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The coal power game

The coal power death watch is a lively business; never a week goes by without some pundit or media commentator explaining why the fuel’s demise draws ever closer.

Put “war on coal” in to Google News and you will currently get more than 4,300 international entries, those sooling on the warriors far outnumbering those complaining about the campaign.

The local AGL Energy generation statement in late April has been widely portrayed here and overseas as another nail in thermal coal’s coffin.

The really odd thing, however, is that, notwithstanding all the noise and the many perceived harbingers of the coal’s imminent demise as a power generation source, hard facts suggest that this death is much exaggerated.

Thus the federal government’s Department of Industry & Science, in its latest review of resources and energy, states: “The large volume of new coal-fired power capacity under construction or approved, particularly in non-OECD countries, indicates that coal is likely to remain a primary source of generation.”

It adds: “The relative abundance, low cost and geographic dispersion of coal resources and the reliability of coal-fired technology will continue to support its use.”

The departmental review, undertaken by its Office of the Chief Economist, acknowledges that concern about the effect of coal use on the environment has prompted many countries to reconsider their energy mix. In particular, the US and some European governments intend to phase out the use of conventional coal in power generation over the medium to longer term.

“While these policies undoubtedly will reduce the demand for coal in advanced economies,” the report says, “this will be more than offset by increasing coal use in emerging economies.”

In a situation where the development of electricity supply is essential for economic expansion and better living standards in emerging economies, it explains, building coal-burning plant is attractive because the technology is established and reliable and because reserves of thermal coal are widely accessible.

Nor is coal-fired generation stuck in the past.

The departmental review points out that a lot of the new projects are based on modern supercritical or ultra-supercritical technologies that emit less carbon dioxide and other pollutants.

(A glance at the coal generation literature also throws up the wide-ranging efforts being made to pursue advanced USC technology which could see smaller plants being built than in the past, with an operating life of around 25 years and much better emissions controls.)

The federal government report predicts that world trade in thermal coal will increase by 2.8 per cent a year over the rest of the decade to reach 1,235 million tonnes in 2020.

The major thermal coal importers, it notes, will account for some 900 Mt of this – compared with less than 300 Mt in 2000 and about 600 Mt in 2010 – despite the past 15 years being a period during which fervor to address the perceived problems of climate change have been at their height and UN calls for urgent action have grown ever louder.

The five biggest receiving players in this trade are the European Union, Japan, South Korea, India and China.

Last year the latter imported 219 Mt, a decline of nine per cent coinciding with heavy regional rainfall and a rise in domestic hydro-electric generation of 25 per cent.

Its 2020 imports are predicted to exceed 260 Mt.

While much is made of China’s plans to shut down uneconomic coal plants, and especially those contributing to urban air pollution, as well as about its burgeoning development of renewable generation in the shape of wind and solar power, the country has around 87,000 megawatts of new projects under construction or approved.

Meanwhile, other Asian countries (India, South Korea, Vietnam, Malaysia and the Philippines in particular) are building or have approved coal-burning power stations with an aggregate capacity of 170,000 MW.

By comparison, Australia has a black and brown coal generation fleet with capacity just under 29,000 MW, of which some 9,000 MW is considered surplus to requirements in an over-supplied east coast market.

What the Department of Industry & Science commentary demonstrates is that the dominant media theme of the “death of coal” is guff once the full global picture is taken in to account.

How this picture may change further over the next 10-15 years with further innovation – for example in developing advanced USC plant and commercially viable carbon capture and storage technology – is open to much speculation.

It isn’t going to happen in isolation – innovation in renewable generation, in small modular nuclear power plants and energy storage will see to that – but it seems very likely to happen and its take-up in advanced and developing economies will be affected by regulations and comparative costs as well as power security and affordability concerns.

What is clear from present project development is that those hammering nails in to coal’s supposed coffin need to get out more.

Many on this side of the debate are ill-informed, naïve and ideologically blinkered, but not all – the more devious of the anti-coal warriors surely appreciate that perception can become reality and their prime purpose is to create the widest possible belief that coal’s day is done in order to gain sufficient political traction to make their dream happen at least in countries like Australia.

A greener shade of black

Media headlines still matter a lot.

They are what catches the eye of casual readers (the vast majority) and pull them in to reports, often only for the first two or three paragraphs.

They play a role in forming public opinion all by themselves. One could cite any number of examples in recent times.

For most of my lifetime people who didn’t like stories or headlines could comfort themselves with the thought that the newspapers containing them would be wrapping fish and chips or garbage within 24 to 48 hours.

Not so in our brave new world of the Internet.

Now headlines live on down the years and a whole slew of them on one page, say in Google News, have a collective influence way past the point where your average sub-editor can even remember writing them.

These thoughts came to mind on Saturday morning when I opened Google News and typed in “AGL Energy” to catch up on the company’s recent statement of corporate intent.

“AGL turns its back on coal-fired power,” said the first one. “AGL Energy to wash its hands of coal-fired power,” said the next. “AGL turns its back on coal,” the third. And so on.

These assertions have appeared in some of the widest-read papers in the land, repeated on the Web. Via the Internet, they are travelling the globe, bringing joy to the green ideologues.

One of our most serious newspapers has published a headline that declaims “AGL’s decision to end coal another nail in the coffin of big thermal coal.”

Hundreds of thousands of Australians will have been informed by these headlines by the week’s end.

The problem is that they are misleading. Very misleading.

AGL is a business controlling generation assets that, in the past financial year, produced 20,730 gigawatt hours of electricity (roughly equivalent to what all the households in New South Wales use) – of which 4,000 GWh was delivered from renewables (wind farms, hydro-power and a small contribution from large-scale solar plants).

The capacity behind this production is 10,628 megawatts – of which 4,640 MW is in two black coal power stations in NSW and 2,210 MW is in Victoria’s largest brown coal plant.

If there is one certain thing about east coast energy supply, it is that the company will not be “turning its back” on or “washing its hands” of these assets in any medium-term time frame with one caveat – the fate of the oldest, Liddell (2,240 MW) depends on the future of the Tomago smelter in the Hunter Valley.

The company chairman is on the record as stating that, if Tomago stays open, Liddell keeps operating.

So what is AGL actually saying?

The policy statement it released on 17 April commits it to (a) not build, finance or acquire any more conventional coal-fired power stations, (b) not extend the operating life of those it currently owns, (c) close all three by 2050 (Liddell reaches the end of its designed working life in 2022) and (d) improve the greenhouse gas efficiency of its thermal operations (which include gas plant).

This is not a corporate commitment to “turn its back” on coal in any meaningful sense of that expression.

The Bayswater power station in the Hunter Valley can deliver 15,000 GWh a year, enough to power two million homes. What it sends out depends on market demand.

As the AGL website says, “Bayswater will continue to be a centrepiece of the NSW electricity system.”

Its designed life extends to somewhere in the 2030s.

Loy Yang in the Latrobe Valley also produces 15,000 GWh of electricity a year. It, too, has a designed life out in to the 2030s.

A commitment not to extend the operating lives of these plants does not mean the company will not spend many millions of dollars on maintenance to meet community needs for reliable power supply.

Back in October, for example, AGL completed a $60 million upgrade of Loy Yang’s digital control system “to ensure energy security and reliability of supply in Victoria.”

I think that AGL had a responsibility (to the community and to shareholders) in its statement to make this point absolutely clear, more so than just saying its “key role” in pursuing carbon abatement comes with “providing secure and affordable electricity to more than 3.8 million households and businesses.”

The headlines and the tone of the coverage signal that the importance of the second bit has flown way over the collective head of the media, a major conduit to those customers and the broader community.

The three-page statement can be found on the AGL website.

The real meat in it, so far as I am concerned, is right at the end.

The company wants policymakers to consider electricity generation policy that encompasses (a) emissions standards for all new power station, (b) regulation to drive the progressive closure of older, emissions-intensive coal plant or supports their retrofitting with CCS technology and (c) continued incentives for renewable energy with increased scope to include all zero and near-zero emission energy sources.

The first of these is part of the Obama carbon plan in the US. The second is policy in Canada. Neither is part of the recently-published Australian energy white paper.

All three are significant policy issues that deserve serious attention.

So, too, is the AGL view that, as a substantial exporter of fossil fuels, Australia has a strategic interest in giving priority to developing and deploying “new or improved near-zero technologies” – with a special mention again for CCS.

Unfortunately, rather than take up the substance of this statement, the mass media are yet again treating us to superficiality, encapsulated in “AGL to close the book on coal-fired power.”

In my time managing the Electricity Supply Association, during which I also edited “Electricity Supply Magazine,” I once wrote a headline that deeply annoyed a Queensland generation CEO – it said his business was “painting itself a greener shade of black.”

Resurrecting it for this post does not seem unreasonable.

What’s next?

Contrary to what persons of strong green views may argue, the biggest success story of the global energy scene in the past 6-8 years has been the transformation of the United States in to the world’s largest producer of oil and gas.

Australia’s efforts in roughly the same timeframe to become the world’s largest exporter of LNG, a status to be reached around 2018, also surely ranks in the top 10 success stories, especially when you bear in mind the coal seam gas role.

Today, the question par excellence for the US shale industry, the Australian gas industry and a raft of other segments of the energy scene, including developments relating to renewables, not least the progress of energy storage, is “what’s next?”

Nowhere does this apply with greater importance to America’s petroleum industry.

With oil prices continuing to fall, can the US shale industry avoid a substantial slowdown?

Included in this thought is the issue of how far can global prices drop before maintaining American shale production becomes too hard?

Which leads on to how long the Middle East producers can sustain their present spoiler stance?

The big issue is not whether global oil prices will recover but when they will, under what circumstances and how far the rebound will travel?

Embedded in all this is the question of whether the Americans can become substantial exporters of LNG and, of course, what that means for the much-touted next wave of Australian export gas developments.

This is of geopolitical significance, unlike the domestic gas contretemps that continues to get much airplay in Australia.

Of course, the east coast gas issue in important locally – it is at least potentially disastrous for the manufacturing sector if policy continues to be mishandled – but this is not even a fourth-order concern for the global energy community.

A salutary lesson in geopolitics is the $US70 billion takeover of the BG Group by Shell. It matters here but it matters far more elsewhere; not least in Japan.

Australia became the largest Japanese source of LNG two years ago. By 2025 our exports of gas are expected to account for 30 per cent of Japan’s imports.

Shell’s share of the Japanese market will grow because of its acquisition of BG’s Queensland assets and also because of BG’s share of the output from two American LNG developments, both targeting shipping gas by the end of the decade.

Down the track Shell could also be selling gas to Japan from Tanzania and Canada.

Throwing such a big stone in the pond inevitably raises its implications for further M&A activity in Australia and elsewhere in the world. This is now a topic of much speculation – including gossip about companies with interests in Papua New Guinea, which is possibly going to be a supplier of 10 per cent of Japan’s LNG by 2025.

(As an aside, by 2025 we can expect to have held four federal elections and a similar number in States here where the gas debate is a hot potato. Think on, as they say in Yorkshire.)

All of which makes the Australian Petroleum Production & Exploration Association conference in Melbourne next month of particular interest to this commentator (and many others, with well over 2,000 people from up to 30 countries expected to attend the event and 12,000 square metres of exhibition space sold out well in advance).

As a veteran of more than 30 APPEA conferences, of which I oversaw management of 11 when CEO of the association, I can think of all sorts of reasons why the event is Australia’s premier energy conference – but the “What’s next?” question is the really big drawcard for May’s forum.

My personal pick of the APPEA offerings in this context is the presentation to be given by Jonathan Stern of the Oxford Institute of Energy Studies on the state of play in LNG marketing and the potential impact of pricing and geopolitics in Asia. He will then moderate a panel discussion that will involve Peter Coleman of Woodside, David Knox of Santos, Mitch Ingram of QGC and Deloitte’s American oil and gas consulting head, John England.

What they have to say will not be the only word and certainly not the last word on the state of play but I reckon it will send ripples out beyond the conference.

Perhaps the biggest issue on the table for Stern and his panel’s attention will be whether a period of LNG price weakness will be seen over the rest of this decade, whether the commodity’s link to crude oil prices is sustainable and how new projects can be brought to market, especially in this country, without a big fall in development costs?

All this takes on special political significance for us at a time when iron oil and coal exports have the collywobbles and another boost for government income (beyond the $13 billion a year the current industry will be delivering in taxes and royalties from 2018 onwards) will be more than merely welcome.

With a score of plenary papers and some 90 business and technical presentations over the three days of the event, the conference offers a whole raft of other questions and answers in the “What’s next?” category, but I’m betting on the Stern gang’s contribution ending up providing the big take-home message.

Triage strategy

We live in interesting times when a projection that there is now not expected to be a winter domestic gas shortfall in eastern Australia in the rest of this decade due, in particular, to significant demand retraction by large industrial users is greeted by radicals as good news.

Even the mainstream media are curiously unable to see the importance of this demand development, with its implications for jobs.

The Fairfax Media report, for example, took seven paragraphs to get round to the point that the change in outlook is mostly due to industrial users struggling with rising prices.   “The Australian” turned to this aspect in the 18th and last paragraph of its report.

The Australian Energy Market Operator report projects a 17 per cent decline in industrial, commercial and residential use of gas between last year and 2019. This, it says, is particularly the case in New South Wales and Queensland “where a number of large industrial gas consumers are closing.”

I have yet to find an media coverage of the reaction of the Australian Industry Group, which said “the biggest reason that we are dodging a shortage is that gas consumption is expected to plunge as high prices drive users, including manufacturers, to close down or switch fuels. Gas-fired generators are throttling back in favour of cheaper, but higher emissions, coal. We are essentially making ends meet through triage.”

To this, the NSW Business Chamber adds that AEMO’s latest forecast confirms soaring gas prices will have a “crippling impact” on manufacturing businesses “and in some cases force them to close, translating in to significant job losses across the State.”

The Chamber points out that 45 per cent of NSW manufactures rely on gas as their primary energy source and many small businesses use gas, collectively quite a large amount, for food preparation and heating. Many manufacturers, it says, will not be able to afford the costs involved in fuel switching. The impact will be especially felt in western Sydney and regional NSW.

The Chamber also comments that the AEMO “no shortfall” forecast “does not mean that NSW is magically off the hook.”

Relying on resources in other States, which the green movement is pleased to identify as a solution, ignoring the fact that in Victoria and elsewhere it is campaigning vigorously against new gas developments, comes with a cost of $1 to $3 per gigajoule for pipeline transmission costs, the Chamber says.

It is calling on the re-elected Baird government to get its act together to provide for a timely and transparent assessment process for coal seam gas projects, using scientific evidence as the cornerstone for its approach.

AiG, which is pleased the federal government is pursuing an examination of the gas market by the Australian Competition & Consumer Commission (something that will take the next 12 months) even as the upstream petroleum lobbyist, the Australian Petroleum Production & Exploration, modifies its stance — initially saying yet another inquiry isn’t needed — to confidence that the review will show the market is working, makes the salient point that “you can’t have a gas market without gas” and urges policymakers to understand that the entry of new resources is critical to consumers.

APPEA sees the AEMO forecast as highlighting the need for more gas to be developed to put downward pressure on gas prices.

Now is the time, it asserts, to ensure that gas exploitation in NSW and Victoria is not hampered by moratoriums and “excessive regulation.”

There are, I think, a couple of points that need to be underscored.

One is that gas price is not, and will not be, the only factor in a manufacturing malaise; the suite of other higher input costs bedevilling factory owners, including employee remuneration, is a witches’ brew that, for example, has influenced companies like Incitec Pivot to switch new development to America.

The other is that gas prices are not going to revert to what they were at the start of this decade because the costs of exploration, production and transport are higher now than they were then. The point is not that more supply will cause prices to fall but that it can contribute to preventing them going much higher.

While I am at it, the rhetoric of supporters of renewables, and their media camp followers, is markedly different when talking about, say, the RET than it is when greens and radicals talk about new gas developments. The promise of some 9,000 more jobs if the RET is re-aligned at a higher level than the federal government wants needs to be set against the back-of-the-hand approach to the employment aspects of baulking gas development.

It is one thing for the greens to pursue this approach — their track record is well-established — but another entirely, in my book, for the more serious part of the media to also ignore the point.

And, while I am on this subject, I have been reading with interest the new Australian Bureau of Statistics report on employment in the renewables sector.

For a start, the ABS finds that renewables-related full time equivalent employment in 2013-14 was 12,690 not the 21,000 number (and sometimes higher) bandied around by the denizens of the sector. Of this, 1,170 people were bureaucrats and another 1,610 were employees of the long-established hydro-power generators. Wind farm employees numbered 2,690, double what they were in 2011-12. The largest number of workers was to be found in the rooftop solar sector, totalling 6,120 and 4,000 down on 2011-12 before the State governments started to make substantial changes to feed-in tariff schemes.

Contrast these numbers with the latest claim by Manufacturing Australia that, unless gas supply is reformed and increased, “up to 83,000 direct manufacturing jobs could be lost.” The lobby group adds: “If we continue on the path we are on, Australia will lose much of our gas-intensive manufacturing industries and we’re not likely to get them back.”

Fuels’ gold

At a time when the need for governments to raise more money in taxation is a top of mind issue for politicians, economists, NGOs and the media – and when the Senate is running an inquiry trying to establish that companies don’t hand over enough of their profits – it would be a darned good idea, I think, for responsible legislators to take a lead out of the upstream petroleum industry’s propaganda playbook.

If you go on to the “Our Natural Advantage” website (www.ournaturaladvantage.com.au) run by the Australian Petroleum Production & Exploration Association, you will find an odometer-style display that is constantly clicking over.

When I opened it on Sunday, it told me that “since January 2013 our industry has contributed $20,053,197,009 (yes, $20 billion-plus) to Australian governments to fund schools, hospitals and infrastructure.”

Like so much of the data of our modern era, it is a number that flies straight over the heads of more than 90 per cent of the population.

In an attempt to counter this, APPEA also points out that the almost $9 billion a year its member companies are forking out at present in company tax, the petroleum resource rent tax, royalties and so forth can meet the cost of 7,000 new hospital beds or pay the wages of 100,000 nurses.

Meld this with what the mining industry pays and you come up with a very significant income from the resources sectors for eight out of nine of Australia’s jurisdictions (there’s not a lot of resource development in the ACT).

The Minerals Council of Australia is telling the Senate probe at the moment that its industry paid $156 billion in federal company tax and State and Territory royalties between 2004-05 and 2013-14.

And the MCA is not losing the opportunity to rubs the Greens’ noses – Christine Milne & Co are front and centre of the committee inquiry – in the fact that the coal industry, which they want closed down and simultaneously to pay more taxes, has coughed up more than $17 billion in corporate tax since 2006-07.

Royalties paid by coal businesses in Queensland and New South Wales, the association adds, were worth $3.1 billion last financial year and are expected to add up to more than $18 billion between now and the decade’s end.

(By coincidence, the House of Representatives has a committee inquiry going on at present in to whether something like 100 environmental campaign organizations are entitled to charitable – ie tax-exempt – status because their primary focus is political activism. At least some of the tax revenue foregone is being made up by dipping in to the rivers of black gold flowing from the coal and petroleum industries against which these organizations campaign so stridently.)

More broadly, the public mind is attuned today to media stories about the decline of the mining boom and, not far behind, the perspective that the promised new wave of LNG developments is in strife because of the current state of global oil prices.

Mostly lost to view is the fact that the current wave of LNG projects nearing completion will see the upstream petroleum industry’s tax contributions rise to about $13 billion annually by 2020.

Take this as an annual average for the ‘Twenties and you are looking at an increase in tax contributions from one sector over the next decade of some $40 billion in aggregate.

How many other areas can Federal Treasurer Joe Hockey and his State/Territory counterparts identify that will deliver such largesse without them having to raise a finger, let alone incur the howls of wrath from vested interests that every other tax grab elicits?

Whatever else the new energy white paper hasn’t done, it has rightly recognized the gas export sector, underpinned by massive foreign investment, is “providing an enormous opportunity for the nation’s economy.”

The paper also emphasizes that energy resources sector exports as a whole – coal, gas, condensate and uranium – are “integral to maintaining a strong national economy,” but neither it nor the government in more general terms, along with those States that most benefit from resources activity, paints the community financial benefits in sufficiently strong colors for the voters.

It’s true that the supportive white paper message will be lost anyway on most people in voter land because few will even know that the document exists, let alone what it contains, and even most of these people will read only a small part of the not especially lavish mainstream media coverage.

The job of really pushing home the values of energy development to the broad community has to go far beyond what’s in the white paper.

Resources companies and their lobby groups do PR continuously on a sectoral basis, of course, but it also mostly tends to be in terms that go straight over the heads of The Mob (as Paul Keating liked to call us when he was PM) and it doesn’t get done collectively in a way that really counters the ideological headline hogs.

The energy sector, and not least the gas business, is being subject to systematic demonization that, via mainstream and social media, is feeding back in to increasing community antipathy to activities on which it is, in fact, critically dependent but about which it is essentially ignorant.

I’d like to suggest to Industry & Science Minister Ian Macfarlane that the 2015 APPEA annual conference, which is being held in Melbourne next month at a venue in the heart of Victoria’s latte belt and at which he is a keynote speaker, is an opportunity to talk up the contribution to the well-being of the community through direct and indirect tax payments of not just the upstream petroleum sector but the energy industry as a whole.

Sure, government needs to represent the community interest through effective policies (eg on carbon abatement) and regulation – and to do the job efficiently rather than via the dog’s breakfast currently provided – but does it not also have a role in speaking up about benefits delivered by the resources sector in terms “ordinary families” (that beloved political phrase) really appreciate: the value they derive in the cash flow going in to hospitals, schools, roads, public transport, police and emergency services and social welfare?

The energy white paper could – in my book, should – have really socked this home, but it doesn’t.

The political trick du jour is to throw the “social licence” cloak over the energy sector at every opportunity.

Of course the industries concerned have to be constantly improving their community standing and some have not done it well – but using this line is also a cop out for policymakers, who are so dependent on the rivers of tax gold derived from resource investment, to dodge speaking out strongly and clearly to voters to stress what they are getting from these activities in terms they can understand.

Missed opportunity

Is the energy white paper, published this week, fully fit for purpose in terms of producing a strategy for, say, the next 10-15 years?

The short answer is “No.”

A clue to an inherent weakness in the paper can be found in the words of the Minister for Industry, Ian Macfarlane, who describes it as providing a framework for coherent and consistent energy policy.

It is not unreasonable, I think, to point out that the 2012 white paper published by Martin Ferguson for Labor did the same.

Merely updating that exercise 28 months later is not the name of the game so far as energy investors and major users are concerned; they want robust policy – which is rather more than the government claims for the document, to wit “robust, resilient and long-lasting principles.”

Of course, the paper has its good parts.

An aspect that should be hailed is its focus on energy productivity given the potential for this to reduce both user costs and carbon emissions. (This should not be brushed aside because green critics grab for headlines by chanting words to the effect that Abbott’s administration wants Australia to “double down on fossil fuels.”)

Another aspect that should be given approbation is continuing government commitment to market-based gas policy.

There is also a controversial decision to launch an ACCC review of gas markets this year (bothering suppliers but pleasing large users).

But a core flaw is that the government cannot even bring itself to acknowledge what energy investors are constantly banging on about: the need for a bipartisan and integrated effort by the Coalition and Labor to end years of conflict in the broad area of energy policymaking.

The brochure synthesizing the paper begins by stating that the Coalition made an election commitment to give suppliers and consumers “certainty and confidence” but the government is unwilling or unable to address why this is not going to happen in the present political climate.

Yes, the paper canvasses the federal government’s desire to obtain timely, co-operative action on energy policy management from the States and Territories – but it does not come up with any bold statement of how to fix the problem. More of the same is not a solution.

Even worse, the paper does not try to grapple with the fact that we cannot make effective energy policy without a settled national position on carbon abatement management. (By “settled,” of course, I mean not subject to be rewritten by the other mob after the next election.)

Macfarlane’s answer when challenged by journalists is that carbon policy is work in progress for a Cabinet committee currently looking at what Australia carries to the UN conference in Paris in December – but this means that the eventual decision could require a different approach on energy policy and is almost certain to be assailed by Labor (with eyes fixed on its grappling with the Greens in marginal seats) all the way to the 2016 election.

It is hardly encouraging that the Cabinet could not co-ordinate its work in these twin areas.

As Energy Supply Association CEO Matthew Warren has said in reacting to the paper, any strategy is “incomplete until it directly considers and addresses climate change policy along with its impact on the economy and the energy sector.”

The white paper makes much of the need for investment to achieve economic development, productivity and affordability but treating carbon abatement as an add-on for future policy attention – instead of embedding emissions management for the long haul in energy strategy – simply prolongs uncertainty for investors.

This is manifestly not just an issue for the Coalition.

Labor is no less culpable.

An example of the inability of the pair to get beyond combat politics is being played out before us at present through the thrust and counter-thrust of the renewable energy target row.

And green ideologues are already calling for the new Labor governments in Victoria and Queensland to take individual action to counter any federal resolution of the RET at a level below the magic 41,000 GWh they hold so dear.

Should this occur, as Warren points out, it will continue the multiple and uncoordinated carbon programs pursued by State and federal governments from both sides of politics that are at the heart of the era of energy policy uncertainty we are now enduring.

Standing back from the fray, it is not hard to see validation in the RET row for an accusation levelled last month by the Energy Policy Institute: that the body politic has made the energy industry a political football because governments (and this applies to both main political parties) have lost control of the agenda.

We seem trapped in a situation characterized by never-ending activism by environmental groups aimed at sensitive areas on the electoral map and political reaction in the form of attempts to pick technology winners, myopic government interventions (with frequent changes of leadership not helping) and policy reversals to suit polling agendas.

Has the new energy white paper raised a plan to lift us out of this morass? Has it stood tall and called for all this to stop?

The depressing answer is that it has not.

Of course, there are points of broad mainstream political convergence: both the Coalition and Labor appreciate the ongoing role of fossil fuels to support our standard of living and to help meet the significant energy needs of our Asia-Pacific neighbors – and the fact that both boost the national economy.

Only the Greens and their fellow travellers can see the use of, and trade in, coal, condensate and gas being abandoned – and at best they account for one in 10 of Australian voters, a political market share that is not growing.

It does indeed, as the saying goes, take two to tango, but, in important respects, it is nonetheless open to debate whether the Coalition and Labor are even on the same strategy dance floor and I can’t read in to the white paper any commitment from the governing party to seek to address this serious failing in the best interests of the community as a whole.

Australia cannot “map a powerful future” – which is the claim made for the new white paper by Macfarlane – unless the mainstream political divide on so many energy-related issues can be bridged, not just federally but in the meeting rooms of the Council of Australian Government and within the States and Territories themselves.

Assigning blame to the Abbott government and not challenging Labor to considerably lift its game – which is essentially what the media are already doing with respect to the white paper – is not going to see this situation change.

Both mainstream parties need to look beyond the election cycle and the six-monthly CoAG meetings.

Perhaps, as the Energy Policy Institute suggests, the national interest needs not just fresh, holistic thinking but also additional institutional capacity to implement change.

 

 

The intelligent grid challenge

George Maltabarow makes an interesting point: if Thomas Alva Edison could return to us today, he would recognize all the elements of the modern electricity supply system but, if Alexander Graham Bell were to return, there is no way he could recognize the modern telecommunications system.

“Perhaps,” says Maltabarow, “in another decade or two Edison would struggle too.”

Maltabarow, managing director of Ausgrid from 2004 to 2012 and now chairman of the Australian Energy Research Institute at the University of New South Wales, will chair an intriguing one-day forum that takes up the “smart grid” issue for the Academy of Technological Sciences & Engineering in Sydney next month.

Intelligent Grids – Technology Pathway to our Energy Future” will explore how the power delivery system, which underpins almost every aspect of our developed world life, can change in today’s fast-moving technological environment, what the barriers are to a different pathway and, highly relevant to the interests of consumers, how should grid services be charged?

The cast of speakers will include ATSE president Alan Finkel, Steve Sargent, the former global vice-president of General Electric, Mike Cleary, chief operating officer of the Australian Energy Market Operator, Glenn Platt, program director of CSIRO’s Energy Transformed Flagship, the University of Sydney’s Tony Vassallo (on “the game changer: energy storage”), Hugh Gleeson, the head of United Energy, Adrian Clark, regional CEO of Landis & Gyr, electricity networks consultant Mervyn Davies and the Grattan Institute’s Tony Wood.

Apart from general interest, one of the big reasons I’ll be going to this forum is that just a month later I will find myself co-chairing Quest Events’ second NEM Future Forum (24-26 June) which is all about the implications of new power technologies, shifting consumer behaviour and policy uncertainty on Australia’s east coast.

It would be hard to find a better training session for this chore than the ATSE intelligent grids forum.

As Maltabarow says, electricity grids here and around the world are now at a crossroad in terms of both the application of new technology and the disruptive changes afoot for network utilities’ business models.

“The trend towards distributed generation will continue and most likely accelerate regardless of what the market institutions, policymakers or politicians do,” he says to me in a long weekend exchange.

The more enlightened network operators are at least thinking about what business they should be in, he adds.

In Maltabarow’s view, access to cheap capital and a skilled workforce should allow the utilities to leverage their existing asset base to develop new businesses that facilitate consumers producing power themselves while making intelligent use of the grid to export energy, charge electric cars when convenient and/or to monitor the state of their storage systems and local network congestion.

Sophisticated system controls are a given for this new model grid, but still more important, Maltabarow argues, will be the creation of an appropriate pricing set-up to enable efficient investment by the network operators, third party businesses and consumers.

Maltabarow, whose wry sense of humor is well known and appreciated through the energy supply community, adds: “The mantra of the green movement that getting off the grid, like motherhood and being a vegan, is a good thing and the pinnacle of modern virtue will gain more and more traction unless grid users can be brought to understand that intelligent use of networks can achieve the twin goals of carbon emission reductions and lower energy costs more efficiently (and sustainably) than other options.”

He sees the distribution businesses becoming more like local power networks over time, not unlike the LAN in the telco space, with modern communications technology enabling two-way power flow as well as an information that, he says, “will transform the industry.”

As well, Maltabarow believes, the high voltage transmission system will continue to be important, even as its energy volumes decline, because, on the east coast, for example, it may be delivering wind power from north-west Tasmania to the Sydney CBD or perhaps nuclear power from South Australia to the heart of Melbourne.

For the politicians, it seems to me, the critical challenge here is both to hear and respond to the will of the community (voters) and to avoid falling for the amateurish and populist decisions ideologues and rent-seekers seek to thrust on them by picking winners and making disastrous interventions that, after consumers have felt the inevitable pain, then need to be rectified in the teeth of opposition from vested interests benefitting from the original decision-making.

You need look no further than the cack-handed way politicians have intervened and re-intervened in the rooftop solar space in the past decade – and yet failed to date to deal with the network tariff issues inherent in a shift to PVs – to appreciate my point.

The challenges the ATSE forum and the NEM Future forum will address are highly important but, at least as much so, I suggest, is how the serious issues of network transformation are conveyed effectively in to the public debate to gain community support for decision-making.

Given the interplay between “intelligent grids” and the consumer hip pocket, this cannot be treated as a second order issue.

PC runs rule over gas

Do you remember that scene from the “Crocodile Dundee” movie where the hero is confronted on a New York street by a mugger and, producing a ginormous weapon, says: “Call that a knife? This is a knife.”

The line resonated with me this morning when, fresh from the pretty substantial effort of the Australian Domestic Gas Outlook conference in Sydney last week, I opened the Productivity Commission website and read its magisterial, 169-page new research paper “Examining barriers to more efficient gas markets.”

If ever there was a must-read for stakeholders in the gas game being played out on Australia’s east coast, this is it.

Initiated by commissioner Philip Weickhardt, who retired from the Productivity Commission at the end of last year, the project is now headed by Paul Lindwall and it contains some curve balls and bouncers for the players as well as a wealth of carefully crafted analysis.

Those in a hurry probably don’t have to read more than the one page of key points.

The commission opens by saying that the integration of Australia’s east coast gas market with the Asia-Pacific region “represents an opportunity for the community to earn a higher return from its substantial non-renewable resources.”  This, it asserts, will result in a net benefit for the community.  That’s one in the eye for a whole regiment of anti-LNG ranters and their tabloid media fellow travellers for a start.

Acknowledging the impacts of opening the export market locally, including “material costs” from higher gas prices for some, the commission warns policymakers that attempts to cope with the cries of pain from affected consumers by, for example, pursuing domestic gas reservation are “unlikely to be efficient or effective in the long run” and “could distort important signals for adjustment.” “Governments should be mindful that policies that interfere with the market could undermine investment incentives including (bringing on) new sources of gas.”

As well, says the commission, policies, such as use-it-or-lose-it mechanisms, designed to accelerate gas production, risk bringing forward supply in ways that reduce the benefits the community obtains from the resource.

Noting that the resistance the gas suppliers are getting from some part of the community is “partly due to the poor early record of some companies in dealing with landholders and local communities,” the commission sees scope for improvement in legislated compensation to better reflect landholder costs when they negotiate access agreements as well as the decline in value of properties. It suggests there is scope for a voluntary, industry-wide code of practice for community and landholder engagement.

Government recourse to moratoriums — for example in New South Wales and Victoria — get the commission’s elbow. Weigh the expected benefits of these moves against the costs such as higher end user gas prices and reduced royalty and taxation income, it suggests. Use of the tactic in NSW and Victoria, its report comments, may necessitate the development of more expensive sources of energy.

“Sound risk management does not equate to eliminating all risk,” the commission opines. Scientific evidence suggest the technical challenges and risks can be managed through a well-designed regulatory regime underpinned by effective monitoring and compliance enforcement.

Market interventions such as the way gas transmission capacity is allocated and mandatory capacity trading requirements also require benefits to be weighed against costs, including the risk of undermining future pipeline investment, it also argues.

There is a lot of talk about the exercise of market power by gas producers and pipeline owners — it cropped up a fair bit during last week’s Domestic Gas Outlook conference — but the commission raises the possibility that high consumer prices and large consumer difficulties in securing new gas contracts could just reflect the risks and uncertainties to be encountered in a market undergoing considerable structural adjustment.

“Markets are dynamic,” the commission points out in the research report,” and participants need to adapt continually to a multitude of forces — the fundamental driving force behind the increase in prices on the east coast is the increase in the value of the fuel. “It is a direct result of producers removing a barrier that previously prevented them from accessing markets that place a higher value on the gas.”

On the social licence issue, the Productivity Commission says upstream petroleum explorers and producers need to give “further thought” to early engagement directly with affected communities rather than just on compensation for landholders. It adds the interesting comment that a social licence is not necessarily an accurate reflection of best interests across a whole jurisdiction or even the region hosting the gas activities.

The code of practice it suggests would need to be developed in consultation with, and endorsed by, key industry and landholder groups, the commission comments, raising the idea that the CoAG Energy Council could help its development and promoting the further thought that there is value in State bodies that assist the interaction of landholders, local communities and the industry — e.g. the Queensland GasFields Commission, an independent statutory agency.

The Productivity Commission also suggests that “there is a strong case” for the use of environmental insurance and assurance mechanisms, funded by the gas industry, to ensure that land affected by its activities will be rehabilitated when they are concluded and the need to do so weighs on investment decisions from the get-go. Environmental bonds are widely used across Australia, it points out.

The commission emphasizes that it has set out to provide an economic perspective for gas issues in eastern Australia. It is a decidedly useful contribution to the debate but its length will militate against it getting much traction in the public rows. I hope the mass media don’t just ignore it and even more that policymakers and their advisers devote some quality time to getting to grips with it.

 

 

Where now for NSW gas supply?

Martin Ferguson delivered a thoroughly sensible talk to the Australian Domestic Gas Outlook conference in Sydney last week.

Now that the fevered atmosphere of the the New South Wales election, well won by Mike Baird for the Coalition, is out of the way, it is worth focusing on what Ferguson has to say about gas development, not least because the poll has highlighted the ongoing voter antipathy to the industry in the State’s coastal north.

The media focus in the aftermath of the election unsurprisingly is on electricity network privatization and infrastructure development that will flow from the sales, but the gas supply situation can’t be shoved back in the closet because its resolution is a real and increasingly urgent need.

Ferguson at ADGO made clear his disdain for politicking for short-term gain that “does not care about jobs or energy security security or investment confidence.”

This was a swipe at NSW Labor’s late campaign threat to kill the $2 billion Pilliga coal seam gas project near Narrabri, a step described by the Australian Petroleum Production & Exploration Association (whose advisory board Ferguson chairs) as an attempt to plagiarise the policies of the Greens — a wasted effort anyway because the Greens appear to have snatched the two NSW north coast seats that the Sussex Street schemers were hoping to take from the National Party.

In making this move, Labor, as Ferguson pointed out, has damaged its credentials on the issue of sovereign risk.

“Call me old-fashioned,” Ferguson told the 200-strong ADGO audience I chaired, “but I still subscribe to the theory that good policy makes for good politics. The short-term allure of opportunism needs to be seen for what it is.”

This is something that needs to be brought home to a wider political audience than just the rather inept schemers in Sussex Street, Sydney.

The critical need, as Ferguson pointed out, is for gas suppliers, consumers, unions and governments to redouble efforts to put in place the regulatory fixes required to deliver an efficient and secure domestic energy sector.

“When people tell you that developing more natural gas will not put downward pressure on gas prices, they’re actually trying to tell you the laws of supply and demand have been repealed,” Ferguson said.

The situation is now at a crossroad, he argued. “There is a real risk that we will fail (to build on the opportunity of more extensive domestic gas infrastructure provided by the east coast LNG projects).”

One of the things that ADGO underlined, at least for me, is the fact that there is certainly more gas available in the Cooper Basin, the Northern Territory and Bass Strait, but the cost of getting it to NSW, where it is most urgently needed, is such that it is not going to be “cheap,” which in the minds of many, including not a few manufacturers, is where it was 3-4 years ago.

This has important implications for a lot of factory owners, but gas costs are not their only input problem as they struggle to survive, a point also made at ADGO.

There are some in the Labor Party who now want to portray Ferguson as a maverick and worse — but it is worth noting that Gary Gray, the present federal spokesman on resources and energy (who made a point of saying to the ADGO audience that he, Ferguson and the Liberals’ Ian Macfarlane all occupy the “extreme middle” of the energy debate) was at pains last week to highlight the expert advice available to governments that the impacts of coal seam gas extraction on groundwater systems are understood and can be minimized and mitigated.

Gray set out the challenge clearly for State governments: to maintain a century-old land compensation regime for State-owned resources and more gas production, generating a long-term revenue resource through royalties and rents, with the best possible environmental protection.

Federal Labor’s objective, he said, is to “develop a domestic gas sector that supports industry, families and communities.”

You have to be smarter than me to see how this squares with the politicking of Luke Foley and NSW Labor in the last fortnight of the State election campaign.

The development of natural gas from coal seams, shale, tight geological formations and offshore, Gray said at ADGO, “will generate many thousands of jobs in maintenance and production, continuing to support Perth, Adelaide, Melbourne and Brisbane as major technology hubs for the oil and gas sector.”  And maybe in due course Newcastle?

The real choice facing policymakers, Gray added, is gas production with modern techniques or no production at all — “and this makes for an easy choice.”

Try telling that to the Sussex Street apparatchiks.

Or to the new crew of MPs from across the political spectrum soon to be assembling in Parliament House, Macquarie Street.

While the outcome of the State election seems to have settled the issue of power network privatization, it would be a stretch to suggest that it has laid the foundations for resolving the NSW gas supply problem.

Can Mike Baird take advantage of his new-minted political authority to deliver the leadership needed to resolve this impasse?

Fields of frustration

I have spent most of the past week co-chairing the Australian Domestic Gas Outlook conference in Sydney, a three-day tour of fields of frustration that are now the stamping ground for gas explorers, producers and large consumers alike as politicians of all stripes puts politics ahead of the economy, jobs and cleaner and more secure energy supplies for the southern seaboard in particular.

For these gas stakeholders, the frustration is the more keenly felt because the problem is not a lack of the resource but an inability of policymakers to enable supplies to flow to where they are needed, notoriously in New South Wales, where, as was clear from some of the program presentations, there is a measurable risk that there will be shortfalls of supply in the next three winters.

The extent and duration of any such shortfall, and how the State government would handle it under emergency regulations, are all matters for endless speculation, but the fact that NSW has reached a point where it may occur is not deniable. One of the Rumsfeldian known unknowns is how stressed manufacturers will react. The analogy of straws and camels’ backs comes to mind.

I thought Cheryl Cartwright, CEO of the renamed Australian Pipelines & Gas Association, made a good point when she argued that, for users, the row with government over delays in resolving the coal seam gas imbroglio is not the most vital issue — the key question is, should the CSG development proposed for the State fail to eventuate,where will gas be sourced? The equally important other point, I suggest, is what the cost of this alternative gas will be?

This highlights the main game for Mike Baird and the Coalition government in NSW — who I expect to be returned in tomorrow’s poll: how will consumers respond to higher gas prices, which are as near to a certainty as anything can be? The mass market can shift energy sources but the large manufacturers, to a substantial extent, can’t.

As Labor leader Luke Foley apparently doesn’t understand, a substantial decline in industrial demand isn’t a solution, it’s a whole new problem for thousands of NSW employees and the State economy.

Paul Fennelly,acting CEO of the Australian Petroleum Production & Exploration Association, reminded ADGO attendees that, even without the influence of the Gladstone-based LNG developments, gas prices for eastern Australia have been on a steadily rising curve because production costs are rising. Exploration and development of gasfields now costs more than it did a decade ago. Transportation of gas costs more. Infrastructure costs more.

APPEA and others on the supply side keep pointing out that downward pressure on gas prices can be achieved by sensible decisions on the location of supply — for example, bringing on the $2 billion Narrabri project that will deliver half of NSW’s gas needs from within its borders (compared with four per cent today) — but this is not a promise that users can expect the bills they were receiving five years ago.

A really important question is how many manufacturers can afford to pay the higher costs of gas that would eventuate even without an LNG industry in eastern Australia?

“We must have a strong and viable manufacturing sector” is a mantra that resonates through all the debate, including the ADGO meeting, but what does it mean in a world where energy prices are well above what they were when the factories were built?

My take on this aspect is that what seriously bugs large manufacturers in particular is (a) the belief that today’s prices are higher than they should be and (b) the sheer uncertainty of future pricing, especially for gas.

The APPEA answer, as Fennelly put to the 200 ADGO attendees, is to develop more gas.

“The science shows that the risks associated with gas operations can be managed,” he said. “The answer is not moratoriums and more reviews. Poor regulation is curtailing local gas operations. We need workable, science-based regulatory frameworks for these operations in all jurisdictions.”

An interestingly large part of the ADGO discussions was devoted to the issue of gas supply reservation for domestic use.

It got bucketed by both Martin Ferguson and federal Labor energy spokesman Gary Gray — who describes Ferguson, Industry Ministry Ian Macfarlane and himself as being part of the “extreme middle” in the energy policy debate — and roundly condemned for the umpteenth time by APPEA as well as being given the back of the hand by organisations like the Australian Industry Group and the Plastics & Chemicals Industry Association (between them representing thousands of manufacturers), but its apostles keep shoving it forward even in the face of advice that the Commonwealth constitution bars federal intervention to impose it (section 92 requires trade between the States to be absolutely free).

Its chief proponent these days is the Australian Workers Union and this no doubt worries opponents of the idea because federal Labor leader Bill Shorten is seen as something of an AWU glove puppet and because of the fear of “one-term Tony” — aka our Prime Minister — emulating Queensland’s Campbell Newman in next year’s national election.

APPEA’s Fennelly made the point at ADGO that, in fact, AWU members probably stand to benefit as much as anyone from policies that reject the reservation voodoo and focus on developing the gas resources that NSW has available.

The other aspect of all this is the inability to date of the gas sector and governments to persuade the rural and regional communities on one hand and the mass of urban middle ground voters on the other of (a) the value of gas in our everyday lives, (b) that the demonising of hydraulic fracturing is wrongheaded and (c) that the regulatory regime is of a good standard.

One way and another, the ADGO discussion spent a fair time confronting this aspect and the obvious take-home message was that this is a task where there is still a lot of work to be done — in an environment where time is running out for NSW, the largest regional economy in the nation where gas meets some 45 per cent of manufacturing sector needs.

Gary Gray made a cogent point this week. The domestic gas industry is at a crossroad, he said. On the one hand, there are pressures to subsidize prices. On the other, resistance to the opportunities to produce it. “Neither approach makes economic sense and both will effectively keep gas in the ground. We must use our ingenuity to produce this gas and get it to market.”

PS: I recommend Angela Macdonald-Smith’s summary of ADGO conference in today’s “Australian Financial Review.” It’s headlined “Pressure building on CSG” and asserts, rightly I think, that “Producers and buyers alike have had enough of paralysis gripping the domestic gas supply sector on the east coast” and that “frustration was palpable” at the event.