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Crisis now in NSW

Late last Wednesday at the Australian domestic gas outlook conference in Sydney, moderating the day’s final panel discussion, I tossed a question and got a reply that, on reflection, puts all the rest of the forum’s to-ing and fro-ing in context.

I said to Mike Moraza, group general manager of upstream energy at AGL Energy, “Look, today’s discussion has gone a number of times to this issue of problems of gas supply for New South Wales – my question is whether this is a crisis still to come or is it already a crisis?”

Moraza’s reply was: “This is a crisis now. That’s a fact. We have run out of time (in NSW). We are not going to be able to fill the supply gaps that will emerge at the end of 2016.”

Also sitting on the panel, Robbert de Weijer,CEO of Dart Energy’s Australian operations until its decision to suspend its NSW operations, added that he believes the State’s end-user gas prices will be very high as a result of the supply problems and a number of large users, not able to afford them, will be “driven out of the State.”

More support for the “crisis now” perspective can be sourced to a comment NSW Resources & Energy Minister Chris Hartcher made in question time at the “Energy State of the Nation” conference organised by the Energy Policy Institute of Australia in late March.

Hartcher volunteered the fact that he was in negotiation with a large industrial company, “with 500 employees and thousands more indirectly employed as a result of its activities,” that was considering relocating overseas because of the prospect of much higher gas prices.

At last week’s gas outlook conference, Hartcher grasped the lifeline offered by Santos, whose senior executive James Baulderstone told participants that his company could produce a quarter of what NSW needs each year from its licence area in the Pilliga forest near Narrabri.

Three points need to be made about the Pilliga opportunity.

The first is that its is a critical resource for NSW gas users in this supply environment.

The second is that the “Lock the Gate” movement is already hastening to attack development in the Pilliga. The activists threaten a “massive community backlash” against the Santos plan.

The third is the time it will take to bring the Pilliga resources to market.

In this latter context, AGL’s Moraza said talk of 2016 production from the field is “a very ambitious timetable.”

Hartcher, when he spoke at the conference, said his government welcomes Santos’s plans but the proposal has yet to be put forward formally.

Santos, of course, has to negotiate its way under a federal environmental approvals regime that is being changed on the run ahead of the September election to pander to the anti-CSG brigade – and it, like the rest of us, has yet to see the report on CSG impacts currently being completed by NSW chief scientist Mary O’Kane.

The Pilliga development will need hundreds of wells and a new pipeline to link the field to the Moomba-to-Sydney line that brings gas from the Cooper Basin to NSW.

Moraza’s remarks and the broad tenor of discussions at the domestic gas outlook conference drive home that the State government and the State’s 450 large business users of gas – as well as the million-plus households and small businesses consuming the fuel – are now between a rock and a hard place.

The rock is the cessation of a large part of the contracts for supply of gas from interstate – representing 95 per cent of demand with 77 petajoules a year coming from Victoria up the eastern gas pipeline and 69 PJ from South Australia and Queensland via the Moomba line – at the end of 2016 and 2017.

The hard place is the price for supplies that retailers like AGL will have to pay to meet customers’ needs.

The company has acknowledged publicly that it is already engaged in legal arm-wrestling with existing major contract holders over their proposals to double the price of wholesale gas.

Media reports claim that suppliers are looking for prices of $6 to $9 a gigajoule versus the average of about $4 of the past three years.

There has also been media speculation that the recently-announced deal between Origin Energy, a major AGL retail rival, and Beach Energy for supply of gas from the Cooper Basin is at the upper end of the $9 ballpark.

The “crisis now” atmosphere will very likely thicken when the NSW Independent Pricing & Regulatory Tribunal announces its draft determination later this month for gas prices from mid-2013 to June 2016 – or perhaps only for next financial year because of the market uncertainty.

I frequently make the point in commentaries and presentations that three four-letter words lie at the core of the energy debate: risk, cost and time.

The current brouhaha over the cancellation of the onshore development of the Browse basin LNG project in Western Australia by Woodside and its partners is a classic example of this: the time taken to sort out the official approvals for this project, the rising costs and the greater risk as the global market changes have led to the “shock” decision, which will not have surprised many professional observers of the local LNG scene.

Time, cost and risk are the key factors in the NSW coal seam gas imbroglio, too.

Apart from the Pillaga development, it may well be possible, for example, to bring new gas supplies from Victoria by “looping” – ie doubling – the coastal pipeline.

But over what time and at what cost for a delivered product?

And what risk does this impose for retailers and consumers?

Business angst over the situation has again been expressed by the Australian Industry Group (which has 60,000 corporate members nationally, many of them in NSW).

AiG has been fretting publicly this month about higher gas prices and an impending “supply crunch” that, it says, will hit jobs and household budgets in Sydney, Melbourne and Adelaide among other places.

(By the way, gas consumption in NSW is far from just a Sydney issue – the metropolitan area requires some 92 PJ a year while Wollongong takes 27 PJ, Newcastle 16 PJ and other regional centres, including Canberra, consume 15 PJ.)

AiG, in its recent statement, notes that “Many industries depend on gas. It is an essential feedstock for many basic chemical products that underpin other industries and everyday life.”

Gas supply, says the lobby group, is “far more fragile and important than many people realise.”

Which is why the crisis that is now enveloping New South Wales is no minor matter – and what is bad for NSW will be bad for the country as the impacts ripple out through the economy.

Our Prime Minister was extra-ordinarily vocal about power prices late last year but she is notably mute about the gas issue today – except for approving her Environment Minister adding to the problem by playing with the Environmental Protection & Biodiversity Act.

Is she likely, one wonders, to have a chat about the issue with other first ministers when she chairs the Council of Australian Governments at the end of the week?

Bridging the deregulation divide

One of the more difficult issues to overcome in public debates is the tendency of industry people and advocates of social policy to talk past each other.

It is very evident in the coal seam gas debate and in the long-running argument over both carbon policy generally and each of the carbon price and the renewable energy target specifically.

AGL Energy managing director Michael Fraser summed this up when he spoke at last week’s Australian domestic gas outlook conference.

“As a society right now, we’ve got choices to make,” he told 200 attendees.

“Choices about our energy future.

“Choices that will have significant economic impacts.

“Choices that should be based on evidence and science.

“Choices that will lead to secure energy supplies, increases in employment and investment and higher living standards.

“Choices consistent with the strictest environmental and regulatory standards.

“However, in order for governments and regulators to make evidence-based choices,we must, as an industry, get community engagement right.

“We must ensure that the facts, the evidence, the science and the benefits are understood by the community.”

Another area where there is a head-on clash between differing opinions is with respect to finally moving away from regulation of small end-user electricity prices.

On the east coast this has happened in Victoria and South Australia (recently) but governments in New South Wales and Queensland – States with more than 60 per cent of consumption and consumers – have dragged their feet.

In a new publication in AGL’s economic working paper series – this one by Tim Nelson, head of economic policy, and Cameron Reid, manager for hardship and social policy – the company has set out a case for suppliers and peak consumer groups moving beyond the ideological divide on this issue to focus on the real job: enabling consumers, and not least those enduring cost of living hassles, to minimise their bills.

Nelson and Reid sum up the present impasse like this: “Proponents of the removal of retail price regulation argue that it has no place where competition is effective. Opponents argue that regulation is necessary for consumer protection.”

The ongoing clinging to regulation is especially frustrating for suppliers because, across the east coast power market (the “NEM”), 62 per cent of 7.9 million household and small business customers have voluntarily shifted from a regulated tariff to market contracts – but only half have done so in NSW.

Nelson and Reid report on a survey of 137 community organisations, financial counsellors and consumer advocacy workers – which threw up that 85 per cent of respondents stated that the cost of electricity is a concern for 60 per cent of their clients most of the time and all of the time for a quarter of them.

This is not a surprise in an environment where the electricity sub-index of the CPI has risen by 13 per cent a year on average since 2009 while the main index has increased by three per cent annually.

For suppliers, the central point is that most power consumers can reduce their bills by shopping around for the best deal – and another point of frustration is that (as shown by AGL research) financial assistance providers don’t know what proportion of their clients have signed market contracts, are themselves unaware of the differences between regulated tariffs and these contracts and, lacking this information, don’t recommend the move to those who come to them for help.

The significant problem here, Nelson and Reid argue, is “confirmation bias” – where the industry believes in deregulation and consumer groups believe in regulated pricing.

They call for both sides to “move beyond the ideological divide” to focus on the provision of information that will help consumers minimise their expenses.

Just as their boss, Michael Fraser, was doing in the gas outlook forum, Nelson and Reid seek greater relationship building between the industry and social groups to resolve the deregulation impasse.

Rightly, in my book, they argue that there needs to be three in this bed: governments as well as suppliers and consumer advocates.

They want the trio to work out a “shared responsibility” approach to enable the right information to get to users.

One of the big hurdles here is to ovecome the urge by more than a few of the stakeholders to see more regulation as the answer – the common default position of far too many in politics, the public service and advocacy groups across a broad sweep of issues causing community angst.

The power industry view is that the vast majority of customers will be better off on market contracts even after accounting for fees and charges applied for agreement breaches – but its big hurdle is the complexity of what is on offer and the innate concern of consumers that it is what is in the small print that bites you.

The industry has not helped itself by allowing suburban door-knocking by power contract sales people to become part of the problem rather than a customer-friendly solution – both AGL and rival EnergyAustralia have now abandoned the practice.

As I have pointed out in “This is Power” and in the commentaries I write for “Business Spectator” on a number of occasions, one of the great lost opportunities of the past 18 months is the way Julia Gillard has ignored the calls from the ombudsmen agencies for a national summit on energy affordability.

It is not hard to see how this could have provided a mechanism for better understanding the energy-related cost of living pressures, improved the way jurisdictions manage support for those most hard-pressed and helped to bridge the divide between those for and against deregulation.

Crass politicking by the Gillard government has sidelined practical action to really help consumers.

I’d like to see the federal Coalition commit to pursuing this path as quickly as possible after it wins office in mid-September (as all opinion polls suggest it will do by the length of the straight, at least in the House of Representatives).

I’d also like to see the Coalition commit to promoting and pushing for full power market deregulation accompanied by efficient consumer protection.

The new AGL Energy economic working paper makes a good case for better co-operative involvement of power retailers, governments and NGOs in sorting out deregulation.

It should not be lost to sight in the morass of the longest-ever federal election campaign.

The Thatcher inheritance

In the millions of words run in the Australian media in the past week about the death of Margaret Thatcher it is notable that none were devoted to the most lasting contribution her approach has made to the our economy.

Certainly there were references to the Thatcher regime being the hard driver of privatisation of state-owned assets but, to a man and woman, the commentators missed the big ticket step that flowed on to Australian electricity supply.

As it happens, this financial year (2012-13) is the thirtieth anniversary of the launch of the reform that also eventually changed energy supply in eastern Australia and is impacting on us to this day.

The British Energy Act 1983, a response to business anger about the inefficiency of UK electricity supply and its cost, gave permission to private generation businesses to use the England & Wales transmission and distribution system.

Piloted by Nigel Lawson (now the 80-year-old Lord Lawson of Blaby, whose TV kitchen goddess daughter Nigella is far more famous in Australia), the legislation launched a furious debate between the Thatcher cabinet and the behemoth Central Electricity Generating Board, which insisted that separating power stations from networks would put supply at risk and leaked copiously to the media to support this view.

(The trade unions, of course, went nuts – as they are still doing here over power privatisation.)

It’s history that the CEGB was no match for Lawson and Prime Minister Thatcher but the debate rolled on for half a decade, during which the Energy Minister became Chancellor of the Exchequer (our Treasurer) and his successor was so captured by the power sector natives that the Iron Lady removed him after the 1987 election.

Even with a new minister, and with Thatcher heavily involved in the in-government debate, it took until February 1988 for the Conservatives to produce a white paper declaring for privatisation of power assets in England, Wales and Scotland and the creation of competitive markets.

The CEGB told the government its plans were “madness.”

It would be tedious here to cover all the goings on over another decade before the competitive electricity market and asset privatisations were completed in UK, but two points are important:

The process could not have succeeded without the determination of Thatcher to “remove the dead hand of government” from electricity supply and the wholesale market her government created was and is the template for Australia’s east coast “national electricity market.”

When, following the Hilmer Report, Paul Keating drove the federal government and the States through the Council of Australian Governments (as it eventually became) to set up the “National Grid Management Council,” the “Thatcher model” for the competitive market was clearly the only way to go – and so it happened.

Now one could write a long essay about how Australia deviated from the Thatcher government approach, not least in the half-hearted attitude to privatisation we have had (but she didn’t have State governments to manage) and in particular our failure to create an east coast national transmission company (in my opinion one of the big mistakes made here), but the “NEM” unarguably has Thatcher as its midwife.

Our “NEM” began operating in December 1998 and was joined by Tasmania in 2005 after Basslink was built, making it, in geographic terms, the world’s biggest electricity market, serving an area that, in Europe, would stretch from Moscow to Lisbon, with the majority of the load delivered to customers within 100 kilometres of the coast.

To carry this energy it incorporates 800,000 kilometres of network infrastructure – by comparison, the British system has roughly the same set-up for three times the population, something that isn’t often considered when noises are made here about network costs, the largest single component of the end-user bill.

Today the “NEM” underpins supply of power to almost 10 million residential and business customers, with a turnover annually of around $7 billion.

No-one will claim that the “NEM” as designed is an unqualified success.

Criticisms of its governance, regulation and structural make-up have rolled on for a decade since the Parer Review reported in 2002. The situation has been made worse by State jurisdiction conflicts of interest as asset owners and the final guardian of consumer needs – as well as by the dominant Labor State governments for most of that time being in the thrall of the union bosses.

The confused and confusing federal approaches here to environmental aspects of power supply have not helped at all.

I suspect Margaret Thatcher would handbag the politicians and bureaucrats overseeing the “NEM” without mercy.

Be that as it may, it has been accepted that the “NEM” delivers Australia GDP benefits of about $2 billion a year – and could do still more if recommended reforms could be properly implemented.

Australia’s “NEM” was not the first cab off the rank after the Thatcher government model.

The Nordic market claims that position and was influentual with our “NEM” architects, too.

Markets in three US areas followed – and then in California (with spectacular unsuccess in 2000-01 but not because of the market concept).

Additional markets have followed across the European Union.

Like other policy areas in which Thatcher’s hard-driving style made a substantial difference, the competitive electricity market is a monument to one of the outstanding politicians of the past century (and the ministers who served in her cabinets and the public servants who aided them) and it would be a shame for us to ignore here how this “light on the hill” helped introduce a significant structural shift in our national economy in the 1990s.

With all its flaws, the “NEM” is an example of how a market can deliver benefits while minimising costs and disruptions for customers.

We are daily receiving these benefits thanks to an initial policy thrust by the stateswoman the British are burying on Thursday.

Perhaps the real tribute we can pay her is to get on with the job of reforming the “NEM” and related activities (like network regulation and asset privatisation) and by coming up with a carbon policy that isn’t chopped and changed continuously.

‘Chainsaw’ cuts through on CSG

The federal Coalition’s Ian Macfarlane — nicknamed “Chainsaw” to the media’s delight — does not muck about.

He dropped in to the Australian domestic gas outlook conference in Sydney en route from Adelaide to his home in Toowoomba and, in a talk of little more than 15 minutes, delivered some forthright advice to his Coalition colleagues governing New South Wales and to other stakeholders in the contentious coal seam gas debate in the State.

Macfarlane also found time in his talk to re-iterate the Coalition’s intention, if returned to government in Canberra, of separating the Australian Energy Regulator from the Australian Competition & Consumer Commission.

His main thrust, however, was directed to the CSG situation in New South Wales — which he succinctly described as “stuffed.”

Macfarlane told 200 stakeholders attending the gas outlook conference that NSW was not looking at the prospect of a crisis — “this is a crisis already.”

(In so saying, he echoed the view of an AGL Energy executive participating in a forum panel discussion late Wednesday.)

The reality of the situation, Macfarlane said, is that there are areas of NSW that must be drilled to deliver CSG as the existing interstate gas supply contracts roll off and the O’Farrell State government must find a way to expedite activity.

Macfarlane, himself a farmer in Queensland with coal seam gas under his land, said the NSW government needs to “join forces” with other stakeholders, including manufacturers, who are now seriously worried about future supply and its cost, to get CSG development going quickly.

He understood that this will “cost the O’Farrell government political skin,” he said, but it needed to “use its political capital” to insist on a fact-based debate and to find an environmentally-sustainable path through the present impasse.

“The government’s priority must be to sort this out,” Macfarlane said — a view contrasting sharply with that of State energy minister Chris Hartcher, who earlier told the conference that “the challenge rests with industry to win the community’s support.”

Macfarlane was no less firm in insisting that the CSG industry needs to work harder to get local communities onside while speaking scathingly of “anarchists with no respect for the law or personal property” campaiging against development.

He pointed to the benefits of CSG activity for thousands of Queensland farmers, claiming that there are now 3,000 who stand to earn $5 million each over 10 years from gas companies.

“The Bible of the Bush, Queensland Country Life,” he added, “is now carrying real estate adverts for rural properties highlighting independent resource income.”

The priority for the O’Farrell government, he said, must be to “avert job losses from Newcastle to Wollongong” in the wider business sector.

As well, Macfarlane continues to strongly reject manufacturing sector calls for some gas to be sequestered for domestic use.

On gas prices, he argued to forum attendees that a $5 per gigajoule price is not going to return on the east coast. “Gas is the last commodity in Australia to be internationalised,” he said.

Earlier Chris Hartcher had said that CSG companies needed to do a better job of persuading landholders that their activities would not harm water resources, but he rejected calls for a moratorium on gas exploitation in the State.

He conceded the time bind now facing the State in securing new gas contracts, noting that the supply problem “could be looming in 2-3 years while the lead time for development is 3-5 years.”

He also said the State government is working on developing a “high-level pipeline strategy.”

Gas at a pivotal point

Sitting in the chair of the Australian domestic gas outlook conference in Sydney today, with an audience of almost 200 stakeholders in the room, I reflect that, if nothing else goes from the forum to policymakers, then the opening address by Michael Fraser, managing director of AGL Energy, will do the job of bringing home to them just what a tiger they have by the tail, and especially in New South Wales.

But at the same time Fraser hasn’t hesitated to lean on his fellow suppliers.

The gas supply industry, he told the forum, is at a pivotal point.

If legislators continue to travel down the path of implementing non-evidence-based policies, the broader community will suffer.

And, if government and regulators are to make the right decisions, then the industry has to get its community engagement right.

Fraser pointed out that there are 3.6 million connections to the gas pipeline network on the east coast.

The need for gas to be available to households, who make up most of these customers, for heating, cooking and providing hot water is obvious – but the importance of the supply system for products and services is less well appreciated in the community.

“This is a case of out of sight, out of mind for the general public,” Fraser said, adding that, apart from its use in services (like making bread) and manufacturing (eg fertilisers), gas now fired generation of 16 per cent of electricity.

“If we get gas policy wrong,” he warned, “the consequences won’t be confined to gas markets. Electricity markets will also be impacted.”

Much of the debate we are having about the domestic energy market at present revolves around the steady decline of demand for electricity as a range of factors, including the impact of the high Aussie dollar on industry and commerce, sends consumption in to a retreat from the peak of 2008-09 – but gas demand, Fraser pointed out, has been rising by three per cent a year for a decade.

That’s twice the rate of growth in demand for coal and oil.

Fraser posed a question to the forum – one that should be asked of the community as the debate rages about expanding the production of domestic gas supply: “Do we want to be Japan or America?”

Japan, where a lack of resources and the need to import LNG from Australia and elsewhere, has that country paying the world’s highest wholesale gas prices.

Or America, where technology developments and and relatively unfettered investment, is enabling the US, riding on shale gas and oil production, to head towards energy independence for the first time in living memory.

“The simplest and easiest way to to alleviate Australian domestic gas price pressures and to secure supplies for industry and households,” Fraser said, “is to find and produce more gas.”

The east coast demand arithmetic is this: in 2012 households used 183 PJ, gas-fired power stations took 210 PJ and large industry consumed 303 PJ.

This is all expected to increase, not least as the east coast population continues to rise.

Now there is no shortage of gas on the east coast. The latest independent modelling of reserves adds up to 48,500 petajoules, dominated by 41,000 PJ of coal seam gas.

The bulk of this gas is in Queensland – 39,000 PJ – with Victoria holding just over 5,000 PJ and NSW and South Australia combined having less than Victoria.

One problem is that 40,200 PJ of these reserves are in the hands of companies with economic interests in exporting LNG from Gladstone.

The other problem is NSW – with 95 per cent of its current gas supply coming from interstate under contracts that soon starting rolling off.

AGL’s major contracts – it is the dominant retailer – end in December 2016 and December 2017, which in new project development terms is uncomfortably soon.

But the State does have 2,800 PJ of coal seam gas resources within its borders, enough to meet some two decades of current-level demand.

Accessing it is the issue.

“New South Wales,” Fraser said wryly, “does have a reservations policy – the problem here is that it is a policy that says leave the gas in the ground where it is of no use to anyone.”

Where the rubber really hits the road in NSW is the potential impact of this situation on big industry.

Roughly half the gas coming in to the State is being used by the manufacturing, processing and non-metallic minerals businesses employing thousands of people.

For example, about five per cent of demand is used in food processing, employing 159,000 people.

Eight per cent of demand is used by firms manufacturing glass, chemicals, cement and ceramics, employing 43,000 people.

Fraser said that general manufacturing accounts for 40 per cent of gas demand in NSW, employing thousands more – many of whom he noted pointedly live and work in Western Sydney.

All of the above was by way really of a preamble to his key thrust: public policy these days is impacting negatively on what the community expects – secure and affordable (in the case of business, competitively-priced) energy supply.

“Policies,” Fraser said, “are often being implemented with little regard for the facts or evidence, in short time periods and without real awarness of the impacts and costs of the decisions.

“This trend doesn’t discriminate,” he added. “It crosses federal, State and local government boundaries, both sides of politics and new and traditional energy sources.

And, he went on, “if radio shock jocks, independent MPs and activists are able to push governments to make big policy shifts overnight, it leaves you wondering which policy will be next?”

However, the AGL boss was no less frank about the need for the industry to improve its game. “I would like to see us re-engaging with communities in ways which ease concerns and facilitate safe and sustainable CSG development.”

As a scene-setter for this conference – which Fraser kindly said showed impeccable timing – his address could hardly be better and, as I write this, I am keenly anticipating what the rest of the speakers will bring to the forum.

More soon.

Positive,neutral or negative?

In the context of the Australian domestic gas outlook conference, which is being held in Sydney tomorrow (10 April) and Thursday, there is a commentary in today’s “Australian Financial Review” that is worth reading.

Written by the paper’s Washington DC correspondent, Ben Potter, and reviewing the American shale boom in an Australian perspective, the commentary comes to this conclusion:

“The lesson (from what has happened in the US) is that government can have a positive, neutral or negative impact on energy policy.

“From a distance it appears that energy policy in Australia has been pre-occupied with setting up an unwieldy carbon tax in isolation from our main trading partners and in fostering the development of giant LNG projects.

“Progress in exploiting our rich resources of unconventional gas – shale and coal seam – has been patchy, with the notable exception of Queensland and the cost of domestic energy is rising.”

In the same newspaper, my friend Robert Pritchard, executive director of the Energy Policy Institute of Australia, also has a commentary on feedback from the “Energy State of the Nation” conference he recently staged.

Using as a peg Ian Macfarlane’s commitment at “ESON” to formulating a new energy white paper within 12 months of the Coalition winning office on 14 September, the likelihood of which is reinforced by today’s new Newspoll, Pritchard reports on the vote at the conference on issues of main concern to stakeholders attending the event.

The main question bothering participants, and anyone focussed on the energy industry knows that this is true for the wider spectrum of stakeholders, is whether the carbon price can actually be repealed without further disruption in the marketplace?

Pritchard reports a dead heat for second concern among “ESON” attendees between whether rural and green opposition will prevent greater development of coal seam gas – fuelled in the main, I suggest, by concerns about the situation in New South Wales – and the direction of future electricity prices in the face of declining demand and the impact of the renewable energy target.

In fourth place was a more generic concern about how government should address energy policy priorities in pursuit of a lower carbon economy.

The AFR’s Potter perceives a problem in the Rudd government walking away from the Asia Pacific forum on technological solutions for abatement when it won office in 2007 – because staying in, he says, would have encouraged us to think more about gas in this context – but all of us who followed Martin Ferguson’s energy portfolio management over five years know that this aspect was always high on his agenda.

Ferguson’s problem was always the haphazard and populist approach pursued by Rudd, then Gillard, Wayne Swan, Penny Wong and now Greg Combet in throwing green rocks in to the energy pool without adequate understanding of the impacts.

The Labor government, as a whole, has simply failed to join the dots on its overall approach to energy and is now relying on rhetoric rather than reason to shield its unsteady path to the polls.

We have reached the stage – as I wrote in “Carbon games on the long March” (this site, 7 April) – where Combet asserts that the carbon price introduced last July is the cause of a reduction in NEM emissions in the last six months of 2012, a conclusion that anyone who understands what has been happening to demand knows to be misinformed.

In the context of onshore gas, the other “Australian Financial Review” commentary worth reading is the one it published at the weekend by highly-regarded energy writer Angela Macdonald-Smith, dissecting the ABC’s “Four Corners” report last week on coal seam gas (which I note lived down to our expectations of the national broadcaster in covering this issue).

As Macdonald-Smith says, “the heated debate over CSG has polarised farming communities, politicians, friends and families.”

“Unlikely alliances have formed between talk show hosts, wealthy landowners and environmentalists,” she writes, “united in their worries over potential lasting damage to water and land resources.”

In her judgement, “examination of the key claims made in the Four Corners program reveals a mix of well-worn attacks by notorious anti-CSG activists and outright misleading assertions, but also valid questions over the impact on water.”

Santos, whose vice-president eastern Australia, James Baulderstone, will be a keynote speaker at this week’s domestic gas outlook conference, took out full-page advertisements in newspapers last week to refute claims that impacts on groundwater were not properly assessed for its CSG developments.

Macdonald-Smith’s commentary contains quite a detailed dissection of some of the most contentious ABC claims.

One thing that can be expected from the domestic gas outlook conference is a further assault by the energy companies on the policy processes impacting on gas development.

This brings us back to Ben Potter’s observation that governments can have a positive, neutral or negative effect on energy activities.

AGL Energy, whose chief executive Michael Fraser and group general manager upstream gas, Mike Moraza, are both participants in this week’s gas forum, has recently complained to the Productivity Commission (which is reviewing assessment processes at present) about appeasement of of some community groups becoming the basis for significant policy changes affecting developments.

The repercussions for the national community need to be also considered, the company said. “If all forms of new energy production are prohibited, it will be impossible to have a secure domestic energy supply.”

Points made by the Minerals Council of Australia to the Productivity Commission are also worth noting.

Boiled down, the MCA says it is time to look at the combined impacts of the huge suite of regulations for resources development and to assess how well they are performing.

“Too often,” says the Minerals Council, “the simplest questions cannot be answered: do these regulations make sense, are they justified and can they be implemented?”

More broadly, it asks, do these measures, systems and approaches enhance or detract from economic development?

To which one might add the question of how efficiently do they really do the job of environmental protection?

If the “Four Corners” imbroglio does nothing else, it highlights a fundamental question about an environmental evaluation process that takes four years, adds markedly to the costs of projects and still leaves people, whether maliciously or not, able to complain that development approval has been inadequate.

Circling back round to the “ESON” attendees’ concerns, perhaps the Coalition’s energy white paper plans can only really meet Ben Potter’s test if a new government is also prepared to tackle the worsening regulatory maze.

The Minerals Council quotes Henry Ergas on what he calls the need to reboot the boom: “Policymakers and companies need to identify and address the inefficiencies that give rise to cost increases and unnecessary development delays or in other ways undermine the competitiveness of Australia’s resource industries.”

It will be interesting to hear what the Coalition resources and energy spokesman, Ian Macfarlane, has to say about this when he speaks at the gas forum.

The German question

What is happening in Germany with energy policy matters here to a certain extent because it is used continuously by the local Greens and fellow travellers as an example of what should be done in Australia.

However, what really is happening in Germany tends to be obscured by the relentless Pollyanna-style media coverage here (and elsewhere).

As the leading German publication “Deutsche Welle” points out, while the international media are fascinated with Merkel’s “energiewende” (energy transition), the local media very often paint the revolution as a “pure nightmare.”

Reporting of the issue inside Germany, says “Deutsche Welle,” is dominated by citizens’ protests against new powerlines, scenarios of power shortages and escalating end-user electricity costs.

There is a fervent domestic debate in Germany over the need to cut subsidies for renewable energy, strongly criticised by local environmental groups because, they say, it will slow down the “energiewende” process.

The solar power revolution in Germany – it now has almost half the global rooftop PV total – is a particular focus for discontent in the strasse.

Conservative politicians want to put an end to the subsidies that have driven the “solar success,” pointing out that the boom has come at the expense of those city-dwellers without solar-ready roofs, low-income consumers and investments in other forms of renewable energy.

German media are full of stories about 10 to 15 percent of households now struggling to pay their energy bills and 600,000 “vulnerable” households having their electricity turned off every year for non-payments of accounts.

Even some environmentalists have begun to grumble about a solar policy that has hoovered up half Germany’s funding for renewables but can deliver only 20 per cent of current output of “green” power.

The capital investment in 30,000 MW of rooftop solar is said to be 100 billion euros and these arrays deliver roughly 30,000 gigawatt hours a year, but the same investment in, say, wind power would deliver two to three times as much energy.

(Although not even such a massive investment in wind will fill the looming supply gap. The nuclear plants Merkel is consigning to the dustbin pushed out 150,000 GWh a year when German consumption was higher – it’s fallen now because of the North Atlantic economic crisis.)

The solar output hassle is why you are starting to see stories here about the need for greater funding of research in German in to electricity storage. This is the magic bullet that will make the OTT investment in solar alright again……………

Meanwhile, the German power industry is stuck with a situation of over-production of electricity (thanks to solar) during sunlight daytime hours.

German suppliers traditionally charge more for electricity during daytime when offices are full and factories are in high operation, but the solar glut is eating their lunch and reducing their profits from high-margin householders during daytime peaks.

Renewables are guaranteed better than market prices while the power surplus drives down prices for traditional generation – in trying to balance the situation, the utilities try to pass the costs to residential consumers, just driving more of them to solar PVs.

The Greens and fellow travellers (here and there) think this is all wonderful, but it has grim implications for reliable, affordable power over time.

But wait, there’s more!

The rest of Europe, fed up with the German policymakers’ games, have just sprung on them via the European Commission, which has now formally launched an investigation in to whether the energy price cuts guaranteed to the industrial sector are a hidden (and unlawful) form of state aid.

The German set-up allows large business consumers to escape substantial network charges (caused by the system needing to cope with renewables) and in 2012 this was worth $390 million, an arrangement that puts industrial competitiors in the other 26 EU countries at a disadvantage.

(The network charges are deposited on German household and small business customers by the way – and they are not happy about it.)

The German government is trying to escape the EU watchdog by arguing that the network reduction scheme is not state aid because it isn’t financed with public money but by a fee on other energy users!

Even these games are not a get-out-of-jail card for German policymakers striving to hang on to business investment and attract more.

My search of Google over the weekend threw up a story that the lower electricity prices emerging in America as a result of the shale gas revolution are an attraction to data centres – for whom power is a substantial input cost.

Boiled down, it appears that a data centre set up in the US with a 2 MW load will pay $750,000 a year less for power in America than in Germany.

Of course, this is small bier in the real world debate.

The big steins are the German government being told by their steel and chemicals companies that their developments are likely to go to America because power prices there are a third of the local bills.

In another less-than-happy twist, the German government and others in the EU are now being told by the European Network of Transmission System Operators that they had better get busy building fossil-fuelled power stations to cope with system security when they hit their intended target of 40 per cent of renewables supply in 2020.

The transmission businesses say the EU will need 38,000 MW of new fossil capacity to underpin the much greener system in 2020.

This is leading Germany, as well as France, the UK, Italy, Poland and Belgium, to contemplate how to prevent the closure of plants made unprofitable by the renewables revolution.

The current favored solution is the introduction of capacity payments to ensure that utilities will keep gas and coal plants in particular available to guarantee supply.

In a belt and braces manoeuvre, the transmission business also want the EU to rewrite the rulebook to enable grid operators, in a situation where there is insufficient capacity and the system is in danger of falling over, to reach in to homes and arbitrarily switch off refigerators and washing machines.

This will require manufacturers installing new technology in electrical appliances, adding to the costs of whitegoods.

Needless to say, the whitegoods manufacturers don’t want a bar of this – and neither do consumer groups.

Finally, and of relevance here, this is the view of Stephan Kohler, head of the German Energy Agency as reported in “Spiegel Online” late last year:

(1) “Many people say we can replace power plants operated with fossil fuels by renewable resources. My response to them is it won’t work. Neither solar nor wind can deliver a secure supply for industry – and in Germany 75 per cent of supply goes to industry.”

(2) “When the sky is blue over Germany hundreds of thousands of decentralized (solar) plants act like a large single power station. All of sudden we have 30,000 MW coming on the grid – which we can’t use. So we have voltage fluctuations that create problems for industry. Or we overload the grids in neighbouring countries. Poland is installing equipment to keep out surplus German electricity.”

(3) “We have to put an end to the completely unstructured installation of solar systems as soon as possible.”

And one final Kohler complaint: what comes with the expansion of renewables is an urgent need to build new transmission lines, but these are being opposed by the environmental movement while they staunchly promote the construction of more renewable power.

As you can see, all that glisters in Germany isn’t gold.

Carbon games on the long march

Here are three statements to be found in the media.

First, a spokesman for Climate Change Minister Greg Combet said carbon pollution from electricity generated for the national (east coast) market fell by 8.6 per cent in the last six months of 2012 following introduction of a price on carbon on 1 July.

Second, a Fairfax tabloid column by Peter FitzSimons this weekend declaims: “So how is it that last week’s news from the Australian Energy Market Operator that carbon emissions fell by 8.6 per cent throughout Australia in the six months after the introduction of a carbon price produces barely a ripple?”

Third, Grattan Institute’s Tony Wood told a News Ltd reporter: “The conclusion that the carbon price is a major factor in reducing emissions is almost certainly wrong. There has been a fall in demand in the industrial and manufacturing sectors due to exchange rates.”

And here are three points to bear in mind as we advance further on the long march to a federal election.

First, the Gillard government carbon price will be increased on 1 July as per its policy schedule.

Second, new electricity prices for regulated customers in New South Wales and Queensland will be finally determined in May and introduced on 1 July.

Third, Coalition governments in Western Australia, Victoria, NSW and Queensland plus the Federal Opposition can then be expected to be very vocal about the further impact of the carbon price on consumers and on the promise that an Abbott government will abolish the measure.

And here is a thought that surely is not irrelevant.

There are 335,000 small businesses in Australia, employing about 1.7 million people – and business software provider MYOB’s 2013 survey of them shows that two-thirds of respondents want the carbon price scrapped, putting this move second on their wish list for policy changes behind the perennial requirement of a much-simplified business activity statement process for the GST.

Read this point with a claim in the News Ltd tabloids that there were a record 10,632 company insolvencies in the year to March, with the number of firms placed in administration 12 per cent higher than during the height of the global financial crisis, and with rising energy bills being perceived by “corporate rescue doctors” as a key factor after the impact of the high dollar.

And read it also with a widely published story quoting the Australian Industry Group CEO, Innes Willox, as saying that scrapping the carbon tax will save businesses 10 per cent on their energy bills.

On the issue of carbon emission reductions in the NEM – and FitzSimons isn’t the first and won’t be the last to assume the “national” market is Australia-wide – power and energy markets research firm RepuTex notes that there was 2.7 per cent less power generated on the east coast between last July and December than in the same period 2011.

The analysts point to increased hydro-electric generation (thanks to flooding rains filling dams) and the market decisions to retire or mothball 3,000 MW of coal-fired capacity in a year.

The emissions outcome, RepuTex says, is that NEM greenhouse gases reached 81.3 million tonnes, a 10-year low, with a reduction of 7.6 Mt for the period compared with July/December 2011.

The firm notes that coal-fired generators no longer hold their pre-eminence in the NEM’s merit order of despatch, where they used to have priority, being displaced via the addition of the carbon price, falling baseload demand and the rising amount of “green energy.”

RepuTex also points out that the window in the NEM for gas-fired generation as a transition fuel to the “clean energy future” is closing although access to relatively cheap gas contracts helped to fill the demand gap left by coal in the past summer.

Rising gas prices, it says, will restrict gas generation over the next five years to periods of high wholesale power bids. Large utility plans for big gas-fired projects have been shelved.

Assuming that the carbon price stays in place, RepuTex predicts that emissions in the NEM will decline seven per cent between 2017 and 2020 with a sharp drop in brown coal generation when the Gillard government’s compensation expires in 2018, with wind energy outstripping growth in consumer demand by nearly 3.5 times over the next seven years (due to the RET requirements) and with marginal coal generators being kept out of the market by low wholesale prices.

With the carbon price removed, the firm says, NEM emissions could be expected to be 13 Mt higher in 2020.

All of which will fuel the ongoing debate ahead of the election, with a wide range of opinions (not all based on facts) being aired over and over.

One of the most important questions now surely is how much Tony Abbott and his colleagues are actually listening to all this as they trudge towards the poll that seems clear, at least at present, to deliver them a smashing victory in the House of Representatives but a less useful outcome in the Senate?

Meanwhile, for those whose heart’s desire is policy certainty, it is a salutary thought that this will be the third federal election with a wholly different political approach to the carbon price issue.

By the time the 2007 campaign was over both mainstream parties were supporting introduction of an emissions trading scheme as well as a much higher RET.

In 2010 the Coalition was totally opposed to a carbon tax and the Prime Minister pledged to the electorate that her government would not introduce one.

In 2013, another government in terminal decline (as was Howard’s in 2007) is clinging to its carbon abatement program and its main opponents are determined to junk it and pursue their own agenda — while the sides have very different views of the RET.

Perhaps the biggest question in the minds of energy suppliers and investors revolves around whether the Coalition could support a flexible price scheme (ie emissions trading) set by the international markets from 2015?

Not far behind is the need to be told just how an Abbott government will run its “direct action” abatement program – which will involve ministers choosing from a pool of bids by business?

No-one in business needs to be told that there are political sharks lurking in these waters.

Someone who is a veteran political cynic said to me last week that he would not be surprised if Gillard, Swan and Combet came back from holidays with a plan to drop the fixed-price carbon regime at the end of this year, thus themselves killing the carbon tax and denying Abbott at least this political mileage in the election campaign.

What do they have to lose (in terms of reputation), he said?

And what might they gain in terms of “saving the furniture,” that is reducing the size of their defeat.

Mad?

Come on, the ALP has redefined mad in Australian politics in the past two years.

Gas & a fraught political nettle

At the week’s end there are 157 people registered to attend the Australian Domestic Gas Outlook conference in Sydney on Wednesday and Thursday.

Factor in keynote speakers and participants on a series of panel discussions and some 195 stakeholders in gas supply and consumption will be on hand.

The speakers will include the Queensland and New South Wales energy ministers, Mark McArdle and Chris Hartcher, and the federal Coalition resources and energy spokesman, Ian Macfarlane.

Leading the large pack of resource sector, farming community and manufacturing speakers participating will be Michael Fraser, managing director of AGL Energy,which is on the front line of the gas supply debate, especially in NSW.

The conference falls just 10 days before the Independent Pricing & Regulatory Tribunal is due to release its draft determinations on both NSW gas and electricity prices for 2013 to 2016.

The “ADGO” event is not just about NSW – far from it – but the State’s gas situation is bound to dominate discussions at a time when two companies with substantial coal seam gas interests, Dart and Metgasco, have suspended operations because of their unhappiness with the policy environment, manufacturers are considering their future there in the face of looming retail price rises and the competition between LNG exporters and domestic requirements is exacerbated there by the roll-off of existing contracts for supply to 1.25 million household and small business customers plus 485 large business users.

The majority of regulated household and small business gas customers in NSW are supplied by AGL and the company is seeking a 10.4 per cent increase in what they pay from July this year.

Even the period for which the price determination is made is in dispute: the retailers would prefer IPART set prices for just 2013-14 because of the uncertainty in market conditions while the NSW Business Chamber is concerned that periodic price-setting will mean “small business consumers risk being faced with severe price hikes combined with minimal certainty about when these price hikes will occur.”

The chamber has told IPART, given the forecast increases to wholesale gas prices and the “fragile state” of business confidence in NSW, small business consumers will be even more sensitive to any such arrangement because gas costs will likely form a higher proportion of their input costs.

These concerns have been reflected in a letter Hartcher wrote to IPART, fretting about the “uncertain supply-demand balance” in NSW and arguing that a double-digit retail price rise “is not in the best interests of consumers.”

The politics of all this – in a federal election year – become clear when you appreciate that 1.1 million NSW households, half of the State total, currently use reticulated gas and another 300,000 customers use bottled LPG.

The politics is triangular, of course, because another side is the vocal opposition to coal seam gas development in western Sydney and a number of regional communities.

Matthew Stevens, a writer for the “Australian Financial Review,” put it well in a commentary at the end of February: “The frustration for everyone in the gas supply chain,” he wrote,” is that NSW has a partial solution to its looming problem within reach but it refuses to grasp what is a politically fraught nettle. “

At some point from 2016, Stevens said, NSW consumers “will start paying gas prices that reflect their State’s drift of importance” for producers and “the failure to embrace policies mitigating their vulnerability.”

The journalist sees the current State government approach as a “classic product of short-term politics risking profound long-term (economic) consequences.”

It is a given that there will be plenty of supplier unhappiness in this vein on display at “ADGO” in the week ahead, driven by the view that some $700 million spent on finding and defining coal seam gas resources is now at risk as a result of both federal and State policy interventions out of the blue.

This is the dictionary definition of sovereign risk.

The strangeness of the NSW situation will be more sharply defined by McArdle being able to point to the different story across the border.

Some 3,700 land access agreements have been signed to date with Queensland farmers by coal seam gas companies versus just 200 in the “lock the gate” State.

Queensland also has a financial assurance arrangement with the gas companies – roughly akin to the bond on rental homes – to cover any damage that has to be repaired when their work is done.

The State government says there is $620 million in this fund at present covering almost 4,000 wells – and it will rise as producers take the well tally to about 14,000 by 2020.

These points and many more will get an airing over two days at “ADGO”.

Meanwhile I have been struck this afternoon, again reading the “Australian Financial Review,” by an interview with Mary O’Kane, the NSW chief scientist who has been asked to “investigate any gaps in the management of risks arising from CSG activities in NSW.”

O’Kane observes to the AFR writer that, before condemning coal seam gas, people should look at the alternatives.

“Extracting energy always has its difficulties,” she is quoted as saying. “There is no such thing as clean green energy. Even all the renewables have their problems.”

In this context, I have also been amused this weekend to read a report from France about the upstream petroleum industry and others snarling at the Francois Hollande government for banning shale activities using fracking – “for serious health and environmental risks” – while giving the go-ahead to “hot rock” geothermal developments that will need to use similar hydraulic fracturing processes.

(A French bureaucrat has explained that the geothermal approach isn’t fracking “in the strict sense” because it will just be used at the onset of a project to “re-open existing fissures blocked by mineral deposits.”)

“France,” says International Energy Agency head Maria van der Hoeven,” is fracking for geothermal,” calling on the Hollande government to re-assess its attitude to shale developments in the light of the high bills Europe is facing for importing gas.

Claude Mandil, a former head of the IEA and now a director of petroleum company Total, observes that “talk of geothermal and fracking is being hushed up so as not to provoke an outcry.”

What a tangled web.

Perils of polarisation

Democracy is a messy business – and messiest of all in a country like Australia where everyone eligible is required to vote.

Apart from pulling a quite large swag of people, perhaps a quarter of the community, to the polling booths when they actually would rather not play and, like pillows, are susceptible to the last person who made an impression on them, the Australian system frequently brings out the worst in politicians as they throw down their populist cards.

The present bizarre debate over taxing superannuation is a case in point with federal ministers rabbiting on about the “fabulously wealthy” in an echo of the carbon price row, in which they couldn’t stop mentioning “big polluters.” (And can now expect to be fanged by small business, who are wearing the higher energy bills and getting no compo.)

The biggest problem with this situation is that eventually the community loses respect for, and trust in, those in government, resulting in massive swings of voting sentiment.

We saw this occur federally in Australia in 1975 (reinforced by an even bigger swing in 1978) and in 1996 – and the current opinion polls suggest the Coalition will find itself in office after 14 September with a House of Representatives majority of more than 50.

If this happens, it will echo the savaging meted out to the ALP in New South Wales, Queensland and, most recently, Western Australia as long-serving Labor governments run headlong in to the accumulated wall of voter distrust and disdain.

Unfortunately, one of the side-effects of this voter behaviour is that it causes politicians winning government to be simultaneously more populist and more timorous as well as fixated on the horizon of the next election – a combination that is less than encouraging if you are an investor with a project with an operating life of several decades, not to mention bankers whose own predicaments have changed their lending behaviour.

What is currently going on in the coal seam gas space on the east coast is a poster child for the fallout for investors of the political morass, especially in an election year.

Dart Energy’s decision to follow Metgasco in turning its back on New South Wales gas development until CSG policy is resolved further highlights the dangers of ad hoc and politically-motivated energy project approval decisions.

Next week’s “Australian Domestic Gas Outlook” conference, which I have helped to organise and am co-chairing, is going to throw the broad issue of gas regulation and the special problem of NSW supply in to sharp relief.

It is hard to see how it can generate anything other than harsh words from the industry for the body politic – and people like NSW Resources & Energy Minister Chris Hartcher have already signalled that they see the issue needing the industry to redouble its efforts to take the heat out of the debate.

More than 200 industry stakeholders have registered to attend the conference or to speak at it, itself an indication of the strong concerns of stakeholders.

At the core of it all is the point that David Byers, the CEO of the Australian Petroleum Production & Exploration Association, keeps making: this situation has real consequences and the potential to impact on gas supply to large numbers of households and businesses.

What is another worry – I think – is that the whole mess could come to a head in 2015 when contracts roll off and we are scheduled to have the next NSW election along with a Queensland election and, if the federal wrangle over carbon price policy falls this way, possibly a double dissolution national election.

“Perfect storm” is a cliché of our times but this scenario would make it look like T.Bear’s picnic.

Meanwhile, we can look forward to the CSG debate being played out on a smaller scale in New England where it seems likely that the sitting MP, Tony Windsor, will be up against the National Party’s Barnaby Joyce.

And, of course, one should never forget the intervention of the party created by Queensland MP Bob Katter, a politician for whom the term maverick would have to be invented if it didn’t already exist, and who has numerous bees under his big hat about coal seam gas.

New England is an electorate where there is a large potential for CSG development as well as for new coal mines and a large community concern about claimed impacts on land and groundwater.

Joyce has been making the point this week that the amendments to the Environmental Protection & Biodiversity Conservation Act that federal Environment Minister Tony Burke has before parliament at present are a result of pressure from Windsor and are going to add to project approval delays while being “pointless” in terms of environmental benefits.

The current Greens line, supported by Windsor and eagerly embraced by the ABC and Fairfax newspapers, is that NSW and Queensland governments have a vested interest in approving resource projects rather than subjecting them to rigorous scientific review.

The industry view, as expressed by Byers, is that Burke’s intervention adds duplication and inefficiency to approvals processes just when governance clarity and investor certainty are most needed.

All this and much more will be strongly debated at the Australian Domestic Gas Outlook conference and then again, in an even bigger arena, at the APPEA annual conference in Brisbane at the end of May.

The problem for the Coalition, which now has ownership of this issue in NSW, like it or not, and has every expectation of being the national steward of energy and the environment after September, is that the polarisation of the community over this matter could already hardly be greater and the economic and consumer cost consequences in the largest regional economy in the country are now looming large.

The answer for companies like Dart and Metgasco is relatively simple: it is to do what they are doing – finding somewhere else to spend their shareholders’ money.

The community of NSW and their State government, however, have nowhere else to go except, ironically, as gas supply tightens and prices go through the roof, to turn increasingly to electricity to fill the gap – and largely this will be coal-fired power from existing plants – or, perhaps, to source CSG from Queensland via a new and expensive pipeline.