Issue 146, June 2017
The energy policy choices confronting Australian political leaders in the financial year beginning 1 July, writes Keith Orchison, add up to make or break decisions for both our electricity and gas markets -- with the need to address community concerns about costs bearing down on federal and State politicians as the election bikes rev back up again. It’s not an environment where wheel-spinning will work to anyone’s advantage. With the Finkel report due to reach CoAG on 9 June, the scene is set for further furious debate about addressing what the Prime Minister labels an “energy crisis.”
Generation of electricity in Australia from black coal rose again last financial year.
Energy statistics published in May by the federal Department of Environment & Energy show that black coal-fired plants produced 114,375 gigawatt hours in 2015-16 – 6,736 GWh more than in 2014-15 and 8,603 GWh higher than in 2013-14.
The analysis also provides calendar year data – and black coal generation in 2016 reached 115,392 GWh, rising 3,771 GWh above the 2015 total.
The DEE report says Australia’s total power generation last financial year was 257,734 GWh – almost 5,800 GWh higher than in 2014-15 and almost 9,900 GWh above the 2013-14 level.
The largest output was in New South Wales – 70,400 GWh (9.7 per cent above the previous financial year) – closely followed by Queensland (67,264 GWh, slightly lower than in 2014-15). These results reverse the pecking order in 2014-15 when Queensland led output for the first time.
The total power station out in the NEM last financial year was 215,605 GWh.
Black coal power stations are by far the largest source of national electricity supply, more than double that from gas turbines (50,532 GWh in 2015-16) and from brown coal plants (48,889 GWh).
The output from renewable generation is barely more than it was two years ago – 37,975 GWh last financial year versus 36,600 GWh in 2013-14 – mainly because of lower hydro-electric production (which in 2015-16 was 16.7 per cent below its 2013-14 level) as a result of a sharp decline in Hydro Tasmania’s generation.
In the variable renewables category, wind power in 2015-16 reached 12,098 GWh with large-scale solar PV at 457 GWh and rooftop PV at 6,381 GWh, 46 per cent above what it recorded in 2013-14. The calendar 2016 data show 12,973 GWh of wind, 563 GWh of large-scale solar and 6,847 GWh of rooftop PVs (15.6 per cent above 2015).
The largest amount of rooftop solar output remains in Queensland (2,055 GWh last financial year) followed by New South Wales (1,461 GWh). The largest level of wind production in 2015-16 was in South Australia (4.318 GWh) followed by Victoria (3,357 GWh).
Six months have passed since the expert panel formed by the Queensland government to study a pathway to 50 per cent renewable energy in the State by 2030 delivered its final report – and there is no sign of it in the public arena.
The panel, chaired by investment banker Colin Mugglestone, delivered the report to the Palaszczuk government on 30 November and its website continues to note blandly that “the government is considering its recommendations and will determine a response in due course.”
The draft report published last October made claims about the target’s cost – based on $6.7 billion of investment – and system security that were vigorously challenged by the LNP opposition and some energy industry quarters even as they were hailed by green energy boosters (some of whom are now asking why the State government is sitting on it?).
The Grattan Institute has labeled the power network regulatory review system – which, it says, has delivered businesses with little commercial risk higher profits than those available to firms “with real market exposure” – as “plain wrong,” declaring the CoAG Energy Council should be “galvanized in to action” to reform the process.
The reaction follows the Federal Court upholding most of the Australian Competition Tribunal’s findings against the Australian Energy Regulator’s 2015 rulings on New South Wales and ACT distribution business revenue for 2014 to 2019. The decision, which represents in aggregate more than $2 billion in extra income for the networks, has been greeted with anger and dismay in the media, especially from consumer groups and NGOs.
The original AER decision cut almost $7 billion from the $30 billion revenue stream sought by the networks for 2014-19.
In reaction to the court decision, Federal Environment & Energy Minister Josh Frydenberg is calling on the State governments – in the case of Queensland and NSW, owners of network businesses – to “cut them (the businesses) off at the pass” and put an end to the review process.
Frydenberg asserts that the AER is the only “appropriate body” to make network revenue decisions, saying the Competition Tribunal is “in practice acting as a second regulator, a role for which it was never intended or resourced to do.”
Federal Labor says it wants “root and branch reform,” apparently referring to the market as a whole. Predictably, the Greens have greeted the Federal Court decision as “a disaster for consumers, another failure of neo-liberal ideology.”
The NSW government says media speculation about the size of ensuing price rises is “wildly wrong” and the Energy Networks Australia, the lobby group for the sector, has declared that the decision should not deliver a price shock or “material impacts” for power customers, being phased in over five years.
“Any bill impacts,” says ENA’s John Bradley, ”are likely to be outweighed by the savings most customers can make by shopping around for a better retail deal.”
The biggest beneficiary of the decision, Sydney-based Ausgrid, part-owned by the State government, says the review mechanism is “an important check and balance” built in to the regulatory framework. It adds that its residential customers will pay an extra $11 annually for five years as a result of the decision (that’s three cents a day).
The generation and retail lobby group, the Australian Energy Council, says the Federal Court decision highlights the importance of CoAG finalizing its examination of the review process. There needs to be a system that cannot be “exploited,” it adds.
CEO Matthew Warren acknowledges that setting regulated returns for monopoly businesses is “inherently difficulty” and that appeals against AER decisions should only focus on correcting genuine errors.
The Australian Energy Regulator says its 2015 decisions set lower revenues than those sought by NSW and ACT networks “because we concluded that costs above efficient levels should be funded by the businesses, not customers.”
The Energy Users’ Association, representing large business consumers, claims its members “have never been under more pressure.” Rapidly-escalating gas and electricity bills mean “it feels very much like a crisis,” EUAA adds.
The association’s CEO, Andrew Richards, says members are concerned that State governments continue to act in isolation on energy measures, declaring “this ad hoc approach will add further financial impacts on consumers who are already straining (to cope) with unprecedented energy bills.”
Meanwhile the chairman of Alumina Ltd, John Pizzey, has told his annual general meeting that the company’s Western Victorian smelter – the majority partner in the Portland venture is Alcoa – is paying 50 to 100 per cent more for electricity than similar operations in the rest of the “western world.” This situation, he said, “should never have been allowed to occur.”
“Ideal climate policy,” says the Grattan Institute, is an economy-wide carbon price, but attempts to implement it have failed because it has not won the necessary political and community support.
In a submission to the federal government’s review of climate change policy, due to be published later this year, the institute says the most pragmatic solution to the situation is to “build on the existing policy mix and use elements of several different options to assemble a new roadmap.”
In some cases, it says, policies that are “less than ideally efficient or equitable” will need to be used in the short to medium term because they “represent a pragmatic mid-point along the path that leads from current policies to (those) needed to achieve more ambitious emission reductions.”
In the case of electricity production, the institute says, generation emissions need to fall from 190 million tonnes of carbon dioxide to 145 Mt by 2030 and “current policies do not include mechanisms that will deliver this result.”
The problem for investors, it adds, is that the rewards for action do not flow to first movers and they are unwilling to take the risk of being first. “The government will need to intervene.”
And, it says, any government approach will require funding – either from taxpayers or such sources as consumers’ energy bills.
Meanwhile a submission by University of Melbourne academics has told the review that the broader challenge for the electricity sector is that much of its generation is approaching the end of its economic life.
The current median age of capacity is 30 years and by 2030 it will be 44 years.
The submission adds that “partisan discussions around coal plant miss the point – a transformation is already under way (and) the issue is how to institutionalize a low-emissions pathway that facilitates investment in new power generation.”
The Australian Petroleum Production & Exploration Association is urging the federal government’s climate policy review to accept that natural gas must play a larger role in a shift to a low-carbon future – not just locally but for this country’s trading partners.
In a submission to the review, APPEA argues that “every credible analysis” shows that gas is essential in delivering reliable, cleaner energy over the next 20 years. The association points out that, for Australian households, gas delivers 44 per cent of residential energy for only 13 per cent of emissions.
A problem in Australia, says association CEO Malcolm Roberts, is that energy policies and climate change policies often pull in opposite directions. State governments boasting about their commitment to climate change action are “effectively locking in dependence on coal-fired power.”
He points out that the Climate Change Authority believes use of gas-fired power generation in Australia will need to double or triple to meet the national 2030 abatement target.
APPEA wants encouragement of gas development to be one of the central aims of the current review.
Meanwhile, the South Australian government has responded to anti-fracking campaigning in the State by retorting that it is vital for more gas extraction to be encouraged to deal with the east coast shortage.
In a paper the government commissioned on the Cooper Basin, consultants estimate that annual demand in eastern Australia next year will be about 2,000 petajoules – and that sustaining this to mid-century, serving the east coast LNG exports and growing domestic supply, will require an underlying reserve of about 80,000 PJ.
The study says the challenge for the Cooper Basin and all gas-producing regions in eastern Australia is to confirm new economic reserves and to improve production per well.
The federal Minister for Resources and Northern Australia, Matt Canavan, hit out strongly at State governments and the new Northern Territory over bans on gas activity during the Australian Petroleum Production & Exploration Association conference in Perth in mid-May.
The market answer to supply shortages and high prices should be more supply, Canavan told 2,020 attendees at the conference, “but that’s not happening because of the ridiculous, silly and stupid moratoria we see in Victoria, New South Wales and the Northern Territory.” The measures, he added, “completely lack any science, reason or logic.”
Money allocated in the federal budget to scientific studies seeking to open up new areas of gas supply are unlikely to go to Victoria, he told media at the conference, while the State prevents onshore exploration.
Energy Networks Australia says the focus on energy security in the federal budget is welcome, but investor confidence remains the key. “Funding (by government) is not the biggest challenge facing the system.”
To solve the gas market problems, the association says, State governments must remove blanket prohibitions on exploration and development.
ENA adds that widespread federal funding of new energy projects (such as pumped storage) should not be necessary if all governments can agree rapidly on a national energy transition plan.
Meanwhile the Australian Energy Market Commission chairman, John Pierce, has told an energy-intensive business conference in Brisbane that there is “a big void” over the next decade that is a brake on energy investment.
Pierce said that, whatever emissions reduction process ends up by chosen by policymakers, there will be a need for “massive” private sector investment in the energy sector – and investors need a predictable policy and regulatory environment. The inability to see this predictability today is a “significant brake” on making commercial investment decisions.
The Clean Energy Council wants to see changes to the way the power market is managed to enable wind turbines and solar technology to play a larger role.
The CEC says current rules inhibit variable renewable technologies from supporting the recovery process after supply system failures. “The market, its rules and regulations have to move with the times.”
The council argues that safeguards current in place for dealing with system shocks don’t work efficiently, relying heavily on inertia (provided by conventional generation) to stop rapid changes in frequency. It says wind turbines and batteries have provided fast frequency responses in other countries to supplement inertia.
Among the steps the lobby group wants pursued is accelerated trials of fast frequency response from inverter-based technologies “to further prove this solution in the context of the NEM.”
Meanwhile the Energy Policy Institute has published a paper, written by analyst Stephen Wilson of Cape Otway Associates, that there is little understanding in Australia of the likely costs of replacing coal and gas-fired capacity with VREs without compromising the power system reliability.
Wilson says most models of future full system costs are based on unrealistic assumptions and he has considered the costs of “technology pairs” – the back-up needed by wind and solar plants – and offers a “more realistic comparison” with traditional dispatchable generation.
He says his modeling results imply that the costs of VRE options are “unaffordable at scale.”
One of the biggest issues of the energy transition is what happens to existing supply infrastructure at the end of its working life.
Management consultants Deloitte suggest that decommissioning has the potential to be “Australia’s next oil and gas boom.”
In a paper released at the annual conference of the Australian Petroleum Production & Exploration Association in Perth in mid-May, Deloitte say decommissioning is an opportunity for the industry to demonstrate global leadership.
Bernadette Cullinane, Deloitte’s Australian oil and gas leader, points out that many assets in this country’s 100-year-old petroleum business are reaching the end of their lives.
“With more than 100 platforms and subsea structures located in Australian waters, founded in notoriously fickle carbonate seabed deposits and in some of the most pristine marine environments on the planet,” she says, “offshore decommissioning here is going to be complex, challenging and costly.
The Deloitte study, co-authored by West Australian professor Susan Gourvenec, estimates the cost of decommissioning Australian oil and gas infrastructure at more than $US21 billion over the next half century.
Gourvenec says industry members will need to work together and with governments, regulators and the research sector to establish strategies to address the challenge of reducing risks and costs.
Today, the report points out, the Australian supply chain lacks some of the required vessels, tooling, disposal facilities and trained workers to pursue offshore decommissioning.
The new Labor government in Western Australia says it wants to end the Synergy monopoly over the south-west system residential electricity market “sooner rather than later.” Synergy is State-owned.
State Energy Minister Ben Wyatt, also Treasurer, concedes that full retail contestability will require the gap between the cost to Synergy to acquire energy and the price at which it sells to householders to be bridged. Wyatt says the retail price for residential customers could have to rise by up to 15 per cent over two years to meet a 2019 target for a market.
At present Synergy receives about $300 million a year in taxpayer subsidies to maintain the cut-price residential bills.
Labor campaigned in the March State election on a claim that Liberal plans to privatize the WA power networks business would push up electricity prices, promising it would keep them down.
The WA Council of Social Services is campaigning now for the State’s tariff equalization measure – which sees power priced the same across Western Australia – to be scrapped, saying it would save households in the SWIS $111 a year (seven per cent of the average bill).
From one perspective, it is understandable that the task force chaired by New South Wales chief scientist & engineer Mary O’Kane should decide (in its interim report, released in May) that its most urgent work is to advise on immediate planning to ensure that the State is well prepared to deal with any possible risks posed to energy supply next summer.
It is certainly understandable that the Coalition State government will want to focus on this; it faces an election in March 2019 and anything like to the South Australian blackout would be a political disaster.
The bigger State issue, however, mirroring the east coast situation as a whole, the purview of Finkel & Co, is the long-term reliability and cost of both electricity and gas supplies. The O’Kane task force promises that a second report, to be delivered at the end of this year, will focus on this challenge, taking in to account the Finkel report, which will be handed to CoAG in early June.
The O’Kane task force says its work to date leads it to question if NEM incentives supposed to drive reliable power supply are operating effectively?
It agrees that it is “conceivable” the closure of Hazelwood power station (provider of 10,000 gigawatt hours a year of electricity) in Victoria, in the absence of market responses, may throw up reliability risks that flow in to NSW as well as South Australia as fuel supplies and capacity factors for remaining plants are tested.
It sees fuel availability as a “potentially significant problem” not just because of the widely-publicized gas supply issue but also because there are doubts about the adequacy of coal supply to power stations in NSW.
More broadly, the task force urges the NSW government to “take a leadership role” in the Council of Australian Governments and the CoAG Energy Council in pushing for a national climate change policy approach and effective integration of variable renewable generation in the NEM.
The size of this challenge for NSW is to be found in the report, citing Australian Electricity Market Operator research, in a chart postulating a shift in the State’s power mix in the medium term from 63 per cent coal capacity today along with 14 per cent gas, 17 per cent hydro, eight per cent wind and one per cent utility-scale solar to 42 per cent coal, 13 per cent gas, 14 per cent hydro, 28 per cent wind and three per cent large solar.
This is far from a minor “transition.”
Something already well lost to sight in the public debate is how conventional generation saved NSW from a blackout at the worst point of the past summer’s heatwaves (late afternoon on 10 February) and that it would have contributed more if not for the problems of adequate gas supply. At this stage the State load requirement was 14,316 MW – and it was dominantly met by coal and some gas plant (9,245 MW) supported by hydro-power (2,619 MW) and the interstate high voltage lines (1,745 MW). Wind and all forms of solar were contributing less than 800 MW of capacity.
Any medium-term perspective of NSW power availability must take in to account that AGL Energy is committed to closing the 2,000 MW Liddell plant in 2022 – which is just around the corner in electricity planning terms.
Meanwhile, the interim report also records that small scale distributed generation, including rooftop solar, now has a combined NEM capacity of 4,500 megawatts (about a third of it in NSW), observing that one of the challenges of the situation is that the market does not know how much electricity is being contributed from “behind the meter” or from where – except in aggregate and as revealed through reductions in demand for grid-supplied power.
As the report drily notes, the transition to lower-emissions power generation has implications for energy security and reliability in the State and the NEM. It sure does and neither your average MP nor the community at large has a handle on the issue
The style of the O’Kane paper does not lend itself to good communication with this general audience. It remains to be seen how the Finkel report will handle this aspect – but, whoever takes on the task, good community education on this issue can’t be left in the “too hard” basket in an environment where voters are only too obviously living on their emotions.
It’s interesting that a recent Essential Report poll indicated 48 per cent of respondents think it is the joint responsibility of federal and State governments to deliver reliable and affordable electricity and gas supplies – versus 27 per cent who think it is all down to the federal government.
1 June 2017
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