New normal

What constitutes the “new normal” in Australian electricity supply makes for a good debate.

The phrase in its current usage derives from the argument that renewable energy is today the cheapest type of new power generation that can be built in Australia – which isn’t the same thing at all as cheap power and doesn’t address the issue of total system cost of supply.

The “new normal,” green power boosters argue, is a growing dominance of wind and solar energy in the generation development market.

Another perspective of our situation, I suggest, is that the “new normal” is a highly politicized energy arena where government intervention is not just growing but is being demanded from various quarters or is perceived by politicians as the only means of escape from a threatening (for them) situation.

The long-term implications of this for all electricity investment, and ultimately for users, are (or should be) troublesome.

Another version of the “new normal” is that both households and businesses, hard-pressed by their budget circumstances due to a range of factors (for example, the size of rental and mortgage payments in the residential sector), are pursuing lower demand (which for companies can include closing down).

How this pans out over a number of years, intermingled as these demand developments will be with the aforesaid political interventions, is simply beyond reckoning at this point.

There are dire warnings about the “hollowing out” of the national industry base that, if borne out, may have a profound impact on our society – or industrial users may come up with new approaches.

In this context, I was interested to see (in the latest issue of the excellent EnergyQuarterly publication produced by consultants EnergyQuest) a suggestion from Graeme Bethune that, rather than going west in the colloquial sense, big gas users may consider going West.

Bethune comments: “There is currently a massive difference between gas market conditions on the east and west coasts. The east coast has a tight market with double-digit prices. The west coast has a depressed domestic market with plentiful supply and prices half those in the east. The WA challenge is to bring big fields to market.”

Instead of building an expensive west/east gas pipeline, he suggests, “why not lure (eastern) industry to WA and then transport finished product overseas (from there) or to the eastern markets?” Western Australia, he adds, has good port, road and rail infrastructure already in place.

The implications for Victoria and New South Wales, if this should come to pass, are, to put it mildly, significant. What would the “new normal” then be for the economies and social life of these States?

One of the points here is that striking Australia-wide poses has its limitations. There are lots of differences between the States.

While all this is going on, the intervention that is the renewable energy target (in its iteration established by the Abbott government) gives the appearance of being met by its due date, 2020. Reporting by the Clean Energy Council (via its Clean Energy Australia 2016 publication) sets RET-certificated electricity output last calendar year at 17,500 gigawatt hours – and identifies $6.9 billion worth of current investment in 3,150 MW of new projects, roughly half what is still needed to achieve the 33,000 GWh target at the end of this decade. Green investors seem confident the rest of the necessary building program will be achieved.

Nationally in 2016, according to the CEC, renewable generation accounted for 17.3 per cent of supply – but more than 42 per cent of this was long-established hydro plant production. Wind power accounted for almost 31 per cent and small-scale solar PV for another 16 per cent.

In the three States that dominate demand and supply – Victoria, NSW and Queensland, with a combined power production last calendar year of 180,342 GWh, almost 89 per cent of the NEM total – all renewable generation, including hydro, amounted to 18,912 GWh.

(As an aside, there is an interesting breakdown in the CEC publication – on an Australia-wide basis – of the components of household power bills, data readers of the media don’t get to see.

(The breakdown shows a rise from an average household annual bill of $1,296 in 2015-16 to $1,353 in the current financial year and projects that this will grow again to $1,390 in 2017-18 and $1,422 in 2018-19. That’s a rise of 9.7 per cent over four years.

(Put another way, at present the average Australian residential account-holder is spending $3.70 a day on electricity supply, up from $3.55 last financial year, in round terms the price of a cup of coffee a day. Smokers with a 40-a-week habit spend about $5.25 a day. On the above projections, in 2018-19 the average household power expense will be $3.90 a day.

(The CEC chart also shows that the current components of the bill amount to $114 a year for various green schemes, $114 for transmission charges, $519 for distribution network charges and $606 for wholesale and retail costs.)

Moving on from this digression – and remembering old Pontius Pilate, who asked “what is truth?” as he wrestled with every political leader’s quandary: to do the right thing or the popular thing – this “new normal” meme comes with many angles and, like so much else thrown around in common discussion, bears careful analysis.

I see the recommendations from the Finkel task force now being pared down to four key outcomes – increased security of supply, future system reliability, rewards for consumers and lower carbon emissions – delivered through three key mechanisms: an orderly transition of the supply system from where it is today to one with lower abatement, enhanced system planning and stronger governance.

The view of a rush to wind, solar and batteries as the “new normal” seems to me to require a lot more thought under this template.

The week ahead sees the CoAG Energy Council wrestling with the Finkel report. The chances of a “new normal” emerging from the meeting in the form of bipartisan political agreement on the path forward are what? And this is before we contemplate whether the federal Coalition can even agree within its own ranks on next steps.

Climate of confusion

By coincidence I have come across the new “Climate of the Nation” report from the strongly green-leaning Climate Institute on the same day I have been reading the latest Essential Report polling and just after looking at a pre-dawn snapshot of east coast market capacity on a pretty standard winter’s day.

Taking the latter first, at 6.30am today 97.6 per cent of the New South Wales load was being met by black coal generation as the State’s population was getting up and its substantial factory sector was gearing up. If you take NSW, Victoria and Queensland together – they represent 90 per cent of the east coast market – at this point 88.9 per cent of the three-State load was being met by brown and black coal generation with wind power providing 0.4 per cent and solar (naturally as the sun wasn’t yet up) 0.04 per cent.

(Eight hours later, I see, at 2.30pm, black coal generation is still bearing 89.7 per cent of NSW load and coal is accounting for almost 82 per cent of required capacity in the three largest States of the market – with hydro power providing 7.5 per cent and wind/solar 4.3 per cent.)

The question that comes to my mind when I look at data like this is what would be required to replace even half this coal power (let alone all of it) with mostly wind power and solar PVs? What would the total system cost be in a set-up where supply is assured and how would this translate in to retail bills?

Despite all the stuff being thrown around in the public arena at present, this is still a substantially unanswered question. Lots of people have opinions, assertions abound but we still lack an independent, widely-accepted-as-credible modeling effort communicated in language the Averages can understand – and this despite the South Australia nuclear royal commission report telling us 13 months ago that “identifying whether a particular generation portfolio will deliver electricity at the lowest possible cost requires an analysis of the future cost of the system as a whole.”

Indeed, one can read the Finkel report just released and see in it validation of the earlier royal commission declaration that “for those planning a future electricity system (and the market in which it will operate), the relevant issue is total systems cost, accounting for the cost of generation, connection, inter- and intra-regional expansion of transmission and distribution networks, and grid support costs.”

But, without this being available in straightforward terms, how can the community at large and the body politic in particular (especially the CoAG Energy Council and the Turnbull cabinet’s energy committee) come to a landing on a policy that will take us at least to 2030?

Modelling done for the Finkel task force, which inevitably is being challenged from left and right, tells us that its preferred approach (via a clean energy target, a topic already of furious political debate) would see a 2030 NEM generation mix that was 53 per cent coal-fired, five per cent reliant on gas, eight per cent on hydro power and 33 per cent on variable renewable generation (the other one per cent green power would be biomass).

Would this outcome satisfy the community as represented in the latest Essential Report poll (and which, of course, includes West Australian respondents and not just those living on the east coast, still less just those in the above-mentioned trio of States that are home to most consumers, household and residential and where most of the impact will fall)?

The Essential poll, taken 11 days after release of the Finkel report, sees 64 per cent of respondents supporting a preference for “more investment in renewable sources” (meaning what exactly?) – and, I can’t resist pointing out, 18 per cent saying “don’t know,” the same number “preferring coal-fired power.”

This poll also returns a preference, responding to the notion of a CET, by 41 per cent of respondents for a measure in which end-user price rises are limited to five per cent, falling to 21 per cent if the rise is 10 per cent and just eight per cent if it is 20 per cent.

Bear in mind in this context that the Finkel report doesn’t suggest prices will drop under what it recommends but that they will be lower than they are likely to be if we continuing muddling along.

Now the “Climate of the Nation” report runs to 48 pages and you really need to read it all to get a picture of what it conveys – you can find it at www.climateinstitute.org.au.

Of course, the interesting (to me) information is well-padded with pejorative promotion of acceptance of climate change but this is only to be expected – green advocates are permanently in a fret that, as is acknowledged in the report, the climate issue is not top of mind for a community plagued by “hip pocket” problems. This bent shouldn’t detract from the value of learning what views about today’s policy game flow from such polling and from focus groups because this is the sort of feedback through their own party research that is influencing our political leaders.

What the Climate Institute asserts is that 96 per cent of Australians “want our primary source of energy” – they are talking about electric power and that’s just 35 per cent of energy used in this country – to come from renewables. What this actually means, we are then told, is that 58 per cent of respondents want their power based on renewables supported by storage and 38 per cent want renewables “supported by fossil fuels.”

The soundbite the institute wants to sell us is that “the public almost universally endorses transitioning our energy system to renewables.” Why do peas and thimbles spring to my mind when I see stuff presented in this way?

The institute goes on to explain in the report text: concern that (an energy system dominated by renewables) “should be properly managed to minimize disruption” lies behind the 38 per cent believing fossil fuels should have a role “in the meantime.”

Which makes me wonder how the respondents and the broad community would react to explanations in plain language from a credible source about the realistic power supply options the east coast has for the foreseeable period from now to around 2030?

By the way, I am interested to see buried in this report that nine per cent of those canvassed think nuclear energy should be Australia’s main source of power. The boosters of nukes among my friends and acquaintances believe this number is higher and would be much more if the legal anathema of the technology was removed and it could be discussed on its merits.

Be that as it may, what remains lacking as the Turnbull government, then CoAG leaders and, sooner or later, the federal parliament grapple with next steps in energy and climate policy – I see the Grattan Institute’s Tony Wood reminding us in an op-ed today that secure and reliable power at affordable prices can’t happen without a credible, national climate change approach – is a community understanding of realistic electricity supply options presented in a form they can actually comprehend.

Until this happens, community perceptions will remain shrouded in a fog of confusion. There is no prospect I can see, under present circumstances, of it lifting any time soon.

Looking back on Energy Week

You’d have to be living under a rock not to know that the biggest public energy issue in Australia today, and one of the two or three top issues overall, is the rising cost of electricity and gas – or that political promises about alleviation, from whatever source, are to be approached with caution.

Sieve the large number of issues aired at Australian Energy Week, just concluded in Melbourne, a fair few of which have been canvassed in the media, as well as the conversations among 400-plus attendees and there’s no avoiding that cost is the over-riding cause for concern, more so than blackouts, which gained notoriety after the South Australian event.

Or that careful reading of the Finkel report does not show the task force offering lower prices down the track, based on modeling, but a possible bill below what business as usual would otherwise deliver depending on many variables. There is a difference.

The manufacturing sector is seriously unhappy, as is only too obvious. Australian Industry Group’s Innes Willox was moved to tell one of the AEW sessions I chaired this week that, from the perspective of business consumers, “the status quo in energy is frankly disastrous.” He added that “Australia’s east coast gas problems are beyond looking crazy.”

Gas loomed large at the conference – which was no surprise. The impact of its high prices on both direct users of the fuel and ultimately on retail electricity bills because of flow-through effects to the generation market was one of the top topics in presentations and discussion at refreshment breaks. As one panel speaker put it, “we have a burning platform.”

And it is hard for consumers to lift their eyes to the far horizon and the many prospects of the “transition” when they can feel the heat of this fire at their backs.

I see a senior media commentator opining this weekend that the Prime Minister and his government now “own” the energy price problem, which may be true in the political sense, but is unreasonable when one factors in the contributing roles of other governments (and oppositions) in the federation. Over the past four years the Coalition has sought to lift us out of the morass of gas policy management – and it is hopeful that its recent moves to compel LNG companies to be part of the solution will prove at least a short-term circuit breaker (however cross it makes the exporters, who point, with good reason, to the sovereign risk issues) – but there is no short-term fix for what both large industry and households want, encapsulated by Willox as “energy to be a source of competitive advantage again.”

For me, Australian Energy Week underscored once more the gulf between the many efforts being made to pursue a new order in electricity supply – to gratify community ideals for a lower carbon society without jeopardizing security and reliability of supply – and the here-and-now imbroglio where concerns about what the new financial year, and especially next summer, may bring are never far beneath the surface of the conversation.

Some of our best minds are addressing the big picture – Alan Finkel, Josh Frydenberg and AGL Energy’s Andy Vesey clearly impressed the Week’s audience with their thoughts in this regard – but, in an environment where seven days in politics is a long time and the prospects for potholes on the road to the next elections are myriad, the here-and-now keeps intruding.

Frydenberg is firm on the point that the federal government is not going to be rushed in to a decision on a key part of the Finkel report, the clean energy target. It’s more important to get this right, and to take the Coalition party room as well as key energy stakeholders along with the decision, than it is to resolve the issue quickly was a key part of his message to the AEW audience.  (We never got to hear the views of Labor’s Mark Butler because a combination of the late Senate sitting on Thursday and one of Canberra’s impenetrable fogs on Friday morning made it impossible for him to get to Melbourne to speak to AEW despite his best efforts. This was unfortunate because, from an energy investor perspective, federal Labor is no less important in how this situation plays out than the federal Coalition.)

Frydenberg acknowledged the major challenge of getting policy right and the competing political problem that power prices are “a barbecue stopper.”

The background to his address is the Prime Minister calling for policy to be based on economics and engineering not ideology and politics, a view with which energy suppliers and major users could hardly agree more and an attitude that fairly reflects a large part of the Australian Energy Week formal and informal discussions, but a decade of game-playing has bred a deep cynicism among stakeholders. There is strong concern that opinion polls still pressure political leaders in to saying things that either prove hard to deliver – lower costs, for example – or send worrying signals to investors about the durability of decisionmaking.

The Australian Energy Council’s Matthew Warren struck a chord, both with an AEW concurrent session audience and more widely through a subsequent newspaper op-ed, when he declared that “energy policy is a mess, prices are rising, reliability is deteriorating and we aren’t getting emissions down at the rate we need.”

The current “investment strike” brought about by “a decade of policy flip-flopping,” he warned, “threatens the future of the national electricity market,” indeed its “death” in the form of re-regulation and “a return to government paternalism of the 1960s.”

His comments, as well as those by Willox and a number of others this week, contrast sharply with the desire of many to focus on a “transition” future where things are much greener and happier. (I noted with interest that the two concurrent sessions of Australian Energy Week that attracted the largest attendance were those dealing with “digital disruption and innovation” and the “future grid.”)

Amongst my reading in recent days has been a law firm’s review of the Finkel report in which it asserts that the two key energy policy challenges facing Australia are the need to better manage the integration of renewables in the power system and to respond effectively to the global trend towards a more intelligent and decentralized supply chain; others would suggest that the two key challenges right now are to remedy the price crisis and to accept and promote a market where no particular technology is being pushed by policymakers and the transmission system has been reinforced so that it and various forms of storage can play a critical role.

Beyond this is the ballooning fear that, having had years of a renewable energy policy but no coherent energy policy, the bigger problem, in the national interest, is what competitively-challenged user industries (with their considerable direct and indirect employment) will shrink or close and in what time frame? This is, as the economists like to say, a non-trivial issue but it is still flying somewhat below the public radar.

A final thought: reading a substantial review of energy issues, including some of the discussion from Energy Week, in today’s Weekend Australian, I am struck by this observation from Matthew Warren: “Energy has never been properly understood by the political class,” he tells the paper. “It has just been something that happens in the background and it just worked. As a result, actions have been taken through a political lens rather than a policy lens.”

How far it is possible to recover from this in the relatively short time available for remedial action to have a meaningful effect where it matters in the present tense (ie for the benefit of today’s consumers and more broadly for today’s economy) is a big question. The carry-home message from Energy Week is that it is one that, post-Finkel, is still totally up in the air – and that an almighty bump as we all fall to earth is not a remote and unlikely prospect even if there are numerous ways open to avoid this in whole or part.

In energy politics, we are, as the poet Matthew Arnold had it, still very much on “a darkling plain, swept with confused alarms of struggle and flight,” terrain for which the Quest Events “energy outlook” conference series, with which I am associated and of which Energy Week is the latest event, has sought to provide a lighthouse for the past six years. The past week’s conference, sadly, has illuminated just how much there is still to do to avoid a grand wreck and the critical point of the shortening time available to do so.

Swimming outside the flags

Alan Finkel is being kept very busy giving speeches about the report of his task force on the east coast electricity market and the level of stakeholder attendance when he talks is testament to to widespread concern about both the situation and how the federal government initially is handling what has quickly become a policy cause celebre.

Tomorrow Finkel will address what I expect to be a crowded room at Australian Energy Week in Melbourne and he will go on the speak at a Grattan Institute forum there tomorrow evening that I understand to have been sold out within hours of being advertised.

Today (Wednesday, 21 June) he has been in Canberra addressing the National Press Club. You can read the full talk at www.chiefscientist.gov.au/

Meanwhile the media continue to make a meal of how the federal Coalition government is wrestling with what they perceive to be the centrepiece of the report: the clean energy target.

For a number of months the media focus was more on the many claims being made that the NEM is a broken reed and needs to be at the very least substantially changed. The CET imbroglio provides them with a new hare to chase but the health of the NEM is central to what Finkel and his task force were asked to assess.

This afternoon Finkel has told the Press Club that the east coast power system is struggling to cope with disruptive change — “but I don’t want to exaggerate: the system is not broken.”

It is, however, he adds, at “a critical turning point.”

“We must improve on what we have to prepare for the growing wave of disruptive change sweeping markets here and around the world.”

In his travels overseas on task force business, Finkel says, the biggest impact on him was long-term policy certainty in other  countries. “It is clear they are ahead of us.”

A resilient market, he declares, actively integrates new technologies to ensure needs are met. “For example, when it comes to new technologies, we can’t afford to have them connect to the grid without giving due consideration to their impact on the whole of the system.” If this isn’t managed well, he adds, “we’ll end up swimming outside the flags.

Finkel has also used the Press Club talk to reinforce the concern Malcolm Turnbull and his government are expressing about energy prices. “everywhere we went in Australia we heard first-hand (about) the pain being caused by rising power prices. We heard from the irrigators in rural communities who need electricity to pump water, from copper miners, from meatworks, from welfare groups representing vulnerable consumers – we heard the message loud and clear.”

In the short term, he acknowledges, the biggest cause of high electricity prices is the cost of gas, which is increasingly setting the prices in the wholesale electricity market. “In this regard, I note that the government (has) made an important announcement about measures to increase domestic gas supply that will ultimately lead to lower gas and electricity prices.”

The task force, he says, shares the concern about gas supply and has made recommendations to address it.

Another factor contributing to high prices, he goes on, are “substantial transmission and distribution charges” and he notes approvingly that the Turnbull government is addressing this by strengthening the hand of the Australian Energy Regulator and limiting the ease of appeal.

But for the longer term, Finkel says,  it is clear that a more fundamental, underlying reason for rising prices in the wholesale market, especially in the price of forward contracts, is investor uncertainty.”This uncertainty revolves around current and future emissions reduction policies (and), in the long term, resolving this uncertainty will put downward pressure on prices by bringing new generation online.”

What this aspect of his report recommends, Finkel says, is a package of steps making up “‘an orderly transition package” — and, he warns, ” this cannot be rushed.”

He makes another interesting point.  The report, he says, takes the position that reliability, security, lowest cost, and reduced atmospheric emissions are the critically important outcomes.

“The generation mix is an input. The exact mix of coal, gas, solar, wind and hydro is not important as long as the outcomes are met. To minimise future price increases we will need a diverse energy mix, including fossil fuels.

“Our modeled emissions reduction pathway is not a dash for 2030. Instead, it is a continuous trajectory in the electricity sector that reduces steadily towards zero in the second half of the century, consistent with the Paris commitments for the whole of the economy. Along the way it delivers a 28 per cent reduction in emissions by 2030, also consistent with the Paris Agreement.

“Our modelling shows that under the clean energy target there will be 42 per cent renewable energy generation in 2030. The greatest proportion of that will be large scale solar and wind at 24 per cent.  In addition, 8 per cent comes from hydro, 9 per cent from rooftop solar and one per cent from biomass.

“This renewable energy will operate alongside existing coal generators (which) will supply 53 per cent of our electrical energy in 2030.”

Further, he says, because the clean energy target his report proposes is technology neutral, if the price of gas comes down in future to lower than what is currently estimated, then gas will contribute to a greater extent than has been modeled. “(As well) if a coal plant were to be built with carbon capture and storage it would benefit under the target at nearly the same rate as a wind or solar farm.”

You could easily miss this measured advice if you are relying on the shorthand reporting of the mainstream media, hunting for an attention-getting headline, let alone the strident noises that emit all the time from many of the “revolution now” boosters of green power.

Finkel says we need to embrace the future — not race towards it. “Move too slowly and we will miss out on what the future offers. Move too quickly and we put at risk the stability and affordability of our electricity system.”

There are plenty of people with views about what further territory the task force should have covered, including Snowy Hydro, which believes the report undersells the potential of its “2.0” project (a topic of a presentation at Australian Energy Week today) and, of course, the mining sector, promoting the role of new coal technology, not least in the Latrobe Valley.

But, it seems to me, that what is in the report deserves a little more careful attention than it is getting, at least with respect to the  points I have plucked here from his Press Club address.

 

Politics and Finkel

Everybody in the federal parliament agrees spiralling power prices are a massive problem, politically and economically.

This assertion by the Australian Financial Review’s chief political reporter at last week’s end (in a commentary headlined “Every galah in the pet shop is now an energy expert”) was followed by another from the Grattan Institute’s Tony Wood that the current political debate threatens to deliver less secure and reliable energy at higher cost, the opposite of what the Finkel report is attempting to get the body politic to pursue.

Wood adds: “In Australia, ‘old coal’ delivered electricity at about $40 per megawatt hour for many years. But those plants are retiring and the cost of power from new coal plants, even the most efficient, is closer to $80. Gas-fired power, even if domestic gas prices move down closer to export parity, will cost $90-100. Wind and solar, when available, can deliver power below these levels, but the cost of balancing their intermittency pushes prices back up. Wishing a return to the costs of last century is futile.”

Critical to analysing the “blueprint” Finkel is offering federal, State and Territory governments is understanding that the task force has implicitly recognised higher power prices are a fact of our lives and that failures of collective political management of the sector will see them rising further out to 2030 because of investor reaction to policy uncertainty. (As readers of this blog know, I discount projections to 2040 or 2050.)

Political touting of the task force as a vehicle to achieve lower power prices – less than they were last year, let alone where they stand now after the latest round of retailer announcements – was always a dubious ploy and is now a hurdle to consideration of other aspects of the panel’s recommendations.

To me, one of the notable features of the first post-Finkel week has been the view, to quote one senior journalist, that the Prime Minister “has multiple challenges in trying to craft a (new) energy policy.” The problem with this perception is that the task equally belongs to the State premiers. The mechanism for moving forward is the Council of Australian Governments.

The new generation of players in the energy space is bored with veterans’ references to the creation of the NEM in the 1990s but it bears repeating, in the present context, that the prime movers in power reform then were Prime Minister Paul Keating and premiers Wayne Goss and Nick Greiner, with Jeff Kennett coming later to the party.

One of the arguments that carries some weight with me is that, pared down, the key impact from the efforts of Keating, Goss, Greiner and Kennett was to get quite a lot of politics out of electricity supply – at least in the NEM – and this worked until late in the past decade when politics came back with a vengeance.

Some see the best possible outcome from the present goings-on is for politics to again be pushed in to a back seat; a big problem is that the atmosphere now is a lot more poisonous than it was in the 1990s (that was often toxic, too) and the main parties have a large amount riding on appearing to win the argument.

As well, there are over-arching aspects, like the size of the emissions reduction target, that are political to the core (which is why, one assumes, that Finkel and his colleagues opted to work with the present 2030 target).

In a new commentary on the Finkel report, the Energy Policy Institute argues that CoAG’s Energy Council, which has until August to come up with recommendations to Turnbull and other leaders, “lacks the institutional authority and resources required” to implement whatever version of the “blueprint” is eventually pursued by the jurisdictions.

EPIA wants to see rapid take-up of Finkel’s recommendation to establish an “Energy Security Board.” From the institute’s perspective, an ESB will be better able to adapt to ongoing technological, social and environmental change and reduce the current propensity towards short-term, piecemeal solutions.

The ESB’s first priority, the institute adds, should be to put together a long-term plan in which the energy industry and the community can have confidence.

EPIA proposes that the ESB should have an independent charter that encompasses all of Australia’s interrelated energy objectives, including to protect consumers, to bolster energy export trade, to strengthen the entire economy and to foster the energy security of Australia and its energy trading partners.

The board, it says, should function transparently, follow predictable practices, consult regularly with all stakeholders and publish an annual report – and it “should include members with wide industry experience and not include political appointees.”

EPIA suggests the board can be established under a single federal law, “doing away with much of the costs, red tape and inefficiencies of separate legislation and administration in nine jurisdictions.”

One of the advantages of taking this route, EPIA opines, is that an ESB will not be “hostage to electoral cycles” and not be bound by political directives except in cases of national emergency.

If you follow the huge volume of political and bystander contributions of the past week, much of it circling around what was clearly a “robust” Coalition party room discussion in Canberra of cherry-picked aspects of the Finkel report, you will find very little about the task force recommendation for establishment of an ESB – but perhaps it should be higher profile as a tool for breaking out of the vicious cycle of politics in which electricity and gas policy is presently trapped.

Note: Alan Finkel is speaking at the three-day Australian Energy Week conference in Melbourne this week, as is Josh Frydenberg, Mark Butler, Victoria’s Lily D’Ambrosio and Queensland’s Mark Bailey. Also presenting will be AGL Energy’s Andy Vesey, the Minerals Council’s Brendan Pearson, Australian Industry Group’s Innes Willox, Energy Networks Australia’s John Bradley, the Australian Energy Council’s Matthew Warren, AEMO’s Audrey Zibelman and AEMC’s Anne Pearson. More than 400 people will be attending the event. (See www.energyweek.com.au)

Can the caravan move on?

It is not hard, really, to carp about aspects of the Finkel report – Tony Abbott has won media gratitude by christening it a “magic pudding” as well as using it to resurrect the “carbon wars” – but the critical issue now, as it was before the document was published, is how the body politic’s leadership can efficiently address the main challenges it throws up in a time frame dictated by electoral cycles?

There was always going to be a dichotomy between what politicians seek – in this case, a circuit breaker for an electorate deeply unhappy about energy prices, somewhat scared about security of supply and split over how far Australia needs to go in pursuing emissions abatement in the here and now – and what someone like Australia’s chief scientist will want to set as a light on the hill for long-term policymaking.

In the immediate aftermath of the “blueprint’s” release, it is clear that the media want to focus on a three-way stoush between federal politicians (the Turnbull government, its recalcitrant right wing and the Labor opposition, perhaps emboldened by what it has seen happen in the UK) over a price on carbon.

The Turnbull cabinet wants to focus on power pricing and security of supply while fending off abatement demands until it can complete its climate change policy review sometime later this year.

Others have their own agendas but denizens of political backrooms, Coalition and Labor, will not have missed Rosemary Sinclair of Energy Consumers Australia saying in the ABC’s “Q&A” discussion on Monday that “the community wants this matter settled”.  She added: “We want to be able to rebuild confidence in this market, we want long-term policy settings and we want costs brought under control and reliability and security stabilized so that we don’t have to worry about these things anymore.”

As well, there’s a recent Essential Report poll (just before the Finkel report was released) that has 28 per cent of respondents saying the top energy policy priority is keeping prices down, 21 per cent saying its reducing emissions, 19 per cent opting for maintaining reliability — and 21 per cent saying prioritize them all. (Also, 12 per cent responded “don’t know”……….)

Meanwhile the Minerals Council of Australia, for one, has opted to challenge the Finkel report on its central theme of a technology neutral approach, not unreasonably accusing it of “studiously ignoring” nuclear energy and pushing in particular for a regime in which coal-fired high efficiency, low emissions generation is given an opportunity for development.

The MCA point that resonates with me is the assertion that “the best, most affordable and reliable energy mix (for eastern Australia) is a balanced one with contributions from gas, renewables, new HELE coal and later from carbon capture and storage as well as (eventually) nuclear.”

How we frame a regime that enables this comprises two sides of a triangle; for today’s politicians, the hotter and harder to handle side may turn out to be the affordability one.

It was notable, I think, that Alan Finkel, appearing on that ABC “Q&A” program, sought to slip in the point that his task force’s focus is on “the lowest prices that can be achieved” not on a return to the much lower bills of the past.

Will this pass the “pub test”?

Josh Frydenberg, on the same program, made sure of throwing in the role of energy network costs in this equation, well aware that the CoAG Energy Council he chairs has the need to resolve network regulation issues high on its “to do” list.

It is going to be more than interesting to see how Finkel, Frydenberg and Labor’s Mark Butler present and refine their views at next week’s “Australian Energy Week” conference in Melbourne. Finkel will come to it on 22 June after making an important presentation at the National Press Club in Canberra the previous day – and Frydenberg and Butler will appear in the “Energy Policy Forum” of the “Energy Week” program on 23 June (with your’s truly in the chair).

One of the points Finkel made on “Q&A” goes to the widest issue with which the Coalition and Labor (in their federal and State guises) need to grapple but which passes over the heads of most of the community. “The existing market, based on purely trading in energy, is no longer effective in sending investment signals to the people who will be building new generation.”

We keep being told (correctly) that the biggest problem for generation investors is uncertainty – and could there be anything more uncertain than the thought that the path on which Finkel is leading the politicians is one where, as in Britain (co-pioneer of the competitive power market along with the NEM and the “PJM” in America), state intrusion becomes a primary driver?

The other theme I see emerging in the public debate following the Finkel review’s publication is the gulf between those, like the Greens, who insist wrestling with global warming is the most important issue, and those (including the task force and certainly the federal government) who see affordability and security of NEM supply as paramount.

Perhaps one should be more specific here: while the impetus for the task force exercise was the supply catastrophe in South Australia, that State is a sideshow in the NEM – the vast bulk of consumption and supply is in three States, Victoria, New South Wales and Queensland with two of them (Victoria, NSW) now having growing question marks over their ability to meet all demand all the time, perhaps as soon as next summer.

Having a SA-style situation in Victoria or NSW (or both), or even the public perception that this could happen, is a political bridge too far for the Coalition and Labor (at both State and federal government levels).

It’s worth noting in this context that the CoAG leaders underlined in their communiqué after last week’s meeting that they “reaffirm (their) commitment to maintain energy security and affordability.”  That’s four Labor State leaders and two Coalition State premiers as well as Turnbull speaking – including the Victorian Labor and NSW Coalition governments.

Churchill was fond of quoting the alleged Arab saying that “the dogs bark and the caravan moves on” and we can be sure of lots more barking around this caravan, but, for political leaders, there is also the certainty that they need to come to two destinations in the near future: first the CoAG Energy Council discussion of the Finkel report and then the next CoAG leaders’ meeting.

Thereafter we will be back in the electoral cycle battlegrounds ahead of polls in Queensland, Victoria, Tasmania, New South Wales, South Australia and federally in 2018 and early 2019.

Reacting to Finkel

We have the report. The issue is “now what?”

And the answer is that we must wait on two more discussions.

The important first step is that the Council of Australian Governments has given the hurry-up to energy ministers to advise on a response to Finkel’s task force recommendations.

CoAG Energy Council, the communiqué from Friday’s leaders’ meeting says, must “provide urgent advice out of session” and no later than August on which Finkel findings can be implemented – and on the timeline for doing so.

In process terms, this is to be expected and the tight deadline for this advice is to be welcomed, but it means that we will wait until some point beyond August (perhaps December) to find out whether or not our governments can genuinely work with each other on this critical issue.

This also won’t satisfy those who see the Energy Council itself and its bureaucratic set-up as a core part of the problem.

The scale of the problems to be addressed has been encapsulated by a comment from the lobbyist Australian Energy Council, representing power generators and energy retailers. CEO Matthew Warren has told the ABC: “Right now (in terms of policymaking) we couldn’t do worse if we tried. We’re making everything worse.”

Some argue that a root cause for this is the way Australia goes about energy market oversight.

The Finkel recommendation for establishment of an Energy Security Board particularly resonates with those, like the Energy Policy Institute of Australia, who are calling for a throwing off of the “chains of ‘co-operative’ energy governance.”

In a submission to the task force, one of 390 it received, EPIA in March declared “the COAG Energy Council and its (bureaucracy) has no accountability to anyone except itself, its decision-making is excessively political (hard of course to eliminate where its representatives change every time one of the constituent governments change) and it has no permanent secretariat or dedicated resources of its own.” The institute urges acceptance that the council and its apparatus is “a cumbersome, sub-optimal and outdated model that is no longer fit for purpose: it is too slow, it has too many part-time masters, it has too many part-time servants and its structure and modus operandi both need streamlining.”

Finkel and his task force agree that the issue of stronger energy market governance is a high order of business for the nine governments. The report’s executive summary highlights the need for a “strategic energy plan” – with an ESB to drive implementation, including whole-of-system monitoring of security, reliability and planning – along with faster rule change processes, a better funded regulator with enhanced market surveillance capabilities and a NEM operator with a broad planning role.

Matthew Warren asserts that the Finkel report can make a fundamental difference by taking politics out of the debate of electricity and emissions. Unfortunately, this may not be what actually happens.

Labor are already playing the coal card as a tactic to wedge the Turnbull government – as are the most conservative in the Coalition’s own ranks although the Grattan Institute’s Tony Wood argues that “the Finkel blueprint can be supported by Coalition government members concerned about high costs, energy security or the future of coal.”

Some reaction, of course, is entirely predictable – like that from the Australian Greens, Richard Di Natale and Adam Bandt declaring the report “a political fix that will keep coal and gas burning for another 50 years.”

Others in politics are leaning towards positive – like Queensland Premier Annastacia Palaszczuk, who notes that, with “the southern States” (who include Labor’s Victorian government) refusing to utilize their own gas resources, her administration can and will step up. While talking up her own “Queensland powering plan,” she also notes that Finkel’s clean energy target (CET) “appears to provide one option to navigate the present impasse.”

Energy Networks Australia tells us that Finkel’s report is “the last, best hope” for customers wanting the energy system stabilized to deliver reliable, affordable supply. “A transforming energy system,” says CEO John Bradley, “needs strong, well-resourced and pro-active market institutions with a shared plan of action and accountability for clear milestones.”

This ambition hangs in no small part on a bipartisan agreement to deliver the CET. This is especially the case with east coast gas supply. As Bradley says, “Australia can’t address electricity system security without removing arbitrary blockages to gas supply and ensuring gas markets are working effectively.”

Naturally, the upstream petroleum is also striking this note. Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, says a CET that works must be “realistically ambitious” – “set at a level that winds back dependence on coal-fired generation without jeopardizing security.” The best option, he asserts, is to use more gas-fired power – at present, he adds, “we are seeing gas generation squeezed out by a mix of cheap coal and subsidized renewables.”

The Finkel report, although I don’t see media so far running this line, is unequivocal in speaking up for a role for gas: “Access to a reliable and affordable gas supply is in the interest of all Australians for its direct use for heating, as a feedstock chemical for industrial processes and as a fuel for electricity generation in the NEM, providing a reliable, low-emissions substitute for ageing coal-fired generation and essential security services to complement variable renewable electricity.”

Meanwhile, the Minerals Council of Australia, while cheering Finkel for supporting a technology neutral approach to energy markets (“a welcome shift from policy settings that have exclusively favored intermittent sources with adverse consequences for reliability and price”), is unhappy that the task force “implies that high efficiency, low emissions coal generation is not low emissions or clean energy.” If countries around the world, asks MCA, are embracing HELE, pointing to more than 1,200 such projects it says are building or planned in East Asia alone, why should Australia discourage the technology? “It is a simple matter of economics and engineering that an energy mix not including new, super-efficient baseload coal generation will be more costly and less reliable.”

The mining lobby is also “disappointed” that the task force report has not recommended the lifting of our local ban on nuclear power, “a technology currently providing zero-emissions baseload energy to countries with a combined population of 4.5 billion.”

As for the Clean Energy Council, the main lobby group for wind and solar investors, while welcoming the report, it is concerned that imposition of additional standards on new renewable energy projects to support energy security could end up being “punitive measures that stifle innovation and unnecessarily drive up costs.”

At the end of the line, of course, are consumers – and Energy Consumers Australia CEO, Rosemary Sinclair, urges a “laser-like focus” on their interests, saying that households and small businesses want to be able to make the most of new opportunities (eg solar and storage) while also being guaranteed that energy will remain reliable and affordable for everyone.

Politicians, not being stupid even if many of them play games that invite the epithet, realize that delivering the whole package ECA demands is a very tall order, especially when they are also trying to woo votes from those with green leanings.

Turnbull and his fellow leaders, in duck-shoving the next moves down to the CoAG Energy Council without giving any over-arching reaction to Finkel (apart from “re-affirming (our) commitment to ensuring energy security and affordability,” to quote the communiqué) are being pragmatic.

It’s what the leaders do after they get the feedback in August that is critical. If their response turns out to be yet another fudge, or subsequently to be undermined by a new battle royal over the climate change policy also now being refined, then things might indeed get worse than they already are.

Press the reset button

You need to go to page 35 to read the condemnation.

There (in a 212-page document) the Finkel task force states: “Australia is behind other countries in developing a clear, national strategy to ensure that our electricity and gas sectors operate and transition effectively and efficiently.”

The opportunity to get this right was clear in 2007-08, when the Rudd-led Labor Party overcame John Howard’s Coalition. It’s been downhill all the way from there. And it rolls on now, as the review rolls out, with the media leaping on the politics of the “clean energy target” (the apparent Coalition choice). versus an emissions intensity scheme (embraced by Labor).

What much of the immediate media coverage does not take up is the serious nub of this whole matter.

What we have, the task force declares, is “a challenging investment environment in the NEM” created by “uncertainty related to emissions reduction policy and how the electricity sector will be expected to contribute to future emissions reduction efforts.”

The cure, as perceived by Finkel & Co, is “a long-term emissions reduction target for the electricity sector, a credible and enduring mechanism for the sector to achieve the emissions reduction trajectory and better management of generator closures.”

And, further, “new standards will also be required to give greater confidence that reliability will be maintained as technological developments continue to affect the system” with new variable renewable generators needing to contribute to regional reliability by ensuring dispatchable capacity is brought forward to the market.”

A long-term, integrated grid plan, the task force says, is required to establish “an optimal transmission network design” to enable the connection of new renewable energy resources. “Coordination of generation and transmission investment so that networks connect the areas with the best renewable energy resources, at an efficient scale, will be a critical challenge.”

When all the singing and dancing in done over the report, perhaps its most important recommendation needing prompt policymaker attention is this: “A new Energy Security Board should drive implementation of the recommendations of this review.”

The CoAG Energy Council, Finkel urges, should “immediately” agree to establishment of the ESB to pursue a new strategic energy plan and this blueprint (devised by the council) should be in place by mid-2018.

The other critical task force requirement is this: “By mid-2018, COAG leaders should agree to a new Australian energy market agreement that recommits all parties to taking a nationally consistent approach to energy policy that recognises Australia’s commitment in Paris to reduce emissions and governments’ commitment to align efforts to meet this target with energy market frameworks.”

Shorn of all the surrounding noise, this is a huge ask for politicians who have spent a decade demonstrating their lack of capability in this space.

In the responses from around the stakeholder spectrum spinning out this afternoon, I like the Deloitte comment that the report “allows Australia to hit the reset button for energy security,” calling for “holistic, clear-headed planning.”

Deloitte adds that “What is important now is to allow the energy industry time to digest the report and its finer points and to fully understand the implications, opportunities and challenges it presents.”

True, but the bigger challenge, I suggest, is for the politicians sitting around the CoAG table to seize the moment and collectively agree to the Finkel proposals outlined above.

That’s the button that needs hitting and there is no logical reason why the body politic shouldn’t do as it is asked.

It takes the task force six pages to list all its recommendations and there are many that need “digesting,” as Deloitte has it, but the critical ones, the umbrella for all that follows, simply require Malcolm Turnbull, the premiers and the chief ministers to have the gumption to say “yes, let’s do that.” And Bill Shorten and federal Labor to follow up by saying “yes,” too.

Just this once, don’t dance the energy politics tarantella – just make a decision in the national interest.

Of course, the devil is in the detail of the “energy market agreement” for which Finkel is calling – and it will no doubt take all of 12 months to hammer this out – but agreeing to pursue it is the key.

And, once that is accepted, failure to achieve a good outcome leaves the politicians open to the ire of the community in the critical 2018-19 political year.

As the report says, “at present, there is no overarching strategic plan for addressing the (NEM) challenges and capturing the (transition) opportunities.” That is a national disgrace in which both mainstream political parties share and Finkel provides them with an opportunity to correct their egregious failings.

In the Catholic rite of confession, the critical issues are acknowledgement of failings and a firm purpose of amendment. That’s what’s needed here.

Governments, says the task force, need to “take decisive action to ensure that the transition to the future grid, whatever it looks like, is smooth and that the electricity system continues to serve the interests of all consumers.”

And it quotes approvingly an Engineers Australia point from its submission to the review process: “Transforming Australia’s electricity generation is not a matter of choosing just one technology over another. It is using a combination of existing and emerging technologies in a structural policy environment consistent with emissions reductions and meeting the demand for electricity while providing a stable environment for investors. A secure energy future will be reliant on these policy approaches being successfully deployed.”

There is a large, important, separate aspect to the task force review, the worrying prospects for insecurity of power supply next summer, and it deals with how to address this at length – rightly so.

This ball is in the CoAG Energy Council court (even if, as Jay Weatherill has found in South Australia, it is leaders who bear the blame when things go pearshaped).

The task force takes a lot of words to say that dealing with the summer challenge depends on the “number of measures” that have already been put in place – which it supports and says it is “confident” they are appropriate.

The caveat is provided, too: “However, it is not possible to prevent or mitigate all impacts from extreme weather events or major equipment failure. The impacts of such events may be reduced through summer preparedness measures, ongoing monitoring and innovative solutions.”

And, just to be more sure, the task force wants a third party review of the Australian Energy Market Operator’s short-term demand forecast techniques. That’s another step that can be implemented straight away.

A lot of the review deals with the medium to long-term future and prospects for technology. It’s interesting stuff, but it’s not today’s main game – what politicians think are supply winners is really not worth a pinch of (insert your choice of substance) and readers of this blog know my view of  today’s perceptions of the system in 2040 or 2050 (the equivalent of 1994 and 1984, going back from here).

Whatever, as Finkel himself is saying, “business as usual is not an option” – and nowhere is that more true than in governance of the NEM and the policy umbrella under which it operates.

Both CoAG and its Energy Council have the opportunity in coming days to demonstrate swiftly, in reacting to the task force report, that policymakers understand this and are aiming to do much, much better than they have to date.

Wrestling with complexity

You won’t be surprised to know that I prefer to be informed about electricity issues by experts rather than via rhetorical flourishes from media figures, be they ever so highly regarded in their field.

As it happens, the latest of such flourishes – in a national newspaper, declaring no future for coal power and talking up renewables – has coincided with CSIRO publishing its Low Emissions Technology Roadmap.

While almost all the public focus in recent months has been on Alan Finkel & Co, whose task force report will be delivered to CoAG at the week’s end, this Roadmap is also part of a process that includes the concurrent federal government review of climate change policies – a reminder that the Finkel report is not a last word.

The first critical point of the new CSIRO report is that it examines pathways (note the plural) for the energy sector to contribute to Australia’s emission reduction efforts – and is not just another paean of excitement over the green brick road.

Whatever route is chosen, CSIRO says, a choice must be made between dispatchable power from flexible generation or opting for storage to support variable renewable energy.

Now the CSIRO work is contained in two documents totaling 450 pages and trying to synthesize it in one short commentary is a mug’s game. What I want to do here is to focus on just one of the four pathways and just on its electricity aspect.

This pathway examines – please note, it doesn’t predict or propose – the use of wind and solar power, up to a limit of 45 per cent in the market, plus low-emission, dispatchable technology, including concentrating solar thermal power with storage, high efficiency, low emissions fossil-fuelled generation with carbon capture and storage, nuclear energy and, surprisingly perhaps, given recent experience, geothermal.

The pathway includes a scenario that that sees a transition to low-emissions dispatchable power with less requirement for expensive grid transformation than others canvassed. Such steps need, CSIRO says, to be considered with their benefits in terms of dispatchibility balanced with their cost and risk (technology, commercial, social licence) profiles.

The whole point of drawing attention to this Roadmap is that, if one stands sufficiently far back and looks with both eyes, its overall message is to highlight the great complexity of the decisions Australia needs to make – as one example, a section that sees development out to 2030 restricted to wind, solar PV and gas also envisages a slower decrease in coal-fired generation.

The CSIRO papers should be seen as an essential reading backdrop to the issue of “technology neutrality” that is rising towards the top of the energy debate and is far from simple in implementation even as it offers the Coalition a means of coping with its own unruly members for whom the climate change issue is a red rag.

The chances are that we will hear a great deal about technology neutrality in the rest of this month, flowing from both the Finkel report and the push by the federal government for consideration of this direction (a path strongly supported by some large lobbying bodies).

“Neutrality” is more jargon, of course, and, in itself, is highly complex.

In just one example, does technology neutrality embrace a situation in which Australia’s younger coal-fired power stations are refurbished using HELE and CCS rather than pursuing greenfields developments? The green boosters, their political acolytes and energy investors with vested interests will, naturally, scream “NO!!!” but, in standing-back mode, it is an option that shouldn’t be ignored.

In one of dozens of observations across hundreds of pages of the Roadmap, CSIRO observes that “HELE technologies allow for the continued use of fossil fuel feedstocks at significantly lower emissions – (and) they also provide a platform which significantly reduces the cost of staged CCS deployment.”

I should interpolate here that the Australian Academy of Technology & Engineering (ATSE) has just released a statement calling on policymakers to “make some decisions about CCS,” arguing that “no matter how earnestly we push towards renewables and lower emissions, large-scale fossil fuel use will continue for some time to come for industrial processes and generation”.

ATSE adds that “retrofitting CCS to existing power stations has been carried out successfully in Canada and the US,” asserting that it is also an option here.

The CSIRO Roadmap also discusses at length an ongoing role for gas in generation and notes that, in order to meet the large additional demand for the fuel raised in one of its pathways, taking in to account the ongoing LNG trade, “it is likely that significant additional unconventional gas reserves will be required,” another challenging issue bearing in mind community attitudes to coal seam gas and to hydraulic fracturing.

As we contemplate all of what is going to be heard this week, it is useful, I suggest, to read the “next steps” advice from CSIRO contained in the Roadmap executive summary.

Policymakers, the organization says, face a range of strategic decisions that need to be made now in order to inform policy design as well as to inform priorities for research and community engagement.

These decisions, CSIRO adds, include whether policy should be national versus jurisdiction-specific, whether policy to drive uptake of low emissions technologies should be economy-wide versus sector-specific, whether policy should be technology neutral versus technology specific and whether Australia should develop technology locally versus acting as a “technology taker”?

There are also, it says, specific key questions for policymakers regarding the future of nuclear power and domestic gas supply.

“While action would be required in the short term to maintain optionality regarding low emissions dispatchable electricity generation technologies, there is a further set of strategic decisions that can be made post-2020 on whether to decrease or increase support for each of these technologies.”

Just thinking about this no doubt makes many heads hurt, but it is necessary to remind ourselves about the big picture each time we read blowhard commentary given high billing in the main media – and, as we snarl at politicians to do better, we need to remind ourselves that this is just one of several areas in which our leaders are wrestling with similar complexity.

So far as electricity supply is concerned, the Roadmap, assuming it is actually read where it matters and not treated as part of the background noise, can be a useful decisionmakers’ tool for the weeks and months ahead.

 

 

 

While you’re waiting

As you twiddle your thumbs while waiting for Dr Finkel’s remedy for what ails us in electricity supply to be delivered, you may care to visit a lawyer.

The one I have in mind is Gilbert + Tobin. On the firm’s website you will find a “white paper” entitled “Wrestling with the electricity market transformation,” a 52-page treatise written by its energy partners after after an overseas tour in January by two of them, Simon Muys and Geoff Petersen.

I was led to it this week by a commentary on the Australian Energy Council website reviewing both it and the new “Powering through” paper from the Grattan Institute. The lobbying group says that the two have a common thread: “increased politicisation of energy with government interventions and uncoordinated responses (are) leading to less than ideal outcomes.”

Gilbert + Tobin itself points to this and five other key themes in its “white paper,” namely the dismantling of a political consensus around the NEM, the importance of overcoming a political aversion to an emissions intensity scheme, the need for a regulatory regime to incentivize grid investment and innovation, what other jurisdictions overseas are doing to incentivize distributed energy and the implications longer term of market transformation for regulators, networks, users and funders.

The firm warns that it may be too late to hope for coherent national energy policy in Australia, given today’s “politically-charged, impatient and fractured” environment, a lamentable thought but one they are not alone in harboring at this time. G+T believes energy politics are here to stay, a perspective that, again, is hard to dismiss as is the firm’s additional point that politics is the art of the possible and energy solutions, therefore, must be shaped to the current climate.

It also throws a line from Socrates at us: “The secret of change is to focus all your energy not on fighting the old but on building the new.”

Having said this, Gilbert + Tobin acknowledges that, both here and some places overseas, there is a sense of panic about energy markets associated with high, and still rising, prices and fears about system security. Today’s Australian Financial Review story about our metal smelters being “sunk” by the rising tide of local energy prices is an example of current angst.

Not surprisingly, quite a lot of the “white paper” is focused on the rise of intermittent renewable resources and the implications this poses for both the grid network and the wholesale energy market, the NEM. One of the points  G+T makes that resonates with me is “a critical question is whether the cost trends seen over the past decade in PVs and storage will slow down as economies of scale are slowly exhausted, subsidies are removed and silicone prices stabilize — or will the rise of electric vehicles trigger a fresh wave of cost reduction, particularly in storage?”

As it happens, this week I have also been reading an economic paper on electricity market design in a decarbonized world sent to me by Tim Nelson, AGL Energy chief economist. Nelson and two AGL colleagues, Fiona Orton and Tony Chappel, mount an argument that the current “energy only” market can work in this environment but extreme pricing volatility is likely to be required to ensure system reliability. The fact that the media and politicians react to extreme pricing volatility as if stung by a horse fly is not the least of the issues leading to the policy stress G+T discuss.

Nelson & Co, in a 20-page paper, see the key question for politicians being “how best to enable an orderly, affordable and reliable transition to a low-carbon energy system” and argue for the introduction of incentives to ensure that intermittent generation can become “firm” and dispatchable, a rule-based mechanism for ensuring advance warning of coal and gas plant closures and the use of supplementary markets to improve NEM resilience. These are all points I wouldn’t hugely surprised to see as ingredients of Dr Finkel’s remedy.

The G+T paper contributes to this aspect the thought that, in fact, we are part of a long-standing and at times fierce debate internationally between proponents of “all energy” markets (which only compensate for dispatched power) and capacity markets (which also compensate for firm capacity, i.e. “security of supply”). The lawyers think a renewed debate about a capacity payment mechanism in the NEM is “inevitable.” They add their view that exploring this step to resolve political concerns about system security is preferable to the direct intervention in generation that is a feature of current South Australian and federal plans. “If politics will not allow an all-energy market to work,” they say, “some form of capacity payment mechanism is preferable to crowding out private investment through direct State intervention.”

The firm suggests that a middle-ground alternative, and one (it says) appears likely to be explored in the Finkel report next week, is to impose additional requirements on new renewable generation to include some form of firm or dispatchable capacity, either through requiring it to be paired with gas generation or via storage.

With respect to the overall environment, the worm in the apple as perceived by Gilbert + Tobin is the possibility, perhaps probability, that Australia will shift away from a coherent national policy towards “competitive federalism,” frustrating the purpose, the firm says, of the Finkel review.

As I have written in This is Power several times this year, I think the critical issue of the weeks and months ahead is not what the Finkel task force recommends but how much of a pig’s breakfast the body politic can make of dealing with the report, not forgetting for a moment that we are moving in to an election period between now and early 2019 for Victoria, Queensland, New South Wales (by far the major entities in the NEM) and the federal government.