Issue 124, August 2015
Welcome to the eighth issue of the newsletter for 2015, writes Keith Orchison, as the politicking over renewable energy takes a new turn and an inquiry in to the eastern gas market gathers momentum while federal politicians settle in for the long run up to the 2016 national election – in which energy issues are clearly going to be high on the campaigning agenda.
Federal Industry & Science Minister Ian Macfarlane says the Council of Australian Governments’ Energy Council, which he chairs, acknowledges that it must be “more dynamic and flexible.”
Speaking after the council’s meeting in Perth in late July, the first since the federal energy white paper was released, Macfarlane said ministers know they are facing times of unprecedented change and it is “more important than ever” for them to work together.
There has been widespread criticism from energy stakeholders of the pace of Energy Council work, conflicts of interest and the lack of a cohesive national approach to policies.
Now Macfarlane says ministers – 12 federal, State and Territory ministers participated in the WA meeting – accept, after reading a draft report on market governance, that they need to be “ahead of the game instead of playing catch-up.”
The council will also make an effort to be more accountable and transparent, he adds.
And ministers have emphasized the need for market institutions and officials to “improve the responsiveness” of the advice and proposals they are putting forward.
The council is going to upgrade its website and “implement a communications plan.”
Among the statements from the Perth meeting, the Energy Council said it noted that building and sustaining community confidence in unconventional gas development is a “high priority.” Ministers committed to developing and implementing a plan on this by the end of 2015.
The council also acknowledged that, as the peak forum for the development of Australia’s energy policy, it should have a central role in ensuring that emissions reduction measures are “efficient and effective.”
The communiqué stressed the importance of abatement measures being consistent with objectives to promote efficient electricity supply investment and the operation of power services in the long-term interest of consumers.
The CoAG Energy Council spent part of its six-monthly meeting in Perth bending ministerial minds around the issues of embedded generation and energy storage and the implications for electricity supply regulation.
In the meeting communiqué, ministers note the potential benefits of technology development but also the need for careful consideration of impacts and risk mitigation.
They agreed to seek advice from officials on whether the current network regulatory framework is sufficiently flexible to operate efficiently under plausible transition scenarios.
The Energy Council will also investigate whether existing consumer protection arrangements need amendment to take account of households now having a wider range of supply options – and whether, in an environment where aggregators are controlling increasingly large amounts of power load, there are risks to the electricity system.
The upstream petroleum industry has lashed back at Senator Glenn Lazarus, a former footballer, for attempting to “trash” the coal seam gas business in Queensland and “playing political football” with the industry.
Lazarus, whose outburst won national headlines because of a media stunt in which he threatened to perform illegal football tackles on the Prime Minister, is campaigning for a royal commission in to the “human impact of CSG” in Queensland.
The Australian Petroleum Production & Exploration Association rejects Lazarus’s approach, and his claims about CSG impacts, as “having no basis in fact.”
APPEA points to independent research debunking Lazarus’s argument and to the CSG industry delivering “unprecedented economic growth” to regional Queensland between Roma and Gladstone.
Thousands of farmers, it adds, are earning reliable and drought-resistant incomes from GSG operations on their land, $70 billion has been invested in industry development in five years, $160 million has been donated to communities and 40,000 jobs have been generated in the LNG construction phase.
APPEA says the State government will receive annual royalties worth “hundreds of millions of dollars for decades to come” and the LNG business will continue to provide thousands of regional jobs in its operating phase.
Lazarus, it argues, is ignoring “a vast body” of “credible science” and government reviews finding that gas operations are safe when undertaken properly
The Energy Supply Association is warning that underwriting renewable energy policy by recovering costs through end-user power bills will distort investment decisions in a “slow train wreck” for the electricity industry.
ESAA says using power bills to fund policies “creates winners and losers” and will be a growing problem as operational price-drivers ease while policy costs continue to go up.
“It will be a perverse outcome,” the association argues, for this approach to lead to over-investment in technologies such as solar PV and thereby further increasing costs.
ESAA uses Queensland as an example, saying policy costs in 2015-16 make up 11 per cent of consumer power bills or an average of $160 a year. The association says retail bills would have fallen three per cent without the policy charges but instead have risen 1.6 per cent.
ESAA points to the Labor State government plan to generate 50 per cent of Queensland electricity from renewables by 2030, saying this will require 44 per cent of centralized generation to be renewable by the end of the ‘Twenties. It argues that such green generation will need a wholesale power price of $80 to $140 per megawatt hour (compared with $63 today) and estimates the extra cost reaching $1 billion a year by 2030.
“At a minimum,” ESAA says, “governments need to stop adding new policy costs in to retail electricity prices. Another funding mechanism is needed.”
The association says the “two most straightforward options” are to use general revenue or a general levy on households and/or businesses. Serious consideration, it adds, should be given to removing existing policy costs from retail prices.
Attempts have been made to water down the media-ballyhooed proposal by Labor for a national 50 per cent renewable generation target by 2030 after it was put forward at the party’s triennial conference in Melbourne by leader Bill Shorten and embraced by the meeting.
Senior MP Joel Fitzgibbon says: “It’s not a policy; it’s an aspiration.” Shadow environment minister Mark Butler says “Labor has an open mind” about how to lift the RET from 23 per cent in 2020 to 50 percent 10 years later.
The actual ALP conference motion commits the party when again in federal government to: “Work to undo the damage that the Coalition government has done to the renewable energy sector and be ambitious in growing the renewable energy sector beyond 2020 by adopting policies to deliver at least 50 per cent of electricity generation from renewable sources by 2030.”
Consultants ACIL Allen have estimated that, to meet the Shorten proposal, renewable energy generation in 2030 would need to be about 113,000 gigawatt hours a year – up from the 33,000 GWh now legislated for 2020.
To achieve the extra output from wind power, ACIL Allen add, up to 11,000 turbines would need to be erected in the ‘Twenties at a “bottom-end” capital cost of some $65 billion.
The latest Clean Energy Council Clean Energy Report states that in calendar 2014 Australia had 71 wind farms with a capacity of 3,807 megawatts involving 1,866 turbines and generating 9,777 GWh.
Media coverage of the ALP triennial conference has focused on the 50 per cent renewables issue and not on the party’s new overall electricity manifesto.
The motion moved by Bill Shorten and seconded by the CFMEU calls for an “electricity modernization strategy” that:
The motion also commits Shorten, when Prime Minister, to combine portfolios to bring electricity policy and climate change together.
A motion carried by the ALP triennial conference in Melbourne ensures that the 2016 federal election will be a re-run of the 2013 poll in one major respect.
Labor’s platform for the election now includes this commitment: “Introduce an emissions trading scheme which imposes a legal limit on carbon pollution that lets business work out the cheapest and most effective way to operate within that cap.”
In the run-up to the conference, Bill Shorten told media: “We are proposing a reasonably soft emissions trading scheme and it will be linked to the rest of the world.” The move was immediately attacked by the Coalition, and especially Prime Minister Tony Abbott, as “an electricity tax scam.”
The new platform states, too, that Labor in government will “develop a comprehensive plan to progressively decarbonize Australia’s energy sector, particularly in electricity generation” and that it will encourage energy efficiency.
The platform also includes a commitment to “work with the land sector and other stakeholders to store millions of tonnes of carbon in the land through better land and waste management.”
The Australian Competition & Consumer Commission has reported to the federal government that it is “satisfied” all electricity and natural gas suppliers have passed through to customers all cost savings attributable to the repeal of the Gillard carbon tax.
The ACCC says it has not needed to take any enforcement action to compel compliance with price reduction.
The commission calculates direct cost savings for mass market customers from removing the carbon tax from energy bills has ranged between $153 and $269. Taking in to account indirect savings, the commission believes the Federal Treasury estimate that repeal of the tax would save households $550 a year is “reasonable.”
In the three major power consumer regions (New South Wales, Victoria and Queensland, home to some 7.5 million accountholders), the ACCC found that repeal delivered savings of between 2.2 and 2.5 cents per kilowatt hour. Average annual consumption in these homes ranges from 4.050 kWh in Victoria (where there is large-scale use of gas) to 5,400 kWh in Queensland.
“There’s a lot to like about alternative fuel vehicles,” says Matthew Warren, CEO of the Energy Supply Association.
ESAA has published a consultant’s report claiming that more than a million electric and natural gas vehicles could be on Australian roads in the next decade and warning of the costs of a “do-nothing” approach to the transport issue by federal and State governments.
Warren says EVs and natural gas-fuelled vehicles can reduce Australian dependence on importing oil and they are “cleaner, safer, better performing and cheaper to drive.”
He says ESAA expects the technology transition to be a bit like that of solar PVs – which, after a slow start, has accelerated over a decade to the point where, with 1.4 million household rooftops holding arrays, Australia has the highest residential solar penetration rates in the world.
“Once there is a critical mass in the domestic market, it will bring down costs of AFVs, support widespread development of charging stations, increase after-sales support and create a re-sale market, encouraging more drivers to buy them,” he adds.
The research, commissioned by the association from consultants Energeia, proposes that steps to help encourage AFV use could include priority road lanes in peak traffic times, parking support and requiring manufacturers to increase the range of such vehicles sold here.
Energeia argues for an interim Australia target of 900,000 electric vehicles by 2025 and 2.23 million by 2030. It also suggests targeting 85,000 vehicles fuelled by natural gas in 2025 and 525,000 by 2030.
Among the costs resulting from a “do-nothing” approach the consultants identify are import bills for 30 petajoules of oil-based fuel over 20 years.
Australia, ESAA points out, does not have a comprehensive AFV policy framework and is lagging behind many international peers in take-up of the technologies.
Perceptions about whether eastern Australia’s gas market is “broken” depend very much on where beholders are standing.
The Australian Workers’ Union thinks it is and is warning that, as a result, up to 235,000 manufacturing-related jobs could be lost across the country, with one in five major factory complexes shutting down.
“Fundamentally, this is not a market that is broken,” says AGL Energy, which has 3.7 million energy customers.
“The market is in a transition phase and, over time, will reach a new equilibrium point.”
The union and the company are among stakeholders who have sent submissions to the east coast inquiry the Australian Competition & Consumer Commission has launched at the behest of Abbott government business ministers Bruce Billson and Ian Macfarlane.
Submissions closed in July and the commission is required to report by next April, placing the review outcome squarely in to the volatile environment of the next federal election.
The ACCC is tasked with considering the state of competition in the market and with establishing whether upstream and marketing gas activities are operating effectively.
ACCC chairman Rod Sims, in a speech canvassing the inquiry, has characterized the east coast market as “opaque, complicated and difficult to understand,” acknowledging that the review is “a huge task” and that, given the number of other such studies in recent years, gas stakeholders are suffering “inquiry fatigue.”
AGL, in its submission, argues that the current market uncertainty is “likely to be overcome in the next few years” and cautioned the ACCC against recommending wholesale changes.
The company argues that increasing the quantity of gas available in eastern Australia should be a primary focus for government market reform and says that removing existing obstacles to supply will help a smoother transition “potentially to a lower price point.”
Origin Energy submits that the market is competitive and notes that, in some cases, government policy has impeded gas exploration and production.
The Australian Petroleum Production & Exploration Association urges the ACCC “not to overlook policy failures which threaten to distort the market in ways damaging to users and producers alike.”
There may be ways to improve aspects of the market, it adds, but the big obstacles to more competition and downward pressure on prices are onerous regulatory restrictions – “notably in New South Wales and Victoria” – impeding supply.
“It’s vitally important,” APPEA argues, “that the inquiry and the government response to it focus on the development of the upstream industry and not be distracted by calls for inappropriate, inefficient and protectionist interventions.”
It also points out that, when the needs of the LNG projects are removed, the east coast market is “actually quite small” and a “significant near-market discovery of between one and two trillion cubic feet in the Otway basin” would have a big impact on supply to southern customers and therefore on price.
The Energy Supply Association agrees that continued resource development is clearly the key to alleviating supply/pricing pressure in eastern Australia but argues that there is obviously scope for improvement in downstream market and pipeline transportation arrangements.
Among the stakeholders fed up with the number of inquiries in to the market is the Australian Pipelines & Gas Association, which points to a review over three years by the CoAG Energy Council of gas capacity trading with both the Australian Energy Market Commission and the ACCC now engaged in fresh inquiries.
“The market is working and everyone who needs gas today is getting it,” APGA’s Steve Davies told a Brisbane power and gas forum in mid-July, calling on the AEMC and ACCC to “avoid covering old ground and to present new solutions” in their reports.
The Energy Networks Association says consumers will benefit more from shopping around than government assistance.
ENA is calling for a national review of the assistance provided to energy customers in hardship, pointing to the importance of network tariff reform. It says about 80 per cent of vulnerable customers are paying more today than they would under cost-reflective tariffs.
“Given the sweeping changes in energy use, now is the time for governments to co-operate in a national review of energy assistance schemes to make sure they are (better) targeted,” says ENA chief executive John Bradley.
He urges the CoAG Energy Council to ensure that such a review is timed to be in step with the introduction of national electricity rules for more cost-reflective network pricing coming in to effect no later than 2017.
PricewaterhouseCoopers says its global research shows that the most disruptive influence in any markets around the world is government regulation.
Mark Coughlin, PwC’s Asia-Pacific energy and utilities leader, adds that the power sector has “never before faced such convergent forces of change.”
For government-related intervention to be more disruptive than technology advances is “sobering,” he says.
To add to the disruption caused by changing or lacking government policy and regulation, Coughlin comments, suppliers must cope with major shifts in customer expectations, the march of disruptive technologies and competition from new entrants as well as traditional rivals.
This is all playing out, he notes, against “megatrends” such as climate change issues, demographic changes, shifts in economic power and accelerating urbanization.
Coughlin says there is no single utility business model to offer a panacea.
“Just as utilities are unsure of market direction, customers are equally uncertain of what really matters to them in energy decision-making.”
In the upstream petroleum industry it is never hard to find opinions that ricochet between glass half empty and glass half full; it is the nature of a risky business.
Thus, “The Economist” in London treats us to an editorial opinion (mildly headed “Shale oil: There will be blood”) arguing that the finances of the American shale oil industry have “turned nasty” because too much cash has been thrown in to the business that has revolutionized the US energy sector and that the current low prices per barrel are opening the door for investment calamity.
This is not just an American issue; petroleum investment is a global business, nowhere more so than here in Australia. If the US industry sneezes, the Australian one is a fair bet to catch a cold.
But there is a big difference between a cold and even the ‘flu, let alone pneumonia; anyone familiar with the history of the Australian petroleum business since the 1960s know this.
The thread, sometimes gold, often a gloomy black, running through this history is the international price of oil and it is anyone’s guess where it is heading at present.
Energy guru Daniel Yergin for one, speaking on a Bloomberg Business television program, has been prepared to speculate that the price could be back beyond $US60 a barrel in a year, a forecast hedged sensibly enough with a stack of caveats, but one that would not have been missed by many investors in US shale.
(Yergin, whose flare for critical insights is not dimmed by age, offers this fascinating vignette in another interview: “This (petroleum industry downturn) is different than those in 2008 and 1998. They were driven by economic crises. This one is more analogous to the mid-1980s when you had very dramatic supply growth. Five years ago you might have been sent for (medical) examination if you said the US is going to become the swing oil producer. But now it is, albeit inadvertently as it didn’t set out to take this role.”)
The International Energy Agency has another perspective: warning that the bottom in oil prices in the current slump “may still be ahead.”
Fact: The history of oil price predictions is even bumpier than the actual trajectory of the commodity’s value.
Like the endless wrangling over climate change, the oil debate is a great user of that little word “could.”
It is everywhere in the current commentaries and forecasts about both topics.
But there are some other facts around with respect to oil.
For one, the price situation has led to a substantial focus on cost reduction for shale producers and other branches of the business internationally, not least the LNG industry.
For another, no-one really knows how much oil can be produced from a shale well – the history of this part of the industry is just too short.
“Decline curve” is the jargon and it is very well understood for the conventional oil game but not so for shale (or, for that matter, coal seam gas) and the trade media are full of speculation.
The answer is an important piece in the bigger jigsaw.
Then there is the whole geo-political shtick – with the commentariat ever so engaged in what they do best, guessing.
For example, will a nuclear agreement with Iran open the gates to another source of oil to flood the global market?
It’s worth remembering that Barack Obama in his first term was pushing for funding support for Brazilian oil development for good selfish reasons; he wanted the oil expected to be found to flow north to America.
Shale oil changed all this and now an important ongoing question is how far can the US go down the path of being an oil exporter.
The other riddle wrapped in an enigma, to steal from Churchill, is the emerging petroleum relationship between Russia and China. Who knows where that is heading?
Last year China replaced Germany as Russia’s biggest buyer of crude oil and the Russian gains are the Saudi Arabian losses.
One could write a book about all this stuff.
There probably are people doing just that right now, but it is worth bearing in mind, when peering at the glass, that there are a rather large number of ways of judging its contents.
Meanwhile, from an Australian perspective, one of the things especially worth remembering is that much of what is going on can be taken as a sign Asia generally, and China in particular, is becoming increasingly spoiled for choice when it comes to energy supply.
There are implications here for our policymakers especially as they go on playing with interventions that add to local costs.
1 August 2015
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