Archive for November, 2014

Gas: the long haul

Reg Nelson, the retiring CEO of Beach Energy, is one of Australia’s most respected petroleum sector identities and his comment this week that the domestic gas scene faces five to 10 years of “a lack of supply and a lot of price volatility” will resonate among supply and consumption stakeholders.

It provides a platform for debate at the Australian Domestic Gas Outlook conference (which I will be co-chairing) in Sydney at the end of next March — right as New South Wales will be going to the polls with energy issues high on the political agenda.

Not surprisingly, the gas outlook figures rather high as well in the submissions now piled up in the federal Department of Industry as the Abbott government wrestles with producing a new energy white paper.

The manufacturing stakeholders’ concerns are being put forward by an alliance of six major industry associations whose members employ 950,000 people and transform 32 per cent of domestic gas production in to value-adding products and services. Their gripe is that the recently-published energy green paper “seems to be calibrated towards energy supply,” including LNG exports, and is missing the needs and opportunities on the demand side.

The associations complain: “One could not imagine a health policy that did not address the needs of patients or an education policy that did not address the needs of students, yet the government has little regard for how gas is used in the Australian economy.” Their view is that too much attention is being paid to new gas supplies “as the panacea to market pressures.”  Increased supply is crucial, they acknowledge, “but more gas from existing suppliers is not going to address fundamental flaws in the market.” They want a government commitment to the Australian Competition & Consumer Commission inquiry in to gas market competition.

The state of this part of the national debate is perhaps exemplified by the submission from the Australian Petroleum Production & Exploration Association that argues too many see raising the value of a product through further processing as synonymous with increasing value adding. It quotes consultants’ modelling demonstrating that manufacturing is generally associated with quite low value-added contributions, particularly in comparison to the gas industry.

APPEA reminds the government that “since the mid-1960s, the oil and gas industry has underpinned much of Australia’s economic prosperity and growth,” with $200 billion worth of projects now being built and prospects for a lot more.

The central thrust of the upstream petroleum industry lobbying is that “it is vital for the white paper to continue to reject calls for inefficient, inappropriate and ineffective regulatory interventions and to focus on market-based energy policies.”

It supports this trenchant view by pointing to 100,000 construction jobs and a $13 billion a year revenue stream for governments in royalties and taxes from 2020 as well as its revitalisation of regional Australian economies.

ERM Power, in its submission, adds this salutary point: while the federal government does have a role to play, the States and Territories have ultimate control over gas development in their jurisdictions. “In order for any policy or strategy arising from the white paper to have any practical effect, commitment by the States and Territories to implementation is required.”

And Origin Energy adds: “The immediate challenge facing the east coast gas market is the removal of impediments to supply.”

The company agrees with the green paper view that the gas market “is not fundamentally broken.”  And it speaks up for the proposed pipeline from the Northern Territory to eastern Australia, saying it “has the potential to materially increase supply.”

There is also a sharp reminder for the federal government in a letter to the white paper task force from Queensland Minister for Energy & Water Supply, Mark McArdle, a regular speaker at the “Energy Outlook” conferences: the green paper, for the most part, he writes, provides a stocktake of the present national energy situation; the Queensland government “looks for a more strategic vision that demonstrates Australia’s intent to be a true energy player on the regional and global stage.”

One of the value of the “Energy Outlook” events, I think, and especially of the Domestic Gas Outlook conference, is their capacity to get some 250 stakeholders from across the spectrum in to one room to debate the developments and issues over three days. The 2013 and 2014 ADGO events have demonstrated real value in the gas debate and the 2015 conference will provide another major opportunity to canvass the gas supply playing field from all corners at a vital time.

Reg Nelson comments in the Beach Energy white paper submission that engagement between the upstream petroleum industry and relevant stakeholders is of “paramount importance.”

I’m looking forward to the next ADGO — with some 40 speakers drawn from policymakers, suppliers, users and regulators —  again making a substantial contribution to this engagement in March.

High wire balancing act

This is a big day for electricity network services — and for politicians wrestling with consumer/voter unhappiness with power bills.

It is especially important for Mike Baird’s New South Wales government.

Not only do the networks all have to pore over the 2015-19 preliminary determinations announced today by the Australian Energy Regulator but they are also dealing with more new rules released by the Australian Energy Market Commission.

The AER will be the one in the headlines because it is proposing to reduce the revenues of the three NSW distribution businesses by $6.5 billion from what the networks bid, delivering material benefits to the State’s three million households as well as to 300,000 businesses over four years, good timing for Baird and his colleagues ahead of the State election in 125 days.

However, the move may have implications for the sales value of the networks, a key factor in the election as Baird promotes a range of infrastructure developments using DB privatisation income.

On the other hand, the proposed consumer price cuts provide emphatic refutation of the Labor and trade union propaganda that privatisation must deliver higher power bills.

The other critical element, which networks are desperate not to have lost in the ensuing fuss over price cuts in the media, is that, as the Energy Networks Association puts it, the funding cuts the AER targets  “threaten to be service cuts in disguise,” arguing that the short-term benefit of lower prices will come at the expense of maintenance, safety and outage response times.

The AER’s latest draft determinations — they will not be finalised until May next year — implement rules made by the AEMC at the end of 2012 affecting network charges and the commission’s new decision is designed to ensure that prices paid by households will more closely reflect the way they use electricity.

The AEMC claims that between 70 and 80 per cent of the residential market are likely to have lower network charges (40 per cent of their final bill) as a result of its new move, saying that homeowners whose power use is at a steady rate through the day are going to be the biggest beneficiaries.

AEMC chairman John Pierce asserts that the latest rules “put consumers at the centre of future decision-making about energy.”

He believes they will now have more clear choices.

As he points out, households are not homogenous users of electricity. “Two households may look the same,” he says, “but they consume electricity in very different ways because of the appliances they own and their differing lifestyles.”

The new rules, Pierce explains, will mean network charges recovered from users will more accurately reflect their individual usage and their choices — for example, the temperature settings on their air-conditioners and whether or not they buy appliances with high energy ratings.

Meanwhile, the network service businesses feel aggrieved that their bids — which proposed capital expenditure well below the outlays of the five-year determination period now ending — have been brushed aside by the AER.

They are also cheesed off that the benchmarking on which the watchdog is relying for imposing capex and opex cuts in the name of efficiency was not published on 30 September, as required, they say, preventing them from reacting to it before today’s decisions.

Vince Graham, who the O’Farrell government made CEO of all three NSW DBs, Ausgrid, Endeavour Energy and Essential Energy, as part of its move to deal with consumer unhappiness in 2011, says the businesses are confronted under the AER proposals with needing to implement substantial job-cutting (of the order of 4,600 people) and an inability to place many of 750 apprentices currently in training.

He also points to the fact that the AER proposes to shear network maintenance costs on the basis (he says) of customers needing to accept more blackouts and being compensated later. “These blackouts inevitably will occur on the hottest summer days of the year,” he adds.

John Bradley, who manages the Networks Association, argues that what the AER proposes will slash distributors’ operating outlays “to levels not seen in 10 to 13 years” and it is “implausible,” he says, that this can happen without impacts on customer service.

This comes with an acknowledgement that consumers are “fed up” with power price increases and expect to see network costs falling as well as an argument that ENA’s members are trying to deliver on this while meeting other customer priorities.

One of the sharp points the networks want to dig home in reaction to the AER’s judgement is that the agency is not a technical or safety regulator and they query what due diligence it has pursued in reaching its decisions.

Behind the network comments lies industry irritation that it is yet again enmeshed in the downside of the boom-and-bust approach to its business — with bursts of high expenditure being allowed in response to consumer anger over blackouts and the time taken to cope with them, then followed by outlay curtailment in reaction to public angst over ensuing price rises.

To which an objective observer must ask what they thought would happen when the massive capital expenditure approvals over five years from 2008 to 2013 resulted in the worst price spikes householders have ever experienced?

Some have taken the view that the public temperature could have been lowered a long way by the capex program being spread over 10-12 years — and, of course, the networks are wearing huge criticism for not having foreseen the sudden dip in household demand in reaction to the price spikes and other factors. (Hindsight makes us all clever.)

Whatever might have been, we are where we are, with the AEMC pointing out today that this environment requires greater consumer consultation over network charges and greater transparency of the impact on the community of regulated decision making.

One can observe that this is a two-way street and the outcome of the new imbroglio created by today’s AER proposals will need to be a clear understanding of their impact on the funding of operations, maintenance and re-investment.

Everyone concerned here is in violent agreement about the primacy of the consumer in a transitioning electricity market — a development that has caught suppliers, service providers, policymakers and regulators on the hop this decade — but today’s AER decisions highlight that much depends on the street corner stakeholders are occupying and, to fiddle with a saying, picking losers is risky business.

In later news, the Energy Supply Association has bought in to the debate this afternoon to argue that, while it supports a tightening of the process regulating the costs charged by networks, the AER draft determinations “go way beyond sensible and effective efficiency gains.”

Association CEO Matthew Warren asserts that proposed “real” — ie, inflation-adjusted — cuts in some cases will halve the operating budgets of networks. He thinks this demonstrates “weak understanding” of how the DBs operate.

“It’s like suggesting losing weight by cutting off a leg,” he adds. “It risks trading cheaper bills for more and longer outages.”

Warren takes up a point I have made above.

“We need to stop the cycle of political over-reaction,” he argues. “One of the drivers of recent higher NSW network expenditure was a reaction to blackouts in 2003-04 caused by major under-spending in the 1990s.”

Shining a light on unfairness

A new paper in the AGL Energy economic series provides sobering reading for anyone concerned about the health of the east coast electricity market (the “NEM”).

Written by the company’s chief economist, Paul Simshauser, who is also professor of economics at Queensland’s Griffith University, the paper is not a “whole of body” diagnosis but rather a snapshot of the network tariffs saga and how problems have been amplified by the schemes to boost solar power.

Simshauser’s paper was delivered to a high-level industry forum in Heidelberg, Germany, last month and uses south-east Queensland as an avatar for the situation. However, he points out, the issues can be found on display in other parts of Australia as well as California and a number of other American states, South Africa, Brazil and elsewhere.

Simshauser’s focus is on the vexed issue of cross-subsidies benefitting households with air-conditioners and those with rooftop solar PV arrays.

When you add in explicit subsidies promoting PVs, he says, the wealth transfer in SEQ, the Energex network franchise area, amounts to 22.6 per cent of grid revenues.

He observes that “the requirement for network and retail electricity businesses to raise synthetic taxes to fund politically-popular policies by artificially raising tariffs is clearly a significant problem and, above all, unfair.”

Simshauser adds that network charges based on a uniform variable rate, the basis for the grid system in the NEM and Western Australia, can now be seen to “violate the accepted canon of fair pricing – viz, pricing at cost.”

He points out that the problem has fully emerged in the past 3-4 years as the present system throws up inefficiencies not previously appreciated in NEM supply with subsidized solar ”essentially changing the price elasticity of energy demand.”

The fact that it takes Simshauser 33 pages to analyze the SEQ issues highlights the complexity of remedying the problems for policymakers and he acknowledges that a new tariff structure “will, of course, produce winners and losers” – which you don’t have to be Einstein to appreciate makes it difficult for gunshy MPs in a febrile political environment.

“But this,” says Simshauser, “is a question of ‘how to transition’ not a reason to accept the unfair status quo.”

As for solar PVs, he argues that the subsidy cost should be taken on to the government balance sheet – that is, paid by taxpayers – not imposed on consumers who have not opted to install them.

In passing, he tips his hat to Oxford University’s professor Dieter Helm, whose recent savaging of politicians picking energy winners includes the observation that removing subsidy schemes is evidently much harder than introducing them, an understanding I have to tell both professors that does not actually require a PhD but goes to the appreciation that a government in search of votes is blind, deaf and dumb to wider concerns regardless of its color.

The impact of the solar feed-in tariff scheme introduced in Queensland by Labor at the start of this decade was initially modeled, Simshauser points out, by his AGL colleague Tim Nelson at $2 billion for its life from 2012 to 2028 – and this evoked a furious pushback from the solar lobby, claiming it was based on wrong assumptions.

However, he adds, the cumulative cost of this FiT at September this year was already $500 million and the LNP government now in office estimates this will reach $3.4 billion by 2028.

Speaking in Germany, Simshauser noted that this may seem trivial when measured against the cumulative German subsidy to date – which is about 108 billion euros – but south-east Queensland has three per cent of the German population and the hit on consumers is therefore comparable.

For me, this raises the question of what is the cumulative cost of all the solar schemes across Australia, something the Abbott government should be able to have computed.

Faced with a problem like this, we should at least be told its full scale.

(Bear in mind, we operate with a media mindset that, as I have pointed out here more than once, led “The Age” newspaper in Melbourne to greet a $40 million aggregate annual increase in Victorian household power bills, resulting from a successful network challenge to an aspect of an Australian Energy Regulator determination, literally with “shock” and “horror” in the headline of the story.)

The new Simshauser paper is useful fodder for the network operators as they continue to push, as does the NEM rule-maker, for the body politic to get serious about restructuring grid tariffs (40 per cent of the final residential retail bill) in the next 3-5 years and not over a decade or longer as governments collectively shy from the inevitable fuss by the media and meretricious players.

In this respect, it is worth underscoring the broad, salutary point made by Simshauser: up to 2005 the NEM was seen as one of the world’s best examples of electricity micro-economic reform but now it is one of the worst-performing power markets on the planet.

The core cause, as he writes, is “misguided policy responding to blackouts in 2004 resulting in network reliability standards being considerably tightened and (from 2007) an unprecedented wave of capital spending.”

When you combine these effects with the burst of solar subsidization and the ongoing rise of air-conditioning use, you end up with a 112 per cent increase in network tariffs in just five years – and this in a period of otherwise low inflation so that the power price spikes are even more noticeable.

Of course this latest AGL Energy paper (number 45 in the company series and available on its website) is dealing with no more than an aspect (albeit a “non-trivial” one) of what ails the NEM, but it highlights the importance of the job of remedying the situation as fast as possible.

The federal government bureaucrats wrestling with the energy white paper should take note even if the detail of this contribution goes over the heads of their political masters.

Integration versus defection

One of the running themes of green boosters is that, given the take-up to date of PVs by households, it is only a matter of time before the electricity grid is well and truly undermined, a piece of self-serving propaganda swallowed whole by too many in the media and politics because of little real knowledge of power supply.

In this green argument, the network business, like the fossil fuel industry, is doomed. It is only a matter of time and of persuading (ie, coercing) policymakers to support the crusade.

It is more than a little interesting, therefore, to read the consultants’ report on distributed generation and the grid commissioned by the Energy Networks Association from Oakley Greenwood and published last week.

The complexity of the discussion, unfortunately, and also the many other topics occupying attention just now, has meant very little mass media coverage of the report.

I sympathize with the journalists in this respect: there just aren’t enough hours in the day to deal with all that is going on at present – and this coming Thursday will see networks front and centre in coverage of another key issue: capex and opex outlays and ensuing charges.

Publication of the Australian Energy Regulator’s draft determination on 2015-19 network revenue for the three New South Wales distributors (as well as the ACT), an exercise which will include the first annual benchmarking of all the DBs, will hog the headlines late this week – and fairly so, given the importance of the decision to many people.

In the interim, the effort by the ENA (via the Oakley Greenwood report) to explain why “integration not defection” is in the best interests of grid customers deserves to be heard.

The core point of the report is that choosing to leave the grid is really not in consumers’ best interests in terms of access to services or money.

It takes the consultants some 30 pages to explain why this is so.

The bottom line, literally, is that abandoning the grid for a stand-alone system would cost households about five to six times their current network charges – between $596 and $850 a month for an average account-holder.

Abandonment would also mean that solar PV users couldn’t sell their surplus power or take advantage of new services emerging as the digital age enables them, a point I have always thought blindingly obvious, leaving me wondering why some solar boosters make so much fuss about the prospects of mass defection.

The Oakley Greenwood report also reinforces the argument from networks and energy supplier lobby groups that those taking up PV systems under present tariff arrangements are having a lend of six-sevenths of the household market. The current cross-subsidy, according to the consultants, amounts to $98 to $163 a year – or around $1 billion a year in aggregate on the east coast, I reckon.

The other aspect of the cross-subsidy issue, as ENA points out, is that those with air-conditioners benefit to the tune of about $700 a year over those without the coolers, an even bigger cross-subsidy.

Together, these points reinforce the view that Australia has taken too long to introduce ways to charge for power based on actual household capacity and its demand on a network.

The next meeting of the CoAG Energy Council really needs to speak clearly about tariff restructuring and, in particular, on a timetable for change.

Inevitably, the green boosters see publication of the ENA report as evidence that the networks are becoming nervous about the threat of mass grid defection on the back of distributed generation and the ensuing prospect of significant write-down of their assets.

While this is probably true as a worst-case scenario, it is hardly the most likely or the only issue; a bigger one for consumers is that being shepherded down the abandonment path (by vested solar interests and deep green ideologues) is likely to deliver them to anything but a better place.

While the real costs of defection for households, as set out in the report, are not minor, they are not the only negative prospects for those succumbing to the full-on off-grid seduction. These include (1) losing the grid’s availability to instantly top-up supply and to sustain power quality when solar output isn’t available or adequate and (2) the fact that the value of electricity at night for householders is likely to be higher than the cost of buying over the grid.

The magic wand offered by the green fairies down the garden, of course, is cheap battery storage but I can’t find an independent, hard-headed industry analyst who thinks this is just around the corner or even likely in any realistic, medium-term outlook.

A big risk for networks is that politicians will get sucked in to the abandonment scenario and start making policy and regulatory decisions based on perceptions of winners, deterred not at all by their own and their predecessors’ failures at this game in the past.

A report like that produced by Oakley Greenwood is necessary back-up for the industry’s counter argument but a really important part of the game is producing advice for the politicians that is simple and supported by a convincing story for the consumers/voters.

The networks sector is not helped by it having been so comprehensively demonized over the past 2-3 years.

In this regard, this week’s benchmarking report from the AER is not going to help the standing of the government-owned DBs in NSW and Queensland.

It is unfortunate, to say the least, that the pressing need for tariff restructuring is inevitably going to get caught up with the privatization debate in these two States over the next two years but to allow either necessary development to be undermined by the other will be still worse.

What we need is a wholly privatized network system, strongly but sensibly regulated for efficiency, with the need for necessary future capex appreciated and supported, operating with a tariff structure fit for purpose, with householders encouraged to take up smart meters and retail deregulation fully implemented.

And with politicians properly embracing the mechanisms and the cost of support for users in hardship rather than spreading a further burden on all consumers in an environment where cost of living pressures are a major problem for a growing minority of the population.

Politically, this is a huge ask but not an impossible one – and ensuring that the debate is comprehensible to both voters and MPs is a critical step, one not made any easier by the meretricious behavior of ideologues.

Reports like this one from Oakley Greenwood are necessary and useful but by no means sufficient for the supplier task of shepherding policy to completion as quickly as possible and carrying consumers with them in wanting the job done.

Fossil fuel’s ‘death’ much over-stated

Virtually lost to view for the Australian community-at-large in the ongoing media hoo-ha about the recent IPCC climate change report, the China/America emissions statement, the G20 meeting and Barack Obama’s Brisbane speech is a major new energy statement.

The International Energy Agency’s annual World Energy Outlook, the latest edition of which was published on Thursday last week, is widely considered the bible of the business and the 2014 issue contains a wealth of material relevant to the current headline debates.

The new report by the IEA, which is recognized as the world’s premier energy think tank, paints a picture out to 2040. In one sentence, it sees 75 per cent of the world’s energy needs still being met by fossil fuels 25 years from now.

So much for the impending death of fossil fuels, the war cry of those demanding investors shed their portfolio holdings in these forms of energy.

A report of this nature is a kind of cut-and-come-again pudding for all the vested interests in the energy space and you can already read on the Web literally a hundred perspectives of what the study implies.

What tends to get lost in this waterfall of opinion is the bare bones of the report, something members of the community should be able to access as well as the many attempts to tell us what to think.

Here are some basic points:

In 2040, the agency predicts, the world’s energy supplies will be split almost equally in to four parts: oil, gas, coal and low-carbon sources. Coal demand will peak in the 2020s, the outlook asserts, but demand for oil will rise from 90 million barrels a day to 104 million barrels – while consumption of gas will increase by 50 per cent and still be growing in 2040.

A critical factor in the IEA thinking is the need to drive energy efficiency harder across the world.

Without the cumulative impact of efficiency efforts at the level the agency predicts can be achieved, oil demand will be 22 per cent higher, coal use 15 per cent higher and gas demand 17 per cent more.

(This is an issue on which the G20, their meeting just ended in Brisbane, have also focused.)

If you extrapolate greater fossil fuel demand to extra carbon emissions, you can readily see that the role of energy efficiency, both in terms of abatement and as a boost for national economies, deserves far greater attention than the fuss constantly given to wind and solar power.

A startling number in the IEA outlook is the forecast that 7,200 gigawatts – each GW is 1,000 megawatts – of new electricity generation will be needed just to replace existing power plants due to be retired by 2040.

This is 40 per cent of the current generation fleet.

Given Australia’s burgeoning role in world gas trade, it is more than just interesting that the IEA sees this fuel’s share of the global energy mix rising from 21 per cent now to 24 per cent in 2040.

Perhaps still more notable, given the prospect for unconventional gas development in onshore Australia, and the virulent opposition to it of the Greens, parts of the Labor Party and the radical Left, the IEA predicts that this sector will account for 60 per cent of the forecast growth of gas demand and, by 2040, about 31 per cent of all production of the fuel.

The agency also says: “Gas is well placed to enjoy a competitive advantage over many other fuels for power generation, given its higher efficiency, greater flexibility, lower capital costs and shorter plant construction times.”

The IEA claims that gas will start overtaking coal as the leading fuel for power generation in the OECD around 2025 – note, of course, that this is the so-called “developed world,” an expression becoming increasingly outdated, and the role of coal will remain strong in most major developing countries.

Overall, says the agency, coal will see 15 per cent growth in production over the modeled time frame and China. India, Indonesia and Australia will account for 70 per cent of world coal production in 2040.

The nuclear story, as foreseen by the IEA, is also noteworthy.

The agency believes 200 of the 434 reactors operational today will be shuttered by 2040 – but by then, it says, nuclear capacity will be 620 gigawatts compared with 392 GW now. However, it sees the nuclear share of power production rising just one per cent to 12 per cent because of the closures.

The IEA says China will account for 45 per cent of new nuclear developments with India, Korea and Russia taking up a further 30 per cent. Another 16 per cent will be contributed by the US.

This nuclear roll-out, adds the agency, will result in more than four years’ worth of global carbon emissions being avoided between now and 2040.

Where the energy illiterate lose the plot in reacting to the report – and the agency does not help much to make the point clear – is over predictions for renewable energy.

The green propaganda trick is to include hydro numbers in generalized statements about future renewable energy and then to talk up capacity growth for wind and solar without dwelling on the greater ability of water power to deliver electrons.

Renewables, says the IEA, will account for almost half the increase in generation capacity by 2040 with solar and wind power taking up 52 per cent of the new capacity construction.

But the rider is that hydro-power will account for 30 per cent of the new green development and its ability to produce electricity well and truly outweighs the variable outputs of solar and wind.

Plus there is the point that integrating larger amounts of intermittent energy in to power grids creates significant challenges from both technical and market perspectives where hydro is a natural fit.

The IEA modelling foresees the output of hydro-electric generation more than doubling by 2040, reaching 6,300 terawatt hours and pushing on to 7,000 TWh by mid-century. This will require the construction of some 3,700 dams, increasing hydro capacity to 1,700 gigawatts, double what it is today. China, India, sub-Saharan Africa and South America will be big players in this development.

In fact, if you combine nuclear and hydro power when looking at energy supply, the picture shifts and the solar and wind hype becomes apparent.

It hardly ever gets attention, though.

Oh, say can you see?

Listening to the live broadcast of President Barack Obama’s speech at the University of Queensland on Saturday afternoon, I was struck by something that he was not saying.

To be blunt, while there was much to appreciate in his general comments about support for freedoms and US principles, I was left feeling it was a somewhat dishonest speech.

It is very easy when listening to such an excellent speaker as Obama to be sucked in by the delivery skills and to fail to see the bigger picture, a trait a large number of his fellow citizens seem to be getting over, judging by the recent mid-term congressional and gubernatorial election outcomes.

What Obama chose not to mention at all at UQ is that, during his presidency, the US has undergone a fossil fuel revolution that is changing America’s economic and geo-political security by tapping his country’s vast resources of oil and gas in shale beds, using clever technology to not only significantly alter the energy trajectory of his nation but pointing the way for other countries like Australia.

With respect to shale resources, the Singapore-based Pacific Economic Co-operation Council said only last week that it didn’t believe “anyone fully realizes how massive (this) revolution is for the US economy.”

Apart from the major impact this is having on geo-politics, it is a significant contribution to the resurgence in US manufacturing, something of which Obama boasted in his speech without attributing it, in substantial part, to greater use of low-cost fossil fuels.

He also chose not to refer to the fact that the shale revolution has allowed his country to greatly improve its terms of trade by eliminating a liquid fuels import bill that has been costing America $US350 billion a year. By 2020 this trade will be $US80 billion in surplus.

Thanks to the development of shale oil and gas, America this year will become the world’s largest producer of petroleum products – and, on Obama’s watch, export of all forms of hydrocarbons has moved to top of the American list of overseas sales, surpassing agriculture, capital goods and even aircraft.

An honest speech would have found room to say that, like Australia, America owes much of its present economic standing to fossil fuels, that their value to both countries’ Asian neighbors is very important and that simply demonizing the industry while talking up climate change policies serves to mislead our populations as to the abatement task lying ahead.

It could, and should, have pointed out the value in an honest dialogue about managing both fossil fuel development and climate change policies.

It could have said that one of the great contributors to the welfare of the Asia-Pacific in the 21st century is the development of trade in liquid natural gas, spearheaded by Australia, Indonesia and Papua New Guinea, some of it led by companies domiciled in America, also contributing to alleviation of carbon emissions as it substitutes for coal.

It could have acknowledged that Obama’s own country and his neighbor, Canada, are hell-bent on thrusting in to this LNG trade, creating a vigorous competition for gas, thereby further energizing Asia’s economies and, by making the fuel cheaper, encouraging its wider use at the expense of coal.

The president’s omissions are all the more stark because he delivered his speech in Queensland, home to the second startling international energy development during his term of office, the creation of a LNG industry based on coal seam gas. And because it was delivered in Australia, which is about to become the world’s leading LNG trader (by 2018), not least because of the investment here of major American companies and the sharing of great geological and technological know-how, partly flowing from the contribution of research in universities.

If Obama (and his speechwriters) had opted for including these thoughts, this address might now be resonating around the world.

Instead Obama reached for feel-good rhetoric and the applause for his UQ talk won’t survive beyond the hall in which he spoke.

Which is rather sad, really, but not surprising I suppose.

Less than meets the eye

Australia’s media in particular have produced a typically naïve reaction to the recent carbon abatement announcement by America and China but, in this respect, they are in lock-step with most of their counterparts around the world.

The additional edge here comes from the near-universal media view, fuelled by Labor, the Greens and radical green lobby groups, that the Abbott government has been “blindsided” by the announcement, something hard to square with the apparent fact that our (and other international) foreign affairs specialists have been expecting it for months.

The gap between perception and reality on this occasion is rather typical of much of the coverage of the greenhouse gas emissions area with the community at large continuously being shortchanged on information in context – with facts separated from rhetoric – and by politicians mouthing “clever” but meaningless noises (as witness Bill Shorten’s kneejerk accusation that Tony Abbott has a “flat earth” mentality in reaction to the US/China statement).

The American and Chinese sides of this exercise are worth closer examination.

In the case of the US, the starting point is that Barack Obama is the lamest of lame duck presidents after the US mid-term congressional elections and has absolutely no chance of getting the Republican-controlled houses of Congress to support this bid to improve how posterity judges him.

More importantly, the inconvenient fact about his new abatement commitment is that it is somewhat LESS ambitious than the forward curve of his 2009 Copenhagen announcement (17 per cent below 2000 levels by 2020) which he has now extrapolated to 2025. The Copenhagen pledge would have produced a 42 per cent US abatement in 2030; Obama now offers 29 per cent in 2025.

(Another interesting point, I think, is that the Americans are at present buying goods from China responsible for half a billion tonnes a year of the latter’s emissions.)

Dissecting the Chinese statement takes more effort.

Its key intention is to set 2030 as the peak year for its emissions – but what does this actually mean?

One way of looking at it is to assume that its current three per cent a year growth in emissions continues for 16 years – that would take China to 16 billion tonnes annually in 2030 versus 9.8 billion tonnes now.

Using our local emissions as a measuring stick, this implies China will increase its emissions by 14 Australias between now and 2030, assuming it is able to stick to just three per cent growth.

As the joint governments’ statement says, keeping to this trajectory will require China to have a fifth of its electricity supply in 2030 from non-fossil fuelled generation, building between 800 and 1,000 gigawatts of nuclear power, hydro power, solar capacity and wind farms.

(For the electricity illiterate, a megawatt is a megawatt, so the green building outlook is already being hyped — but it isn’t of course. A megawatt of nuclear capacity will deliver a lot more in terms of electrons than its equivalent in solar or wind plant.)

Another way of looking at this picture, given the large amount of coal-fired capacity China has built in recent years and is still building, is that there is not going to be a drop in the next 16 years in the four billion tonnes of coal burned there annually just to create electricity and probably not before mid-century.

The media spin internationally on this development can be encapsulated by one headline and sentence from a large northern hemisphere player.

“US and China reach historic climate change deal, vow to to cut emissions,” said the headline. “Barack Obama and Xi Jinping have announced both countries will curb their emissions over the next two decades,” said the opening paragraph.

Well, the pair made no “deal,” made no “vow” and did not announce their countries “will” curb emissions.

The key paragraph in their statement says this: “The US intends to achieve an economy-wide target…….China intends to achieve the peaking” and refers twice to their “making best efforts.”

As a Harvard University law professor points out, (1) what happens if the goals expressed in these intentions are not achieved is left unaddressed, (2) it will not be a violation of the statement if their “best efforts” do not succeed and (3) the announcement creates no obligations whatsoever.

It is, he adds, not a treaty nor a pledge nor even an agreement.

It is certainly not, to use the most frequent phrase from green claims and general media commentary, a “commitment” by the world’s two largest emitters “to reduce their contributions to climate change.”

In fact, crucially, there is no limit on the peak the Chinese say they will reach in 2030; is there, in fact, an incentive here for them to emit more over the next decade to make the peak higher?

As the lawyer rightly also says, just because the announcement is aspirational, it is not meaningless; it will be useful if it injects momentum in to the UN negotiations in Lima (starting at the end of this month) and Paris (December 2015) – but the gap between this sort of statement and a binding, global commitment to limit carbon emissions is very, very wide.

Hyping the announcement to the level of Moses descending Mt Sinai with the tablets is well and truly over the top and, locally, using it to give the impression that it has created a crisis for the Abbott government is complete nonsense except to the extent that venal opposing politicians, abetted by a compliant and unquestioning mass media, can make it so.

Settling for second best

I wrote about the new Business Council energy statement, which is its contribution to the federal government’s energy white paper deliberations, in my post here on Monday and focused then on the important things it had to say about gas supply, surely the key energy issue of the day – but there is a broader and deeper point arising from this document that should not be ignored as it has been by the mass media (commercial TV and the tabloids).

BCA chief executive Jennifer Westacott made the point strongly when she addressed the Sydney forum that was the launching pad for the statement. “For some time now,” said Westacott, “a confused debate about what constitutes good energy and climate change policy has Australia settling for second-best policy.”

In the BCA media statement releasing the paper, the council went further, condemning the domestic energy market as “not fit for purpose for the 21st century.”

I don’t imagine that I am alone in thinking this is an extra-ordinary judgment on national management of an issue that has dominated public debate since at least 2007 and has seen two energy white paper investigations as well as the Federal Treasury “Strong growth, low pollution” paper plus all the reports of Ross Garnaut, the Productivity Commission and so forth.

An important question we collectively need to answer is what lies at the root of this national inability to comes to terms with good strategy for a sector that, as Westacott said on Monday, has shaped our economy, accounts for 21 cents in every dollar Australia exports and provides hundreds of thousands of direct and indirect jobs? Unless we can confront this flaw, how can we repair the energy policy damage between now and the end of the decade?

The Business Council CEO provides this litany of influences on our “second-best” approach: (1) moratoriums in some States constraining access to natural gas at a time when we need these resources the most, (2) duplicative and costly environmental and planning regulation, (3) the renewable energy target, (4) network regulation adding costs for consumers, (5) “fragmented and ineffective” approaches to climate change policy, and (6) slow progress on energy market reform.

We are in an energy environment, Westacott complains, where residential and small business electricity prices have doubled in 10 years, business power bills have gone up 88 per cent, gas prices have increased by a third in five years and resource projects are 40 per cent more costly to deliver than in America.

These energy prices, she says, are undermining Australian industry’s international competitiveness.

Here I would like to have seen an acknowledgement that an equally important issue is the competence with which industry manages its use of energy – who would like to assert that, across the board, we are in the front ranks of energy efficiency?

The BCA argues that we cannot continue to let policymaking be derailed by “short-sighted slogans that do not allow for a middle ground.”

Others have lambasted all this as “feel-good, gesture politics.”

The debate is characterised by Westacott as “underpinned by misinformation and emotion” – to which she might have added venal politicking for short-term gain.

She points to the BCA paper as offering a simple proposition: that Australian energy policy needs a vision that aligns energy and climate change policy.

Inherent in this observation, but not spelled out so as to apply the heat to mainstream federal and State political leaders, is that we also need a far greater sense of urgency about attaining higher ground – which is very different from governments making rushed, catch-up decisions to paper over the ever-growing number of energy supply cracks.

The council offers five key areas for a new approach: (1) improve the competitiveness of the energy sector, (2) develop more natural gas resources and make the market more efficient, (3) improve electricity markets, too, (4) continue a markets-based approach to liquid fuels supply and (5) manage greenhouse gas emissions cost-effectively.

Like just about everyone else in the market of ideas without an ideological or political axe to grind, the BCA calls for bipartisanship to pursue this approach.

The council adds: “If Australia does not act to strike the right balance in energy policy, the economy as a whole will be less competitive and consumers will be worse off.”

No-one with commonsense can argue against the broad BCA thesis but it is not the first time all these thoughts have been raised in the national debate, including in submissions to both the current white paper and the one published only 25 months ago.

No-one in authority can claim to be unaware of these thoughts.

And yet we still settle for second-best policy (which in some respects, I think, is being charitable).

Given the state of play, would it not make sense to hold a special Council of Australian Governments meeting to discuss energy policy at first ministerial level?

Shoehorning a discussion in to the crowded agenda of the normal meetings – I can’t find a date on the CoAG website for when the next meeting, the 39th, will be held; the 38th was last month – is really hardly the go.

Or are we going to muddle on?

BCA dumps on reservation

There are many interesting aspects to the 70-page review of Australia’s energy policies that the Business Council is releasing today, but the most important is the peak body’s unequivocal rejection of domestic gas reservation, a proposal from some of the largest manufacturers in the land who have been unrelenting in their propaganda for this cause over the past three years.

Rejection of the concept by the upstream petroleum industry has been shrugged aside to date by the manufacturing lobby. “They would say that wouldn’t they,” has been the line.

Rejection by both mainstream federal political parties in government has not deterred the factory lobbyists either and it is hardly a secret that powerful elements in the trade union movement are at work to persuade Bill Shorten to change Labor’s stance.

But now we have the peak voice of all Australian business dismissing gas reservation as a really bad idea.

The BCA says: “Having considered this issue in depth, (we) do not consider reservation an appropriate or effective policy response.”

There is a reason, it comments, why no other commodity here is subjected to a reservation policy – it ultimately leads to inefficiencies in resource allocation.

The council bases its gas reservation rejection on two key grounds: (1) any such move will be a disincentive to resource sector investment and (2) it will do “very little” to address the problem of higher prices as they will continue to be determined by international and domestic market forces and the underlying costs of production.

There are “more than enough gas resources,” the BCA adds, “and the challenge is getting the gas out of the ground in time to meet demand.”

If reservation is introduced tomorrow, it says, it will not decrease the price of gas.

“In order to reserve gas, there needs to be gas to reserve.”

The problem with reservation, it declares, is that it “actually leads to delays in developing the gas needed to meet demand” by adding to costs that and increasing disincentives to development.

The council also fires a large shot across the bows of the body politic on gas costs, an issue that is growing in national importance as political leaders make noises suggesting the rising price problem is being addressed and as some governments fall well short of managing the community concerns about the physical impact of gas development.

Gas prices have increased by 36 per cent in “real” (ie inflation-adjusted) terms over the past five years and the Business Council declares “There are no quick fixes to rising gas prices.”

That’s a message that should be writ large on both ministerial and media walls.

For political leaders in Melbourne and Sydney, where elections loom, there is also a blunt message: “Inappropriate barriers in New South Wales and Victoria are making the situation worse.”

The solution?

“Increase Australia’s supply,” argues the BCA. “It is the best way to ensure that businesses and households can access reliable and competitively-priced gas.”

And the council adds this elbow to the political ribs: “Governments cannot impose regulations on gas developments (that restrict delivery) and avoid responsibility for adding to the pressure of rising gas prices and the risks of unmet demand during peak periods.”

The council has listed the gas supply issue in its five priorities for energy reform in a statement that appears just as the federal government is settling down to examine the responses to its green paper ahead of next year’s white paper (although the Department of Industry website still lists the end of 2014 for publication).

The BCA’s priorities are: (1) improve the competitiveness of the energy sector by lowering the cost of production, (2) ensure access to gas resources and improve information and trading in gas markets, (3) improve electricity market efficiency by moving to consumer prices that reflect the cost of delivery, (4) underpin national transport fuel security via open, competitive domestic and international markets and (5) address carbon emissions goals by driving R&D investment and making abatement cost-effective.

Above all, the BCA says, delivering on these priorities requires “bipartisanship and policy settings that stay the course.”

Australia needs a balanced approach to energy policy, it adds, “that strikes a balance between promoting economic growth, energy security and environmental sustainability.”

So far as gas is concerned, the Business Council urges action to unlock new reserves while hearing community concerns and taking steps to ensure safeguards are in place for the environment.

It also calls for better engagement between the gas developers and the community – and for the NSW and Victorian governments to replace moratoriums on exploration and development “with a robust regulatory regime that ensures best-practice environmental standards and land-use practices.”

Divestment & delusion

The fossil fuel disinvestment issue flared briefly in to prominence in Australia, at least so far as the media are concerned, and has now faded in to the background again – but it has not gone away and a number of universities are wrestling with demands that they remove oil, coal and gas stocks from their endowment portfolios.

The rather botched effort of the Australian National University to surf this wave got a lot of media attention, mainly because of strong political reaction to the decision, while the later decision of the University of New South Wales not to bow to the campaigners got barely a tenth of the coverage.

(Just how far, by the way, that the media mythology can run over facts is well illustrated by a current commentary in the magazine “Eureka Street” about the ANU’s divestment from coal, which is exactly what it has not done.)

Britain’s Glasgow University has gone down the ANU road and, at this distance, this may seem barely noteworthy except that the decision has sparked criticism from its own school of engineering that is worth wider attention.

Led by Paul Younger, professor of energy engineering at the university, the school has dismissed the university decision as being “well-meaning but ultimately misguided” for a range of reasons.

First, say the engineers, for heat and transport fuels, there are no fossil fuel alternatives yet available at scale and it is imperative the academic sector engage with industry to make ongoing use of these fuels as sustainable as possible.

Second, they argue, the skills and facilities of the hydrocarbons sector are indispensable to the development of carbon capture and storage (a development that, as I wrote in “Business Spectator” yesterday, is given a prominent role in 21st century abatement in the new IPCC climate change report although you wouldn’t know this from local mass media reporting).

Without CCS, the Glasgow school avers, there is no realistic chance of the world reaching decarbonisation targets this century.

Third, say the engineers, CCS is not just about improving the environmental performance of fossil fuel use; if applied to sustainably-produced biofuels, “it offers one of the few hopes of actively stripping greenhouse gases from the atmosphere.”

The Glasgow engineers go on to argue that “fossil fuels are not just an energy issue,” pointing out that the vast bulk of food consumed in Europe today is produced with fertilizers made using fossil fuels and, again, “there is no alternative available at scale to replace this in the foreseeable future.”

As well, they say, “the chemical and processing industries are overwhelmingly based on the use of synthesis gas produced from fossil fuels, producing many of the pharmaceuticals upon which modern society relies as well as the vast array of plastics, many of which lock up carbon in the long term.”

All of this, of course, is as germane to Australia as it is to Scotland and Europe.

Professor Younger points to Glasgow University’s R&D efforts in fossil fuel-related areas and argues that a divestment decision jeopardizes its credibility “as it suggests we are unaware of the context in which our research takes place.”

He and his fellow engineers argue that decarbonization is too complex and too important to be amenable to “simple gesture politics” – broadly the stand taken by Harvard, for example, as well as UNSW – and they declare that it is “morally repugnant” to heap opprobrium on a key Scottish export earner while expecting tax revenue from such sources to help support university education.

They could add that, in a world moving towards requiring about a third more energy mid-century than it does today, arguments for policies to promote efficiency of use make good economic as well as environmental sense but suggesting that Asia, where much of the growth will be sited, is going to abandon fossil fuels to achieve economic development and to lift scores of millions from abject poverty is utterly fanciful.

Much the same can be said about sub-Saharan Africa, where 600,000 people, a large number of them small children, die each year for lack of access to energy, a point that, for me anyway, makes Christine Milne declaiming “Do you want coal or death?” especially nauseating.

For the developed world (and industrial juggernauts like China), the difference sensible policy and technological development can make is well illustrated by just one statistic: mid-century electricity demand would be double what it is now forecast to be without the anticipated large gains from end-use efficiency.

That’s the difference between gestures and down-to-earth practical efforts.

The divestment debate could do with a very large injection of commonsense, of the sort offered by the Scottish engineers, rather than the unquestioning coverage it routinely gets in the mass media in countries like Australia.

It is also worth saying that much more could be done by our leading mainstream politicians, whether Labor or Coalition, to challenge the divestment mindset in a way ordinary Australians can understand and appreciate.

The case for a sensible, long-sighted approach to our energy activities has yet to be put before our community by its leaders in a persuasive way – which is pretty extra-ordinary really when you consider how dependent the politicians are on success in this arena, not just in terms of security of supply and economy-wide benefits but also in developing a workable roadmap towards greater sustainability mid-century.

As a postscript to all this, here is what Glasgow University’s leaders have just said in a statement after being publicly cornered by their own campus engineering faculty:

“At a time when it has stated its intention to reduce its endowment investment in fossil fuels, the university remains committed to sustaining and developing its activities in energy science and engineering, including both fossil fuels and renewables.

“In view of their impact on the climate, there is a need to reduce our reliance on fossil fuels, but it will be necessary to continue to use them for many decades to come.”