Issue 104, December 2013
Welcome to the final issue of this newsletter for the year, writes Keith Orchison, and best wishes to all readers for Christmas and the new year, one in which significant changes are in prospect for the electricity and gas sectors as governments wrestle with carbon policy, the fate of the renewable energy target, ongoing serious pricing issues and a swag of network and retail-related developments that each has the capacity to be controversial.
Both the O’Farrell government and the energy industry have leapt on the latest Australian Energy Market Operator perspective on medium-term prospects for gas supply on the east coast.
New South Wales Minister for Resources & Energy Chris Hartcher issued a statement saying the AEMO report “highlights the potential to State households to suffer severe gas shortages during winter months” if the proposed coal seam gas developments in the Pilliga forest and Gloucester Valley are not brought on stream by 2017.
The AEMO outlook statement comments that, if gas production in Queensland and South Australia is prioritised for export, there will be flow-on effects for NSW with potential shortfalls of 50 to 100 terajoules a day over the winter peak periods from 2018.
The market operator points out that, besides gas developments within the NSW borders, opportunities exist to augment transmission capability between the State and Victoria, to increase production in central Australia’s Cooper Basin and to develop a new pipeline link between the State and Queensland.
Observers point out that the critical element for NSW is the time needed to pursue any of these development in a situation where existing contracts for gas supply from beyond the State’s borders are rolling off between 2015 and 2017.
AGL Energy managing director Michael Fraser, whose company wants to produce CSG from the Gloucester Valley, says the AEMO report “paints a very real picture of the potential shortages facing NSW unless action is taken to source gas locally.”
The Australian Petroleum Production & Exploration Association adds: “Now is not the time to be saying no to gas development – there are serious consequences awaiting households and businesses if restrictions on gas exploration and production are not lifted immediately by the NSW government.”
Meanwhile, federal Industry Minister Ian Macfarlane has said in an interview with “Business Spectator” that the impending gas crisis will be a major item on the agenda of the Standing Council on Resources & Energy – the Council of Australian Governments’ energy ministers committee – when it meets in Canberra on 13 December.
Macfarlane said that, for east coast gas users, “reality is prices north of $6 per gigajoule” for the next decade, adding that costs will most likely be $7 to $8, bearing mind that the rules and regulations now imposed on CSG producers add $3/GJ to extraction.
Hartcher is warning that the AEMO report suggests restrictions may have to be imposed on gas consumption when existing South Australian supplies are diverted to LNG exports from Gladstone if the NSW projects are baulked.
According to AGL’s Fraser, NSW could be short of gas for seven months of the year by 2018 on the AEMO outlook, “with a significant impact on the needs of the State’s manufacturing industries, affecting their competitiveness and jobs.”
AGL claims that the proposed Gloucester Valley development can supply more than 15 per cent of forecast NSW gas needs by 2017-18. Santos has claimed that its Pilliga project, when completed, could meet 25 per cent of NSW needs.
The Australian Industry Group says that one of the key issues facing manufacturers in 2014 and beyond is the supply and cost of gas on the east coast.
AiG chief executive Innes Willox says “gas supply issues are going to be company defining issues in many cases,” adding that “if we don’t get this right, it will have catastrophic consequences for Australian industry.”
Willox said a survey undertaken by the association earlier this year showed that manufacturers able to secure gas supply contracts faced prices between $5/GJ (for short-term deals) and $9 compared with an average of $3 to $4 in the past.
“This is a huge transformation,” Willox said. “It will take eastern Australian gas prices from among the lowest in the world to among the highest.
“Energy users costs could increase by about $5 billion a year, more than the gross revenue the carbon price would raise in 2015-16.”
AGL Energy is warning that New South Wales businesses will be the first to feel the hurt of any disruption to the State’s gas supplies.
In a commentary in the “Sydney Morning Herald” at the start of December, the company’s head of economic policy and sustainability, Tim Nelson, says that, unless more gas is produced within NSW borders, the State effectively become reliant on a single source: Victoria.
He points out that the Eastern Gas Pipeline linking the two States, even with proposed expansions recently announced, will not have sufficient capacity to meet NSW winter peak demand.
Unless more gas is produced in NSW, there are likely to be times when supply is curtailed,” Nelson says, “and, if this occurs, the regulations require gas to be turned off for large industrial users before households and essential services.
“If there are shortages, businesses rather than households will face disruption.”
He also forecasts that gas price spikes for business will be more than double those for households in the new environment.
Australia is the keystone of Japan’s quest for energy security as the country strives to overcome the impact of March 2011’s Great East Japan Earthquake as it is known to the Japanese.
Latest Japanese government data show that Australia met 19.6 per cent of LNG import needs – or 17.06 million tonnes – to help fill the gap left by the idling of the country’s nuclear reactors. Supply from Australia is expected to exceed 31 Mt by 2017.
Prior to the earthquake (also shorthanded as 3/11 in Japan), Australia was also providing 30 per cent of Japan’s uranium needs.
The east coast “national” electricity market notches up its 15th anniversary in December in an atmosphere of greater uncertainty than at any time since it was launched after long consultation in 1998.
The market will receive special focus at the meeting of the nation’s energy ministers on 13 December. The Standing Council on Resources & Energy has commissioned a special report by management consultants on the “NEM” that will be presented to a lunch with industry representatives during the meeting.
Where high wholesale spot prices and steadily rising demand fuelled investment, particularly in gas-fired generation, in the first few years of “NEM” operation, a range of factors over the past three years have stalled investment (other than that driven by the renewable energy target, itself now under challenge).
The most recent Australian Energy Market Operator’s review concludes that, other than in Queensland, where there may be a small capacity deficit by 2019, there will no non-RET related generation development in the “NEM” this decade.
The critical question, in fact, is how to remove up to 4,000 megawatts of capacity from the market in an environment where first mover status may well be a disadvantage.
The Bureau of Resources & Energy comments that, while the overall outlook for investment in generation for the rest of the decade “remains subdued,” there is a need to maintain a “robust pipeline” of projects that can be moved forward should conditions change.
BREE says there are 37 projects across Australia at the “publicly announced” stage with an aggregate value of $7.9 billion and 6,246 MW of proposed capacity.
“We want to see power bills, gas bills and other bills go down to relieve households and businesses of cost pressures” is the Abbott government promise at it completes an edgy first two months in office.
This commitment was made by Industry Minister Ian Macfarlane, in the context of talking up the government’s drive to abolish the carbon price legislation, in an address to the inaugural National Mining Day is Brisbane on 22 November.
However, in a subsequent interview with “Business Spectator,” Macfarlane conceded that the costs imposed via more than $40 billion worth of electricity network developments over the past six years “cannot be unwound.”
Several hundred thousand Victorian households on default tariffs – so-called “standing offers” – have been told that their power bills will go up by between 1.8 per cent and 4.8 per cent from 1 January. Small businesses face an electricity price rise of up to five per cent.
St Vincent de Paul Society estimates that the increases will impose an extra $30 to $80 a year for affected households.
Electricity retailers attribute the increases, which will also flow through to customers on competitive contracts, to higher input costs, including network and “smart meter” charges.
Victorian gas prices, for the first time in years, will rise by more than electricity bills – the “default tariff” costs will go up by 4.4 to 5.3 per cent.
Meanwhile a conservative think tank, the Institute of Public Affairs, is arguing that Victorian electricity costs are higher than they should be because of a range of impositions on retailers during the State’s Labor era.
These include a consumer protection requirement that retailers may not charge late fees, the greater expense involved in servicing “smart meters” and low early contract termination fees.
IPA director Alan Moran comments that policymakers fail to appreciate that additional retailer costs incurred through regulation are recouped from customers.
The upstream petroleum industry has jumped on research by the Australia Institute to point out that, on the think tank’s own polling, Australians are “almost 10 times more concerned about economic growth and development than they are about coal seam gas production.”
The Australian Petroleum Production & Exploration Association says the institute’s survey – used to criticise APPEA’s ongoing promotion of CSG – throws up that concerns about gas development rank 13th out of 15 issues in the poll, with two per cent of respondents saying it is their top concern versus 18 per cent ranking economic issues as the subject most requiring politicians to take action.
The institute survey also found that 36 per cent of the survey’s 1400 respondents had not heard of CSG and 81 per cent said they didn’t know the difference between CSG and LNG. Despite this, the survey claims, 56 per cent of respondents oppose CSG development on agricultural land even if landowners consent to it.
The major energy industry associations are deploring the state of the east coast debate on gas issues.
APPEA chief executive David Byers, responding to another foray in to the debate by the “Lock the Gate” activist group, is warning on the “danger of taking a simplistic and ideological view on a complicated issue.”
Benefits from the CSG/LNG developments are not disappearing overseas, as “Lock the Gate” and the Australia Institute claim, says Byers.
He cites a McKinsey & Co report showing that 69 per cent of gas sale revenues from LNG projects remain in Australia, with the developers “spending vast amounts on local goods and services.”
Energy Supply Association chief executive Matthew Warren says the debate is “descending into farce,” decrying “a conga line of opinions based on hand-picked factoids filling the debate with clueless self-interest.”
Looking at the NSW situation, Warren says a well-orchestrated, largely activist campaign has evolved to oppose development of coal seam gas reserves – with many of the opponents apparently against development on any terms.
He adds that the NSW government decision to impose a two-kilometre perimeter “around not only dwellings but also vineyards and even horse stables” has “shut down gas for manufacturers who are screaming for it.”
Warren comments that it is harder to see a genuine public outcry in NSW, pointing to the “Stop CSG” party receiving just 4,225 votes in the State in the recent Senate election. “That’s 0.1 per cent of the vote.”
Meanwhile the Australia Industry Group CEO, Innes Willox, says his organisation is not advocating handouts for struggling manufacturers to deal with the “gas crisis.”
This, he says, should be a “last resort” and “not something we are advocating.”
An October speech by the AiG chief executive was interpreted as suggesting that governments might have to pay handouts to manufacturers financially crippled by price rises for gas.
However, Willox says “Our focus is on lifting supply barriers threatening gas availability and to find ways for industry to weather the rise in prices.”
The AiG approach, he adds, includes calling for a national interest test to be applied before the export of gas from new facilities or from extensions of existing ones is permitted.
The association, he says, supports export of Australian gas but is concerned because “an unintended consequence (of LNG sales) is to push up gas prices in Australia, making local industry pay global prices for a resource we own here.”
Federal Industry Minister Ian Macfarlane is pointing to modelling by the Australian Energy Market Operator as a key influence on his concern that the NSW gas impasse needs to be resolved.
“I can produce 30 economic studies saying that there will be a gas shortage but the people I believe are AEMO (because) they are the one charged by the States and the federal government to tell us what the energy supply situation is,” Macfarlane has told the media after convening a meeting in Canberra in late October of activists, gas companies, landholders and members of parliament for areas at the centre of the controversy.
“AEMO predicts there will be a shortage in the market and that gas prices will double to a point where businesses will close down in Newcastle, Sydney and Wollongong,” Macfarlane declared.
“In NSW the expectation is that the price will exceed $12 per gigajoule simply because there (will not be) enough gas in the market.”
He added that this will not occur as a reflection of international prices but because of a local shortfall.
“There will be a $4 to $5 premium on gas in NSW. We want to get rid of this because we want to keep industries in NSW competitive.”
$4.5 billion project
The biggest upstream petroleum project in southern Australia, the $4.5 billion Kipper-Tuna-Turrum offshore development in Bass Strait, has begun flowing gas and oil.
Operators ExxonMobil says the project includes conversion of the existing West Tuna facilities and the addition of two new pipelines to link its output to the existing Bass Strait gas-gathering grid.
At construction peak, 1,300 people worked on the development, which has delivered $2.8 billion in Australian content purchases.
Gas from the Turrum field is due to flow in 2014 and the Kipper oil and gas field will be brought on stream in 2016 after mercury scrubbing facilities are completed at the onshore Longford processing plant.
ExxonMobil says that project will help maintain gas production levels from the Gippsland Basin fields that have now been operating for more than 40 years.
Meanwhile, Kerrie-Anne Lanigan, gas and power marketing director of Esso Australia, has told the Eastern Australia Energy Market Outlook conference that developing more gas storage facilities should be pursued.
Lanigan said storage near demand centres could be filled during the summer months of lower consumption.
“The prize for the southern States,” Lanigan added, “could be in the order of 20 to 50 petajoules a year of additional supply simply through using infrastructure more effectively.”
She said Australia needs a multi-faceted approach to the gas supply situation, including bringing on new resources, adding to storage capacity, resolving market trading issues and addressing policy and regulatory reform.
AGL Energy economist Tim Nelson says that, apart from investment in renewable energy enforced by the RET, there is not likely to be any new development of power generation on the east coast this decade.
Speaking to the Eastern Australia Energy Market Outlook conference, Nelson observed that government policy “has been very successful in encouraging new investment in power generation in the ‘NEM’ – almost all new capacity over the past decade has received some form of subsidy.”
But, he said, the combination of the “energy only” market and government incentives has “created a significant distortion.”
The current over-supply of generation in the “NEM,” he said, “is almost the exact quantum as capacity added due to government subsidies.”
Politics, he added, “is very good at adding capacity but has ignored the resulting market over-supply dynamics.”
Continued development of renewable generation in a market of flat demand growth will further increase over-supply, he said.
It is unclear whether barriers to generators exiting the ‘NEM” exist, Nelson argued, but one important factor is “first mover disadvantage” where a power station operator makes other companies better off through a tighter supply/demand balance by shutting down.
He also pointed to expensive site remediation costs as a key issue for companies considering shutting generation.
Policy uncertainty, he said, remains an important factor.
“Will there or won’t there be carbon pricing long term? Will demand growth pick up due to interventionist government policy?”
Meanwhile, AGL’s main market rival, Origin Energy, used its annual general meeting in October to argue that the federal government review the effectiveness of the RET next year.
Chairman Kevin McCann said the company believed the 20 per cent target for the scheme, which Origin supported, “is already nearly met.”
Consultants Pitt & Sherry say demand for electricity on the east coast was seven per cent below the December 2008 peak in the year to September 2013. They report that New South Wales demand, which is the main influence on the falling trend, has reduced by 6,000 gigawatt hours annually since 2009.
The displacement of coal by wind, hydro, and gas generation, coming on top of the fall in demand, saw emissions down by 29 million tonnes, equal to nearly 16 per cent, over the same period.
Can the national electricity market, as currently designed, cope with the stresses imposed by policy interventions to drive clean energy and the parallel reaction of users to strong price spikes?
The question was on the minds of the 160 participants in the Eastern Australia Energy Market Outlook conference staged in Sydney at the end of October.
Co-chair Ed Willett, now retired as a commissioner of the Australian Competition & Consumer Commission, queried how well the “NEM” could be managed not only to continue to improve it but to avoid it “going backwards” in the present environment, pointing to the “compromised” UK market, which was the template for the local design.
ESAA chief executive Matthew Warren said that the key functions of the “NEM” are to dispatch electricity to meet demand at the most efficient price and to trigger generation investment as needed through response to price signals. Wholesale power prices in 2007 had triggered a round of gas plant developments “which are now increasingly unviable,” he commented.
One of the key present issues, he added, is that the renewable energy target, in its present mode, is likely to deliver 28 to 30 per cent of electricity demand in 2020 rather than the 20 per cent originally proposed.
Warren highlighted recent developments in the European Union, citing the Magritte Group, to underscore the risks confronting the “NEM.”
The Magritte Group of 10 CEOs of major EU utilities, which together have half Europe’s generation capacity, issued a dramatic warning to governments in October that security of power supply is under threat because of the region’s clean energy programs.
The CEOs, who named their group after initially meeting in an art gallery, says policy reform is needed to ward off blackouts and to help them cope with the financial problems they are now facing. They assert that the EU environment policy is failing and that rising power bills are undermining European industry competitiveness.
They blame political actions and “misguided subsidies” for solar and wind for what consultants Capgemini are calling “market chaos.”
Some 51,000 megawatts of gas-fired plant are now in mothballs in the EU and the consultants warn that the remaining 80,000 MW of gas generation is not recovering its fixed costs and is at risk of closure by 2016.
A very cold European winter could lead to serious energy supply and electricity grid balancing problems, Capgemini say.
Germany has recently increased the renewable subsidy paid by mass market consumers to 18 per cent of the final bill, further distorting the largest single market in Europe.
Utilities complain that this and policies in other EU countries mean that more than 50 per cent of the power bills Europeans are now paying have nothing to do with generation or network costs.
The Magritte Group is calling for a Europe-wide system of paying utilities to keep fossil-fuelled capacity on stand-by – a step attacked by the environmental movement as a subsidy for fossil fuels.
New South Wales government-owned high voltage powerline business, TransGrid, has decided to stop work on a $227 million project on the State’s Far North coast.
TransGrid says the decision is driven by a planning review which has concluded that a new HV line in the area is now not required until the 2020s “or possibly later.”
The development has been highly controversial and opposed by environmental groups and some of the local community.
The Queensland government is sticking to its stance that its power distribution system is not for sale and insists it will not privatise other electricity assets without a tick from voters at the 2015 election.
Reiteration of the Newman government posture has come as a result of pressure from lobbyists Infrastructure Partnerships Australia for sale of all the taxpayer-owned energy assets, with IPA claiming that they could reap between $40 billion and $48 billion, more than enough to meet the need to cut up to $30 billion from State debt.
The government has indicated that it will ask the electorate at the next election to approve the generation sales but continues to rule out network privatisation despite rumors that it may be open to offloading its high voltage business, Powerlink Queensland, which IPA claims to be worth $10 billion.
It is an arguable point that we are living through one of the most dishonest periods of public debate (about issues generally not just energy ones) in Australian history.
Certainly, there are a large number of people contributing to the energy arguments who use all sorts of sleight of hand to promote their particular views.
Of course, there are many contributing honest endeavours in following their corporate and policy interests, but one only has to go to the media (whose own faults in reporting energy news and views are many) to see how the conga-line of meretricious players bearing factoids (see ESAA’s Matthew Warren above) continues to dominate the scene.
As a result, we end up with opinion polls in which members of the public hold two contradictory opinions simultaneously (e.g. the need to cut energy prices while pursuing large carbon abatement targets), testament to the lack of capacity of mainstream politicians to seize the middle ground (see Paul Howes above).
In passing, the ideological pressure for 100 per cent use of renewable energy on the east coast, based on claims that this charge is supported by a study the Gillard government (bowing to pressure from the Greens) required the Australian Energy Market Operator to undertake, is a fine example of the genre.
AEMO was debarred from examining the carbon costs of this concept – but elsewhere there is academic research (from the green-friendly side) identifying the needed price as between $50 and $100 per tonne.
On the broader front, there is not an energy issue in contention at the moment where a majority of contenders are not talking their own book rather than addressing solutions from the perspective of the long-term interest of consumers and the community at large – although this is often piously dragged in to support whatever argument is being pressed.
In this environment, the new federal government has taken on a helluva task in committing to a fresh energy white paper for publication in 2014.
The version that was published in December last year, which the Coalition says is not good enough and, in truth, which was more a description of the issues confronting policymakers than a white paper and was not helped by so much of the ground being occupied by Gillard, Swan, Combet and others clinging to their parliamentary need for support by the Greens and independent MPs, is the marker for Ian Macfarlane and his advisors.
There is a large amount of new material now to hand in addition to what informed Martin Ferguson and his advisors – with more to come, including the report on east coast gas issues commissioned in May by stand-in minister Gary Gray for deliver in December.
The separate review of the renewable energy target – which was derided by the Australian Chamber of Commerce & Industry at October’s market outlook conference as “an ugly baby” – is of major importance for the white paper.
While “gas” may be the word of the day in the current energy debate, “power” has not vanished from the scene just because it is being less discussed on the big (media) stage.
As highlighted at the outlook conference (see some of the coverage here and also in reports on the “This is Power” blog), the ability of the east coast competitive electricity market to continue to fulfill its two main roles (in the short term to dispatch enough power to meet demand at the most efficient price and in the long term to create a price signal for new investments) is in question while there is a shipload of stakeholders who query whether the “NEM” is still fit for purpose, given the environmental agendas now running.
In this context, the latest message from the University of Queensland’s academics focussing on energy policy (see report above) is worth highlighting.
We don’t need, they argue (and rightly), a revolution – we do need a coherent long-term policy framework that focuses on an orderly transition to supplying energy fit for our 21st century purposes at the lowest possible cost, and, in the case of electricity, this should be technology-neutral (i.e. allowing consideration of nuclear power and CCS).
Central to where we go is settlement of the issue of placing a price on carbon, a debate that has now been running here for a decade with what can be charitably described as a complete policy muddle ensuing.
Do we need a link to a global price, with all the uncertainties entailed in that, given that the issue is as much a political football in Europe as it is here?
Or do we need a local structure designed to deliver an abatement target at a level and over a time with which our economy can live?
This is a central issue for any energy white paper and the document cannot, or at least should not, be written until this is finalised – which brings us right back to the need for the main parties to resolve the matter in the middle ground.
Cynics will say that we should not hold our breath waiting for this to happen.
Realists will point out that, unless it happens, our energy policy framework will stay broken and we will all pay for it.
1 November 2013
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