Issue 112, August 2014

Welcome to the August issue of this newsletter as release of the federal energy green paper looms, writes Keith Orchison. Following the repeal of the carbon tax, attention turns to the RET review and the green paper to the Abbott government’s further strategies. Meanwhile pressure mounts on the Baird government in New South Wales over gas supply – and the West Australian government’s watchdog has snarled at reservation policy.

Green paper

Is 10 September the day the Abbott government puts forward its energy green paper? 

Energy industry speculation that it is has been fuelled by an announcement by the Committee for the Economic Development of Australia that this is when Industry Minister Ian Macfarlane will address a lunch forum in Sydney, focusing on three major points: (1) providing a clear policy framework for Australian businesses to grow and compete in an increasingly competitive global market, (2) clarifying the future of Australia’s energy generation and the move to a mix of traditional and renewable energy sources, and (3) delivering tangible results in renewable energy technologies.

Meanwhile, manufacturers have lost hope that the green paper will bring them good news on a gas reservation policy after Macfarlane dismissed the concept in a radio interview as “ideological claptrap” and against free market principles.

Ditch flawed ETS

Frontier Economics managing director Danny Price has called on Bill Shorten and the ALP to “put the failed emissions trading scheme behind them” and switch to a more efficient approach of pursuing carbon abatement.

Writing in a national newspaper, Price says the Rudd and Gillard governments argued that the national economy would continue to grow despite their carbon tax but failed to acknowledge that it would be about $120 billion smaller over two decades than it would have been without the measure.

The Abbott government’s “Direct Action” plan, even if it is more costly in securing abatement, “will be much cheaper for the economy overall than an ETS,” he claims, and it is “more economically suited to being scaled up to meet a tougher target than an ETS.”

Dismissing a letter from 59 economists supporting retention of the Rudd/Gillard carbon pricing arrangements, Price adds that “flawed group thinking among economists is no less prevalent than elsewhere in public policy.”

He asserts that, contrary to simplistic understanding, an emissions trading scheme is “far from being the most economically sensible option for achieving our emissions reduction commitments when all relevant costs are taken in to account.”

Lower ebb

The use of coal to make electricity nationally has fallen to its lowest level since 1997-98, according to the Bureau for Resources & Energy Economics.

Publishing data for 2012-13, BREE says coal plant contributed 64 per cent of the generation fuel mix, with a fall from 77 per cent in 2003-04.

Looking at electricity sent out by power stations in 2012-13 (i.e. before line losses are taken in to account), BREE says growth in Western Australia and the Northern Territory helped to offset the fall in the east coast’s NEM production.  Power output nationally was 249 terawatt hours compared with 253 TWh in 2011-12.

Electricity generation in BREE’s reports includes off-grid production in remote and rural areas as well as household rooftop solar PV output.

It attributes the overall fall in grid-connected demand to increased consumer energy efficiency, mild weather across much of Australia, a reduced industrial load and user responses to higher power bills.

Far from ready

The new “Smart Grid, Smart City” report for the federal government has thrown cold water on the often overheated green media claims about energy storage being near to emerging on the mass market.

The report, released by Industry Minister Ian Macfarlane, says: “At present, commercially mature forms of distributed storage have limited availability and are not financially viable for most Australians.”

A cost-benefit analysis run by consultants to the project indicates that “from the early-to-mid 2020s, distributed storage could begin to be financially attractive for consumers and will grow in installed capacity over the (review) period through to 2034.”

The headline news from the report, promoted by Macfarlane, is that the electricity sector could achieve a net economic benefit of up to $28 billion over the next two decades through better use of power with flow-on gains for household and business customers.

Macfarlane says the report reinforces the need for east coast energy market reform.

“The bottom line,” he adds, “is that any new technology should empower consumers to lower their bills without adding extra costs.”


Flat tariffs

The Energy Networks Association has welcomed a new study of tariffs by AGL Energy, saying it highlights the opportunity to introduce a fairer pricing system to help lower the long-term cost of supply.

ENA says that AGL research demonstrates that residential customers in financial hardship are worst off under current network flat rate tariffs.

While a change in tariff structure will increase costs for some customers, the study shows that 64 per cent will be better off, ENA adds.

The association argues that the key barriers to introducing a better tariff arrangement are a range of issues that need to be collectively tackled by governments, energy institutions, networks and retailers.

“Smart tariffs will provide an opportunity ensure fairer cost recovery and will reward consumers who can conserve energy at times of peak demand, thereby reducing network costs pressures and delivering both immediate and long-term savings for consumers,” it says.


While stakeholders wait impatiently for the Warburton panel reviewing the renewable energy target to report to the federal government, a development expected early in August, the war of words between green boosters of the existing measure and other interests who want the RET reduced or abolished continues to rage in the Australian media.

The “big beasts” of business lobbying – the Business Council, the Australian Chamber of Commerce & Industry and the Minerals Council – re-opened fire in late July via a new modelling exercise commissioned from Deloitte Access Economics.

Environmental groups retorted that the study’s modelling is out-of-date and slanted even as the report confirmed one of their chief points: a reduction in the RET will see more than $10 billion in investment in green generation foregone between now and the end of the decade.

A reduction in the target to a “real 20 per cent” by 2020 would reduce typical household bills by between $21 and $36 per year, the study found.

A key issue for renewable generators is found in Deloitte Access modelling showing that they will receive some $9 billion less in income between 2015 and 2030 under a “real 20 per cent” arrangements compared with what they will garner if the measure is retained at its current level.

The consultants also observe that subsidy-induced investment in renewables generates costs to the broader parts of the economy.
“In influencing the electricity generation mix, the RET scheme affects the price paid for power, which is an important input in to many economic activities,” they add.

Meanwhile, the Grattan Institute has suggested that the RET could be expanded to a “Clean Energy Target,” widening the scheme to include such technologies as gas, carbon capture and storage and “even nuclear.”

Energy Brix

One of the Latrobe Valley’s longest-running businesses is being mothballed at the end of August, although the closure is temporary according to owners HRL Limited.

The 60-year-old Energy Brix power station and briquette plant is shutting as a federal government two-year $50 million grant (part of the carbon tax scheme) ends.

HRL says it will undertake a feasibility study in to repowering the plant.

It adds that the decision to mothball Energy Brix flows from the loss of three major briquette customers and “the poor current outlook for wholesale electricity prices.”

While the trade union movement is lamenting the job losses, claiming they could total 100, the green lobby group Environment Victoria is rejoicing, saying that the closure is “unlikely to be the last of Victoria’s old and dirty power stations.”

Conflict of interest

The Australian Competition & Consumer Commission has told the Harper inquiry in to competition policy that conflicting objectives remain a major issue for electricity suppliers owned by governments 15 years after reform of the industry was launched in the wake of the Hilmer Report.

The ACCC tells the “son of Hilmer” review that there is still significant ownership of generation and networks in Western Australia, New South Wales, Queensland and Tasmania.

“A consist theme of energy reviews over 15 years has been the potential benefits of privatization of these assets.”

The reviews, it adds, have highlighted that these businesses may have conflicting objectives under government ownership.

“While they may have incentives to become more efficient and profitable, their decisions may also be influenced by political factors or state development concerns.”

Privatisation of networks, it says, may help align business objectives with those of the incentive-based regulatory framework.

In generation, it argues, private players have been reluctant to compete with State-owned businesses because they believe government companies may not act commercially.

The commission, which has tried and failed to stop AGL Energy acquiring Macquarie Generation from the NSW government, maintains that privatization of power plants will only be of long-term benefit to consumers if there is adequate competition.

“This requires sufficient competing players (numbers and size) to be active in the market.”

Governments benefit from selling generators with substantial market power or in a way that enables the buying entity to enhance its market power because the sales attract premiums, the ACCC asserts, but they create competition concerns.

Meanwhile, in the same submission, the commission has spoken out for retail price deregulation, warning that there are risks in continuing with regulation in a competitive environment.

“If regulated prices are set too high,” it says, “consumers will pay too much (and) if they are set too low, competition will be affected (when) retailers are discouraged from entering and competing in markets.

“Prices that are too high or too low distort economic activity.”

Remove restrictions

The Clean Energy Council is calling for the Harper competition policy review to recommend reforms that will enable rooftop solar and “behind the meter” storage to “compete head-to-head” with large generators and retailers.

The council argues there are unnecessary regulatory restrictions applying to the solar sector.

The CEC asserts that distributed generation and storage is now cost-competitive with centralized generation and electricity transmission but centralized generators are protected by regulatory barriers.

In the case of network businesses, the CEC adds, a number of aspects of their operations can be undertaken without oversight by the Australian Energy Regulatory and “many of these can adversely affect prospects for distributed generation and storage.” 

It claims there are situations where privately-owned distributors are acting as “de facto regulators of their competition.”

Distributors, it says, are “powerful monopolies” and should not be free to set tariffs and grid connections rules “that price their competitors out of business.”

AEMC warning

The Australian Energy Market Commission has highlighted the importance of legislators ensuring that the design and implementation of carbon policies are reconciled with the efficient operation of the energy sector.

In its submission to the Harper review of competition policy, the AEMC warns that failure to integrate the policies can have significant impact on energy price signals and the efficient allocation of risk in the sector.

Policies such as the renewable energy target and solar feed-in tariffs “have altered the operation of energy markets, reallocating costs and risks and impacting price signals in ways that were unforeseen at the time of their development.”

Where carbon measures conflict with the ability of an energy-only market (the NEM) to send meaningful price signals for new investment in generation capacity, it says, this may undermine future supply reliability.

“The operation of the RET has led to wholesale market price outcomes divorced from underlying energy supply and demand fundamentals. Wholesale prices are (now) very low but new capacity is still entering the market.”

It suggests that bodies like itself should be consulted when non-energy policies with implications for the sector are being designed to minimize the overall costs to consumers over the long term.


The New South Wales Environment Minister, Rob Stokes, has run in to cheers (from the environmental movement) and jeers for going to the Clean Energy Week conference in Sydney and indicating that his government wants to emulate California in pursuing energy and environmental policy.

Maurice Newman, chairman of the Prime Minister’s Business Advisory Council, has written a rebuke (in his personal capacity) in a national newspaper saying that the “extraordinary” statement shows “appalling judgment” and “is a measure of the degree to which green fantasies have penetrated the thinking of otherwise sensible governments.”

Newman, like other critics of Stokes’s comments, points to the dichotomy in California between political ambitions for green energy development and the biggest American economy’s performance.

He quotes economist John Husing’s observation that “California’s green energy fixations are widening an ever-growing chasm based on geography, class and race,” noting that one in five Californians in the state’s agricultural and manufacturing regions are living in poverty and its power bills are 40 per cent above the national average.

Stokes told Clean Energy Week that the Baird government is “committed” to a renewable energy target of 41,000 gigawatt hours by 2020, a policy that the Abbott government is widely expected to reduce to a “true 20 per cent” of demand at the decade’s end (perhaps 26,000 GWh).

This commitment, however, is not included in the media statement Stokes issued about his speech.

Stokes also told the conference that the Baird government intends to spend $290 million over the next decade on agency energy efficiency measures and on-site generation, aiming to reduce government energy bills by $55 million annually.

Meanwhile a research team at Stanford University has published a $US1 trillion plan to ensure that all Californian energy use (electricity and transport) comes from renewable sources by 2050.

The study argues that 603,000 megawatts of new generation capacity will be needed to meet the zero emissions goal. The state has 66,000 MW of capacity today and imports about a third of its power needs from other North American sources.

Must do better

The inaugural issue of a bimonthly newsletter from the University of Queensland Energy Initiative says a lack of clarity of purpose and politicization of energy and climate issues has left Australia exposed on all elements of the “energy trilemma.”

UQEI, which is directed by professor Chris Greig, says potential gas shortages in New South Wales, an ageing power generation fleet and an increased reliance on imported liquid fuels reflect declining energy security.

High domestic prices for electricity and gas are impacting on energy affordability at the household level but also driving the manufacturing sector out of Australia, it adds.

And environmental regulation and climate policies are plagued by duplication, inconsistency and uncertainty, it says.

“In this setting, investor confidence along with innovation in energy has stalled.”

UQEI comments that scientists and innovators have failed to provide technology solutions that would make policy trade-off decisions easier. “And there is no guarantee that that a single technology panacea even exists; it is far more likely to be a portfolio.”

The second major problem UQEI identifies in pursuit of solutions is “the lack of awareness of energy concepts in society, a lack of energy literacy.” 

So long, it says, as those empowered to develop energy strategy are lobbied by vested-interest advocates and elected by an uninformed public, the situation is unlikely to improve.”

Be a leader

The Australian Pipeline Industry Association has welcomed a statement by the six main manufacturing industry associations apparently rejecting the notion of gas reservation and praising the benefits of increasing exports.

The rejection of reservation, APIA says, “shows a genuine maturing of the debate and an increasing understanding of the policy challenges.”

Market reform, including the introduction of short-term trading and the Gas Bulletin Board, has improved transparency and efficiency in the domestic gas market, it says, but can’t provide more gas, arguing that policymakers need to tackle issues affecting access to supply, including joint marketing by major producers, tenement management and possibly regulation of access to the production facilities of large companies by small producers.

The association says the eastern Australian gas market is “under tremendous strain” and the situation “can only get worse” without action.

While the country is on track to being the world’s largest LNG exporter, APIA adds, “it is not a leader in ensuring there is sufficient gas for both export and domestic markets.”

Meanwhile, the manufacturing associations say they want governments to reduce barriers to new gas production and “use-it-or-lose-it” regulation of commercial resources “to prevent producers withholding supply.”

The Australian Industry Group, one of the six bodies, says a growing LNG industry and a diverse national industry base with a strong manufacturing sector need to be pursued. “We need action on two fronts: to get more gas flowing by replacing blanket bans on production with strong but workable regulation – and (domestic) market reform.”

The Australian Petroleum Production & Exploration Association comments that “it is clear gas customers no longer see a reservation policy as a credible or workable solution to the challenges faced” – but it argues that the domestic market is working and points out that transparency and efficiency issues are under consideration by the federal government in the energy white paper process.

APPEA argues that rising domestic prices do not equate to market failure, reporting that producers and customers have entered in to 16 gas supply agreements in eastern Australia since 2012.

Apart from removing restrictions on gas supply, it adds, the best way to help manufacturers will be for policymakers to boost productivity and encourage investment through lowering taxes, more efficient regulation, more investment in skills and greater labor market flexibility.

Reservation rejected

Western Australia’s Economic Regulation Authority has called on the State government to put an end to the domestic gas reservation policy initiated in 2006.

ERA says there is “no economic justification” for government intervention in the domestic gas market and there is no failure in the WA market.

Requiring LNG proponents to reserve 15 per cent of their production for the WA market is “essentially a tax,” the regulator argues. “In the long run, less profitable gas production will lead to a reduction in industry investment and cause total supply to fall further.”

The reservation policy distorts the WA market and prevents the State realizing full value from its resources while providing a subsidy to users. What’s more, ERA says, artificially reduced local prices result in an over-consumption of gas and, over time, inhibit innovation in competing fuels and processes.

Abandoning the measure, it adds, will help investment in industries that have a comparative advantage in WA.

However, it acknowledges that taking this step may result in domestic gas prices rising beyond export parity to correct market anomalies.

Last word

One of the core requirements of a democracy is that its voters should be well-informed; this is the more important in Australia where voters are effectively forced to go to the polls (although they need not actually cast a vote).

As is widely recognized, the bane of intelligent discourse here today, and indeed in America, Britain and some of western Europe, is what social researcher and political strategist Mark Textor describes as “false and divisive” politics.

Textor argues that “most decent people are walking away to avoid it,” leaving the debate to “shock jocks on the right and outrage merchants on the left.”

He is right, I think, but this throws up, and nowhere more than with respect to energy policy, how well informed people are when they cast their votes and, especially in the case of federal parliament, to whom they allocate them when they “walk away” from the major parties.

This matters a great deal because of our preferential voting system and particularly for the Senate, where the fate of legislation is decided.

We end up with an unvirtuous circle: the “sensible middle” (as Paul Howes has it) reacts against what it perceives to be a circus and the situation just gets messier.

For energy supply, this produces the cancer of policy uncertainty, something investors cannot abide, and leads to fresh problems, more ideological and “shock jock” hype and a still more fertile ground for the “outrage merchants.”

Energy development investors see the solution lying in bipartisan (Labor and the Coalition) approaches to policy, but this, too, is not straightforward.

It is hardly a secret that the Labor and Coalition energy portfolio holders – Ian Macfarlane, Martin Ferguson and Gary Gray – broadly see policies through the same lens; the problem is that their government leaders, to put things politely, have been far more attracted to divisive politicking and have miserably failed to integrate carbon and energy measures.

Ironically, in the area of electricity prices, where there has been a bipartisan federal/State approach to the main driver of costs, network expenditure, the outcome has been thoroughly negative for consumers.

The issue here is not so much expenditure on essential infrastructure augmentation, although some, especially the manufacturers’ lobby groups, argue the outlay has been much too large, but that politicians and the supply sector failed to carry consumers (aka voters) with them and, probably, should have pursued a longer game in implementing the capital investment.

The problem now is the capex is spent, the costs must be recouped, the tariff charging system is inefficient and inequitable, a large bloc of vested interest has emerged in reaction to price spikes in the form of solar PV owners and the solutions involve winners and losers among consumers (aka voters), as a new economic paper from AGL Energy has demonstrated.

This is fertile ground for those who play “false and divisive” politics for their own ends, for the “shock jocks” with bloated egos, for the meretricious in the media who see their role far too often as presenting “shock, horror” stories for readers, viewers and listeners and for the radical green ideologues whose agenda is oriented to anti-capitalism rather than the long-term interests of “sensible middle” consumers.

Last month Martin Ferguson made an excellent speech to a Clayton Utz forum in which he urged our leaders to “see the world as it is rather than as we would like it to be or through the blurred lens of ideology.”

His comments in this speech assaulting the inability of government in New South Wales to resolve the coal seam gas imbroglio made headline. His broader points never made it to the mainstream media (except in a commentary I wrote for “Business Spectator.”)

Ferguson poses an important question: will Australians 15 years from now look on the current era with regret and ask how did we let energy opportunities slip through our fingers?

Much attention is being focused at present on the RET review and then the publication of the federal energy white paper; some (but not much) attention is also being given to the Harper review of competition policy (although I doubt that five in 100 of the “sensible middle” would even be aware of the exercise).

All are important to the future of energy supply and to our national ability to attract investment but none can offer a quick fix for the issues that are in public contention.

A case in point is the need to pursue consumer and economic benefit through energy market reform via steps that could deliver $28 billion in value over 20 years, the focus of the “Smart Grid, Smart City” report, an exercise begun under federal Labor and now released (and promoted) by Ian Macfarlane.

Hardly any of the points made in this report and the steps it supports will register with the “sensible middle” – not least because there will be no significant attempt in the mainstream media to report on the paper in any depth – but its thrust is critical to resolving the issues that have upset voters and made screaming headlines for the past several years.

“Only connect” is a phrase that was in post-war vogue for a while and still lingers in various forms, but it is perhaps worth highlighting in this context.

Unless the “sensible middle” and sensible politicians, who do exist no matter how debased the image of the breed, can connect and this connection can be turned to timely and efficient policymaking, then the answer to Ferguson’s question is “Yes.”

Keith Orchison
1 August 2014




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