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?

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