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Coolibah Commentary

Issue 161 September 2018

How far energy policy played a role in the collapse of Malcolm Turnbull’s prime ministership is a matter for debate. More than a few other factors were also in play. But the future of electricity policy is now again up in the air and the chances of it being settled before the next federal election (whenever that may be in a febrile environment) are slim. From a political perspective, as new PM Scott Morrison made clear in his first speech, power bills are high on the Coalition agenda. Morrison has dubbed his new Energy Minister “the minister for getting electricity prices down.”  How regulation may be used to drive these reductions is a source of heartburn for retailers. Meanwhile State and Territory governments may see the inability for effective energy and climate policy action at the federal level as opening more opportunities for them. And, for all NEM jurisdictions, the spectre of energy supply security is ever-present at their shoulders.

AEMO ‘confident’

The Australian Energy Market Operator claims to be “confident” that, together with industry, it can manage power supply in Victoria – the State now seen to be most vulnerable to security issues – during extreme heat in the summer ahead.

Temperatures of 40 degrees or more in Victoria could bring about load-shedding, the operator’s new market review says, adding that it has taken action to deal with such conditions, including contracting additional emergency reserves.

AEMO declares it has factored in an increased supply risk flowing from thermal generation reliability trends in recent years. It also sees some risk in New South Wales if the current drought affects availability of hydro power and cooling water for coal plants.

There is a network reliability uncertainty, too, if bushfires impact on southern mainland State interconnectors.

Quotes of the month

“These are dark and disruptive times for Australian energy companies. Instead of getting the security of the national energy policy they have been seeking for the better part of a decade, they have instead become pawns in unpredictable and punitive energy politics” – columnist Matthew Stevens in The Australian Financial Review on 19 August.

“Recent high power prices are driven by increased wholesale prices. That’s because we’ve seen more than 5,000 megawatts of power stations close since 2012 and no like-for-like replacements. Replacement investment demands bipartisan policy and the lack of it remains the biggest drag on the energy market” – Australian Energy Council’s Sarah McNamara on 20 August.

“The (Turnbull government’s) decision to abandon the national energy guarantee’s emissions target is terribly disappointing – but the States still need the policy’s reliability obligation in place as they add more renewable energy to the grid” – Energy Security Board’s Kerry Schott on 21 August.

“I think the truth is that the Coalition finds it very hard to get agreement on anything to do with emissions because of bitterly entrenched views that are more ideological views” – outgoing PM Malcolm Turnbull on 24 August.

“Without the NEG we have limited options to manage system reliability – which may result in escalating costs of repeated interventions by the market operator,” – Andrew Richards of Energy Users Association, which says its members employ more than a million Australians and pay $billions in energy bills each year.

New minister

One of the toughest tasks for a new minister in the Morrison team falls to Angus Taylor as Minister for Energy, succeeding Josh Frydenberg but with the environment portfolio once again to be pursued separately. He has to pick up the pieces in the wake of what is perceived as an energy policy meltdown that contributed to the Liberal leadership change and faces a critical meeting of the CoAG Energy Council in December as well as the challenge of being seen to drive power price reductions.

Taylor is no tyro in the energy field. Prior to entering politics as MP for Hume, he was a director at Port Jackson Partners where he focused on the resources, energy, infrastructure and agriculture areas. Before that he was a partner at the global consulting firm McKinsey & Co (where he specialized in agricultural issues). He was also a member of the Peter Reith-chaired working group charged by the previous Liberal government in Victoria with investigating new gas developments in the State.

In a sense, he is bred to the energy field – his maternal grandfather was Sir William Hudson, founding commissioner and chief engineer of the Snowy Mountains scheme for almost two decades. Taylor says his decision to leave a successful private sector career and enter politics was influenced heavily by Hudson’s record as “a great public servant.”

His new appointment won’t be popular with some green energy activists because he has previously spoken out against wind energy as a cheap way to reduce emissions and because of the intrusion of wind farms in to rural communities. He supported the scrapping of the RET.

On the other hand, he has spoken strongly in the past for the role of rooftop solar energy in regional Australia, saying it can play a prominent role in delivering lower-cost electricity and carbon emissions abatement at a low cost.

He has been described by one pro-green journalist as “an anti-wind campaigner who is no climate sceptic.”

Asked by journalists at his media conference to announce the ministry if splitting environment and energy meant his government would not see energy policy through the lens of climate change, Prime Minister Morrison responded: “The challenge we have is reliability, price – keeping the lights on and getting the prices down.”

‘Challenging’

One of the more important reports lost to view in the wild political scramble that erupted in late August has been the latest survey of the east coast gas scene by the Australian Competition & Consumer Commission.

The ACCC found that, while there have been improvements in the east coast supply outlook and operation of the market, “many users find conditions extremely challenging as gas prices remain significantly higher than historical levels.”

The commission points to factors including AEMO forecasting a sharp fall in gas generation requirements – from 176 petajoules in 2018 to 88 PJ in 2019 – as well as higher production in Victoria and the start of gas flowing from the Northern Territory.

However, it warns that east coast prices may increase to reflect higher Asian LNG spot prices. While many eastern Australian C&I users are pursuing strategies to cope with market dynamics, it adds, “many still face difficult long-term investment decisions and questions about their long-term operations.” These users report continuing to receive offers for gas supply at prices two to three times historical levels and on less flexible terms. Most of them are still negotiating for 2019 contracts.

ACCC chairman Rod Sims says an improvement in east coast market conditions requires a greater level and diversity of supply, a more efficient transportation system and greater transparency.

Ups & downs

The latest market review by the Australian Energy Market Operator, covering the second quarter of 2018, shows fluctuating fortunes for coal-fired generation and hydro power.

AEMO reports that average black coal generation capacity reduced during Q2 because of planned and unplanned outages in New South Wales at the Bayswater and Eraring power stations. Average output at Bayswater was down 314 megawatts compared with Q2 last year and it fell 282 MW at Eraring, resulting in a 63 per cent quarter-on-quarter increase in the State’s imports of electricity.

Meanwhile Yallourn brown coal power station in Victoria had one unit on a planned outage for three-quarters of Q2 this year.

Hydro generation, on the other hand, had its highest average capacity use in this quarter since 2016 and set a new record for the NEM. This was in part due to the prolonged outage of the Basslink interconnector which saw Tasmania relying on domestic supply for April and May at a time when the State’s gas generation was also unavailable. AEMO also notes that cumulative generation from Snowy Hydro so far this year is only slightly behind its record 2016 output.

The largest mainland increase in hydro use occurred in NSW, with the technology setting wholesale prices in the State for almost a third of the quarter. However, says AEMO, black coal generation remained the dominant price-setting fuel type in the market in Q2.

The operator also points to wind generation being up 546 MW in Q2 compared with the same period of 2017 when there were low wind conditions. Output was also affected by 154 MW of new wind farms joining the market.

The report notes the ongoing growth of rooftop PV generation in eastern Australia, with the estimated daily maximum generation from this source in the NEM rising 421 MW against the same period last year, reaching 2,637 MW in Q2 this year. This, says the operator, reflects a record amount of new capacity installed in 2017 (more than 1.06 gigawatts) plus another 500 MW installed in the first half of this year.

Record low

AEMO reports that annual carbon emissions in the NEM in the 2017-18 financial year were the lowest on record for the market in terms of both absolute output and emissions intensity.

The drivers, says the operator, were the closure of Hazelwood brown coal power station in Victoria in March last year and increased generation from renewable sources.

It reports a large increase in hydro generation (663 MW) and variable renewables (703 MW) and a considerable decrease in gas-powered generation (697 MW) for Q2 compared with the same period in 2017.

Grid model

Consultants Ernst & Young think Australia’s monopoly transmission companies need to reconsider their business models in an environment where there is a “plausible” threat of increased competition in connection services.

EY power and utilities advisor Simone Zawadski says recent changes to the national electricity rules provide the impetus for more rivalry in high voltage services at a time when there will be demand for new transmission investments and with the most likely competitors for incumbent networks already active in the marketplace.

Zawadski says AEMO’s recently-released integrated system plan clearly identifies the need for future investment in transmission infrastructure as the NEM shifts to significantly greater renewable energy penetration and energy storage.

One prospect, she adds, is that the design, engineering, procurement and construction companies to whom incumbent transmission businesses frequently sub-contract their developments at present may now want to compete for connection services in their own right. This trend, she says, is already evident overseas, notably in North America.

She warns the incumbents here against a false sense of security but says it is more likely that they will set out to exploit their geographical positions, market visibility, local experience and existing relationships with customers. They will need, however, to build new strategies, she adds, to get ahead of the rising competition.

More nimble

Simon Corbell, former ACT deputy chief minister and energy minister and now an advisor to the Victorian Labor government, says it is now clear that sub-national governments can act more quickly on energy and climate policies than the federal level and with greater innovation. They have, he observes, the constitutional powers and ability to act decisively in these areas.

Corbell points to State and Territory leaders being held more directly accountable for fires, floods and storms he sees as the impacts of climate change. “Energy affordability and jobs creation in the renewable energy sector are also critically important areas on which voters, especially in regional areas, are judging governments. Closer to the action and more directly accountable than the federal government, States are responding by embracing the opportunities renewable energy presents.”

He adds: “While sub-national government action is often derided as sub-optimal, the track record of the federal level of government is dismal. With the demise of the NEG, it’s time for forward-looking State and Territory governments to build on their record of success and innovation in supporting renewable development.”

Smart meters

The Australian Energy Market Commission says more than a half million electricity smart meters have been installed across the east coast market.

However, the commission acknowledges there have been customer complaints in some regions about installation delays – and “instances where customer service from retailers and metering businesses has been poor.” It says it is working with regulators, ombudsmen and industry, notably in South Australia, to resolve implementation issues “as quickly as possible.”

Price perspective

Grattan Institute energy program director Tony Wood warns that all prospective replacements for the existing fleet of coal-fired power stations are going to deliver electricity at wholesale prices around $80 per megawatt hour.

In a newspaper interview, Wood asserts that policy moves to favor coal, as promoted by some in the federal Coalition, will not push down costs. “Anything we replace these ageing power stations with is going to be more expensive, whether more coal, gas or renewables. The cost of coal is going to stay where it is while there is a probability that the cost of renewables is going to continue to fall.”

Turnbull’s last word

Before the wheels fell off his prime ministership, Malcolm Turnbull published a statement on energy policy that deserves not to be lost to view in the wreckage.

Acknowledging again at the start of the week of his downfall that electricity prices are too high, Turnbull said: “There’s no single reason for higher prices and no single solution to fix (them).”

His government intended, he said, to “set a price expectation that should be the most anyone pays.” If through the steps to be taken, prices did not come down, “we will implement the toughest penalties until (consumers) are getting value for money.”

He added: “We will not hesitate to use a big stick, as we did with gas, to make sure the big companies do the right thing by their customers.”

Turnbull said: “Australians cannot afford for politicians to keep arguing about power prices any more. I know (they) want us to get on and fix the problem now.”

He condemned Bill Shorten and the ALP for “only having a plan to put electricity prices up” via “reckless emissions targets and even bigger subsidies while driving traditional power companies out of business,” saying that “as the ACCC reminds us, we have to stop subsidizing one technology or another.”

By default

The power price steps announced by the federal government on 20 August were co-authored, along with Malcolm Turnbull, by Scott Morrison, now Prime Minister, and Josh Frydenberg, now Treasurer.

It directs the ACCC and the Australian Energy Regulator to set default prices for households as well as small to medium businesses to replace current standing offers in New South Wales, Victoria, South Australia and south-east Queensland, regions where prices are today not regulated.

Under the approach, the AER will be given powers to set a maximum price for default offers in each region. It is claimed the gains for householders will range from $183 a year to $416 – and that small businesses will benefit by between $561 and $1,457.

The plan proposes to impose limits on the penalties customers can face if bills are not paid on time and result in lost discounts.

The announcement also made a Coalition commitment to implement underwriting of “new, stable, low-cost, technology-neutral generation for commercial and industrial customers.”

Break-up caution

The Australian Industry Group has called for any attempt to forcibly break up electricity businesses to be treated with caution.

Reacting to Malcolm Turnbull’s statement on the “national energy guarantee” that led to the Liberal leadership debacle, AiG chief executive Innes Willox said: “The power of the threat of some intervention can be appropriate and effective as a last resort as we saw with the domestic gas security mechanism – on the other hand, forced divestiture would be a serious step that was specifically ruled out by the ACCC in a comprehensive report on improving electricity prices.”

Frontier Economics’ Danny Price told media that giving the ACCC power to break up energy companies “would be a catastrophe for the market.” He declared it would “freeze fragile investor confidence and make things worse for consumers.”

Melbourne Business School dean Ian Harper, who chaired a review of competition policy for the Abbott government, said a break-up policy would be “a blunt instrument” and could leave the electricity sector with fewer players. “Decision-makers can never be sure the individual parts of a broken-up business will be viable on their own.”

Not happy

Unsurprisingly, the mainstream generators and retailers were far from happy about the Turnbull government’s about-face on the “national energy guarantee.”

The Australian Energy Council, representing the 21 major power businesses, pushed out a media statement declaring that “re-regulation of electricity prices and aggressive market interventions are not the long-term answer to high energy prices,” which Turnbull said was his government’s over-riding focus.

The AEC harped on about the need for bipartisan policy to underpin new investment in power infrastructure in the face of political reality that the Coalition could not even muster unanimity on policy amid its own Liberal and National MPs – and the Labor side had no interest in lending a helping hand.
 
The AEC declared that greater regulatory monitoring of power prices would be “welcome,” asserting that fresh scrutiny would find its members “are, and have been, acting appropriately.”  The association added “retail price caps and other interventions” would just “treat the symptoms and not the cause.”

It argued that “re-regulation has the very real potential to damage competition and confidence” because it is so difficult for regulators to set default prices accurately. If they were set too low, it said, some energy businesses would be pushed out of the market and, if too high, would end up costing consumers more.

Polled

A Roy Morgan poll published at the end of the week of the Liberal leadership battle found Coalition electors believed the Turnbull government had been focusing too much on climate change targets and not enough on energy costs – and, among other things, needed to “introduce a government-funded energy system to play against privatization.”

Labor supporters, the polling company said, focused on “lack of action on climate change.”

Meanwhile, a ReachTell poll commissioned by Greenpeace and published in the first week of August, found that more than 70 per cent of those canvassed “wanted the government to set a high renewable target to put downward pressure on power prices.” They expressed this view after being told that energy market analysts Reputex believed more renewables in the power mix would lower bills. ReachTel said 52.6 per cent of those polled strongly agreed with the proposition and 17.6 per cent agreed versus 25.8 per cent who disagreed.

“It’s clear,” said Greenpeace, “that Australians love renewable energy and want more of it. They want the government to champion (it).”
Part of the ReachTel polling also showed that, when asked to comment on the proposition that “by 2030 sources such as solar and wind will provide the majority of Australia’s electricity,” 35.6 per cent strongly agreed, 24.1 per cent agreed, 32.9 per cent disagreed and 7.4 per cent didn’t have a view.

Last word

Regardless of a change of government whenever a national election is called, events of the past two years dictate that the political pressure to lower energy costs, and especially electricity bills, will not go away.

Contrary to much of the noise in the public “debate” (it has been and remains far more a slanging match), the market is unlikely to deliver substantial bill relief any time soon and the polarization of opinion around renewable and coal-fired generation as a means of addressing the price issue suggests any form of further intervention to pick winners can only add to contention.

As the Grattan Institute’s Tony Wood has pointed out, future wholesale prices, regardless of generation technology, are likely to hover around $80 per megawatt hour while what can happen to network charges, still the largest source of current pain, in the relatively near future is debatable.

This leaves the focus on retailers at one end and on regulators at the other – with policymakers showing every sign of relying on the “watchdogs” to force price cuts. The other prospect, and it becomes an increasingly real one as each month passes and promises of lower prices are not delivered to customers/voters, is political intervention to put a cap on charges.

The added angle is that the mass market is tired of what it sees as being gamed by retailers, tired of the tangled web of contract offers and too-clever-by-half discounts – and, perhaps, tired above all of being constantly told it is users’ own fault that they are not grasping better deals when the offerings are so complicated.

The Australian Energy Regulator chair, Paula Conboy, pointed to this in a mid-August speech in which she canvassed “new frontiers in regulation.”  Conboy said that, beyond changes in technology, there remained another frontier: trust.
The Australian Energy Market Commission, she noted, has found that consumer trust of retailers had fallen to 39 per cent in its latest survey, with only 25 per cent believing the market is working in their favor.

“Consumers,” she said, “ must trust that the businesses they are buying goods and services from are not ripping them off, price-gouging, gold-plating or misleading them.”

And she noted that trust is a two-edged sword for regulators. “Regulation must keep up with the pace of transformation and change – and with innovation, disruption and new technologies.” If it doesn’t, she said, businesses will lose revenue and consumers will lose choice – and this can lead to a loss of confidence in regulators.

It would be also fair to say, I suggest, that the AEMC polling suggests this two-edged loss of trust is already happening; as also witnessed in the banking sphere (daily illustrated at the royal commission), where consumers feel they have been failed by both the financial institutions and the regulatory process. In energy right now, they apparently hold retailers in lower regard than bankers and their ilk.

One of the last acts of the Turnbull government, via a directive from the then-Treasurer, now Prime Minister, Scott Morrison, was to instruct the Australian Competition & Consumer Commission to launch a seven-year rolling scrutiny of electricity prices following its very detailed recommendations in the review just ended. The first of the new reports will be delivered in March. As the investigation is a formal direction, the gentailers have to supply the commission with whatever information it seeks.

Suppliers, of course, are cheesed off, especially in the private sector, highlighting that the recently-completed inquiry over 18 months found none of them (apart from a government-owned entity) was engaged in market manipulation. One of them told a newspaper that the big frustration is that “this is all about politics.”
Well, they have that right – and it’s about politics because the consumers/voters are fed up with the present situation and want action.

Of course, political steps may have unintended consequences but the gentailers might have thought a bit harder about where all this was heading when the first storm signals appeared two or three years ago.

An important next step is whether the rest of NEM governments will support the ACCC recommendation of a cap on end-user prices through a regulated “default offer.” As the Grattan Institute comments, this has short-term appeal in that it will reduce charges for the relatively small number of households currently on bad deals. In Victoria, for example, this is seven per cent of residential accountholders. But, as the institute also says, the danger is that politicians may be tempted to use price caps across the board.

It argues this is “likely to damage competition and inadvertently benefit the biggest power companies” because an “aggressive” cap could prevent many retailers from recovering their genuine costs of supply. Eventually, it says, fewer retailers would see savings from lower margins offset by cost rises in a less competitive market. “Now,” it declares, “is not the time to abandon market-based competition.”

Economically, it’s right. Politically……..well that’s another story and does anyone need persuading, after the events of late August, that politics still conquers all?

Keith Orchison
27 August 2018