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Looking beyond what we see

If you want to see a sensible prediction for where we will be living politically post the 14 September federal election, do read Max Walsh’s commentary in Thursday’s “Australian Financial Review.”

(See “Even in Opposition, Gillard and Swan won’t make it easy for the Coalition,” 28 March.)

Walsh sets out what should be the focus for many lobbyist minds from here forward: a thumping victory in the House of Representatives for the Coalition is unlikely to be accompanied by a set-up in the Senate that allows Tony Abbott to legislate radical change.

In this respect, bear in mind the key word is “unlikely” – so fed up are we that anything goes at the next poll.

I have been amusing myself in recent weeks by asking people if they know who Kim Campbell is?

Hardly anyone does.

The answer is that she was the first female Prime Minister of Canada, who came to the job with 156 seats in the House of Commons in Ottawa in June 1993 and exited in October, leaving the Conservatives holding just two seats, the biggest single crushing of a major political party in the history of the Commonwealth’s “old Dominions.”

Campbell ran what was probably the worst election campaign by a major party in modern history and the analogies between her and Julia Gillard can quite quickly be stretched to breaking point, but my main thought re her is that government leaders should not try the patience of the “mob” – as Keating called us – too far.

The current opinion polls suggest that this is just what Gillard is doing, aided by the continuing saga of shameful deeds under Labor in its long reign in New South Wales.

The other side of this coin is that the Canadian Senate is a political nothing whereas our Senate is a nithling (look it up) that can be dangerous for our government leaders.

The core reality of the current political situation here is that Gillard’s government may be engrossed in a desperate bid to “save the furniture” but the Greens and Bob Katter’s party have a different agenda – each striving to be in a situation after 9/14 to hold Abbott and his Coalition to ransom.

One cynic suggested to me last week that the Coalition could be quietly encouraging Pauline Hanson to re-emerge from the shadows as a way of splitting the potential vote for the Katter-ites.

Whatever. The point is that the outcome for the Senate is important and, supposing that the Coalition doesn’t end up with a workable situation, in reality, as Max Walsh explains, it would probably be early 2015 before a double dissolution process could be set in train.

This is not something executives in the energy industry in particular want to hear. The thought of another two years in policy purgatory makes their heads hurt – badly.

I have lost track of the number of industry people who have said to me that “Oh well, bad as this all is, it will be over by early next year” and who have not been amused to hear that this probably isn’t so.

How the Greens’ vote will fare on the eastern seaboard is one question for which there is no real answer at present. The second is whether Katter & Co can get up as a fifth party, at least in the Senate.

My suspicion is that he will – and at the expense of the Coalition rather than the Greens.

If I was still in the resources industry lobbying business – which I haven’t been since December 2003 – I’d be devoting some quiet time to thinking about the Senate and the long months leading up to a double dissolution in early 2015.

Everybody knows that the Coalition will go through the ritual of trying to wreck the carbon tax but it will pay to try to understand what else will be going on, apart from efforts to garrott the carbon-related agencies and quangoes set up under Rudd and Gillard.

As a result of Ian Macfarlane’s appearance at last week’s “Energy State of the Nation” forum, we know the Coalition will launch a new energy white paper process in 2014, that it will require another review of the RET next year – by whom, I ask myself – and that it will aim to sever the Australian Energy Regulator from the ACCC.

It doesn’t have to get especially excited by abatement programs early in the first term because the electricity market is delivering this anyway – the decline in consumption since 2008-09 is continuing and it has yet to become clear when the bottom will be reached, not least because the outcomes for manufacturing are still unclear and will be masked to a certain extent by growing demand from the public services sector.

Dealing with “green schemes” will become a greater first term priority for the Coalition if it is baulked from killing the carbon price and will need to meet its promise to help reduce the size of energy price growth – the more so when the threatened surge in domestic gas prices manifests itself.

Hopefully, the new federal government will come to terms quite early in its reign with the realisation that the biggest single means of cutting consumer costs is to guide/push/kick its State counterparts in Sydney and Brisbane in to introducing full retail contestability and a better tariff process. This task will be much harder in Queensland than NSW, but it must be accomplished – and with it has to come a consumer support system far better than the existing one.

Listening to Chris Hartcher in particular lately, it is obvious that part of the political load-sharing (or worse –shedding) is going to come from an insistence that the energy industry must do more to improve its relationships with the community.

The obvious industry retort is yes and you lot must do more to create a policy and regulatory environment in which we can work pro-actively.

An optimist can look at all this and see opportunities for genuine progress. A pessimist will embrace Hanrahan and fear we will all be rooned.

And, like a huge rock falling in to a pond, the cathartic election in September will change the environment in which all sides are working – but not necessarily in the way many today perceive it doing

As Rafiki says – he’s the wise baboon in The Lion King; grandpas know this stuff – you have to look beyond what you see.

The RET row rolls on

It was a given that the comments by Grant King, Origin Energy CEO, about wind energy and the true cost of the renewable energy target would raise the blood pressure of those who favor retaining the scheme at its present level and fear what a Coalition government will do.

One of their ploys is to argue that it would be best to leave another review of the RET until 2016 rather than next year, which is what the agreement between the federal government and the Coalition over the legislation requires.

The Coalition’s Ian Macfarlane blew this out of the water at the “Energy State of the Nation” forum last Friday when he insisted that the biennial review arrangement be maintained, said that there would be another review under a new government next year and added that anything like a target approaching 30 per cent (rather than the agreed 20 per cent) of consumption would be put under scrutiny.

This came on the heels of King’s speech at a Committee for the Economic Development of Australia forum in which he accused the Climate Change Authority of “completely skipping” the opportunity in its 2012 review of addressing the true cost of the RET.

It is not really surprising, therefore, to see “Climate Spectator” this week sailing in to King for “peddling unadulterated rubbish” about the RET and being “conveniently ignorant” about wind energy.

In passing, it is courageous (cf Sir Humphrey Appleby) of any of us armchair commentators to badmouth an energy industry executive of King’s standing in these terms, but this, I am afraid, is all of a piece with the migration of the snide nature of so much academic debate in to the media via the Internet in recent years.

One can distill this argument down to the question “Does wind generation variability result in additional power system management costs?” to which the short answer is “Yes,” and the real question then is “By how much?”

My understanding of the situation is that there are three main sources of additional or indirect costs:

First, the so-called firming capacity cost – the cost of generation to meet peak demand when intermittent wind power is not available. One can view this as market hedging costs, the cost of building peak capacity or the cost of having wind farms plus peaking plant versus lower cost baseload capacity.

Second, ancillary service costs – the frequency control and network control services, bought by the Australian Energy Market Operator and recovered across the east coast market.

Third, transmission costs. While wind farms pay for their direct grid connection costs, so-called deep connection costs and transmission costs in general are also recovered across the market. Wind farms are mostly not sited in the same place as existing fossil-fuelled generation and wind generally requires more transmission per megawatt hour than conventional capacity.

While King didn’t set out an analysis of these costs in his CEDA speech, Origin Energy’s submission to the Climate Change Authority last year asserted that just the market cost of hedging unfirm load will be $5 billion higher for the currently-preferred RET when set against 20 per cent of a diminished level of demand across the life of the scheme.

You can end up with consultants at 20 paces in this debate and the situation is not improved by cherry-picking of the data and not always, more experienced people tell me, full understanding of the somewhat convoluted consultancy explanations.

The real point here is not whether a guy managing one of the country’s biggest energy retail businesses, with masses of expert advisers, or another senior industry executive with a different perspective and his own army of advisers or an armchair commentator with very different experience is right – the real point, as King told CEDA, is that the CCA could and should have dealt better with the issue.

Some looking on will think that an agency with its leadership handpicked by the Gillard government delivered the answer on RET it wanted to hear – and has since endorsed – and will wonder what an independent body, like the Productivity Commission, would say if asked to address the real cost of the scheme?

My own view is that, as I said in a post on this site on 19 March, I think King was correct to ask at CEDA whether we have the right selection of carbon abatement policies and whether policymakers really understand the full costs?

As I said in a commentary in “Business Spectator” this week, there are rather too many example of government forays in to the energy area, and other areas, being “mad, bad or dangerous or all three.”

The core issue here really is not whether, with the benefit of 20-20 hindsight, the electricity industry would or should have built a different supply system between 1980 and 2005 (when most of the present system was constructed) but whether the alternatives now being pushed along by this federal government, itself driven by ideology and the overwhelming urge to pursue populist programs, and by the Greens and their fellow-travellers are the most efficient and cost-effective way forward?

Cat-calling from the sidelines is not an answer to this question.

A challenge for Ian Macfarlane is whether he will require the CCA do the job again next year or whether he will pursue a different, more transparent and more independent RET review?

Tangled in green tape

Whatever the differences between Australians on the need for and scope of environmental regulation, there should be a fair degree of mainstream agreement that this form of bureaucratic oversight must be highly efficient.

Unfortunately, with project regulation, the gap between political rhetoric and on-ground reality is, if anything, widening and eventually the nation pays for this – literally – in terms of lost economic benefits, lost jobs and taxation revenue foregone.

The “green tape” troubles are not solely a resources sector issue but, as the engine room of the Australian economy today, this area’s problems with the current regulatory tangle should have a fix-it priority.

Just how hard it is to get governments to deal with this issue can be illustrated by pointing out that the Productivity Commission recommended improvements in 2009 to federal/State regulatory duplication and business is still up in arms about the problem today.

At the time the commission identified 22 petroleum and pipeline laws and more than 150 statutes affecting the oil and gas industry, regulated by more than 50 agencies.

A year ago the Gillard government and the States, via the Council of Australian Governments, agreed to do something about regulatory streamlining. Not only has this failed to eventuate in any meaningful way, but the recent politics-driven intervention by the federal Environment Minister in coal seam gas project approvals has pushed the process backwards.

While not surprisingly buried in terms of media attention by the current manic goings-on in the federal government, Monday’s release by the Australian Petroleum Production & Exploration Association of a review of how “green tape” impacts on LNG should send a wake-up calls to policymakers in the States as well as Canberra.

The issue at hand is the potential for “green tape” to interfere with economic benefits for the community.

APPEA points out that, on current development trends, the LNG sector should be delivering $65 billion a year to the national economy and contributing $13 billion in tax payments.

You can buy a lot of activity in the schools, health, police, welfare and other areas with $13 billion annually.

How much of this is at risk because of the regulatory mess?

At the core of this problem is the fact that far too many people in politics, in government bureaucracies and in the media take continuation of our resources boom for granted when there are a rising number of reasons why the long list of multi-billion dollar projects awaiting investors’ go-ahead are not rolled-gold certainties.

Poor regulatory practices are high on the catalogue of barriers.

The issue is not just that some projects may not go ahead but that, in numerous cases, the regulatory swamp may impede development — sometimes by years.

This kind of delay not only represents a cost to developers, but to the community – modelling undertaken for APPEA claims that delays of two years in production and construction schedules can cause a loss of government tax revenue of between seven and twelve per cent.

Translated, for an offshore LNG project, that could represent a loss to the community of more than a billion dollars.

As APPEA puts it, “Australia’s environmental regulatory framework contains numerous overlapping, excessive and inconsistent requirements that cause project delays and (add to) costs.”

In some cases, two bodies within the same government are involved, resulting, APPEA complains, in “unclear and often inconsistent approvals for the same activities.”

This is bad enough for developments within one jurisdiction.

God help those whose projects cross boundaries – as, for example, the Ichthys LNG development which extends across waters governed by the federal, West Australian and Northern Territory regimes and comes ashore at Darwin.

The APPEA report says there is considerable overlap in the range of documents required by the project’s various approving entities, as well as
different statutory timeframes for approvals.

Some documents are required to support specific licences and permits while others are needed as a result of approval conditions associated with an environmental impact statement.

It takes about three months to prepare an EIS for submission with significant compliance costs.

An especial bete noire for the sector is the federal Environmental Protection & Biodiversity Conservation Act – which Tony Burke is currently amending to further impede coal seam gas development – and which 73 per cent of business respondents to an Australian National University survey agreed duplicates other processes without significantly improving environmental outcomes.

While the LNG projects may seem far away to the bulk of the population living on the south-eastern seaboard, the domestic gas issues for the east coast are much closer to home.

APPEA chief executive David Byers argues that what eastern Australia needs is more gas, not more regulation.

He points out that the current CSG intervention by the federal government adds duplication and inefficiency at a time when clarity and investor certainty are needed to ensure that, especially in New South Wales, consumer needs are adequately met.

The three critical words for regulation are efficient, co-ordinated and transparent.

The fact that we have reached today’s stage in transgressing against all of the trio speaks volumes about the quality of policymaking and governance across federal and State jurisdictions.

The fact that the problem is well known to policymakers and that they are supposedly committed to fixing it has to be seen against their manifest inability to get on with the job.

Perhaps a lot more needs to be made of the fact that this dilatoriness is a cost to the community – and one that will get bigger if the problem isn’t fixed.

Dear Gary Gray

Dear Minister
On the plus side, your appointment to replace Martin Ferguson as federal Minister for Resources & Energy will be viewed by most in the sector with some relief, given your past experience as a Woodside consultant and some of the alternatives the Prime Minister had.

A few may also remember that you chaired an important review on Australia’s skill needs in pursuing the benefits of the resources boom, a role that will have exposed you more recently to the many issues confronting investors in mines and energy.

It is also a fact, I’m afraid, that most in the resources and energy sector will be anticipating that your’s will be one of the shortest tenures in this role in modern Australian history – and more than a few would like it to be shorter still through, somehow, the government going to the polls earlier than 14 September.

A number will fear that you have neither the clout nor the time to defend the sector from the predatory attack of a desperate Treasurer as he faces Budget Armageddon on 14 May.

Most will hope that you bear in mind the alleged Hippocratic Oath line – it doesn’t actually appear in it but has been widely attributed to the oath – of “first do no harm.”

A classic example of the “it seemed a good idea” approach is the move by your colleague, Environment Minister Tony Burke, to amend the Environmental Protection & Biodiversity Conservation Act to win voting friends among the opponents of coal seam gas development.

You inherit this portfolio, of course, in a year of public ferment over energy.

Writing in an Op-Ed for “The Australian Financial Review” today, Origin Energy managing director Grant King comments: “I can’t remember a year in which Australians have talked more about energy.” He is mostly right, although it would be interesting to contrast today’s media coverage of the issue with the debate that raged over petrol prices early in the reign of John Howard.

More to the point is the message King has for you and State governments about the trio of key energy topics: carbon reduction, energy prices and supply reliability.

Trying to address carbon intensity runs the risk of worsening the price problem, and vice versa, King points out.

Most importantly, he again pushes the point he made at his recent Committee for the Economic Development of Australia speech: reliability should be the top objective and it often isn’t because governments under-estimate the cost of unrealibility of supply.

Your predecessor, Martin Ferguson, had a mantra running through his speeches: the importance of the long-term interests of the consumers.

In an environment where your government is now fixated on both the imminent train wreck at the polls and the ongoing dissent among the passengers (your caucus), the greatest danger for the rest of us is that you and the Cabinet will forget the community’s long-term interests, which are by no means the same as the thought bubbles emerging from focus groups and opinion polls.

It is a worry that the Prime Minister and the rest of you are going to be faced with so many kneejerk temptations in the weeks and months ahead.

The soon-to-be revealed draft determination on regulated power prices for New South Wales is one such; it is highly unlikely that the IPART proposal will be a single-digit percentage increase in power bills and, as in Queensland last month when the QCA proposed a 21 per cent average rise (worsened by the Newman government’s post-victory price freeze), the media will go in to a feeding frenzy.

The really important issue here is that the CoAG energy ministers’ council needs to meet soon to progress the market reforms Martin Ferguson so carefully shepherded last year.

The Coalition ministers at the meeting you will chair have no reason – other than the long-term interest of consumers – to play a straight bat.

Ferguson’s status was crucial in the second half of last year in persuading them to (mostly) do so despite extra-ordinary provocation from the Prime Minister.

In the same time frame the federal government is going to receive the final report by the Productivity Commission on power networks.

It is hard to see how this report will sustain the Prime Minister’s much-hyped $250 price cut in household power bills in 2014 – and the political kneejerking that may follow is a decided cause for concern.

Fall-out in the CoAG energy ministers’ council deliberations could throw the market reform agenda off the rails and this is a process that badly needs to be completed soon in the long-term interests of consumers.

Ferguson earned the industry’s respect because, despite numerous hurdles thrown up by decisions in other corridors of your government and in other governments, he doggedly pursued the creation of an energy policy that is balanced, robust and stable.

Whatever else you do in the few months you will have in this job, your priority should be to sustain this drive and not to allow political agendas to prevent its progress.

Australia is splendidly equipped with a wealth of energy resources and simultaneously handicapped by the problems with its energy market framework and with regulatory approval of projects.

Time is the key.

It took far too long for the reform process to gain some momentum and that forward movement is only too readily baulked.

Please do your best to keep the momentum going despite the distractions of politicking.

Yours sincerely, Keith Orchison

Meanwhile, in the real world (3)

In the midst of the Gillard government’s days of shock and horror at the end of last week, one of its key independent advisory agencies quietly released a report presaging developments that, over time, will help the Prime Minister not one bit.

Our media did not miss the appearance of the report despite the other issues attracting priority attention, but, as is their wont, put a gloss on the product that I think misses the essential point.

The document in question is the Australian Energy Market Commission’s “Electricity price trends report,” which attempts to foresee household power bills until mid-2015.

Its appearance was greeted by a tabloid heading “Finally, relief from electricity price pain” and a “compact” headline “Power price pain to ease for households.”

The heading in “The Australian” was “Power prices tipped to peak,” which is rather nearer the mark, and “The Australian Financial Review” opted for “Relief in sight on power prices” – to which, I think, the appropriate question is “relief for whom?”

To put this development in proper context, let us track fast backwards four months – to mid-December when the Prime Minister got lots of approving headlines as she emerged from a Council of Australian Governments meeting to promise householders $250 a year cuts in their power bills from 2014.

Now I have harped long and hard on “This is Power” and in “Business Spectator” on the fact that her claim over-eggs the Productivity Commission draft report on which she hangs it – the report estimated $100 to $250 savings – and completely glosses over the necessary environment for it to happen: the east coast-wide roll-out of smart meters and introduction of a new pricing tariffs.

Set against that promise, the AEMC report is not good news for the Prime Minister or households, something the latest media reports miss entirely.

What the commission says is that, to quote almost the last media statement issued by Martin Ferguson before he resigned his resources and energy portfolio, household bills are expected to RISE from July by around three per cent per year, in line with inflation.

As Ferguson said, the AEMC finds that the peak of network capital outlays is now behind us, with wholesale and retail costs due to remain relatively steady “due to the wind-back of a number of green schemes” (the minister’s words.)

What this means for your typical east coast household is that power bills will continue to go UP over the next three years unless the Coalition, on winning federal office, can succeed in killing the carbon price.

On a rough and ready estimate, they will be about $250 per year HIGHER in 2015 on present indications rather than falling by this amount, as promised by Gillard.

Is this or is it not worthy of highlighting in media reports?

I think it is, obviously.

Remarkably, to me, the Coalition has not appeared over the weekend pointing out the gap between the promise and the forecast reality.

Ferguson also had a message for Queenslanders, one of the two expected key battlegrounds for the political parties in the federal election (which may be earlier than September).

“Where State governments intervene to stop electricity prices reflecting their actual costs, the trend in the (AEMC) report will not transfer to the bill.

“Instead consumers in these States face further bill shocks with the price of electricity playing catch-up to recover costs that cannot be avoided.”

The point is that the best way to help customers in New South Wales and Queensland, who represent half the household consumer base on the east coast, is to let the competitive market set the retail price and force retailers to compete to offer customers a better deal.

In South Australia today the switch to full competition means householders are being offered deals nine per cent below what they were paying in January.

Unfortunately, the mainstream media simply cannot or will not take the time to provide readers, listeners and viewers with the full context when they report power price issues, thus contributing to ongoing confusion and public anger over the situation – and inevitably to further political kneejerking, sending the problem spiralling further down towards a still bigger mess.

The overall situation isn’t helped by the complexities of price-setting, not the least of which is the ongoing issue of the demand trend.

The AEMC report contains this warning: “If demand is lower than forecast in network regulatory determinations, then network prices, particularly for revenue-capped businesses, are likely to rise quicker than outlined in (our) report.

“This is because the total revenue allowance is set for a five-year period. Prices are based on forecast consumption. If consumption volumes fall, then networks will increase their charge per kilowatt hour to maintain revenue at the allowed level.”

The current forecast of the Australian Energy Market Operator is that east coast demand will fall 2.4 per cent in this financial year and be flat in 2014-14.

This outlook depends on what happens to the economy and, for example, the anticipated further rise in cheap imports, aided by the high Aussie dollar value, and the ongoing impact of this on power demand as domestic manufacturing wilts still further.

As an example of the issue, NSW Resources & Energy Minister Chris Hartcher told the “Energy State of the Nation” conference on Friday that he was currently in talks with a company employing 500 people – and whose business resulted in thousands of indirect jobs – that was telling him the present outlook for gas supply and prices was driving it towards re-locating overseas.

AEMC also draws attention in its report to the flow-on effect of lower power demand to the generation sector, with power station owners (whether private or public) slowing or delaying new investment and/or shutting existing plant in response to the current trend.

This situation, of course, is exacerbated by the Gillard government’s determination, driven indisputably by its political needs, to cling to the existing requirement for 41,000 gigawatt hours of large-scale renewable energy supply by 2020 – which looks increasingly like representing almost 30 per cent of demand rather than the 20 per cent initially targeted by the policy.

East coast market wholesale power prices today are at rock bottom (or at least the generators hope they are).

A change in the capacity available in the market and in the capacity mix has implications for future wholesale prices as well as reliability of supply.

“For this relief much thanks” is a line from Shakespeare’s Hamlet.

Householders may yet find it is an ironic retort to the “relief” the media headlines have been offering them this past week on power prices.

Meanwhile, in the real world (2)

The elephant in the room at the 2013 “Energy State of the Nation” conference in Sydney on Friday appeared after lunch in the shape of a 44-page booklet from consultants KPMG dropped on to attendees’ tables.

It is a report prepared by KPMG in collaboration with the Energy Policy Institute of Australia and a working group of senior executives drawn from across the energy sector.

In a foreword, Mark Johnson, chairman of Alinta Energy, reminds us that the energy white paper highlighted that private sector investment in the energy sector will require a huge amount of capital over the next 20 years.

“Can we confidently expect that existing policy settings plus our resource endowment and location will get us to this goal?” Johnson asks. “Or is this too sanguine an outlook?”

The energy white paper adds up the outlay expected to 2030 as $530 billion, of which $240 billion is estimated to be needed for domestic electricity generation, transmission and distribution plus gas pipelines.

As KPMG says, these estimates are uncertain and could be over-stated.

Demand for electricity, for example, has fallen almost 14 per cent against projections that were made in 2008. This could be because earlier forecasting models were flawed and it is not yet clear whether the decline is a long-term trend. Nonetheless, significant investment in electricity supply is still going to be needed.

The degree of uncertainty now attached to the white paper investment estimates doesn’t matter, the consultants assert.

“What matters is that the investment challenge is more than substantial.”

Global competition for capital is intense, KPMG say, and there are “blockages to unlock.”

They go on to point out that funds are relatively readily available to the energy sector here for highly-rated, low-risk investments, although factors such as market and sector risk will raise the price of capital – and ultimately the prices consumers pay.

“It is the second-tier investments, especially second-tier greenfield projects, which are most likely to struggle to find financing,” they warn.

For those committing the money, KPMG say, confidence is critical: confidence in policy, regulatory frameworks and financial markets.

“The greater the uncertainty around Australian energy investment, the great the costs of finance will be.

“Where the uncertainty is too great, finance may not be available at all.

“The possibility of an investment shortfall is real.”

There’s the elephant.

Australia, say KPMG, should be a good country candidate for investment, taking in to account the richness of its resources and its proximity to the world’s fastest growing economies.

Even with our reputation as a high-cost country in which to deliver projects, there are advantages in a well-established system of government and generally sound regulatory frameworks.

“However, energy investors’ perceptions are that Australia is currently prone to policy and taxation turnarounds which pose a significant country risk.”

KPMG point out that risk aversion among global investors is much higher now than in the past.

In this country, traditional financiers of our energy infrastructure, the banks and governments, are overhauling their balance sheets. Governments are wary of taking on new debt. The Australian banks are no longer able to provide the previous volumes of cheap, long-dated loans and, like banks worldwide, are retreating from long-term energy infrastructure funding.

“Increasingly, Australian banks regard themselves as midwives to energy projects and transactions rather than long-term guardians. With few exceptions, the era of loans lasting 10 or 12 years, or longer, is largely over.”

The banks increasingly take the view that the energy sector should look to bond markets to match the underlying long-term nature of energy assets with long-term forms of funding.

This, of course, throws the local project proponents in to the global money cauldron where competition for funds is intense.

Australian power companies and utilities, say KPMG, now must compete for capital not only with counterparts at home and abroad and with other energy resource developments but also with other sectors seen more favourably by investors seeking long-dated assets with reliable income streams.

In Australia alone, they add, the energy sector’s plans are part of 160 major projects needing $1,000 billion in funds.

The bottom line, they argue, is that long-term energy and infrastructure investment will have to come from the sources that it arguably always should have come from: pension funds, insurance companies and other investors with similarly long horizons.

Legislators here, KPMG say, can help by pursuing better energy policy management.

They suggest four areas where investor doubts and concerns could be alleviated: (1) the future of carbon policy and the approach to renewable energy; (2) policy-generated barriers to energy investment; (3) the structure of the electricity market and (4) regulation of the electricity market especially as it affects retail pricing.

“Balance,” say KPMG, “must be sought between a broadly free market approach and regulation trying to protect the interests of both investors and consumers.”

They quote one financier as telling them: “Why would you write a 15-year deal when you don’t know what the rules are going to be next year.”

They also quote both financiers and industry figures as telling them that the uncertainty over carbon pricing is the biggest single barrier to investment in Australian energy.

Summing up the Energy Policy Institute view, its executive director, Robert Pritchard, writes in the report that a new energy world emerged in the five years it took the Rudd and Gillard governments to produce the white paper. “Energy industry investors now have to deal with a bewildering assortment of policy, regulatory and market risks.”

An “investment-grade” energy policy, he argues, must be “balanced, robust and stable” and an attractive taxation regime is an essential ingredient.

In shorthand, the policymakers have to discipline themselves to reduce the risk for investors of sudden policy changes.

To which KPMG adds: “Australia needs to do more to differentiate itself as an attractive, low-risk energy investment destination for the long term to both local and overseas financiers.””

Looking at the current political environment, one may be forgiven for thinking this is a very big ask – which perception carries with it the question of what price Australian consumers will pay over time for all this political self-indulgence?

Tributes flow to Ferguson

Whatever the resources and energy industry may think today of the gutted Gillard government, their respect for Resources & Energy Minister Martin Ferguson was on wide-ranging display yesterday.

Ferguson chose to resign, as the media are reporting this morning, unwilling to serve under a Prime Minister he obviously sees as not governing for all Australians.

As reflected by sentiment around the “Energy State of the Nation” forum in Sydney, where Ferguson had a speaking engagement he couldn’t keep, most people in the sector see his departure as “hugely regrettable,” a comment elsewhere from an iron industry chief executive.

The Minerals Council of Australia got it right when it opined that Ferguson had “a strong commitment to consult with industry on policy challenges” and a grasp of the fact that, for the resources industries, “effective government is primarily about providing a framework for long-term growth and prosperity.”

It is a mark of the respect held for Ferguson that even a political opponent, the Coalition’s Chris Hartcher, his New South Wales ministerial counterpart, spoke warmly about him as the news reached the “ESON” forum during his presentation.

The Australian Petroleum Production & Exploration Association also hit the spot in its comments regretting Ferguson’s departure from the ministry.

“For more than five years Martin has been an outstanding minister,” APPEA said, “and one held in the highest regard for his willingness and capacity to understand issues.

“He is a man of enormous integrity dedicated to the creation of opportunity.”

Energy Supply Association chief executive Matthew Warren spoke for many of us, too, when he issued a statement late yesterday saying that Ferguson has made a material difference to the major transition on which the energy industry is embarked.

“He has recognised the need for reform,” Warren said, “and has tempered this with commonsense, (understanding) the need to ensure that it is delivered at the lowest cost and in a realistic time frame.”

His observation that Ferguson stands for practical solutions, realistic outcomes and commonsense is a widely shared view, as evidenced by comments of those attending “ESON.”

It is a telling point about views of the rump of government Gillard now leads that a number of people have wondered to me over this week whether there is any chance of the federal election being brought forward from September?

As I have pointed out to them, the independents MHRs could achieve this by withdrawing their support and Tony Abbott apparently intends to give them the opportunity to do so by moving a motion of no confidence in the government on 14 May, Budget Day, when the parliament resumes.

Windsor, Katter, Oakeshott and Wilkie can bring forward the poll by supporting this motion, but will they choose instead to vote for their own self-interest?

(I have this vision of a typical “Telegraph” front page with pictures of the four and a huge headline that cries “You can put us out of our misery.”)

It was interesting at “ESON” to hear the man expected to replace Ferguson in due course as resources and energy minister, Ian Macfarlane, set out at least some of the steps the Coalition will take when, as widely expected, it wins a thumping victory in the election.

Macfarlane told the Energy Policy Institute of Australia forum that the industry is today being held hostage by the federal government’s inability to govern and its reliance on the Greens.

(Christine Milne, of course, was fast out of the blocks yesterday to celebrate Ferguson’s decision to quit the cabinet.)

Macfarlane promised to work to establish a genuine one-stop shop for project approvals, the current problems involving governments of both stripes being probably the energy sector’s number one concern.

He underlined the Coalition’s commitment to the renewable energy target and reminded listeners that part of the deal he negotiated with Senator Penny Wong to create the present legislation involved a review every two years.

“We will review the RET next year,” he said, “and we will look at the target; if it 30 per cent instead of 20 per cent, it is simply not sustainable.”

Macfarlane also dismissed the much-delayed energy white paper, published late in 2012, as a “damp squib.”

A Coalition government, he said, “will produce another white paper within 12 months.”

A new government, he also pledged, will separate the Australian Energy Regulator from the Australian Competition & Consumer Commission.

The Department of Climate Change, he promised, would be “gone.”

As for the Coalition’s controversial “Direct Action” approach to abatement, Macfarlane said some more detail will be released before the federal election but the plan will rely on negotiations and discussions with industry after the poll.

Just how long we will have to wait to see the Coalition taking up the reins of government is open to discussion, but the energy transition clearly will roll on.

Meanwhile, let’s see how Gillard’s pick for the portfolio fills a pair of very large shoes. The “Australian Financial Review” is suggesting this morning that she may appoint Western Australia’s Gary Gray.

Meanwhile, in the real world

In a week in which the Canberra political circus went in to overdrive and ended in a whimper not a bang, it is hardly surprising, I suppose, that this study has been ignored in the media – except, of course, it deals with a topic that has been regularly reported as being politically “white hot,” one into which the Prime Minister hurled herself with fervor from August to December last year.

The fact that the study deals with an issue of concern to several million Australians was still not going to get it attention in a week like this.

Published on Wednesday, the review is entitled “Improving energy concessions and hardship payments policy” and has been produced by Deloitte for the Energy Supply Association.

Given the impending federal election, it is not unimportant that it deals with cost of living pressures for young families, first home purchasers, low income singles and regional consumers not connected to the power grid.

These are people who, says Matthew Warren, ESAA chief executive, are “really hurting” and are being not satisfactorily helped by current State concession programs.

Reading the review, one is inclined to end up teeth-grinding at the dichotomy between all the political noise about this issue and the relatively basic failure of legislators to get a grip on what needs to be done to alleviate energy bill stress.

One of Deloitte’s key recommendations is that governments actually go to the trouble of identifying consumers who are currently missing out on assistance and address the elegibility criteria in each State and Territory jurisdiction.

Another important recommendation is that assistance paid as a percentage of total energy bills is of more help to struggling consumers than lump sum payments because costs vary with the seasons.

Despite all the political hoopla over power costs during the past 2-3 years, Deloitte find that Australia has no operational definition of “vulnerable” energy customers.

The consultants have opted to define them as people who are “at risk of experiencing genuine financial stress due to moderate increases in their energy bills.’

In Britain, by contrast, government identifies people living in “fuel poverty” as those whose expenditure on electricity and gas is more than 10 per cent of their annual after-tax income.

In America, one assistance scheme, offers a discounted kilowatt hour rate to eligible families, allowing them to avoid higher tier tariffs when their energy usage increases (eg in winter).

In their preamble to the report, Deloitte observe that lowering the impact of energy bills on customers is supposed to be at the forefront of policy agendas across all jurisdictions.

Increases in prices affect the wellbeing of the most vulnerable in society to the greatest degree, the consultants note, because their incomes leave them little wriggle room and they don’t have the means to invest in energy efficiency measures.

Most of those affected, I’d add, are renting accommodation and can’t take effective action anyway.

Deloitte pick up the recent work by AGL Energy’s Paul Simshauser and colleagues to point out that, while rising pay packets are keeping the percentage average households spend on energy relatively stable, the vulnerable customers suffer because bills are rising faster than concession payments – which the State and territory governments only adjust for the CPI (except in Victoria where concessions are percentage-based.)

The concessions framework in most of the country, in other words, is not sufficiently helping those who really need it.

Lurking ahead, as the consultants highlight, is the planned widespread introduction of smart meters, with time-of-use charges and critical peak pricing.

Although, as I have written more than once before here and in “Business Spectator,” Julia Gillard does not seem to understand this, the PM’s promise to chase $250 a year power bill cuts for households is based on a Productivity Commission report considering the gains of mass use of meters plus ToU.

Deloitte warn that careful consideration needs to be given to protecting vulnerable customers from the bill shocks that can flow from this policy – and, in particular, the concessions system needs to be reviewed and improved.

Really, this is cat-on-the-mat stuff and it is diabolical that the Council of Australian Governments, and especially its chair, the Prime Minister, who has made such a fuss about acting to help families troubled by power bills, have not addressed these points long since.

In this regard, it is notable that the Prime Minister has simply ignored calls from the country’s energy and water ombudsmen for a national summit on energy problems for vulnerable customers.

And the media have ignored her ignoring the call.

It is equally notable that the media, especially the tabloids and their now “compact” cousins, have ignored statements and publications by the ombudsmen and NGOs aiming to help vulnerable customers that have drawn attention to this stuff — except that is to use such material to lambast the power supply companies, and the networks in particular.

To put it mildly, political game playing and media ambulance chasing have taken precedence over focussing on practical steps to help those who need it.

The fact that the Deloitte/ESAA report has appeared in a week of particular federal political hysteria will not serve to see this issue get the attention it deserves.

I was plagued as a schoolboy by an especially nasty maths teacher, who used to snarl at me as I dithered at the blackboard in front of a sniggering class: “Don’t just stand there, boy, do something!”

It’s advice that our political leaders and their advisers, who have emoted so much over power prices in the past 2-3 years, could take to heart with respect to helping the vulnerable energy customers, aka a large number of voters.

The ESAA/Deloitte report is required reading for them.

King’s speech

It was a shame to miss Grant King’s talk kicking off the 2013 energy series of the Committee for the Economic Development of Australia but I had the best of reasons; I spent the afternoon with my seven-year-old grandson and was rewarded with the kids’ quote of the year so far: “Grandpa, look at those pigeons co-operating!”

Now that I have the transcript of the Origin Energy managing director’s talk, I can see why certain green-tinged scribes may be jumping up and down a bit.

I am always drawn to ol’ Sir Winston’s comment – “The dogs bark and the caravan moves on” – when observing this kind of reaction.

In fact, reading King’s talk, you receive a clear understanding of where he’s at.

He began by reminding CEDA trustees (and guests) that the media and politicians may talk a lot about cheap energy (or at least competitively-priced supply) and about lower carbon-emitting energy, but the most important factor for customers and the economy is reliability.

The reason, he said, is that the cost of unreliability is so high – and we are fortunate here to to suffer this penalty so seldom because there is sufficient redundancy in the system.

Looking at power generation, he pointed out that 13,000 MW has been added to east coast capacity since the NEM was launched in 1998, with most of it over the past 10 years by the private sector.

Even allowing for the impact of the Big Dry in the past decade, he pointed out, the NEM generators have delivered “remarkably consistent” and “extremely competitive” wholesale power prices around $40 per megawatt hour.

In inflation-adjusted dollars, the price is the same today as 10 years ago.

“The NEM,” said King, “has been an extra-ordinarily effective tool in delivering both reliability and competitive prices to consumers.”

Of course, having had his business pinged by State price regulators, King was not going to lose the opportunity to tell them, and their political masters, that it is “complete folly” to try to guess what the wholesale cost will be going forward in setting regulated retail prices.

Moving on to the issue of greenhouse gas emissions, King started to ruffle the feathers of the green pigeons.

Origin’s opposition to the fixed 45,000 gigawatt hour renewable energy target for 2020 – rather than the original goal of 20 per cent of retail sales – is well documented.

King told CEDA yesterday that achieving the higher target – in effect 27 per cent – will require “an extra-ordinary increase” in investment in wind farms in particular.

Stating what should be the blindingly obvious, but apparently is not in some dovecotes, he pointed out that the further investors move from existing transmission infrastructure in pursuit of the sites needed for the big RET, the higher the the development costs will be.

The Climate Change Authority, King said, “completely skipped” the opportunity to address the true cost of the RET in its 2012 review and he called for the proposed 2014 review to make “a decent effort to tell the community what these schemes are actually costing on a fully-costed basis.”

Coming back to reliability, he argued that high levels of wind energy will inject more and more volatility in to the NEM and therefore more unreliability of supply unless wind farms are supported by enough open-cycle gas plant, which will produce electricity at a cost higher than wind power.

Coming to the small-scale side of the RET – ie solar PV rooftop arrays – he noted that, in summer, it is quite useful in lopping off the peaks of power demand, but in winter, when the peak is after dark, it is no darned use.

And that is why, contrary to what some birds think, solar PV does not solve the need to invest in network infrastructure to address peak demand.

With regard to the carbon price, King repeated something well known to the supply industry: $23 per tonne is too low to change the merit order of generation despatch in the NEM.

He asserted that, even allowing for the loss of the flooded Yallourn power plant for a time, there is very little evidence of carbon abatement in the first six months of the Gillard government scheme.

Recent changes in the generation mix, and hence emissions, he said, are down to a reduction in consumer demand, the Yallourn outage, an increase in hydro-electric production, higher consumer prices and the RET.

Cruelly, for the beleagured federal government, he maintained that “it is unlikely the government forecast of 15 million tonnes a year of abatement due to the carbon price can be achieved and, therefore, the cost of abatement will be significantly higher than (it) estimates.”

The really important point, King told CEDA, is not the cost of carbon but the cost of carbon abatement and “we are paying an extraordinarly high price” for it.

As for the bugbear of the manufacturing sector – the oft-repeated claim that electricity here is no longer cost-competitive globally – King conceded that the Bureau of Resources & Energy Economics data for household cost comparisons is “quite old,” but he doubts whether, even allowing for the large domestic price spikes of recent years, this country’s relative position has deteriorated substantially.

He agreed that, while the Gillard government is compensating households for green policies, small to medium-sized firms and large users are bearing the carbon burden, with many not able to pass on the costs to their customers.

Paraphraising King, what he told CEDA goes like this: (1)The NEM is delivering wholesale electricity reliably at a competitive cost but we lack a true picture of carbon costs, (2) the RET plan comes with reliability risks and (3), with networks, we are in for another wave of cost increases because of the investment that will be needed to support a large amount of renewables in the system as well as an ongoing need to deal with spikes in demand.

His key point is that “we are entitled to question whether we have got the right selection of policies” and whether customers are being given a true picture of policy costs and how they are affecting the final bills.

If you read some of the stuff that has been written overnight about this talk, you may get a very different picture – but, personally, I think King told it exactly like it is.

Energy, carbon & a microcosm

Efforts to discern the real impacts of energy policy tend to get harder as they move up the scale.

By the time they are being debated at the national level, a lot is being lost in terms of the human element.

This is being borne out at present by a surge of media interest, albeit very belatedly, in the impact of carbon policies on small and medium-sized businesses.

(I was writing 12-18 months ago, when the carbon political row was at its height, that all the talk by the Gillard government of compensation for households masked the fact that there was no relief for SMEs, but the mainstream media couldn’t be bothered to take an interest in the issue then.)

A consultants’ study for Tourism Accommodation Australia, for example, now says that the combined effect of these policies is a $115 million annual hit on the budgets of hotels and motels.

The tabloids are suddenly running with “the straw that broke the camel’s back” stories about how higher energy bills, driven in part by the suite of carbon measures, including the renewable energy target and solar schemes, are contributing to companies going to the wall.

The argument is that, while the high Australian dollar is a critical factor, carbon policy costs are an added burden at a bad time for these firms.

(The Australian Securities & Investments Commission is reporting that business collapses averaged 886 a month in the year to the end of February, 12 per cent higher than during the height of the global financial crisis.)

Making political hay while he can, the New South Wales Treasurer, Mike Baird, claims that his department’s modelling shows that the Gillard government’s carbon tax will add $580 million to the energy costs of small business and households in the State this financial year.

Against this background, it has been interesting this week to read a report by Deloitte Access Economics on the prospects for the NSW Hunter region over the next two decades.

As Deloitte point out, the Hunter is a microcosm of the national economy, the country’s largest regional area and home to its seventh biggest city (Newcastle) “with significant exposure to resources, energy production, agriculture, defence and service industries.”

The region is home to about a twelfth of the State’s economic activity and much of its business is exposed to energy policies and especially carbon policies.

The area’s largest primary industry is coal mining for export as well as local power generation.

The Hunter Valley coal chain in the world’s largest coal logistics operation (always a surprise for one’s American colleagues to hear this) involving 16,000 train trips a year to three terminals and on to 1,200 ships annually.

At the human level, the coal business provides 17,700 full-time jobs – and its needs are served by construction, transport and wholesale trade industries, say Deloitte, employing another 37,400 full-time workers.

The consultants add that modelling by the NSW government suggests that the introduction of the federal carbon price regime will result in 18,500 fewer jobs in the Hunter by 2020 in emissions-intensive industries.

Power generation is a big player in the region, with 80 per cent of the State’s electricity coming from local generators, most of them fired by black coal.

As Deloitte say, however, modelling for the federal energy white paper and subsequently predicts that the amount of electricity produced on the east coast from black coal will stay stable between now and the 2030s.

(The most recent modelling by the Bureau of Resources & Energy Economics holds that black goal power plant output overall in 2035 will still be about 100,000 gigawatt hours a year, only marginally down from now, while it forecasts the virtual demise of the Latrobe Valley’s brown coal generation.)

In terms of NSW power demand, one of the big questions is what will happen to Tomago?

This aluminium smelter is still operating while the other Hunter smelter (at Kurri Kurri) shut last May.

Deloitte comment that “the outlook for the smelter and the region’s aluminium manufacturing industry remains highly uncertain, with new Chinese production coming on line and higher (Australian) power prices making it increasingly difficult for Tomago to compete.”

Economically speaking, a white knight for the region could be coal seam gas development but, as every galah in the petshop knows, CSG’s future in NSW, certainly over the rest of this decade, is up in the air because of political knees jerking in response to rural community attitudes and rabid environmental campaigning in some quarters.

{If you think “rabid” is too strong language, note the complaint from the upstream petroleum industry lobby group APPEA earlier this month that “there has been a spate of violent and menacing behaviour from activists towards farmers (who have given permission for CSG activity on their properties) – one gas company even received a bomb threat.”}

Deloitte see the potential for CSG production in the Hunter to “develop at a scale to complement the coal mining operations” and they don’t see the carbon price as likely to have a substantial impact on the sector, but they note that “technical supply issues” and escalating construction costs could be significant investment factors – while the competing land use situation, especially in the upper Hunter, is a major issue.

There is a paragraph in the Deloitte report worth repeating.

It says: “The emergence of a significant CSG industry offers enormous economic advantages to the region. These include the potential to support electricity generation and local manufacturing in the Hunter and to contribute to exports of LNG.

“However, these gains are highly contingent on such development being achieved with minimal disruption and risk to the area’s keystone agriculture sector.”

In this respect, the Hunter is a microcosm for the country as a whole, too, as Australia wrestles with the potential and the problems of its unconventional gas resources.

And, of course, to end where I began, the Hunter is a microcosm for voter reaction to the carbon policies – a point that should be of no small interest to the Member for Charlton, Greg Combet, whose seat is in the heart of the region.

I looked on Combet’s websites (seat and ministerial) today, expecting him to have something to say about the Deloitte study, which affects not only his constituency but his portfolios.

Can’t find a word.