It’s time?

The Hansard reports of Senate Estimates hearings can at least sometimes make for interesting reading (and just as often serve as a cure for insomnia). I trawl them for energy-related discussion because occasionally they throw up a point worth noting.

One such in May was the quiz of officers of the Department of Environment & Energy with Senator Simon Birmingham (the Education Minister and manager of government business in the Senate) sitting in for Josh Frydenberg (who belongs to the “other place.”)

What caught my eye was an exchange on nuclear power with Liberal senator Eric Abetz wanting to know if anyone in the department was looking at the technology? And, he was quick to add, at high efficiency, low emissions coal generation?

Short answer: no. (Although, officials pointed out, when such issues come up, the minister – Frydenberg – may call for a briefing.)

It needs to be noted here that the government is, of course, engaged in a raft of activities relating to energy supply and climate change policies – but, despite its potential to deliver non-emitting electricity, not nuclear power even though we are the planet’s third-largest producer of uranium.

The last time I saw Frydenberg say anything on the technology was back in January when he answered a newspaper inquiry by stating that pursuing it would require bipartisan support – which doesn’t exist. Last September he told The Australian:Any investigation would need a long-dated timeframe and would unlikely address the more immediate issues of affordability and reliability.”

This short-term outlook at government level – and some will argue it is a short-sighted attitude that should not endure – perhaps can be set alongside the current initiative overseas to promote the use of nuclear by the US, Japan, Canada, Russia, South Africa, the United Arab Emirates, Poland, Argentina and Romania, a clique that doesn’t (at least yet) include France or China. This was launched at last month’s gathering in Copenhagen of the Clean Energy Ministerial – an international talking shop to which Australia belongs and whose 24-nation members plus the European Union are responsible for 75 per cent of global greenhouse gas emissions.

It can also be evaluated alongside an International Energy Agency commentary that notes 33,000 megawatts of new nuclear power has been connected to grids around the world in five years (with China accounting for two-thirds of this) while 18,000 MW has been shut down permanently. The IEA expects the Chinese to approve eight new reactors this year and says it is likely total global capacity will be 438,000 MW by 2020 although more uncertain that this fleet can then be expanded to 490,000 MW by 2025 as was previously being foreseen, largely because of retirements of aged reactors.

(I see reported elsewhere that China has named exporting its nuclear skills as one of 16 national science and technology priorities.)

The IEA also comments on the efforts being made to reduce barriers to nuclear development by cutting back investment risk, increasing safety features and promoting small modular reactors (the generic name for plants of 300 MW or less which offer greater opportunities for factory fabrication).

Five SMRs are under construction around the world at present and May saw GE Hitachi Nuclear Energy announce that it and Dominion Energy (one of the largest US electricity and gas utilities) are to pursue work to commercialize its BWRX-300 reactor, which it declares will be “more efficient, simpler, safer and needing a fraction of the footprint of the current fleet of light water plants.”

GEH asserts that this SMR could require 60 per cent less capital cost per megawatt than other water-cooled designs “which would make it cost-competitive with combined cycle gas and renewables.”

Given the amount of angst here and overseas about nuclear power safety, it is also worth pointing out that SMRs are designed not to melt down; they shut and cool off in an emergency.

The issue at home, it seems to me, is not whether there should be some sudden lunge here to build nuclear plants, of whatever size, but whether there should continue to be a blanket ban on even considering doing so?

Part of the political block against this rests on the belief that there are “deep community objections” to the technology’s use here – but is this really the case? Feedback from colleagues – admittedly interested parties strongly favoring nuclear – suggests there is quite a lot of support in the community for at least considering lifting the ban.

How to test this is an issue for political leaders and they are for the most part missing in action in this space. The question they should be asking themselves is how well the long-term national interest is being addressing by shying away from this debate?

The advice I get is that, if the legislative roadblock is cleared away, the first SMRs could be in operation here by 2030 – which is the time horizon of choice for a whole raft of stakeholders wanting to see Australia on a different carbon emissions path.

Between 2030 and 2035, according to overseas commentaries, global installation of SMRs could lie between 55,000 and 75,000 megawatts.

It’s also being suggested to me that SMRs could be twinned with pumped hydro in Australia in an approach to expand “clean” power as the existing coal-burning fleet reaches closing time.

Whatever, it is surely time for the issue of nuclear energy in Australia to again be given some serious thought at leadership levels rather than to continue to be the plaything of theoretical discussion littered with ideological baggage.

Politics & power

Reading an editorial in the  Australian Financial Review – which was about superannuation – I came on a comment that really resonates with the energy sector: “While the whole system sits on the shifting sands of political contestability, it will never have the requisite stability to give Australians true confidence in its future.” You can say all that again, with even more emphasis, for energy/carbon abatement policies, as almost every day demonstrates at present.

The point is underlined by Catherine Tanna of EnergyAustralia in a media interview in which she asked “Why is Australian energy policy so politicized?” – adding that such politicization is “disproportionate” here; “other countries seems to solve their energy problems far more easily despite differences of approach.”

The impact of this on the community was neatly made by a recent Newspoll survey showing a quarter of respondents don’t know whose energy policies to embrace and the rest are roughly split between Labor and the Turnbull government.

Sadly, the prospects here for taking politics out of energy, especially with elections approaching in Victoria, New South Wales and federally, while electricity and gas prices remain high on the public agenda, seem less than zero.

Tanna also commented that the competition between coal and renewables should be replaced with a focus on integrating fossil fuel power production with the green technologies. I would have liked to hear her add “at the lowest total system cost” to that view – and just as much to have taken the opportunity of highlighting the current considerable reliance of the economy on fossil fuels for electricity with the rider that “fast tracking” change (the catchcry of the activists and their fellow travellers) is not a practical option. (This has just been underlined by the Victorian Labor government officially setting deadlines of 2032 and 2048 for Yallourn and Loy Yang brown coal mines respectively and requiring the power stations owners to give five years’ notice of any intention to shut. All in the name of energy security.)

In the context of all this, it is interesting to read the new Clean Energy Australia annualreport, just published by the Clean Energy Council, mostly for the mountain of statistics it contains. The CEC, of course, like others in the renewables sector, is eager to promote the allegedly irresistible rise of wind and solar power as part of the policy debate.

Its publication, again, coincides with a report in the past week from the International Energy Agency (Status of Power System Transformation) that includes inter alia this thought: “Decreasing costs for both wind and solar energy, and strong government policy support have contributed to (an) impressive story.” Then the Paris-based agency adds: “These renewable power sources also come with a new set of challenges not faced before by power plants, utilities and system operators. The main one is the variability of renewable generation: how to ensure continuous and stable power when the wind is not blowing or when the sun isn’t shining. This creates uncertainties for the security of electricity supply. The challenge of integrating variable renewable energy in daily operations is compounded by other developments, such as the deployment of decentralised energy sources like rooftop solar and smart loads such as electric vehicles, and the spread of digitalization. Faced with such transformations, policymakers and other power sector stakeholders need a co-ordinated and pro-active response to managing these market changes and ensuring electricity security in modern power systems.”

Our Energy Security Board, the Australian Energy Market Commission and Josh Frydenberg may say “Yes, well, this is what we are trying to do,” and they are, but (in an environment where so much of politics is reacting to perceived public opinion) the messaging reaching community tends to lean towards the Green Pollyanna side – when the media are not being hysterical about the risks of blackouts.

In this regard, the CEC report plays up the national role of renewables in a way that (as presented through the media to the public) tends to create an impression that I feel is somewhat misleading.

The claim for the 2017 role of renewables is supply of 38,172 gigawatt hours out of 225,082 GWh across the NEM and Western Australia. My “yes, but” point is that 12,920 GWh of this was hydro power (ie long-established, conventional generation) and another 3,713 GWh was bio-energy (ie sugar cane bagasse and “black liquor” from industrial sources such as papermaking, both also long-established) and also included is 7,723 GWh estimated for rooftop solar power. Separate out grid-connected wind and large-scale solar power and one finds that they contributed 13,781 GWh in 2017. Take out the WA number and the NEM figure is 11,368 GWh.

Context in this respect is that gas-fired generation in 2017 (using EnergyQuest data) provided 21,375 GWh, brown coal plants in Victoria (with Hazelwood withdrawn in March last year) 38,316 GWh and black coal plants in NSW and Queensland 148,334 GWh. (And, in the current first seven days of wintery weather in the NEM, coal and gas provided 82 per cent of grid electricity.)

Bottom line: fossil-fuelled power remains the backbone of the NEM, which in turn is very strongly the backbone of the economy, notwithstanding a high outlay of money on variable renewables over the past decade. Replacing this spine – or even half-replacing it – with VREs would require a very substantial investment in transmission alone through a decade in which there is every prospect that market demand will not grow, raising issues about end-user costs going up rather than down as the politicians keep promising the community.

This is not a message reaching the hoi polloi and, taken with the thoughts of the IEA (and others trying to make a serious point in the debate here), demonstrates that overheated calls on community sentiment to support a faster rush to wind and solar come with risk – for the consumers.

In passing, I spotted something else in the CEC report – which is an interesting compilation of data, well worth reading – that I hadn’t appreciated until now: if you take out WA numbers for installed rooftop PV capacity in 2017, you find that the NEM total is 929.6 megawatts, which is roughly what it was in 2012 (926 MW) after which it dropped.  Rooftop PVs (according to EnergyQuarterly) provided 6,793 GWh in calendar 2017 versus 5,720 GWh in 2016 and 5,046 GWh in 2015. Steady growth, then, rather than going gangbusters, which is the impression some wish to give

The summer that was

That the media – mainstream and social – have become a shouting factory for debate about energy issues is rather beyond argument now, I’d suggest. The result is that facts seldom get presented (even in serious publications) without a loading of opinion and members of the community looking for straightforward information have their work cut out.

A case in point is the current coverage/commentary on a report by the Australian Energy Market Operator about last summer’s east coast power supply – which didn’t fail spectacularly despite all the dire stuff to be found in the media last spring and the season being the second-hottest on record.

(You may recall the ABC’s 7.30 Report asking back in early December “Is the electricity grid up to the summer?” – using the 2016 South Australian blackout for illustration.)

AEMO sums up the summer now ended in 20 words: “The system performed well and no NEM customer experienced interruptions to their electricity due to insufficient supply being available.”

Like the image of a swan on the water, this serenity masks a great deal of paddling below the surface including bringing back three mothballed plants, securing off-market sources through the reliability and emergency reserve trader, better focus on weather trends, rescheduling generation maintenance and a bit of leaning on gas supply to ensure sufficient fuel for Victorian turbines at a crucial time. There was also a significant reduction in unplanned transmission line outages at a time where interstate flows were an especially important factor in sustaining supply.

And buried deep in the report is this riposte to some of the most strident of the media commentariat: “Some media coverage in the summer period highlighted potential reliability concerns with the coal fleet. While there were unplanned unit outages (typical for thermal generators during warmer weather), the NEM coal fleet recorded its fourth-highest summer availability in the past 10 years, with around 250 MW more capacity available than the long-term average for this period.”  (And this, of course, with Hazelwood power station removed from the system for the first time, pulling about 1,000 MW from available capacity. AEMO records that the rest of the NEM coal fleet increased average load by 580 MW compared with the 2016-17 summer.)

Some current media coverage has made a big deal of the fact that there were days when Victorian and South Australian supply looked a bit shaky and AEMO used the “RERT” mechanism twice at a cost of $51.26 million to avert problems. Naturally, this has been headlined as “costly” back-up even as the operator points out that a large power failure of just an hour would have cost a lot more. AEMO chief executive Audrey Zibelman says that, averaged over the number of consumers saved pain, the cost works out as equal to two cups of coffee.

The operator also notes that some coal units in Victoria and New South Wales had “issues” with returning to service after long-term outages (“not uncommon after extensive outages and maintenance periods”) or because of access to adequate coal supplies. “These issues have now largely been resolved,” it says.

In passing, federal Environment & Energy Minister Josh Frydenberg has complimented AEMO on “doing a good job” over the summer; he could, I suggest, have taken the opportunity to say the same to the supply sector, which collectively seems to have performed well in fairly trying circumstances.

At least some of the fossil-fuelled suppliers – those not intent on painting themselves a greener shade of black – would like greater recognition that their contribution remains the backbone of the east coast grid.

As the Minerals Council has been quick to point out, asserting “coal remains Australia’s energy foundation and has a competitive future,” between the beginning of December and the end of April coal-burning generation (both brown and black) produced more than 76 per cent of the NEM’s power (leaving aside estimates of rooftop solar use), the next highest supply being gas at 10 per cent.

In saying this, it needs to be acknowledged, too, that rooftop solar installations hit a record for estimated use in December, according to current analysis by the Australian Energy Council. (It is calculated as 1,124 gigawatt hours for the country as a whole, meaning, I’d guess, about 900 GWh for the NEM – where the black coal plants alone in New South Wales and Queensland are averaging about 10,000 GWh a month, just to provide context.)

The solar statistic does underscore the need to get a better handle on the real impact of PVs, especially in the NEM, in the light of the capacity now installed and the continued rate of growth. AEMO is pointing out that the market can lose (quite suddenly) between 200 and 300 megawatts of capacity when the skies cloud over in a major city and managing this is just one more issue for the operator, one that will be harder to handle after 2022.

PS The past week’s bit of news that will have had the gentailers sitting up and paying attention, I reckon, is not the AEMO summer analysis but Frydenberg’s reported comments to the Coalition government’s party room that he is “worried” about the concentration of ownership in the NEM. With the Australian Competition & Consumer Commission due to produce its next major report on the sector at the end of June – and chairman Rod Sims signaling that he is concerned about market competition – this presages a new headache for the dominant companies, especially with the political need to play to the voter gallery as the next federal election looms. There is more than one reason that the heat will be on again for suppliers by next summer.

Picture ‘remains a poor one’

A speech about the “enormous pain” for consumers in our “complicated and undoubtedly political” energy market by Rod Sims, chairman of the Australian Competition & Consumer Commission, to the Energy Users Association earlier in May deserves more media attention than it got — which is certainly a lot less than the ongoing  stoush between the Coalition federal government and AGL Energy over Liddell, a sideshow for most consumers in the here and now.

Even so, I doubt the big players in the energy sector and their lobbying bodies missed Sims’ tart comment, reinforced in a media statement about the talk, that “the market is working extremely well for energy companies, but is working badly for commercial and industrial users. It is (they) who need us to find solutions; the energy companies don’t have as strong an incentive to fix the problem.”

The commission’s report on electricity at the end of next month will surely stir the pot to a much larger extent, but, in the meantime, his EUAA commentary contains stuff that needs to be better appreciated by the general community, who are not as seized as they should be, I think, of the fact that (as Sims puts it) properly managing energy policy is “one of our defining economic challenges for the century.”

Not surprisingly, given his audience, Sims’ focus for the talk was on “C&I” – commercial and industrial customers, who account for 60 per cent of the east coast power market and half the gas supply share versus 25 per cent for households.

Apart from the obvious large factories, these consumers include small industrial firms, financial services, commercial building services, construction and retail services, public services and agriculture – the “C” element making up 26 per cent of overall demand.

The “C&I” sector is characterized by usage of more than 100 megawatt hours a year and its members copped a 28 per cent rise in “real” (that is, inflation adjusted) power costs over the best part of a decade to 2015-16. Sims is holding on to the latest numbers for his new report but observes that the big jump in wholesale prices in the NEM in the past 18 months has added “significant pain.”

He points out that “business across all sectors has faced even higher increases over the past 12 months, following renegotiation of long term contracts.”  He adds:  “Many of these businesses cannot pass on the increased costs and are considering reducing staff or relocating overseas. Some businesses have even been forced to close. This is a terrible outcome for these companies, their staff and, ultimately, for the country.”

Past over-investment in networks, he says, is “locked in” and will burden all consumers “for decades” without remedial action.

And then there is the “double whammy,” which Sims declares to be unique to Australia, of gas becoming more frequently the marginal (ie price-setting) source of electricity (especially in South Australia and Victoria) at a time of shortages in supply.

There are other factors, too. Sims comments: “The third area (affecting cost increases) is environmental or ‘green’ schemes aimed at achieving sustainability objectives. Over the past decade, various State and Territory-based environmental schemes have been introduced. For example, in most NEM regions early adopters of solar PV were offered stunningly generous feed-in tariffs of up to 60 cents per kWh. These have been of direct benefit to recipients of the feed-in tariff (solar PV customers) but the costs of the schemes have been passed through to all electricity users. Thankfully, these schemes are generally closed to new customers or have ended.”

And then, of course, there are retailer charges, the butt of so much political and media attention in the past year. They are not as important in the “C&I” sphere as they are for householders but you can be sure they will get a large amount of further fuss next month and thereafter.

Naturally, Sims used the EUAA talk to canvass the broad issues affecting the east coast gas problems, noting that they are expected to be “especially acute” for “C&I” users in South Australia, New South Wales, the ACT, Victoria and Tasmania.

“The ACCC,” he says, “does not weigh into the debate about the environmental issues surrounding (gas exploration) restrictions, but it is our job to point out the consequences of blanket bans on projects, including on conventional reserves, in the form of significantly higher gas costs. (They) also prevent exploration to confirm the existence of gas reserves that, on a robust cost-benefit analysis, would improve consumer outcomes.”

The picture, he adds, “remains a poor one” for “C&I” gas users, the southern market is “incredibly tight” and the issue is “critical,” noting that “at present, Australia’s east coast gas market strongly favours those with gas over those who want it – this must change and on many fronts.”

Considering that the “C&I” sector is a huge source of Australian employment, the impacts canvassed by Sims ought to be top of mind in public debate but they tend not to be in the media accessed by the millions. Back in September, for example, comments by the Australian Chamber of Commerce and Industry received passing attention in the business media but not otherwise: “”We risk a double effect,” the chamber said, “with energy prices hitting investment decisions, affecting demand for labor while also putting pressure on margins impacting the affordability of wage rises.”

With important elections lying ahead federally and in Victoria and New South Wales, this stuff, it seems to me, needs to be far higher on the ladder of serious debate (which is not how I would categorize the dominant Punch-and-Judy show) than it is.

PS: In talking to journalists after the EUAA address, Sims said something that should also be highlighted: “The ‘national energy guarantee’ is not the main game. It’s important but it’s not the main game.”  The bigger picture, he added, is also network costs, the cost of green energy schemes and rising generation and retail costs. There are a few walls I’d be inclined to write this on.

 

Taxing times

One happening this week serves to highlight a significant development for business in Australia – and not just for the energy sector. Any presumption of innocence when malpractice claims arise has gone right out the window.

There have been events too numerous to catalogue here as to why this should be so; the ongoing drama of the banking royal commission is a fine example. Such things have opened the door for politicians and media to throw sticks and mud at the corporate sector without restraint.

For the energy networks, assailed as “gold platers” for some years for implementing opex and capex plans that have gone through the regulatory mill, the latest is the accusation that they have been “price gouging” over their tax liabilities.

This claim has been launched by federal Environment & Energy Minister Josh Frydenberg, who has asked the Australian Energy Regulator to examine the allowance networks can include in their charges relating to tax. He points to information from the Taxation Office that there is a discrepancy between what the AER has set for recovery of this element and the amount the networks actually pay to the ATO.

And then the killer punch on which the media has seized as proof of guilt: “It is totally unacceptable for consumers to be charged for corporate tax liabilities that are not actually incurred,” the minister, who is a lawyer, said in his media statement.

A draft report on the issue is being required of the regulator by “the middle of the year,” which is weeks away, with a final report to the CoAG Energy Council in December.

But the media lynch mob are off and running. “Electricity price gouging: government to crack down on networks,” said one headline. Fairfax Media asserts “$400 million a year power price gouge triggers probe.” One of the largest tabloids headlines: “Power companies in gun for gouging consumers over tax liabilities.”

Energy Networks Australia CEO Andrew Dillon denies there is “gouging”.

“The current benchmark approach to tax allowances is set by the AER to avoid customers in different suburbs paying different charges and the risk of sudden price rises when there is a change of ownership,” he says, adding that “many (past) knee-jerk policy decisions have led to poor consumer outcomes.”  This is well-buried in media coverage where it gets a mention at all. The focus is on how can the bastards be made to pay back what they have pinched.

The AER has published a paper calling for submissions on the issue. In it, the regulator reports that its estimate of energy networks’ tax payable in regulatory determinations for 2012-13 to 2016-17 amounted to $5,050.4 million, of which $3,967.3 million accrued to electricity distribution businesses, $743.4 million to high voltage transmission operations and $339.8 million to gas sector networks.   And $3,223.2 million of the AER estimate of tax payable in this time frame related to networks owned by State governments. The regulator also says it is advised by the ATO that energy networks listed on the Stock Exchange or privately owned paid less tax than estimated by the AER – but the government-owned ones paid more than estimated.

The tax segment, the AER notes, represents about four per cent of the revenue the energy networks are permitted to recoup.

And the tax gatherers’ analysis has focused only on the electricity distribution businesses.

AER adds: “The ATO noted that it had to make assumptions and exclusions in undertaking its analysis, but the full details of (these) were not set out in the (whistle-blowing) note.”

It also says that, in pursuing the issue, “we have encountered significant difficulties in obtaining accurate and consistent information in the public domain on actual tax payments and other relevant tax information for the energy networks.”

It goes on to caution that “the ATO note identified a number of potential drivers that could be contributing to the discrepancy between expected tax costs and actual tax payments.” These include factors that can alter the relevant tax rate (ownership structure), interest expense (gearing) and depreciation expense (diminishing value, self-assessed asset lives, low value pools).

“The AER needs to understand these potential drivers and their impact on observed tax payments” before making a report.

Its current activity, it says, is a step in reviewing the regulatory tax approach to ensure this aspect of determinations “serves the long-term interests of consumers.”

The regulator notes that, if it finds grounds to recommend changing the rules, it will put proposals to the Australian Energy Market Commission – which will pursue consultation in its own right.

In short, should there really be an issue, it will be some time next year before any fix is in place.  The lynch mob, of course, will keep running with pejorative language all along this path.

And the political hares are running, too. Victorian Energy Minister Lily D’Ambrosio is telling Fairfax Media that the Coalition federal government has “known for years that consumers were being ripped off by power companies but they did nothing about it.” And Frydenberg is asserting “network rip-offs in the five years from 2013-14 occurred due to rules put in place under federal Labor in 2012; we are cleaning up Labor’s mess yet again.”

As Fairfax have it, D’Ambrosio wrote a letter to Canberra last month claiming that the corporate tax allowance issue “threatens to slug Victorian consumers with an extra $602.2 million in energy costs” between 2016 and 2020.

And – surprise! – Bill Shorten is out and about calling for “energy companies who have been gouging customers by as much as $400 million a year to cover inflated tax liabilities to refund every cent.” And he doesn’t want any waiting about while the regulator pursues a review. “Australians want action” right now by the Turnbull government against “large corporations treating consumers like mushrooms.”

Even Henry the Eighth held show trials before he lopped off heads.

The networks, meanwhile, will need to get their skates on: the return date for submissions to the AER on its paper canvassing the issue is the end of this month.

Complex & ‘simples’

There were 95 speakers and panel participants at the 2018 Australian Energy Week conference that ended on Friday in a wet and windy Melbourne.

They addressed some 360 delegates in plenary and concurrent sessions that scanned the breadth and depth of our transitioning east coast market.

Kicking off proceedings in the chair at the event’s final Energy Policy Forum, I sought to summarize discussion up till then like this: “Most of those attending have wanted to focus on the generation mix for the next decade, the nature of network infrastructure needed to enable this mix, on the vexed problem of consumer costs and, not least, on raising the profile of consumption management in this environment.

“A strong theme in Thursday’s generation mix concurrent session was the vital role of investor confidence in the NEM arrangements now being pursued.

“In this respect, I note that the Australian Energy Regulator has launched its latest newsletter by emphasizing that, notwithstanding the ‘screaming headlines’ in the media, the nuts and bolts work of securing reliable energy at the lowest possible cost goes on every day. My own emphasis would be on the ‘lowest possible cost’ phrase – which is not the same thing as ‘cheap energy,’ the focus of so much public discussion and indeed in focus here this week from manufacturers.

“One cannot listen to the catalogue of investments needed to achieve current market transition plans, let alone more ambitious ones, and not wonder when the community will wake up fully to the point that a substantial part of achieving the desired lower bills will need to come from what users can do for themselves?

“In turn, this raises the issue of energy equity that has been also discussed here.

“Another theme emerging from the conference’s presentations is a concern that getting policy settled is becoming the political goal where the higher issue is making the market really work – with the rider that consumers and investors may not react the way policymakers expect.

“The argument has been put forward here that what investors need is (1) a certain ground, (2) the financial capability to deliver on their plans in an environment where there is a lot of money around but a skittishness about investing here and (3) the benefits of genuine market competition, with one of our CEO speakers adding a fourth “C” – confidence in being able to have economic utilization of infrastructure investment overs its planned life which relates to (2).”

The investment question is not a minor one; modeling commissioned from KPMG by the Australian Energy Council estimates that $23 billion is needed for building NEM generation alone between now and 2030. Conversation with executives during Energy Week suggests the network outlays needed could run to $16-18 billion more. The issue is not a lack of finance availability but bringing it to our market. One executive speaker opined that “there is a wall of money out there – we just have to find a way to attract it.”

By the end of the Energy Policy Forum, I felt I could add to my catalogue a growing view among participants that the CoAG Energy Council is capable of delivering the “national energy guarantee” but also more skittishness about how relatively little it would take at the political level to derail the process.

One of the factors is how political stances feed on community views that, in turn, are influenced by how market players communicate with consumers at large. The Australian Energy Market Commission’s chairman, John Pierce, put his finger on a sore point in the Forum when he described household awareness of the government’s energy-made-easy website as “unacceptably low” and laid the blame on retailers still not doing enough to build public awareness of cost savings and other aspects that could ease user concerns.

New energy entrepreneurs and the incumbent retailers are starting to rise to the challenge, he said, but this is not happening fast enough to alleviate energy bill unhappiness. What the market needs right now, he added, is a disruptor to take the complexity away from retail offers and make bill easier to understand and compare.

The other key factor that he identified as an “oil slick under the wheels of the market” is the failure to date to agree on a mechanism to integrate energy and emissions reduction policies – which brings us round to the “national energy guarantee.”

Pierces argues the NEG is “all about bringing energy policy back to its true focus, the consumer.” It aims, he says, to meet abatement commitments without putting a further cost burden on households and the economy. It is critical, he says, to stay the course on this reform to create a mechanism that can adjust to whatever change the future may bring “at the lowest possible cost.”

That phrase again. What it actually means is costs lower than they will otherwise be if we continue to stumble and bumble through the “transition.” But a change this complex cannot possibly be “cheap.” This will be the more so if the body politic continues to pick technology winners rather than allow investors to use a neutral market to compete for advantage. Which is why going all out to guide consumers, and especially households, towards the best ways to meet their needs is so important. A point that, as the damned meerkat’s catchphrase in the TV adverts has it, should be perceived as “simples” by suppliers.

Pressure cooker

It was written almost 160 years ago but nothing I can think of comes closer to encapsulating the atmosphere of today’s energy debate: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”

As learned readers know, that’s Dickens, still spot on today right down to his reference in the opening of A Tale of Two Cities to “noisy authorities” and comparisons being offered “in the superlative degree.”

The latest example of how old Charles nailed it for us in the here and now (and in many other respects than energy) is to be seen in the past week’s sudden outburst of rowing over whether an investment case can be made to build new coal-fired power stations in Australia.

Mind you, I am not complaining because the ruckus is a great lead-in to the upcoming Australian Energy Week over three days in Melbourne, which includes an Energy Policy Forum I will be chairing next Friday featuring Josh Frydenberg, Kerry Schott, the Australian Energy Market Commission’s John Pierce, Labor’s Mark Butler and the ACT government’s Shane Rattenbury.

Also on the Friday forum program will be Ron Ben-David (Victorian Essential Services Commission), Simon Corbell (former ACT deputy chief minister and now renewable energy advocate for the Victorian government), Matthew Warren (Australian Energy Council) and Mark Williamson (executive GM of the Clean Energy Regulator).

And this will come after two days of plenary and concurrent sessions of Energy Week,including input from the Australian Energy Market Operator’s Audrey Zibelman, Manufacturing Australia’s James Fazzino and a host of CEOs and senior executives from across the spectrum of the power business, not forgetting a panel discussion on the evolving energy mix.

It’s worth reminding ourselves at this point that the Prime Minister (15 months ago in a National Press Club address) has described energy as the “defining debate of this Parliament” – perhaps now limping towards its finale – and declared the Coalition “stands for cheaper energy” and more reliable supply.

For commerce, industry and 10 million household accountholders, this remains the touchstone of the debate. And for those who focus seriously on policy development, the key to long-term success is being faithful to the need to be deliver an over-arching neutral system that allows investors to decide which technology stacks up for their shareholders.

What makes at least some investors twitch is hearing leading participants in the policymaking arena continue to utter statements that promote favored forms of technology, dismiss others and decline to even think about some (e.g. nuclear). Too often, these utterances include claims about the relative costs of technologies. For example, “the cost of coal is always going to be more than the cost of wind and solar.”

As I said to a number of people this past week (and tweeted about it, too), anyone making such claims needs reminding of the sage advice of royal commissioner Kevin Scarce (in his report two years ago) that: “For those planning a future electricity system (and the market in which it will operate), the relevant issue is total systems cost.”

Scarce went on to say:  “In developing Australia’s future electricity system there is a need to analyse the elements and operation of that system as a whole and not any single element in isolation.” (He called in his report to the South Australian government for the development of a “comprehensive national energy policy that enables all technologies, including nuclear, to contribute to a reliable, low-carbon electricity network at the lowest possible system cost.”)

In this context, especially for those wearing green glasses, it is also worth pointing to a recent paper by Simon Bartlett, a former electricity network senior executive now a professor at the University of Queensland, that sums up things this way:

  • Power systems have fundamental needs: load following, flexibility and dynamic response.
  • Increasing intermittent renewable generation in a power system has a “pressure cooker” effect and can involve an unaffordably high level of integration costs.
  • Every power system is different but, in most systems, the practical upper limit for renewables is around 40 per cent of total electricity generated. This may be exceeded but it is likely to require a greater level of interconnection with adjoining power systems, more energy storage, increased recourse to demand-side management and regulatory changes.
  • The scale-up of intermittent renewables not only diminishes the robustness of a particular power system but can also magnify the short and long-term risk of investing in non-renewable generation assets and the power grid itself.

(You can find Bartlett’s paper on the Energy Policy Institute of Australia website.)

As for the Energy Policy Forum on Friday, if I am in need of an introductory comment from the chair, I may just plagiarise one from John Pierce (in the AEMC’s Making Market Transformation Work paper): “The changing mix in generation sources means we have to manage the power system differently and evolve the market. There is no silver bullet. There are many options we could take. But we need to understand how different solutions would interact with the rest of the system: affecting prices, reliability and security. Decisions made today will affect national economic development for decades to come.”

Not as evocative as the one from Dickens with which I started, but very much to the point for those participating in Australian Energy Week and for those wrestling in national leadership with the “energy crisis.”

Dangerous time

A question eastern Australian business executives are asking themselves with increasing frequency and increasing frustration is what they can say with certainty about their outlook for energy supply over the next three to five years?

The answer for most of them is not a helluva lot beyond a gut feeling that all talk about “putting downward pressure on prices” is not the same as, and perhaps not even close to, making their current bills smaller. And they won’t have been thrilled to see Snowy Hydro CEO Paul Broad reported (in the Newcastle Herald) as saying “Whichever way you look at it, power bills are not going to come down again in the foreseeable future” when you take in to account the steps Australia must pursue to pursue carbon abatement under its Paris commitment. He added “In my view, Australia’s time of having a cheap energy source as a comparative advantage will be no more.”

It is not surprising that business people are focused to a large extent on their own corporate bottom lines and are impatient with the “electricity revolution” because they can’t see it resolving their dominant need.

More than a few have rallied behind the complaint that the current debate does not focus sufficiently on the eastern market’s “national electricity objective” – which is to take care of the long-term interests of consumers.

One of the more outspoken on this is the Energy Users Association, representing substantial retail, mining, manufacturing, materials and food processing industries.

In its submission to the Energy Security Board on the “national energy guarantee,” EUAA takes the stance that the proposed measure is far from perfect but represents a chance to return energy costs to bearable levels. “A third, fourth or fifth best policy is better than no policy,” it says.

The association’s nagging concern, however, is that the NEG will deliver a gold-plated solution for supply reliability, a re-run of what happened to networks in the past decade.

EUAA argues that the NEG as so far explained is not taking in to account the ability of consumers to pay for a grand design and will – again – lock in costs they will go on paying for years, perhaps decades.

There is also increasing focus on what may need to be spent to provide grid support for pushing large amounts of wind and solar power in to the NEM at the expense of technology alternatives. Big investment on high voltage transmission is obviously a key aspect of the paper the Australian Energy Market Operator is currently preparing on integrating renewables in to the NEM through “renewable energy zones.”

Taking advantage of Anzac Day to catch up on my reading, despite being frustrated for a week by Optus being unable to resolve a “complex problem” with its local Internet service, I was struck by comments in the trade magazine Energy Source & Distribution by Robert Barr, the long-serving president of the Electric Energy Society of Australia.

“It is evident,” writes Barr, “that we are gearing up for very major increases in (NEM) transmission capability at a time when customers are suffering from historically high electricity costs.”

There needs to be very careful scrutiny, he says, of the costs and benefits that will accrue to the community from the expansion and investment being considered.

Barr writes: “Where transmission investments do not meet the required (by regulation) rate of return, we either have to scrap (them) or have them at least partially funded by those generators who wish to take advantage (of them).

“This is basic commonsense economics,” he adds, “that can easily be overlooked in the enthusiasm to connect more renewable generation and spend other people’s money.”

The Energy Network Australia lobby group, meanwhile, has told AEMO that the current regulatory test (the RIT-T in the market’s acronym soup) was designed to assess transmission investments responding to demand growth where today’s planning mindset is about unprecedented changes to the generation mix. The present approach of the test, it says, “is unlikely to deliver the best solutions for customers.” A key objective now, it argues, should be accelerating the process for grid investment approvals to “deliver the transformation” at the lowest cost.

Others are arguing that policy aiming to provide an incentive or subsidy for particular technologies won’t meet what should be national objectives of reliability and affordability for power supply. The key contextual setting for planning, they say, should be to ensure the broadest range of technology solutions are available for selection and application in an integrated system.

No question, this whole situation is madly complex, allowing the disputants much room for tub-thumping and self-interested claim and counter-claim, not to mention political posing, contributing to the business community’s sense of unease. However, the issue of just what supporting infrastructure will be needed by the rush towards REZs is not a minor matter and miss-steps could literally be extremely costly.

The Energy Policy Institute is making the point that “this is a dangerous time for energy policy formulation” and arguing that “independent policy thought is indispensable for properly addressing” the next steps so that decisions will survive electoral cycles and lobbying of beleaguered governments for further intervention to achieve ends activists want pursued more quickly.

It seems to me that the backlash to today’s state of affairs will pale by comparison with what will happen if energy costs become too great for many businesses to bear and there is a big fallout for employment.

In this context, a warning last year from contributors to a Minerals Council paper remains valid: “A number of major businesses (are) openly questioning their future viability because of energy costs. The hollowing out of Australia’s industrial base is a real prospect (that will have) severe consequences for living standards.”

Let’s talk NICE

“Members of government, federal and State, would prefer that I was not here tonight,” New South Wales Acting Premier John Barilaro told an Energy Policy Institute of Australia forum in Sydney on Wednesday evening.

Why? The National Party leader and State Deputy Premier was speaking about nuclear power and his Coalition colleagues, it seems, had been in contact to say they would prefer not to have an additional wrinkle added to an already fraught energy debate.

Barilaro, who will pursue re-election in the NSW poll next March in the seat of Monaro where he has a 2.5 per cent margin, is unabashed by their concerns. “We would be crazy not to have a conversation about nuclear,” he declared at the EPIA forum.

But he was equally blunt in telling the institute audience that those favoring inclusion of nuclear in the generation mix – or as EPIA’s Robert Pritchard points out, calling for a technology-neutral stance that does not explicitly ban nuclear – can’t expect the running to be made by politicians; supporters will have to generate a public attitude to banish the ban that influences action in Canberra (it is federal legislation that bars the fuel) as well as NSW, Victoria and Queensland (collectively home to most electricity use) where there are also laws effectively prohibiting nuclear power.

There is actually a private member’s bill (put forward by conservative Cory Bernardi) in the Senate at present proposing amending the federal legislation but nuclear proponents are not especially hopeful it is going anywhere.

Barilaro’s view echoes that of a former Coalition federal minister, Ian Macdonald, who told the Senate last November when the bill was being discussed: “Any decision to establish a nuclear power plant would, given the way the Australian political system works at the moment, require bipartisan support and community acceptance. I would imagine that community acceptance could be garnered if the debate were truthful, but you will have the Greens political party and those on the left of the Labor Party coming out with horror stories about what nuclear may or may not do.”

Barilaro, who went to a conference in Atlanta, Georgia, recently, bases his own pro-nuclear stance on the view that the developments in technology on show there – notably moves towards commercial viability of small modular reactors, plants of 300 megawatts or less capacity – offers Australia an opportunity to “delink” the debate from past fears and inhibitions. His selling point seems to be the newest nuclear technology is still five to 10 years away from being ready for installation here, bearing in mind the regulatory changes that would be needed, and we should take advantage of this time to ensure that Australia is ready to embrace the best generation arrangements to meet our “political, environmental and energy needs” in the next decade.

Hailing the “national energy guarantee” (focus of a critical CoAG Energy Council debate tomorrow) as an appropriate strategic tool that doesn’t seek to push any particular technology, he asks “why, then, wouldn’t you have nuclear as part of the consideration?”

Barilaro peppers his conversations about the nuclear option, including a number of recent radio interviews, with references to the very different approach to the issue in Canada.

As it happens, I have just been reading a report about the federal government there using its Natural Resources Canada agency to launch a process to prepare a roadmap (to be published later this year) for on- and off-grid applications of small modular reactors. NRC is charged with developing policies and programs to enhance the contributions of the natural resources sector to the Canadian economy.

The Trudeau government is also launching a “NICE Future” initiative next month. “NICE” stands for “nuclear innovation clean energy” and the program is a joint effort involving Canada, Japan, the US, Argentina, Poland, Russia, South Africa and the United Arab Emirates.

The Trudeau regime says “nuclear energy is an important part of Canada’s clean energy and climate change initiatives and, beyond energy, the nuclear sector contributes to a wide range of other scientific and economic activities such as medicine, human health and safety, material testing, food safety, even space exploration.”

Canadian Nuclear Laboratories, a key player in this new technology push, sees SMRs as being the sector’s future internationally, arguing that they can be employed in places where their behemoth ancestors simply can’t get a foothold, that they have relatively low up-front costs and that they can be linked with other forms of energy production, including intermittent renewables, as well as with water desalination.

Running supportive public relations, the Canadian Nuclear Association lobby group argues that, as well, when considering the entire power life cycle, including construction, mining, operations and decommissioning, nuclear is one of the cleanest power technologies available. (Canadians, by the way, get 15 per cent of their electricity from large nuclear reactors today – compared with the European Union depending on the technology for 25 per cent of its power.)

Where all this is going locally remains to be seen. Pritchard, a lawyer who is chairman of a company called SMR Nuclear Technology as well as executive director of EPIA, says “if the community doesn’t want (nuclear), we are not going to have it – end of story.”

Barilaro’s message last night is that those in the resources sector who believe nuclear power must be reconsidered as part of the Australian power scene should get their skates on and work harder to promote the facts about the technology and its usefulness in addressing our “energy crisis” to enable planning for NEM’s post-coal era to take it in to account.

Take the next step

It’s hardly rocket science to observe that Josh Frydenberg has a hard row to hoe on Friday when he chairs the next CoAG Energy Council meeting and thereafter, assuming his confidence in a positive outcome in Melbourne comes to fruition, of harvesting the “national energy guarantee” in a form that is politically marketable to the voting public before this year is out.

I recommend reading his 11 April address to the National Press Club in Canberra. (You’ll find it on his website.) We pretty well all rely on media coverage of these things and, thereby, lose the full flavor of presentations.

In finally getting round to reading his talk, I’m struck by a number of aspects of what was clearly a carefully-crafted manifesto for the Environment & Energy Minister’s big challenge.

One is his observation that Fatih Birol, the International Energy Agency head, has pointed out to him that what is driving a rapid uptake of new renewable technologies is not so much the carbon abatement they deliver but their declining cost curve. What the government is trying to make clear via the NEG, Frydenberg says, is that the time for further subsidization of renewables is over, adding “It strikes me as paradoxical that the first to say that renewables are cost competitive are often the loudest to call for another round of subsidies.”

Another is his defence of the existing and ongoing role for fossil fuelled generation in the NEM. He points out that in the summer (almost) just gone – it is taking a remarkably long time to shift to autumn this year – coal and gas plants produced 82 per cent of the NEM’s power production and, in calendar 2017, the top 20 power stations by output included 17 that were coal-burning.

Coal-based generation still has plenty of life in the NEM, he adds, and the market is signaling that investors are more willing to upgrade existing plants than to build new ones.

A third home truth, he told the Press Club, is that, like it or not, we are moving to a carbon-constrained future and this is shaping the energy system. He quotes former US Energy Secretary Ernest Moniz saying that, with the weight of global politics, technology and capital markets all leaning in one direction, “you can’t stop the waves crashing on the beach.” Nonetheless, Frydenberg says, calls to decarbonize the Australian economy virtually overnight “are as irresponsible as they are futile.” The government, he pledges, will not engage in virtue signaling and gesture politics “at the expense of our blue collar workers, their industries and our international competitiveness.” This, he told journalists, is not a time for ideological big experiments and reckless emission targets.

But the hardest nut to crack, he acknowledges, is integrating energy and climate policy – to which I would add that the still harder one is doing so while dealing with the community’s insistence that it wants lower energy bills right now and in an environment where supply investment decisions are influenced by user actions to reduce their consumption and charges in the face of high bills.

The alternative to finding a workable market-based solution, Frydenberg points out, is more expensive short-term government interventions and higher costs to be paid by Australians either as consumers or taxpayers.

It doesn’t follow, of course, that the NEG is the ideal answer to all this, which, inevitably, given the nature of politics, is what the Turnbull government must argue, but right now it is the only game in town – unless this exercise is dragged out until the next federal election and, assuming the opinion polls are right, we then get a new Labor government with a whole new set of propositions and a whole new slanging match.

This situation is not helped by the public’s confusion about energy issues – which, Frydenberg told the Press Club, is worsened when we hear “both ends of the political spectrum singing from the same hymn sheet, calling for government intervention in the market but to achieve diametrically opposite outcomes.”

The question, says the minister, comes down to “how do we establish a policy framework that manages the (electricity) transition, achieves the objectives of lower prices, higher reliability and lower emissions – and provides constancy and consistency through political cycles?”

The Frydenberg/Turnbull assertion is that the NEG is “the first and best opportunity” to do so. Knocking it back, Frydenberg argues, is a “vote for higher prices, higher emissions and less (NEM) reliability.”

And supporting it, he asserts, is not going to limit growth in renewable energy, one of the main arguments against it from the green activist corner, because modelling by the Energy Security Board shows the wind and solar share of the NEM will rise from 17 per cent now to between 32 and 36 per cent in 2030.

So where do we go from here?

Frydenberg explains that Friday’s meeting of CoAG ministers will be asked to support “a move to the next phase of detailed design.” His goal is to get the Energy Council to approve a final design in August and then, before 2018’s end, to have federal legislation to set a national carbon emissions target and State legislation to enact the NEG mechanisms. To make the measure reality, he told the Press Club, all NEM jurisdictions, Coalition and Labor, need to agree.

Few meetings at this level of government have attracted as much attention. Stakeholders across the spectrum are wound up to a high level of angst and anticipation about the outcome.

Mark Collette of EnergyAustralia, I see in this morning’s Australian Financial Review, is describing it as “the best chance in a decade” to end the political impasse in climate and energy policy, urging ministers not to get bogged down in detail and to “take the next step.”

The paper, in an editorial, asserts that the power industry, big manufacturers and the renewable energy itself are all now urging ministers to agree and let the Energy Security Board take the plan to the full design stage. It adds: “There is therefore nothing to gain for Labor governments attempting to veto the NEG on Friday. A grand bargain between reliability, carbon reduction and price lets Australia face any energy future with confidence.”

Only three more sleeps……….