Issue 116 December 2014
The sooner we put 2014 behind us, the better, says Keith Orchison, welcoming you to the year’s final Coolibah newsletter. The focus in this issue is on the new round of submissions on the energy white paper and they do a lot to explain why there is still so much to be achieved after a hectic but insufficiently productive past 12 months in domestic electricity and gas policy development.
If there are two words epitomizing the tone of many of the submissions that poured in to the federal government in response to its energy green paper, they are “falling short.”
They could equally be used to describe public perception of the overall performance this year of Prime Minister Tony Abbott and some of his ministers despite a relatively successful G20 meeting, major trade agreements and the repeal of the carbon tax.
From across the spectrum of energy stakeholders, the message back to the government is that it will have to work much harder to produce a white paper that comes close to satisfying supplier and consumer needs for a strategy to meet the long-term needs of investors and consumers.
The Australian Aluminium Council, for example, complains of shortcomings in the green paper that “risk consigning energy market reform to another cycle of modest ambition, poorly directed and only partially delivered.”
Among the critics is Queensland’s Coalition State government.
In a letter to the federal white paper task force, Queensland Energy & Water Supply Minister Mark McArdle expresses concern that the green paper “for the most part provides a stocktake of the present energy situation.” He calls for a “more strategic vision.”
The Newman government, in its submission, complains of ongoing poor co-ordination of policy positions between the States and Canberra.
Meanwhile, with the federal government still mired in its attempts to find sufficient parliamentary support – whether from Labor or enough Senate cross-benchers – to amend the renewable energy target, hopes that the white paper will appear this year appear to be dashed and a number of submissions now urge “no rush” in completing the task.
The situation is not helped by a near-universal view that the Abbott government is travelling exceptionally poorly only 15 months in to its first term, creating investor concern that, whatever the EWP contains, it could be overtaken by events at the next federal election, an astonishing environment for the winners of a crushing victory in September 2013.
This perception will be hardened by the defeat of the first-term Napthine Coalition government in Victoria at the end of November, although it needs to be remembered that the Liberals and Nationals hold a 35-seat majority in Canberra.
Investors in renewables and industries most affected by the RET are especially desperate to have this measure restructured as swiftly as possible in a way that delivers longer-term certainty, but few believe this is in prospect.
More generally, a core criticism is that the green paper focuses too much on resolving near-term issues but falls short on proposing a medium-to-longer term strategy necessary to support significant new investment.
On one of the major current issues, the problems of domestic gas supply and rising prices, the key concern is that the green paper is strong on rhetoric but weak on addressing the critical requirement of coordinating State and Territory steps to encourage supply and allay community and environmental concerns.
Energy industry stakeholders who entered summer a year ago hopeful that there could be an early strategy resolution from a government entrenched in power for two or more parliamentary terms will go on Christmas holidays in 2014 deeply concerned about the state of play.
The federal government’s energy green paper has come under sharp attack from the Australian Academy of Technological Sciences & Engineering.
In a response submission, ATSE says there are three critical weaknesses in the paper: its short-term focus, its acceptance of Australia’s reliance on fossil fuels and the institutional and fiscal barriers to reforms it proposes.
The green paper mindset leaves Australia exposed to possible future moves internationally to limit and/or price carbon emissions, ATSE argues.
The paper, it says, is “disturbingly silent” on positioning Australia to achieve significant decarbonisation over coming decades.
The paper’s reform proposals, it adds, “appear difficult to deliver under present policy settings” because of a lack of bipartisan support, misalignment between federal and State policies, reduced energy and resources sector profitability and funding cuts to research.
“Notwithstanding recent declining electricity demand and claims of over-investment in networks highlighted in the paper,” ATSE says, “the power sector will require significant capital investment in coming decades,” suggesting that there should be more support for innovation and investment in efficient, less emissions-intensive technologies, including renewables and nuclear energy, and a process that makes it easier to write down and replace old, inefficient generation plant and supply equipment.
ATSE “strongly recommends” that the green paper goal of “securing reliable and affordable energy in a technologically-neutral way that could also help lower emissions” be recast as “securing reliable and affordable energy in a technologically-neutral way that will transition the sector to lower emissions.”
It also urges the government to include in the white paper a commitment to strengthen the resilience of the electricity system over the next decade by creating incentives for significant capital renewal and diversification,” including “taking a strong position on nuclear power.”
The nuclear point was given a surprise boost at the end of November by comments from Foreign Minister Julie Bishop, describing reactors as “an obvious direction” for consideration after 2020.
Back in September Industry Minister Ian Macfarlane annoyed nuclear proponents by saying the government had no intention of leading a new discussion on nuclear energy in Australia even though the green paper is “agnostic” on technology options.
AGL Energy has told the federal government in its latest energy white paper submission that it is vital to take a long view to avoid the need for policy changes in future that can be anticipated now.
The company says that the “heightened state of uncertainty” that arises from frequently-changed policy settings and objectives imposes “financing premium penalties” to generation investment and can lead to “sub-optimal” development and plant retirement.
AGL calls for policy settings aimed at encouraging lower emissions generation to be “transformational, not additional,” arguing that current lack of certainty plus poor integration of energy market reform is a bigger issue than regulatory influence.
It also warns that the emergence of distributed generation and onsite electrical storage introduces “considerable risk” for consumers in the absence of well-defined and enforced safety standards.
AGL says distributed generation and storage “have the potential to significantly harm consumers” if poorly manufactured equipment is allowed to be sold or if equipment is installed or operated incorrectly.
It calls on the federal government to establish a process for “rigorous” safety and technology standards and says all providers of electricity should have the same regulatory obligations imposed on them.
Major Energy Users Inc, representing 20 large energy consuming companies in the NEM, Western Australia and Northern Territory, has slammed the green paper for “failing to identify and address many significant issues” confronting the markets.
It complains the paper has “taken the easy option and produced a mild, and what should be readily achieved, agenda.” And it says the paper “simply articulates a very tired and well-worn wish list.”
It also accuses the federal government of “waxing lyrical about the need to incentivize investment in the energy resource sector” in the paper while being silent on investments that could be made by downstream industry.
Major Energy Users adds that the paper “demonstrates a lack of any real progress in policy development – it just does not appear to understand or reflect the issues confronting domestic consumers.”
The lobby group identifies two “elephants” in the energy space: a failure to tackle network asset valuation and a “complete failure to understand the enormity of the impact of rising domestic gas prices.”
It poses three questions for the federal government: (1) why is there no emphasis on attracting investment for downstream activities, (2) where is the analysis of impacts on existing investments of energy policies and (3) where is the risk assessment of the impact of the world price for LNG falling?
It also asks why the green paper fails to address “the ever-increasing concentration of electricity supply chain elements”?
Major Energy Users accuses the government of examining the gas industry “in isolation of what occurs downstream of the market.”
Speaking for one of the biggest sectoral users of gas (with six alumina refineries accounting for 14 per cent of domestic consumption), the Australian Aluminium Council notes the green paper acknowledges near-term shortages in eastern States supply are likely to occur regardless of any action taken now; this, it says, should not be used as a reason for not pursuing action that might provide relief to domestic consumers or create a deep and more transparent market.
Decisions taken in 2015, the council adds, will determine if the supply shortages and associated collateral damage are “simply short-term issues or become the new norm.”
Origin Energy argues that the immediate challenge facing the east coast gas market is the removal of impediments to supply and calls for a concerted effort to bring the fuel to market in a timely manner.
In its white paper submission, the company welcomes the federal government’s “continuing resistance to distortionary policies such as domestic gas reservation” and its verdict that the gas market “is not fundamentally broken.”
Origin emphasizes that any increases in wholesale gas prices will not see a proportionate rise in residential retail prices.
Wholesale values, it says, “only constitute between 10 per cent and 30 per cent” of bills depending on States and consumption.
The company adds that the pipeline proposed to link gas production from the Northern Territory to eastern Australia “has potential to materially increase east coast supply.”
It also argues that any effort to pursue gas market reform needs to undergo “a robust cost benefit analysis” prior to implementation.
Meanwhile AGL Energy, pointing to New South Wales facing 21 days a year of unmet winter gas demand from 2016, agrees that “the clear policy response needed is one that removes existing obstacles to supply.”
The company says that “the most fundamental barrier to bringing on new gas reserves is government policy” and accuses the Victorian and NSW governments of making policy “arbitrarily and without empirical evidence or a scientific rationale, failing to take in to account the large segment of the community neutral or supportive towards gas development.”
AGL calls for the removal of “all ad hoc, non-scientific planning and regulatory barriers to exploration and production of gas.”
The Energy Supply Association says the absence of focus on a clear national framework for determining the basis of carbon emissions reduction policy is “a material gap” in the federal government’s green paper.
“Attempts to reduce the carbon footprint (of energy use) have been hindered by the proliferation and rapid turnover of policies,” ESAA argues, and “even now, there is no clear guidance on what longer-term emissions policy may look like or how post-2020 goals may be set.”
Meanwhile the Clean Energy Council is calling for the government to use the white paper to “set out an enduring vision for the role of clean energy in the economy,” complaining that ongoing change in policies has “seriously undermined” the confidence of the renewable energy sector, with the RET, it points out, now facing its third review in just two years.
As a company that operates across Australia, Alinta Energy tells the federal government in its white paper submission, that the absence of a holistic policy approach to common energy issues is a substantial problem, often duplicating functions and providing conflicting signals to investors.
“Australia’s current fragmented policy landscape,” Alinta says, “is the result of an absence of a multi-jurisdictional, long-term and bipartisan strategy on energy issues.”
The CoAG Energy Council, it argues, often struggles with managing controversial topics and “inevitably tends to focus on issues of the day, hindering the progression of important long-term energy policy.”
The problem, it adds, is compounded by “the increasing tendency of policymakers across all levels of government to develop settings without regard to the long-term consequences for the energy market.”
Nowhere, it says, is this more apparent than in the area of environmental policy.
A similar point is made by the Australian Industry Greenhouse Network in its submission.
AIGN calls for an end of fragmented policy development in areas such as renewable energy promotion, energy efficiency and carbon abatement, urging the white paper to address “a framework that is coherent with national economic goals.”
Hydro Tasmania is seeking a review of electricity tariff structures as part of a broader consideration of a revamped east coast regulatory framework taking in to account non-network investment alternatives, assets valuation and cost recovery mechanisms.
This review, it says, should aim to ensure that the regulatory framework provides for competitive neutrality between market incumbents and new entrants as well as providing for a level of consumer protection appropriate for a changing market.
Hydro Tasmania also calls for the white paper to include the right signals for aged emissions-intensive generation to exit the wholesale power market.
Mining giant Peabody Energy says that, “contrary to positions taken by activists,” Australia does not need to choose between its coal resources and a low-emissions future.
The company says technologies such as carbon capture and storage “are opening the door to a sustainable, low-carbon future at lowest costs,” with CCS having the potential to reduce national emissions 31 per cent by mid-century.
It adds that the “BTU conversion process” – converting coal in to higher value energy forms including liquid fuels and pipeline-quality synthetic gas – “represent a critical opportunity to underpin Australia’s energy security.”
The Electric Energy Society of Australia is urging the federal government, in developing the white paper, to pay special attention to “vastly improving the performance of energy regulators.”
EESA says: “Past cycles of feast and famine investment caused by regulatory actions of ‘drive the system harder’ followed by ‘fear of large-scale outages’ has cost the nation dearly, leading to high-cost, inefficient capital network investments.”
It calls for the development of policies that “provide for steady annual capital expenditure to achieve the right balance between outage risk and reliability.”
The draft revenue determination of the Australian Energy Regulator for the trio of New South Wales distribution businesses, delivering power to three million households, is a seminal event in the ongoing saga of boom-and-bust power network management.
After three years of increasingly angry consumer reaction to major retail power bill rises in the wake of the NSW trio’s record capital outlays between 2009 and this year and political fright leading to a rewriting of the regulatory rules, the AER has astonished the DBs by ripping $6.5 billion out of their revenue bids for 2015 to 2019.
The move is heavily influenced by the first annual benchmarking of all the networks by the AER, a controversial development in itself, and the sector as a whole is up in arms over the process and the extent of expenditure restrictions proposed for the NSW businesses.
The AER announcement is not a final decision – that will come next May.
The regulator’s preliminary decision (and its accompanying determination for the ACT distributor) has been greeted by the Energy Supply Association warning that electricity supply within the NSW borders could be “less safe and less reliable” if the 33 per cent cuts to budgets are pursued.
ESAA chief executive Matthew Warren says the lobby group supports tightening of the regulation of network costs, but the draft determinations “go way beyond sensible.”
He adds: “We are talking about cuts in some cases that would halve the operating budgets of these businesses. This seems to demonstrate a weak understanding of how they operate and what sort of savings can sustain safe and reliable services. While these cuts would bring cheaper bills, they risk trading these off for more and longer faults and outages.”
Warren says: “It’s like suggesting losing weight by cutting off a leg.”
He calls for an end to ‘the cycle of political over-reaction driving the regulation of networks,” arguing that “one of the drivers of recent increased network expenditure in NSW was to increase reliability in reaction to blackouts in 2003-04 that were caused by major under-spending on infrastructure in the 1990s.”
The Energy Networks Association says the AER proposal for NSW network operating expenditure returns them to a level not seen for 10 to 13 years and warns that the cuts are “service reductions in disguise” and are “a high risk approach to an essential service.”
Vince Graham, CEO of the three NSW businesses (Ausgrid, Endeavour Energy and Essential Energy), says implementation of the AER proposal would see job cuts of 4,600, a threat to employment of 750 apprentices currently in training, a reduction of $460 million in vegetation management programs and deterioration in the time the networks take to restore power supply after major storms.
It would be possible – it might even be necessary – to write a white paper on the sole topic of reforming electricity network tariff structures.
This is an issue that affects all eight million east coast residential account-holders and especially the million and more who have taken advantage of subsidies to install rooftop solar PV systems.
Even discussing the solar issue attracts the ire of those with vested interests in the technology and high hopes for its continuing take-up by householders.
Part of the propaganda approach here seems to be to create as much fuss as possible, with the support of mass media, who love “a bit of biff” and can see obvious advantage to themselves in playing up the likelihood of a relatively large sector of the community facing a loss of a benefit, to scare politicians away from addressing the mismatch between what customers pay and the true cost of supply.
The other side of the coin is that, without significant tariff reform to allow accurate cost recovery by networks, the transition to a new and much better power grid environment is effectively stymied.
This issue was always going to emerge because of the impact of mass investment in air-conditioning, but the addition of the solar situation has drawn the fevered attention of climate change ideologues riding on the inevitable ire of PV purchasers who didn’t anticipate (because no government offering them subsidies understood the hidden danger) that the tariff question was lurking in wait.
Anyone wanting a plain language exposition of the situation, and politicians generally and government ministers in particular, should read the part of the Origin Energy submission on the energy white paper dealing with this issue.
Then they should read the relevant segment of the Consumer Utilities Advocacy Centre submission and top it off by referring to the Energex submission.
These are not the only ones addressing the point but, having read most of the large number of responses to the green paper, I feel the trio cover the topic in the most readable fashion – and this is very much a matter of clear communication as well as good technology and appropriate structures.
Starting with stressing that addressing the cross-subsidy issue is critical in ensuring equitable pricing for all small customers as well enabling networks to cost their services on the basis of users’ impact on the grid, Origin identifies all the points (not a few) that have to be resolved.
The kick-off step, it argues, needs to be development of a set of guidelines for appropriate network tariff structures, a task, it suggests, for the Australian Energy Regulator.
A key issue is customer understanding of what is going on.
The approach, says Origin, “needs to be as clear and uncomplicated as possible” to enable householders to relate their usage decisions to tariff structures and to respond to price signals (which drags in the knotty problem of gaining acceptance for smart meters).
As the company points out, this is a situation where customers voluntarily adopting tariffs may have limited consumption impacts but mandating them “may lead to bill shocks and resistance.”
Getting all this right also requires governments to have a workable approach to customer hardship. Right now each jurisdiction has a different approach and, as Origin notes, the assistance provided is not always targeted on those who most need it.
CUAC agrees that there is a need to reform the way network bills are arranged but it wants the approach to “consider the system as a whole and to revisit the underlying assumptions of the original tariffs rather than seeking to simply ‘bolt on’ provisions for new technologies.”
It wants flexible pricing to be on an opt-in basis and that flat tariffs should still be available.
Energex, on the pointy end of the tariff issue in a humid franchise area where air-conditioning rules and the solar subsidy schemes involve a wealth transfer between consumers of the order of $3.4 billion between 2012 and 2028, is keen to emphasize its commitment to engagement with householders to resolve the problem – and to point out that reform won’t be successful without providing customers with access to their usage data and with technologies like advanced metering.
The bottom line here is that this is one of the most complex issues needing resolution in domestic energy supply and that delay in addressing the resolution is wholly unhelpful to consumers and suppliers alike.
The Energy Efficiency Council, in its white paper submission, makes the salient point that tariffs should be designed around the long-term interests of consumers rather than short-term goals.
The starting point for effective action, in fact, is not the white paper (which should endorse the concept and the need for timely action) but the CoAG Energy Council taking a set of decisions that will not just embrace efficient tariffs in principle but launch the process to have them in operation as soon as possible – and certainly well before the end of the decade.
1 December 2014
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