Archive for April, 2017

Stand and deliver

In my working career I had a long engagement with the twin issues of relationships between the federal government and Australia’s other jurisdictions and between States themselves, both through gigs in manufacturing (way back in the 1970s) and energy (from 1980 to 2007, mostly through industry associations but also through chairing the energy committee of the Critical Infrastructure Advisory Council). Apart from the sterling work done to establish the NEM, this experience has not provided me with huge confidence in the commitment of politicians to co-operative federalism.

As Paul Keating said, and he was quoting his mentor, Jack Lang, in the race of life always back self interest – you can be sure it is trying. This is demonstrated time and again in energy policymaking and especially in the past decade.

The Keating/Lang quote has popped back in to mind in observing the stirrings from the West over the prospect of an intercontinental pipeline being pursued to bring gas to the beleaguered south-east coast, a thought bubble initially floated by defeated WA Premier Colin Barnett and seized on by Malcolm Turnbull and others of his ministers, increasingly desperate to find a way out of the maze of trouble that is the south-eastern gas market (a problem on which I have helped focus over the past five years through the Quest Events Australian Domestic Gas Outlook annual conference – and one where the writing was on the wall from the get-go).

If the federal cabinet thought that a $3 billion to $5 billion pipeline was a get-out-of-jail card for the mess in to which south-eastern State and Northern Territory politicians have dragged the national government, it can now think again.

If they want to take our gas because of policy failures in the East, says new West Australian Premier Mark McGowan, they (ie the federal government) will have to provide a better deal on the goods and services tax (a major irritant for WA policymakers of all stripes and their community for years and years).

And further, declares his Mines Minister, Bill Johnston, if they want our gas in the East, the federal government is going to have to come up with a reservation policy (like Labor introduced in WA when it was last in office). “Let’s understand what would happen (without reservation),” says Johnston. “They’d export our gas from the east coast.”

Former WA Treasurer and now opposition leader, Mike Nahan, is no less trenchant. “We should not focus on exporting our gas to the East but (on) importing jobs and investment to the West,” he says, a slap for Barnett, who has not retired but is still sitting on the Liberal Party backbench.

Being in the position of all care and no responsibility these days, I’m quite looking forward to trekking across the Nullabor in mid-May to observe the next instalment of all this at first hand during the Australian Petroleum Production & Exploration Association annual conference in Perth, billed by the association as a forum for taking a hard look at the issues (of which the east coast imbroglio is but one) in hard times.

It’s a great deal more fun being on the sidelines observing the stress and strain than in the middle as manager of the industry association (a role I held for almost 11 years, mostly in the 1980s) and it is interesting to see how many issues keep coming back to the fore in different guises (like the debate today over the petroleum resource rent tax, initiated in the 1980s by Keating, Bob Hawke and Peter Walsh, and one of the biggest matters with which I got to wrestle on behalf of APPEA members during my time there).

With a dozen keynote addresses, including one by McGowan, and some 90 other presentations, the 2,000 or so attendees expected at the 2017 APPEA conference will be exposed to one of the best opportunities around to be better informed on the challenges energy stakeholders (oil and gas professionals, analysts, politicians, bureaucrats and service and skills providers) face in a time of rapid change and turbulence.

The value of the industry to the economy and to international investors is vibrantly illustrated by the conference’s exhibition – this year featuring 135 exhibitors from two dozen countries occupying 9,000 square metres of the cavernous Perth Convention Centre. In terms of gathering information (“networking” in the jargon), the APPEA exhibition aisles have few peers.

The other illustration of the event’s importance is the way journalists flock to it each year. There have been occasions in recent years when 40 to 50 of them have been on hand for four days – and media news directors don’t let that happen lightly in these straitened times.

My heading on this TiP – “Stand and deliver” – was chosen with the WA Government’s hardline retort to Canberra in mind, but it applies equally to APPEA and its members with respect to the conference. As APPEA chairman Bruce Lake says in the event’s program (which is on the association website) “at times like this (the conference) becomes more important than ever – (this) is our strongest platform for conveying our key messages to politicians, our supplier partners and the media.”

One of those messages this year will need to be, I think, a stronger emphasis on how the recent florid campaign about the alleged failings of the PRRT, arguing for new tax imposts on the industry, just ignores the fact that in 2014-15, despite recording a net loss of $600 million amid the wreckage created by the global oil price collapse, APPEA’s members coughed up $5 billion in various tax payments to the nation’s governments.

The community at large just doesn’t know this. Nor do they get that imposing still higher burdens on oil and gas investors in Australia is no way to help them get reliable and more affordable energy.

In an environment where so much of what drives political decision-making is public opinion, this is not a minor point.

Meanwhile, the West’s pollies know a good card when it is handed to them: if Turnbull & Co want the WA’s gas resources to flow east they will need more than “nation-building” rhetoric – and that’s before the work has been done to establish if the pipeline concept is even commercially viable (not least for the deeply worried manufacturers for whom it is being offered as a lifeline).

As pipeline major APA Group has been saying in recent days, the idea faces “massive logistical and economic hurdles” – and this was before McGowan & Co made the stakes a bit higher.

FOOTNOTE: I wrote this post before waking up on Thursday to news that the Turnbull government proposes to introduce regulations to limit gas exports from the east coast (to quote today’s Australian Financial Review, “if they are emptying domestic reserves to meet overseas contracts.”) This just adds more bite to my “Stand and deliver” headline — and to the timeliness of next month’s APPEA conference in the energy debate. We do indeed live in interesting times.

A matter of perspective

To force or not to force, that is the question – well, actually, a question and probably not the one that really matters at this juncture.

A Senate committee chaired by the Greens’ Peter Whish-Wilson, a Tasmanian, wants the federal government to devise a plan for the “orderly retirement” of coal-fired power stations.

The two Coalition members of the committee, which produced a report just before Easter, retort that forcing the exit of coal power is not the best way to achieve an “effective” – do they mean “efficient”? – transition of the electricity system to a lower carbon footprint.

The two Labor senators on the committee, noting that “coal-fired power generation will continue to play a significant role over coming decades,” point out that achievement of the Queensland government’s 50 per cent renewable energy target for 2030 does not require the early retirement of (State-owned) coal power. They might have added that the last thing their colleagues in government in Victoria want to consider at this point is shutting down the rest of the Latrobe Valley’s generation – or that, if they could have the time over, their colleagues in government in South Australia may well have figured out a way to keep the Northern brown coal plant limping along.

Interestingly (to me), there is no Coalition or Labor dissent from a committee recommendation that the federal government should establish “an energy transition authority with sufficient powers and resources” to plan and co-ordinate a shift in supply sources.

(This was promoted to the committee by the Australian Council of Trade Unions among others. ACTU wants the entity run by a tripartite board representing industry, government and unions.

(The Greens want this, too, and tried a private bill on federal parliament late last year – to create “Renew Australia” with, surprise, surprise, a remit to introduce 90 per cent renewable generation by 2030.)

Meanwhile, not least because the federal government wedged itself in a kneejerk reaction (warding off rumbles from its ultra-conservative members) against a suggestion last year that the Finkel review would opt for an emissions intensity scheme, the majority of the Senate committee (ie Greens plus Labor) wants Turnbull to commit to “fair consideration” of all policy recommendations from the task force, including an EIS, when it reports in the next couple of months.

The committee’s task was to look at the future role of coal power in the NEM and Western Australia’s SWIS market.

Coal generation makes up 78 per cent of the east coast market and half the SWIS supply. In all there are 23 coal plants in operation (Hazelwood having just shut) – of which five are in the West. Ten have shut since mid-2012 and the environmental movement’s contention is that, just to meet the present 2030 national abatement target, “a substantial portion” will need to go by the end of the next decade.

The other plank in the activists’ push is for the national electricity objective to be amended to include a requirement to reduce carbon emissions because – they told the committee – the current NEO is “all about NEM security, supply and cost.”   (The mainstream power supply sector’s response is that activists campaign for this because they see it as a proxy for getting abatement policy “right” at the national level – whereas, it is argued, if you produce a durable, bipartisan climate change, you don’t need to also meddle with the market.)

The Greens’ line, which they have written in to the committee report, is that evidence to its hearings “highlights the need to have coal-fired power retired in the medium term.”  The coal sector’s retort is that, to the contrary, a key aspect of addressing supply security and affordability is to build new high efficiency, low emitting (HELE) plants like those springing up in the rest of Asia.

A core point in all this is (or should be) whether or not to leave investment decisions to investors – whether considering closing existing plant or building new generation. The Greens and fellow travellers naturally want measures to “assist” the process; in other words to force out operating coal generation and “facilitate” more wind and solar power, bolstered by energy storage and more high voltage transmission.

Reading the “committee view” in the report, there are a number of aspects worth noting.

It is hard to disagree with the observation that “ad hoc (recent) pronouncements from both federal and State governments have only added to (public debate) and regulatory confusion without moving the country any closer to a cohesive national plan.”

On the other hand, the report’s declaration that “it is clear the era of coal-fired generation is drawing to a close” – a Green hand obviously at work here – clashes with the real world.

In our south-east Asian neighborhood, for example, there are new coal plants being planned or under construction with a capacity of 125,307 megawatts, part of some 835,000 MW in the pipeline more generally. Whether or not, as one prominent green newsletter put it this month, “it is disturbing that Asia seems to be sheltered from a global drive to less (power) dependence on coal,” pretending this isn’t happening ought to be beneath a federal parliamentary committee.

The question (my emphasis) is not, I think, as posed in the committee view – expressed as “not if coal-fired power stations will close but how quickly and orderly these closures will be and what supporting policies, if any, will be in place to manage the process” – but rather the four issues the Grattan Institute, among others, is urging on the Finkel task force for its “tight focus” —

  • New market rules to manage emerging security challenges and future capacity risks
  • A plan for next summer when (NEM) shortages may arise
  • Requirements for integrating energy and climate policy, and
  • The ability of the NEM to provide the right signals for new investment and what alternative policies may be needed.

Politicians riding their hobby horses are not helping to keep any such “tight focus.”

One of the other Grattan admonitions is also relevant here: “Maintaining flexibility through the transition is critical to ensure we can take advantage of better solutions as they emerge.”

All the fuss of recent months should be underlining the paramount importance of high levels of security and reliability of electricity supply – and the non-stop complaints across the spectrum of consumers about the size of their energy bills should be spurring politicians to elevate this to the top of their consideration, too.

That the Senate committee report has got barely any media coverage – and this dominantly has been about squabbling along party lines among the senators – is no surprise given its tone versus the key issues engaging the mainstream public debate.

Whish-Wilson in a media statement asserts that “the lack of a clear, government-led process to retire coal-fired power stations is fuelling the crisis in the energy system” – which is a pretty one-eyed perspective of what is really going on.

Gas imbroglio

 

Back in 2015 the collective governments of Australia made a promise to energy consumers.

The CoAG Energy Council declared: “(We) have 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.”

One may judge the policymakers’ success so far in pursuit of this pledge against what the Australian Industry Group is saying to the federal government in its submission ahead of the 2017 Budget: “Our energy market designs and policy frameworks fall far short of what is needed to achieve affordability, reliability or sustainability. Reform is needed, and soon.”  AiG adds: “Without nationally coordinated and durable action, price increases and supply risks are likely to intensify. Industry investment and employment are threatened.”

And how hollow that CoAG pledge rings after a week in which the federal government, writhing in the coils of what it acknowledges is an energy crisis, has walked away from another summit meeting with suppliers with only an ACCC monitoring role as cover for the gas imbroglio – while at the same time it has started talking up pursuit of a 40-year-old concept, a west-to-east gas pipeline (that would cost an estimated $5 billion — and how many years? — to build).

It’s been a week for talk of interconnection, with the Prime Minister also slipping down to Tasmania to promote the prospect of expanding the State hydro system as a “battery” for the NEM, a possibility that comes with the need for a second Basslink costing north of a billion dollars.

To which, of course, one has to add some $2 billion to upgrade Snowy Hydro, last month’s throw of the federal dice – along with the network costs of integrating several thousand megawatts of wind power in to the Victorian system as a purported substitute (promoted by the Labor State government) for the shuttered Hazelwood.

Plus whatever eventually comes out of the thrashing about in South Australia.

The charges for all this must be recouped from the mass market, which takes about a quarter of consumption, and from business.

And they will be costs on top of the price rises already in train – of which, AiG, in its Budget submission, says: “The substantial price rises under way for electricity and gas can be softened by good policy but are unlikely to be reversed. Greater efficiency and productivity in the use of energy will be needed to limit the extent to which higher prices translate to higher final costs.”

For its part, the ACCC, via chairman Rod Sims, is telling the media that gas business users on the east coast are now faced with a “worst-case scenario,” adding “I do think companies will go out of business because of this and that’s a crying shame.”

Just how big the gas problem is depends on perspective. AiG, in an open letter to Malcolm Turnbull and Bill Shorten proposing remedial actions (which the upstream petroleum industry has dismissed as “half-baked” and threatening to “shred incentives for investing in new projects”) makes this observation: “There are different views on how big the shortfall is. Some gas suppliers appear to still deny the market is physically short at all. The recent Australian Energy Market Operator Gas Statement of Opportunities finds a gap of 10 to 54 PJ per annum from 2019 to 2024 (unless demand from gas fired electricity generation declines equivalently, which would lead to electricity shortages at critical times) or a cumulative gap of 156 PJ to 2024. We are aware of significantly more pessimistic assessments by gas market observers. EnergyQuest believes the market is a cumulative 172 PJ short by 2020 and 205 PJ short by 2025. Credit Suisse believes the gap is bigger, sooner.”

It goes on: “However short the market is, the price impacts are clearly enormous.”

What follows from this, only too obviously, is that the domestic gas market will self-correct over the next few years through consumers (and especially manufacturers) either going out of business or shifting towards alternative energy sources.

What may surprise some dancing on the periphery of the issue is the extent to which this correction has already bitten in to the market over the past decade. Go back to 2009 – the time of the global financial calamity – and our gas suppliers, then selling 373 petajoules a year to our factories, expected manufacturing demand at the end of this decade to be 509 PJ annually and to continue rising to 537 PJ a year by 2024-25.

The current ElectricityGasAustralia yearbook has 2014-15 factory gas demand at almost 345 PJ and sliding to 302 PJ by 2024-25. (For context residential consumption is 162 PJ and projected to flatline over the next decade while commercial business requirements are 53 PJ annually and expected to stay there over the next 10 years, a time of expected ongoing substantial population growth.)

A huge manufacturing correction manifestly has already taken place (obviously reacting to a lot more than just energy prices) and energy suppliers were already factoring in a further 10 per cent dip in factory gas requirements before the present crisis enveloped all concerned.

Where manufacturing needs are now heading is a large question and one that should be researched (perhaps by the Productivity Commission).

The other big aspect of the forward demand equation is the gas requirement of power generators. Back in 2009 (when electricity requirements exceeded 400 PJ) suppliers expected a rise to about 562 PJ by now and a push towards 630 PJ by the decade’s end.

Today actual demand is more than 10 per cent lower than it was at the close of past decade and, via the yearbook, is forecast to be below 240 PJ by 2019-20, bouncing back a bit to around 270 PJ in 2024-25.

The other side of the generation coin is that gas suppliers today foresee the much-discussed energy transition pushing the need for their product up the curve in the years ahead, projecting more than 350 PJ a year in requirements by the mid-2030s.

Of course green activists don’t want this to happen and the Web resounds with their arguments about why it shouldn’t do so.

The challenge for Turnbull, south-east government leaders and the body politic generally is not just to look around themselves now and react to today’s pressures but to look beyond the present electoral cycle – and not to create more (and perhaps different and bigger) problems down the track by wrongheaded activity today.

Dissent rampant

If you want to peer through a window on to what ails the energy debate in this country at a policymaking level, look no further than the just-released report by a Senate committee in to “the resilience of electricity infrastructure in a warming world.”

This 176-page report purportedly from a committee chaired by the Greens’ senator, Sarah Hanson-Young, includes some 90 pages of dissenting commentaries by member senators from Labor, the Coalition, Nick Xenephon and One Nation.

The Labor dissenters’ bit comments that “this inquiry presented a unique and timely opportunity to articulate a policy vision for Australia’s energy future” which has not been grasped.

Even if you raise an eyebrow at “unique,” it was certainly a timely opportunity for the body politic at a federal level to pursue some commonsense common ground – and it has yet again left the players in a tangled, squabbling heap.

On the other hand, as the Labor dissenting report observes, “almost every witness” at the inquiry agreed that failure to articulate a plan to transition to a low-carbon future is crippling the energy industry.

(This, of course, is the Turnbull government’s fault, the Labor crew assert – to which the only possible response is “look in the mirror.”)

As witnesses from AGL Energy told the committee: “Market participants need time to plan. There are often five to 10 years in a planning horizon and we need some sort of predictability of when to replace assets to avoid the disorderly transition we are experiencing today.”

Whether or not, as Frontier Economics claimed to the committee, the present situation represents an “investment strike,” it is so manifestly untenable that the willingness of politicians to continue to eschew seeking common ground in favor of shouting at each other (literally in some cases, see Weatherill versus Frydenberg) is almost (but not quite because we have seen it all before) beyond belief.

The Turnbull government, via the dissenting comments of the Coalition members of the committee, dismisses the Hanson-Young version of the report as “so biased it could have been written before the inquiry even commenced.”

Interestingly, the government senators comment that it is “beyond (our) comprehension” that South Australia, Victoria (where the Liberals and Nationals are far from blameless) and New South Wales (with the Coalition in office) could impose moratoriums on exploration and extraction of onshore natural gas in their States in the face of supply shortages and rising energy prices.

Accepting that the Coalition’s contribution will have been vetted by the government, and leaving aside the ritual bashing of Labor positions (and vice versa in the Labor contribution), it is perhaps notable that these senators make it clear the Turnbull administration is (a) determined to pursue “technology agnostic” policy, (b) is unwilling to be party to driving coal generation out of the NEM and (c) is depending on the Finkel task force to draft “a long-term national blueprint” for the energy sector. They “refute the (inquiry main report) suggestion that the Finkel review is not focused on the stable supply of electricity in the future.”

They also push the argument that the existing RET “acts as a tax on energy consumers and is causing electricity prices to rise significantly.”

Given his pivotal role (along with other NXT senators) in the make-up of the present Senate, it is also be worse noting Nick Xenephon’s comments in his dissenting report.

In part, he accuses Hanson-Young of “making a fundamental error” in seeking to pit renewable energy against gas generation. The Greens’ approach, he declares, would see “energy prices driven so high and reliability driven so low that it will lead to a damaging de-industrialization of the economy.”

To ensure power affordability, he adds, gas must be used as a transitional energy until renewables can offer the affordability and security that consumers and businesses require and expect – and pursuing this requires embracing a scheme where high emission generators buy credits from low and zero emission power producers.

Part of Xenephon’s approach would see the federal government imposing a public interest test on future new gas exports along with a “use it or lose” approach to corporate gas resources and, in the interim, prohibiting companies with current LNG contracts from buying up further domestic gas supplies to meet export needs.

He also wants “urgent reform” of NEM rules to ensure investment certainty and to drive greater reliability, grid stability and lower prices.

When they are not simply bashing their party’s political drums, the Labor senators want the AER and AEMC “to consider reviewing existing policies” – neither entity is actually in the policy-making business – to give “clear guidance” on “prudent investment” by networks to protect themselves against climate change risks. Perhaps the official ALP spokesman could tell us what this means – and even hazard at guess at the costs that would inevitably flow through to consumers.

The Labor senators also advocate “ongoing support for emerging technologies to overcome technical and regulatory hurdles to entering the market” but say not a word in their recommendations about a 50 per cent renewable energy target in 2030, which is supposedly the federal party platform. Room here, too, for more clarification from Shorten and others.

And they speak up for “stable and consistent policy (such as an emissions intensity scheme)” to support investment in new power infrastructure.

As well, they want a plan for “an orderly exit of ageing generators” from the NEM.

So, yes, the Senate report is another window on the dog’s breakfast that is the policy discussion between politicians and perhaps reinforcement of the necessity of the Finkel inquiry – but the question it underscores is what hope do we have, when Finkel has landed, that the federal government, the State governments and the federal Labor opposition can come to a meaningful agreement on any forward path the task force recommends? Buckley’s on this evidence.

The vision thing

If we have learned nothing else in the energy debate over the past year it is that what really matters to consumers is security of supply and cost.

The former is easy to define: the lights are either on or not.

The latter tends to be a murky pool and one where politicians and businesses seeking to make a buck out of consumer concerns can fish endlessly with the media happy to play along in the “shock, horror” game.

It’s useful, therefore, to find amid the many submissions to the Finkel task force that someone (the Australian Industry Group) has done the core arithmetic.

AiG tell the task force that, when fully passed through, the electricity and gas price rises currently in train will cost users collectively between $10 billion and $12 billion a year (that’s up to $36 billion in 2018-20, not a trivial sum) – with households paying an extra $3.6 billion annually and all forms of business an extra $8.7 billion.

In the latter case, AiG points out, energy-intensive manufacturers will be particularly hard hit, paying up to $4 billion a year more.

Companies in primary metals manufacturing, food, basic chemicals and non-metallic mineral products (including building products) “are particularly exposed to a double hit to their profitability from steep electricity and gas price increases,” the association adds. And, as the media panic demonstrates whenever any such business even looks as if it may close a plant, these are large direct and indirect employers.

The cumulative costs presented by AiG give point to what the politicians are seen to be promising the Mob (as Paul Keating used to describe us voters seven prime ministers ago). However phrased, this is an easing of the energy budget pain.

How this will be achieved is the big question. As AiG says in its Finkel submission, it won’t be easy.

The association comments: “Gas faces international price parity and rising production costs while all new electricity generation looks expensive.”

AiG goes on: “It is very plausible that current steep increases in electricity and gas prices (will) induce more households and businesses to use solar and batteries – but, without reform to the current market structure, they will only face incentives to cut their use of the market, not to install and operate (these) assets to support the market and create value for everyone.”

The goal, the association argues, should be to provide a market framework that will work for society as a whole. “The alternative – continuing paralysis and division over energy and climate policy – is a threat to us all.”

The current “national electricity objective” – the driver of the market’s rules and operation – is at heart “to promote the long-term interests of consumers” and AiG suggests that a starting point for worthwhile action is for the task force to draft a new vision on which there can be broad agreement. Without this, it says, “policy is more likely to be reactive, uncoordinated or hostage to unspoken choices and assumptions” and it adds there is a particular problem in the form of a mindset that it is inevitable Australia will lose its energy-intensive, trade-exposed industries to lower-cost countries.

The association also suggests part of the new vision be along the lines of “Energy should become a source of global competitive advantage for Australia’s trade-exposed industries. Our energy systems should help make Australia an attractive location for energy-intensive industries all the way through the global transition to net zero emissions.”

Of course, AiG acknowledges, any such vision must contain elements relating to the interests of household consumers and other stakeholders; its own push is to get recognition of the importance of energy to industry (and by extension to the economy in which we all live and work).

Thinking about this, I feel there is a fair bit to be said for giving priority to tackling “the vision thing” (as George Bush senior once put it) in pursuit of clarity of the principles that could/should shape a new policy approach on the basis that, for a ship without a rudder (and even worse without a map), navigation becomes near-impossible. Any port will do for politicians in these circumstances as is only too obvious from the present energy melee – and we shouldn’t lose sight for a moment that, whatever Finkel & Co may offer, it is politicians at both federal and State levels who eventually will make the decisions.

The vision thing is also taken up in the submission from the Energy Policy Institute to the task force.

EPIA wants the CoAG Energy Council to be advised to take two immediate steps: first to pursue an agreed national energy vision and to identify the policy priorities that flow from it – and, second, to appoint a “chief planner” with the appropriate mandate, powers and resources to guide implementation of the vision and undertake long-term planning for the power system, including its interaction with the gas system.

The “chief planner,” EPIA adds, should pursue a rolling 30-year horizon in consultation with industry, mass market consumers and other key stakeholders.

The institute notes that going down this road will require an efficient working relationship between the “chief planner” and the trio of NEM institutions (the Australian Energy Regulator, the Energy Market Commission and the Energy Market Operator), suggesting their roles and powers may need to be reviewed.

Beyond this, as is obvious from a slew of submissions to Finkel, lies the question of whether the design of the NEM continues to be fit for purpose. Opinions vary widely – EPIA thinks it is “outmoded,” others have talked of it being “broken” and there is a quite strong mainstream supplier body of thought that pursuing a new market design is not going to work unless and until the issue of long-term emissions policy is resolved on a durable basis.

There is a crucial need to be practical about all this.

The Australian Industry Group, in its Finkel submission, makes this salient comment: “Energy users and suppliers need reasonable confidence about the future direction and detail of energy and climate policy (but) full certainty is not achievable or desirable given the need to evolve and adapt our energy system over time to changing circumstances.”

However, says the association, it is possible to deliver a clear forward pathway and to define processes for shifting it as required in the long term.

This is why, it seems to me, the vision thing is really important. The ways and means of this “pathway” may shift, but the underlying intent shouldn’t change.

We are in a situation today where achieving a political consensus on a technological route is almost impossible (and undesirable, many of us would argue) – but perhaps we can improve things significantly by focusing on a vision of what we (that’s a mainstream “we;” the fringe dwellers want only their own radical way) envisage as a national goal and setting in place a process to pursue it.

 

 

Investors’ lament

One of the most noticeable aspects of my cherry-picking trek through the jungle of submissions to the Finkel task force is that the investment natives are not just restless – they are deeply unhappy (a perspective reinforced today by the head of the Business Council warning against governments taking over the energy market — a reference to recent developments — and reminding politicians that “we still have to have strong private enterprise making investments.”)

Supplier and user concerns are too many and varied to canvass in any one post on this site but a submission I have been scanning at the weekend serves as a good example of the investment tribe’s angst.

It has been sent in to Finkel by Bobbi Lambright, managing director of ATCO Australia, which owns much of the West Australian gas reticulation network and has interests in gas-fired power stations in Karratha (WA) and Adelaide. As with all the submissions about which I write, it covers far wider ground than can be dealt with here. My particular focus today is how Lambright’s paper sketches the investor mindset. (ATCO is headquartered in Calgary and is one of Canada’s largest energy companies.)

A capsule (in my words): The south-east Australian gas and electricity markets present enormous uncertainty. It is difficult to estimate the likely level and volatility of future prices – which makes it difficult to determine whether to invest, for example, to increase the production of the Osborne plant in South Australia or to improve its flexibility. However, this risk is well understood by businesses such as ATCO as is the longer-term issue of technological change; the greater barriers are the “constant state of flux” driven by uncoordinated policies between our governments, the lack of a coherent approach to abatement strategy, “policy based on crisis management rather than long-term goals” plus the “failure of NEM governance arrangements,” not least an inability to develop rules to place technologies on an equal footing (“by properly valuing them in terms of the value they generate or the costs they impose”) and subsidies driving further uneconomic expansion of renewable energy.

And the company adds pointedly: “What are investors such as ATCO to make of investing in a country uniquely endowed with gas reserves that cannot sustain policies that translate those endowments in to increased supply and lower prices?”

This is quite a mouthful but it shouldn’t be glossed over. Other investors will express their concerns differently or with different emphasis, but directionally it should be a weather vane for Turnbull and the premiers, Frydenberg and the energy ministers, seven east coast cabinets and federal Labor’s leadership.

It points to a lesson we should have learned over and over again since the 1970s about the resource sector but don’t seem to have done: if you pursue policy like monkeys writing Shakespeare you will end up scaring off key members of the investment community and dragging the country in to economic canyons from which it is difficult and costly to escape.

One of our abiding sins is that we are so well off here in terms of the breadth and value of our natural resources that “she’ll be right” is too often a guiding political principle. Except that, so far as power supply is concerned, as we have been seeing lately, she can just as easily be wrong and the consequences are not trivial.

Lambright and her business tell Finkel and his colleagues: “From ATCO’s perspective, the need to place the NEM and broader energy policy on to a stable footing cannot be overstated.”

They are not Robinson Crusoe in this respect. See many other submissions (to Finkel and other inquiries past and present). See and hear the constant laments in the serious business media.

There are a couple of other aspects of the ATCO submission that are worth underscoring (I said I was cherry picking).

One is this: “While technology has changed rapidly, we sit at something of a hiatus (because) emerging technologies – such as storage, intelligent networks and more sophisticated demand responsiveness – are not yet available at low enough costs with sufficient scale and reliability to ensure a fully secure and reliable low emission power system.”

That is something our mainstream political leaders in particular should read slowly and carefully several times or at least until the stars in so many of their eyes start to dim.

ATCO also says that it believes one of the most difficult issues faced by the task force is to ensure that, in seeking a rapid restoration of secure and reliable east coast power supply, it does not recommend changes to market arrangements that “are premised on a fixed view of the nature of the market that will best meet the long-term interests of customers.”

The submission adds: “During periods of technological and political flux, it is difficult to predict the best future mode of supply and the industry structure most likely to provide it.”

The company’s judgment on the NEM includes this: “The market has failed to adapt to the changing technological landscape (and to subsidies and policies bringing it about) because core services that are essential to (its) secure and reliable operation are not priced at all or are improperly priced.”

And it also says: “The governance arrangements for the NEM have proven inadequate for ensuring an orderly transition in the face of technological and policy change. This is, in part, due to initial design choices that are now not appropriate (such as the structure of network pricing) and the way in which proposed rule changes are raised, evaluated and (where necessary) put in place.”

It is unfortunate, declares ATCO, “that more radical change only comes about in response to a clear market crisis,” adding that “while the NEM and its governance arrangements are problematic, there is no doubt that the lack of coordination across renewable and carbon reduction policies has unmasked these faults.”

And one last point (at least in this post) that seems to me to need far greater focus in the public debate: lack of coordination in renewables policymaking, ATCO argues, has resulted in a lack of clarity about the true level of green subsidies. “It is, in practice, much higher than overt subsidies because renewables do not pay to correct the deterioration in security and reliability they engender, compounded by the withdrawal of investor capital due to increasing uncertainty.”

The “s” words

After another week in which the extent to which politicking and populism hold sway in our energy debate has again been demonstrated, the importance of getting a solid grip on power market planning needs to be underlined even more strongly.

It seems, as a result of this week’s Senate horse-trading, that we are now to also have a joint report on “policy or policies to enhance power system security and to reduce energy prices” from the Australian Energy Market Commission and the Climate Change Authority – this in addition to the Finkel task force report (due mid-year) and the federal review of climate change policies (due end of 2017).  This apparently includes a deal with Senator Nick Xenephon that rules changes for the NEM to “pursue energy affordability and security” will be implemented by July next year.

Meanwhile the Senate select committee in to “the resilience of electricity infrastructure in a warming world” should be reporting in April and there is also a House of Representatives standing committee inquiry under way in to “modernizing the electricity grid.”

Plus the Australian Competition & Consumer Commission inquiry in to retail competition in the east coast electricity market.

Expecting policymakers to get a real grip on a durable, efficient consensus way forward in this environment requires leaning on hope rather than experience.

However, there is good advice already available – if the politicians will stop blathering and start focusing on what needs to be done.

As an example, speaking at a Committee for the Economic Development of Australia forum recently, Origin Energy CEO Frank Calabria, who is also the current chairman of the Australian Energy Council, put his finger on three key words for the new direction in energy supply management that we so obviously need.

We have to stop spinning our wheels, Calabria told the CEDA lunch, and make sensible and swift decisions to ensure supply security.

The “s” words are what matter – “security” and “sensible” and “swift.”

In an environment where “broken” is the epithet most frequently thrown at the east coast energy market, Calabria argued that the cost and complexity of redesigning the NEM will far outweigh any benefits. Instead, he said, we should act quickly to adapt the market to meet Australia’s energy goals.

This can be accomplished, he added (and the points form part of Origin’s submission to the Finkel task force) in three ways.

First, immediately operating the NEM to cope with the high levels of variability from renewable energy and the decline of coal and gas generation. “Sufficient synchronous – or coal and gas – generation must be physically available in each State at all times and interconnector flows must be managed so that the system is resilient to sudden changes in production and demand.”

Second, developing ancillary service markets relatively quickly to keep system voltage and frequency stable, enabling efficient and technology-neutral security as the generation mix changes.

Third, focusing on the future impact on the market of distributed generation, storage, smart meters and demand response.

There’s much more in Calabria’s CEDA talk (it’s on the company’s website), not least speaking up for an emissions intensity scheme to be put back on the table by the Turnbull government, asking “why travel down the path of ‘next best’ solutions that will only drive up the cost of carbon abatement?”

The Origin addendum to this is that the achievement of clarity on long-term emissions policy will help the continued viability of the NEM.

Interestingly, the company’s Finkel submission, in talking about the market, also throws in the thought that the objective of proposals for increased interconnection between the market regions (which has quite a lot of support) may be to enhance reliability, but it could also further undermine the viability of generation in these areas.

The appeal for me in the approach of Calabria and his business as set out above is that it reinforces a concern that a number of us share – it was a frequent point of discussion in the breaks at the recent Australian Domestic Gas Outlook conference – that Finkel’s task force may be tempted to over-reach and policymakers, with their only-too-obvious penchant for over-reacting, to then grab at options that have glamor in the media but risk throwing up yet more unintended consequences.

Grattan Institute, in its submission, reminds the task force that the heart of the job it has been given is to report on whether the NEM can continue to efficiently deliver dependable power supply through the transition on which we are embarked? “Effectively,” says the institute, “(answer the question) is the market broken?”

The Grattan paper provides its own answer: “While there is room for improvement, the NEM is working by responding to greater uncertainty about generation investment and system security with high prices.” It adds: “The NEM has many mechanisms to manage issues with generation capacity, system security and network optimisation. Some of these are still to be put to the test. We should test and build on existing low-cost mechanisms before making major capital investments or redesigning the market.”

It urges the adoption of “no regrets” moves, adding: “(They) are things that are likely to be needed whatever the future brings. They should be low cost, technology-neutral and enable new solutions to emerge over time.”

One of my industry friends, who has had experience locally and overseas at senior executive levels, has commented to me this week, in supporting the view that the NEM is not broken, that one the keys to addressing the problems which sparked the present “crisis” mode in the national debate is for the Australian Energy Market Operator to ensure there is enough synchronous plant in each region depending on the demand at the particular time and the level of intermittency presented for dispatch.

“AEMO,” he adds, “must be brave enough to schedule intermittent plant (zero marginal cost plant) off while bringing more expensive plant onto the system to ensure security.  If they had done that from the beginning, we would not be where we are.”

All of this lends itself to the argument that, whatever else it cares to comment about, the Finkel task force should ensure its major thrust is to answer the big NEM question with Calabria’s three “s” words at the forefront of its thinking.

How far a practical, focused report will be heard in this cyclone of inquiries and politicking is another matter.