Archive for July, 2014
The tabloid “Courier Mail” newspaper in Brisbane has summed up the contrasting energy fortunes of Queensland and New South Wales pretty well in a weekend editorial.
On the one hand, it says, thanks to ongoing State government efforts that began under Peter Beattie in 2000, Queensland is developing “an economic powerhouse” of coal seam gas and LNG from which the community is going to benefit until at least 2035.
It cites the example of the Santos LNG project with contracts worth a total of $120 billion by the mid-Thirties “and royalties of 10 per cent heading back to Queensland.”
On the other hand, it avers, New South Wales is in “a horrifying economic bind,” hamstrung by vocal opponents concerned about the environment.
The shape of this NSW bind has been highlighted this week by a consultants’ report for AGL Energy, one of the upstream petroleum industry players struggling to develop CSG in the State.
The work by ACIL Allen demonstrates that enabling access to the resources under NSW can deliver gas prices 12 per cent lower in 2025 than a situation where there is no supply from within State borders.
If NSW sleepwalks in to having no new local supply, AGL points out, large sums of money will go over State borders to fund purchases at a cost to the local economy that includes substantial job losses.
The ongoing imbroglio has spurred the Australian Petroleum Production & Exploration Association to launch a new public information campaign to encourage, it says, politicians from all parties to support gas development in NSW.
The NSW Labor response has been to pass a motion at its State conference in Sydney at the weekend pledging to make the Northern Rivers region a “CSG free zone” if it wins the election at the end of March, an unlikely prospect admittedly.
In the context of all this, I was struck by an op-ed contribution in the “Australian Financial Review” by political and corporate strategist and social researcher Mark Textor.
He claims that most Australians want the “false and divisive” politics of today to go away.
“Most decent people,” he argues, ”are walking away to avoid it” and the situation only suits “shock jocks on the right and outrage merchants on the left.”
The big problem for the “decent people,” also characterised by Paul Howes as the “sensible middle,” is that they may walk away but they can’t hide from the consequences of what is going on in many areas, including energy policy.
The big question is how to get the “sensible middle” to pay attention and, in the case of NSW gas supply, to influence the Baird government, which, barring a surprising outcome in the March 2015 election, is going to have to wear the consequences out to 2019 of its behavior on this issue since 2011.
The fact that the present mess is equally the responsibility of the Carr, Iemma, Rees and Keneally governments between 2005 and 2011 should not go unnoticed but the ball now is in Mike Baird’s court and only he and his ministers can produce a resolution.
Nor can they continue to dilly dally. This is very much a “now” problem.
The ACIL Allen paper and its own in-house work, says AGL, show that it is possible NSW will not have sufficient gas to meet median peak demand in winter 2016 – but development of current projects (such as its proposed operation in the Gloucester Valley) will see “shortages become unlikely, thereby eliminating adverse economic effects.”
AGL uses the report to argue that, even though it represents a small fraction of aggregate east coast demand, bringing on the Gloucester project will have the immediate effect of reducing wholesale gas prices for NSW.
(Santos makes the same point for its Pillaga project.)
The modelling, AGL adds, demonstrates that increasing supply will reduce wholesale prices, contrary to assertions by those with a green agenda who keep trying to debunk the gas sector’s claims.
The ACIL Allen work also demonstrates that NSW could become self-sufficient in gas supply by a steady progress towards production of 160 petajoules annually by 2030.
What’s missing at the moment is a broad government analysis of all the State’s energy options and an evaluation of their merits, leading to a strategy out to the ‘Thirties.
Bob Carr made a stab at this in late 2005 with a green paper but he and his Labor successors never finished the job.
That was then; this is now and this is a task the Baird government should pick up and carry through at flank speed.
One advantage it has is that, with the Coalition also in power in Canberra, it can piggy back on the work currently being done by the federal government.
A sign that the Abbott government’s energy green paper is imminent is that Industry Minister Ian Macfarlane has committed to speak at a lunch forum in Sydney on 10 September (staged by the Committee for the Economic Development of Australia) with an agenda that suggests his topic will be the report.
We already know that the east coast gas situation is a special focus of the federal exercise – and some data buried in the ACIL Allen report underscores why this should be so.
The consultants have a base case model in which eastern Australian gas consumption declines from its present level of about 650 PJ to less than 600 PJ over the rest of the decade before a slow rise to 620 PJ by 2035.
As they say, this is dramatic downward revision of relatively recent predictions of gas demand trends, something I have written about a number of times on the Coolibah site and also for “Business Spectator.”
They attribute the outlook mainly to a collapse in the demand of gas for power generation but I suggest that, as the Energy Supply Association yearbook forecasts show, the drop-off in manufacturing is also no small part of the equation.
This all has wider significance than the impact in NSW because the “Premier State’s” fortunes are an important aspect of our national prospects.
“Don’t just stand there – do something” is the stern advice the Baird government needs at this juncture and, to the extent it has any impact in influencing swift action, the new work for AGL is to be welcomed.
There is a comment in a strongly-worded critique of the ABC Four Corners program “Power to the People” on Barry Brook’s “Brave New Climate” website that struck home with me at the weekend.
The writer, Geoff Russell, points out, as an example of the ineffectiveness of solar and wind power as a carbon abatement approach, that Australian electricity supply comes today with 850 grams of carbon dioxide per kilowatt hour – while the French supply runs at 70 grams and has done so since the 1990s thanks to its nuclear industry.
Germany’s energy revolution, Russell tartly adds, plans on hitting the French target through renewables by about 2050……..
Reading this (and I recommend the piece at www.bravenewclimate.com), I wondered again whether the Abbott government will bring itself to utter N-words in the forthcoming energy white paper?
It is all very well doing a renewable energy review – the outcome of which should be known to us very soon – but the critical issue for dealing with our national fears about climate change, apart from adaptation, which always gets a back seat but is going to be of all-consuming importance if the fears are recognised, is how to transfer from a carbon-emitting electricity system to one that isn’t or, at least, is very low-emitting.
The Labor white paper in December 2012 had to squib the nuclear issue because, despite Martin Ferguson’s views, the party is still too cowardly to take up the discussion, obviously fearing the impact on its left flank of maddened Greens.
The French, by the way, meet 73 per cent of their electricity needs from nuclear reactors – the mirror reverse of our current supply from coal-fired generation.
It is worth also interpolating that one of the bipartisan views among the major parties here is that our long-term future supply will come from a variety of sources, not one.
Even in its most craven moments of giving ground to Bob Brown and Christine Milne, the Gillard-led government was not prepared to concede a shift to 100 per cent renewable electricity supply, although it did allow a carefully constrained report on the issue to be produced by the Australian Energy Market Operator as a sop to the green Cerberus.
However, not even the Department of the Environment was prepared to allow the glee of the Greens to go unchallenged when the AEMO report appeared saying cautiously that 100 per cent renewables is “feasible.” The department published a website commentary warning that the study was “exploratory in nature” and “a contribution to broader understanding.” The costs reported, it added, were hypothetical and didn’t consider transitional factors.
There is nothing hypothetical about nuclear.
Thirty countries today have 435 nuclear reactors with a total installed capacity of more than 370 gigawatts.
One of the smallest contributors to this percentage is China (which has just two per cent of the world’s nuclear fleet, about 16,000 MW, equivalent to the capacity serving New South Wales) but the Chinese have big plans in this space – one of the side-effects of a larger-scale Chinese foray will be a reduction in nuclear plant building costs with ramifications for the rest of the world.
As with gas and coal, Australia is a “super power” when it comes to nuclear resources – roughly a third of commercially recoverable uranium on the planet lies within our borders. Only Kazakhstan and Canada produce more uranium, but, with a political mindset stuck in the 1970s, we continue to run away from the idea of using some of it at home.
A really big point at issue is that most of our coal-fired plants will reach the end of their working lives in the 2030s and 2040s. Now is the time to be thinking about what will replace them – and that is the job initially of the energy white paper.
The federal Treasury had a stab at this back in 2011 – the “Strong growth, low pollution” report overseen by Wayne Swan.
Of course, it avoided nuclear power like the plague and based its perceptions on a not-small and growing carbon price.
It came up with a mid-century scenario where black coal had been given the elbow, brown coal still clung on and coal with carbon capture and storage played second fiddle to gas-fired generation with and without CCS – while renewable energy, including conventional hydro power, grabbed more than 40 per cent of supply.
A lot has happened since 2011 – we are on to our third prime minister for one thing, carbon tax has got the axe, gas prices are soaring and the RET is under stern scrutiny – and it will be remarkable (I think) if the next energy white paper runs away from the nuclear question.
A critical question is public perception. The conventional view is that nuclear energy lacks a social licence in Australia, but I don’t think the question has ever been posed in an intelligent way to the community.
The starting point is that a majority of the population want Australia to be strong on carbon abatement; whatever other nonsense can be contrived from loaded poll questions, this much is clear.
The next point is that there is no silver bullet, but at least some silver buckshot.
However, putting it to use requires stability of policy and this includes a sensible attitude to pursuing commercially viable CCS, a sensible attitude to producing a lot more gas and a sensible attitude to fostering genuine renewables research (eg advancing storage) rather than engineering wealth transfers to the advantage of established technology like wind power.
A third point is an appreciation that, whatever the state of the power market today, the long-term outlook is for use of a lot more electricity (including the use of electric vehicles) and this requires a serious attitude to generation planning as well as to ensuring that rooftop solar power fits properly in the grid.
It also, surely, must include a willingness to be serious about nuclear energy – and this will require a change of heart in the Labor Party as well as a spine transplant for the present Coalition.
The starting point is the next energy white paper and a public acceptance, especially in the media, that we are not in a contest between the economy and the environment – or that, if we are, we all lose.
Not a small part of the current renewables debate is the question of whether and to what extent most household electricity consumers are subsidising those who have installed solar PVs on their rooftops and how this should end?
The current Greens weapon of propaganda choice is to label any attempt to charge solar householders for extra supply costs “a tax on the sun” — which led to the Victorian Energy Minister Russell Northe taking to Twitter to argue back “Solar power is great, but it costs money to send it around the grid. You don’t get to feed your power in to the grid for free or to have it overly subsidised by the rest of us.”
The Energy Networks Association has used Clean Energy Week to challenge the “dinosaur” of solar panel subsidies.
“Does anyone think that solar panels are unproven technology needing their market entry supported?” CEO John Bradley asked in a talk.
He argued that the Warburton panel review of the renewable energy target, reportedly due to be handed to the federal government in less than a fortnight, should find that the small-scale part of the scheme is an anachronism, over-incentivising investment in a form of technology that “is already mature.”
In the ENA view, renewables subsidies paid by customers should be directed to where they are needed most.
“If we want to put downward pressure on customers prices,” Bradley said,”we should stop funding proven technologies with significant market share. It’s time to modernise the system.”
Bradley claimed that the Australian energy sector is “at the leading edge of integrating small scale solar” in to power supply, with Queensland and South Australia having higher PV market penetrations than anywhere else in the world and 1.2 million national roofs now sporting solar panels.
However, he argued, solar PVs are not only a high cost form of carbon abatement but their support scheme increasingly results in unfair outcomes for the bulk of residential consumers who have not chosen to install them or can’t do so (e.g. renters), pointing to the high penetration in Queensland adding $100 million to the annual bills of State households without them while the subsidy in Victoria is said to average $60 to $180 per year smeared across non-solar customers.
Elsewhere, I see the “Sydney Morning Herald” reporting that the cumulative cost of lost network revenue (recouped from the non-PV majority) will be $1.25 billion over five years.
I suppose a critic could also describe this as a “sun tax.”
The pushback from the solar boosters is that the benefits of PV’s contribution to peak demand management and cost should also be factored in to any calculations.
The “subsidy” issue, of course, does not only relate to solar PVs.
As ENA has pointed out earlier this month, a householder using air-conditioning without load control at peak periods is benefitting to the tune of $350 a year from customers who don’t do this.
And, again as ENA’s Bradley says, resolving this situation is not only about a new form of tariffs relating to PV persons — it also requires attention to the further roll-out of metering technology, the introduction of flexible prices and a substantial revision of customer hardship programs.
As the AGL Energy paper on tariffs released earlier this month shows, some 64 per cent of Australia’s nine million households will be better off if the present flat-rate tariff system is junked, but this leaves a third of the mass market who will be worse off — a thought to give pause to a lot of politicians.
They and policymakers’ advisers have been caught on the hop by the strong take-up of rooftop solar.
The push/pull effect of subsidies introduced with insufficient thought and sudden spikes in end-user bills resulting from the combination, in the main, of higher network charges and green schemes has driven investment in PVs at a stronger rate than ever envisaged.
Only three years ago the Australian Energy Market Commission was forecasting that PV output would reach 3,170 gigawatt hours annually by 2020, but output today has already exceeded 3,200 GWh.
The big issue here is not householders disconnecting from the power grid, as green motormouths carry on about, but how the networks can service the PV users’ conventional needs a majority of the time while delivering what the rest of us require at acceptable cost and reliability.
(Yes, I know that economically viable energy storage is just around the corner — it has been since the early 1990s when I was helping to finance R&D through the Australian Electricity Supply Industry Research Board; for all the talk today, it has still to emerge on to the mass market in an acceptable form for consumers rather than ideologues.)
The tariff issue is probably not going to be addressed by Warburton’s panel, whatever other waves it creates about the small-scale RET, but this becomes more of a political problem the longer the stakeholders take to come up with a viable alternative arrangement for charging PV users equitably.
If Warburton takes up the ENA’s call for the small-scale RET to be abolished, and the government moves to act on its recommendation, all this is going to become another political football in the Senate before we are much older; and if you thought the upper house handling of the carbon tax repeal was messy, can you imagine how this issue will get treated?
At that point the Greens’ current throwaway line of “a tax on the sun” will move towards centre stage.
What the solar boosters want is legislation to prevent energy retailers from discriminating between those households using solar power and those that don’t as a condition of their licence. They describe this as a way “not to protect the incumbents or the status quo.”
As the Clean Energy Council puts it: “The current network pricing model isn’t working but the answer shouldn’t be to penalise those who have been encouraged to do the right thing.”
You won’t be surprised to know that Labor — in Victoria where an election is nearing — has hopped on the bandwagon to cry against “ordinary families being punished for saving energy and saving money.”
You also don’t have to be much of a politics wonk to appreciate the opportunity for Palmer and his PUPs to add to the mayhem.
The media punchline at the moment is that “networks face a solar dilemma” but it is rather more than this.
Yet again the body politic across jurisdictions is going to have to play catch-up after landing us all in a mess and it looks like the Abbott government may find itself in the firing line.
It is always fun to look for the weasel words in reports about the future of energy – at least in those reports that can be taken semi-seriously; some of the stuff available on the Web borders on the barking mad.
So I was amused today in reading a short commentary – on a gas industry-related website – to see an intro declaiming “it looks increasingly likely that ‘King Coal’ will lose its crown” almost immediately followed by a quote from those who published the study on which this thought bubble is based saying: “The demand for coal in the future and its price will rely on numerous factors and their timing.”
However, this commentary did lead me to the study by Standard & Poor’s Rating Services entitled “Carbon constraints cast a shadow over the future of the coal industry.”
The S&P report kicks off: “Despite being the most polluting source of power generation, accounting for 41 per cent of global carbon emissions, coal remains a cornerstone of the world economy, delivering 30 per cent of energy and 40 per cent of electricity.”
The ratings agency goes on to assert that a “significant decline” in coal production and consumption globally is “becoming a much more realistic concept” – but then it adds “however, the pace and scale of change is far from clear and investors could potentially remain in the dark for some time.”
S&P then comments that it believes countries around the world will find it hard to change their energy profiles materially over the next five to 10 years without compromising their economic competitiveness.
“This is mainly because of the cost of coal compared with other energy sources and the lack of alternative energy infrastructure.”
All of which leads the agency to conclude: “We expect the demand for coal to grow in absolute terms over the next five years, notably in countries such as India and China, albeit at a lower-than-historical rate (even as) demand falls in some OECD countries.”
And it says: “We believe that coal will remain a key commodity worldwide.”
It adds that it believes coal companies will have time to adjust to evolving market conditions as changes in national energy mixes play out, noting that this is a regional commodity (mainly due to the cost of transportation) and the dynamics in regions will be different.
“We believe the main risk (for the coal business) will be the speed of change,” it says.
Now all of this is rather different language from that used in the green media, especially some of the electronic versions there-of, where “apocalypse now” is the order of the day.
It is also essential background against which to view Australia’s next big day at the United Nations – on 23 September when Ban Ki-moon wants global leaders to assemble in New York to discuss carbon abatement policies. The green brigade are no doubt sharpening their knives for Tony Abbott for the occasion.
Some of the key facts with which S&P pepper the report I have been reading provide more important background for that UN discussion, not least the fact that, over 13 years of unabated hoopla about the climate and the purported great strides in green energy, coal consumption rose by 3.9 per cent per year (between 2000 and 2013), including an increase of three per cent last year, and now stands at eight billion tonnes annually, heading towards the role of the world’s top source of energy in the near future.
Included in this, of course, is coking coal, a key raw material in steelmaking.
Seaborne coal supply, which has increased markedly since 2007 when China became a net importer to meet its power needs, still accounts for only 14 per cent of world demand.
(In passing, S&P sees most of the relatively little additional seaborne capacity coming to the market between now and 2017 being supplied by mines in Indonesia and Australia, where international prices are still competitive.)
This is the real world, not the shadowlands beloved of the greens where the “death of coal” is just around the next corner, where every mine proposal is a step towards disaster and where Australia junking a poorly-crafted carbon price regime is a contribution to global doom, putting us at odds with so many countries trying to do the right (green) thing.
There is a reminder in the S&P commentary, too, of where Australia stands in coal production, with output annually of 400 million tonnes, around the same as Indonesia and Russia, less than half that of the US (one billion tonnes a year still despite the “shale gale”) and far, far behind China (3.5 billion tonnes).
That darling of the environmental movement, Germany, by the way, is producing 200 million tonnes a year.
S&P’s report notes that there are now some 1,200 coal-fired power stations in the world – of Australia has 27 (a number mothballed), I point out – and that China has 360 and India more than 450.
The agency’s review is also interesting, I think, in providing a hit list of crucial factors that will affect future use of coal.
These are: (1) a change in the energy profile of China and other countries, “with a potential move to shale gas,” (2) technological breakthroughs, (3) carbon pricing, (4) new government generation regulations such as the Obama step in the US, and (5) global economic growth and urbanization.
The report says growth in coal demand may flatten “but whether (new initiatives) will lead to a decline of coal use is more uncertain.”
For those who leap up and down at every story out of China suggesting an adjustment in the behemoth’s use of coal – not all of them from official sources – the ratings agency adds this sobering thought: “Even if coal consumption in China is capped, large energy deficits persist in key countries in Asia where pollution is either not top of the agenda or an issue.”
What I find interesting, too, is that some people can read a report like this and come to the conclusion that “it seems increasingly likely that ‘King Coal’ will lose its crown.”
It is they, rather than the coal business, living in the shadowlands.
With the report of the Warburton panel reviewing the renewable energy target now set to be delivered within the next fortnight, the players are polishing their arguments again — although definitely not for the last time.
We can expect all and sundry to be revving their engines still more loudly once the report is published and the debate returns to the political arena.
The green boosters have convinced themselves that the Abbott government has already decided to strangle the RET and that the Warburton review is a fig leaf; nothing right now will convince them otherwise.
They are deaf to Bob Baldwin, who is parliamentary secretary to federal Industry Minister Ian Macfarlane and who has told the Clean Energy Week audience that, contrary to the cries of the green sector and coverage by such media outlets as the ABC, Fairfax and the supporting electronic newsletters, the government has not come to a landing on the issue and it, too, is waiting on the panel’s report.
Baldwin said the government recognises “the important role of renewables” and expects “Australia will continue to access energy from a diverse range of sources.”
Speaking at the same event, the Labor Opposition’s Mark Butler urged a return to a bipartisan approach to renewables and accused the Abbott government at the same time of “devastating confidence” in the sector by instituting the review.
Another politician out and about on the issue is the New South Wales Coalition’s Environment Minister, Rob Stokes, who told Clean Energy Week that the Baird government wants to be “the (local) answer to California,” a declaration I think raises more questions than perhaps he intends.
(I wrote a post here recently on what has really occurred in California, especially in manufacturing, as it pursues a energy policy popular with Hollywood and other denizens of war one might describe as the “metro left.”)
Stokes said the State government is supportive of the present 41,000 gigawatt hour goal for the RET for 2020.
Meanwhile Infigen Energy’s Miles George, wearing his hat as chairman of the Clean Energy Council, told the ABC and other media that changes to the target will mean “the death of the renewable energy industry in Australia,” which would come as a surprise, I feel, to the hydro-electric generators, who supply 55 per cent of the 15 per cent of consumed electricity that is renewable.
(Hydro power delivered just over 19,000 GWh of the almost 35,000 GWh of electricity produced from renewable resources in calendar 2013, equal to the consumption of 2.7 million households.)
The CEC has marked its promotional week by despatching an open letter to federal MPs, State energy ministers and cross bench senators, signed by 17 companies, including overseas firms, who that $10 billion has been outlaid on large-scale renewable projects in Australia and assert that changing the RET will damage this country’s reputation as a safe place to invest in all forms of infrastructure, a thought that may surprise the LNG sector with its far larger outlay on projects.
Leave the RET as it is, the companies plead, and another $14.5 billion will be invested in large-scale renewable projects between now and 2020.
It occurred to me this afternoon in reading mainstream media coverage that one of their quirks is that a trenchant statement by people or business sectors antagonistic to the RET and other green schemes is almost always accompanied in the interests of “balance” by counter points from spokespersons for the green side but the reverse often doesn’t apply.
As it happens, I was re-reading at the weekend the commentary on the RET produced for the Australian Industry Greenhouse Network by the Centre for International Economics in Canberra and thought that the CIE perspective of the policy rationales for the measure is an interesting summary of the “anti” perspective.
In its study, the centre commented that the measure only indirectly targets emissions and is a very costly way of doing so. And that it is a production subsidy, not a R&D subsidy, And that an increase in consumer costs is not an energy security step.
On a key propaganda point pursued by supporters of the RET, the CIE observed that, even without it, east coast wholesale power prices would still be depressed because the market is oversupplied. Its argument is that reducing the RET from its present level might have a small impact on wholesale prices, but would allow NEM demand and supply to balance better.
The centre asserted that the carbon abatement cost of the RET lies between $37 and $111 per tonne.
Perhaps most importantly — and I have just finished reading the Deloitte report for the manufacturing sector on the gas price hassles for factories (see the other post I have put up today) — the CIE claimed the RET adds $20 million to $50 million a year to food processors’ costs, $20 million to $40 million annually for the wood products and paper industry, around $120 million annually for the iron,steel and aluminium industries and around $50 million a year for other manufacturing.
Premier Baird might find it interesting to bring these industries, all important to his jurisdiction, together with his environment minister to discuss the Californication of NSW before the State government offers another outburst of enthusiasm about renewables.
As I never tire of pointing out, context is everything in assessing energy and related policies.
How Warburton and his panel treat the overall context for the RET is going to be fascinating.
I read the media statement from six industry associations representing the bulk of the manufacturing sector and then re-read it – and, nope, the word isn’t there.
In a lengthy statement releasing a study by Deloitte Access Economics on the transforming gas market, the associations do not mention “reservation” once, which is noteworthy after several years of factory lobbying (and government rejection) on the issue.
Needless to say, the upstream petroleum industry has leapt on the point.
In its own media statement, the Australian Petroleum Production & Exploration Association highlights that “it is clear gas customers no longer see reservation policy as a credible or workable solution to the challenges faced.”
Where APPEA and the manufacturing six – the Australian Industry Group, the Energy Users Association, the Australian Aluminium Council, the Steel Institute, the Food & Grocery Council and the Plastics & Chemicals Industry Association – do seem to agree is that there is an urgent need to remove State regulatory restraints on gas development and to increase production for eastern Australia.
Where they don’t agree is that the six want reform of the east coast gas market to boost competition and transparency while APPEA says the market is working and, anyway, its transparency and efficiency is under consideration by the federal government in the energy white paper process.
The manufacturing six want a separate investigation by the Australian Competition & Consumer Commission in to the “depth, liquidity and competitiveness of the domestic market.
(The other participants in this part of the debate are the gas pipelines. The Australian Pipeline Industry Association says it is “bewildered” by calls for transmission reform. Investment connecting gas basins over two decades, it argues, has increased competition significantly . “Pipeline capacity is not a bottleneck in gas supply. Access to, and development of, gas reserves is the answer.”)
At its core, the Deloitte study reinforces a point that some of us have made often: the importance of insufficient gas in the economy and, by extension, the risks governments like those in New South Wales and Victoria are incurring for more than their own bailiwicks in their fumbling with the development issue.
Under the current situation, including gas price scenarios that Deloitte claim are “realistic,” the consultants warn that manufacturing could contract by $118 billion over the next seven years with the loss of 14,600 jobs.
The serious declines, they add, will be in NSW, Victoria and Queensland — but the ripple effect will be national.
APPEA, for its part, argues that, apart from removing restrictions on increasing gas supply, policymakers should focus on steps to boost national productivity and to encourage investment, including lower taxes, more efficient regulation, continuing to invest in skills formation and improving labor market flexibility.
Do this, it says, and all trade-exposed companies, including manufacturers, get to increase their international competitiveness.
APPEA also draws attention to Deloitte modelling that, when you allow for the value-adding contributions of gas, shows an overall net increase in Australian GDP.
The manufacturers’ associations say that the impacts modelled by Deloitte are worse than those threatened by the carbon tax if it had been left in place.
Where the blows fall is also politically important: the Food & Grocery Council points out that most of its members’ processing takes place in rural and regional areas; shut plants down there and not only town communities but also farmers feel the pain.
Deloitte itself comments that: “While exporting Australia’s previously untapped unconventional coal seam gas reserves is expected to provide a boost to GDP, realizing these benefits will also entail painful consequences. Both costs and benefits are very unevenly spread across sectors and regions. Greater input costs associated with higher gas prices and greater risk arising from a more difficult gas contracting environment will have adverse consequences for many regions and States.”
It is not being particularly insightful to say that the politics of all this are pretty devilish but the politicians on the pointy end have yet to demonstrate anything like leadership.
This inability to deal with environmental radicalism and carry the “sensible middle” in support of effective policy is not something uniquely Australian.
I see the sacked UK Environment Secretary, Owen Paterson, saying that PM David Cameron, en route to an election, pushed him out last week to appease “the green blob,” the environment mafia whom he describes as a “mutually supportive network of environmental pressure groups, renewable energy companies and some public officials who keep each other well supplied with lavish funds, scare stories and green tape.”
Paterson said that much of his work as a minister was devoted to loosening the “blob’s” grip on government policy.
He left office, he added, “with great misgivings about the power and irresponsibility of anti-capitalist agitprop groups.”
Back here, what the Deloitte study throws up in particular is that where things stand today with respect to east coast unconventional gas supply is the prelude to a lot of business and community pain thanks to the green blob and the inability of governments to come to terms with the demands on them for leadership.
The Australian Industry Group’s view perhaps sums up the situation: “We need both a growing LNG industry and a strong manufacturing sector,” it says.
On the first, it and the upstream petroleum industry are ad idem: get more gas flowing by replacing blanket bans on production.
On the second, just what strength of manufacturing we can retain over the rest of the decade is one of the biggest national questions.
This is a sector that still employs 950,000 people today.
How many workers will it have in 2024?
And how far will governments allow the “green blob” to influence this outcome?
I tend to access most radio and TV coverage of energy issues through the Internet; it saves watching and listening time and it provides a written record.
This route also protects my blood pressure from reacting to some very irritating people.
Unlike Clive Palmer, for example, the ABC’s Tony Jones is someone who gives me the irrits. I avoid his programs except for information purposes via the Internet.
Looking at a transcript of his 17 June “Lateline” interview with federal Environment Minister Greg Hunt, I am reminded why this is so.
Jones sought again and again to challenge Hunt about an academic report from the ANU claiming that the carbon tax was a major cause of Australian electricity-based emissions reductions. Hunt wanted to cite the recent Australian Energy Market Operator in response, but the compere was determined to dismiss its work as “a competing study.”
Most of the transcript is a tedious to-ing and fro-ing as Jones and Hunt talk past each other, exactly the reason I can’t be bothered watching this stuff.
But what, actually, did AEMO say?
Going back to their mid-June reports, one finds the following.
There was a decline averaging 1.8 per cent a year in NEM demand for electricity between 2009-10 and 2013-14.
There is reduced residential and commercial consumption in most NEM regions “due to strong growth in rooftop solar PV installations and ongoing energy efficiency savings in response to high electricity prices.
(Bear in mind here that one of the key green boosters’ arguments in recent months has been (correctly) that the rise in network charges well exceeds the combined impact on households of the carbon tax and the renewable energy target.)
Looking forward, AEMO expects, apart from rising demand in Queensland from the LNG export projects, that NEM consumption will remain depressed, not least because of increases in energy efficiency savings thanks to regulations impacting on appliances and buildings.
A further factor has been and will continue to be the state of the manufacturing sector – and I have yet to hear even the loudest of the boosters wanting the carbon tax to be given credit for killing factory output and jobs.
AEMO also finds that around 6,000 megawatts of new generation capacity development is now not being pursued because of the state of the market – demand falling and a large capacity surplus – with most of the mothballed plans being for gas-fired units, reflecting also the changing assumptions about gas prices since they were first mooted.
By far the largest NEM regions are Queensland, New South Wales (plus the ACT) and Victoria.
Together, they account for 88 per cent of the NEM’s residential customers, 86 per cent of its commercial and industrial customers and 87 per cent of electricity consumption.
They are also home to 27,400 megawatts of coal-fired generation capacity out of the 29,900 MW across the nation.
So, to what does AEMO attribute the downturn in demand in these three States (and the ACT)?
In Queensland, it says, reduced residential and commercial demand due to the country’s strongest growth in PV installations and pursuit of energy efficiency. In NSW, essentially ditto.
In Victoria, demand is falling and will go down faster as large factories close, PV installations rise and the contribution of energy efficiency grows, offset by the strongest population and income growth in the country.
Let’s shift to Pitt & Sherry, which points out that the total fall in NEM carbon emissions from June 2012 (when the tax was introduced) to now has been 18 million tonnes during a period when demand fell by 8,700 gigawatt hours.
This is the carbon tax period but only an ideologue will claim this drop in emissions solely (or even mainly) for the Gillard measure.
Looking longer, the total fall in annual emissions from 2008 to 2014 has been 32.4 Mt accompanying a fall in power demand of 14,600 GWh.
Do you read in to this a dominating influence of the carbon tax?
The analysts’ Hugh Saddler makes the interesting observation that power generation was the largest driver of growth in Australian emissions until 2008.
“Since then it has been the largest source of reductions, almost completely offsetting increases from other source categories,” he says.
On the supply side, as Pitt & Sherry also point out, the clear winner from the carbon price over the past two financial years has been hydro-electric power, and especially the hydro generation in Tasmania – from dams, I add, that the Greens dislike and despatch to the mainland over the Basslink interconnector they fought tooth and nail to prevent being built.
Saddler estimates that Hydro Tasmania gathered $80 million in revenue in 2013-14 from exporting power to Victoria.
However, energy output from large-scale hydro, and not least from Tasmania, is limited by availability of water – which, in turn, is decided by a balance of rainfall, runoff and evaporation.
“The Hydro’s” output was severely constrained from 2006 to 2010 by drought and there is room for a discussion about how far the recent surge in supply results from a return to the long-term average of availability and how much to a corporate decision to take advantage of the carbon price while it lasted.
Coming back to the main point, it would be facile to claim that the carbon tax had no impact on electricity-related emissions in its brief, turbulent life, but one could debate how this impact occurred.
How much of it was a product of the burden for energy-intensive, trade-exposed industries?
How much of it, therefore, came with the added impact of a hit on jobs?
In welcoming the tax’s abolition, the Australian Chamber of Commerce & Industry’s Kate Carnell, a former ACT chief minister, observed that it made key industries less competitive “while providing very little by way of environmental benefit.”
What is obvious from the data above is that the fall in power demand (and therefore in emissions) started well before the carbon tax was introduced and will continue, if AEMO’s forecasts for a further slowing in consumption are borne out, through to the end of the decade.
One can then come to the point that a significant impact of the tax’s sibling, the RET, has been to over-crowd NEM generation capacity and that, because of the gas price situation, investment in lower-emitting new power plant is affected to the benefit in part of old coal-burning generators – with what longer-term implications for the trajectory of the power-related emissions as well as the NEM’s reliability?
I find it disappointing that Greg Hunt didn’t go to the Jones interview rather better prepared.
All the numbers above are on the public record and readily accessible. He could have used them to shut Jones up and to better inform “Lateline’s” viewers.
The above information is also available to the ABC, Jones and “Lateline,” of course, but the horse the broadcaster chooses to ride is nearly always of a different color.
Just when one thinks another paper on energy issues would be a bridge too far along comes something that is a must read.
This time it is a new product in the AGL Energy applied economic and policy research series, written by professor Paul Simshauser, the company’s chief economist, and David Downer, pricing analyst.
The title makes the thrust clear: “On the inequity of flat-rate electricity tariffs.” The 24-page commentary can be found on the AGL website.
I like the opening gambit: “Proposals to reform default flat-rate electricity tariffs are rarely met with enthusiasm by consumers groups or policymakers because they produce winners and losers.”
Which happens, however, to also be what the present structure does, as Simshauser and Downer point out: “Existing flat-rate tariffs result in half the consumer base paying too much while the other half are cross-subsidized.”
Their commentary follows one from the Grattan Institute earlier this month – I wrote it up on this site on 7 July under the title “Anticipate resistance” – and, as I said in a letter published in “The Australian Financial Review” yesterday, reacting to a growl about it from a “Fin” reader, there is no point in shooting the messengers on this issue: it is overdue for resolution by policymakers and regulators.
The power suppliers are also hitting on the issue in their submissions to Ian Harper’s competition policy review.
United Energy and its sibling Multinet Gas, for example, call on policymakers and regulators to support network tariff reform to “ensure that customers are provided with pricing signals that represent the true cost of their individual use of the grid.”
And the Energy Supply Association argues that the present set-up “leads to unfair cross-subsidies.”
It wants a tariff system that “accounts for not only how much energy is consumed but also the time and rate at which it is consumed, consistent with the make-up of network costs.”
Simshauser and Downer do a good job, I think, of canvassing the complexities inherent in moves to reform tariffs, fuelled by data drawn from 160,000 smart meter households in Victoria and the AGL’s online survey of residential customers.
They don’t set out, as the Grattan Institute does in its paper, to advocate for a particular approach, but they do push the thought that we now have economically viable smart meters at a time when metering services can be deregulated and we – in fact, the energy ministers under the CoAG umbrella — should be getting on with this job.
In passing, they make a point that is worth special note because it helps to explain the angry consumer reaction to recent big price spikes (leading in turn to political knee-jerking and media bad-mouthing of the networks).
It took 23 years – from 1985 to 2008 – for electricity bills to double the last time round, they say, and this time it has taken just seven years.
In the context of the to-do at present over the carbon tax and its role in retail bills, it is also worth recording their list of the causes of the latest price spikes: rising equipment costs, rising renewable energy subsidies, the introduction of the carbon tax and, above all, a tightening of reliability standards leading to rapid increases in transmission and distribution investment to meet forecast peak demand growth.
To which I would add a comment made by Origin Energy in its submission to the Harper review: “Increasingly efficient appliances, better real-time pricing and usage information plus distributed generation capacity have served to lower energy demand in a manner that appeared inconceivable to most five years ago.”
So much for the blame-mongers who want to attribute the high growth of network charges to “gold-plating,” greed and incompetence.
As Simshauser and Downer point out, the east coast networks’ spending proposals drawn up before the global financial crisis assumed strong growth in peak demand and the regulatory authorities accepted a huge shift from outlaying $10 billion in capex in one five-year determination period to $40 billion in the next (the one now ending).
As they say, the financial crisis took its toll on energy demand in 2008-09 and then overlapping federal and State solar PV subsidies (and hidden subsidies arising from the existing tariff structure) accelerated contractions in consumption, further aggravating tariff increases and further driving down demand.
One of the values I see in the pair’s paper is the light they throw on the fact that there really is no such thing as the “typical household.”
Using their database, they come up with five “cohorts” of residential customers, outlining how they use electricity and how some could save almost $1,000 a year under a more equitable tariff system – while others could lose as much as $440.
This is the point in the “Yes Minister” game, of course, where the Sir Humphreys start using the term “courageous” to warn their masters of the minefields ahead.
Simshauser and Downer acknowledge that price spikes, and the media hysteria they have created, have brought about a diminished political willingness to become involved in tariff reform,
They argue that governments will need to resort to targeted adjustment assistance from their budgets to ensure that genuinely vulnerable customers are helped.
That raises its own issues when governments are in full panic mode over deficits and placating winners and losers in the bigger picture – but it also needs to be seen against the manifest inability of our political leadership (both sides) to cope with those not in hardship but wanting to cling to their subsidies (or to resist them being taken away because, say, the purchase of a large solar PV array is “helping to save the planet.”)
The value of this paper by Simshauser and Downer does not lie in their producing a silver bullet from the economic magicians’ box of tricks but rather in their careful and clear explanations of potential winners and losers, who are not always who you might think.
I won’t describe their paper as required reading for legislators because many MPs’ eyes will glaze over three pages in to the report, but it certainly is for the public servants and other advisers charged with helping the pollies to pursue a most necessary reform.
The ability of the Harper report to help in this regard should not be underestimated.
The language of the energy debate, especially the bits relating to green energy, constantly raises my eyebrows.
For example, I see the Clean Energy Council telling the ABC yesterday that there is “a global race on in renewable energy” and, by extension, Australia is a loser under current policy proposals.
Well, I wonder, why is it a “race,” what is the distance of the “race” and could someone could define “win” (because by definition a race has to have a winner) in the context of Australian consumers, business and residential?
One of the reasons Australia is perceived in a poor light in this “race” is that, according to Bloomberg New Energy Finance, just $40 million was invested in large-scale renewable capacity in Australia in the first half of this year.
There is a reason for this, apart from the ongoing uncertainty about the renewable energy target and the carbon tax (just repealed as I write this post), and it is to no small extent the large excess of generation in the east coast energy market.
One of the contributing factors to this, using BNEF numbers, is that $11.1 billion has been invested in large renewables capacity in Australia (most of it on the east coast) between 2009 and 2013.
In this period, according to analysts Pitt & Sherry, the total fall in demand in the NEM has been 9.2 per cent or 14,600 gigawatt hours.
(In passing, and given that the actual point of carbon policies is to reduce greenhouse gas emissions, Pitt & Sherry also estimate that the total fall in CO2 since the NEM peaked in calendar 2008 has been 32.4 million tonnes, equal to almost 17 per cent.
(Australia’s electricity generation emissions, say the analysts, are now 13 per cent below their 2005 level, interesting reading against Barack Obama’s commitment to have the US spend the next 15 years pursuing a carbon dioxide reduction from power stations of 30 per cent below 2005 levels.
(And, seeing we are on this point, the International Energy Agency reports that global coal use has increased strongly over the past 10 years and is 60 per cent higher than it was in 1990.
(The Chinese consumption of coal now exceeds 4.2 billion tonnes a year – by comparison, the Australian power sector burns around 100 million tonnes of black and brown coal annually.)
This digression is not all that far off the point of the post: what actually is the “race” that is underway and how does one define “winning?”
It might be easier to form a view of what “losing” could be for Australian electricity consumers.
Here is the Energy Supply Association in its submission to professor Ian Harper, who is reviewing national competition policy (as canvassed in “Lifting our game” on this site on 13 July):
ESAA argues that a key issue for the market is ensuring that policy and regulatory frameworks allow for the allocation of costs to participants in line with the requirements they place on the system and allocation of revenues to them in line with the benefits they provide.
The association says that, one the one hand, the NEM has been robust to a large extent despite a range of distorting policy interventions (of which the RET is one) but that, on the other hand, price signals today appear unlikely to drive an efficient transformation in the way power is made, moved and consumed.
Significant financial and commercial barriers exist to exit from the market of conventional generation, it adds, the present low wholesale prices are “not sustainable” and “there are likely to be adverse long-term consequences relating to poor reliability and future under-investment.”
ESAA claims that generators are already responding to market conditions by reducing operational costs, primarily through cutting spending on “non-essential” maintenance.
In the same vein, EnergyAustralia has told Harper that the “energy sector (is experiencing) a series of challenges created by falling demand and unparalleled growth in embedded generation,” with the emergence of storage technology still to come, creating an environment where power generators “are struggling to realize an adequate return on investment.”
EnergyAustralia argues that the long-term “natural solution” is closure and/or consolidation in pursuit of greater efficiency – but the ACCC hinders mergers and acquisitions.
When you look at all the factors, says this member of the big trio of east coast gentailers, you can see efficient investment signals being reduced, leading to “at best, increased wholesale electricity prices or, at worst, threats to reliability of supply.”
Nor is the Eeyorish point of view solely that of players with vested interests – the favorite epithet of green boosters when challenged.
The Australian Energy Market Commission tells Harper in its submission that, with respect to carbon policies, “pursuit of one objective may undermine achievement of other, equally important objectives.”
For example, it says: “policies aimed at meeting a climate change objective may conflict with the ability of an energy-only market design to send meaningful price signals for new investment in generation.”
This, in turn, it says, may undermine future supply reliability.
And it adds: “The operation of the RET in its current form has led to wholesale market price outcomes divorced from underlying energy supply and demand fundamentals (prices are very low but new capacity is still entering the market).”
Stack this up against facile “race” rhetoric and you may start to appreciate the risks we are running when contending parties play the populist game.
Use of “race” is no doubt designed to appeal to the great Australian interest in sport but this is a minefield not a playing field and it is the ordinary consumer down the track who may get hurt.
Which leads me to ask again about the real nature of the “race” in which we are apparently engaged.
Is this a race to the bottom, cheered on by energy-illiterate bystanders and ideologues?
In a flight of fancy, one might slightly amend Miranda and say “O brave new world that has such runners in’t.”
With so much media attention focussed on the federal budget as well as on the Senate shenanigans over the carbon tax and the renewable energy target, it is not really surprising that one of the most important policy reviews has slipped in to the shadows.
In the long term, however, it is highly important for suppliers and consumers of energy, especially electricity.
I am talking about the “Son of Hilmer” inquiry – the “root and branch” review of competition law the Abbott government has asked a panel chaired by Ian Harper of Melbourne Business School to undertake.
Almost a quarter century ago the Hawke/Keating regime sooled a panel chaired by Fred Hilmer on to this topic and the east coast electricity market is a product of that project.
(So is Orchison’s involvement with the electricity industry. I was minding my own business in 1991, in my eleventh year of being CEO of what is now APPEA, when I was headhunted to re-invent and run the Electricity Supply Association by the bosses of the State electricity commissions who were thoroughly spooked by what they saw coming down the road and recognized their need for professional representation in the policy arena. I dug ESAA out from its hidey-hole behind a greasy spoon café in downtown Melbourne, got rid of most of its 50-plus engineer-dominated, inward-looking committees, installed a very good management team, well supported by a board, and the rest, as they say, is history.)
Apart from my ongoing interest in matters electrical, at least from a policy perspective, my other incentive right now for getting my head around submissions to the Harper Review is that the next Eastern Australia’s Energy Market Outlook conference – presented by Quest Events in Sydney on 17-19 September – is looming in my diary.
I am chairing the opening day and then the third day “NEM Future Forum” and the strong level of interest in the event already being shown underscores the fact that east coast energy market stakeholders have a lot on their minds.
What’s exercising them has been summed up in one paragraph by the Australian Industry Group in its submission to Harper:
“Although the energy sector has made great strides in competitiveness since the early 1990s,” it says, “the cost of energy has become a serious issue for industry. Despite depressed wholesale electricity prices, the rise in network charges ensures that retail electricity prices remain very high. Natural gas prices have also risen dramatically as a result of the looming start of gas exports from Queensland. These prices represent a threat to the competitiveness of many businesses. Ai Group believes that there are numerous opportunities for the federal government to assist industry through enhancing the competitiveness of the energy market.”
Another side is presented in a submission from the Consumer Action Law Centre, which tells Harper “there is a role for the inquiry to consider how competition policy can not only grow the economy but (also) improve outcomes for the most disadvantaged and vulnerable members of the community.”
The Energy Supply Association (as ESAA now is – in passing, with the National Generators Forum just absorbed in to its activities) urges Harper to support the identification and prioritization of initiatives that will minimize regulatory burdens for suppliers as well as remedy market distortions.
Coupling this with a robust concessions framework to provide targetted assistance to those in need, it adds, will “ensure consumers benefit from efficient prices and reliable supply over the long term.”
It is worth saying here that I feel the energy policy environment in the 1990s was more imbued with thought for the longer term than it is today notwithstanding the many reviews; our politicians at present are too often short-order cooks with their focus on the “I want it now” cries from the voters as represented by a multitude of campaigners and their media fellow travellers, most of whom seem more intent on promoting ideologies than the broad public interest.
The Energy Retailers Association argues to Harper that a number of the reforms proposed by Hilmer remain “unfinished or diluted” and it urges their re-assessment followed by incentivisation of the State and Territory jurisdictions to finish the job.
ERAA makes a point that, I think, needs to be emphasized in these politically turbulent times: “The (original) adoption of national competition policy was a seminal and rare moment in Australia’s economic history when all governments, regardless of political persuasion, agreed that the national interest could be best served by a suite of reforms that could boost productivity and international competitiveness.”
How far our body politic has fallen since then in integrating energy and carbon abatement plans and regulation.
The Energy Supply Association advocates two key steps in getting reform back on track.
One, not surprisingly, is remedying policy uncertainty, especially as it relates to energy and abatement, not least because current distorting interventions discourage future generation investment and may exacerbate the current NEM oversupply situation.
The other is ensuring the allocation of costs to market participants are in line with the requirements they place on the system and the allocation of revenues in line with benefits provided to the system.
It is fair to say, I think, that the outcome of the Hilmer Inquiry and the subsequent policy driven by federal and State governments was a triumph for advocacy by “big business.”
The 1990s business leaders knew what they wanted, they marshalled their arguments convincingly and, broadly speaking, they got what they sought from like-minded political leaders.
I am unconvinced that the current crop of business leaders can bring the same degree of oomph to the task — and they have two hurdles not faced by their predecessors: (1) the influence of the radical lobby groups aided by social media, the ABC and the Fairfax newspapers and (2) a visceral community pushback resulting from the markets delivering high prices at a time when the cost of living is a big issue for a large part of the population.
Combine this with too many legislators who give the impression that they can’t find their posteriors with the help of a map and a strong light and you do not have an encouraging environment for sound decisionmaking.
The Australian Industry Group argues that the state of energy markets is a contributing factor to this country being “not in a strong position to overcome the income-sapping impacts (for industry) of lower commodity prices and the retreat of investment from resource and energy projects” – although the LNG sector may wrinkle its brow at this last point.
What AiG wants is “a strong and concerted effort to lift productivity and competitiveness across the economy through better use of labor, capital and energy.”
Looking at the 40-person speaker slate for the EAEMO conference in September, I think this event will be an excellent and timely opportunity to further evaluate where we are in managing the east coast’s energy markets and what we need to do to lift our game.
(PS: you can find the full EAEMO program at www.questevents.com.au.)