be a help.

Eyes on the prizes

My interest in LNG goes back almost 30 years – to the mid-1980s when Woodside and partners were pursuing the North West Shelf project (“the loneliest gas in the world”) and I was running the upstream petroleum industry’s Australian lobbying association, which had been mostly fixated on oil for its first two decades.

Today I am watching the British Columbian government in Canada seeking to launch itself on the same LNG path, partly through the eyes of my good friend David McDonald, a former chairman of APPEA from the 1980s, now domiciled in Vancouver.

What Australia has achieved so far makes it the model for the BC-ians and, at the same time, we and they are rivals for new LNG opportunities – while they are using what has been recently going on here as a model of how not to do it.

The BC Premier, Christy Clark, earlier this year cast LNG development as a once-in-a-generation opportunity for the province – and, of course, that is what it has been for Australia, delivering us a remarkable extension of the mining boom over two decades.

The challenge for the Canadians is whether they can make a start in this business at a time when the global gas market has never been more competitive?

The challenge for us is whether we can build on an exceptional start to win still greater national and corporate shareholder rewards when there are many, including the Canadians, trying to eat our lunch?

For Premier Christy Clark, the prize is 100,000 provincial jobs and elimination (through tax earnings) of British Columbia’s $C60 billion debt.

My reading of the Canadian media is that the western community (their WA) and many journalists are seized of the value of pursuing this goal even though there are a raft of challenges, including environmental concerns and First Nations (ie aboriginal) issues, plus the usual slew of naysayers, including political opponents and greenies.

Australian developers share with wannabe Canadian ones (including companies also active here) the valuable asset of geography.

“Proximity is paramount in the global LNG market,” a North American analyst said this month. “It means lower shipping costs and it also gives BC exporters an edge because of the dependability and flexibility afforded by shorter shipping time.”

Us, too, we can say.

The problems for BC, said another American analyst on the same day, are social resistance, labor pool constraints, a fuzzy fiscal regime and First Nations issues.

That sounds pretty familiar, too.

A key point for both BC and Australia is that we are far from the only fish in the LNG pool and, as the Sino-Russian deal has brought home, some of our rivals are just selling gas without the expensive bells and whistles involved in the LNG process.

It is interesting, in this context, to light on a view of the big picture from Royal Dutch Shell chairman Jorma Ollila at the petro-giant’s AGM in The Hague late last month.

The world’s population is growing rapidly, Ollila told Shell shareholders, and even more importantly hundreds of millions of people are leaving poverty behind. This means energy demand will double in the first half of this century even when efficiency gains are taken in to account. This demand will be met by a diverse mix of resources, particularly gas and a strong growth in renewable energy from a low base.

“The reality, and an opportunity for this company,” Ollila said, “is that hydrocarbons will play an essential role in the energy system for a long time to come.”

His perspective is based on Shell modelling, released earlier this year, that sees energy from all forms of renewables (including hydro power) rising from 13 per cent now to 25 per cent in mid-century and the fossil fuel share dropping back from around 80 per cent now to two-thirds of 2050 demand.

In this mindset, gas is the fastest and most cost-effective way to secure energy supply while contributing to the global decarbonisation effort and, especially important in China, helping to reduce air pollution.

Just how far gas can go is highlighted by one statistic: today China meets six per cent of its energy demand from gas and 67 per cent from coal.

This year is the 50th anniversary of the LNG industry. It is a more than interesting question to ask where it will be when it marks its century of global service – or even its 75th anniversary (in 2039)?

And it is worth underlining that projects being built now, whether here, in North America or elsewhere, will be part of that 75th year supply – as no doubt will the Russian pipeline.

It is also worth pointing out that what Shell describes as the most important innovation in the gas industry in decades, floating LNG plants, is to get started in Australian waters with the Prelude vessel now being built in South Korea.

All in all, this is an extra-ordinary story with a multitude of angles and a multitude of conflicting interests and perceptions.

How far Australian interests can be pursued in this environment is a matter of opinion – and I am looking forward to helping to contribute to such judgements in Brisbane in a fortnight when the Australian Gas Export Outlook conference is staged.

Events like this are especially useful in providing reality checks on the stuff that appears in the mainstream media; an example is the present “oh crikey” reaction to the Sino-Russian deal when, as Wood Mackenzie are pointing out, the Russian gas is to be delivered to north-eastern China, a market that is not going to be served by LNG.

Of rather more importance is the question of whether this deal might spur a move to meet some of the Japanese gas needs from Siberia, the Russians already delivering gas to Japan from Sakhalin island.

Gazprom is reported to be considering a new LNG terminal at Vladivostok (for 2018) with its eyes on the Pacific market.

Whether you are in Vancouver, Perth or Brisbane, that’s the sort of news to wrinkle the brow.

I look forward to getting better informed at AGEO in the very near future.

Frankenstein market

I have finally got round to listening to a podcast of the Grattan Institute’s energy forum in Brisbane a few days ago and an interesting set of opinions it contains, too.

(You can find the podcast on their website along with a transcript.)

Featuring the University of Queensland’s professor Chris Greig in the chair and the institute’s Tony Wood plus AGL Energy’s professor Paul Simshauser, Energex’s Mike Swanston and Cameron O’Reilly of the Energy Retailers’ Association, this was always going to be worth attention.

Encapsulating all they said in a post isn’t really possible but there are a handful of points that I would like to record here.

DEMAND FORECASTS: What’s quite weird, said Wood, is how no-one saw the consumption decline coming, including the experts, the Australian Energy Market Operator, “who have got it wrong every year since 2006 with some of their senior people currently saying their objective this year is to get it less wrong!”

To which Simshauser added that today’s environment follows an annual growth rate of 10 per cent on the east coast between 1956 and 1969, then a period of three decades averaging around six per cent and then another spell of growth between two and four per cent before the sudden dip of the past five years.

REINVIGORATING REFORM: Everybody, said Wood, including investors, asset owners and environmentalists, is demanding governments “do something” – and this requires policymakers to make some pretty tough calls in a climate where change and adjustment to it are now permanent features of the investment landscape.

One of the key actions the institute wants to see occur is reinvigoration of the 1990s national reform agenda, “which got stuck somewhere in the early part of this century and really needs to be driven very strongly (now).”

To which Simshauser added that we have too many overlapping policies.

“Individually,” he said, “each may be alright but put them together and you have a Frankenstein market.”

ENERGY MARKET: Simshauser pointed out that some $6 billion was invested between 1998 and 2002 in response to NEM price-related signals and thereafter another 11,000 MW (roughly another $11 billion of capex) has been installed because of policy decisions.

Now there is roughly 10,000 megawatts of over-supply on the east coast.

“The market is horrendously over-supplied – and this is because no-one thought about what was going to happen when noble objectives collided with a very brutal energy-only market.”

What we have, he added, is an increase in asset values from about $8 billion in 2005 to about $20 billion today without much more power being produced.

The other nasty thought he raised, and one I have discussed with numerous people in recent months, is that about 75 per cent of NEM plant is beyond its design life.

This drew a comment from Greig that, to sum up, the investments coming in to the system are not only oversupply but intermittent and NEM baseload is largely all old – and a further observation from Simshauser that, while the current cutback on maintenance was “spooking” AEMO, because “sooner or later it will have a consequence,” a security problem is not necessarily imminent because of the downturn in demand.

TECHNOLOGY SPEED: If there is one thing about the green commentariat and the media generally that gives me the irrits it is the naïve chattering about technology revolutions that are just around the corner, so it is interesting to hear Wood say: “One of the things that is impossible to predict is what will happen in technology and how quickly and where it will happen.

“Do not believe anyone’s forecasts about where technology is going to go.”

PRIORITIES: Simshauser said what he would like to see fixed first is the issue of using volumetric tariffs to recover network costs.

More broadly, Wood pointed out to the forum that the three big things in energy policy are reliability, affordability and sustainability – in that order.

It is only when the first two are under control, he said, that the community will engage seriously on sustainability.

Angst on price, he added, is where we are now.

In tackling climate change policy, “no-one is going to go to the electorate to say we are putting up power prices 50 per cent.”

And Simshauser, again, said a major company like his needs durable, sustainable policy for the better part of 25 years to make big decisions and right now it is not seeing it.

What we do have, said Wood, is “a complete dog’s breakfast of climate change policies.”

ROLE OF GOVERNMENT: The forum included quite a lot of discussion among the panel about the appropriate role of government in the energy markets, including ownership.

I particularly like this contribution from Wood: “I don’t think getting governments out of the pool is the right answer; but, while they’re in the pool, we need to ensure that they are not biting everyone else.”

As well, and it is highly appropriate in the renewed row over privatization of networks (or private sector equity injections as now proposed by Queensland Treasurer Tim Nicholls – which is the way Baird could also go in New South Wales), Wood commented that research by the Grattan Institute demonstrated government-owned DBs are “considerably more expensive in their operating costs” while O’Reilly averred that “there’s likely to be more political distortions in government ownership in terms of industry behaviour because energy ministers get backbench pressure to do things that are sub-economic or uneconomic.”

To which Wood added that what has to be ensured is that government doesn’t impede innovation, entrepreneurship and activity the market can deliver. If policymakers can get the signals right, he argued, industry can deliver the affordable, reliable and sustainable energy in the most effective way.

Forums of this sort solve nothing but they are helpful in shedding some light on the “darkling plain” and explaining why we are faced with a “rough ride ahead,” as Greig noted in closing the discussion.

The problem, of course, is that, illuminating as this is for the few attending the event, we are still left with literally millions of Australians in the dark about what is going on, “helped” only by what the media tell them.

Which is not a small part of why we all continue to wrestle with a Frankenstein market in an environment where most of the present crop of politicians have lost capacity to govern for the long term or to communicate effectively when they attempt to do so.