Archive for March, 2015
Do you remember that scene from the “Crocodile Dundee” movie where the hero is confronted on a New York street by a mugger and, producing a ginormous weapon, says: “Call that a knife? This is a knife.”
The line resonated with me this morning when, fresh from the pretty substantial effort of the Australian Domestic Gas Outlook conference in Sydney last week, I opened the Productivity Commission website and read its magisterial, 169-page new research paper “Examining barriers to more efficient gas markets.”
If ever there was a must-read for stakeholders in the gas game being played out on Australia’s east coast, this is it.
Initiated by commissioner Philip Weickhardt, who retired from the Productivity Commission at the end of last year, the project is now headed by Paul Lindwall and it contains some curve balls and bouncers for the players as well as a wealth of carefully crafted analysis.
Those in a hurry probably don’t have to read more than the one page of key points.
The commission opens by saying that the integration of Australia’s east coast gas market with the Asia-Pacific region “represents an opportunity for the community to earn a higher return from its substantial non-renewable resources.” This, it asserts, will result in a net benefit for the community. That’s one in the eye for a whole regiment of anti-LNG ranters and their tabloid media fellow travellers for a start.
Acknowledging the impacts of opening the export market locally, including “material costs” from higher gas prices for some, the commission warns policymakers that attempts to cope with the cries of pain from affected consumers by, for example, pursuing domestic gas reservation are “unlikely to be efficient or effective in the long run” and “could distort important signals for adjustment.” “Governments should be mindful that policies that interfere with the market could undermine investment incentives including (bringing on) new sources of gas.”
As well, says the commission, policies, such as use-it-or-lose-it mechanisms, designed to accelerate gas production, risk bringing forward supply in ways that reduce the benefits the community obtains from the resource.
Noting that the resistance the gas suppliers are getting from some part of the community is “partly due to the poor early record of some companies in dealing with landholders and local communities,” the commission sees scope for improvement in legislated compensation to better reflect landholder costs when they negotiate access agreements as well as the decline in value of properties. It suggests there is scope for a voluntary, industry-wide code of practice for community and landholder engagement.
Government recourse to moratoriums — for example in New South Wales and Victoria — get the commission’s elbow. Weigh the expected benefits of these moves against the costs such as higher end user gas prices and reduced royalty and taxation income, it suggests. Use of the tactic in NSW and Victoria, its report comments, may necessitate the development of more expensive sources of energy.
“Sound risk management does not equate to eliminating all risk,” the commission opines. Scientific evidence suggest the technical challenges and risks can be managed through a well-designed regulatory regime underpinned by effective monitoring and compliance enforcement.
Market interventions such as the way gas transmission capacity is allocated and mandatory capacity trading requirements also require benefits to be weighed against costs, including the risk of undermining future pipeline investment, it also argues.
There is a lot of talk about the exercise of market power by gas producers and pipeline owners — it cropped up a fair bit during last week’s Domestic Gas Outlook conference — but the commission raises the possibility that high consumer prices and large consumer difficulties in securing new gas contracts could just reflect the risks and uncertainties to be encountered in a market undergoing considerable structural adjustment.
“Markets are dynamic,” the commission points out in the research report,” and participants need to adapt continually to a multitude of forces — the fundamental driving force behind the increase in prices on the east coast is the increase in the value of the fuel. “It is a direct result of producers removing a barrier that previously prevented them from accessing markets that place a higher value on the gas.”
On the social licence issue, the Productivity Commission says upstream petroleum explorers and producers need to give “further thought” to early engagement directly with affected communities rather than just on compensation for landholders. It adds the interesting comment that a social licence is not necessarily an accurate reflection of best interests across a whole jurisdiction or even the region hosting the gas activities.
The code of practice it suggests would need to be developed in consultation with, and endorsed by, key industry and landholder groups, the commission comments, raising the idea that the CoAG Energy Council could help its development and promoting the further thought that there is value in State bodies that assist the interaction of landholders, local communities and the industry — e.g. the Queensland GasFields Commission, an independent statutory agency.
The Productivity Commission also suggests that “there is a strong case” for the use of environmental insurance and assurance mechanisms, funded by the gas industry, to ensure that land affected by its activities will be rehabilitated when they are concluded and the need to do so weighs on investment decisions from the get-go. Environmental bonds are widely used across Australia, it points out.
The commission emphasizes that it has set out to provide an economic perspective for gas issues in eastern Australia. It is a decidedly useful contribution to the debate but its length will militate against it getting much traction in the public rows. I hope the mass media don’t just ignore it and even more that policymakers and their advisers devote some quality time to getting to grips with it.
Martin Ferguson delivered a thoroughly sensible talk to the Australian Domestic Gas Outlook conference in Sydney last week.
Now that the fevered atmosphere of the the New South Wales election, well won by Mike Baird for the Coalition, is out of the way, it is worth focusing on what Ferguson has to say about gas development, not least because the poll has highlighted the ongoing voter antipathy to the industry in the State’s coastal north.
The media focus in the aftermath of the election unsurprisingly is on electricity network privatization and infrastructure development that will flow from the sales, but the gas supply situation can’t be shoved back in the closet because its resolution is a real and increasingly urgent need.
Ferguson at ADGO made clear his disdain for politicking for short-term gain that “does not care about jobs or energy security security or investment confidence.”
This was a swipe at NSW Labor’s late campaign threat to kill the $2 billion Pilliga coal seam gas project near Narrabri, a step described by the Australian Petroleum Production & Exploration Association (whose advisory board Ferguson chairs) as an attempt to plagiarise the policies of the Greens — a wasted effort anyway because the Greens appear to have snatched the two NSW north coast seats that the Sussex Street schemers were hoping to take from the National Party.
In making this move, Labor, as Ferguson pointed out, has damaged its credentials on the issue of sovereign risk.
“Call me old-fashioned,” Ferguson told the 200-strong ADGO audience I chaired, “but I still subscribe to the theory that good policy makes for good politics. The short-term allure of opportunism needs to be seen for what it is.”
This is something that needs to be brought home to a wider political audience than just the rather inept schemers in Sussex Street, Sydney.
The critical need, as Ferguson pointed out, is for gas suppliers, consumers, unions and governments to redouble efforts to put in place the regulatory fixes required to deliver an efficient and secure domestic energy sector.
“When people tell you that developing more natural gas will not put downward pressure on gas prices, they’re actually trying to tell you the laws of supply and demand have been repealed,” Ferguson said.
The situation is now at a crossroad, he argued. “There is a real risk that we will fail (to build on the opportunity of more extensive domestic gas infrastructure provided by the east coast LNG projects).”
One of the things that ADGO underlined, at least for me, is the fact that there is certainly more gas available in the Cooper Basin, the Northern Territory and Bass Strait, but the cost of getting it to NSW, where it is most urgently needed, is such that it is not going to be “cheap,” which in the minds of many, including not a few manufacturers, is where it was 3-4 years ago.
This has important implications for a lot of factory owners, but gas costs are not their only input problem as they struggle to survive, a point also made at ADGO.
There are some in the Labor Party who now want to portray Ferguson as a maverick and worse — but it is worth noting that Gary Gray, the present federal spokesman on resources and energy (who made a point of saying to the ADGO audience that he, Ferguson and the Liberals’ Ian Macfarlane all occupy the “extreme middle” of the energy debate) was at pains last week to highlight the expert advice available to governments that the impacts of coal seam gas extraction on groundwater systems are understood and can be minimized and mitigated.
Gray set out the challenge clearly for State governments: to maintain a century-old land compensation regime for State-owned resources and more gas production, generating a long-term revenue resource through royalties and rents, with the best possible environmental protection.
Federal Labor’s objective, he said, is to “develop a domestic gas sector that supports industry, families and communities.”
You have to be smarter than me to see how this squares with the politicking of Luke Foley and NSW Labor in the last fortnight of the State election campaign.
The development of natural gas from coal seams, shale, tight geological formations and offshore, Gray said at ADGO, “will generate many thousands of jobs in maintenance and production, continuing to support Perth, Adelaide, Melbourne and Brisbane as major technology hubs for the oil and gas sector.” And maybe in due course Newcastle?
The real choice facing policymakers, Gray added, is gas production with modern techniques or no production at all — “and this makes for an easy choice.”
Try telling that to the Sussex Street apparatchiks.
Or to the new crew of MPs from across the political spectrum soon to be assembling in Parliament House, Macquarie Street.
While the outcome of the State election seems to have settled the issue of power network privatization, it would be a stretch to suggest that it has laid the foundations for resolving the NSW gas supply problem.
Can Mike Baird take advantage of his new-minted political authority to deliver the leadership needed to resolve this impasse?
I have spent most of the past week co-chairing the Australian Domestic Gas Outlook conference in Sydney, a three-day tour of fields of frustration that are now the stamping ground for gas explorers, producers and large consumers alike as politicians of all stripes puts politics ahead of the economy, jobs and cleaner and more secure energy supplies for the southern seaboard in particular.
For these gas stakeholders, the frustration is the more keenly felt because the problem is not a lack of the resource but an inability of policymakers to enable supplies to flow to where they are needed, notoriously in New South Wales, where, as was clear from some of the program presentations, there is a measurable risk that there will be shortfalls of supply in the next three winters.
The extent and duration of any such shortfall, and how the State government would handle it under emergency regulations, are all matters for endless speculation, but the fact that NSW has reached a point where it may occur is not deniable. One of the Rumsfeldian known unknowns is how stressed manufacturers will react. The analogy of straws and camels’ backs comes to mind.
I thought Cheryl Cartwright, CEO of the renamed Australian Pipelines & Gas Association, made a good point when she argued that, for users, the row with government over delays in resolving the coal seam gas imbroglio is not the most vital issue — the key question is, should the CSG development proposed for the State fail to eventuate,where will gas be sourced? The equally important other point, I suggest, is what the cost of this alternative gas will be?
This highlights the main game for Mike Baird and the Coalition government in NSW — who I expect to be returned in tomorrow’s poll: how will consumers respond to higher gas prices, which are as near to a certainty as anything can be? The mass market can shift energy sources but the large manufacturers, to a substantial extent, can’t.
As Labor leader Luke Foley apparently doesn’t understand, a substantial decline in industrial demand isn’t a solution, it’s a whole new problem for thousands of NSW employees and the State economy.
Paul Fennelly,acting CEO of the Australian Petroleum Production & Exploration Association, reminded ADGO attendees that, even without the influence of the Gladstone-based LNG developments, gas prices for eastern Australia have been on a steadily rising curve because production costs are rising. Exploration and development of gasfields now costs more than it did a decade ago. Transportation of gas costs more. Infrastructure costs more.
APPEA and others on the supply side keep pointing out that downward pressure on gas prices can be achieved by sensible decisions on the location of supply — for example, bringing on the $2 billion Narrabri project that will deliver half of NSW’s gas needs from within its borders (compared with four per cent today) — but this is not a promise that users can expect the bills they were receiving five years ago.
A really important question is how many manufacturers can afford to pay the higher costs of gas that would eventuate even without an LNG industry in eastern Australia?
“We must have a strong and viable manufacturing sector” is a mantra that resonates through all the debate, including the ADGO meeting, but what does it mean in a world where energy prices are well above what they were when the factories were built?
My take on this aspect is that what seriously bugs large manufacturers in particular is (a) the belief that today’s prices are higher than they should be and (b) the sheer uncertainty of future pricing, especially for gas.
The APPEA answer, as Fennelly put to the 200 ADGO attendees, is to develop more gas.
“The science shows that the risks associated with gas operations can be managed,” he said. “The answer is not moratoriums and more reviews. Poor regulation is curtailing local gas operations. We need workable, science-based regulatory frameworks for these operations in all jurisdictions.”
An interestingly large part of the ADGO discussions was devoted to the issue of gas supply reservation for domestic use.
It got bucketed by both Martin Ferguson and federal Labor energy spokesman Gary Gray — who describes Ferguson, Industry Ministry Ian Macfarlane and himself as being part of the “extreme middle” in the energy policy debate — and roundly condemned for the umpteenth time by APPEA as well as being given the back of the hand by organisations like the Australian Industry Group and the Plastics & Chemicals Industry Association (between them representing thousands of manufacturers), but its apostles keep shoving it forward even in the face of advice that the Commonwealth constitution bars federal intervention to impose it (section 92 requires trade between the States to be absolutely free).
Its chief proponent these days is the Australian Workers Union and this no doubt worries opponents of the idea because federal Labor leader Bill Shorten is seen as something of an AWU glove puppet and because of the fear of “one-term Tony” — aka our Prime Minister — emulating Queensland’s Campbell Newman in next year’s national election.
APPEA’s Fennelly made the point at ADGO that, in fact, AWU members probably stand to benefit as much as anyone from policies that reject the reservation voodoo and focus on developing the gas resources that NSW has available.
The other aspect of all this is the inability to date of the gas sector and governments to persuade the rural and regional communities on one hand and the mass of urban middle ground voters on the other of (a) the value of gas in our everyday lives, (b) that the demonising of hydraulic fracturing is wrongheaded and (c) that the regulatory regime is of a good standard.
One way and another, the ADGO discussion spent a fair time confronting this aspect and the obvious take-home message was that this is a task where there is still a lot of work to be done — in an environment where time is running out for NSW, the largest regional economy in the nation where gas meets some 45 per cent of manufacturing sector needs.
Gary Gray made a cogent point this week. The domestic gas industry is at a crossroad, he said. On the one hand, there are pressures to subsidize prices. On the other, resistance to the opportunities to produce it. “Neither approach makes economic sense and both will effectively keep gas in the ground. We must use our ingenuity to produce this gas and get it to market.”
PS: I recommend Angela Macdonald-Smith’s summary of ADGO conference in today’s “Australian Financial Review.” It’s headlined “Pressure building on CSG” and asserts, rightly I think, that “Producers and buyers alike have had enough of paralysis gripping the domestic gas supply sector on the east coast” and that “frustration was palpable” at the event.
One thing that stands out in reading mainstream and electronic media, or listening to radio or watching television, is the inability of so many people, including a majority of commentators and reporters, to really understand the electricity supply chain.
Yes, the chain is quite complex but simplistic thought bubbles about parts of it, pursued in isolation, do little to help the debate or inform an election such as next weekend’s one in New South Wales.
Issues such as having sufficient energy available when it is required (which can be mid-evening), steps to efficiently service different parts of the chain and the role of segments in meeting the community’s earnest but inchoate desire to reduce greenhouse gas emissions (which tends to be focused on power generation at the same time that many holding such opinions are contributing to rising carbon emissions from the transport sector and their own energy inefficiency) are just some of the factors.
To concentrate on security of supply above all else or on reliability of delivery without due attention to network charges or on emissions abatement without proper understanding of the impacts on end-user bills is to invite the lightning — usually in the form of a backlash from the community.
As Martin Ferguson, who is increasingly taking on the role of this country’s energy policy sage, said in a filmed interview with me on the On Power website (you can see it at www.onpower.com.au), there is no silver bullet in dealing with energy policy, whether electricity, gas or transport; the issues are complex, endless inquiries serve to confuse rather than resolve strategy and what is needed above all else is political leadership — which involves making serious decisions on the best available advice and being prepared to wear the ramifications because it is impossible to satisfy everyone (not least the ideologues and in particular those of a Green shade who are opposed to fossil fuels and broadly to capitalism).
In the NSW election campaign, the Greens, with whom Labor have now struck a preference deal, are arguing for closure of the State’s fossil-fuelled power stations, a ban on coal seam gas development and recourse to 100 per cent renewable energy generation by 2030. Labor itself is now promising to “tear up” the Santos licence to develop CSG from the Pilliga scrub, a project on which the company has so far spent $1.2 billion, without compensation.
Nowhere in the Greens propaganda, which the Luke Foley-led Labor Party is apparently prepared to swallow in return for preference support in marginal seats, is there any reference to a critical four-letter word: cost.
(In a fierce commentary in the “Australian Financial Review” on Saturday, Matthew Stevens says: “Whether Foley is a simplistic political animal driven by the availability of Greens preferences or just an utterly ill-informed Luddite is not exactly clear.”)
In this context, cost does not only refer to the bills sent to households and to tens of thousands of small businesses, the mass market, but to the policy impact on large users — in particular, the NSW manufacturers, who provide direct employment for some 300,000 of the State’s five million voters, not a few of whom are in the constituency of Auburn in to which Foley has been parachuted by the Labor machine.
As the NSW Business Chamber pointed out on Friday in reaction to Foley’s latest folly: “He claims the looming gas crisis is a hoax because industrial users will reduce their demand due to high prices — but this ignores the economic impact that comes with businesses downsizing or closing and job losses in traditional hubs such as Western Sydney.”
Factories are affected by both higher power bills and the gas supply situation.
These industries, in turn, provide revenue and employment in smaller businesses through their requirements for goods and services.
Between them all, they pay a substantial amount in tax (corporate and personal) that is fed in to State government revenues and then spent on public services and community infrastructure investment.
The latter includes financial help for energy users in hardship for whom every power bill is a new source of stress.
This ripple effect is all part of the cost of energy systems and is broadly ignored when the ideologues are riding high on their hobby horses.
An insight in to the issue can be found in the impact of the renewable energy target, over which so much political time and so many millions of words have been expended in the raucous public debate of the past 15 months.
Both the federal Coalition and federal Labor say they are conscious of a need to resolve the ongoing wrangle on a compromise RET in order to ameliorate its impact on energy-intensive, trade-exposed industry, who made their concerns clear to the Rudd/Gillard governments between 2008 and 2013 and were, to an extent, ignored.
The cost of failing to properly address the “EITE” impacts of the RET are now clear to federal political leaders, trade unions and State governments. They should have been so at the outset of this foray in to “feel-good” politics.
This is far from a solitary example of the inability of policymakers and the green-tinged cheer squad, including the ABC newsrooms and a substantial part of the Fairfax media group, who leap up and down for various aspects of energy policy, ignoring the need for a holistic strategy that is stable over a couple of decades, and then fly in to blame mode when the winner they have picked turns out to be a loser.
The core issue, as Ferguson says, is leadership — but it needs, above all else, to be well-informed leadership that has taken in to account all the aspects of decisions and to include a really good job of communicating the consequences of them to those who will be affected.
The issue of east coast gas supply is another stand-out example of failure in this respect.
The need to resolve network tariff structures to make them fit for purpose for the electricity transition now under way — and to bring so-called smart meters in to mass use in eastern Australia — is yet another.
Finding an equitable and efficient way to resolve the glutted east coast wholesale generation market is a very big challenge; resolving the RET at a political level is not the “silver bullet” solution for this task.
The week ahead’s Australian Domestic Gas Outlook conference, which I will be co-chairing, is a good opportunity to discuss all this.
The real locus of resolution of the policy impasse, however, is (or should be) the Council of Australian Governments.
Once the NSW election is out of the way, national politicians will have a period of clear air before the fevered weeks, or worse months, of the 2016 federal election, to focus on the key steps needing to be addressed.
They stand accused right now of failing to seize previous opportunities and of delivering a “dog’s breakfast” (quoting the Grattan Institute) of energy strategy.
In doing this, they have left the gate wide open to what a previous federal Secretary of the Treasury, John Stone, used to describe in the 1980s as the “meretricious players.”
The full-on advent of the Internet this century, of which the “meretricious players” take great advantage, has churned up the debate to an extra-ordinary extent.
Neither mainstream governments nor the key energymsupply stakeholders have demonstrated an ability to use the Web to optimal advantage — and this is now an essential element in communication, not least with the hundreds of thousands of young people who will be voters for the first time in 2016 and the back end of this decade, when government in Victoria, NSW and Queensland in particular, as well as federally, will again be up for grabs.
Communication is undoubtedly critical — but first comes decision making and good leadership.
While we may be unhappy with the cost of getting policy wrong in recent years, it is a safe prediction that we will be aghast at what a continuing lack of proper planning will deliver by 2020 and the early years of the next decade.
In an editorial harshly critical of the rest of the media, the “Australian Financial Review” has highlighted what it describes as “the great lie” of the New South Wales 2015 election campaign.
The Labor party, says the paper, has been “shameless” in asserting that State household electricity bills will rise under Mike Baird’s plans to part-privatize two of the three NSW electricity distribution franchises and lease 100 per cent of TransGrid, the high voltage grid.
“This,” says the newspaper, “is not a claim that can be debated legitimately. It is factually wrong.”
And it gestures to the Australian Energy Regulator’s draft determinations for 2015 to 2020, due to be finalized next month, that will see the charges levied by the trio of NSW distributors fall 20 to 30 per cent by the end of the decade.
With or without privatization, the paper rightly adds, the whole network sector will remain heavily regulated, something the Labor campaign ignores.
(Elsewhere the “Financial Review” reports Martin Ferguson making the point at my “On Power” yearbook launch forum that the unions and Labor are “deliberately overlooking” regulation of grid operations because “it doesn’t suit their arguments.” My filmed interview with Ferguson is now to be found on the “On Power” website at www.onpower.com.au. In it in he dismisses the NSW Labor campaign claiming privatisation will be to the detriment of consumers as a “bald lie”.)
The “Financial Review” takes up something I have been arguing here and elsewhere: it is not balanced journalism to “allow one side of politics to sprout obvious falsehoods” unchallenged.
“This is a faux balance,” the AFR says, calling on the rest of the media to “do your job on the cost of power.”
Of course, it is not only on the issue of prices that the anti-sale campaigners are getting away with murder.
The assertion that, since privatization, Victorian and South Australian customers have suffered at the hands of investor-owned network businesses is equally untrue.
Work undertaken by management consultants Ernst & Young shows that, in inflation-adjusted terms (which is the most accurate measure albeit one both ordinary Australians and everyday media reporters seem to find hard to grasp), network charges have fallen while those in NSW and Queensland for typical residential recipients of government-owned DBs have doubled.
Perhaps this is the greater lie: it is possible to speculate (however wrong-headedly) about future network charges because many factors will decide what they actually turn out to be, including the need to replace aged assets — bearing in mind CoAG’s intention that they will head down across the east coast under tougher regulation — but to ignore the actual past outcomes, engaging in tricksy use of final retail bills for consumers, is simply dishonest.
It is not hard to find the relevant numbers: In Victoria (in nominal terms in this case) power bills have risen from $752 in 1996-7 to $1,495 now with the network charges rising $227 while in NSW in the same time frame end-user bills have gone from $745 to $1,925 with network charges rising $726.
How is it possible (without chicanery) to portray this as a signal that network privatisation will “slug” consumers?
EY also points out that the privately-owned DBs in Victoria and South Australia reduced their underlying operating costs per unit of energy transported (again using “real” or inflation-adjusted terms) between 1996 and 2013 without adverse impacts on service levels.
The consultants are careful to note that network businesses in most cases improved their reliability over 2006 to 2013 — some of the government-owned businesses did so significantly — so performance here does not seem to be related to ownership.
This said, as EY notes, efficiencies made by privatized networks have not been at the expense of service standards, one of the planks in the “anti” campaign.
It is blatantly obvious that this campaign is seeking to take advantage of the fact that consumers are fed up with power price increases and now distrust power companies (not least because of a sustained effort in vilification by mass market media who have opted to beat up the negatives rather than examine the situation thoroughly).
Labor and the trade unions in both Queensland (where the anti-sales campaign must be deemed successful as it helped to unseat the Newman government) and NSW have been “shameless” in playing to this distrust.
The NSW “stop the sales” campaign has four prongs: (1) higher power bills, (2) more blackouts, (3) large job losses and (4) loss of $1.7 billion in government revenue.
With respect to the latter, I have pointed out in a “Business Spectator” commentary that there is a hole in the “anti” campaign arithmetic amounting to a cumulative $3 billion to $4 billion over the rest of this decade because the new regulatory arrangements will substantially cut DB payments of dividends and tax equivalent payments to the NSW government.
It also need to be underscored that the job loss claims in the “anti” campaign are duplicitious because both Labor and the unions know that, regardless of ownership, the NSW grid businesses must shed workers to comply with the new regulatory determinations.
The “Australian Financial Review” has belled the media cat on coverage of the privatisation debate.
Now, in the last fortnight of the NSW election campaign, will other media outlets (radio, television and newspapers) take up the challenge to bring the facts home to listeners, viewers and readers — or will they continue to maintain a “faux balance” in their reporting and analysis?
To continue to do the latter is to betray their audience.
One of the most influential figures in the energy industry debate, beyond the radar of the populist stuff, is Graeme Bethune.
CEO of energy advisory firm EnergyQuest, Bethune, a former senior manager with Santos, produces a number of analytical reports each year, including the closely-read “EnergyQuarterly,” which is something of a bible for people needing serious information on the gas industry in particular.
This is subscriber-only material, as you would expect, but I am able occasionally to take advantage of Bethune’s good nature to get insights in to his take on developments that affect policymaking.
The latest issue of “EnergyQuarterly,” for example, raises a major point: whether and how the global fall in oil and LNG prices will affect Australia’s east coast gas market, especially with respect to prices, a bugbear for the mass consumers and large users alike and one I expect to be front and centre at the end of the month when the Australian Domestic Gas Outlook conference is held in Sydney.
Bethune’s view is that “with the east coast now connected to the international gas market, it is inconceivable that lower global prices will have no impact domestically.”
The prevailing theory not so long ago was that supplier companies could make more money from selling gas for high prices in Asia than by selling it domestically, he observes. “However, this is no longer the case.”
As he says, global developments are taking some of the pressure off demand for Australia gas for trade in the LNG markets. Coming along the chain, this reduces LNG producers’ ability to pay for local gas while the fall in demand for gas by east coast power producers is also taking pressure off the domestic market.
Assuming domestic supplies are available, this, Bethune suggests, could lead to a situation where domestic gas prices, while still being higher than their historical levels, may be as much as $3 per gigajoule below the forecasts that have made users, and especially manufacturers, blench over the past 12-18 months.
The source of extra gas for the domestic market under this scenario and the cost of its production are manifest considerations as is the question of whether governments, especially in New South Wales and Victoria, can get their act together to resolve the drilling restrictions hassles.
Opening the On Power 2015 yearbook forum in Sydney yesterday – an event sponsored by PricewaterhouseCoopers and distinguished by a strong speech by Martin Ferguson that reporter Angela Macdonald-Smith has written about in all three Fairfax daily newspapers today (it’s on their websites) – I reminded attendees of the advice of Rafiki, the wise baboon in “The Lion King,” that we should always look beyond what we see.
God forbid that it be thought I am comparing Dr Bethune to a baboon, wise or otherwise, but he is playing a Rafiki role here in getting us to think beyond what we suppose we can see.
Critical to the point is that we still have to have an adequate supply of gas and baulking explorers and producers from delivering this – under properly regulated conditions (and I refer you to my “Sense and nonsense” post on “This is Power” on 5 March in which I reported on the review undertaken by Allan Hawke) – is simply not in the community interest.
Among the things Bethune challenges in his latest “EnergyQuarterly” report – a publication soon to mark a 10-year milestone – is the conventional wisdom that there is sufficient gas in Bass Strait to meet demand for 30 years, something the new Labor government in Victoria is embracing to help justify its attitude to holding up onshore exploration.
Bethune suggests that analysis of available information indicates a reserve life about half of that routinely quoted by politicians and some others.
The moral of all this is that you don’t wait until you are waist-deep in the mire with the water rising, as successive NSW governments have done, to think and act strategically.
This is the thrust of the trenchant advice coming from Ferguson and you will be able by the end of this week to see on the On Power website (www.onpower.com.au), a filmed interview between he and I, recorded before the yearbook launch forum, that is a clarion call for a hugely improved approach to energy policymaking.
Interestingly, Ferguson says in this interview that he looks to the new Victorian Premier, Daniel Andrews, and a re-elected Mike Baird to shoulder the responsibility for making this happen, emulating the way Nick Greiner and Wayne Goss worked across party lines with Paul Keating a quarter century ago to bring about major electricity reforms.
Bethune’s observations highlight the fact that the ground can shift significantly in the energy arena, something it has done a number of times since the 1970s with respect to electricity, gas and more, and policy needs to be robust enough to cope.
Ferguson, not surprisingly, finds the current state of the energy debate “seriously worrying.”
We don’t need any more inquiries, he tells me, “we need to exercise some leadership and make some decisions.”
Ferguson is one of the keynote speakers at the Domestic Gas Outlook conference, too, and the 200-or so delegates booked to attend this event can expect to hear a further leadership challenge exposition from him.
Just how far is Australian energy policymaking in crisis?
One of my friends, with a long experience in the energy sector, argues that government in this country has become dysfunctional and that, with administrations in nine jurisdictions changing all the time, agreement on national energy policy is most unlikely.
This situation, the Energy Supply Association asserts, has left the generation sector “chronically oversupplied” and new plant “unbankable” as a result of constant policy changes and market distortions created by government interference since the middle of the past decade.
Lurking in the shadows is the issue of to what extent profit-constrained generation owners have deferred significant maintenance efforts in recent years and what impact this could have on east coast electricity market (NEM) security if it led to multiple power units being offline at the same time?
ESAA, which I managed for 12 years from the start of electricity reform in 1991 to 2003, demands “a return to development of national energy policy that incorporates a credible, long-term strategy to reduce greenhouse gas emissions.”
Meanwhile the electricity delivery sector is in uproar over the application of a new regulatory approach after the previous one succeeded, along with the impact of green schemes, in delivering a politically-unwelcome doubling of consumer power bills in just five years.
The efficiency of network management is a source of constant contention, including a current Senate inquiry, the latest of many reviews since 2011, and the ability of policymakers to introduce a fit-for-purpose tariff regime as well as a full roll-out of “smart meters” remains up in the air.
As well, the security of the east coast gas market, including cost-competitive prices, is highly controversial and attempts to address much-needed new supply are subjected to guerilla tactics by anti-fossil fuel radicals and to vacillation by State governments fearful of a community backlash over environmental impacts.
This is not a good start on a long trek to mid-century during which, it is suggested, a half trillion dollars — $230 billion on generation and $300 billion on networks – will need to be invested.
Today, in Sydney at a forum sponsored by PricewaterhouseCoopers, the 2015 edition of my “On Power” yearbook will be launched with the theme “A need for balance” in a Q&A-style discussion that involves Martin Ferguson, AGL Energy’s Tim Nelson and PwC’s Mark Coughlin, the management consultant’s utilities leader.
The forum is a prelude to an important conference in the Australian Domestic Gas Outlook series that I will co-chair in Sydney at the month’s end, with both Ferguson and Nelson among 40 speakers addressing an audience of about 200 stakeholders on the eve of the New South Wales State election.
In the introduction to the yearbook, I have commented that optimism among electricity investors is in even shorter supply now than it was in 2013 when the publishers, the Armstrong Q group, and I launched the “On Power” website (www.onpower.com.au).
The focus of “On Power” is specifically on the NEM – the east coast electricity market that includes almost 48,000 megawatts of generation capacity, 9.5 million customers, a wholesale energy turnover of $9.5 billion and a retail turnover more than double that.
(My Coolibah website, host to the “This is Power” blog, covers national electricity and gas issues and has been known to trespass in to the international arena, as do the regular commentaries I write for “Business Spectator.”)
The need for NEM balance in policy, regulation and debate has never been greater, I argue in the “On Power” yearbook, and it often seems increasingly hard to achieve in an environment seeking to embrace energy supply security (which includes costs consumers find affordable), rising consumerism and carbon abatement.
The quest for balance, I believe, needs to encompass a wide range of services as well as significantly better communication between suppliers, policymakers, regulators and consumers.
Politicians and regulators need to avoid the traps of consumerism.
Frankly, this is not a new argument on my part – it featured strongly in the six “Powering Australia” yearbooks I wrote in partnership with publisher Jaqui Lane before circumstances placed us in new environments.
It gets a regular airing in “This is Power” posts and in my commentaries for “Business Spectator,” which go all the way back to 2008 when the NEM had a whole set of different players and there were different government leaders while the concept of a slump in power consumption was on no-one’s mind and the networks were being launched on a capex spending spree that has now driven our power prices to the top of the political agenda.
That was when the new Rudd government was grappling with what was supposed to be an emissions trading scheme, with a new renewable energy target program and with the beginnings of an attempt to produce an energy white paper (eventually published at the end of 2012 and now a reincarnated as a work in progress for the Abbott government).
Way back on 23 February 2009 I wrote a “Spectator” commentary that argued few subjects are more likely to induce “MEGO” (“my eyes glaze over”) in your average citizen than a debate on power prices – how times change! – but customer behaviour when their prices spiked up was an important question.
Well, I got that bit right at least.
Governments have come and gone (federally, in Victoria, Tasmania, New South Wales and Queensland – only in South Australia and the ACT has one party, Labor, held sway in eastern Australia since 2008-09) but the energy swamp (and not least the power supply one) has widened and deepened.
Another person engaged in the current NEM debate suggested in correspondence with me and others last month that “the current flip-flop environment” for energy included in its drivers the increased use of “small target” and “oppose everything” strategies by political parties while in opposition, the inability of most governments to explain nuances of complex issues in a “sound-bite world,” the shift of the media to being an entertainer and player rather than a reporter, a “what’s in it for me” mindset among the more splintered lobby groups and companies that make up the energy sector and the unwillingness of the community (or perhaps its inability because of all this other stuff) to see past the latest round of bribes at election time.
I find it hard to argue with any of this while still believing that efforts must be made to persuade the mainstream players in the body politic to see beyond their noses – one of the reasons that the 2015 “On Power” yearbook, like all its predecessors, will be despatched to sitting MPs.
Back in 2010 I wrote a “Business Spectator” commentary suggesting there were “ominous signals” for federal and State politicians who had been “basking in the reflected light” of a system providing power at very competitive costs by global standards and these signs were emerging as “the natives are getting very restless about the impact on their bills of network charges” while “pollies are dancing all over the place trying to decarbonize.”
I assisted at the time in the production of a management consultants’ review of the NEM that warned “while the situation may not yet be dire, it supports a perception that power supply security in eastern Australia is more uncertain than it has been since the 1970s.”
With hindsight, that wasn’t wrong and five years later, while the situation may still not be wholly dire, it supports a strong perception that the need for a bipartisan approach to a balanced energy policy has never been greater.
Looking at the Essential Report polling, it is interesting to see that cost of electricity and gas is the top concern out of 12 issues for Australians.
In a report published on 24 February, Essential finds that 47 per cent of respondents (just over 1,000 people across the country drawn from a consumer panel of about 100,000) are “very concerned” about these costs, with 38 per cent somewhat concerned and 12 per cent “not so concerned.”
The next three in the ladder of concern are housing affordability (74 per cent bothered), cost of food and groceries (78 per cent) and unemployment (71 per cent). The cost of petrol rates ninth (with 24 per cent very concerned, 40 per cent “somewhat” and 26 per cent in the “not so” bracket).
Translate this in to the New South Wales election (to be held on 28 March) and it isn’t hard to see why Premier Mike Baird has moved to create the role of electricity commissioner if he wins the poll as a safeguard for consumers.
“No bill shock vows Baird” is the front page lead (overshadowed by a beat-up on “Who is Australia’s richest woman?”) in the Fairfax Sydney Sunday tabloid today.
Inevitably, in tabloid-speak, the commissioner is to be the “electricity price tsar” and interestingly Baird has opted for Alan Fels, the inaugural chairman of the Australian Competition & Consumer Commission from 1995 to 2003.
Not only is Fels charged with “ensuring power bills are lower under privatization” – how exactly does this square with the role of the Australian Energy Regulator to independently determine the networks’ capacity to raise revenue? – but Baird says the successful purchasers of holdings in NSW networks (TransGrid, Ausgrid and Endeavour Energy) will be required “to sign a guarantee that network prices will be lower in 2109 than they were in 2014).
The latter point is also interesting because the government-owned distributors and the rural franchise holder (Essential Energy) to be kept in government hands are fighting tooth and nail to ward off the draft determinations of the AER aimed at achieving something like this outcome.
This belongs under the political heading of “whatever it takes,” made notorious by Bob Hawke’s political fixer, Graham Richardson, and is clearly deemed by the NSW Premier to be needed to ward off the Labor/trade union claims of the ills privatization will bring.
The anti-privatization campaign has four legs: the “sell off” will mean higher electricity prices, a less reliable network with more blackouts, massive local job losses and “loss of $1.7 billion in public profit.”
Tendentious would not even begin to describe these assertions, but I imagine that the private polling the main parties always conduct through election campaigns is throwing up that the propaganda that is biting with swinging voters is the threat of higher prices.
Solution: let’s have an “electricity price tsar.”
Those who groan or shudder at the nature of this sort of politicking may care to read a commentary in the weekend edition of “Australian Financial Review” by Geoff Kitney in which he canvasses recent research by the Australian National University’s school of politics.
In short, the study finds just three per cent of respondents to the ANU polling have trust in political parties.
Only 15 per cent believe democracy in Australia is working well.
Trust in government has declined to the levels at which it lay when the Whitlam administration crashed and burned in 1975.
Hence Baird reaching for Fels.
On the ANU research, hardly anyone is going to believe a politician but someone like Fels, something of an icon as a consumer watchdog, can be relied on to “keep the bastards honest.”
Indeed, Fels tells “The Sun-Herald” that “I am happy to stand up to governments and power companies if necessary.”
He adds: “I am confident that prices will come down – ie network charges after privatization – and I (will be) there to provide an additional guarantee.”
Interestingly, the ABC, which always emulates a rat faced with a drainpipe when offered an opportunity to grab other media stuff badmouthing the Coalition, had not published a word about the Fels manoeuvre by midday on Sunday (as I am writing this).
Meanwhile a poll undertaken in NSW for Fairfax Media by the Ipsos research company claims that 47 per cent of respondents support Baird’s privatization/infrastructure plan, 46 per cent oppose it and eight per cent are undecided.
If this represents what is really going on, the “price tsar” manoeuvre has obvious political advantages.
NSW, by the way, has an independent watchdog already: the Independent Pricing & Regulatory Tribunal.
In December, at the State government’s request, it launched a review of NSW retail power competition that is due to report later this year.
In a submission to this inquiry, the Public Interest Advocacy Centre makes an interesting observation. In less than two decades, PIAC says, electricity supply in the State has moved from a monopoly service at a single price to a market where dozens of retailers offer scores of prices. This places an expectation on consumers that they will engage with the market to ensure that they pay the lowest prices for their needs. However, it says, there is a risk that consumers who “set and forget” their supply arrangements or are not able to navigate the market effectively will pay more than they need.
To what extent, one has to ask, is this situation a contributor to electricity prices being the hottest of community “hot button” issues as reflected by the Essential Report poll?
And to what extent will even the appointment of an “electricity price tsar” – actually an electricity network charge “tsar” – change public perceptions?
As political leaders like Peter Beattie, Campbell Newman, Steve Bracks and Colin Barnett have found in recent times, you need to be careful how you play this game – it’s a minefield.
With an eye, of course, on this month’s New South Wales election, the Greens have introduced a bill in federal Parliament that proposes giving Australia’s farmers and local councils the right to say “No” to coal seam gas and coal mining developments and to ban hydraulic fracturing (“fracking”) for production of unconventional gas.
Not even a Bill Shorten-led Labor party would support this, but the point is in the gesture – as it is in Tasmania, where the Liberal State government has extended a Labor/Green moratorium on “fracking” for another five years to “protect the State’s fresh and safe produce.”
Meanwhile, in a region where the issue is live because of present benefits and future opportunities, the Broome shire council in Western Australia has rejected an attempt to declare the municipality “frack-free.”
Sensible onlookers despairing of the “fracking” games should direct their attention to the report Allan Hawke has just produced for the Northern Territory government.
Hawke, a former senior federal public servant who is a Companion of the Order of Australia after a career that included being chief of staff to Paul Keating and our high commissioner in New Zealand, has spent nine months undertaking a hydraulic fracturing review for the Northern Territory government.
His finding is straightforward: “The environmental risks associated with hydraulic fracturing can be managed effectively subject to the creation of a robust regulatory regime.”
There is, he adds, “no justification whatever for the imposition of a moratorium” on the technology.
Hawke has told the NT cabinet to form a sub-committee to set the standard for a best-practice regulatory regime.
“It is at the political level,” he says, “that the balance can be struck between promoting shale gas production, setting the environmental management parameters, facilitating land access and fostering economic development.”
There you have it: sense to set against the nonsense of the debate across Australia, and especially in New South Wales and Victoria, for the past several years.
Hawke’s report runs to 226 pages, but the executive summary is just 15 pages and it at least should be required reading for this country’s premiers, ministers and the leaders of their mainstream political opposition (as it should be for senators confronting Green grandstanding).
Yet again, this report throws up the question that I have posed here and elsewhere, taking from the recent Australian Academy of Technological Sciences & Engineering publication dealing with “energy opportunities” – is it possible in “modern Australia” in an era of combat politics to establish a bipartisan, 20-year vision for each of the energy policies of real importance to the economy and the long-term interests of the community?
I have every intention of putting this on the table at the end of the month when I co-chair the Australian Domestic Gas Outlook conference (with some 250 attendees) in Sydney and on Tuesday when, with the support of PricewaterhouseCoopers, I am facilitating a forum (with some 70 invited attendees and Martin Ferguson and Paul Simshauser of AGL Energy as keynote speakers) to launch the 2015 edition of my On Power yearbook – which this year has the theme “A need for balance.”
As I say in the introduction to the On Power book, optimism among energy investors today is in short supply, shorter even than it was in 2013, a year of unblessed memory for its political shenanigans, and the need for policy balance has never been greater in Australia.
Far too many of the players in the political arena have a predilection for grasping what David Byers, the departing chief executive of the Australian Petroleum Production & Exploration Association (off this week to BHP Billiton), describes as “the wrong end of the pineapple.”
Byers points out that Australia has abundant resources of natural gas, enough to meet both export and domestic demand, with the success of east coast LNG efforts driving the large-scale development we are now seeing of coal seam gas.
Despite the “glass half empty” scenario that so many commentators find attractive, Byers argues, and I believe he is right, that Australia can continue to be a star of the global gas industry, making a similar contribution to our economy to that of the agricultural sector while the gas industry also meets east coast gas supply requirements.
The critical issue is whether mainstream political leadership can get its act together – with “together” the operative word.
As Hawke observes in the executive summary of his report, “fracking” and the unconventional gas industry are serving as a proxy in the eastern States as well as the Northern Territory for opposition (from the Greens and their fellow travellers on the nation’s radical fringe) to fossil fuels per se.
Trying to play this for political advantage or ducking and weaving around it for the same reason (as the Coalition government in NSW has done for four years) is seriously not in the national interest.
Hawke, who is as experienced in advising politicians in government as any person in Australia, says in his report that “fortunately there is a considerable body of informed opinion (which he cites at length) that allows separation of the wheat from the chaff” on the “fracking” issue.
The substantive weight of agreed expert opinion, he points out, says there is no justification for opposition to the technology when its use is properly regulated.
Hawke’s advice is important for more than the NT.
As he notes, development of the Territory’s shale gas resources (which have still to be properly delineated by an exploration program) could lead to another LNG export train being built at Darwin or to links to the east coast supply chain to ameliorate the domestic market’s problems in accessing competitively-priced, long-term gas contracts.
It says volumes about the state of public debate that the Hawke report (with the exception of the ABC, it must be noted) has been effectively ignored by eastern Australia media despite its weight and good advice.
By contrast, the switching on of a tiny wave power array over in the West has been covered in more than 40 stories.
If we are genuine in pursuing a need for balance in energy policy and underpinning the already considerable benefits of gas developments for the economy, this should not be happening.
One of the more notable interventions in the current activity around the future budgets for east coast electricity networks has come from Professionals Australia, which numbers the sector’s engineers in its ranks along with scientists, pharmacists and architects, totalling 23,000 members.
The professional engineers – numbering thousands who build and maintain electricity assets – have gone for the Australian Energy Regulator’s throat on the issues of power safety and reliability in response to the draft determinations slashing the revenues of the New South Wales and ACT networks.
The 25-page submission is on the PA website.
In one sentence, the engineers use it to argue that “It would be penny wise and pound foolish to make cuts that risk a litany of future disastrous (supply) problems and costs.”
The regulator, they say, should have regard to long-term community interests rather than short-term pressure over electricity prices and being the “champion of price cuts.”
The paper picks up where Networks NSW and ActewAGL left off in giving the AER determinations a kicking, notably in arguing that the watchdog is obliged to take full account of its obligations under the National Electricity Objective to ensure safe, reliable and cost-effective power supply and not just the cheapest options.
Shorn of hyperbole, the Professionals Australia proposal is that the AER sits it technical advisory group down with PA’s professional engineering representatives before coming to a final landing (due next month).
It also calls on the AER to provide a risk analysis with its final determination and argues that the draft determinations rely on limited engineering reviews by its own staff and consultants using desktop analysis.
This situation is an exemplar of what happens when politics intervenes in areas where it doesn’t below, a point the Energy Supply Association sought to make last month when it attended the public hearings of a Senate committee looking at network performance.
Governments, ESAA pointed out, more than a decade ago intervened to constrain the distributors’ expenditure.
When the consequence was highly unpopular and scary blackouts, notably in NSW and Queensland, regulation was rewritten to support network investment, tens of billions of dollars of it over a short time frame (2009 to 2014).
The later consequence (along with other factors, like coincident political moves on green schemes) has been soaring end-user power bills in NSW and Queensland and more modest (but still not welcome) increases in Victoria and South Australia – so now the rules are being changed to prolong the boom-and-bust cycle.
Professionals Australia reminds the regulator that it is “all too easy” to dismiss the prospect of significant failure in electricity supply, but says there have been many major interruptions in developed countries in recent years, most notoriously down here in New Zealand.
The engineers add that they “understand the technical consequences when electricity infrastructure is run to failure” and they pose three questions:
Is the regulator prepared to risk public safety?
Does the AER accept that imposing the proposed cuts inevitably will lead to substantial future remediation investment to address the consequences?
Is the AER prepared to accept that it has detailed advice not to go down this path?
It seems incongruous, PA adds, that the regulator is prepared to do so in a climate where the community “would be outraged and fearful” if it knew the risks and dangers of what is being proposed.
How, it asks, for example, can the AER propose TransGrid reduce bushfire mitigation by 85 per cent?
Elsewhere, pointing to the ongoing spread of suburbia in the major cities, the submission warns that the level of cuts proposed may hold up new connections and urban developments due to lack of resources.
Not surprisingly, the prospect of large job losses as a consequence of the determinations also weighs heavily on the engineers as does the likelihood of reductions in DB employee wages and conditions.
It’s a passionate presentation and serves to further underscore the magnitude of the task the body politic has imposed on the regulatory system by its pursuit of “boom and bust” in a critical infrastructure area.
The “Canberra Times” newspaper, the only media outlet I can find to take up this story, has asked the AER how it reacts to the submission and has got the expected poker-faced reply that the paper is being “currently assessed.”
Professionals Australia CEO Chris Walton has told the newspaper that his members’ gripes included the fact that the regulator is not only proposing “savage cuts” but has proposed no transition period for significant change.
“This,” he says, “will result in important work being abandoned immediately and increase risk and danger exponentially.”
This exercise has still a fair way to run and it will be followed by determinations affecting networks in other States.
As I have commented in earlier posts on the issue, as well as in my “Business Spectator” commentaries, there is a prospect that the argument will end up in the courts, raising some interesting questions about what happens to power infrastructure work during the legal football match.
What was that Laurel and Hardy line? “Well, here’s another nice mess you’ve gotten me into!”