Coming together again — to what end?

A (very welcome) wet three days in Sydney and a large part of New South Wales provides an interesting window on the State’s ability to meet its power needs outside of sunny and/or windy periods.

The Open NEM widget is the data source for Thursday through Saturday.

It’s notable for a start that NSW imports (mainly from Queensland) provided 38 gigawatt hours, as much as in-State wind and solar put together (22 GWh from wind farms, 4.5 GWh from solar farms, 11.3 GWh via rooftop PVs). Gas plants (11.2 GWh) and hydro systems (13.2 GWh) came in handy – but by far the largest contribution (82.5 per cent) came from NSW’s black coal generation, which delivered 475.4 GWh.

The green boosters tend to play games with capacity because it often makes their love objects appear shinier to the public at large, so it is also interesting to look at the load requirement at 6.30pm on Friday: nowt from solar after dusk and 294 megawatts on line from wind, with 668 MW from hydro and 726 MW from gas plants – while the State’s coal generators provided 7,265 MW and imports (mainly more coal power from Queensland) access to another 527 MW.

The supply picture shifts shape all the time, of course, depending on the weather, time of day and the availability and cost of generation resources, but it is handy to keep in mind the production statistics above when considering that NSW is destined, in strategy being envisaged by the Australian Energy Market Operator for a mooted big shift from conventional resources to wind, solar and storage, to be the NEM region subjected to greatest change.

One wonders how much appreciation (beyond the industry’s technical experts) there is that the system will need a lot more generation capacity to deliver the same amount of product when variable renewables replace today’s major supply sources? And the issue is not just generation.

In this context, I see the Energy Networks Association, in a submission on rule changes to the Australian Energy Market Commission, making the point that, while three years’ notice of mainstream generation closures may be adequate for investors looking at building wind or solar farms, it is not likely to be for infrastructure such as new transmission lines, including interconnectors.

Transmission planners, ENA points out, work on 10-year horizons and have to take in to account long lead times on such issues as corridor and site selection, stakeholder and landholder engagement, acquisition of easements and environmental approvals.

How much of this stuff weighs on the minds of the federation’s energy ministers and their office advisors, not to mention their political colleagues looking for angles to impress voters, is something I also often wonder about. (For example, this one-liner from Premier Daniel Andrews last month: “It’s simple — greater supply of renewable energy means lower prices.” An echo of Jay Weatherill’s claim in Adelaide last February that “(lots) more renewable energy means cheaper power for South Australians.”  That played well with SA voters as we know.)

The transition challenges, for the NEM as a whole and for the large-demand States (Victoria, NSW and Queensland) in particular, are dealt with far too airily in the public debate for my liking.

Now, we are about to witness another ministerial gathering – it is reported this weekend that the CoAG Energy Council is to meet again in Sydney on 26 October. (This will be the fourteenth such chinwag in the wild gyrations of current policy contention over the past three years.)

For one government (Victoria’s), participation will be on the eve of a challenging election campaign – and it will also be in the week after the Wentworth by-election with all its portents for Scott Morrison’s federal government.

What will be on the council’s agenda apart from updating reports by AEMO, the ACCC, the AEMC and the Energy Security Board?

The ministers got some advice from the ACCC’s Rod Sims in a conference speech in the past week. The best way to move the policy process forward, he said, is to separate out affordability, reliability and emissions reduction for attention rather than trying to address all three in a single package. Australia’s political parties, he observed, right now have seemingly “irreconcilable differences” on carbon abatement.

Is the most appropriate game plan, then, to press on with actions that will have an impact on power bills in the relatively short term while pursuing consensus on measures that will sustain downward price pressures beyond the decade’s end through underpinning supply reliability?

One path ministers could choose to take is to focus more strongly on energy productivity, bearing in mind that there is momentum in this direction from consumers, especially those in commerce and industry (responsible for 60 per cent of consumption), as a defence against painful present prices and the ongoing high level of policy uncertainty.

Meanwhile, federal Energy Minister Angus Taylor is still taking the Morrison government’s price-oriented energy messages to consumers via radio interviews. Here’s the thrust of one he had with an Adelaide radio station late in September: “There are three parts to what we are doing. The first is stopping the rip-offs by big energy companies. (The second is) a default market offer so that, if you don’t have time to negotiate (a contract), you still get a fair deal. The third is (to) make sure there is enough investment in generation capacity in the market. Through these three areas we are (aiming to) drive down prices while keeping the lights on. That’s energy policy.”

It will be interesting to hear what he has to say after he has chaired the next Energy Council meeting. And to discover what the ministers have found to agree on.

PS: Here’s the key statement from the 7 October 2016 council communiqué: “Ministers agreed that their primary responsibility is to ensure the security, reliability and affordability of the energy system for all Australians.”

Trouble in transition

Is it “Huhner kommen nach Hause, um zu schlafen” time for Germany’s Angela Merkel?

That’s “the chickens come home to roost” – and, in the case of Merkel’s signature Energiewende policy, still being lauded by green boosters as “paving the way for the world,” to quote one just last month, the portents from independent analysis are not too good.

Apart from the well-publicized political problems being encountered by a committee appointed by the Berlin government in the wake of its last federal election to advise on an exit from coal power, the independent body that audits the German budget, the Bundersrechnungshof (BRH), has just declared that at least 160 billions euros have been spent on the program over the past five years alone, costs are continuing to rise and the abatement targets remain out of reach.

The BRH points out that Merkel has 26 laws, 33 regulations, 72 indicators and 675 bureaucrats engaged in the Energiewende program but “there is no place where everything comes together, no place that assumes overall responsibility.”

In particular, BRH says, there are no quantified targets and no measurable indicators for energy affordability and security of supply.

The auditors’ proposed solution: scrap the whole bureaucratic shebang and rely on “simple and transparent CO2 pricing.”

And the German government response? It got the report a month in advance of it becoming public and whipped out a retort last week that Energiewende is “effectively and efficiently co-ordinated.”

Perhaps the best (or worst) aspect of the government reaction is the bald-faced effrontery of cost denial. The multi-billion euro levy that supports the German version of the RET, says the economics ministry, “should not be counted as a cost of the transition.” And the billions of euros in relief payments to German manufacturers to compensate for higher energy bills are “measures of industrial policy that cannot be attributed to Energiewende.”

The regime also offers a marvelous Sir Humphrey response to demands for an independent cost-benefit analysis of the policy: this could only be done by comparing a world with and a world without Energiewende, the government declares– and this could not be achieved because of the large number of uncertain basic assumptions that would be involved!

This stance has its foundation in the fact that, since 2000, four different political parties have been in power in Germany in three coalitions and all have supported the policy – and opinion polls still show that 90 per cent of Germans see Energiewende as vital to the country’s future.

This is despite the fact that German household energy prices (the trigger down here for political upheaval) have risen to 308 euros a megawatt hour compared with an average of $205 in the European Union as a whole – and the RET subsidy is now double the level that Merkel & Co in 2011 promised it would not exceed in 2020. (Non-energy intensive industry in Germany pays 96.5 euros per MWh for power against the EU average of 85.)

In the context of all the boosting here of the need for an integrated system plan to support much larger levels of wind, solar and hydro power in the NEM, it should be noted that, while the German target for high voltage transmission to support Energiewende is construction of 3,582 kilometres of lines by 2020, to date less than 900 km have been built.)

Allow me a digression, although it is not really out of context: the summer just ended in Europe was, by their standards, a scorcher and notable for weeks of heatwaves with barely a breeze. As a result in Germany, where there are 30,000 wind turbines, capacity on line on some days was just 1,300 megawatts – against a total installed of 58,000 MW. Ironically, the supply security savior was Germany’s brown coal (lignite) power stations, which rely on mine water for cooling, versus the black coal and nuclear plants that also had to reduce capacity because of the high water temperatures at their sources.

(For the record, power generation in Germany for the first nine months of 2018 has been provided by 101 terawatt hours of brown coal plant, 56 TWh from black coal, 53 TWh from nuclear plants, 28 TWh gas, 15 TWh hydro, 34 TWh biomass, 74 TWh wind power and 40 TWh solar power. That’s a fossil-fuelled share of 46 per cent plus 13 per cent for nuclear versus under 29 per cent for wind and solar.)

One last thing: back in 2004 the federal German environment minister was Jurgen Trittin. He was a Green, part of chancellor Gerhard Schroder’s “red-green” coalition and led the policy decision to phase out German nuclear power by 2020 (you can see from the data above how successful that has been). Trittin famously (that should probably now be infamously) told German householders in 2004 that support for renewable energy to achieve the transition would “cost no more than a scoop of ice cream a month.”  And here is the president of the BRH today: “The expenditure for the ecological restructuring of energy supply is in blatant disproportion to the hitherto poor yield.”

Do bear this in mind when observing our home-grown Greens going on about big Australian renewables targets and how they will help cut the price of our power.

In all directions

“Be prepared” is not only a motto for the Scouts – and stakeholders in energy supply clearly are embracing it at the moment.

It is being reported, for example, that both electricity and gas companies are sounding out law firms on support should either the Coalition or Labor dial up a royal commission in the months ahead. This is sensible because, from where I am sitting, the chances are about 50:50 of this occurring, with the added rub that, under Labor, sooled on by the union movement, the issue of privatization could be on the agenda. As the banks have found, the reputational risk for companies exposed to such a commission are not trivial.

Meanwhile, it is also reported that the business community and Labor (in the form of Bill Shorten and energy spokesman Mark Butler) have held a meeting at Parliament House, Canberra, to discuss, among other things, pursuit of the “national energy guarantee” – with Butler assuring them the Opposition wants to make sure that “the good thinking (on the NEG) is not entirely lost.”

It won’t be lost on the energy sector that the outcome of the Wentworth by-election is crucial to how the next act of the present political drama plays out; a poor showing in Malcolm Turnbull’s former seat would make life still more difficult for Scott Morrison & Co – and a defeat would put the government on life support.

While all this is going on, new Energy Minister Angus Taylor and his advisers are said (in the media) to be working on a proposal to support upgrading of existing coal-fired power stations to “improve performance, cut emissions and prolong operating lives,” an approach claimed to have been initiated by his predecessor, Josh Frydenberg, now Treasurer, who would have to find the funds for any form of financial contribution.

Taylor’s current theme, set out in an op-ed he has written, is “lower (power) prices while keeping the lights on.”  The Morrison government, he promises, “will not be driven by ideology or grand gestures but by pragmatism.”

To which he adds: “We will not hesitate to intervene to stop price-gouging. We will strengthen the powers of regulators to tackle dodgy practices – and continue to crack down on rampant over-investment in distribution and transmission.”

He also asserts that “the Victorian grid will be stretched to the limit this summer.” And I can’t see a tweet from Premier Daniel Andrews (who is ever so busy on social media) rejecting this notion.

In this context, the Australian Energy Council, representing gentailers, has just published a commentary sniping at the Australian Energy Market Operator over its “surprising” and “substantial” shift from previous outlooks to warn of a deterioration in 2018-19 in Victorian supply prospects. Without publishing the basis for its analysis, AEC says, AEMO is assuming that thermal generators’ performance is declining, “presumably due to age.”

And the lobby group grumps: “AEMO is currently seeking to progress a number of controversial proposals in the reliability area whose prospects are improved if stakeholders have a heightened perception of reliability risk.”

Whatever, the Coalition government is clearly back again to arguing that reliability needs equal weight with cost in cobbling together its next iteration of policy after a fortnight or so of arguing that, like Coles, its big focus is on pushing prices “down, down.”

If you want an un-edited version of Taylor’s thinking, you should go on to his departmental website and read the transcript of his Sky TV interview with Chris Kenny last weekend. It includes this:

“The one piece of the NEG that we are hanging on to ……. is the reliability guarantee. And this is saying if you are going to put in this intermittent generation, then you have to pay for it. You have to make sure that the system can actually deliver and it is the piece of the NEG that is critical to continue with. The NEG itself is gone, but we are hanging on the reliability guarantee because that will force the States to ensure that they do provide baseload power and, if they don’t, they’re going to pay the price.”

There’s also a cautionary comment for politicians up on Energy Networks Australia’s website this week: “Much of the post-NEG public discourse has focused on the lack of policy certainty in the energy sector over the past decade. This has time and again created headaches for networks and generators – who are required to build and maintain critical national infrastructure over decades, not three or four year cycles. Put crudely, networks and other parts of the industry have frequently been victim of policy made with short-term political cycles in mind rather than the long term interests in consumers. All too often, kneejerk decisions about how we invest have ultimately led to long-term pain for energy users.”

All true, but it is hard to see in the present environment (including the Victorian election in November) how business can hope to have politicians dismount from their cycles. Rather, they are in the fictional Lord Ronald mode – he who “flung himself from the room, flung himself upon his horse and rode madly off in all directions.”

PS: On the topic of Victoria’s power supply, the latest quarterly data (sourced from Graeme Bethune’s EnergyQuarterlyshow that, comparing April to June 2018 with the same months in 2017, there was a strong consistency in the contribution of brown coal generation: 9,505 gigawatt hours versus 9,493 GWh in 2017.

For other sources, gas dipped (down to 620 GWh from 1,010 GWh), hydro rose (937 GWh versus 762 GWh) and the wind contribution pushed up to 949 GWh after being at 622 GWh in 2017 quarter. The State’s rooftop solar PV was estimated at 246 GWh (218 GWh the previous quarter).

 The interconnector flows from the State to New South Wales were 336 GWh (minus 78 GWh in the previous quarter), to South Australia down to 334 GWh (496 GWh) and to Tasmania were 147  GWh after being 280 GWh in the other direction last year.

 Leaving aside rooftop electrons, the coal plants held 79 per cent of Victorian in-State generation in the June 2018 quarter.

Taking supply’s measure

To state the obvious, despite almost three years of thrashing about, Australia is heading in to 2019 without a settled electricity market structure or settled energy policies to balance prices, supply reliability and emissions abatement. One can go on debating this ad nauseam but, until the federal election is over, progress at the political level is out of reach. Whether the next poll will actually deliver a government in control of the parliament in Canberra and whether the collective of federation governments can do sensible business together is another matter.

A sleeper in this situation is whether or not the shaky Morrison administration will pursue a royal commission in to energy – and equally whether a future Shorten government, which the pundits seem to all think is a given, might follow this course.

During the interval, it is useful, I think to adjust the picture of what actually is happening in both gas and electricity supply – and one of my best go to references for doing so is the EnergyQuarterly series published by Graeme Bethune’s EnergyQuest consultancy. The analysis and commentary in the EQ September edition, now published, are particularly interesting.

My particular focus this Sunday morning is the factual oasis EQ provides on NEM generation in the 2017-18 financial year at a time when the latest renewable energy whims of the election-bound Andrews Labor government in Victoria are at least some of the media rage of the moment with simultaneously irritating and boring juggling of numbers by politicians and reporters, the bottom line of which appears to be that the handful of wind and solar farms being supported will generate about 3,000 gigawatt hours a year.

Leaving aside estimates of rooftop solar PV use, Victoria, according to EnergyQuarterly, generated 45,692 GWh in FY18, down from 52,219 GWh in FY17 because of the closure of Hazelwood power station, one effect of which was to see the net flows of electrons from the State to its neighbors slashed from more than 7,000 GWh to a mere 156 GWh.

Just sticking with interconnector flows for the moment, the other notable FY18 feature was the continuing rise of power supply to New South Wales from Queensland – up from 3,560 GWh to 5,504 GWh, which is mostly black coal-fuelled supply.

For the NEM as a whole, EnergyQuarterly reports that (not including rooftop PVs) black and brown coal dominated the market with a combined 146,834 GWh – down, of course, from FY17’s 150,848 GWh because of Hazelwood.

In the rest of the mix, gas-fuelled generation plays piggy in the middle: up when hydro supply is down and down when wind generation is up. In FY18 hydro output was marginally down (at 14,730 GWh) while wind generation was well up (13,000 GWh compared with 10,522 GWh in FY17). Gas turbine output provided 19,219 GWh – up from 17,768 GWh the previous financial year.

Utility-scale solar is still in nappies, so to speak – it can be expected to grow quite solidly on proposed developments in the next few years – and came in at 656 GWh, with oil bringing up the field with 23 GWh.

Rooftop solar PV keeps on climbing – in FY18 it was 7,301 GWh in the NEM, 16.5 per cent higher than the previous year. To which can be added 1,269 GWh calculated to be used in the south-west corner of Western Australia.

If you factor in all forms of power, South Australia is the only mainland State close to providing half of its supply from renewables – 48.6 per cent in FY18. The other shares were Victoria 11.6 per cent, NSW 6.6 per cent and Queensland 4.9 per cent. (Over in the West, the share for the SWIS was 14.8 per cent with fossil fuels, black coal and gas, providing 85 per cent.)

EnergyQuarterly comments that the Labor governments’ renewables targets for Victoria and Queensland “look extremely ambitious.”

That decline in Victorian generation, EQ notes, was offset by 3,000 GWh of wind and gas production in South Australia and 3,600 GWh in the other States.

And, in the context of all the jabber about greenhouse gases, it points out that the Australia Energy Market Operator found FY18 emissions were the lowest in the NEM’s history both in terms of absolute emissions and emissions intensity.

As readers know, one of my hobby horses is that homogenizing the data in to market-wide shares masks the weight of supply and demand on the real east coast, NSW and Queensland.

With (in round terms) 5.2 million household account-holders and 620,000 business customers, the two States are where a very large part of electricity action is, as underscored by the EQ data for FY18.

Between them NSW and Queensland generators provided (excluding rooftop PVs) 125,206 GWh – or 64.4 per cent of NEM production.  Of this, 110,726 GWh was produced by black coal units, 88.4 per cent of the two-State market. Including hydro, utility-scale renewables provided under 6,500 GWh in the two States, barely five per cent of the market, with gas generation bridging the gap.

Having so many houses, it is not surprising that the two States also have the lion’s share of residential solar PVs, which were estimated to involve nearly 4,600 GWh of use in FY18.

This is the real world for a considerable number of Australians but the boosters, busy balancing green angels on non-metal pins, tend to ignore or gloss over it. A rational outcome for prices, policy and emissions can’t be reached without properly factoring this bit of geography in to the equation.

And my friends who want to see nuclear playing a role in our future generation mix would never forgive me if I didn’t add here that it would be a very good thing if technology like SMRs was included in calculating the total system cost of replacing aged equipment in the mix on this side of the continent (and in the south-west, too, home to another million households and some 125,000 businesses almost constantly overlooked in the “debate” about these matters.)

Meanwhile, as a senior academic who knows energy issues very well commented to me in the past week, it seems that more and more we are headed back to (pseudo) central planning but with far more political excitement than we ever had in the days of the State electricity commissions. That’s a thought with which to conjure.

 

So many moving parts

Is the NEG dead or merely resting?

Rather opportunistic comments by Labor spokesman Mark Butler in recent days suggest that the government-in-waiting could pursue some version of the “energy guarantee,” using the Coalition government’s own recent rhetoric – failure to pursue the NEG would push consumer power bills up by $300 rather than down by $150 – to rattle the Liberals’ bars.

Butler is promising that Labor will put out its own energy proposals – a “very detailed policy” – by next May (the last point for a combined election for the House of Representatives and half the Senate), declaring it will be a sector-based approach with each industry to be given different obligations.

The current Labor policy on electricity (published on the party website) commits it to “at least” 50 per cent of national (note not NEM) electricity being provided by renewable energy by 2030. This approach, the ALP asserts, “will drive jobs creation, drive manufacturing investment and put downward pressure on power prices for families and small businesses”.

There is also a commitment, which tends to be wholly ignored by the media, that the ALP will push to double Australia’s energy productivity by 2030. This, the policy declares, is “the key to decarbonizing Australia’s economy while maintaining economic growth.”

Most of the energy “debate” – it’s a shouting match, really – tends to be focused on the east coast. So what are the electricity figures for the country as a whole?  According to the Department of Environment & Energy, in calendar 2017 the national output of electricity was 259,445.7 gigawatt hours.

This includes 8,082 GWh of rooftop solar power, leaving despatch to the various grids (mostly the NEM and the SWIS in Western Australia) but also including use by mining projects, at 251,363.7 GWh.

The breakdown of this supply in 2017 included 120,831.9 GWh from black coal generation, 38,312.7 GWh from brown coal plants, 54,929.2 GWh from gas turbines and 6,285.4 GWh from units running on diesel. This represents an 87.7 per cent contribution from fossil fuels Australia-wide. Reducing this to 50 per cent by 2030 would require increasing renewable energy’s total contribution to some 125,000 GWh annually.

What was it in calendar 2017? According to DE&E, and again leaving aside rooftop solar PVs, it was 31,004.5 GWh – of which hydro power contributed 13,933.2 GWh, wind 12,668.1 GWh, biomass 3,636.9 GWh and utility-scale solar 765.9 GWh.

The challenge in scaling this up to Labor’s 50 per cent target in 10 years, in terms of capital costs for generation and transmission plus back-up services for such a large variable capacity hardly needs highlighting. Nor does the flow-on cost to customers, even allowing for success in driving greater energy productivity. (Once more for the dummies: what matters is total sector costs.)

And it shouldn’t be overlooked that a substantial part of this burden will fall on consumers in New South Wales and Queensland – home for 109,890 GWh of black coal generation and of 2,211 GWh of wind and large solar generation in calendar 2017.

Perhaps all of this, and more, will be taken in to account as Labor follows through on this week’s promise that it will consult “all stakeholders” before making a final decision on the policy to take to the polls. “We won’t be rushed,” said a curiously anonymous spokesperson to the Australian Financial Review yesterday.

 The Grattan Institute’s Tony Wood spoke for a lot of people when he told the AFR overnight that “there are so many moving parts and we don’t know what is going to happen.” (The same story quotes an anonymous energy executive as saying the industry right now is “beside itself.”)

The Clean Energy Council, meanwhile, is saying its clientele “does not need a new subsidy” but does need policy certainty –  but how in this environment, until at least after the next federal election, could anyone, Coalition or Labor, offer that?

It seems to me that the nearest horizon for policy “certainty” will be some time in the second half of 2019 and then only if whoever is in power in Canberra has support from a Senate in which half of today’s sitting members have to pass through the next poll, too.

How can this situation contribute to lower NEM electricity future prices until way in to 2019 and probably in to 2020? As Global-ROAM’s Paul McArdle says, future contracts represent the market’s consensus on where prices are heading and they started rising last month as the ground opened under the NEG.

EnergyQuest’s Graeme Bethune perhaps sums up the situation best in his latest quarterly review published today: “So, what do business and investors do now? Probably nothing. The east coast needs substantial investment in electricity and gas supply, but — without an emissions policy — what should anyone invest in? And what should energy buyers do, with uncertainty about future prices? The situation isn’t helped by widely varying forecasts of energy supply and demand, when AEMO says Victoria won’t be able to meet its own gas needs from 2022 and then three months later says everything will be fine until 2030. (The federal government hasn’t produced any Australian energy projections since 2014, probably for political reasons.)”

Bethune quotes a foreign investor as telling EnergyQuarterly that “the NEG was a hope for us, a potential investor in power generation, to get a clear and stable view on energy policy, but the current political situation is somewhat disappointing.” That, with months to go to New Year’s Eve, is absolutely my pick for understatement of 2018.

And, in viewing all this, let’s not forget that a desperate Morrison government may yet opt for an energy royal commission, which, once launched, as the banks one demonstrates, is an unguided missile.

One prospect of any such inquiry is reinforcement for a statement by the ACCC’s Rod Sims: “The national electricity market is largely broken and needs to be reset.”

A commission finding of that nature really would open Pandora’s box and deliver the likelihood of a re-run of the whole NEG saga, plus perhaps a shake-up of the market operating and regulatory entities, through until the end of the decade. Feed that in to your electricity prices crystal ball……….

 

 

Right royal fuss

The federal Liberal Party having dug a deep hole and thrown itself in to it, seemingly along with the prospects of a Coalition re-election, business attention inevitably is leaning increasingly to what a Labor government’s policies can deliver for energy supply next year and beyond.

The problem is that Bill Shorten & Co have yet to unveil their own energy blueprint, apart from repeatedly pressing green buttons on renewables, and are unlikely to do so when the travails of the Coalition in this area are hogging the media headlines.

Perhaps the biggest threat for electricity suppliers at this point is that Scott Morrison will launch a populist royal commission in to the whole mess, an inquiry that couldn’t report before the next federal poll, leaving Labor to cherry pick the findings at its leisure on winning office.

The degree of angst over the commission prospect is well illustrated in a commentary, written by CEO Sarah McNamara, just published by the Australian Energy Council.

She writes “it is difficult to see what taxpayers would learn from a royal commission that has not already been thrust into the light by the work of ACCC chairman Rod Sims and his team after 15 months of what can only be described as a forensic look at the energy industry.”

And, she says, “a royal commission would add more sensationalism to energy politics; it would send the very worst message at this time for investment confidence and ultimately consumer prices.”

Moreover, “the financial services royal commission was the result of allegations of illegal practises uncovered by journalists and the admission from the financial services industry itself that a royal commission was justified.”

McNamara declares: “No such trigger exists for the energy industry.” Nor, she says, do recent profit results for Australia’s largest gentailers signal the need for an inquiry at commission level. “Profits have been largely driven by the wholesale part of the businesses, not retail, and those higher wholesale profits are a direct result of tightening of firm supply.”

McNamara points out the CoAG Energy Council has already sought powers similar to those of a royal commission for the Australian Energy Regulator via amending the national energy laws to give the regulator the power to compel individuals to appear before it and give evidence.

“CoAG,” she says, “is also seeking to conduct a targeted review of whether additional provisions of the national energy laws or subordinate instruments should attract the highest maximum civil penalty amount. It is a safe assumption the AER will get these powers soon, once the CoAG Energy Council secretariat determines how to implement them. These are akin to a royal commission’s power to compel individuals to give evidence, compel businesses to hand over documents, make recommendations to government, or prosecute breaches of the law in court against businesses or individuals.”

It’s quite telling, I think, that the gentailers, via the AEC, now feel free to snap at the new Prime Minister.

McNamara writes: “It is unclear what the Prime Minister and Energy Minister mean when they refer to wielding a ‘big stick.’  Certainly, they are keen to distract from their failure to progress the national energy guarantee (NEG), but what is clear is that the political heat around energy costs has only increased in recent weeks.”

And McNamara reminds Morrison that, as Treasurer, he commissioned the ACCC’s review into energy prices and it did not find any evidence of misconduct in the industry. “It did point to a range of factors that had led to the current energy situation,” she says, “including that at all stages of the supply chain decisions have been made by many governments that set the NEM on the wrong course.”

Really, she points out, “there is no secret why energy prices fluctuate.”  As the AEC sees it, the major factor behind high power prices in the current market is wholesale price volatility because we’ve been existing in a policy vacuum for more than 10 years.”

She adds: “We do not have sufficient levels of investor confidence to drive the kind of investment the market very badly needs.”

The gentailer lobby group is getting a form of support today from the most outspoken of the large consumers’ bodies, the Energy Users Association.

“Be careful what you wish for,” CEO Andrew Richards is telling the Morrison government via the media “because (you) are not going to come out of a royal commission smelling like roses – (politicians) are just as much to blame for high prices as energy companies.”

And the Energy Consumers Australia CEO, Rosemary Sinclair, adds that, “while we understand the motivation for (calling) a commission,” Australia has just had the two biggest reviews of the energy sector in a generation. What she wants to see is “collective commonsense and a focus on better deals for consumers now.”

In an editorial this week, the Sydney Morning Herald comments that the purpose of flagging a royal commission is to “give the impression that the government is doing something while in fact postponing a decision until after the election.” Morrison, the paper asserts, is “running away from what Malcolm Turnbull called the bitterly entrenched and ideological rift on energy policy inside the Coalition”.

The SMH adds that the Prime Minister may find himself “running on a unity ticket” with Shorten on this issue. The Labor leader, it says, will “happily agree” to holding a commission and “if this becomes a competition of which party can be more hostile to big power companies, the Liberal Party is sure to lose”.

Whatever, as my grandchildren are wont to say, the political odds on an energy commission being set up are now starting to look interesting.

There be dragons

Hard as it may be to do so, let’s put aside the present political game and focus on the bare bones of electricity supply.

Issue one, can the southern mainland States get through the summer without significant security issues? The agency responsible for ensuring this happens, the Australian Energy Market Operator, is giving a qualified “Yes” – providing, it asserts, there are not significant thermal generation failures in extreme heat, providing interconnectors do not run in to trouble (eg from bushfire impacts) and providing it can work with industry to limit problems.

Blackouts in parts of New South Wales and Victoria last weekend were, of course, heralded by some in the media as a “dramatic reminder” of such potential problems – but they related to lightning strikes on the network system – and a subsequent blackout in South Australia was created by gale force winds dropping trees on power lines.

Issue two, the one on which new Prime Minister Scott Morrison is betting a fair bit of his political farm, is power prices and, even by recent standards of the energy debate, this is a messy area seemingly getting messier, with “big sticks” being waved by the federal government but without a clear picture at present of what can be delivered via more regulatory pressure and when.

Meanwhile green boosters are strongly pushing the argument that NEM wholesale prices have already “turned a corner” and that current investment in renewables will deliver lower costs over the next few years and more such investment will do so to an even greater extent.

Which brings me to issue three: the need for a better understanding of how gas costs have influenced the wholesale price in the past 18-or-so months and how they may do so in the next year and out to 2022 because of Asian gas prices, the cost of east coast imports through LNG terminals and any fall in the value of the Australian dollar as a result of international developments. (The latter would also see a non-trivial impact on vehicle fuel costs, another voter bugbear.) While the impact of relatively expensive gas is widely publicized with respect to commerce and industry direct users, its influence on the NEM wholesale market tends to flow somewhat below the radar of the public debate.

Issue four, I think, is the real maverick in this stable – the unintended consequences of politicians chasing quick fixes. The Grattan Institute has pursued this point. In a recent commentary, it said that, if intervention ends up damaging retail competition by forcing out retailers who can’t fully recover their costs, fewer retailers and increased market concentration could see lower retailer margins “more than offset by price increases resulting from a less competitive wholesale market.”

New federal Energy Minister Angus Taylor made no bones this week, in his first speech in the role, of the Morrison government mindset. “As a Liberal,” he said,” I’m not a strong believer in heavy-handed government intervention. It would be marvelous if we could fix these problems by leaving industry alone. But unfortunately we’re well past that point. This is a sector now characterized by heavy-handed historical government intervention. Poorly conceived interventions in the past leave us no choice but to make interventions if we’re going to get things back on track quickly. On the other hand, the sooner industry itself steps up and provides the solutions to the problems that I’m outlining, the sooner government can get out of the way.”

My hated high school maths teacher used to snarl at me, hesitating at the blackboard, “don’t just stand there, boy, DO something!” There’s a strong element of this impacting on the Morrison government at the moment.

The political pulling power of the government imposing what it describes as a “price safety net” is a strong attraction for Morrison & Co – as manifestly is choosing to interpret the recent ACCC electricity report as providing an imprimatur for “a program to underwrite new stable low-cost generation for commercial and industrial customers.”

And, looming over it all, is the growing conviction of the commentariat as well as the business community, that, while the exact timing of a general election may still be unclear, Australia is about to get another federal Labor government – with Shorten committed to pro-renewables intervention (and the expensive grid augmentation that must accompany it) as well as a much higher carbon abatement target for 2030. To steal a Labor line from an earlier era, the Coalition can be expected to “do whatever it takes” to ward this off or at the very least to “save the furniture” by limiting the size of its defeat.

Perhaps the biggest risk for electricity suppliers in this environment is that the “default price” morphs in to a price cap. A line from Malcolm Turnbull as he lunged towards his political eclipse worries some gentailers mightily, I believe. “We’ll set a price expectation which should be the most anyone pays.”

And the then Environment & Energy Minister, Josh Frydenberg, now Treasurer, added: “For too long the energy companies have made out like bandits. Some companies have tripled their profits as struggling families have tried hard to meet their power bills.”

Morrison has made much of the fact that, so far as he is concerned, Taylor’s real portfolio title is “Minister for Cutting Power Prices.”  Another version of this would be “Minister for Politically Acceptable Power Prices.”

As those maps centuries ago were wont to say about terra incognita, “there be dragons.”

Big stick time — again

Once more energy policy is being used as a vehicle for the games politicians play and the only certainty about the present environment in Canberra is that the consequences for electricity supply will be disruptive and possibly damaging for suppliers.

Industry anxiety about the situation is on display in a media statement issued by the Australian Energy Council (representing the 21 major generators and retailers).

“Reforms to be the market must be properly considered,” it says. “(New) calls for substantial changes risk poor outcomes for consumers. The industry stands ready to engage with the (federal) government in good faith on the extensive range of recommendations made by the ACCC. The devil is in the detail and there are no quick fixes. The ‘national energy guarantee’ must remain the focus.”

However true all this may be from a supply perspective, it is bolting horse time at the top of the Turnbull government because of fighting within its ranks; sound policymaking is always one of the first casualties of such situations.

Today there is an eerie throwback to the Julia Gillard government era with the Prime Minister posting a Facebook video in which he promises “we will not hesitate to use a big stick to make sure big companies do the right thing by their customers.” That is almost word-for-word what Gillard said in August 2012 as she struggled with public unhappiness over power prices – her target then was the network companies.

According to Turnbull’s Facebook comments, the government now intends to try to set a “price expectation” that defines the most mass market consumers should pay. Power companies that don’t pass on these savings will be put on notice by the Australian Competition & Consumer Commission and face the “toughest penalties” if they don’t take appropriate action.

The problem with making up this stuff on the run is that there is always a another flank opened to attack by opponents and the ever-present jackals of the media. The “wave of new laws being hurriedly put together to force private companies to lower their power prices,” the West Australian says this weekend “ignores 2.5 million Australians in WA and the Northern Territory.”

Meanwhile the cynics in the Canberra political commentariat are pointing out that things have reached the stage where the NEG per se is irrelevant. “You could replace (it) with a can of apricots and the situation would be no different,” writes News Limited commentator Joe Hildebrand today.

“Politics in the twenty-teens is the domain of the hardliners and extremists,” he adds. “If you actually pull back and look at the big issue — in this case an energy policy which promises to reduce both power prices and greenhouse emissions — you’d think (Turnbull) was on an unbackable winner. Indeed, virtually all of the moderate voices in politics, the business community, expert think tanks like the Grattan Institute and anyone with half a brain thinks it’s a pretty good plan, or at the very least better than nothing. But that hardly matters.”

Looking at what is going on in Coalition politics right now, I rather think Hildebrand is right – and that, for those of us who care about energy policy, raises the issue of what prospect there is at this juncture to pursue the “certainty” investors keep emphasizing they need? Short answer: not much. The prospects are growing that we will have to get through the elections ahead (Victoria in November, New South Wales in March and the federal one any time from quite soon to May) to see some sort of settlement in this area.

On the other hand, who can tell what will emerge from the horse-trading and dealmaking on the grandest and most desperate of scales (Laura Tingle’s phrase in an ABC commentary) as the Prime Minister seeks to lock in the support of both his own government team and the States who have to deliver the NEG in legislation?

As for the energy retailers, it is hard to see how they can dodge the Prime Minister’s “big stick” in the form of wrecking what the media have dubbed the “loyalty tax” – the costs worn by household and small business consumers on the average standing offer compared with the best deal that can be found in the market. It is claimed that the gap ranges from as little as just under $300 a year to as much (in South Australia) as more than $830.

If the government adopts the ACCC proposal, the Australian Energy Regulator will be given the task of setting a default rate – which will vary across the NEM depending on distribution zones.

However, as the Energy Council says, there is no quick fix. It will take time to draft and implement the necessary steps – and the AER will need to consult on its decisions.

Meanwhile the political circus will continue.

Federal Labor has come out this weekend promising it will implement more simple power bills with a “regulated capped offer” that it claims will save east coast households an average $165 a year.

There is a federal cabinet dinner at The Lodge in Canberra on Sunday night to discuss energy policy. Oh to be an insect on that wall………….

 

 

A model future

I’ve lost count of how many times over the past four decades I’ve tried to persuade people that models are not scrying glasses, enabling specially-skilled people to divine our future. Scenarios are not forecasts.

Energy professional don’t need persuading, of course, but our world is jam-packed these days with the naïve as well as the meretricious players, not a few of them engaged in politics.

The fuss that’s going on at present over modeling undertaken for the Energy Security Board as it strives to sell its “national energy guarantee” to the body politic is just another reminder that any such exercise will be seized on by all sorts for their own purposes.

What various people take from looking at the spreadsheet the ESB has made available will depend on the mindset they have.

In my own case, the work serves to underscore several things I have thought noteworthy in recent times.

The folly of the “death of coal” notion is one.

The model (produced by ACIL Allen and factoring in many current trends and policies) sketches a substantial ongoing role for both black and brown coal, the former the mainstay today of power supply in New South Wales and Queensland, the latter important to Victoria.

It suggests that, starting with output of 54.5 terawatt hours in the financial year just ended, NSW coal-based generation will rise to 56.3 TWh in 2019, decline to just over 45 TWh when Liddell shuts and end the ‘Twenties at just over 47 TWh.

Next door, Queensland generation is shown at 49.4 TWh in 2018 and sliding down to under 41 TWh in 2030.

If this occurs, the technology’s 88 per cent hold on generation output in the two States will be 80 per cent at the next of the next decade.

In Victoria, the model sees brown coal generation, which it estimates at 33 TWh this year,pushing up to just over 34 TWh in 2030 even as wind energy production quadruples to 10.7 TWh and solar farms deliver 2 TWh a year from 2020 onwards. (Their 2018 contribution is set at 2.6 TWh.)

But what about South Australia, that bellwether of the green revolution, I hear you ask? Well, the model sees local electricity sent to the grid sinking to 8.3 TWh at the end of the next decade from 11.5 TWh currently while rooftop solar use doubles – and it expects 5.4 TWh will be met by wind farms, about a fifth of the whole NEM’s wind supply. No wonder, there is a sense of urgency over there to pushing for substantial new interconnection.

Looking at the NEM as a whole, the model sees overall power sent out (which excludes rooftop solar PVs) will barely shift from just under 180 TWh a year (178.4 TWh in 2030 versus 179.3 TWh in 2018). It allocates a market share of 49.1 per cent for black coal plant, 19 per cent for brown coal, 15 per cent for wind power, 8.1 per cent for hydro power, 5.6 per cent for utility-scale solar and a rather dismal 2.6 per cent for gas generation.

Neither at present nor down the track is this what an ABC News reporter has labeled “the delicate mix of coal and renewables.”

For the crowd who are concerned about a sad fate for variable renewables to be brought about by the NEG, this model in fact suggests the NEM output from wind farms will almost treble – from 9.4 TWh in 2018 to 26.9 TWh in 2030 – while solar farms’ output will shoot up from 0.7 TWh in 2018 to 10.1 TWh in 2030. (The green activists want much more than this, of course, and Labor keeps flirting with risk by promising to deliver it to them — a brazen pursuit of marginal parliamentary seats where the main competition is the Greens.)

Rooftop PVs’ contribution is perceived in the ESB model to jump from 7.4 TWh this calendar year to 20 TWh in 2030, underlining the need set out by the Australian Competition & Consumer Commission for the NEM as a whole to embrace cost-reflective network charges.

What all this boils down to is a NEM supply from fossil fuels in the past financial year of 155 TWh sinking back to not quite 127 TWh in 2030.

And what strikes me, looking at the spreadsheet, is the large investment in capacity required to deliver this mooted outcome: an extra 5,200 megawatts of wind units plus 3,500 MW of new large-scale solar plus 2,300 MW of battery and pumped hydro storage – not to mention rooftop solar PV jumping from 5,900 MW in 2018 to 16,000 MW in 2030.

(A big part of this generation investment would be in three States, NSW, Queensland and Victoria: 1,700 MW of wind and big solar capacity in NSW, 2,900 MW in Queensland and 3,100 MW in Victoria.)

What’s not revealed is the total system cost – think of the network augmentation this scenario will require – and I am ever-mindful of the wise advice of royal commissioner Kevin Scarce three years ago: “For those planning a future electricity system (and the market in which it will operate), the relevant issue is the total systems cost, accounting for the cost of generation, connection, inter- and intra-regional expansion of transmission and distribution networks and grid support costs.”

There is still no analysis to hand of a future NEM that examines total system costs on a credible basis – and that is what will dictate the trajectory of power prices.

In particular, it seems to me, if the move to much increase renewable energy in NSW and Queensland (beyond what the ESB modeling encompasses) is to be pursued, in States with more than half the market and a large dependence on coal power, then total system costs — from the power plant to the wall socket — need to be in sharp focus.

Onward (and hopefully upwards)

The speed with which two key business associations put out statements on the CoAG Energy Council deliberation of the “national energy guarantee” today is testament to both relief that the encounter didn’t end in a car crash and concerns that the destination be reached as soon as possible.

In part, I suspect, this is influenced by industry’s fears that the Energy Security Board’s Kerry Schott is right when she points out that foot-dragging on this issue could see decisions ending up being pushed out beyond next year’s federal election (which must be held by May).

As is widely publicized in the media today, next steps after this morning’s discussion are the Coalition party room review and then a telephone hook-up of energy ministers next Tuesday.

It is worth noting from the CoAG communiqué published this afternoon that, at the request of South Australia, the Energy Council has collectively acknowledged “a reliability gap could emerge at any time” over the next 10 years – and has asked the ESB to suggest “legislative options” for addressing this.

While on the subject of the communiqué, it should not be overlooked that the other important business on a crowded agenda was consideration of the Australian Competition & Consumer Commission report on retail electricity pricing. Ministers “agreed to act quickly” by progressing an initial set of 16 cross-jurisdictional recommendations from the ACCC, including reducing the time it takes for consumers to switch retailers, ensuring they get the information they need before their contracts end and fast-tracking consideration of how to increase penalties for unacceptable retailer behavior as well as strengthening the commission’s investigative powers. The Energy Council also agreed to a program of work to consider another 23 recommendations from the ACCC.

As well, the Energy Council has agreed to devote part of its December meeting to further consideration of the Australian Energy Market Operator’s integrated system planning report and has given Kerry Schott and the ESB a lead role in progressing “an actionable strategic plan” on transmission planning and interconnection augmentation.

This is all important stuff but the immediate focus of industry – suppliers and large users – is on next steps for the NEG. The Energy Users of Australia Association has shot out a reaction to the meeting that, in effect, says “so far so good but do get on with the job.”

EUAA chief executive Andrew Richards says “this policy has been circling the airport for too long – it’s time to land the NEG” in the interests of maintaining grid reliability, delivering lower end-user costs and progressively pursuing emissions abatement.

The EUAA points out that AEMO actions to ensure adequate supply last summer have come home to roost for its members (who pay billions in energy charges annually) in the shape of “substantial bills” to pay the costs involved. Failure to land the NEG, the association warns, will leave the maintenance of system reliability being managed by AEMO and State governments via further costly market interventions.

This morning’s CoAG meeting, of course, is being followed this afternoon with a deluge of media coverage seeking to highlight the ongoing political biff – and the weekend will see plenty more, encapsulated by Channel Nine’s assertion that the policy “must still stagger through a minefield that could blow it apart.”

While claiming a “victory” today (as he has) might be going a bit far, Josh Frydenberg is entitled to feel he and the federal government have passed in fair shape through this NEG gate; what some of his own backbench colleagues may do next week before Malcolm Turnbull can massage a party room decision fit for purpose is the next challenge.

The Liberals are themselves not above playing political hardball whiles simultaneously trying to hold the high ground – Frydenberg is out and about this afternoon charging that the Greens are “wagging the tail of the Labor Party” in Victoria ahead of the November State election, declaring the Andrews government is “no longer in charge” and warning that, if it trips up the NEG, “the people of Victoria (are) guaranteed higher power prices and an increased risk of blackouts.”

It was interesting to read an op-ed by the Grattan Institute’s Tony Wood in the Australian Financial Review ahead of today’s meeting – in which he decried accusations that the NEG is “enormously complex.”  It is, he asserted, in fact “alarmingly simple.”

Wood argues that the measure, in essence, requires retailers to deliver “increasingly clean” energy to consumers and to ensure they have enough contracted capacity to meet demand. Design limitations, such as the potential impact on NEM competition, he claims, can be addressed during the implementation phase.

He supports pressure being applied to the Turnbull government to increase the abatement target, but declares, the guarantee should be green-lighted because it can deliver lower end-user prices through higher energy investor confidence, including development of new coal-fired plants if they are commercially viable.

“There are those from the extremes of both sides of this debate who have concluded that the guarantee would be worse than doing nothing. They are wrong,” he adds. “The danger is that our political warriors will beat each other to a standstill with no clear victor and no clear policy. If that happens, the big losers will be Australian energy consumers and the environment.”

Of course, there are a multitude of devils in the NEG detail, but, broadly speaking, I think Wood hits the nail on the head – as he also does when counselling the politicians to leave the debate on enhanced carbon abatement to the upcoming federal election.

The last word at the close of an interesting day belongs with EnergyAustralia CEO Catherine Tanna (in an op-ed just published on the Financial Review website).

The NEG, she writes, is a mechanism designed to give east coast society more reliable and cleaner energy. The process it proposes can be endorsed now – and the ambition left to another day. She’s disappointed the NEG was “kicked down the road” today.

And she asserts that the NEM does not have a power capacity problem. “There’s more than enough installed, nameplate generation – it’s just not where it needs to be or not always available when it’s needed. Everybody deserves affordable, reliable and cleaner power. That’s what the NEG will deliver.”

If I was Frydenberg, I’d be making sure that the Coalition party room members read Wood and Tanna over the weekend – rather than continuing to be distracted by (or contributing to) the Punch & Judy show on offer in the popular media.