Issue 77, September 2011
Welcome to the ninth issue of the year, with the website continuing to build readership records – reaching 7,557 readers last month. This edition focuses on a wide range of topics, including the future of the renewable energy target, the ongoing problems of achieving deregulation of electricity prices, the turf war between retailers and monopoly networks over who should interact with customers and the “deadweight loss” for the economy of decades of emissions trading. It also reveals a shock indication from the ACCC of a new, aggressive attitude to electricity supply.
In a strong opening speech as he takes over one of the country’s most powerful jobs this month, Rod Sims, the new chairman of the Australian Competition & Consumer Commission, has warned the energy supply industry that it is high on his list for priority attention.
With media attention focused almost exclusively on his comments about Telstra, the declaration by Sims that the electricity industry will get the ACCC’s particular attention under his leadership has gone almost entirely unpublicised.
Sims said electricity prices are a crucial cost of living issue for the community and the ACCC and the Australian Energy Regulator will now play “a large role” in addressing “many aspects” of power supply.
“There is significant potential for bill shock and consumer distress in this rapidly changing, often confusing and critical market,” he declared. “Current consumer concern over cost of living pressures has much to do with utility prices. This is an area where the commission can assist consumers by utilising its tools and taking a whole-of-ACCC approach.”
He added that the combined forces of the ACCC and the AER will tackle energy issues “on a range of fronts.” The AER, he said, will soon be putting forward vital rules changes to “address the imbalance in the network regulatory regime between efficient investment incentives and fair charges for consumers.”
He said the two bodies will “interact seamlessly” in developing strategies to educate consumers about energy issues.
Sims said: “The ACCC will do more to ensure energy businesses play their part. The market is not truly competitive where there is bad sales behaviour or where confused customers do not understand prices structures and are switching retailers against their interests. This will be an important ACCC enforcement focus in future.”
He also said the ACCC and the AER will be active in monitoring the wholesale spot market for illegal bidding and market manipulation.
Having an independent specialistic regulator like the AER as part of the ACCC, he declared, allows a holistic strategy to be developed and delivered in the interests of consumers.
Australia’s energy retailers continue to head butt monopoly network businesses over involvement with customers in contestable services. The issue simmers away beneath the surface, but retailers are making it clear that they resent the competition.
The latest retailer foray in to the argument comes in AGL Energy’s submission to the Australian Energy Market Commission’s inquiry in to “giving consumers choice in how they use electricity.”
AGL says it is concerned that businesses operating primarily as regulated network operators are increasingly engaged in contestable areas. When this is ring-fenced, it is not a significant problem, it comments. However, is regulated income being used to fund business development activities in emerging contestable markets?
AGL says it firmly believes that only contestable players should be in contact with customers to provide demand side participation services. “Regulated businesses have no need to be in contact with customers in relation to new products and services.”
The company calls on the AEMC to ensure that businesses with regulated revenues are ringfenced to keep them out of the competitive arena.
The prospect of the national renewable energy scheme not reaching its 2020 target is rising higher in industry debate with Origin Energy chief executive Grant King now suggesting it may be more sensible to increase the RET to 25 per cent and push out the deadline to 2025.
Meanwhile the Victorian government has imposed new planning requirements that the Clean Energy Council claims will drive wind farm development out of the State, the Western Australian Premier, Colin Barnett, has called on the federal government to shut down the RET as it implements a carbon price and the New South Wales Premier, Barry O’Farrell, has expressed a personal preference for no more wind farms in the State. The NSW government is reviewing planning regulations applying to wind project developments.
Infigen Energy chief executive Miles George believes that the surplus created in the renewable energy certificate market by the federal government’s botched approach to small-scale activity, resulting in a REC glut and wind development being stalled, will be over by 2014.
He indicates that this could see a situation where six times the current installed operating capacity of wind farms would need to be constructed between 2016 and 2020 to meet the target, a prospect considered impossible in the industry if Victoria and NSW have stymied many projects.
AGL Energy chief executive Michael Fraser argues that the 2020 target is still achievable but concedes “a hell of a lot has to be built in a hurry.”
The Victorian government rejects the idea that its new regulations will prevent wind farm development. Planning Minister Matthew Guy says the previous Labor government approved development of 1,107 turbines with a capacity of 2,629MW and only 400 have been erected to date.
Pacific Hydro says that it remains committed to building the three Victorian wind farms approved by the Labor government, but “does not envisage” building more.
Powering Australia conference tackles critical issues
What would you choose as the top eight issues facing the power industry and policymakers today as they prepare for a massive capital investment program over the next two decades?
The Powering Australia Conference – to be held on 27-28 September at Zinc on Federation Square, Melbourne – has opted for these:
- Technology development (including CCS and solar power)
- Transmission in a carbon-constrained environment
- Finding highly-skilled workers for a multi-billion dollar task
- Prices – where are they going and how can they be curbed
- Customers – tackling their concerns and fuel poverty
- Cleaner energy – challenges for wind, geothermal, gas, solar, nuclear and coal
- Looking at the future of the Latrobe Valley.
The Power Australia Conference draws on expert opinion from across the energy industry. The Federal Minister for Resources & Energy, Martin Ferguson, will also launch the 2011 Powering Australia yearbook.
For more information and registration, visit www.halledit.com.au/poweraust2011
The Australian Capital Territory has rejected advice from the Australian Energy Market Commission that it should stop regulating the price of electricity for households and other small customers. ACT residential prices are being held at an average of $1,538 a year compared with $2,702 in neighbouring Queanbeyan in NSW
Both the Energy Supply Association and the Energy Retailers Association, each including the “big three” retailers (AGL Energy, Origin Energy and TRUenergy) in their membership, have called on east coast governments to give up price regulation as the carbon regime is introduced.
AGL has warned that retention of regulation runs the risk of “driving over-consumption, inaequate competition, merchant investment blackouts and, following any price increase, a media assault.”
ESAA and ERAA point out that the compensation proposed by the Gillard government for the carbon regime assumes that costs will be fully passed through to customers. They are calling for federal financial penalties to be imposed on the States and the Territories if they continue to block deregulation.
In a submission to the Queensland Competition Authority’s review of electricity tariff regulation and prices, ESAA argues that the direct impact of carbon pricing on wholesale energy costs remains unclear. It says this uncertainty will be "particularly acute” until effective financial instruments to hedge carbon costs emerge.
“The risks to the market from under-recovery of carbon costs far outweigh the risk of over-recovery,” it warns.
Alinta Energy, which is looking to expand its retail business in to the eastern States after building up a customer business of 600,000 in the Western Australian market, has also told the QCA that it should bear in mind that Queensland has one of the most competitive electricity markets in the country.
Meanwhile AGL Energy, in a submission on demand side issues, has reminded the Australian Energy Market Commission that has “a critical role” in working with the CoAG Ministerial Council on Energy to pursue outstanding reviews of effective energy competition in NSW and Queensland. A finding that there is effective competition is intended to be the precursor to lifting retail price regulation.
With a State election looming in Queensland and the Anna Bligh’s regime under heavy pressure according to opinion polls, it is most unlikely that the State government will be willing to accept any move that could be linked to rising power prices, a major political issue.
The mahority of Queensland businesses have experienced a rise in energy costs of between 10 and 20 per cent annually over the three years since 2008-09, says the State’s Chamber of Commerce & Industry. “These increases have had a significant impact on business investment and profitability,” it says in a submission to the Queensland Competition Authority.
Rising prices have increased operating costs and supply chain input costs.
Economists are pointing out that Australia faces a “deadweight loss” – sending money overseas with no domestic benefit to show for it – of hundreds of billions of dollars over the next 35 years for implementation of the emissions trading scheme.
The Treasury modelling the federal government is using claims that there will be 94 million tonnes of emissions credits bought abroad in 2020 and assumes a price of $29 – which would deliver an economic cost of $3 billion. By 2050 the annual cost would rise to $57 billion.
News Limited economics writer Terry McCrann claims that the cumulative “deadweight loss” of the measure over almost four decades will be about $650 billion on the credit price trends modelled by the Treasury.
Proponents of the scheme argue that the expenditure will result in “real and lasting investments” in carbon abatement in other countries. Opponents retort that there is no global trading scheme in prospect, that the Kyoto treaty seems likely to lapse next year without agreement on a replacement and that verification of the validity of abatement abroad is already under questioning.
The federal government and others are promoting the concept that Australia could become part of a Pacific trading agreement that included New Zealand, Japan, Korea and California with countries like Indonesia supplying reductions. Prime Minister Julia Gillard has also raised the possibility that an Australian scheme could be linked to the controversial European Union ETS
Australian proponents of nuclear energy decry a situation in which failure to embrace reactors here could lead to billions of dollars being spent abroad on abatement created by using the technology.
Parts of the environmental movement are reminding the Prime Minister that she promised in the 2010 election campaign no new coal-fired power stations would be built under her leadership.
The criticism has arisen from the ongoing row over the proposed 600MW Dual Gas plant in the Latrobe Valley, which is supported by a $100 million subsidy granted by the Howard government in 2006. Enviromental activists want the grant withdrawn.
In another prong to their campaign they are appealing against the Victorian Environmental Protection Agency decision to allow Dual Gas to build the first stage of the Morwell integrated drying and gasification combined cycle plant. The company is also appealing the decision to limit initially to a 300MW development.
The Latrobe Valley Council, representing a municipality that draws a fifth of its gross regional product from the electricity industry, has voted to support the full development. Lobbyists Environment Victoria have “blasted” the council decision, saying: “It’s a distraction from the transition that needs to be made to a long-term and sustainable future.”
Dual Gas claims that the project will involve 350 direct jobs during construction and 40 continuing jobs when the power station is operating. It says the plant’s greenhouse gas intensity will be 31 to 36 per cent better than that of Loy Yang A, the Valley’s best performer in terms of emissions.
Federal Energy Minister Martin Ferguson has acknowledged the shortcomings of the mandated smart meter roll-out in Victoria launched by the State Labor government in its final years in office. “I think unfortunately this could have been done better,” he said in launching the $100 million Smart Grid, Smart City project in Newcastle. Consumers, he said, must be onside at the start of the meter roll-out. “This means transparency and genuine community engagement.”
The Australian Energy Market Operator’s latest statement of opportunities review reveals a huge bank of almost 33,000MW of power projects under consideration for the east coast, but just 1,000MW of committed developments.
AEMO’s list is dominated by wind farms (15,851MW) and gas projects (11,217MW).
The operator says the committed developments are the Woodlawn wind farm (48MW) and Eraring power station upgrade (120MW) in NSW, the first stage of the Mortlake gas plant (566MW), the Macarthur wind farm (420MW) and the Oaklands wind development (67MW) in Victoria plus the Bluff wind farm (53MW) in South Australia.
The longer list includes projects like the proposed 500MW geothermal power development at Innamincka in central Australia that is still a long way from being built and the 2,000MW of coal or gas baseload development at Macquarie Generation’s Bayswater B site in the NSW Hunter Valley, a project in limbo as the new O’Farrell government wrestles with an electricity strategy and waits on the report of the inquiry by former judge Brian Tamberlin, expected in late October.
AEMO says it has been notified of 6,600MW of wind development plans in NSW spread across 26 locations and 4,815MW of wind farm plans for Victoria.
Publication of the 2011 “SOO” led to a rash of media scare stories about impending supply shortfalls, especially in Queensland, where the Premier, State Treasurer and Energy Minister were drawn in to the public arena to assure consumers there was no cause for alarm.
The Queensland “woe” stories appeared despite AEMO saying in its report that significant generation developments in the State included six gas-fuelled power stations with a total of 3,000MW capacity, with one of them, ERM Power’s Baremar 3 development, expected to begin construction in January.
The O’Farrell government is complaining that it has discovered that the defeated Keneally government has left it a “booby trap” in the shape of the Cobbora coal mine.
State Treasurer Mike Baird says the new government will have to ensure mining begins at Cobbora in time to deliver coal to power stations in 2015 or face paying compensation of hundreds of millions of dollars to the successful “gentrader” sale businesses.
Baird complains that the deal, which carries a liability of $100 million in its first year, commits Cobbora to supply coal at $30 per tonne, well below current market rates.
The new NSW Energy Minister, Chris Hartcher, has told a forum of the Committee for the Economic Development of Australia that the State must not become too dependent on renewable energy and must focus on developing its gas supply industry.
Hartcher told CEDA: “There is no silver bullet which (will) provide the energy Nirvana of low cost, zero emission, consistent electricity supply.”
He added that, while coal will not expand, a comment seen as indicating that the State government will not approve a coal-based development at the prime Bayswater B site near Newcastle, it will be the main source of power for NSW “for many decades to come.”
The State has 11,797MW of coal generation capacity at present and the environmental movement has been strident in calling for early closure of the 2,060MW Liddell plant run by Macquarie Generation and commissioned in 1971-73. Delta Electricity’s Wallerwang power station (1,000MW, commissioned between 1976 and 1980) is also on the environmentalists’ hit list for early closure.
The market operator, AEMO, says in its latest review that proposals for 3,820MW of gas-fired generation in NSW have been lodged with it, the largest of which is Origin Energy’s Kerrawary project (1,000MW) near Goulburn with “an expected construction start date of January 2015.”
Hartcher told CEDA that it is “prudent” for NSW to develop it own gas resources, both for power stations and direct household use, rather than to rely on importing gas from South Australia and Victoria.
Buying too much electricity from interstate is also “leaving NSW exposed to disruptions,” he said, pointing to importation of 12 per cent of demand in the February heatwave.
Gas currently makes up only about 10 per cent of NSW’s energy needs and 90 per cent of it is imported from interstate.
In early August, AGL Energy, reacting to negative media coverage of the claimed impact of coal seam methane on aquifers, said that CSM gas would “become increasingly critical from around 2015 when increasing demand (by) export LNG projects in Queensland is projected to produce a major disruptive change to east coast markets.”
The power industry’s rule of thumb view of NSW generation needs at present is that electricity demand growth will require addition of about 1,600MW of capacity by 2020. The State’s annual power demand is expected to rise by about 15,000 GWh over this decade.
NSW Energy Minister Chris Hartcher gave the national solar power industry still more cause for indigestion when he told a Sydney business lunch that small-scale PV supply is “hideously expensive.”
The sector is confronted, according to the Clean Energy Council, with the prospect of a “significant market correction” in 2011-12 after two financial years of strong growth driven by federal and State subsidies.
The national renewable energy regulator has reported that more than 80,000 solar PV systems were installed in the first quarter of this year following installation of almost 58,000 in the last quarter of 2010.
Queensland has been a particular boom State for solar. The Energy Minister, Stephen Robinson, says the State feed-in tariff scheme, which continues to pay householders 44 cents for every kilowatt hour they send back in to the power grid, says the subsidies have resulted in more than 105,000 PV systems being installed since mid-2008.
He estimates that the scheme has cut a total of 315,270 tonnes of carbon dioxide to date.
The result of the national pursuit of PVs, according to consultant’s modelling for the Office of the Renewable Energy regulator in Canberra, is that energy retailers may be required to buy a record 38.5 million small-scale technology certificates under the RET scheme in 2012, adding about $1.54 billion to consumer costs.
Decisions by governments to cut subsidies and limit the capacity able to benefit from grants, it is claimed, will see the number of certificates required fall by more than 60 per cent in 2013. Federal Climate Change Minister Greg Combet claims that the retailers’ cost of buying the permits in 2013 will be 70 per cent below the 2012 figure.
Meanwhile Jeremy Rich, CEO of the solar sales business Energy Matters, which he says now has a turnover of $100 million a year, denies that the FiT schemes are a subsidy “in any shape or form.” They are, he says, “a fair price for solar fed in to the grid that Australians need.”
In Victoria, the National Electrical & Communications Association, has given the Baillieu government half-hearted praise for its move to slash solar incentives.
The State government has replaced the Brumby regime’s Premium FiT scheme with a reduced incentive program, slashing the return from 60 cents per kilowatt hour to 25c and capping the scheme at 100MW.
While deploring the cut, arguing that rising power bills over the next five years (the life of the new arrangement) will exceed what’s on offer, NECA says at least this arrangement provides a softer landing for the industry in Victoria compared with moves elsewhere to close down corresponding schemes.
Customers who are already in the Brumby scheme will go on receiving the 60c rate until 2024.
The Climate Institute did us all a favour during August in setting out to lambast the Coalition over its “direct action” approach to carbon abatement.
Leave aside the debate over a carbon price through taxation (which the Climate Institute favours) versus asking emitters to bid for taxpayer-funded subsidies to abate (which it opposes).
Leave aside also the fact that the Gillard intends that a very large part of this abatement be obtained by purchasing credits overseas – see the “deadweight loss” comments above on this aspect – when no efficient global scheme exists or is likely to exist this decade.
The favour is that the Institute has added up the Australian budget for abatement in terms of volume for what is left of this decade (just over nine years).
The target, as claimed by the federal government, is now 160 million tonnes of annual abatement in 2020. It was claimed by Kevin Rudd to be 144 million tonnes, but continuing growth in energy use and economic activity has pushed it higher.
The Climate Institute reckons that the cumulative cut in emissions for the decade is 713 million tonnes, equal to 15 months of national output of greenhouse gases – or, if you like, to closing down Victoria’s Hazelwood power station almost 45 times.
But even this figure is somewhat deceptive.
If you believe, as I do, that the real target (because of economic growth) will be 200Mt a year in 2020, the cumulative amount by 2025 is likely to be about two billion tonnes.
Others (see above) have been doing arithmetic out to 2050, but for me 2025 is far enough for the moment.
Between now and then, under this scheme, we are setting out to impose tens of billions of dollars in extra cost from this measure alone – and then you add the cost of the RET(which could be increased – see above) and other decarbonisation programs -- on Australian business (users of 72 per cent of power supply) in a period with the hairiest economic outlook since the Great Depression 80 years ago.
This, of course, is not the propaganda being emitted by the Gillard government using $12 million of our money to persuade us to swallow Julia Poppins’ medicine – but the electorate seems to instinctively understand the point because more than 60 per cent of those answering opinion polls believe we are going to be worse off under the carbon scheme.
Attacking the Coalition over its ill-defined and worse-explained “direct action” proposals does not get us over the hump of what is bipartisan policy: delivering on the 713 million tonnes of abatement this decade or two billion tonnes by 2025 – and doing so at a time when our rivals in global trade are mostly not doing anything equivalent.
For the Climate Institute, assuming that Tony Abbott will win the next election (which about nine out of 10 Australians must now be thinking) and then have to pursue a double dissolution follow-up election to destroy the carbon price scheme, the big question is “how do we think the economy will cope with five more years of carbon uncertainty?”
Is it not possible that, in this global economic environment, the bigger question is how will the Australian economy cope with a massive self-imposed extra cost between now and the mid-Twenties?
The green (and Labor) mantra is “the sooner we introduce a price on carbon, the cheaper our response to climate change will be.”
The reality is that the heavy lifting in global abatement, if we can manage a worldwide agreement, is not going to occur this decade but in the late Twenties, the Thirties and the Forties.
You have to have Copenhagen-type stars in your eyes to believe otherwise. Which American president is going to impose a carbon cost this decade? No US, no global scheme.
Twelve million bucks worth of print and electronic media bluster cannot disguise this.
Today, thanks to the Climate Institute, we now have a better picture of the size of the self-imposed challenge this decade (and just beyond) and this should drive home that none of the policymakers have a viable plan to address it.
Which is what you get, of course, when you put the carbon cart so far ahead of the energy policy horse and then hobble the horse with such cords as a non-nuclear policy and, at a different end of the scale, a refusal to support fuel cell energy for households because it is gas-fired even though it will deliver more abatement than solar rooftop arrays.
The “unintended consequence” – the bureaucrats’ get-out phrase for policy stuff-ups down the ages – of this exercise could be that we are weakened in our ability to pursue the real abatement task in the Twenties and beyond.
The Climate Institute may be right in saying that the big challenge is what Tony Abbott can do once he is in office, but the immediate question is whether the sensible members of the ALP federal parliamentary team are going to go along with this extra-ordinarily bad idea (in its present form) to the bitter end?
The coup that removed Rudd just over a year ago had at its core a sensible understanding that the carbon scheme, as proposed, was bad policy and should not go ahead.
Gillard at the last election pledged us that this would be the case.
Whatever her reasons, she reneged on that promise and has pursued the policy with even more vigor and spin than her predecessor.
The simple fact now is that, 14 months after the coup, the carbon scheme, as proposed, is still bad policy and should not go ahead.
The economic environment in which it is being pursued is even more dangerous than in July 2010.
Can the ALP parliamentary membership muster the fortitude to repeat what it did before and finally halt this cart before it plunges, with all of us on it, in to the ravine?
7 September 2011
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