Archive for December, 2016

The numbers game

Anyone who really wants to get his or her claws in to the complexity of our domestic gas and electricity supply could do a lot worse than scan the new edition of “Electricity Gas Australia.”

The yearbook, which in its annual electricity form has been published for more than 60 years (most of that time by the Electricity Supply Association of Australia, with the “e” more recently for “Energy”), has shifted in to electronic guise for 2016 and is now jointly presented by the Australian Energy Council and Energy Networks Australia via their websites.

It remains a cornucopia of information about the twin domestic essential services and offers many insights for the path ahead to those who take the time to dig and ponder.

In the context of the long-term issues of both supply and carbon abatement, one of the most important observations (to me) of the new edition, using analysis by EnergyQuest, is that the amount of energy Australia needs to use per unit of GDP can be expected to sink to 2,279 gigajoules per million dollars by 2034-35 – down from 3,506 GJ in 2014-15 (the year covered by the new book).

As the International Energy Agency constantly makes clear (and as is continuously broadly ignored by media here because of the one-eyed focus on renewable energy), this is one of the critical factors for all industrialized nations in pursuing global climate change goals. It is also, of course, a key issue for economic health in all countries. For Australia, how far national energy intensity improvements can be made beyond present (relatively weak) government aspirations should be a hot topic but it isn’t – and it is a not unimportant point for investors in long-life energy infrastructure, too.

As with just about everything related to energy, this is a complicated issue. In Australia, we are in the throes of a rapid shift towards less energy-intensive business activities (commercial and services) while the growth of manufacturing (as the yearbook puts it) is “moderate.”  A considerable (but not the only) factor is that this translates, as the people of Portland, for example, can tell you, in to socially jarring closures of factories – and, as our politicians know only too well, in to emotional demands for costly bailing of the boat by governments. And eventually it impacts on what governments have available to spend on health, education and other services that are hot button issues across the country.

As the yearbook data throw up, large, new industrial development results in large, lumpy increases in power requirements. For instance, Queensland business electricity consumption shot up 14.3 per cent in 2014-15 – that was the impact of the new LNG projects at Gladstone. On the other hand, Victoria recorded the biggest State fall in power use in 2014-15 – that was the flow-on from the closure of Point Henry smelter.

Two of the yearbook tables to which I always turn early are the breakdown of numbers of customers and their power consumption.

The latest volume shows that the number of business customers has gone backwards by nearly 3,000 in New South Wales and the ACT while growing by 2,000 in Victoria and by 10,000 in Queensland – while it is almost static In South Australia and Tasmania.

Nationally, despite a 5,000 gigawatt hour rise in Queensland business consumption, corporate demand has barely risen by 1,000 GWh. In the three most populous States (NSW, Victoria and Queensland), making up 90 per cent of the NEM, business demand has fallen by 37 GWh despite the Gladstone impact.

For gas, national manufacturing demand has fallen from 352 petajoules in 2013-14 to just under 349 PJ in 2014-15 – and the two associations are forecasting a further decline to barely 300 PJ in 2024-25.

Interestingly, there is a turnaround in the outlook on gas for generation. In the 2015 edition of the yearbook, the countrywide power sector’s gas demand was recorded as 341 PJ and was expected to crash to 182 PJ by 2018-19. In the latest version, the 2014-15 demand by the sector is reported as almost 361 PJ – and, while a decline is projected for 2019-20 (to just under 240 PJ), the outlook for the ‘Twenties is now seen to be a bit above 300 PJ.

There are a few points for cogitation here: clearly the need to make the grid more secure is a factor, but what will the price of this gas be and how will that affect retail power bills? Where is this gas coming from, given the current political nonsense over exploration and development? And how does a business make a go of gas plant investment in an environment where VREs and coal-fired overcapacity have this form of generation in a vice?

In passing, while the yearbook’s outlook for residential gas demand 12 months ago was for a small but steady rise out to the middle of the next decade, the latest projection is as flat as a strap to 2024-25.

There are a myriad of other nuggets to be mined from 2016’s “Electricity Gas Australia” but here’s a final thought that is not irrelevant for the Finkel task force and the CoAG ministers awaiting its report in mid-2017 (with anticipation or trepidation, I wonder?):

One of the long-running features of the yearbook is a rolling 10-year forecast of electricity load – which now looks out to 2024-25. It is based on the perceptions of the associations’ members.

For the NEM, the system energy (overall generation requirement on the grid) forecast for 2024-25 is 189,084 gigawatts hours versus 183,376 GWh in 2014-15.

Now one could practically write a book just on the push and pull in the marketplace of economics, corporate strategies, technological change and national policy based on this outlook.

Suffice to say, “messy” is an apt piece of shorthand.

The two associations, in their overview for the yearbook, observe that the NEM “continues to face a variety of different factors affecting the dynamics of the wholesale market.” Ain’t that the truth.

‘Tis the season to be hot

Spare a thought for the South Australians as you prepare for your weekend feasting on turkey, ham and Christmas pudding; they face 40 degree heat on The Day as well as 37 degrees on Christmas Eve and Boxing Day.

Given recent events, it’s not surprising that Treasurer and Energy Minister Tom Koutsantonis has been quick to tell local media that the expected peak of State power demand (forecast by the Australian Energy Market Operator, he says, to be 1,888 megawatts) will be well below the planned available capacity of 2,800 MW (which, of course, includes what can be accessed through interstate transmission).

Our summers routinely offer a stern test for the east coast supply system’s resilience.

Back in mid-January (on the 13th as it happens), the NEM’s peak broke 32,000 MW with New South Wales passing 12,800 MW (most of it feeding Newcastle-Sydney-Wollongong, depending to a major extent on black coal generation with the ever-reliable back-up from Snowy Hydro). The State’s own summer peak actually came about six weeks later, hitting 13,529 MW.

Harking back to South Australia, one of the characteristics of seasons past has been capacity peaks there coinciding with those in Victoria, but the substantial investment in wind farms seems to have somewhat changed this pattern. Last summer, SA reached 2,948 MW just before Christmas while Victoria’s peak was in late February this year – 9,280 MW.

For completeness, the Queensland peak was 9,158 MW on the first day of February.

I must acknowledge here that I am sourcing this data from Paul McArdle’s excellent WattClarity blog, which is a mine of information.

McArdle put up a post on this blog last week (“Forecasting is a mug’s game” – do read it), reacting to all the media publicity about the recent AEMO and Australian Energy Market Commission publications. In it, he observes sagely that “There is no model that exists (or even could exist) that can accurately represent all of the intertwined technical and commercial intricacies of the NEM,” adding that “a model is just a model, it is not reality.”

I can think of more than a few walls on which I would like to graffiti this.

He makes another point that is highly germane to much of what we read in the mainstream media and the industry-oriented websites: “I’ve also noticed a trend for people to adopt their favourite forecaster and to bag their least favourite ones – a trend which seems to be based on the degree to which the outputs from the modelling exercise align with the recipients’ own preconceived notions of what the outcome should be.” How true!

McArdle’s own summary: “Software’s not perfect (flaw #1), nor are humans (flaw #3) and data can lie (flaw #2).”

One of things I note about all the electricity hoo-ha of the past 2-3 years is that the commentariat is fixated on telling us about the uptake of solar PVs by householders but never (and I don’t mean hardly ever) discusses the ongoing purchase of air-conditioners any more.

Alan Finkel’s preliminary report to the Council of Australian Governments talks about the “unstoppable” take-up of photovoltaics and, he says, distributed energy storage, which is probably directionally correct, but the air-con purchases also continue to soar and this shouldn’t be overlooked.

I live in The Hills district of Sydney, some 42 kilometres from the CBD, and major housing development is under way on the plains beyond my home – an urban area the population  size of Canberra is being constructed there along with a new railway line. Whenever I drive out that way I notice how relatively few new houses have rooftop solar – but I’ll bet nearly every last one of them has air-conditioning.

When you see those eye-watering maximum temperatures for Sydney on the television news (the record in my decades out here has been 44 degrees on two or three occasions), this is where the highest measurements are being taken. And the issue is not just top temperatures – I have lost track of how many 20 degree minimums we have had in recent weeks, with a top of 26 degrees at midnight one evening.

That’s when air-con is in high demand and solar is off duty.

The biggest of the Sydney Basin network businesses, the recently-privatized Ausgrid, is currently telling its customers “Don’t overcool your house. Keep the (air-con) temperature between 23 and 26 degrees. Every extra degree you set the thermostat below this adds 10 per cent to your cooling costs.”

When you consider how many householders have the gizmo set around 19 degrees (and even as low as 16), this is a message with point to people who are often in an uproar over their power bills.

Coming back to where I started this post, the level of peak demand in hot (and often also humid) summers in the eastern mainland States raises some curly questions as the NEM’s removal of fossil-fuelled spare generation capacity rolls on. Hence part of the concern in SA to have more interconnection with NSW – which, as there are closures in Victoria, will increasingly be a key source of capacity from its black coal plants.

But, even with more transmission capacity several years from now, supposing this happens, wholesale prices in the mainland NEM can be expected to rise. To what extent and for how long this will be tempered by the construction of some 5,000 MW of wind farms and utility-scale solar farms required by the RET by 2020 (supposing this happens) remains to be seen.

Anyway, the immediate focus for Christmas is going to going to be scorching South Australia with five days in a row of more than 35 degrees. Its electricity supply will never have been more closely watched.

The price is what?

The Prime Minister this month has elevated the issue of what we pay for electricity in particular (and energy more generally) in to the leadership arena and it does not take Old Moore to predict that it is a topic that will continue to hog some of the political headlines in 2017.

The context, as we all know, is Malcolm Turnbull’s political need to sit on the suggestion of some form of carbon trading in electricity supply, a relic from the “war” of earlier this decade over a tax on emissions on which some of his party retain strong feelings.

The pricing issue is broader and wider than this and seemingly never a month goes by without some element of the media returning to it with lurid headlines.

For those who like to salt their debates with facts, which often tend to be in short supply in the energy shouting game, I recommend reading a contribution that appeared in The Conversation on Friday. Written by the Melbourne Energy Institute’s Dylan McConnell and reviewed by RMIT’s Alan Pears, it’s readily findable by putting “Are Australians paying twice as much for electricity as Americans?” in to Google Search.

This assertion was first made by the Energy Users Association in 2012 and was repeated earlier in the month by Liberal MP Craig Kelly, chair of the federal government’s backbench committee on environment and energy, in an ABC radio interview.

McConnell does a good job, I think, of taking us through the hoops needing to be negotiated to properly assess the claim.

Energy economics, as he says, is a lot more complicated than most of what is waved about in the public arena.

If you really come down to it, he adds, “most countries actually spend a similar proportion of their GDP on energy costs.” Take Japan, as an example. Its energy prices are really high but so is its energy efficiency and productivity. It spends roughly the same in GDP terms on energy as the Americans.

The bottom line, McConnell suggests, is that prices may be higher here for individuals, but that doesn’t mean our economic energy costs are higher than in America.

Kelly was talking about what householders in particular are charged on a per kilowatt hour basis. If you use currency market exchange rates, he’s correct for 2014, says McConnell – but in 2015, using this comparator, Australian prices were 70 per cent higher. If purchasing parity power exchange rates are used, and this is a contentious topic among economists, McConnell says Australian electricity prices are 50 per cent higher than in America.

But they’re higher, right?

Short answer is yes but let’s bear in mind that the key factor in the spike in our power pricing this decade is network charges, which have nothing to do with the “carbon wars” and have flowed from a change to regulatory arrangements in turn flowing from a political kneejerk to a series of blackouts in the past decade.

RMIT’s Pears also points to the issue of charges to connect homes or business premises to the power network. The more electricity used, the lower the network cost per kilowatt hour to the user.

In the case of a comparison of our power bills with those in the US, we need to bear in mind our householders use a lot less energy here. American homes on average use 10,812 kilowatt hours a year. Our national average is now 5,772 kWh (15 per cent less than it was in 2008).

“So,” says Pears, “we would expect Australian household prices (ie per kWh) to be higher because (our) large fixed-supply costs are spread across a small amount of consumption (compared with America).”

While we are on this topic, I recall that back in April the Australian Energy Council, representing generators and retailers, published a commentary on a worldwide comparison of electricity prices (it’s on their website) and dwelt on the fact that, using federal government analysis, in 2014 in equivalent purchasing power exchange terms, Australian charges (20.47 US cents per kilowatt hour) were then well below the OECD average – 23.03 US cents/kWh.  (The cheapest? Norway on 8.47c and Canada on 8.49c, with America at 12.5c. Britain was 21.98c, Japan 25.47c and, way up there at the top, was Germany at 37.84c.)

The AEC made another point that gets comprehensively lost in any public debate about this issue: on the power purchasing parity basis, Australians use 2.27 per cent of average daily wages to meet their daily power bill, amongst the lowest expense in the OECD. Again, this stuff is complicated. Germans have the highest electricity prices but the country also has high worker remuneration levels, so its daily power bills “only” account for 4.89 per cent of daily wages. If this were the situation here, there would be rioting – in the media if not in the streets.

In terms of the economy, it’s our industrial electricity prices (remembering factories work in an environment where the biggest users can negotiate contracts with suppliers) that are of most significance – and a comparison for 2015 of a basket of 18 countries prepared annually by NUS Consulting shows that our firms don’t fare so badly on accessible charges.

The NUS analysis is expressed in US currency per kilowatt hours and it’s no surprise to find Italy (15.70 cents) and Germany (15.22) at the most expensive end, along with Britain (14.16) – nor is it surprising to find Sweden (5.34) and Canada (7.23) at the cheapest. The US result on this ladder is 9.43 cents – and Australia is just 8.17c.

However, as any Australian factory owner will quickly tell you, it’s low Asian power charges (and such factors as labor costs) that give them indigestion.

The NUS numbers are no more than an indicator for a basket of non-Asian countries but they do talk to the broad point that there is an element of hype in the stuff that reaches our community. The cynical assumption by the hypers is that perception is reality.

Outside politicking (is anything these days?), our power price perceptions do need to be looked at more closely in a way that the community can follow – and this needs to be in the over-arching context of the pursuit of supply reliability and affordability as well as lower emissions (the “trilemma,” which I guess we should declare one of the words of 2016) not in silos chosen for their impact.

Which is why The Conversation piece would be timely and educational if more than a relatively small handful of voters ever took it in.

Words, words, words

Back in October the CoAG Energy Council ministers told us they agreed that their primary responsibility is to ensure the security, reliability and affordability of the energy system for all Australians.

Back in August they told us they recognized “there is a need to respond to this paradigm shift in energy markets and respond in a way that maintains the confidence of energy consumers and investors in our energy markets, which must be reliable, affordable and sustainable – business as usual is not an option.”

Back in December last year they told us that they had agreed to “a national, cooperative effort to better integrate energy and climate policy, with a clear focus on ensuring that consumers and industry have access to low-cost, reliable energy as Australia moves towards a lower-emissions economy.”

They said they also agreed that “fundamental to solving our energy challenges, is increasing the amount of supply, the number of suppliers, and removing obstacles towards this end.” And they agreed to “modernize regulatory frameworks and consumer protections so consumers can engage with increasingly dynamic and decentralized energy markets driven by the need to accommodate emerging technologies.”

At today’s meeting in Melbourne, they tell us in a new communique that they have “acknowledged (we were) meeting at a critical time for Australia’s energy market as (we) work to maintain the security, reliability, affordability and sustainability of the national energy system for all Australians.”

And they have agreed to meet again in February, assuring us that “the future security of the national electricity market (NEM) remains (our) top priority.”

As I look at all this, why is it that what comes to mind is Eliza Doolittle singing “Words, words, words, I am so sick of words. Is that all you blighters can do?”

Perhaps I am just overly cranky. Certainly, Energy Networks Australia, via CEO John Bradley, is prepared to be more optimistic. In a media statement this afternoon following the ministerial council meeting (which seems to have been marked by a not inconsiderable degree of political bickering), Bradley says: “There is still time for Australian governments to work together to achieve a national energy plan in the interests of customers.”

There is, he adds, “enormous support” among stakeholders for governments “to put customers above politics,” reminding the politicians that they and the supply industry are “collectively accountable” for “fixing a damaged energy system in 2017.”

And, he argues, “the point of a decentralized energy revolution is that no government or company can refuse to compromise – we can only work through stable policy which promotes markets and incentives” because the “peace dividend for customers is enormous.”

The core issue now, as it was at this time last year and the year before and the year before that, is whether governments and the mainstream political parties can collaborate. ‘Tis the season when we should allow hope to conquer experience but I’m afraid I have severe qualms about whether we heading towards a “fresh start” (what ENA seeks in the headline to its statement) in 2017.

As it happens, I am reading the ministerial communiqué and the ENA comments at the same time as a new commentary from the Energy Policy Institute, which has today published a paper on investment in electricity infrastructure in a low-carbon era (it’s on the EPIA website) and is calling for a “truly national energy vision” to be crafted, including “fundamental redesign” of the NEM.

EPIA executive director Bob Pritchard observes that “the increasing penetration of variable renewable energy in the NEM is causing the closure of coal- and gas-fired power stations, threatening system security and creating unmanageable risks for investors.”

He adds: “This is giving rise to social effects for which the community is not prepared and is occurring during a period of heightened community dissatisfaction with traditional political processes” – of which, I point out, the CoAG talking shops are one of the more prominent.

Pritchard also comments that “there is plenty of money for investment” but electricity generation has “become a no-go zone.”

Yesterday bodies representing consumer groups, business energy users, the trade union movement and electricity and gas suppliers put out a joint statement ahead of the CoAG meeting stating that “the status quo of policy uncertainty, lack of coordination and unreformed markets is increasing costs, undermining investment and worsening reliability risks – this impacts all Australians.”

Today one of the group, the Australian Energy Council, representing power generators and energy retailers, followed up by warning that “the longer we delay an agreed national strategy, the more we can expect price volatility and supply reliability to be compromised.”

AEC chief executive Matthew Warren added that “the efficiency and operation of the National Electricity Market is now rapidly being undermined” and he said “the challenge of integrating more large-scale renewables, forced into the grid by arbitrary State-based targets, will continue to escalate in the absence of a broader, integrated approach.”

Earlier in the week the AEC warned that the new interconnectors being energetically promoted in a number of quarters “could increase costs and reduce reliability if they are not part of a national energy and climate strategy.”  Warren said: “In the absence of a national climate and energy strategy, it is difficult to predict what conditions a new interconnector will be dealing with in 10 years, let alone by the end of its working life.  These are 50 year assets that have material impacts on generation at both ends of the line. The risk is they increase costs without necessarily solving the system security problem they were meant to fix.”

The CoAG energy ministers in their latest communiqué tell us they “recognize the need to guide the transition of the NEM from a system of centralized, synchronous generation designed for a different electricity market to a more distributed, low emissions, flexible electricity system driven by new technologies and changing consumer preferences.”

They have “agreed to fast-track for consideration additional measures to strengthen the NEM.”

Is this what is needed?

Ahead lies the Finkel report and the review of national climate change policy that Malcolm Turnbull and Josh Frydenberg managed to turn in to a full-on political scrum only a few days ago.

As we close the books on 2016 and read just all the words thrown in to the debate in December alone are we confident that what supplier and consumer stakeholders say they want is actually what the feuding politicians are setting out to deliver?

Now, about gas

Apart from the complete absence in the interim Finkel task force report of any reference to technology neutrality (or the possibility that, if the whole NEM shebang needs rethinking, as the commentary suggests, perhaps so does our ban on nuclear power), it is notable that there is more than a small wake-up call in the document on the non-renewable issue of natural gas.

Prominent in the executive summary (the bit politicians tend to read, leaving the rest to their advisers) is this statement: “Open cycle gas-fired generators are well-placed to complement variable renewable electricity generators. However, Australia’s east coast gas market has undergone profound change with the expansion of our liquefied natural gas export industry. Domestic gas prices have risen considerably as Australian gas markets have become linked to international markets and supply has been tight. The need for greater gas supplies for electricity generation is increasingly urgent.” (The italics are mine.)

And further on, under the sub-heading “Gas has a critical role to play,” there is this: “Over the next three years, increases in residential electricity prices are likely to be driven by an increase in the wholesale price after a long period in which prices were suppressed by a large excess of supply over demand.

“This change is caused by the retirement of two large coal-fired generators – Northern in South Australia in May 2016, and Hazelwood in Victoria in March 2017.

“Rising wholesale gas prices will also affect wholesale electricity prices. This is particularly the case where gas generation sets the wholesale price, as it often now does in South Australia.

“As traditional generators leave the market, liquidity in electricity financial markets may become a problem, also putting upward pressure on the overall cost of generation.

“Gas has the potential to smooth the transition to a lower emissions electricity sector. Gas generation provides the synchronous operation that is key to maintaining technical operability with increased renewable generation until new technologies are available and cost-effective.

“Furthermore, gas is dispatchable when required.

“The role of gas in the NEM’s future generation mix is complicated by events in both domestic and international gas markets. Australia’s east coast gas market was previously quarantined from international markets, but in recent years has transformed into a major LNG export industry with prices dependent upon international oil prices.

“Domestic gas prices have risen considerably and become more volatile due to being dependent on the international price, in conjunction with a tight supply-demand balance and rising costs for the development of new reserves.

“System security and retail prices are both negatively impacted by the recent increases in gas prices and constraints in gas supply.

“Additional gas supplies for electricity generation are needed urgently. Reviews by the Australian Competition and Consumer Commission and the AEMC have identified a range of issues affecting gas market competitiveness. The COAG Energy Council is currently implementing a package of reforms.

“However, even after they are implemented, there will still be uncertainty as to whether sufficient gas will be available to meet future domestic demand. This is due to supplies being diverted to meet international LNG supply contracts, low levels of exploration and forecast production, restrictions on onshore exploration and development in some States and Territories and infrastructure constraints.

“Tighter gas supply translates to higher gas prices. Most consumers are not directly exposed to the wholesale electricity markets and these cost pressures. Nevertheless, increased wholesale prices due to the generator retirements and higher gas prices will inevitably flow through to higher retail prices for consumers.” (My italics again.)

Amid all the coverage of the past week, and it has been extensive, I don’t see much attention (and no prominence at all) to what can hardly be described as a minor part of the Finkel report even with the Australian Petroleum Production & Exploration Association hurrying out a media statement on Friday afternoon to draw attention to the comments.

APPEA’s Malcolm Roberts says the report “shows just how urgent our national energy security situation has become,” adding “a mix of policy indecision, restrictive regulations and politically motivated bans and moratoriums, particularly in Victoria, has stymied gas exploration and development and is placing this transition at risk.”

In the explosion of media coverage of the Coalition’s pratfall on an emissions intensity measure for power generation, the color and movement of the CoAG leaders’ debate and the Finkel report itself, the meeting of energy executives called by Industry Minister Greg Hunt at the week’s beginning to discuss “the major issue of gas” turned in to a one-day wonder (or still less).

Hunt told journalists he sees reliable gas supply as crucial to the federal government’s bid to integrate climate change and energy policy while maintaining energy security. “Gas is the single energy source which manages to achieve energy security, ­affordable energy and emissions reduction — it represents the holy trinity of energy,” he said.

Resources Minister Matt Canavan chimed in to say “We are facing shortages of gas right now and certainly pressures on the market and we expect that will exacerbate over the next five years,” adding that it is “incredibly important” for particularly for certain parts of the manufacturing industry, “petrochemicals and the like,” that they have access to affordable gas. (The plastics and chemicals industries alone employ 50,000 people.)

Given the Finkel report comments and the Prime Minister’s emoting about his focus on consumer energy prices, one might have expected more media attention to the gas part of the equation, but this is so far not the case. The issue’s not going to go away, however – and the “network roadmap” report brought out by CSIRO and Energy Networks Australia, also published this week, highlights why this is the case just for electricity generation.

Included in this study is modelling that suggests the contribution from variable renewable energy in the NEM can rise from 20 terawatt hours a year now to 60 TWh annually by 2030 with coal-fired output falling by half – but gas generation’s contribution increasing four to five-fold (to as much as 97 TWh annually).

How do we get anywhere near there with the present monkeying around with State and Northern Territory bans and moratoriums on gas activity?

Easier said than done

Anyone expecting some profound policy directions from the initial (rushed) report to the Prime Minister, premiers and chief ministers on the future security of the national electricity market from the Finkel task force was having themselves on.

The breadth of the panel’s task, which has only just begun, is well illustrated by the multiplicity of questions contained in its interim commentary handed to governments this week and made public today after the CoAG leaders’ meeting.

The next big step is stakeholders getting in their responses (which will be made public) by 21 February to enable a measured final report to be delivered to CoAG by the middle of next year.

The politically important aspect of this week’s goings-on has been the Prime Minister Malcolm Turnbull and his cabinet collectively scoring a fairly spectacular own goal, to use a soccer term, as they reacted to loud noises from some of the Coalition caucus over their adverse reading of initial comments about the other report the government is commissioning – the long-signalled review of climate policy.

It’s quite reasonable for the media to be making a fuss over this aspect – it goes to the governance skills of an administration balanced on a political knife edge – but, so far as consumers and investors are concerned, the main game is still the final conclusions of the task force and how these are managed collectively by CoAG (with State leaders’ penchant for theatrics on display at the media conference after today’s meeting).

By then this week’s media stories will be old news (the metaphor in another age was that, in the long term, bad press would be useful only for wrapping fish and chips) and the chief focus may be on a collective capacity to come up with NEM 2.0.

The likelihood, to quote the “Australian Financial Review” this afternoon, that, as a result of the Coalition cock-up this week, consumers (mass market and business) are “condemned to a future of second-best energy policy” is just rather colorful speculation.

Perhaps the most notable part of today’s CoAG media conference was the Prime Minister’s repeated reference to the Finkel report’s comment that NEM household bills rose almost 50 per cent on average (in inflation-adjusted terms) over six years.

The message to voters via tonight’s TV news is “I feel your pain and don’t intend to add to it.”

Turnbull could have added the other Finkel observation that “inadequate supply and the high cost of natural gas are contributing to electricity prices rises,” a problem to be laid squarely at the feet of certain State governments (and not likely to be helped by the attitude of the new Labor regime in the Northern Territory).

A central theme from the task force is “we will have to change the way we operate” – to which many may respond “duh” but it is the core point, really. To state still more of the obvious, the devilry will come in how politicians handle the detail handed to them by Finkel & Co. Their track record over the past five years is not flash.

The task force acknowledges its challenge is to come up with a set of solutions that “simultaneously provide a high level of energy security and reliability, universal access to affordable energy services and reduced emissions.” This, the interim report adds drily, “is easier said than done.”

And going to Turnbull’s political message, it adds “a higher level of energy security has cost implications.” Especially, I think it might have added, if you radically change the generation mix to fit in lots more variable renewable energy.

This brings us round to how to move more emissions-intensive coal-fired generation out of the market – and, awkwardly for more than Turnbull and his cabinet, the report points out that (a) regulated closure has slightly higher economic costs than an emissions intensity scheme, (b) a bigger RET has the most impact on system security and (c) an emissions intensity scheme (which a knee-jerking federal government is vigorously eschewing) integrates best with the NEM’s current pricing and risk management arrangements.

And, for the premiers of Tasmania and South Australia, each ever-so-eager to see new high voltage transmission links built from their States to the coal-burning ones of Victoria and New South Wales, the report notes that the benefits of this for system security and reliability need to be weighed against the cost to consumers. (It adds that recent analysis of proposed extra links for SA shows they are “either very expensive or have long lead times or both.”)

While all this was hogging centre stage, the Australian Energy Market Commission has today also published its advice to the CoAG Energy Council on integration of energy and emissions reduction policies.

The AEMC analysis shows an emissions intensity target scheme will deliver the best outcomes for consumers in terms of price, system security and the certainty of meeting the national abatement target for 2030.

And, in bad news for the federal Labor opposition and the Labor governments of Victoria and Queensland, the AEMC also finds that an extended RET has the highest cost of abatement because it does not reward switching from high-emitting plants to those with lower emissions.

Under a bigger RET, says the commission, brown coal generation remains in the market for longer while black coal and gas plant are crowded out and it will be harder to maintain system security.

“The extended RET also has the highest resource costs owing to the large amounts of new generation investment needed to meet demand while achieving required emissions reductions. This implies more resources (being) diverted from other areas of the economy to allow (renewables) investment to occur.”

And the AEMC adds – in a bitter pill for the activists who love to prate about wind and solar depressing today’s wholesale power prices – that consumers will bear the cost in the longer term when demand and supply come back in to balance, reversing wholesale prices and causing retail bills to rise.

Prior to the CoAG Leaders’ meeting, the Grattan Institute’s Tony Wood published a newspaper op-ed expressing the thought that, given this week’s goings-on, “a continuation of the dog’s breakfast that has already contributed to security concerns is a prospect.” Looking at the Coalition’s statements and the rest of the political commentary, he added “there is no good news here.”

Only Pollyanna could declare him wrong at this point of time — but a more pragmatic view may be that self-interest could force mainstream politicians, federal and State, to find a way out of this swamp before a fed-up electorate can drag them under.

Should we be encouraged or depressed by the thought that, by Christmas next year, we should know the answer………..

Back to the future?

If you’re suffering flashbacks, it’s okay — it’s not you, it’s the body politic.

The “crazy carbon backflip” by the federal government, as I note the “Australian Financial Review” describing the events of the past two days, has seen the prospect of a power generation emissions intensity scheme torpedoed and sunk before it could even be evaluated by the impending review of climate change policy. Now that is some form of record even  by our standards of public debate about energy — although it has the hallmarks of the experiences we suffered in 2007 and 2010-11 and 2013-14.

As one National Party backbencher has put it during this week’s melee: “The politics around climate change are awful.”

Not surprisingly, the Australian Energy Council CEO, Matthew Warren, has sent out a media statement today sighing that “to arrive at a well-considered policy the government’s review needs to assess all feasible options” and adding — clearly in vain — that “the government must leave all policy options on the table as it prepares to undertake a critical review of climate policy in 2017.”

One of his member company CEOs, EnergyAustralia’s Cath Tanna, is seeking to “encourage” everybody who is engaged in the debate not to rule anything in or out ahead of the policy review. “It’s far too early to be jumping to solutions,” she says. Hah! If jumping to energy solutions was an Olympic sport, it would be gold, gold, gold for Australia.

Tanna wants “a bit more time spent on defining the problem before jumping to conclusions.” That I think is what Malcolm Turnbull and his cabinet appointed Alan Finkel and his task force to pursue. Could the government have perhaps waited to at least see Finkel’s opening report to the CoAG leaders’ meeting on Friday before barging out in to the public arena with stuff about the climate policy review in 2017?

Grattan Institute’s Tony Wood suggests that an outcome of this week’s contretemps could be that we end up with a “fourth-best” policy and exactly the opposite of what those whose knees jerked on Tuesday say they want: i.e. more uncertainty and even higher energy prices.

Turnbull, in hosing down his revolting backbenchers via the media, has made this commitment: “We will not take any steps that put upward pressure one energy prices.” That won’t get forgotten in the rolling maul that will be the national energy debate from now to the next federal election.

Somewhat lost to view in all this fuss has been the release of the “Electricity Network Transformation Roadmap,” a project in which Energy Networks Australia and CSIRO have partnered over the past two years. The central theme of the roadmap, to quote ENA’s John Bradley, is “a plan to transform the grid into a platform more like the internet, where customers can trade and share energy or receive offers of innovative services, with the confidence of a secure, affordable and low carbon service.”  CSIRO’s modelling asserts that more than 35 per cent of all electricity could be generated and managed by customers by 2050 through rooftop solar and battery storage which can then be fed back into the grid.  It foresees $200 billion being spent by customers or their agents, not utilities, in going down this path. (And it predicts that a trillion dollars will be spent by all investors in the electricity system over the next 34 years.)

I guess I have made my antipathy to far-horizon forecasts pretty well known through this blog and other communication efforts. My bottom line is try sitting in 1982 and predicting 2016 — that’s the equivalent of scrying 2050 from here.

One other point: choose 2035 as a horizon instead of 2050 and you are already dealing with a political environment where there will be six or seven federal elections between now and then. After recent experience here and overseas, who would like to prophecy the shape and direction of governments in power over even this time, let alone out to 2050?

Bradley sums this up well by telling media a key problem is that carbon policy that can “change dramatically at every election or differ in every State is a recipe for a high cost and less secure electricity service to customers”.

The “key concepts report” for the roadmap (available on the ENA website) runs to 100 pages and requires some concentrated assessment — not on for me in a week when so much else is happening — but I have focused today on one aspect that seems to me quite germane to the current situation. The report includes a “plausible projection of Australia’s energy mix to 2050” (by which the authors mean sources of electricity generation) and it’s what the figure shows to 2035 plus a breakdown of possible generation mixes for 2030 under the scenarios used in the modelling that has attracted my attention (apart from the fact that the nit-picker in me looks at “plausible” and raises an eyebrow.)

This 2050 projection prominently displayed in the report foresees generation production rising from around 240 terawatt hours in 2015 to close to 300 TWh in 2035 — and shows conventional generation (by which I mean coal-fuelled power, gas turbines and hydro system) contributing about half.

It’s no surprise that this projection shows a major rise in contributions from rooftop PVs, wind power and utility-scale solar (they reach, so far as I can gauge, about 140 TWh in the middle of the ‘Thirties). But that is half the picture. Allowing for hydro staying at its current level of 17,000 TWh, I reckon this shows a fossil-fuelled requirement of the order of 130 TWh in 2035.

(And, in passing, the modelling assumes no take-up of nuclear power out to 2050. I understand why — CSIRO is a government body — but is this realistic? What would a significant breakthrough for small modular reactors, the most likely form of nuclear power for the NEM in my view if there is a shift, mean for any such outlook? What would it mean for capital outlays on transmission and storage?)

Also in the report are three mix scenarios for 2030 based on “business as usual” (i.e. today’s policies), a technology-neutral framework and a carbon price mechanism.

The BAU one has brown coal at 20 TWh (it was 45 TWh in 2015), black coal at 83 TWh (114 TWh in 2015), gas at 97 TWh (19 TWh in 2015), hydro at 17 TWh and non-hydro renewables at 60 TWh (triple the current level). The one for a carbon price mechanism breaks the mix down to 19 – 82 – 73 – 64 – 16. Interesting, is it not? The imminent “death of fossil fuels” it certainly isn’t.

The media coverage of the roadmap report doesn’t focus on any of this. Greens and their fellow travellers in some newsrooms naturally see an opportunity to highlight a vision splendid — as one website puts “It’s official: we’re on target for zero emissions by 2050.”  Another hails the fact that “households will power half the grid by 2050.”

Well, they would say that, wouldn’t they?

An issue really germane to the current political goings-on is that quite a lot of this modelling depends on what Turnbull has just subjected to a wrecking ball.

As Paul Graham, CSIRO’s energy economist, tells “The Guardian” newspaper “modelling carried out for the roadmap indicated an emissions intensity scheme is the best option to reduce power prices over the medium term because the scheme subsidises low-emissions technologies.”  To which he added that the transformation now under way in the electricity sector is best managed with market frameworks that don’t pick winners and are technology-neutral.

An exercise like the roadmap is valuable. No doubt Finkel and Co will find it so. But it’s not holy writ and what really happens is going to depend on what the body politic comes up with next — and how honest the politicians of both mainstream parties are about the costs (which can only be worn by consumers or taxpayers).

The politics of this may be about household bills, but the economics are about the impact on commerce, manufacturing and mining.

To repeat myself, what comes out of Friday’s CoAG meeting is going to be an interesting pointer to the year ahead.




Constructive dialogue?

There’s a thought in the Queensland Productivity Commission report on electricity that should be front and centre as we go through this week of the national climate change review being launched and the views of the Finkel energy security task force being exposed for the first time (via an interim communication to the CoAG Leaders’ meeting on Friday).

The QPC report (which was handed to the Palaszczuk government on 31 May but kept under wraps until 30 November) comments en passant that emission reduction policies should be designed “to allow the electricity market to find the least-cost means of achieving a clearly-defined objective.”

Read this against this week’s lament from the Australian Energy Council, representing retailers and generators, that investment in key infrastructure has been “paralyzed by a decade of energy and climate policy uncertainty.” To which AEC adds: “Our energy system is visibly deteriorating, as evidenced by recent events in South Australia.”

And Energy Networks Australia chimes in “after the last decade, the most important design feature of carbon policy is stability – a volatile carbon policy means higher costs or less reliable supply.”  (If I had been putting out this media statement, I think I’d have been inclined to replace “or” with “and.”)

To all of the above, the Australian Petroleum Production & Exploration Association adds the point that the key to delivering lower carbon emissions and affordable energy security is policy integration but “unfortunately, nowadays energy and climate change policies are often moving in different directions.”

The most cut-through comment, however, comes from BHP Billiton chief executive Andrew Mackenzie. Ultra-irked by the latest failure in South Australian supply, he has told the CoAG leaders via the media: “Olympic Dam’s latest outage shows Australia’s investability and jobs are placed in peril by the failure of policy to both reduce emissions and secure affordable, dispatchable and uninterrupted power. The challenge to reduce emissions and grow the economy cannot fall to renewables alone. This is a wake-up call ahead of the COAG meeting, and power supply and security must be top of the agenda and urgently addressed.”

All the wake-up calls in the world, however, won’t change the stumbling trajectory of our power path unless political leaders are prepared to accept a prime directive – and, again, the QPC has provided some good guidance.  The commission comments: “Technology neutrality remains the over-arching principle of regulation in the NEM.” The market system, it says, has been designed to encourage efficient outcomes and “not to act as a barrier to the use of whatever technologies deliver the most cost-effective service.”  And the rules, it emphasizes, state that “a key consideration for market design is the avoidance of special treatment (for) different technologies.”

The challenge for policymakers, adds the QPC, “is not to resort to restrictive frameworks to protect incumbents or, particularly, to pick winners.”

The dilemma for the Palaszczuk government, of course, is that it simultaneously wants to protect the electricity supply incumbents in Queensland that it owns while furiously picking renewable winners for blatant political advantage and fending off increasingly unhappy business and residential power consumers whose prices since 2007 have risen faster than not just anywhere else in Australia but anywhere else in the OECD.

Politicians tend to focus on householders (because they vote) and thus recent measures should, says the QPC, see residential bills fall 3.4 per cent in “real” (inflation-adjusted) terms out to 2034-35 but – and here’s the rub because householders are workers – rise by between 0.8 per cent (commercial) and 2.1 per cent (industrial) for businesses.

Buried in the commission’s commentary is further advice for politicians generally that they need to be “thoughtful in pursuing policies and regulatory interventions that affect the way parts of the supply chain operate and develop.”

And one of its key recommendations to Palaszczuk & Co applies equally to the other CoAG members: “Government intervention should be limited to circumstances of market failure, only occurring where the benefits outweigh the costs.”

Many of us may say this is “cat on mat” stuff but the past decade has amply demonstrated how politicians struggle with the basics in energy policy (and much else besides).

The point is not that politicians are dumb but that far too many are venal – their focus is on their self-interest, something that voters in Britain, America, Italy and elsewhere have been demonstrating this year that they are just not prepared to accept any more. That “elsewhere” includes Australia and has been on show in the rise of alternative parties, the subject of much comment in parts of the local media at present.

A case of venality in point in Queensland is the Palaszczuk government’s solar fixation.

The QPC keeps telling it that its target of 3,000 megawatts of rooftop solar PV can be reached by 2022 without intervention and that driving this target to attainment in 2020 (purely for politically cosmetic purposes) requires a feed-in tariff well above a fair price – while an even higher tariff will be needed to achieve one million PV rooftops by 2020 (an election line). To which the government keeps responding “Don’t care; we’re going ahead.”

Behavior like this in kindergarten used to get kids sent to the naughty corner.

A basic message from the commission to the State government is that it should pursue collaboration through CoAG on carbon policy rather than pursue independent action – which is the point being pushed on political leaders more generally by increasingly frustrated business lobby groups.

The AEC is also saying, and not for the first time, that effective policy must be embraced by both major parties. One only has to watch question time in Parliament House, Canberra, to see how far this aspiration is from attainment.

As the ENA adds in its comment on the climate change review, “fragmented policy across the country will cost customers hundreds of dollars more per year without (abatement) benefits.”

And, of course, the ongoing behaviour of governments over gas exploration and development also plays in to the power issue, a point APPEA keeps hammering, this week again arguing that gas generation is “the key technology” to complement variable renewable energy in delivering reliable, affordable supply while pursuing lower emissions.

APPEA and other lobby groups want “constructive dialogue” at the CoAG Leaders’ meeting on Friday. We don’t have long to wait to see if this prayer is answered.

Beyond coal?

Let’s start with some facts: in calendar 2015, on the data provided by the Australian Energy Market Operator, black coal provided 51.5 per cent of electricity sent out by east coast power stations and brown coal contributed 25.8 per cent.

According to the Cedex report produced by Hugh Saddler, total coal generation in the 12 months to September this year was 75.9 percent with brown coal output at 22.3 per cent.

With the closure of the Port Augusta generation earlier this year and the planned closure of Hazelwood in March, the output by brown coal plant will continue to change – but to what extent and how much of the slack will be taken up by black coal production in 2017 remains to be seen.

The role of coal as the current bedrock of the eastern mainland States’ power system, however, is not open to question. How to shift to a lower-emissions, affordable, efficient and reliable new mix is the challenge – and the idea that this can be achieved in the next decade or so without coal power at all seems to me, at least, to be fanciful in the extreme.

This is backdrop to the tabling of an interim report on coal power by a Senate committee chaired by the Greens’ Larissa Waters.

The Greens/Labor majority on the committee want the federal government, in summary, to produce a plan now to close all Australia’s coal power while maintaining energy security and helping the power workers displaced by the move.

Needless to say, these senators want yet another government body – an “energy transition authority” – to oversee the process.

Coalition senators have produced a minority, dissenting report warning that what the Greens and Labor propose would transfer the energy transition risk from power businesses to taxpayers while increasing end-user prices and reducing supply security.

Not surprisingly, Environment & Energy Minister Josh Frydenberg points to the Finkel energy task force and says the government intends to wait on its advice.

Meanwhile the Australian Energy Council is reacting to the Victorian Labor government setting up a retail energy market review by pointing out that, apart from the Australian Energy Market Commission regularly reporting on NEM retail competition, the State’s consumers are likely to see “significant increases in energy costs next year as a result of Hazelwood ceasing operation.”

AEC says: ““This cost increase is a by-product of the reduction in the State’s generation capacity of around 20 per cent.”

It has also responded to the Senate report by saying that the policy focus needs to be on reducing emissions rather than closing power stations. “We need to think hard about how we are going to run the system at the lowest cost while maintaining reliability.”

What I find notable about the Greens/Labor majority report for the Senate committee is that, despite calling for an “honest and robust” discussion on the coal closure issue, it has turned a determined tin ear to the expert evidence delivered to it in a 17 November hearing by EnergyAustralia executive Mark Collette.

He told the committee that replacing the energy coming from coal and gas plants with renewables – which is the goal of the Greens and their fellow travellers – would require construction of about 75,000 megawatts of new capacity or about 500 power projects.

Collette estimated the cost of this at between $100 billion and $150 billion and pointed out such a system would need significant back-up – with the storage offered by batteries and other technology costing about as much again as generation investment.

The senators mightn’t like to hear this and might want to disbelieve it, given all the Pollyanna advice they are getting from elsewhere about how green technology costs will tumble in the best of all possible worlds, but they surely should acknowledge to the Australian community that this is what they have been told. They haven’t.

For lay people struggling to comprehend the size of the task, Collette offered senators this further thought: if the whole extra renewables build was wind power, two to three turbines would need to be erected daily every day for 30 years.

Elsewhere it has been pointed out that just building the projects needed to deliver on the federal government’s current national carbon abatement target for 2030, something the Greens and Labor want to ditch for much higher ambitions, would require spending about $25 billion on wind and solar developments (before the system resilience issues are addressed).

As it happens, there is another green-as-grass administration at present providing an object lesson is how hard it is to go down these paths. This is the Alberta government in Canada. Having committed to ditching the province’s coal power, it is moving to cap retail prices to be paid by consumers and introducing a capacity market over the top of its current NEM-like system.

The Alberta regime aims to junk 6,300 megawatts of coal generation (owned by the private sector, who want compensation) and replace it by two-thirds renewable and one-third gas capacity.

Leaving all else aside (and these matters are complex, as we know), the Alberta government is planning to subsidize electricity (in a province with winters that make Tasmania look like St Tropez) for mass market consumers. You might like to place your bets now on how well this will go.

(In passing, another Canadian provincial government, Ontario, equally green, is currently in more political trouble than cod at a cats’ picnic with sky-rocketing power bills, an issue opinion polls there say is voters’ chief concern. Ontario’s energy minister is vowing this week that the policy will now become “technology agnostic” and acknowledging that his government’s efforts to force intermittent renewables in to the provincial system have been “arbitrary, leading to sub-optimal outcomes and have heightened community concern.” And this in a region with recourse to major hydro capacity as well as nuclear power.)

As it happens, Frydenberg was giving a keynote address to an energy conference at the Australian National University (for some reason that is beyond me the text is to be found on his personal website and not the official departmental one) as the Senate committee’s perceptions were being publicized.

As an example of just how hard it is to please critics at present, I note an email circulating among some of my fellow travellers in this space (people collectively with several centuries of experience of the business) which (a) praises Frydenberg for providing a very candid description of the local context and challenges and (b) notes that he did not dwell on the reform barriers or show appreciation of the scale and timing issues that affect the transition.

Frydenberg acknowledged to the ANU Energy Change Institute audience that “it is a big job to ensure stability, security, and reliability in the energy system while at the same time balancing the costs to industry and consumers and the need for a transition to a low carbon, low-emissions economy.”

He went on: “Policies need to provide the right environment to create and maintain flexible, well‑functioning and competitive energy markets that provide clear price signals. They need to provide investment certainty for industry but also provide an environment that encourages and rewards innovation. This means having an energy market that is technology neutral. Building on from our current energy market reforms, we need to take a whole-of-system approach that addresses all of the interlocking components of the energy market.”

Quite so. Senators please note.

Now on to the CoAG Leaders’ meeting in Canberra at the end of next week — which will receive an interim report from the Finkel task force.