Issue 108, April 2014
Welcome to the year’s fourth newsletter, writes Keith Orchison. A major point of focus this month will be the nation’s (and the southern hemisphere’s) biggest energy conference in Perth where gas and oil issues, national and international, will be examined as the federal government continues to beaver away on an energy green paper and consideration of the RET’s future – and as West Australians go to the polls for a re-run Senate election that will impact on federal upper house decisions over the next two years or longer.
Australia is migrating away from its relative energy price advantage and the consequences are playing out in demand destruction, offshoring of industry production and rising residential inability to meet bills.
This was the view put to the “Energy State of the Nation” conference in Sydney in late March by Oakley Greenwood director Jim Snow, who told attendees at the Energy Policy Institute forum that the full impacts of what may have seemed reasonable policy decisions in the past will become more transparent (and more unpalatable) in the next 3-5 years.
Snow questioned whether the consequences of these decisions, the restructuring now under way and the impact of trade offsets are yet understood?
“The offsets,” he said, “are intended to be greater national income from international energy sales and the associated economic benefits of being able to source goods from more cost-competitive countries. The question is: Do we have the trade-offs right?”
Snow argued that the same rigor and logic applied to the case for energy export developments needs to be followed in assessing domestic energy policy. “A more holistic approach is required, with rigor, and this needs to be addressed urgently.”
The Institute of Public Affairs has told the federal government that the role of the energy white paper is to improve supply resilience.
“Avoid the over-reach of attempting to become a blueprint for the future,” says its submission, one of 259 the government has received.
The IPA says the white paper should have a single focus: to allow the market to bring about efficient production of energy with interventions limited to addressing natural monopoly situations.
The IPA submission argues for Australia to abandon existing renewable energy schemes and to allow the energy market to operate on commercial terms. It dismisses concerns about “sovereign risk,” arguing that Spain, “previously the poster child of subsidy excesses,” has eliminated promised subsidies “without the government suffering a reputational penalty.”
One of the world’s leading energy analysts has set out a series of lessons Australia can learn from the factors that have plunged the European Union’s power companies in to a crisis.
In a paper published on the Energy Supply Association website, Mark Lewis, former managing director of commodities research at Deutsche Bank and a winner of awards for energy research, says comparisons between the NEM and the European market are material: both are over-supplied, both have significant mandatory deployment of renewable generation, both have carbon prices below the value needed to give gas generation an advantage over coal plant, both face the equivalent of oil-indexed gas prices and both face increased standing of efficient assets as a result.
Lewis notes that 5,000 megawatts of new gas generation was constructed in the NEM from 2004 in response to market signals at a cost of about $4 billion and says this investment “is most vulnerable to being stranded in current market conditions.”
He warns that the present market conditions are likely to have a knock-on effect on opex spending on coal-fired generation at or near the end of its commercial life.
“Companies that have endured substantial balance-sheet pain from impaired gas assets are likely to be less willing and able to invest in maintaining their older assets,” he says. “It is not unreasonable to see scenarios in the near future where reliability at scale becomes an issue if the issues surrounding the transformation of the energy supply sector are not resolved.”
Lewis argues that companies in Australian electricity supply should examine their financing structures and the flexibility of their strategies to ensure that they can adapt to change.
He also calls on company executives to place public interest concerns high on the list of corporate priorities. While energy affordability is now a major political issue in Australia, he says, no stable long-term policy framework has been developed to deal with it.
“As in the European Union,” Lewis adds, “squaring the circle of objectives on consumer affordability, energy security and decarbonisation while affording investors acceptable returns is a complex task. A bipartisan approach (in Australia) to the development of sustainable, long-term energy and carbon policy appears to be a sensible and essential first step.”
Market analysts Pitt & Sherry say that the impending closure of the Point Henry aluminium smelter in Victoria will remove about 3,000 gigawatt hours a year of demand while new wind generation, currently under construction through the renewable energy target scheme, can be expected to contribute about 2,400 GWh to the NEM.
The two effects will reduce annual demand for all other generation by between 5,000 and 6,000 GWh.
The current stagnation of gas generation in the NEM, they add, is “almost certainly the precursor of an imminent decline.”
Pitt & Sherry principal consultant Hugh Saddler says say the market outlook for the immediate future is for less hydro-electric and gas generation and a higher share for coal plants in the total supply mix.
However, the Clean Energy Council claims that about $1 billion worth of wind farm development has been “put on ice” pending the federal government’s review of the RET. This includes three projects worth $750 million proposed by Spanish company Acciona for development in Victoria.
Former federal resources and energy minister Martin Ferguson has called on State governments to show leadership in the development of unconventional gas supplies.
Speaking to the “Energy State of the Nation” conference in Sydney, he acknowledged that the three LNG projects at Gladstone have “fundamentally altered the supply dynamics of Australia’s domestic gas markets.”
Ferguson, whose post-politics activities include acting as an advisor to the Australian Petroleum Production & Exploration Association, said he expected domestic gas prices to spike in 2015-16, causing pressure on households and large-scale users.
“The key to resolving this problem,” he said, “is to ensure that adequate supply reaches the domestic market, particularly in NSW.
“With an appropriate market framework in place, Australian households and businesses can get access to competitively-priced gas. The challenge is allowing gas producers to get abundant resources out of the ground.
“Unfortunately, this option is being stymied by environmental campaigners who claim that hydraulic fracturing will have apocalyptic social and environmental consequences.
“Overcoming this misleading campaign will require political leadership – through careful regulation of CSG projects and then calling out the activists who oppose almost any form of wealth-creating development despite the science.”
Ferguson told the ESON forum that, if State governments failed to back development of CSG, they will need to explain to an angry electorate why they haven’t taken action to allow additional supply of gas to moderate the fuel’s price.
The Energy Users Association of Australia says a study undertaken for it by consultants Marsden Jacobs Associates confirms the “alarm bells” about the difficulties facing industrial consumers in securing long-term gas contracts at prices they can afford.
“The uncertainty our members face is disconcerting, to put mildly,” says association CEO Phil Barresi. “There are far-reaching implications for eastern Australia if the economic impact of high gas prices is not addressed. What we are lacking is sound policy to resolve this issue.”
Marsden Jacobs surveyed industrial companies using an aggregate 60 petajoules of gas a year, about a fifth of the total gas consumed nationally by the sector.
Modelling undertaken by the consultants suggests that a rise in wholesale gas prices to $9 per gigajoule would also flow through to the mass market as a 15 per cent retail price rise and cause a fall in demand of 6 petajoules a year.
They add that the impact on existing gas generators – no new gas-fired plants are expected to enter the power market over the next 10 years – of the wholesale price doubling to $9 would result in only a marginal rise in wholesale electricity costs. It would cut power sector gas demand by 50 to 100 PJ a year, a decline “largely replaced by increased generation from coal plant.”
Meanwhile the Manufacturing Australia lobby group says major companies are under pressure to move offshore and that 100,000 direct jobs are at stake if they do.
And building products company CSR has announced it will close a glass plant in suburban Sydney, with a loss of 150 jobs, because, says managing director Rob Sindel, of rising energy bills and the cost of gas
A new economic paper, released by AGL Energy in mid-March, says that, while expanding the infrastructure serving the New South Wales market will help to deal with gas supply needs, it will not eliminate looming energy shortages in the State and their extent and severity will “remain at unacceptable levels” without supply from within the NSW borders.
Written by Paul Simshauser, AGL’s chief economist and also professor of economics at Griffith University, and Tim Nelson, the company’s head of economic policy and sustainability, the paper warns that, absent demand rationing in other regions, “material increases” in aggregate supply in Queensland or “demand destruction” in NSW, State shortages in 2016 are unavoidable for large industry. Shortages for the mass market are “unlikely.”
Simshausers and Nelson say the forced exit of some gas-intensive manufacturing loads in NSW “seem almost inevitable.”
They explain that LNG producers, gas-fired power generators, gas shippers and large industrial customers can be expected to initiate a series of swaps and options to avoid government emergency intervention – but warn that, if these arrangements are insufficient, supply curtailment will be needed.
At best, they argue, the reliability of gas supply for NSW in 2016 is “uncertain.”
The State could experience 21 days of supply shortages in winter 2016 “which would cause significant disruption to the manufacturing industry,” affecting some 50 factory sites, many in Sydney’s western suburbs.
Simshauser and Nelson add that, if policy and regulatory problems can be resolved in NSW early in 2014, supply from AGL’s Gloucester Valley project could start in 2017 – and they speculate that the Santos Narrabri project realistically could begin production in 2018 if the development gets federal and State approvals.
The Australian Petroleum Production & Exploration Association says there is “enormous potential” to safely explore and develop Queensland’s shale gas resources to create another wave of economic development and has deplored claims by the State deputy leader of the opposition that this could threaten agriculture and livestock production.
APPEA says major political parties should not adopt the anti-resource development pose of the Greens. The upstream industry, it adds, supports robust regulation and best practice operations as central to managing and mitigating fracking risks.
CSIRO has described the 130,000 square kilometre Cooper Basin, which spreads across the South Australian/Queensland border, as “standing out as the most prospective and commercially viable region for shale gas development in Australia.” Other Queensland basins seen to have shale potential are the Georgina, the Galilee and the Bowen, the southern half of which is covered by the Surat basin.
Origin Energy, in a new briefing for investment advisers in the US, says its Australian operations have been impacted by declining demand for electricity, “largely driven by solar PV and energy efficiency measures.”
The company says it expects the reduction in household power demand to moderate as solar installation rates decline and energy efficiency trends are “largely offset by growth in households.”
Meanwhile the Energy Supply Association has welcomed a Queensland government decision to deregulate solar PV tariffs, saying more flexible arrangements “are the best way to unlock genuine value in solar systems while keeping down power prices” in the State.
The Newman government move switches responsibility for paying for rooftop solar power output from State-owned networks to energy retailers and affects 40,000 homes. Another quarter of a million households who took up the previous Bligh government’s feed-in tariff deals at a much higher rate are unaffected by the change.
The FiT arrangements have seen the two government-owned network businesses pay $243 million to PV array owners in 2012-13 financial year, a subsidy that is then smeared across all household accounts, adding $32 annually to the bills.
The Bligh government scheme is expected to be costing Queensland households an average of $276 a year by 2015-16. The scheme runs until 2028.
Mining giant Rio Tinto has told the “Energy State of the Nation” conference in Sydney that it is pointless to “wish away” fossil fuels globally and called for policies addressing global warming concerns to “recognise the ongoing significant role” of these fuels.
Harry Kenyon-Slaney, chief executive of Rio Tinto Energy, based in Brisbane, told ESON attendees that a key step should be raising the efficiency of coal-burning power plants from the “lamentable” current average of 33 per cent. Lifting this to 42 per cent would reduce emissions from coal power by a quarter.
Another, he said, is the continued pursuit of commercially viable carbon capture and storage technology.
Kenyon-Slaney said that it is “absolutely critical” for the Abbott government to “get the new energy white paper right.”
This, he said, is a valuable opportunity for “a reality check on Australia’s approach to the future of its energy sector – an opportunity to address the creeping energy costs that are putting financial pressure on Australian businesses and households and eroding this country’s competitive advantage.”
Due to policy settings, Australia’s industrial electricity prices are now 50 per cent higher than in China or the US, he argued. “Given the abundance and high quality of Australian energy resources, how did the competitive advantage slip away?”
Australia’s future prosperity, he added, depends on a “make-or-break attitude” to economic progress in which a carbon tax, the minerals resource rent tax and increasing royalties are not answers.
Governments, he asserted, “need to provide the right structures and incentives, not penalties and burdens…….to incentivise the development of Australia’s rich energy endowment.”
Energy policy and climate policy must be integrated.
Kenyon-Slaney pointed to International Energy Agency forecasts that coal-fired power generation will increase by 70 per cent between now and 2035, with China using coal by then to produce 60 per cent of its electricity needs.
He said renewable energy technologies “have received massive and sustained support” but Rio Tinto believes ongoing support for carbon capture is also essential “as a real-world response to climate change.”
In a draft report, the Productivity Commission, whose deputy chairman, Mike Woods, will be a keynote speaker at the APPEA conference in Perth, has found “an abundance of flaws, mythologies and foregone opportunities” in Australian infrastructure financing, funding and procurement.
“Australia is not a cheap place in which to build infrastructure,” the report says, “but the sources of the cost pressures that have created this situation are numerous and no single reform is likely to alter them.”
The commission suggests $1 billion a year in community costs could be “readily” saved from the reforms it proposes and says targetting a 10 per cent reduction in the cost of delivering infrastructure could contribute savings of $3.5 billion annually.
It adds that perceptions of a crisis in productivity or undue wage breakouts across all infrastructure construction activities are “misplaced” and says cost pressures have come off to some extent as the construction boom in mining has abated after ballooning for a decade. The labour share of total costs has “not changed appreciably” over two decades.
Looking at public infrastructure, the commission is calling for a “comprehensive overhaul” of the processes used to assess and develop them, citing “numerous examples” of poor value-for-money projects. It warns that, without reform, more spending will increase the drain on user, taxpayer and community funds.
It includes electricity networks among examples of inefficient State projects where processes could be improved.
The Queensland Competition Authority is moving to prevent energy retailers from transferring electricity and gas customers to inferior deals without warning when they fixed-term contracts expire.
The State electricity code will be amended to require retailers to issue reminders of expiry dates to customers between 20 and 40 days before the due date and to provide information on what new deals are available. They are also going to be obliged to advise customers they can choose another retailer.
Consumer advocates claim that the current practice can cost householders “hundreds of dollars a year.”
The Clean Energy Council is envisaging an Australian electricity supply situation where the role of grid-connected power will be inverted from the primary source to a safety net supplier of last resort, with smaller generation, boosted by energy storage, the main provider.
CEC chief executive David Green says that “we are in the early stages of a transformation in the way we build, operate and finance our electricity infrastructure.”
He poses the question: “So what if, instead of a small number of large power plants being owned by a few companies, we have a much larger number of generation facilities with a larger number of owners?”
And also: “What if consumers were mobilised to participate directly in the financing of much of the new infrastructure, lowering the barriers to entry and spreading the risks and rewards of investment?”
The CEC claims that the advantages of this transformation “could be enormous,” asserting that they would include more competition, lower cost infrastructure and more efficient use of resources.
Green says this path “has a long way to go and includes many uncertainties” but he claims Australia is already embarking on the transformation.
Australia, he points out, is a relatively small market for many goods and services, prone to domination by a small number of incumbent players “such as the big four banks, the supermarket duopoly and the current triopo0ly of integrated electricity generators and retailers.”
Green claims that Australia has managed to shift around 13 per cent of its electricity generation to decentralised renewable sources so far – but this includes the hydro-electric operations of major businesses such as Hydro Tasmania and Snowy Hydro.
Australia has relinquished a key economic advantage – access to low-cost, reliable energy – due in a large part to deliberate policy decisions by federal and State governments, the Minerals Council has declared in in submission to the 2014 federal budget process.
The MCA has told the Abbott government that energy market reforms and complementary policies placed downward pressure on energy prices from the early 1990s until 2007. “However,” it claims, “in the past five years electricity prices have increased by almost 80 per cent for business.”
The association argues that energy and climate change policies have been pulling in opposite directions in recent years – with structural and regulatory reforms to markets being undermined by layers of extra charges, standards and regulations.
The MCA says that exporting and importing-competing companies “now face average Australian electricity costs that are 130 per cent higher than those prevailing in other advanced economies.”
The association attacks the renewable energy target, saying it is “an expensive and inefficient form of infant industry assistance.”
The MCA claims that the direct costs of the RET were $1.5 billion in 2011 and $1.6 billion in 2012. It adds: “Over the life of the scheme in its present form, the RET and related support measures will involve a transfer of between $20 billion and $30 billion from energy users to producers of favoured technologies.”
It says that both the RET and the Rudd/Gillard governments’ carbon tax “contradict the key objective of the national electricity market to promote efficient investment in, and the efficient operation and use of, electricity services for the long-term interests of consumers with respect to price, quality, safety, reliability and security of supply.”
MCA says that, while inefficient climate change policies have accumulated, national energy market reform has stalled and need to be “re-invigorated.”
The association supports the repeal of the carbon tax and calls for the RET to be phased out, with the government adopting a technology-neutral approach to the promotion of low-emission power generation.
Grattan Institute energy program director Tony Wood has warned, in a submission to the federal government’s energy white paper process, that Australia is paying insufficient attention to the emergence of the largest nuclear power program in the world in China supported by India, Russia, South Korea and Japan “and almost certainly later on by the US.”
Wood says the first four nations are “preparing an assault on energy markets in the short term with the latest reactor designs incorporating improvements in safety, simplicity and reduced cost.”
The technologies being developed, he adds, “Represents the only clean sustainable power form with the capacity to cope with the predicted population of the planet and its power needs during the latter half of this century.”
Wood tells the federal government that Australian policymakers cannot pretend these nuclear programs do not exist. He queries the “token treatment” of nuclear power in the final few pages of the issues paper the federal government produced as a guide to its EWP thinking.
“The authors (of the issues paper),” says Wood, “appear to be innocent of, or indifferent to, probably the greatest threat to the durability of the energy white paper. Australia could be profoundly influenced by the nuclear policies of Asia, which are not mentioned (in the issues paper).”
Wood adds that there is a vocal and well-financed anti-nuclear element in the Australian community, but it is a “big mistake” to assume that there is currently widespread opposition to nuclear power. “This has never been canvassed.”
He proposes that the white paper should include a section devoted to the nuclear issue.
AGL Energy is taking the Australian Competition & Consumer Commission to the Australian Competition Tribunal over the watchdog’s attempt to block the company’s purchase of Macquarie Generation from the New South Wales government.
ACCC chairman Rod Sims says the ACT decision will have “major implications for the energy industry.” He says the commission does not want 80 per cent of both generation and electricity retailing held in just three hands in NSW.
The blackout that left parts of Darwin without electricity for 12 hours in mid-March was caused by errors in maintenance work at a sub-station in an industrial estate outside the Northern Territory capital.
The trigger for the incident was a circuit-breaker malfunction during switching to isolate a transformer for routine inspection. Generation sets at the Channel Island power station automatically shut down and the Weddell plant was unable to carry the load of Greater Darwin.
The blackout affected tens of thousands of homes and businesses in an area from Darwin to Katherine, 320 kilometres to the south.
The APPEA annual conference has become an Australia resource sector landmark in recent years.
The event commencing 6 April in Perth is an example of why.
It will involve more than 3,000 delegates from more than 800 companies and 28 countries, some 100 papers (including 16 keynote addresses from leading figures) and 12,000 square metres of exhibition space in the cavernous Convention Centre filled with businesses and agencies promoting activities, goods and services.
The reason why the conference is so big can be found in APPEA’s data: around $200 billion worth of upstream petroleum projects are being built around Australia at present, underpinning (at last count) 100,000 direct and indirect jobs and production that, by the decade’s end, will be contributing $13 billion to the community in taxes alone.
Another side of this coin is that the industry’s Australian operations are regulated by more than 150 statutes and more than 50 government agencies. This doesn’t stop environmental organisations and their fellow travellers, like The Australia Institute, from calling for still more red tape.
As several items in this issue of Coolibah newsletter illustrate, the challenge for governments, and especially the New South Wales government, is to act to encourage more gas development while regulating the industry to reflect the risks revealed by proper scientific research.
The purpose of the deep green movement, of course, is to do everything it can to impede fossil fuel development, a task it pursues with vigor and no little communications skills.
While the oil and gas industry fights back in the public arena, sometimes not terribly effectively, the real battleground is government cabinet rooms around the country where, too often, ministers seem to cower and contemplate the scene with less than the degree of resolution their responsibilities require.
In his Sydney talk reported above, Martin Ferguson synthesized the three key steps these ministers need to pursue.
Governments, he said, need to demonstrate leadership to ensure that sufficient gas is delivered at competitive prices on the east coast.
They also, he said, must integrate their approaches to climate change and energy policies to ensure the efficient delivery of essential services as well as carbon emissions abatement.
And they must continue to work together on energy market reform.
Ferguson conceded that both sides of mainstream politics have at various times lost sight of the basic principles of good energy policy design.
As APPEA chief executive David Byers has pointed out in a commentary in Gas Today magazine, it isn’t enough for a country to have abundant energy resources. Above all else, it also needs a stable and predictable investment climate – but what we have been getting is “scrambled policies” (quoting Ferguson again) that “leave producers dazed and confused.”
Policy interventions over the past decade have helped to deliver different dynamics for the two wings of essential energy services in Australia: the electricity generation sector is over-supplied and network charges have helped push prices to painful and worrying levels – while restrictive regulation and political game-playing are threatening to despatch gas supply in to equally unsatisfactory territory because of a lack of adequate domestic production.
The body politic, which is charged above all else with caring for the long-term welfare of the community, can hardly look on this situation with any degree of satisfaction.
A country, like a sports team, performs best when it plays to its strengths.
There is ample evidence that Team Australia has not being doing so, especially on the home resources and energy playing field, for some considerable time.
Despite this, as the APPEA conference demonstrates, very considerable development has been achieved in a key area – energy exports – but it is far from enough; urgent attention also needs to be given to ending the erosion inflicted on Australia’s domestic energy advantages and to making good at least some of the damage.
After a decade of energy policy and environmental policy frequently pulling in opposite directions, it is time for federal and State governments to move with a sense of urgency to create a better environment for investors and customers.
1 April 2014
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