Archive for December, 2017

‘It’s not a simple choice’

As we move in to the last days of 2017, the federal government, via the publication of its climate change policy paper, has summed up the electricity supply challenge just at the point when early summer heatwaves have been testing southern State supply resilience.

Simultaneously and coincidentally, I guess, the Energy Security Board has put out a paper that underscores the fragile state of things.

The ESB’s “health of the NEM” diagnosis is that the market is unwell but hopefully on the mend. The three worrying symptoms, it finds, are

▪ electricity bills are not affordable

▪ reliability risks in the system are increasing; and

▪ future carbon emissions policy is uncertain.

To manage a recovery, says the board, “we need governance that is fit for purpose.”

In the policy paper released yesterday, the government says: “Australia’s energy market is undergoing the largest transition since the creation of the NEM. The same transition is happening across the world, driven by retirement of ageing thermal generation, flattening demand for electricity and rapid growth in renewable energy resources. The costs of intermittent generation from wind and solar, once prohibitively expensive, have plummeted in the past decade. At the same time, electricity prices for households, business and industry have increased, and investment has dried up for the kind of dispatchable generation needed to stabilise the grid, such as ready-to-use sources like coal, gas, pumped hydro and batteries. The government’s priority is to deliver a more affordable, more reliable and cleaner electricity supply for all Australians.”

Public sentiment on this, as I indicated in my previous post, using the latest Essential Report poll, is that about one in five of us believes all three goals should be given the policymaking priority and 15 per cent think it should be abatement of emissions. More than a third want energy costs to be the priority and 18 per cent say it should be supply reliability.

In the new paper, the federal government asserts that the “national energy guarantee,” which it and the eight State and Territory governments will again debate at CoAG Energy Council in April, will:

  • incentivize the right investment in the right place at the right time
  • lower wholesale prices and reduce spot price volatility
  • improve reliability, and
  • reduce emissions at lowest cost.

It adds that its policy will level the playing field and be technology neutral. “It will provide an incentive for every single technology to perform within the two constraints of meeting international commitments and maintaining reliability.”

For those in the community wanting cheaper power and hanging out for large cuts in their bills, it would be as well to understand the fine print of the government promise: “Modelling estimates that the (policy) will result in wholesale electricity prices beingan average of 23 per cent lower than without the guarantee over the period 2020 to 2030. The lower wholesale prices drive a reduction in retail prices, with the average household expected to save around $120 compared to business as usual on its electricity bill each year from 2020 to 2030.”

Then they need to appreciate what the Australian Energy Market Commission is saying in its new report – the topic of my post on Monday – to the effect that “without investment in replacement dispatchable capacity, wholesale prices will remain volatile and the (end-user price) rollercoaster will be repeated.”

Unfortunately, of course, the community has its head around very little of this except what its gleans from media soundbites.

For the more engaged stakeholders, there is a need to take the reality pill, too.

“Technology neutrality” has become a catchphrase but what it actually means for the NEM, bearing in mind this version of “neutrality” continues to eschew nuclear energy, is highly debatable.

One of my interlocutors complained to me in an email yesterday with respect to other just-published material about “the sheer lack of understanding of the dearth of system security features of non-synchronous, intermittent, weather-dependent generation technologies,” adding that “the huge costs of add-ons required to go close to accounting for this continues to be under-appreciated.”

So it is time to trot out one more time the wisdom of the admiral – royal commissioner Kevin Scarce in his report to the South Australian government. Scarce, former senior navy officer and former State governor, said 19 months ago that “identifying whether a particular generation portfolio would deliver electricity at the lowest possible cost requires an analysis of the future cost of the system as a whole, that is the total costs of generation, transmission and distribution.” And he added: “For those planning a future electricity system (and the market in which it will operate) the relevant issue is total system cost (including) inter- and intra-regional expansion of networks and grid support costs.” And also, essentially reacting to the “go for renewables” lobbying he received, “it is not a simple choice.”

You won’t find a mention of total system cost in the spruiking pursued by either the federal government or the Labor party (whether federally or in the States).

Here, for example, in the new climate policy document is the Turnbull regime’s hype for the NEG: “The guarantee is a credible, workable, pro-market policy that does not involve subsidies, taxes, or trading schemes. It will lower electricity prices, make the system more reliable, encourage the right investment and reduce emissions. Importantly it is technology-neutral, offering a future for investment in whatever technology the market needs – solar, wind, hydro, coal, gas, batteries or pumped hydro storage.”

I missed a commentary in The Conversation on the NEG by the Grattan Institute’s Tony Wood in late November; reading it today, I am struck by his observation that this may be the first example in the world where policy seeks to integrate emissions reduction and energy security. It’s the design that matters, he adds, and the hard work on this has yet to be done. He declares: “The fundamental elements of the proposal provide a workable framework, its key elements will have to be part of any effective solution, and a credible alternative does not currently exist. The next best step would be for all parties to commit to making the NEG a workable solution to a serious national problem.”

As has been the case for at least a decade, the critical factor with new energy policy development is politics, bearing in mind that today almost a quarter of the actual federal votes cast go to populist parties and independents (and about five per cent of any voting doesn’t count because it is “informal”).

No objective spectator of our political scene can avoid the notion that we could have a different federal government in 12 to 18 months and the big “what if” has to be the make-up of this administration. Will it be a different coalition? Does it necessarily follow that this would headed by Labor? Which leads to the obvious thought: if it is anything other than some form of the present regime, what is the fate of the NEG?

Dem NEM bones

It occurs to me, reading the new Australian Energy Market Commission report to CoAG ministers on household price trends, published today, that the appropriate theme music for the NEM is “Dem Bones.”

You know how it goes: “toe bone connected to the foot bone” all the way through to “neck bone connected to the head bone.”

And here’s the AEMC: “Wholesale market outcomes are increasingly interconnected with environmental policy, the wholesale gas market and system security.”

(The commission offers this soundbite for the media in the “infographic” on the report: “Consumers are riding a power price rollercoaster driven by changes in generation.” And this thought for the politicians: “The key to an orderly restructure of the electricity sector is to keep making market reforms that don’t add to consumer costs.”)

The AEMC notes that wholesale electricity costs now comprise approximately 30 to 40 per cent of residential power bills – which went up by an average 10.2 per cent from 2016-17 to 2017-18 primarily due to rising wholesale prices flowing from power station closures and, says the commission, will decrease by 6.6 per cent in 2018-19 and 2019-20 primarily due to them falling again as a result of the introduction of 4,100 megawatts of new capacity (mostly renewables) and the re-entry to the market of Queensland’s gas-fired Swanbank E plant.

Of course, there are a heap of other factors at play and even the experts can struggle to produce a clear picture of the impacts. Here’s the AEMC again: “In (our) 2016 report interconnectors were expected to have a large effect on the trend in wholesale prices” following the close of Hazelwood – but this didn’t happen.

Perhaps the biggest commission expectation in the new report is that NEM electricity demand will stay flat from 2016-17 to 2019-20, so changes in wholesale costs will relate to what happens to supply.

The AEMC’s working hypothesis includes the view that gas prices on the east coast will remain high from 2017-18 to 2019-20.

And reinforcing my “Dem Bones” whimsy is the point that the projected downward trend in power wholesale costs in the short term is expected to be largely driven by new capacity pushed in to the market by the RET – but, says the commission, in the medium term this can contribute to earlier retirement of large-scale synchronous generation (which can’t recover operating and maintenance costs in the greener market), decreasing competition and increasing wholesale prices.

“Without investment in replacement dispatchable capacity,” the AEMC adds, “wholesale prices will remain volatile and the rollercoaster will be repeated.”

And there is another joker in the NEM pack: the expected decrease in wholesale costs, the commission warns CoAG ministers, “may not necessarily translate in to lower retail prices for consumers” because of increases in environmental and/or network costs in some jurisdictions.

There is also the small matter of the impact of RET flow-on effects on hedging contracts, a key NEM activity for generators and retailers faced with significant trading risks – an issue about which the community knows virtually nothing and cares even less. The commission says, “As traditional generators retire, there will be fewer (power producers) to supply firm hedging contracts (resulting in) upward pressure on wholesale electricity contract prices.”

“Further,” says the AEMC, “(with fewer generators providing contracts) the risk faced by retailers from volatile spot prices may increase” because they can’t hedge. Over the long term “this potentially affects the level of retail competition.”

Green boosters and politicians on the make brush this stuff aside as they rush to promote greater and greater levels of wind and solar investment and, especially the Labor party at federal and State levels, to capitalize on public sentiment favoring renewable energy.

(On this point, after a weekend when Bennelong voters dashed Labor hopes of a boilover in federal government, it is worth, I think, drawing attention to the latest Essential Report poll. The question posed was “when considering the outcomes of energy policy, what do you think should be prioritized?” Thirty-seven per cent of respondents opted for keeping down the cost of energy, 18 per cent for maintaining supply reliability, 15 per cent for reducing carbon emissions and 22 per cent said “we do not need to prioritize, all can be achieved.” Good old “don’t know” achieved seven per cent. Essential Report last posed this question in June when those opting for keeping costs down totaled 28 per cent. That was also when a special Newspoll found 60 per cent of respondents wanted action to push down energy prices as a top priority, with 10 per cent opting for prevention of power blackouts and 24 per cent wanting carbon abatement as the primary policy objective.)

Coming back to the new AEMC report, the commission includes this quiet admonition to CoAG: “A number of governments (have) recently introduced their own energy policies aimed at increasing renewable generation, providing system security or putting downward pressure on wholesale spot prices. These policies, like the RET, have the potential to additionally affect supply/demand dynamics and wholesale electricity costs.”

Considering the amount of shouting in some quarters about the impacts of environmental policies (the RET, solar subsidies and so on), one should also record that the AEMC says they and system security costs range from three to 14 per cent of household bills, depending on jurisdiction – and are higher in the ACT and SEQ. Looking out to 2020, the commission sees them decreasing in SEQ but rising elsewhere in the NEM. The reason they’re going down in SEQ is that the Palaszczuk government has reacted to non-PV community growls by removing the smeared solar bonus scheme charge and shifting it to taxpayers……….

The direct costs of environmental policies are estimated by the commission to rise by around 19 per cent over the next two years mainly due to higher costs for certificates under the large-scale RET and also State environmental feed-in tariffs.

Finally, given the importance of network costs in residential power bills (with transmission charges amounting to 5 to 12 per cent and distribution charges 30 to 45 per cent), the commission expects this component to rise in South Australia between now and mid-2020, to remain stable in south-east Queensland, New South Wales and Victoria, and to fall slightly in the ACT and Tasmania.

The bottom line in the AEMC message to ministers is that short-term gains flowing from fluctuations in wholesale power costs won’t last without investment in new dispatchable generation capacity – and it makes no bones about the problem: “uncertainty is stopping investment and will put upward pressure on prices in the medium term.”

Grounds for optimism?

Given the events of 2017, it might seem a little quirky for the Australian Petroleum Production & Exploration Association to pick “Resilient business – success in the new energy market” as the theme for its 2018 annual conference, but optimism has long been the trademark of oil and gas producers.

Thus we see Kevin Gallagher, Santos CEO and lead industry speaker at the APPEA conference in Adelaide next May, opining that the biggest game-changer for the sector in 2018 would be opening new areas for gas development in New South Wales (where the incumbent Coalition government has made footdragging on this issue an art form) and the Northern Territory (where the relatively new Labor government is torn between the competing lures of considerable future economic benefits and the politics of cosying up to the NIMBY movement).

Gallagher says the Macarthur basin in the NT “has the potential to do for Australia what the shale gas revolution has done for America,” which is a pretty big statement when you consider what the US shale oil and gas boom has accomplished in the past decade, turning that country’s energy environment on its head thanks to embracing the new extraction techniques of drilling horizontal wells and hydraulic fracturing.

Gallagher adds in a promotion for the APPEA conference that the opportunities here to find new solutions integrating gas, renewables and energy storage are “limited only by our imagination” – and, one may add, by the toxic quality of the national energy debate.

APPEA chief executive Malcolm Roberts acknowledges that 2017 has been “challenging” but he, too, sees hope in greater recognition of the importance of natural gas for national energy security and a transition to lower carbon emissions.

In a new submission to the CoAG Energy Council, which is due to hold a potentially critical meeting about policy next April, APPEA argues that time is running out for the development of new unconventional gas resources to replace the declining output from existing eastern Australian fields and ward off further east coast supply tightening and higher prices.

Another worm in the apple comes via the Australian Energy Market Operator, in a just-released statement on gas supply and demand, warning of a domestic shortage in Western Australia if new resources are not brought onstream in the next five to seven years. The cause for concern is that WA petroleum exploration is at its lowest level since 1990 – and the new Labor government has imposed a moratorium on hydraulic fracturing, baulking exploitation of large potential onshore shale resources.

The WA government is embarked on the 14th review of fracking in Australia while the 13th, arranged by the new NT government, has just delivered a report which the panel chair, Justice Rachel Pepper, encapsulates as saying: “The overall conclusion of the report is that risk is inherent in all development and that an onshore shale gas industry is no exception. However, if the recommendations made are adopted and implemented in full, those risks may be mitigated or reduced – and in many cases eliminated altogether – to acceptable levels having regard to the totality of the evidence.”

How far it is realistic for the industry to be hopeful that Pepper-style commonsense will prevail in WA, the NT, NSW and even Victoria (where the Labor government seems determined to shoot the State economy and consumers in the feet despite decades of reliance on gas as an essential service) is debatable – and has been debated many times at the APPEA conferences and the Australian Domestic Gas Outlook conferences (the next is in Sydney in February) over the past six years.

APPEA is taking some further cheer from the latest report in to gas supply by the Australian Competition & Consumer Commission and the coincident Shell announcement that will bring the Arrow resource in Queensland (“the largest undeveloped resource on the east coast”) to both domestic and export markets.

APPEA points out that the ACCC report “confirms that the gas industry and Queensland’s LNG industry in particular has secured east coast domestic gas supply for 2018 and 2019,” following heavying of production companies by the Prime Minister earlier this year which in turn followed dire market operator warnings about potential shortfalls lying ahead.

The association takes particular note of the commission saying that “the best way to address the supply shortage in the southern States is to increase production of gas in the southern States.” As Roberts sees it, the ACCC paper “places the blame for higher-than-necessary gas prices at the feet of governments,” and in particular those in NSW and Victoria. To which APPEA adds that further reform of transmission operations will help, given they “can add $2 to $4 a gigajoule to prices in southern States” when gas has to be ferried long distances.

And Roberts tosses in another sharp point, too: the ACCC report, he says, “continues a trend this year of dramatic revisions of demand forecasts,” in this case converting a 55 petajoule east coast shortfall for 2018 predicted in September in to a 20 PJ surplus six weeks later. “Cooler heads,” he suggests, “need to prevail in 2018.” Now that really is optimism.

Speaking of reports, and hasn’t 2017 seen a tsunami of them, there is also a paper just published by BDO, accounting and management consultants, that looks globally and locally at gas markets – and among its observations is that the mooted Australian west-east gas pipeline, now subject to one of the Turnbull government-funded feasibility studies launched this year, should not be dismissed as a pipedream. Local BDO partner Andrew Hillbeck says: “It’s a possible solution and it’s an opportunity for innovation – at the very least it requires more consideration.”

However much optimism producers want to project, business consumers, and especially the manufacturing industry, still view 2018 with trepidation. Their concerns are summed up by ACCC chairman Rod Sims, who says that “despite increased supply providing important short-term improvements in conditions, the market is still not operating as well as it could.” Prices, he asserts, remain higher than they would be in a well-functioning and competitive market.

Prices offered to large commercial and industrial businesses have fallen back from $16 per gigajoule early this year to between $8 and $12 – but, says Sims, “the picture for smaller C&I customers remains bleak.” Some, he adds, are “in a precarious position.”

And because there is always one more thing to consider in the wild ride that is the gas game these days, bear in mind comments by National Australia Bank a fortnight ago, warning that Victoria is in “a tricky position” for electricity supply this summer (owing to generation issues at Loy Yang A and Yallourn power stations) and that this may lead to greater dependence on gas turbines with flow-on impacts on southern fuel availability and on wholesale electricity prices in the NEM.

 

Brave new world

It was inevitable that the media would leap on AGL Energy’s Liddell announcement at the weekend to the disadvantage of the federal government and of Malcolm Turnbull in particular as he led the charge to bully the company in to not shutting the plant.

Needless to say, the ALP has leapt on the company announcement, too, with Labor’s Mark Butler taking the hyperbole prize for declaring “Turnbull ends 2017 with his vision for the future of Australian energy in tatters.”

Lord alone knows what was going through the minds of the Prime Minister and others when they pulled this stunt; the proverbial petshop galah could have told them it wouldn’t fly. Their immediate reaction ploy now is to flick what AGL says it plans to do to the Australia Energy Market Operator for assessment – with a response required in February.

Josh Frydenberg, however, is pushing the point that should be uppermost in the minds of all concerned. “We are technology agnostic when it comes to generation,” he’s telling the media. “Our priority is the stability and affordability of power to Australian households and businesses.”

Here on the other hand is Bill Shorten, while campaigning in the seat of Bennelong with Kristina Keneally: “We need more renewables in our energy mix. We need to reform the national energy markets. We need to also make sure that we’re getting the gas that is produced in Australia prioritized to be sold to Australian industry first. Labor is for certainty. This will deliver new jobs in renewables. It will deliver fair dinkum action on climate change. And the fact of the matter is that good energy policy is good environment policy and vice versa. We are determined to make sure that Australians get lower energy prices and we’re going to do it by encouraging investment in renewable energy.”

In all the fuss, it would probably be as well to remind the community how New South Wales gets its power before greenwash wholly obscures the picture. Unfortunately, they seldom get this information – the Punch & Judy show that is our politics is of far more media interest.

Electricity generators in the NEM’s biggest region (accounting for 37 per cent of the market’s power) provide a “baseload” of 5,500 megawatts and are challenged to meet up to 14,000 MW when summer demand is at its peak.

The NSW market is currently serviced in the main by 10,160 MW of black coal-fuelled plant and 4,803 MW of gas and hydro capacity (of which 4,236 MW is of the “quick start” mode).

To which must be added supply vulnerable to the weather and time of day: some 1,200 MW of household rooftop solar power, 155 MW of utility-scale PV at Broken Hill and 660 MW of wind farm capacity.

And, not to be overlooked, NSW relies also on what capacity is available over the NEM interconnectors (critically from Queensland during a south-east heatwave, that is from more black coal and gas plants).

One of the core facts to be found in AEMO’s modeling is that it expects a small decline in NSW overall power needs between now and 2022 – reaching just under 66,000 gigawatt hours that year (2,000 GWh less than the power industry was forecasting in 2015) – but it can’t see a fall in peak requirements and perhaps there will be a rise.

As Tim Nelson, AGL’s chief economist, puts it, “the (NSW) market will require less energy but the same or more capacity.”

Explaining the thinking behind the company’s life-after-Liddell approach, Nelson says: “The combination of stable or rising peak demand, declining underlying energy demand and increased output from variable renewable generators has distinct implications for the type of investment required to replace Liddell. The amount of energy served by ‘dispatchable’ generation is decreasing as a result of falling energy demand and increased output from variable renewable resources. Given the same (or even an increase in) capacity is required but the amount of energy needed from ‘dispatchable’ generation is lower, the type of complementary plant is likely to shift from inflexible coal plant to more flexible gas-fired plant, better suited to operating at a lower capacity factor. This is reinforced by the increasing need for plant to complement variable renewable resources when they are not producing due to a temporary lack of wind or solar resources.”

On balance, the company’s case is that optimal investment now needs to be in peaking generation and it sees about 1,000 MW of new fast-start capacity being required – while still sending out some 15,000 GWh a year from Bayswater power station.

Nelson adds this: “While climate change and the need to reduce greenhouse gas emissions has been one major issue being discussed within the context of Liddell, it is clear that changing technology costs and the nature of electricity demand have also been key factors. Longer term, it may be that energy storage (through batteries, pumped hydro or production of hydrogen utilising renewable energy) is a better option than new gas-fired generation. But given renewable penetration in the NSW market is not sufficient to meet minimum demand, there is little benefit to deploying energy storage. This may change as greater levels of investment in renewable energy may see renewable production capacity exceed minimum demand at some point in the future. At that time, storage would be a direct substitute for gas-fired generation.”

Whatever the longer term may hold – and let’s not forget that nuclear advocates strongly believe a genuine technology-neutral approach would open the door to small modular reactors in the NEM in the next decade or that there are a number of other players whose plans could impact on AGL’s aims – it ought to be obvious to all but the blinkered that the backbone of NSW supply is going to continue to be fossil fuels for years to come, subject, of course, to what policy machinations come from the body politic, bearing in mind there will be three State elections and probably three federal polls between now and the mid-Twenties.

What seems unarguable is that one of the keys to avoiding landing eastern Australia (and not least NSW) still further in the energy mire is an adequate and workable plan to ensure there is sufficient gas supply to support “flexible” power generation.

Self interest for AGL, having been frustrated in pursuing gas development in NSW, dictates the LNG importing scheme it now has under consideration. The broader consumer interest should require a major shift in jurisdictional attitudes, in NSW, Victoria and the Northern Territory in particular, towards encouraging unconventional gas development to serve south-east Australia.

The Australian Petroleum Production & Exploration Association points to the Narrabri project being capable of supplying 50 per cent of New South Wales needs, to “significant” resources in Victoria’s onshore Gippsland and Otway basins and to “promising” resources in South Australia – apart from what the Northern Territory onshore prospects could deliver.

Whether what has gone on at official levels in 2017, via the CoAG Energy Council and so on, is a harbinger for progress in this regard in 2018 is an open question.

A pessimist would say not but the Turnbull government can’t afford to be pessimistic.

Speaking to journalists late last month, the Prime Minister declared that, by the time the Energy Council meets in April, we can expect to see the “national energy guarantee” fully fleshed out and in a position where it can take the energy market “into a new world where we have reliable, affordable energy and meet our emissions reduction targets.”

I’m tempted to say “Yes, Prime Minister” but that would be naughty and I don’t want Santa to just give me a lump of coal — and I’d like Turnbull to be right.