Archive for August, 2015

Opinion soup

A senior writer on the “New York Times” – in an op-ed headlined “The widening world of hand-picked truths” – has opined about the Internet helping people to become trapped in “self-reinforcing bubbles of thought.”

There are few areas where this is more on show than in the debate about the role of coal. (I wrote a bit about this on 5 August.)

The NYT commentary reached me in tandem with a local Web story headlined “Renewables now second only to coal in generating the world’s electricity.”

For many Australian media readers, I should think, this is just reinforcement for the belief that wind and solar power are on an unstoppable ride to power supply dominance.

As with so many ingredients in what one of my dear friends, on reading the NYT commentary, described as “opinion soup,” this should be taken with a substantial grain of salt.

The best source for electricity production statistics – output matters in the carbon debate because it’s what produces emissions, consumption data having to allow for grid line losses in delivery – is the International Energy Agency.

The latest IEA report on key electricity trends contains this information:

First, world gross electricity production has risen from 6,144 terawatt hours in 1973 to 23,391 TWh in 2013. (Australia contributes just 215 TWh at present.)

Second, 67.2 per cent of world output in 2013 was from fossil-fuelled plants, with hydro-electric systems delivering 16.6 per cent, nuclear reactors 10.6 per cent, bio-fuels and waste two per cent and “geothermal, solar, wind and other sources making up the remainder.”

That “remainder” amounts to 3.6 per cent.

Third, a critical element in assessing what’s going on is the 5.2 per cent annual rise in non-OECD electricity production over 40 years compared with the 2.2 per cent increase in output in the 34 nations (including us) making up the OECD.  Four years ago non-OECD generation surpassed “the developed world” for the first time. It’s still rising while the OECD production is falling. One of the factors in this is that more and more of the manufacturing that required energy in the “industrialized” West is now shifting to what used to be called “the Third World,” although a fair bit has migrated from Europe to America to take advantage of low gas prices.

Fourth, if one focuses on just non-OECD electricity production, in 2013 supply from fossil fuels stood at 73.8 per cent of 12,253 TWh with 4.1 per cent provided by nuclear reactors, 19 per cent by hydro-electric plants and 3.1 per cent by biomass and geothermal/wind/solar power.  The most significant data, of course, relates to China.

We tend to get a lot of media fuss here about China closing old, inefficient coal plants (23 GW to be shuttered between 2014 and 2020) and constructing large amounts of renewables (of which quite a bit is hydro in big dams) and rather less on the fact that, just in the first half of 2015, the regime added 43 GW of new capacity of which 23 GW was fossil-fuelled.  Which makes the fact that this month the Obama administration in the US and the Chinese regime have agreed an MoU on joint work to advance carbon capture, utilization and storage a point not to be glossed over.

But China is by no means all the Asian story. Nor is it just about China and India.

South-East Asia (that is, the 11 countries south of China, east of India, west of New Guinea and north of us, including Indonesia, the world’s fifth-largest coal producer) should not be overlooked

When last I checked, the IEA was forecasting that growth in coal-based electricity production in South-East Asia as a whole would amount to 700 TWh annually between 2011 and 2035 to which one could add 200 TWh of gas plant output and 300 TWh of renewables (of which half would be large-scale hydro).

Among the many drivers for this is the fact that some 134 million South-East Asians (a fifth of the regional population) still have no access to electricity today.

When one looks at the overall global data and notes the very large contributions from fossil fuel plants, a question posed by professor Chris Greig of the University of Queensland’s Energy Initiative (in UQEI’s latest newsletter, available on the university website) should come in to sharper focus.

Greig asks what if it is not possible to reduce global carbon emissions to zero by the end of the century (what’s said to be required to meet the “two degree target”)?

We may need, he suggests, to prepare for 550 ppm atmospheric carbon rather than 450 ppm.

Now this is a major topic for another day, but my underlying point for the moment is that the type of renewables-boosting headline I reported above insistently offers just one flavor of carbon/energy “opinion soup” when the real menu is rather different.


This “soup” doesn’t reflect what is really happening in Australia’s big back yard and further afield but what those of a radical green mindset want us to swallow.

Living on such a diet as well as in “self-reinforcing bubbles of thought” has its own consequences, especially in an environment where 53 per cent of Australians (recent Essential Report poll) want more done to address climate change. Their focus is on Australia doing more, but climate change is a global issue and I believe very few expressing this opinion have anything like a realistic global perspective — thanks to what they are being fed.

Gas opportunity

For your average eastern Australian – ie living in capital cities or the urban sprawl of south-east Queensland – the Northern Territory, mentally at least, is another country, a place to fly over en route to holidays in Bali, Thailand or Europe or to gawp at on television.

Increasingly, for the upstream petroleum sector, however, the NT is coming to represent Opportunity with a capital O, especially as the combination of radical activists and NIMBY communities stand in the way of development on the east coast.

Of course, the problem of what has been dubbed “localism,” a phenomenon the Greens have been far more adept at using for political ends in this country than either Labor of the Coalition, is not uniquely Australian; for the gas industry, for example, it manifests itself as much in New York State and Lancashire as it does in northern New South Wales and Victoria.

It’s been interesting, therefore, to watch how the seemingly endless east coast efforts to baulk new gas projects, regardless in NSW of the consequences economically, have opened a door for the NT.

The potential of this is being aired again this week in the same month in which an intriguing idea about reshaping Australia jurisdictionally has also got some attention.

In a nutshell, the latter thought is that South Australia and the NT should merge in to one State, unlocking billions of dollars in investment opportunities and taking a lot of current co-operation between the jurisdictions to a whole new level. Enter the State of Central Australia.

Now segue to the gas business where one of the key domestic prospects is the interconnection of NT reserves with the east coast, potentially through Moomba.

The chances of NT gas rising to a new level of importance in the national economy are being canvassed this week in a Deloitte Access Economics study commissioned by the Australian Petroleum Production & Exploration Association.

APPEA is billing the Deloitte review as the first comprehensive assessment of how a new shale and tight gas industry in the north could be created.

The association CEO, Malcolm Roberts, one of the keynote speakers at next month’s Eastern Australia’s Energy Market Outlook conference I am co-chairing in Sydney, says the report demonstrates how shale gas could become a “game-changer” for the NT.

Deloitte examine two scenarios for supply of NT shale and tight gas to the Territory, the east coast and export markets over two decades from 2020 to 2040.

Roberts, while being properly cautious about how current global developments have put all gas developments here and overseas under pressure, moots that this is a prospect offering “a new wave of investment for decades to come” that could reinvigorate regional centres like Alice Springs and Katherine, delivering billions in economic value and a swag of new jobs.

The consultants calculate that the NT’s gross State product (GSP), which is about $20 billion a year today, could be given a cumulative boost of $17 billion to $22 billion over two decades from further gas exploitation.

As the Deloitte paper points out, we may see a decision before the year end on a plan to link existing gas pipeline infrastructure in the Territory to the eastern States, possibly via Moomba, enabling supplies to be delivered to NSW in particular. Meanwhile the NT Chief Minister, Adam Giles, has been expressing confidence that a pipeline link between the Territory and the east coast will be flowing gas by 2018.

(One of the leading proponents of this idea, Richard Cottee, MD of Central Petroleum, will be on a panel with Roberts and others, discussing getting more supply to the east coast at the afore-mentioned EAEMO conference.)

The Deloitte study (which can be accessed through the APPEA website) really doesn’t do much more than paint a broad canvas but it serves as a new reminder, when so much of the public debate is either doom-laden or marred by partisan poison, that, if our leaders and our investors can chart a path, this country has extra-ordinary resources potential.

The review’s remit didn’t include that other part of Central Australia, the Cooper Basin, which also has significant unconventional gas prospects.

Means & ends

Over the many years I have been in the energy game I have often observed the pendulum effect, whether in public debate, policy making, regulation or business models.

In short, a push too far in one direction inevitably leads to a push back (sometimes by necessity) – and, on occasions, yet another push, an example being network investment where suppression of capital outlays led to service problems, then a rule rewriting that introduced a multi-billion dollar splurge on infrastructure, then much higher prices and now a whole new approach to benchmarking which is at present itself under challenge in the courts.

I think we are seeing the pendulum effect at work now, also, with respect to renewable energy.

The key challenge in the present environment is achieving greater clarity about what we are really striving to do.

Professor Chris Grieg, director of the University of Queensland’s Energy Initiative, says in a new newsletter editorial (see that a critical issue is to separate means from ends. “The goal is to limit global warming. Not to end the use of fossil fuels or to achieve 100 per cent renewables.”

Inter alia, Grieg adds that there is a need for acceptance of the role for transitional solutions, for example replacing low-efficiency, coal-fired generation with natural gas or even high-efficiency coal provided there is a robust and credible plan for future retrofitting of carbon capture and storage.

Thoughts in the same vein are to be found on the Energy Supply Association website in a new commentary titled “Should Australia adopt RET Mark 2?”

This short paper deserves close attention, not least by those politicians who are again getting carried away by populism in a policy area that desperately needs hardheaded evaluation and to be approached with a genuine eye to the long term.

The ESAA commentary needs reading in its entirety. Here, let me cherrypick a handful of cogent points.

First, the challenge we face on a global scale is too many greenhouse gas emissions, not insufficient renewables.

Second, policies like the RET appeal in some quarters because proponents want abatement to come from the sources they like rather than the lowest-cost options.

Third, when a policy like the RET logically starts delivering mostly wind farms, the least-cost technology in an environment where nuclear power is banned (the latter is my interpolation), then proponents of technologies like solar start pressing for alternate ways to promote their preference.

Fourth, picking “winners” (again, my words) pushes up costs for consumers no matter how much sophistry is deployed to argue otherwise.

Finally, and this is an issue that gets least attention from politicians and most green propagandists, a functioning wholesale power market is critical to the economy and, to quote ESAA, “if we continue to expand the RET, it will reach a tipping point where it no longer functions and we will be back to government-directed investment.”

The risk, as both ESAA and I see it, lies in the expanding RET having the knock-on effect of destroying the market, one of the major achievements of energy reform of the 1990s.

As ESAA puts it, “It is unrealistic to expect a market to work where half the market gets over half its revenue outside the market.”

Circle back to the point on which ESAA opens its commentary: the issue globally is too many emissions, not too few PVs or wind turbines.

Dealing with the former must involve greater use of low or zero emissions generation technology but it will also include a range of cheaper emissions reduction activities.

The political problem is well summarized by Chris Grieg: today’s politicians and their advisors are looking for “simple soundbite solutions” and their handling of an issue of major complexity is muddled by a large dose of vested-interest advocacy. This delivers policy outcomes plagued by spin and ruptured by partisan politicking.

Which bring me back to the pendulum – I think the current political settings and the current state of propaganda are a serious turn-off for the many Australians whose bent is the “extreme middle” of politics and who are, to varying degrees, concerned about this country having staggered in a few years from having highly competitive energy prices towards being at the most expensive end of the OECD cost scale.

Those who want to push for a more resilient energy/climate approach understandably feel sometimes that the whole game is going to hell in a handbasket – but my view is that the present situation requires a still greater effort to talk sense to the community and to members of parliaments (the plural is necessary because of our federal arrangements).

This is why the commentaries from UQ Energy Initiative, ESAA, Grattan Institute and the Energy Policy Institute, the economic working papers published by AGL Energy in recent years and the contributions from ATSE and others are important.

It’s why I see real value in the series of Quest Events “energy outlook” conferences which I have been helping to organize and promote in recent years (the next of which is Eastern Australia’s Energy Market Outlook in Sydney in mid-September).

It’s why I edit the “On Power” website and its yearbook, which is despatched to every MP in the NEM parliaments and to all Federal MPs each year.

Such efforts need to be pursued to ratchet up public appreciation of the need for energy and climate policy to be integrated and co-ordinated across our federal, State and Territory jurisdictions.

This policy needs to be efficient, long-lasting, neutral and (to quote a word often used by UQ) resilient in an economic and technological environment that has changed massively over just the past 10 years.

Ideally, it must be bipartisan and this is perhaps the biggest hurdle of all that we face locally at present.

Above all, it must properly appreciate what our ends (or ambitions, if you wish) are and the means available to pursue them efficiently.

Go figure

Reading what I think could be fairly described as a rant on renewables policy in “The Australian” by economist Henry Ergas (, including a wonderful reference to the “lead-filled sock of fate,” I ventured for once down to the emailed reactions on the newspaper website.

I seldom if ever bother to read the emailed input, even to my own commentaries in “Business Spectator,” because so many of them are written by energy illiterates, nutters or supporters of some vested interest. Life’s too short.

More by accident than design, I did, however, run an eye over the responses to Ergas and, by so doing, spotted something interesting: there are views “out there” about domestic electricity prices that are all over the shop.

One reader notes that the “average family bill” is $1,600 a year. Another retorts that the average is more like $3,200.

Inevitably, there is the solar type – “I live alone and have 20 panels (5 kW)” – who reports a quarter’s bill of $300.

Yet another says the average for a “Melbourne family” is $650 a quarter (or $2,600 annually).

And so on.

It seems to me worthwhile to pass on some official information on residential power bills, but before doing so, can I make the point that a large number of home-dwellers today are living alone relatively close to the CBD in capital cities (and tend not to be there during the day), mostly not in houses, and this tweeks the statistics both in terms of the amount of electricity used per household and the average costs.

Geography has a fair bit to do with electricity bills, too.

Victorians, for example, tend to depend on gas for cooking, space heating and hot water. South-east Queenslanders don’t need much space heating but they are devils for air-conditioning. And so on.

The Australian Energy Market Commission, in its most recent report to the CoAG Energy Council about east coast retail matters, records that the “average electricity consumption of “the representative consumer” is as high as 7,627 kilowatt hours in Tasmania and 7,180 kWh in the ACT – guess why! – and as low as 4,533 kWh in sunny Queensland and 4,645 kWh in gas-rich Victoria. The New South Wales “typical” customer consumes 6,500 kWh a year and for South Australia its 5,000 kWh.

There’s more to it than this, of course.

Residential consumption varies markedly within States, too. The AEMC website records that it ranges between 2,500 kWh a year and 9,500 kWh.

So a low consumer in south-eastern Queensland pays about $800 a year and the power-thirsty ones fork out around $2,528. In NSW, the range is $903 to $2,638. In Victoria $889 to $2,389. In South Australia $917 to $3,025.

The commission records a jurisdictional average number for these mainland regions, too – in SEQ it’s a low $1,302 while in NSW it’s a high $1,869. The Victorian and South Australia numbers are, respectively, $1,339 and $1,633.

En passant, this blows out of the water the Labor/trade union anti-privatization propaganda in NSW earlier this year that the States with private network owners (Victoria and SA) had the highest bills – they were running on costs per kWh, I suspect, which are 28.76 cents for the “average” NSW user, 28.82c in Victoria and 36.68c in SA.

You only have to look at those numbers to appreciate that offering average national or even eastern Australia household cost data has its problems. But wait, there’s more!

One of the points made in the AEMC retail competition report is the benefits householders can get from shopping around varies considerably, depending on distribution network costs, individual consumption, discount eligibility and the type of contract. Compared with the most expensive standard tariff bills, NSW customers can save as much as $720 a year versus $570 in Victoria, $400 in South Australia, $330 in the ACT and $250 in SEQ.

The residential price comparator websites provided by State governments offer guides to prices relevant to geography and consumption that are on offer.

There’s another aspect, too: costs vary by jurisdiction according to what State governments have done to support green activities, slugging the “average consumer” in the process.

The most notorious is the “solar bonus scheme” Labor’s Anna Bligh visited on householders in the south-east corner of Queensland – which I have seen estimated at an aggregate $70 million a year.

When combined with the federal solar support under the RET, the 80 percent of SEQ homeowners without PVs are paying out something like $236 each as a gift to the solaristas.

This area is fertile ground for all sorts of opinion venting, much of it oriented to the view that Australians by-and-large are pretty darned cross about power bills – which is rather at odds with independent research for the AEMC showing that 54 per cent of those interviewed across the east seaboard (a poll confined to people who pay the bills instead of your average poll that picks up anyone who will stand still long enough to be interrogated and is probably just mouthing conventional wisdom) believe their electricity supply provides value for the money they spend (versus 32 per cent who think it doesn’t).

Finally, there’s this from an ASIC “money smart” newsletter.

The data is outdated but directionally I reckon it’s still not far off the mark.

Across the nation, your average lone-living person spends $20 a week on all fuel and power versus $104 on food and drink and $24 on booze. A couple with kids aged eight to 14 spends $43 versus $279 and $31.

The loner’s annual spend on all forms of energy is $1,040. The family’s is $2,236.

Go figure, as they say. (I had to put this in so I could write the headline!)

A lot has changed

I couldn’t put it better myself. “A lot has changed in 12 months. The energy industry continues to undergo a rapid transformation.”

The quote is from Matt Zema, CEO of the Australian Energy Market Operator, prefacing the operator’s annual electricity outlook statement.

I might just pinch it as an opening comment for next month’s 2015 Eastern Australia’s Energy Market Outlook conference in Sydney which I am co-chairing with Mike Swanston.

The fact is that the pace of market and issues change in eastern Australia just keeps accelerating.

I suppose at an underlying level (relating to the treatment of energy by policymakers and vested interests) one might still be able to quote Jean-Baptiste Alphonse Karr – who famously wrote more than 150 years ago plus ca change, plus c’est la meme chose or “the more it changes, the more it is the same thing” – but the sense of market participants today is that this time it’s really different.

“Unprecedented” is getting a lot of use in serious discussion of the state of play. The environment is certainly massively volatile.

For example, since the NEM Future Forum that I helped to present in late June we have seen the RET revised and then gazumphed by the Labor Party promising a 50 per cent target by 2030, the Coalition government producing a hotly-debated new post-2020 emissions abatement target, the Vertigan panel publishing an energy market governance draft report that obviously jarred the CoAG Energy Council, power networks announcing that they are going to develop a 2025 grid roadmap in cahoots with CSIRO and now AEMO fretting aloud that the proposals for shutting down coal-fired generation raise questions about reliability for South Australia, Victoria and New South Wales (potentially affecting a mere 6.4 million electricity customers).

To which, of course, one must add the efforts being made before the Australian Competition Tribunal by NSW network businesses to up-end determinations to cut billions from their revenue and the counter-effort by consumers to have them slashed still more – as well as the push by the NSW government to privatize most of its affected businesses.

And this is just for electricity.

The September Energy Market Outlook conference also has an important gas agenda where discussions will now be influenced by the recent Labor decision to pursue a national interest test for LNG developments if it regains federal office, submissions to the Australian Competition & Consumer Commission inquiry in to east coast gas supply raising a number of contentious points and the debate about fuel switching (from gas to electricity in reaction to current gas prices and fears of still higher ones) gaining momentum.

Gas market concerns will have been sharpened by ANZ recently producing a seriously interesting review – “Australia Gas Industry: When Markets Collide,” available on the bank’s website – that includes a prediction household prices will rise 30 per cent in Sydney, Melbourne, Brisbane and Adelaide.

The extent to which the underlying wholesale prices will prove a last straw for some struggling manufacturers is constantly being canvassed in the media and in submissions to the federal government and its agencies.

One of the opening papers at the Energy Market Outlook conference (to be delivered by CS Energy CEO Martin Moore) is entitled “Eastern Australia energy in 2025 – more of the same or much, much different?”

From one perspective that’s an easy question to answer; however, the devils are in the range of directions in which change can travel as technology, politics, regulation, consumer sentiment and the “animal spirits” of the market interplay — with a contribution from Nature from time to time (see my postscript to this post).

Nor should one forget the occasional significant impact of system failure, as we have seen in such events as the five-week Auckland blackout, the Australian east coast blackouts that led to network regulation being changed (and prices to double) and several rather large gas supply glitches. As a highly successful British leader, Harold Macmillan, said, when asked what he most feared in politics : “Events, dear boy, events.”

The value of the Energy Outlook series of conferences, I think, lies in enlisting key people with something really useful to say and posing issues for them to canvass in front of a substantial and very interested audience of stakeholders.

Not surprisingly, one of the recurring reactions of attendees in commenting on these events is their great value as a networking opportunity. There is much to be said for old-fashioned face-to-face conversation rather than more social media heckling.

September’s EAEMO conference speaker line-up includes the new CEO of the Australian Petroleum Production & Exploration Association, Malcolm Roberts, the chairman of the Energy Users Association, Brian Green, the ACCC chair, Rod Sims, the CEO of the Energy Networks Association, John Bradley, the Grattan Institute’s Tony Wood, the CEO of the Australian Energy Market Commission, John Pierce, the CEO of the Energy Supply Association, Matthew Warren, the CEO of the Minerals Council, Brendan Pearson, the inimitable Martin Ferguson plus Keisuke Sadamori, director of energy markets of the International Energy Agency, and 10 company chief executives.

Backing up the two-day main event is a one-day forum on gas supply and demand that will include among presenters the federal government’s John Ryan, the South Australian government’s Barry Goldstein, the New South Wales government’s Kylie Hargreaves, the Queensland Gasfield Commission chair, John Cotter, ACIL Allen Consulting’s Paul Balfe plus a slew of other commentators, all focussing on the outlook for the east coast over the next five and 10 years.

The three days of presentations and discussions (including a series of robust Q&A panel sessions), I feel sure, are going to provide a more than useful test of how well (or poorly) the east coast energy market is adjusting and adapting to an accelerating rate of change.

The judgment of many of the participants of how far we still have to go to establish an efficient, durable platform for energy security and continuing carbon abatement is probably eminently predictable – but opportunities like this for really informed and rational discussion of the issues rather than the too-frequent rat-baggery of the media and political exchanges are really to be welcomed, I’d argue.

PS: On the point of “unprecedented,” it also pays to keep an eye on matters for which there is a precedent. One such, it seems to me, is the looming El Nino weather event. Will this bring a new drought? If so, will we see dams in the Snowy scheme, Tasmania and Victoria reduced to the levels of 2007-09? Will lack of water again be an issue for coal-fired generation for both cooling and raising steam? What are the implications for this on power spot prices and risk premiums?  Events, eh! Something else to explore at EAEMO.

On target?

How one presents stuff is frequently half the game, not least in politics.

This is true, for example, when wanting to promote the notion that Australia is a carbon emissions “pariah.”

Grant King made a point in a speech back in June that is relevant right now amid the fuss over the abatement target the Abbott government will take to Paris.

In essence, the pariah perspective starts with Australia contributing 1.1 per cent of global emissions with 0.3 per cent of the world’s population. Gotcha!

But things look rather different when you take in to account that this country also contributes 1.9 per cent of global GDP.

Work initially done a year ago by Deloitte Access Economics demonstrates that Australia does better than most G20 countries in terms of the efficiency of converting carbon to GDP.

(The G20 nations are responsible for 76 per cent of global carbon emissions.)

The G20 emissions/GDP average, the consultants say, is 560,000 tonnes of carbon dioxide emissions per US billion dollars of GDP – and the Australian figure is 420,000, similar to that of Mexico, Canada, Brazil and the US. Nuclear France is about half this.

Countries that show up better than Australia by this measure are mostly those with large amounts of low-carbon electricity generation – eg Brazil, big in hydro-power, and France, reliant largely on nuclear power.

King’s case is that a “winning trifecta” in this race is to grow one’s economy, improve carbon efficiency and reduce absolute emissions.

He pointed out in June that the only countries to achieve this in 2012 were the US, Canada and us.

Deloitte (commissioned to review this stuff by Origin Energy) have updated their modelling – and the only G20 country to complete the trifecta in both 2012 and 2013 is us.

King said to his Sydney audience, “Arguably Australia is the gold medal performer in achieving economic growth at the same time as reducing emissions and improving carbon efficiency, but this is not the impression you get from the general debate.”

His argument is that Australia “should be very careful in terms of how it frames and expresses its emissions target because over the past couple of decades we have performed as well or better than our peers in improving our carbon efficiency.”

And he is right in asserting that “recent history is rich with examples of governments attempting to solve global problems locally in response to political or domestic pressure, often with quite unintended consequences.”

Like him, I am wedded to the notion that dealing with carbon abatement to mitigate what we fear will be unpleasant climate change is a practical challenge, not an ideological one.

It certainly shouldn’t be a political football.

The solution, or perhaps that should be better stated as our current contribution to a solution that will occupy governments over the century in a physical and technological environment that will shift many times, lies in investing in innovation in many ways and substituting less carbon-intensive electricity generation in particular for more emissions-intensive plants.

In Australia, a big part here can be played by significantly improving energy productivity — which is not a task limited to the power sector.

What we need here and now, says the Energy Supply Association in a new statement, is “a comprehensive review to establish an efficient, effective, durable process for reducing emissions across the economy.” (How horrible to think that this can be said after the production of two federal energy white papers in not much more than three years.)

Unfortunately, quoting the Grattan Institute’s Tony Wood after the ALP national conference (and its headline renewables and abatement decisions), what we continue to get is “poisonous politics trumping good policy.”

I have been reading another speech delivered three weeks ago to Canadian energy ministers by Maria van der Hoeven, executive director of the International Energy Agency, in which she commented that “a low-carbon system is not only about renewable energy.”  That should be painted on quite a lot of Canberran and other Australian walls.

Van der Hoeven underlined the depth of the challenge facing governments in Paris by noting that “the Copenhagen (international) target of 17 per cent below 2005 levels is nowhere on track.” (So the way forward is to lift the bar to even more unachievable goals?)

She also talked up carbon capture and storage (Canada is rather more active in this area than Australia) as an example of innovation to be pursued, lamenting the “noticeable decrease in public funding” for the technology.

The IEA wants its members to triple their collective energy R&D budget from $US17 billion annually today.

For politicians here and elsewhere, genuinely taking on the big picture unarguably is a Herculean task.

As American columnist Robert J. Samuelson says, they respond to the dilemma of curbing emissions without plunging the world in to depression by talking tough on abatement and really giving priority to the economy.

When they fall well short of an adequate overall approach, as they all do, you get the problems we have here – defined by King back in June when he commented that he hoped the next 20 years of energy-related policymaking and programs in Australia would not be “crazy” like the past 20 years.

Samuelson offers this further salutary thought: there may be a “mission impossible” quality to pursuit of curbing global warming, although few will say so openly.

There are two hopes, he adds.

One is that the warming predicted by some computer modellers is overstated (because, he says, “there is actually much uncertainty”).

The other is to try much harder to liberate economic growth from the present forms of using fossil fuels through technology breakthroughs.

Which brings us back to Van der Hoeven, who has devoted a lot of the past year to lobbying her IEA members for “a long-term strategy based on a portfolio approach.”

Put aside the political rhetoric and we are not seeing a lot of that around here, are we?

Something’s going on

Listening to the language of the energy debate, you can only feel sorry for “ordinary Australians” wrestling with hard-to-follow issues that are being loaded on top of already pressured lives.

“Something’s going on,” one of the players said about power network issues on radio this past week and that’s unarguably true; the big issue is what is really going on, how to avoid populist political intervention messing it up and who, eventually, pays the piper.

Plus how to communicate this stuff to the community at large.

The Energy Network Association seems right to me when it comments that a key issue in getting the electricity transition to work is how and what is regulated.

It is really trite, however, to argue, as one especially green commentator did last week, that “markets are changing and regulators need to change with it (sic).”

Well, duh! That’s like saying it’s hot in the Nullabor; the need for appropriate, effective, efficient change is the meme of the professional debate about electricity here and in a lot of the rest of the world.

The recent NEM Future Forum I co-chaired was all about this and much of next month’s Eastern Australia’s Energy Market Outlook conference will be, too.

ENA rejects the suggestion that it is “pushing” for consumers to pay regardless of their connection to the grid or arguing its members should have special tax privileges.

A paper it has produced canvassing future regular options, ENA says, does not require consumers to “pay one dollar more than currently allowed for.”

The association adds that it has set out to “open a conversation” and is plainly not amused that its overtures have promptly elicited more rude noises from some of those who have worked so hard to give networks a bad name over the past 2-3 years.

Consumers, ENA says, are not going to benefit from critics “inverting” its position or “assuming away the challenges and complexities” of reform.

Paula Conboy, chair of the Australian Energy Regulator, speaking at the ENA conference in Brisbane last week, made a good point.

“There has been a great deal of commentary on ‘energy market disruption’ and how it may shape the future direction of markets and regulation,” she said. ”Some of this can tend to be somewhat esoteric. Sometimes (it) infers that we are seeing shifts to markets that have previously been in some sort of static equilibrium.

“But we have always seen our markets evolve. In the past, (they) have had to respond to change in policies, consumer preferences and, to a lesser extent, technologies.”

Now, she went on, we are dealing with a situation where consumers can, if they wish, control how electricity is delivered to them and how they use it. New products and services are emerging and so are new business models.

Conboy claims that probably the most important feature of existing regulation is that it is “forward-looking and incentives-based,” noting that the aim is to make regulated businesses embrace efficient expenditure and investment decisions.

“But,” she emphasizes, “this does not means changes to existing regulation are not required to deal with market changes.”

Importantly, she adds, this requires ensuring the incentive framework remains “sufficiently flexible and robust” while policymakers work out where a line needs to be drawn between what now needs to be regulated and what doesn’t.

Conboy points out the latest iteration of rules contains, among other things, an objective that tariffs should reflect efficient costs, that cross-subsidies should be removed, that charges should be based on the long-run marginal cost of services and that they must vary depending on the place and nature of network cost drivers.

She had much more to say – the talk is on the AER website – but her wind-up point needs clear focus: the idea that the regulatory framework is broken is the wrong way to start peering at further change.

This “broken” notion is, of course, bedrock for the loudest critics of everything the networks say and do.

Caught up in this debate is the issue of when and how the network businesses recover their investments and, to put it mildly, this is not an easy discussion in the “age of entitlement.”

The ENA and its members argue that we could be heading down risky roads:

  • One may see (ENA says) tomorrow’s power consumers being required to contribute to the return on capital from assets no longer delivering them a service.
  • The other, the association argues, may see investors, anticipating the prospect of stranded assets, requiring higher future returns and/or reducing what they outlay.

Either situation, the association asserts, represents a “first order failure” of regulatory policy and it calls for “more flexible depreciation techniques.”

This is a “conversation” with a lot of players and how long it will take to deliver an outcome – in a policy environment the Productivity Commission has chided for being “tardy” and the current Vertigan panel on governance is not giving a pass mark – is another big question.

One thing is sure: more shrieking by the usual negative suspects is not going to help.

Opening the annual regulatory conference of the AER and its big sister, the Australian Competition & Consumer Commission, also in Brisbane last week, ACCC chair Rod Sims wryly observed “stakeholders can have very different perspectives.”

Ain’t that the truth!

One of the issues occupying the attention of the watchdogs is “whether current regulatory frameworks may be hindering electricity networks from offering services that consumers will increasingly value.”

That, it seems to me, is pretty well the point ENA is addressing.

Its CEO, John Bradley, declares that “best energy minds” need to “shape regulation that unlocks better price outcomes and better service for customers.”

It goes without saying that what the ENA and its members want is a better playing field for their businesses, too.

As Bradley puts it, regulation must be predictable enough to minimize the major investment costs borne by consumers but flexible enough to encourage innovation by both his members and the innovators striving to compete with them.

The traditional cost recovery approaches, in ENA’s argument, may not be the best way forward – and this is not a perception that is only under discussion in Australia.

Here, unfortunately, the debate is remains bedeviled by the “black hat/green hat” diatribe and its attraction for the mass media, leaving the mass audience stirred but not well informed.

The role of coal

It’s almost impossible to read the local and international media without finding someone opining on the imminent “death of coal,” the more so in a week when Barack Obama is kicking his clean energy plan down the road, so it is interesting to note a view of the fuel’s prospects from the Office of the Chief Economist at the federal Department of Industry & Science.

In another life, the office was the Bureau of Resources & Energy Economics (BREE) and before that it was part of the Australian Bureau of Agricultural & Resource Economics (ABARE).

Notwithstanding bureaucratic musical chairs, it remains the main commodities market advisor to the federal government.

Among the many commodities it watches is thermal coal, the source of so much generation of electricity and of controversy – and the source in 2014-15 of $15.6 billion in export income for this country.

(It’s worth interpolating here, I think, that, while so much attention is paid to thermal coal and all the alternatives to it for making electricity, our bigger export is metallurgical coal — $21.7 billion in trade revenue last financial year – which is less abundant, higher in calorific value and absolutely critical for steel-making. Overall, 1.13 billion tonnes of metallurgical coal was used worldwide in 2014 to produce 1.66 billion tonnes of steel. I am waiting to hear what green substitute the decarbonizers have in mind for one of the mainstays of the world economy.)

The Office of the Chief Economist’s current view is that world trade in thermal coal is going to exceed a billion tonnes in 2016, supported by ongoing construction of new power stations.

The office notes that the Chinese have 96,000 megawatts of coal-fired capacity under construction (roughly double the total installed power capacity here) and India has 113,000 MW being built.

One could add that South Africa is building two coal-burning power stations totaling 9,564 MW and has another 10 under consideration – while the Japanese utilities are being shouted out by the nation’s environmental movement for allegedly having as many as 43 coal-fired plants on their drawing boards.

Meanwhile, some mean-spirited commentators in America, having read and re-read the text of Obama’s lengthy weekend statement, have come to the conclusion it is setting targets for a transition that will see a slower shift from coal to gas-fuelled plants in the US over the next 15 years than since 2005.

(A reminder of that Melbourne rag trade joke from the late 19th century: never mind the quality, feel the width.)

These commentators point out that on page 636 of the statement – that is not a typo – the administration actually comments “(the new target) will by no means entail fundamental redirection of the energy sector.”

Up front – that is on page 17 of the statement – the Obama regime also declares that in 2030 “coal and natural gas will remain the two leading sources of electricity.”

(The US Energy Information Agency separately is saying that, even with the new regulations, coal will contributing 26 per cent of power supply in America in 2040. It is a 30 per cent at present.)

Mind you, even this just enables the greenish commentators to take a new downbeat slant.

Bloomberg, for example, opines that “King Coal is dying (slowly) of natural causes.”

Another says: “Noose is tightening on coal.” And so on.

Lay readers would be hard-pressed to learn from this media hoop-la that the real message is that coal is expected by independent experts to fall over a quarter of a century from dominance of power supply to being a substantial also-ran.

Here are some other stats worth pondering.

They are drawn from the well-regarded (by professional energy analysts) Statoil Energy Perspectives 2015 report.

First, the proportion of the world’s GDP held today by the US, the Eurozone and other OECD nations is 63 per cent – and in 2040 is forecast to shrink to 49 per cent. Where economic growth takes place will dictate to a fair extent what energy resources are in demand and it often be coal.

Second, in a scenario in which the Norwegian petroleum giant’s economics team imagine a world of geopolitical rivalry where the global governance framework promoted by the UN erodes but there is lower energy demand and lower carbon emissions, the global energy mix is 30 per cent coal, 27 per cent oil and 22 per cent gas in 2040 (instead of 29-31-22 today).

Third, in a scenario imagining a strong green transition, Statoil projects 14 per cent coal and 24 per cent each for oil and gas in 2040. And 10 per cent nuclear………

It’s not unreasonable to imagine a world somewhere in between this trio of models – although, of course, the environmental movement, politicians riding the populist renewables tiger and the mass media not only imagine a green Nirvana instead but insist that’s the story we get fed.

In the in-between world, none of coal, oil and gas has “died of natural causes.”

They go on representing some 70 per cent of energy consumption with coal accounting for a bit above 20 per cent.

Statoil’s economics team suggests that in these three scenarios – and they are modelling constructs not forecasts – coal consumption can plummet by 2.4 per cent a year over 25 years in pursuit of large abatement or grow by as little as 0.4 per cent to 0.8 per cent annually in worlds where supply security and local availability considerations take precedence over planetary sustainability.

The point, however, is that coal doesn’t vanish out of the energy mix (any more than oil and gas do).

Even in a green energy transition as viewed by practical people, coal is part of this mix and fossil fuels overall are about half.

How many of our fellow citizens in Australia who don’t spend their days obsessing about energy but are “informed” by the mass media are even remotely aware of this, do you suppose?

And, of course, it matters in the real world because it is perceptions that sway votes – and it’s at the ballot box in this country where everyone eligible is required to vote that the policymaking rubber hits the road. Which is what the green propaganda machine is counting on.

And how come our Coalition federal government, armed by its advisors with real world information, is not doing a very much better job of telling Australians what is actually going on?

I have a suggestion: let’s have a debate in the House of Representatives about “The future of fossil fuels in Australian energy and in our export trade.”

Can do (much) better

The Council of Australian Governments’ Energy Council seemingly has decided to take it on the chin.

Confronted by a politely but sharply critical draft report on energy market governance from the panel chaired by Michael Vertigan, 12 ministers from the nine jurisdictions, meeting in Perth for the first time since the federal energy white paper was handed down, have produced a communiqué resolving “to improve the efficiency, visibility and transparency” of Council functions – and emphasizing the need for market institutions and officials “to materially improve the responsiveness to the Council” of advice on how to deal with market change.

Curiously, the promise to do better is buried on page three of the seven-page communiqué the Energy Council issued after the Perth meeting.

The headline message the ministers wanted to impart is that the Council “aims to reduce the cost of energy for households and businesses” while maintaining national competitiveness and economic growth, reducing carbon emissions, improving sustainability and protecting consumers – pressing all the political “hot button” issues in one sentence at the very top of the communiqué.

The difficulty is that a large number of Us Outdoors see the Council as the problem, not the solution, as evidenced by this comment from the Vertigan panel (whose final report will be delivered in September): “Throughout (our) consultation process and in submissions, a consistent commentary has been provided that the Council and its senior committee of officials lack a focus on strategic direction and are not providing effective and active leadership.”

The panel adds: “A strongly recurring (stakeholder) theme was that there is a lack of transparency and accountability in the Council’s work. For example, the Council’s terms of reference are neither final nor publicly available.”

Stakeholders, the panel says, believe Council agendas are too long and lack clear focus “and that the opportunity for early, effective and targeted input to the policy development process does not exist.”

Vertigan and his colleagues go on to comment that the lack of a clear common purpose among nine governments can have “significant implications for reform.”

They point to stakeholder complaints that a national approach on issues is “difficult” where some governments don’t implement Council decisions or only partly implement them or even renege on a commitment they have made.

I will note here that the sacrament of confession in the Roman Catholic rite works for the penitents where they not only acknowledge their sins and have a firm purpose of amendment but also actually deliver – and the last bit is as important as the first two.

So, too, it is here: the CoAG Energy Council is still playing political games – witness the opening statement of the communiqué as presented above – while swiftly passing remedial action down the line to public servants and market institutional bodies and promising to do better in communications.

The real issue is that the energy policy fish is rotting from the head.

It is the inability of political leaders of governments to both form holistic, workable approaches to the complex challenge of energy security and carbon abatement and then to convert them in to a national approach that encourages investment and wins the confidence of voters that is the cause of the malaise perceived by stakeholders and complained about so vigorously to the Vertigan panel.

The inescapable observation is that the buck should be travelling up the line to CoAG first ministers, who want to be seen to be cutting energy bills, protecting consumers, growing the economy and contributing to “saving the planet” through carbon abatement without at any time in the past decade genuinely grappling with the over-arching difficulties.

The Business Council says in one of its current submissions that “energy policy must achieve a balance between promoting economic growth, energy security and environment sustainability; policy that is developed with an eye to each of these objectives is more likely to build consensus and minimize the risk of future changes.”

It then sums up how well our political leaders have managed this task by stating that the energy sector today faces tensions that have been exacerbated by policy missteps by all levels of government over a number of years.

As it happens, the Energy Supply Association is also out and about at the moment pointing to the fact that, while recent regulatory developments are contributing to reducing the operational costs of electricity supply on the east coast, policy interventions are pushing them up.

The association challenges the body politic to find a way to pay for policies without bundling the costs in to power bills – for example, via taxation.

As I wrote in “Business Spectator” this week, it is one thing to have the endless argy-bargy in the media about how much populist green measures really add to energy costs, it is another entirely for governments to do the sums for the cost of picking winners and present them as a tax bill.

Coming back to the Vertigan panel draft report, this is an important document, covering a lot of ground in 97 pages.

The panel observes that, while some of the criticisms fed to it by stakeholders are justified, it is clear that many submissions “imply expectations of the Energy Council which are unrealistic in a multi-jurisdictional political/administrative environment.”

The panel comes to the view that the Energy Council is the “premier and appropriate body to have over-arching responsibility and policy leadership for the energy market, including enabling co-operation between the (national) government and the State and Territory governments.”

In the absence of such leadership, it adds, it is unrealistic to expect reform to be delivered by individual (institutional) bodies.

It sees a way forward in the Council agendas being “targeted at strategic priorities within a broader reform agenda” and it wants the senior committee of officials to take responsibility for ensuring the agendas are fit for purpose and for guiding the politicians to ensure effective decision-making.

We’ll see what stakeholders think of this in the weeks ahead.

Personally, I think the problem lies higher up the chain.