Archive for October, 2017

PC idea worth some thought

An interesting proposition from the Productivity Commission that goes to the heart of the east coast “energy crisis” is, rather surprisingly I think, getting no attention at all.

Last week the commission released its five-yearly review of the nation’s productivity (“Shifting the Dial,” available on its website, something all thinking Australians should read) and a number of the topics on which it has made critical comments, including energy, have received a lot of media attention (and rightly so).

A particular commission perspective on better managing the gas problem has met with less interest.

This is part of what the review says about the issue: “Removing the moratoria on gas exploration and development in New South Wales, Victoria, Tasmania and the Northern Territory, which have slowed the growth in supply, are one place to start (to ensure adequate domestic supply).

“There are more effective models of community engagement which exploration firms can, and should, seek to apply if given the opportunity.

“Local employment and investment should be upfront considerations, not left to others to guess at. Royalty regimes may need review.

“Bans are unlikely to be lifted simply because of pricing concerns. The decision (by the federal government – which the commission labels ‘undesirable’) to intervene in exports may actually relieve a pressure on States with bans.

“A voluntary industry-wide code of practice might help the gas industry improve their relationship with the community, but must be accompanied by moves of substance.

“None of this is intended to question the science and the efforts of chief scientists to establish safer practice. But, as is often the case, the science is not enough to carry the policy debate.

“To build community confidence in gas exploration and production a code must go beyond other desirable aspects of gas exploration — safety regulation, sound scientific evidence, and monitoring and enforcement of compliance — and include clear guidelines and arrangements to manage community impacts and support landholders in negotiating land access agreements.”

So far as I can see, this advice has been allowed through to the keeper since the report appeared.

There has been no reaction from the federal Environment & Energy Minister, Josh Frydenberg. In fact, the Sydney Morning Herald reports that his office “declined to comment on the report” – but this, I don’t doubt, was wholly about the PC embracing the carbon pricing at exactly the time the Turnbull government announced a policy (the “national energy guarantee”) in effect eschewing it, something the media pack have seized on eagerly (and who can blame them?)

There’s no reaction to the PC proposition on a code from the moratorium ringleader, the Victorian government.

No comment from the New South Wales government, which has been meandering for many months on a path to who knows where when it comes to addressing the State’s pressing gas needs issue. (The Australian Petroleum Production & Exploration Association CEO, Malcolm Roberts, slammed it earlier this month: “The NSW government has a Yes-No approach.  It claims to be open to business, but boasts of closing nearly all the State to exploration. And it seems to be in no hurry to release new acreage or to approve the only live project in the State.”)

But even the upstream petroleum industry has not reacted so far to the commission’s suggestion about a positive new approach to gasfield access. And neither have any farmers’ organizations.

Perhaps few have read to page 161 of a 255-page report, perhaps there is so much else in the document to attract attention – but I think this commission view deserves some reflection where it matters.

The core reasons why this is so have been canvassed widely many times, not least the fact that the gas imbroglio is a fundamental part of the electricity market mess now labelled a national crisis.

As the commission points out in its new report: “The difficulty for generators in accessing long‑term supply contracts at acceptable prices, coupled with uncertainty in carbon pricing, (has) reduced the viability of investment in gas-fired generation — the natural complement to renewables. The significant increases in the domestic price of gas have been a key factor in the rising wholesale electricity prices.”

Does the PC perspective also not fit with the gas industry view that the States could (I’d say should) take up the Queensland approach to having development facilitated independently?

As the Australian Pipeline & Gas Association president at the time, Shaun Reardon, put it at the organization’s annual conference in Cairns this month: “The Queensland experience – which empowers the State gas commissioner to consider developments on a case-by-case basis while also taking in to account community and other issues – presents an enviable model. State and Territory governments could do well to look to it for inspiration. This model strikes the right balance and will enable additional gas to be made available for market, bring jobs, investment and other opportunities to local communities, support local industry and avoid demand destruction through high prices or uncertain supply, enable gas to act as an important partner to renewable technologies and, importantly help to solve the east-coast gas crisis.”

If not elsewhere earlier, I think you can expect to hear more about the PC’s proposal when the Quest Events’ Australian Domestic Gas Outlook conference is held in Sydney at the end of February. (Preliminary details of the conference are on the Quest website.) It’s not an idea that should be just left to fizzle.

Present tense

This weekend I have been reading an English newspaper report on a leading football club manager complaining about “the knee-jerk British society in which the heat of the moment is all-consuming, the weight of the present is the only thing that matters and longer-term consequences are an afterthought.” How apt that is as a description of Australian society, too, and how often this effect plays out in our policymaking, fuelled by the popular media and, of course, social media – not least in recent times for energy,

In this “heat of the moment” environment the quite important latest report of the Productivity Commission has flickered briefly in our public discourse and then focus rushed on to other matters.

There are a number of areas where the commission’s review of Australian productivity deserves close attention. Energy is one of them. The PC’s acerbic perspective on the topic received brief media mention and is already seemingly lost under the “weight of the present.” After all, it is already almost week-old news………

The commission, warning that “the costs of getting the energy system wrong are just too large to contemplate,” calls for government co-operation on reforming the NEM to be a priority and sums up its recommendations like this:

Australian governments must:

› stop the piecemeal and stop-start approach to emission reduction and adopt a proper vehicle for reducing carbon emissions that puts a single effective price on carbon

› clearly articulate the acceptable trade-off between reliability and cost

› achieve more efficient pricing, by ensuring that prices paid to producers reflect any additional costs they impose on the system (such as frequency management), that access to the grid, rather than just use, can be priced (so people using the grid as a back-up pay for this service) and that prices to consumers reflect the nature of the demand that they require from the system

› provide clear strategic direction to the expert bodies and a clearer accountability for outcomes

› let the market regulators and participants get on with their work, holding them to account for the outcomes

› ensure that short-term fixes are technologically neutral and move the system toward a sustainable long-run outcome.

What prospect is there that CoAG leaders meeting next month will embrace this advice in full and set in train steps to implement it? In a word, zero.

Federal, State and Territory governments are deep in their energy/carbon war bunkers and “longer-term consequences are an afterthought.”

As Peter Harris, the PC chairman, puts it (I’m quoting from a report in The Australian), CoAG is “the place where good policy goes to die.”

In its commentary on energy (at page 159 of a 255-page review), the Productivity Commission says: “With electricity and gas making up 2.5 per cent of GDP, and being an essential input for all industries, the cost of failure to resolve the problems will only rise in the future. It is too difficult to put a price tag on getting energy policy right, in large part as the counterfactual — what would happen if we continue to try to muddle through without clarity on carbon pricing — is impossible to define. Nonetheless, the returns from (our proposed) reforms would be worth many billions.”

With a nod to the Finkel report, the commission adds “The issues affecting the sector are complex and their solution requires considerable technical expertise as well as good regulatory and institutional design. This requires solving the immediate problems, but also needs to be mindful of transforming the energy system so that it will deliver for consumers in the long as well as the short run.”

The PC calls on governments (ie CoAG) to: “restore national agreement on simple, clear objectives — that recognise the inherent tensions between prices (costs), reliability and emissions and provide guidance on acceptable trade-offs — then leave the field to expert implementation.” It adds: “determine which institutions do what — then let them get on with their work, holding them to account for their stated responsibilities.”

With respect to the last point, it also says: “The core of the regulatory architecture is three expert bodies — the Australian Energy Market Commission, the Australian Energy Regulator and the Australian Energy Market Operator. They respectively develop policy with governments, regulate and run the system. In theory, such institutions have the advantage for governments that they can moderate the inevitable political pressures governments face to act spontaneously given popular concerns. But in practice, insufficient use has been made of the independent expertise and public explanations of those three bodies when forming energy policy.”

Meanwhile, the media, having seized briefly in the past week on what is the most political of the commission’s energy comments (pricing carbon), have skittered away to other, momentarily more juicy topics.

Included in what the PC says is an observation that government agreement on 49 of Finkel’s 50 recommendations “is not a pass mark.” – and I add that between the CoAG Energy Council lip service and implementation of the 49 steps still falls a very large shadow.

The commission also declares: “A broadly accepted commitment on emission reduction targets over the investment profile for electricity assets is essential to give firms sufficient confidence to make the investments needed to deliver electricity at the lowest possible cost and the right levels of reliability for users over the next few decades.”

It says: ” It is a principle of every properly-designed pricing system that the charge should reflect its harms. Thus carbon emission intensity is necessarily a matter to be reflected in the regulated pricing system. The compromises necessary to do this are much-debated, but what should be accepted is that low carbon technologies (such as solar and wind generation) are inherently part of the properly-priced future.”

It buys in to the seemingly endless political fighting over a renewable energy target in this way: “The Commission has previously criticised the use of renewable energy targets (RET) on the basis that they are not technology neutral, and so are distortionary compared with the policy of putting a price on carbon. But we have also acknowledged they have been an important tool in delivering on emissions reduction commitments.

“Finkel’s recommendation for a low emission energy target (LET) would be an improvement on the RET. It would better reward lower emitters, and depending on its detailed design, would move Australia’s energy market closer to the outcomes that would arise from full carbon pricing.

“The critical point is that while there are various ways of placing prices on carbon, establishing an agreement on one of them, even if not perfect, provides a guide for investment toward the lowest cost emission reduction options. These costs must include any additional cost imposed on the network by choice of any particular technology.

“The RET is specified in terms of gigawatt hours of renewable electricity and not in terms of emissions. It was formulated and operates independently of wholesale electricity markets and is not explicitly incorporated into the spot price. This has created problems as it effectively pushes the cost of intermittency and frequency management onto the purchasers of electricity rather than onto the producers of renewable energy.

“While the low marginal cost of renewable generation means that these producers can sell into the grid when they were producing (as they would have the lowest priced bid), they do not have to pay for the reserve capacity of other generators that are needed when renewable production falls relative to demand. This may be a problem with any certificate-based scheme based on the production rather than the delivery of electricity. Prices need to be able to be based on not just when the electricity is delivered (by bidding into the spot market for five minute contracts), but also its availability.”

Coincidently, the commission’s review has paralleled delivery of a draft electricity market report to the UK government by Oxford professor Dieter Helm (their version of the Finkel report). In it, Helm comments: “The scale of multiple interventions in the electricity market is now so great that few if any could even list them all and their interactions are poorly understood. Complexity is itself a major cause of rising costs and tinkering with policies and regulations is unlikely to reduce costs. Indeed, each successive intervention layers on new costs and unintended consequences. It should be a central aim of government to radically simplify the interventions and to get government back out of many of its current detailed roles.”

Quite so.

UQ, IEA, SEA & us

Most of us, I know, are suffering from energy report fatigue at the moment but I have to tell you there is yet another substantial tome just published that should be of more than passing interest to Australian industry and policymakers.

It deals with energy developments in our neighborhood and is the third in a biennial series of reviews of the 10 ASEAN states.

On Thursday evening in Brisbane, its publisher, the International Energy Agency, unveiled it to an audience assembled by the University of Queensland at the latest iteration of UQ’s excellent “The Energy Exchange” series, presented in association with the Energy Policy Institute of Australia.

The economic health and social stability of the ASEAN countries is of considerable importance to Australia, not least because of our rivalry or co-operation, depending on the nation, in energy trade. How these countries source their energy needs is also going to play an increasingly significant role in global management of carbon emissions management — and this will play back in to one of the central issues of our local policy management, and of who governs Australia, out to 2030.

Two of the three critical issues for the ASEAN 10 are shared with us: access to reliable and affordable electricity, using it to fuel economic development, and emissions reductions. The third, which thankfully does not challenge Australia in the same way that it does China, India and the ASEAN countries, is air pollution, especially in big cities. As was pointed out at the UQ forum, this is a major health issue for our neighbors and one their governments are under rising pressure from their communities to manage far better.

The ASEAN nations’ urban population alone is projected to grow by 150 million — 30 Sydneys — in the next quarter century and their overall energy demand is expected to rise by two-thirds, representing a tenth of the total global increase. The impact of this on what we can sell abroad (not just volumes but values) — eg coal and LNG — and what we import (eg petroleum products) is not to be sneezed at.

Scenarios, of course, are just that — models of what might be, given cherry-picking by modelers of a raft of factors — and they are not (or shouldn’t be seen as) forecasts of what is going to happen, although they far to often get treated as such.

How such international scenarios are treated here as part of our endless local bickering about energy policy (eg over new coal mines) is not unimportant. The “death of coal” schtick, for example, looks decidedly odd when seen against the IEA’s main scenario in this new publication for a more than doubling of ASEAN production of power from the fuel between 2015 and 2040 — a rise of some 500 terawatt hours annually (for context the total New South Wales demand is about 70 terawatt hours a year).

Just to demonstrate the complexity of the debate, as noted by IEA energy analyst Ali Al-Saffar at the UQ forum, this rise is somewhat less than was anticipated by the agency back in 2015, but to portray the coal scene as plunging in to the abyss (a line peddled almost daily in our media) hardly makes sense when one sees such data.

The agency believes 100 gigawatts of new coal generation will be brought in to ASEAN operation (that’s about 80 Hazelwoods or Liddells), taking the region’s coal-burning capacity to some 160 GW as these countries more than double their total power output to around 2,220 TWh a year in 2040, riding a rise in coal-based generation of almost 600 TWh.

The IEA model also reckons on ASEAN power production from renewable energy rising by about 375 TWh annually but it needs to be pointed out that roughly half this increase is from a large conventional source, hydro power (a form of electricity supply the Greens & Co rail against, too).

Every time reports such as this latest IEA one appear, we have a deluge of media ooh-ing and ah-ing about green capacity developments. In this case, wind capacity does indeed shoot up 22-fold between now and 2040 and solar PV more than 12-fold, a massive investment — but the numbers that really matter are for production.

In its main scenario, the IEA now projects 2040 output by ASEAN coal plants at almost 900 TWh and gas plants at 630 TWh with hydro systems at almost 350 TWh — while wind farms deliver 55 TWh and solar 85 TWh. (One of the region’s real big spurts in green power production, apart from hydro, is geothermal — it is projected to more than treble to 75 TWh.)

One of the points the IEA makes in this report is that “coal maintains a strong foothold in (South-east Asia’s) projected consumption, not only because it is markedly cheaper than natural gas, but also because coal projects are in many cases easier to pursue as they do not require the capital-intensive infrastructure associated with gas.”

From a self-centred Australian perspective, it is interesting to see the agency also relying on a model where South-east Asia’s position as a net gas exporter is called in to question in an environment of flattening ASEAN production and rising demand. Being, as we are, a country that can make a substantial contribution to the neighborhood’s energy security is hardly a bad place to be — assuming we can get our own act together better than we have been demonstrating lately.

Something that should not be lost in looking at this review is the point the IEA makes about a strong approach to energy efficiency. The core scenario canvassed in this post sees the 10 countries needing to spend $US2.7 trillion between now and 2040 — and the agency points out that a commitment to pursuing efficiency could add just $US200 billion to this bill but halve the foreshadowed ASEAN level of carbon emissions, slash $US175 billion from the 10 nations’ energy import costs and contribute substantially to pursuit of better air quality, especially in their cities.

My point, really, is that, given where we live, this IEA report is not just about 10 other countries but also, to potentially quite a considerable extent, about us and, therefore, is deserving of some close attention here.

One of the considerable values I see in the UQ “Energy Exchange” events is the way the university keeps picking really worthwhile topics for attention and the way knowledgeable people demonstrate at these forums that Australians can talk without heat about energy trends and issues, a sharp contrast with the routine big fusses in our public debate with an over-supply of ranting and rhetorical flourishes.

 

 

 

Deal or no deal?

On energy (and much else), the Guardian newspaper is as green as grass, but a weekend commentary on the Turnbull government’s latest approach to energy policy by its Australian political editor, Katharine Murphy, contains this plea: “Can all the key players in our political system be grown-ups, rise above frustrations, past botch-ups and petty intrigues, come together to consider an issue on its merits and ultimately act in the national interest?”

Cynics will opine that, for this to happen, there will need to be an Olympic-standard triumph of hope over experience, but I am also interested to see another senior political writer, Malcolm Farr of News Limited, canvassing the prospect that the “national energy guarantee” may be a route to “peace in our time” after 10 years of “fractious debate and policy failure that have consumed five prime ministers.”

As one would expect, the hills and valleys of our media are alive this weekend with the sound of chin music on the NEG theme and much of it metaphorically will soon be wrapping fish and chips, but there are other bits in the public arena of some value.

One I recommend is the transcript of a Canberra breakfast forum organized on Thursday by the Australian Industry Group. Snippets from this event have appeared in the media but the full report of the presentation at the National Press Club by Malcolm Turnbull — and the ensuing Q&A session that also featured Kerry Schott, chair of the Energy Security Board, Audrey Zibelman of AEMO, John Pierce of AEMC and Paula Conboy of the Australian Energy Regulator — is worth reading. It’s on the media segment of the Prime Minister’s official website.

Turnbull told this forum that the new approach recommended by the ESB “will guarantee reliability, restore stability and confidence to the energy market” and “we can expect lower prices than under any other approaches.”

Do note the last bit.

The Prime Minister referred a little later to the NEG “placing downward pressure on wholesale (power) prices,” adding the ESB has told the government to expect wholesale prices to be 20-25 per cent below current forecasts in the period from 2020 to 2030. “Now, that is 8-10 per cent below what was expected under the Clean Energy Target and translates into an average $100-115 fall in residential power bills a year in the same period.”

Given the media penchant for beat ups via aggregating the impact of power bill rises – I recall The Age during the Gillard prime ministership actually using “shock” and “horror” in a headline about an aggregate rise of $40 million a year for Victoria’s two million residential accountholders – I am a little surprised that Turnbull & Co have not thought to point out that, at $100 a year per household, the NEG could deliver something like $8.5 billion in relief to NEM householders between 2020 and 2030.

And, while on this aspect, it was good to see Paul Kelly in The Weekend Australian calling out Bill Shorten & Co for being “brazen beyond belief” in bagging the lack of Coalition modeling of the NEG while continuing to duck producing economic analysis of their proposal for a 45 to 50 per cent renewable energy target for 2030. The sloth and incompetence of the political commentariat in not pursuing Labor relentlessly for this modeling has been a feature of the past two years of the energy debate.

Coming back to the AiG forum, the AEMC chairman had an interesting retort to a question about modelling the NEG.

“Models don’t give you truth, right,” Pierce said. “Good models give you a set of conclusions that are consistent with the assumptions you put into them but, more importantly I think, they teach us something about the relationships within what you’re looking at.

“And one of the things that I would hope would come from further work is the deeper understanding about how the mechanics of these (NEG) mechanisms will operate in the future.

“If I can have a bit of a personal vent,” he went on, “one of the things that has frustrated me about this debate for a long time is people forming views and judgments about the virtues or otherwise of different policy mechanisms based on what some model says will be the technology that will be on the ground in five years’ time, seven years’ time, 10 years’ time rather than will this policy mechanism deliver the policy objectives and are those objectives clear?”

One of the things about which we can be sure, Pierce added, is that the views around technology costs in 12 months, in 18 months and in two years’ time will be completely different and “that will give you a different result when you chuck it through these models.”

His appeal is for a focus on the NEG and how it works and whether it achieves the policy objectives “because that’s really the test, irrespective of whatever the future may bring in terms of technology costs or gas prices or coal prices or any of the other myriad of things that drive outcomes.”

Whether this sort of thinking can prevail among political leaders when the modeling the Coalition is seeking is delivered in mid-November for CoAG consideration remains to be seen. Our energy politics being as toxic as they are, the answer is probably not – but Murphy’s challenge can’t be answered unless this does happen.

Contained in the AiG forum transcript is this plea from Turnbull to the Labor opposition: “They don’t have to have the indignity of supporting a proposal prepared by me and Josh (Frydenberg) and Scott (Morrison) and Barnaby (Joyce). This has come from the Energy Security Board, established with outstanding leaders on it by CoAG. More Labor jurisdictions were part of that decision than Liberal ones. The (ESB) membership was applauded by the federal opposition.

“I think this is a real opportunity for Labor to say: ‘Well, we’ve always said we wanted to have a bipartisan approach. We got the recommendation from a board that was set up on the recommendation of Alan Finkel. It was established by CoAG. Let’s take their advice.’ I think it is pretty straightforward and it is about time for some commonsense to break through all the politics.”

This got him a challenge from the forum floor from the Guardian’s Murphy: “Are you going to stow the rhetoric, get people around the table and actually cut a deal on this stuff? Or are you going to basically comply with the wishes of some in the Coalition who just want another zero-sum pathetic round of blame shifting with Labor at the next election? What’s it to be?”

The response she got at the time (surprise, surprise) was waffle, but her question should have a life beyond that breakfast meeting – it goes to the heart of achieving a step change in this debate.

Are the Labor people up for it? Are Turnbull and his ministers?

The Prime Minister finished up the forum by appealing to the business community to get on the backs of the State and Territory governments to support the NEG.

Different politicians can argue about who is most to blame for the massive energy policy failure of the past decade, he said. Adding, in a quote the media picked up because they will always go for the biff: “Too much ideology, too much idiocy or absence of mind, whatever you want to call it. Let’s now use economics and engineering as our guides.”

And, reverting to statesman mode: “We’ve got some great advice from an independent expert board. Not appointed by the federal government – appointed by CoAG, so by all governments. We put them there to seek (their) advice. Let’s now take it.”

Let’s see what the month ahead now brings.

Fishy business

The quote of the year so far in what has been the most interesting period in our energy policymaking since the 1990s comes today from The Australian commentator Henry Ergas: “If there is a lesson from Australian energy policy, it is that it is far easier to make fish soup out of an aquarium than vice-versa.” I’ll pay that!

The new big fish in our aquarium in the Turnbull government’s “national energy guarantee” device, devilishly clever or diabolical depending on the stance of the observer.

Filleted down to its bare bones, the NEG aims to impose a reliability obligation and an emissions reduction obligation on energy retailers. John Pierce, chairman of the Australian Energy Market Commission and one of the advisers on the policy, summed it up at a forum in Canberra yesterday as “the (market) business that can produce the lowest cost reliable supply that meets the emissions target wins.”

The verdict of the nation’s power suppliers (delivered by the Australian Energy Council’s Matthew Warren) is that NEG is “a considered attempt to address the issues of reliability, cost and emission reductions from energy.”

The politically-important rural lobby, the farmers and food processors in areas that are a minefield for the Coalition at federal and State levels, speaking via the National Farmers Federation, sees the move as “promising,” emphasizing that what the Bush wants is whatever will bring down power bills.

The manufacturing lobby (via the Australian Industry Group) sees the plan offering a “plausible” policy direction to create conditions for investment in new generation and in factories. The Minerals Council says it welcomes the Turnbull government’s “acceptance of advice from the Energy Security Board that technology-neutral policy signals are needed to drive investment in reliable and affordable power supplies.”

“Our” ABC, so often the mouthpiece for the Greens and green-leaning opinion, uses one of its “investigative reporters” to deliver a website commentary that (a) the government wants us to believe it will “deliver the trifecta: no blackouts, less carbon dioxide emissions and lower prices” and (b) “there is serious room for doubt, but who really knows?”  The broadcaster asserts: “It’s impossible to make a definitive judgement because the policy, made on the run with obvious haste, is so sketchy.”

Other green lobbyists and commentators see the NEG as seeking to replace the Finkel clean energy target proposal “with a dirty one,” as the latest ploy of those conniving to depress renewables investment at the expense of existing fossil fuel generation and as potentially bad news for rooftop solar PVs.

University of Queensland professor John Quiggin declares: “The most important thing to understand is that (the NEG) is designed not to produce a sustainable and reliable electricity supply system for the future, but to meet purely political (Coalition) objectives for the current term of parliament. Those objectives are to provide a point of policy difference with Labor, to meet the demands of the government’s backbench to provide support for coal-fired electricity and to be seen to be acting to hold power prices down.”

Former Liberal leader John Hewson, now an ANU professor and a serial critic of his old colleagues, comments that the NEG “may yet prove to have been clever politics by Turnbull, both within his government and against Shorten, but any sort of medium-term guarantee is unlikely to impress voters who will have to live with further increases in their electricity prices and face the insecurity of possible blackouts for at least the next few years – certainly before the next election.”

The official opposition, federal Labor, allowed its knees to jerk vigorously for a day or two and has now settled in to calling for modelling to validate the claimed reductions in power prices and energy-based carbon emissions.  (There has been much Labor mocking this week of the government claim of a saving of $115 a year in household power bills; I’m a little surprised the federal government has not responded by drawing attention to Julia Gillard’s 2012 promise of a $250 annual saving from her “big stick” approach to networks plus pursuing smart meters and reliability standards; you’ll remember how well that went………..)

Malcolm Turnbull, in a radio interview today, has put his finger squarely on the big “if” of his new policy. “Clearly,” he said, “ we need CoAG cooperation. It’s got to be a CoAG mechanism.” Yesterday, at a forum in Canberra, he was asked  “What happens if the States simply say no?” His reply: “Let’s focus on getting them to say yes. The Energy Security Board was established by the States and the Commonwealth – it is a COAG creation.” To which he later added as a challenge to federal Labor: “This is a real opportunity for Labor to say: ‘Well, we’ve always said we wanted to have a bipartisan approach. We (have) got the (NEG) recommendation from the board that was set up on the recommendation of Alan Finkel. It was established by COAG. Let’s take their advice’.”

Josh Frydenberg has now written to the State governments, whose energy ministers were left out of the loop as the Coalition formed the NEG approach with the ESB’s input (because obviously they would have played political games to stymie the announcement), inviting their input to the next steps, including modelling of impacts.

His opposite number in federal parliament, Labor’s Mark Butler, meanwhile is saying it doesn’t matter whether he opposes the policy at this point because a State veto (via CoAG) will negate the NEG. Some political reporters are adding that, with difficult elections looming in Queensland and South Australia, a stoush with Canberra over energy may just be what Labor premiers Palaszczuk and Weatherill need – but the Canberra Times, in an editorial, is talking about feelings among Labor’s federal frontbenchers that it will be “unconscionable to have more trench warfare (about energy policy) that could extend to the next election and beyond.” At this level, the paper claims, there is an urge to “get off the energy merry-go-round.”

(All this raises an interesting point: if baulked in CoAG by the Labor States, could the Turnbull government legislate federally to make the NEG law? The Energy Policy Institute suggested back in March that “the door is open” for a National Energy Commission to be introduced via federal legislation, dismissing the CoAG Energy Council as “cumbersome, outdated and sub-optimal” and calling for Australia to “throw off the chains” of co-operative energy governance.)

A CoAG meeting next month will be the first formal opportunity to put the issue of co-operative federalism on the NEG to the test. Clearly, there is lots of room for more fishy business in energy politics despite the heartfelt plea from the Canberra Times that “pragmatism, not ideology is needed.”  The paper adds: “What is on offer is far from perfect. That said, many believe it will create a framework that can be improved and tweaked in the years ahead. It is also the only alternative to a dysfunctional mess that is likely to be on offer in the forseeable future.”

Last word: The Prime Minister, speaking at an AiG function on Thursday made this observation (which I haven’t seen picked up in the media):”The NEG is not going to bring down the price of gas. The price of gas is determined, and I repeat it for those who doubt it, is determined by supply and demand – like the price of everything else.” Hardly a minnow in the electricity policy aquarium, this point.

The faceless candidate

This is the post I was going to run here on Monday before the ACCC paper on electricity prices landed and required priority attention. I’m of the view that this is still one of the most important energy issues for Australia going forward and deserving of a lot more meaningful focus by policymakers: 

Here’s an odd thing: our local media and green activists, so eager to bag Australia at any opportunity in the energy arena, especially when it relates to carbon emissions, seem to have completely missed a new example of where we appear deserving of criticism and our federal government needs to lift its game.

My source is the new International Energy Agency review of global energy efficiency, released earlier this month.

At one level, this 143-page document (available free on the agency website) contains a fair amount of encouraging news.

It declares “the world continued to generate more value from its energy use in 2016,” recording that global energy intensity (measured as the amount of primary energy needed to produce one unit of GDP) improved by 1.8 per cent last year and has tracked at an average rate of 2.1 per cent annually since 2010.

The IEA points out that the saving last year (measured as the difference between actual GDP and the notional level had energy intensity stayed where it was in 2015) was equal to twice the size of the Australian economy: $US2.2 trillion.

In 2016, the agency adds, the world would have used 12 per cent more energy without the efficiency improvements since 2000, equivalent to adding another European Union’s energy consumption. Without the electricity productivity gains in the IEA nations and major emerging economies since 2000 more than 1,000 gigawatts of additional power plant capacity (costing $US1.9 trillion) would now need to be in use.

Gains in efficiency, it says, last year helped households across the world save between 10 and 30 per cent in annual energy spending. For factories globally, use of energy per unit of economic output fell nearly 20 per cent between 2000 and 2016.

Needless to say, performance in this area is patchy and the countries with strong programs lift the global averages. A case in point is Germany – where the famous Energiewende program has increased household power bills hugely but German householders appear strangely quiescent to outside observers. German households spent seven per cent of disposable income on all energy bills in 2016, with electricity a big part of the picture. But energy efficiency helped them save $US45 billion in 2016, according to the IEA.

We also hear a great deal about big spending on solar and wind generation. Well, the global investment in energy efficiency last year was more than $US230 billion, with China well to the fore.  Without China, the fall in global intensity in 2016 would have been 1.1 per cent. Chinese energy demand growth is now running at just one per cent a year; the IEA says it would be seven per cent without the energy intensity improvements.

And there’s this: 77 per cent of the recent global emissions abatement achievement – greenhouse gases have held steady at around 32 billion tonnes of carbon dioxide equivalent since 2014 – is down to improving energy intensity versus 23 per cent for changes in the fuel mix.

Now here is the bum note for Australia: the IEA report includes a focus on percentage improvements for energy efficiency in 28 countries between 2000 and 2016; our performance is the fourth worst. Only Mexico, Finland and Brazil are below us on this ladder. Way above us in percentage terms (performing up to five times better) are Ireland, the Netherlands, the UK, Japan, Switzerland and China in that order.

This news has passed over our collective heads here in the past 10 days since the report came out.

Where is Labor shouting the odds about this situation and promising to do so much better if it wins national office? Its official policy, after all, is to double energy productivity by 2030. More importantly right now, where was even a single sentence in Josh Frydenberg’s headland speech to last week’s “national energy summit” conference referring to the importance of energy efficiency in dealing with the crisis that is now in the headlines daily? Literally, he said not a word on the topic.

Of course, the issue is not being ignored by the federal government. You can dig in to its website to find it declaring “managing energy use is a critical issue for Australia” and outlining national programs for pursuing improvements. What you won’t find is top level promotion of the issue, still less acknowledgement of the warning by the Academy of Technology & Engineering nearly two years ago that this country has languished at or below the OECD average for energy productivity for two decades and the current approach won’t improve this. Go to an important op-ed Frydenberg published in The Australian on 21 August and you will find a passing reference to energy efficiency – he lumps it in with solar subsidies and so forth in noting that “green schemes” account for eight per cent of the average household power bill.

There’s another bar chart in the IEA report that shows up our less than stellar performance in this area. It measures the coverage potential of mandatory energy efficiency codes and standards – this time in 37 countries. Australia and New Zealand sit right at the bottom of the ladder with Chile and Brazil. The top five are China, Japan, the UK, Germany and the US. I’d be the last to argue that bureaucracy and red tape are a satisfactory measure of virtue, but there is a message for us there, too, surely.

The point at issue is not that Australia has done nothing about energy productivity but that it has done nowhere near enough in its own interests.

The Energy Efficiency Council in a submission to the federal government’s climate change review (which is due to report before the end of 2017) puts its this way: “While energy management has delivered substantial reductions in greenhouse gas emissions over the past 20 years, Australia has barely tapped its potential. The Australian government has set a target to improve energy productivity by 40 per cent by 2030 and numerous studies suggest that we have the potential to further strengthen the economy by doubling energy productivity by 2030. However, with the current suite of policies in Australia, we will not meet the government’s current energy productivity target, let alone more ambitious goals.”

The Climate Change Authority a year ago gave energy efficiency a solid plug in its review for the Turnbull government of abatement policies. It pointed to

  • Energy efficiency being one of the fastest and most cost-effective ways to reduce emissions
  • Many efficiency opportunities being low or negative cost
  • The benefits from improving efficiency include job creation.

Lobbyists here for energy efficiency were more than a little disappointed with the Finkel report failing to follow this up strongly. They complain Finkel dwelt too much on the supply side and nowhere near enough on the demand side even while giving lip service to the need to accelerate the roll-out of energy efficiency measures. The panel’s big failing, they assert, is no recommendation on mechanisms to foster greater take-up of energy efficiency technologies in homes and businesses.

As the lobby sees it, the tragedy of the policy debate is that energy efficiency seems far harder to grasp than the arguments for attention to generation (whether dispatchable power or wind and solar). It is, they complain, “the faceless candidate waiting for a decent seat at the policy table.”

The new IEA report seems to give credence to that perception.

Watchdog barks at quick fixes

The blockbuster report on electricity prices from the Australian Competition & Consumer Commission was always going to land with a crash in the media and both the document itself and today’s tsunami of journalism following it are no doubt weighing on Malcolm Turnbull and his cabinet energy committee as they face a week in which they seem to have committed themselves (probably unwisely, given the amount of unfinished preparatory business) to stand and deliver on energy policy.

The media all have their own angles, reflecting their pursuits of the past year, but perhaps the one that will catch the attention of ministers most sharply today is an ABC report that “ACCC chief (is) sceptical clean energy target would reduce power costs.”

The broadcaster highlights Rod Sims saying it is “arguable” whether the CET would have this impact, as claimed in the Finkel report.

That’s about politics, which is a vital aspect of the “energy crisis” game but far from the only one.

If the ministers want a fast summary of what Sims & Co are saying, they should go to page 151 of the 170-page report – where the ACCC focuses on four points.

First, it says, there appears to be insufficient competition in generation and retail markets, which both raises prices and increases barriers to supplier entry. “The lack of availability and high price of gas has also increased the price of electricity.”

Second, and no surprise given the work of its acolyte, the Australian Energy Regulator, it declares “there appears to have been over-investment in network operations” as well as inefficient cost recovery and higher than warranted rates of return due to the network regulation framework. “Some of these costs represent a continuing burden on consumers.”

Third, the ACCC says, “some measures to improve environmental sustainability have been overly generous and poorly targeted, with outcomes that appear inequitable.”

And finally, it sees retail deregulation as “benefiting some and hurting others.” This market, it adds, is “exceptionally complex” and consumers have no ability to exit it. “We need to ensure that that consumers have the tools to enable them to make informed decisions about their electricity services.”

As is being picked up and headlined in the media, the commission dumps on energy retailers, and especially the “big three,” for confronting mass market consumers with “unnecessarily complex and confusing behavior” – which it declares appears in some cases to be “designed to circumvent regulation.”

In summary, says the commission, “solutions to (the) affordability problem will not be straight forward; nor is there a ‘silver bullet’ that will address all problems.” (As Jennifer Hewett observes in the Australian Financial Review today, this is not especially helpful to a government “facing demands for urgent action and easy-to-understand ‘fixes’ – not to mention a few more three-word slogans.”)

The ACCC also comments: “Some mistakes of the past are beginning to be unwound while others, unfortunately, will affect electricity markets and consumers for decades to come.” (My emphasis.)

It finds that power bills for the mass market have risen by 63 per cent on top of inflation since 2007-08. It also points out that Queenslanders are paying the most, followed by South Australians and people living in New South Wales. Victoria, the spearcarrier for privatization and deregulation, so much demonized in recent debate, has the lowest bills.

And it is worth highlighting this snippet from the media statement Sims has put out this morning: “There is much ill-informed commentary about the drivers of Australia’s electricity affordability problem. The ACCC believes you cannot address the problem unless you have a clear idea about what caused it.” I don’t see that featuring prominently in today’s media………….

There is also this fierce shoulder charge in the report for the body politic: “Over the past decade successive (national and State) governments have failed to balance competing priorities of security and reliability, universal access to affordable energy services and reduced emissions, often making decisions with limited regard to (their) impacts on the overall affordability of electricity. These decisions, combined with other regulatory and business decisions, have led to higher prices for all users.”

This should not be allowed to slip through to the keeper. It’s a damning indictment of both sides of mainstream policymaking and the politicians far too often are allowed to point fingers elsewhere.

In passing, because so much fuss has been made about the point, it is worth noting that, while Australia’s international electricity cost position has “deteriorated substantially” (says the ACCC), the commission records OECD data showing that we have fallen from the fourth cheapest in 2004 to the 10th cheapest in 2016. As the commission notes, there are many and varied ways of considering price comparisons, but the essential point is (to quote it again) “on any measure, it is clear (our) prices have gone from being a source of competitive advantage to a drain on business productivity and a serious affordability concern for households.”

Stand far enough back, shove the politicking aside, and this is the fundamental issue for policymakers across the federal system but especially, of course, for the national government.

The challenge confronting Turnbull and his ministers right now, at a time of considerable political weakness for their government, as the opinion poll dirge dogs its every move, is to demonstrate that they are doing something meaningful to halt the downward slide and, in particular, to alleviate voter (ie household) unhappiness while explaining there is no one bound that will free us from this situation. Turnbull & Co cannot achieve this on their own and the State governments, mostly run by their opponents, are more hindrance than help.

Right now, the most important of the many slogans derivable from the watchdog’s report that could be daubed on the cabinet room walls in Canberra, and where else politicians gather to mull energy matters, is “there is no silver bullet” and the community needs to be told so. The message will not be greeted with cheers but Australians need to understand it to save us from being sucked in by more snake oil salesmen offering cures that will only make things worse.

Understanding capacity

Let’s avert our eyes for a moment from the slow motion energy policy train wreck that is playing out on our domestic scene. Fortunately there is a ready topic to hand.

The inability of so many who dabble in the energy pool to actually understand how it works is on display in the mainstream and social media most weeks and has been especially so in recent days in hyperbolic international reaction to the latest International Energy Agency publication looking at the state of play for renewable energy.

This has reached some sort of apogee (or do I mean nadir?) with no less than Christiana Figueres (the former head of the UN climate change activities) tweeting in the wake of the rush of gee-whiz media coverage of the IEA report that the “speed of the energy transition every day more jawdropping” (sic) on the basis of “solar to surpass nuclear by end-2017.”

This sort of stuff flows, as the knowledgeable readers of this blog know, from misunderstanding of capacity factors and of the fact that a megawatt of dispatchable power will deliver considerably more over a year than one of intermittent nature.

In the case of the Figueres, absurdly, the link she provides to the article exciting her tweet contradicts her point in its second sentence: “While nuclear currently far exceeds solar in terms of energy generation, some predict solar could be the world’s largest source of energy by 2050.” (I’ll come back to that use of “energy” in a moment.)

Yes, it is estimated that by the end of 2017 the capacity of solar power globally is likely to be 390 gigawatts versus the current 391.5 GW for nuclear reactors – but the electricity output of the two resources is 2,476,670 gigawatt hours a year at present from nuclear versus 375,000 GWh from solar, nuclear having a capacity factor around 90 per cent compared with about 24 per cent for solar PVs (with 32 per cent for wind farms and 58 per cent for today’s global coal fleet).

The IEA says that solar power “could feasibly” be the world’s single largest source of electricity (not energy overall) by 2050; readers will all know my view of projecting so far forward – the equivalent, as I have written frequently before, of standing in 1984 and predicting today’s scene.

Shorn of all the BS littering the public energy debate, what the IEA is asserting is that renewables collectively will increasingly take market share from fossil fuels in global power production. Stop the presses!

The agency, much criticized for leaning too far to fossil fuels in the past, seems to me to be now a tad anxious to paint itself a greener shade of black and this comes through in how it shapes and presents statements like the latest one. Dig deep enough in the material and you find the IEA saying “Coal (will) remain the largest source of electricity generation in 2022 (but) renewables (in all forms) are closing in on its lead.”

Today, actually, the global need for power is being met primarily by 9,200 terawatt hours of coal-burning generation and 5,700 TWh from gas turbines. In addition, 2,600 TWh comes from nuclear plants and 6,000 TWh from all forms of renewable energy, of which by far the dominant are hydro systems.

To break the shares down, in round terms coal generation is providing 39 per cent, gas almost 23 per cent, hydro 16 per cent, nuclear a bit under 11 per cent, oil just on four per cent and the collection of sources that include solar and wind just on five per cent with biofuels and waste about two per cent.

Broadly speaking, the agency is forecasting that coal-fired power production will be just under 10,000 TWh a year in 2022 and gas-fired around 6,000 TWh – that’s a rise for fossil fuels — while all forms of renewables will jump quite strongly to just over 8,000 TWh (of which hydro generation will still represent nearly half) with the nuclear contribution staying around 2,600 TWh.

No matter how the whirling dervishes of green boosterism twist and turn, this means that conventional power production (coal, gas, hydro, nuclear) will continue providing the vast bulk of world electricity five years from now, notwithstanding “jawdropping” investment in wind, solar and battery storage in the interim.

One of the factors that tends to get lost in all the hoo-ha is the growing role of electricity in the overall energy scene. It amounts to about 18 per cent of total energy production today and you can find a range of crystal ball views of where it is going over the decades towards the middle of the century, the most popular being about 40 per cent. How this latter amount of electricity (or even, say, a 25 per cent share) will be sourced is a very large open question but how demand will be sourced through the next decade is not really that difficult to work out.

A problem with discussing global warming just in the context of power stations is that the issue (obviously) relates to all energy supply and use. The US Energy Information Administration, in its latest forecasts, suggests all global energy demand could rise 28 per cent between 2015 and 2040 – and, to the chagrin of the environmental activists, this scenario sees actual coal supply (in all its forms) rising a bit even as gas becomes the fastest-growing fossil fuel.

As the EIA carefully says, this is not a prediction of what will happen but rather of “what may happen given certain assumptions and (its) methodologies.”  To which it rightly adds: “Energy market projections are subject to much uncertainty, as many of the events that shape energy markets and future developments in technologies, demographics and resources cannot be foreseen with certainty.”

(If I ran the world, this sentence would be a mandatory prominent caveat in every media report of the “transition.”)

The grand dichotomy here is between the views (IEA, EIA, BP, Statoil, ExxonMobil, Shell etc) of an inexorable rise in world energy demand and those of the deep green activists with a neo-religious belief that peak energy demand can be achieved in the not too distant future.

Coming back home, today’s local energy policy battleground is occupied by the mainstream pragmatists seeking to ensure, to quote Josh Frydenberg, that emissions reductions are not pursued at the expense of reliability and affordability of electricity and gas supply and the idealists (and anti-capitalists in at least some cases) who want to bring about the earliest possible demise of fossil fuels and also to baulk any move to embrace new nuclear technology. We also have populists like Bill Shorten trying to play to both sides of this divide.

Scams like the solar assertion that kicked off this post are a weapon in this conflict – as an annoyed tweeter has responded to Figueres this week, the concern is that readers will walk away “with a lie in their heads” about what is actually going on in the energy marketplace.

Because this can influence how Australians vote, it is a not-unimportant issue at federal and State political levels – and this week’s “summit” is another reminder that our energy supply house of cards is teetering ever more dangerously because of politics.

Quo vadis?

In a year in which a slew of reports about energy have landed with a political bang in Australia, we can look forward to one more that will drop in December.

This will be the latest in the Australian Energy Market Commission’s series on residential price trends, a requirement of the CoAG Energy Council, covering financial years. The bang may turn out to be louder because this report for 2016-17 will roughly coincide with another for the federal government on climate policy being undertaken by Josh Frydenberg’s department.

The inter-action of energy costs and carbon emissions abatement is real and an ongoing source of friction in our debate.

The initial (2015) AEMC residential price review review, which got less attention publicly at the time than it deserved, highlighted the fact that, while network costs (focus of much political and media fuss about “gold-plating” since 2012) were decreasing, an upward trend in wholesale costs was emerging. The wholesale costs issue, of course, is now the demon king of the pantomime.

The 2016 AEMC review, published in mid-December last year, reinforced the message by making it clear that we could expect to see residential costs rise in financial years 2017-18 and 2018-19, “driven by significant increases in wholesale costs following the retirement of Hazelwood power station.”

That report told CoAG ministers that wholesale prices are being affected by environmental policy pushing large investment in wind and solar power, gas-fired power stations increasingly becoming the market’s price-setting generators and the need to focus more on system security. Which is what we have seen happen through calendar 2017 amid much political and media hyperbole.

(In passing, something the AEMC reviews bring out but which tends to get ignored in the media fuss about what households pay is that there is a wide variation in actual residential electricity consumption across the States: in New South Wales the average is not quite 6,000 kilowatt hours whereas in Victoria it is just over 4,000 kWh – because there is widespread direct use of gas – and in Queensland it is 5,170 kWh. It’s 5,000 kWh in South Australia, but 7,300 kWh in the winter-blasted ACT and 8,550 kWh in Tasmania.

(Another factor, which has become a focus of Turnbull government fuss about retailer behavior, a game still going on, is the percentage of households in each State on lower-priced market offers: in south-east Queensland it is 70 per cent, in NSW 73 per cent, in SA 85 per cent and in Victoria 91 per cent; in Tasmania it is hardly anyone. Push the SEQ and NSW rates up to the SA and Victorian ones and the price pressure picture would be a bit different. The argument that retailers are somehow conspiring to keep as many users as possible on the higher-price standing offers looks a bit odd when viewed against SA and Victoria.

(This stuff is not irrelevant when considering how householders/voters react to the cost situation.)

Against this background, it is interesting to see the AEMC push out a paper this week on “Making market transformation work,” which I don’t see getting any media attention. In it the chairman, John Pierce, and CEO, Anne Pearson, again highlight the importance of the wholesale price issue.

“Emerging benefits from the (NEM) energy revolution,” they say, “are very real but at risk because of the cost pressures coming from the wholesale generation sector.”

They also make a point that frequently seems lost on the journalists reporting the latest gee-whiz news on renewable energy. “While investments under the RET have increased the level of installed megawatts,” they say, “there are times when the overall mix cannot deliver enough hours of electricity or enough security services at the right time to meet consumer demand.”

This is the nub of the whole Animal Farm-style (“two legs good, four legs bad”) shouting match between contending fan clubs for technologies that is the seemingly endless background noise to the current debate. “Meeting consumer demand with a new mix of technologies,” the AEMC pair remind politicians, “requires price signals to guide private sector investment – and in the NEM these come from the spot price and the forward contract price.”

The critical element, they say, is for policymakers to put emissions reduction mechanisms in place that allow price signals to work. If you do this and put all technologies on a level playing field, investors can be expected to fill the capacity gaps. “International evidence suggests emissions reduction policy needs to support effective competition in the power system. Otherwise consumers bear the cost of investment risk and ongoing government intervention.”

The other reminder in the latest paper, a cat-on-the-mat point, is that “making the market transformation work is about two things: keeping the lights on and gas flowing (while) delivering change at least cost to consumers.”

In a speech in September, Pierce added an important caveat: “There are lots of actions we could take to keep the lights on and the gas flowing …… but not all of these will deliver the (transition) objectives while keeping bills affordable for consumers and supporting much needed private sector investment, which in the electricity sector at least, is estimated to be in the billions.”

A translation is needed: this game is really not about making energy cheaper again – in the sense of what prices were in the past – but keeping the pain of the transformation we have to have to a minimum.

I can’t see this message being conveyed by mainstream political leaders in the public slanging match that passes for a debate or, on the occasions when it gets passing mention in their comments, it being highlighted for the hoi polloi by the media in terms that can be understood.

Simply speaking the message is that there is no free lunch: system security and emissions reductions come at a cost. Which brings us to the two-fisted political problem of the day – households (ie voters) say they find the present cost unacceptable while manufacturers (they are telling us louder) are in at least some cases finding it unbearable with consequences for employment (impacting voters again).

“Quo vadis?” is a Latin phrase from the Christian tradition that became famous in my childhood because of an epic film. It is an apt question – “where are you going?” – for our political leadership as we move towards the final months of an epic year for energy in Australia.

In wading through the information swamp towards publishing my October Coolibah energy newsletter (now available on this site) I saw a comment by an American power system expert that has relevance for us. She wrote: “We have a complex society and a complex grid with conflicting sets of goals and requirements. Our electronically-based, electricity-dependent society needs a mix of fast, flexible, clean resources that can collectively deliver a low-cost, high-reliability, high-resilience energy system. Supply and demand-side resources should be assembled in portfolios that have a solid probability of meeting societal and operational goals under a wide variety of possible future paths and a reasonable range of costs.”

Who, as we in Australia finish out 2017, ushered in as a year of “energy crisis” by the Prime Minister, feels even minimal confidence that where we are going can deliver what this American outlines?