Coolibah Commentary

Issue 166, February 2019

Having weathered the opening blasts of summer (notwithstanding the Victorian heatwave hassles), writes Keith Orchison, eastern Australia still faces many energy issues before the New South Wales election late next month and the federal poll in autumn, not least the ongoing threat of high gas prices for the manufacturing sector, a key feature of the Australian Domestic Gas Outlook conference that will be held in Sydney early in March. Meanwhile, with the climate change wrangling continuing unabated as political pointscoring ahead of the elections, the green argument has been bolstered by an OECD country report released in January that argues, despite carbon emissions in the NEM in 2018 being 21 per cent below their peak in 2008, for a “major shift to clean energy.” The beleaguered federal government, on the other hand, maintains its stance that the main game is energy affordability and reliability. The supply picture amid high heat and humidity on the east coast emphasizes that black and brown coal generation remains today by a long way the backbone of the market. And then there is the federal government’s ongoing company-bashing ploy………

Quotes

“The bill would constitute the largest-ever peacetime intervention by a government in to a market” – Craig Emerson in a submission to Senate Legislation Committee on proposed energy market misconduct legislation.

“Short-term, supposedly populist policies, do not address the fundamental reasons for high electricity prices” – Andrew Richards, CEO, Energy Users Association of Australia, on the same draft legislation.

“The case for intervention to reduce market concentration has been poorly made” – Grattan Institute submission to the Senate committee.

“It’s been rushed and it hasn’t been thought through” – Catherine Tanna, CEO, Energy Australia.

“Fully renationalizing the electricity industry is the only sensible solution to drive down costs and eradicate energy market misconduct” – Electrical Trades Union.

“The energy companies may not be perfect, but yelling at them isn’t a substitute for a coherent energy policy” – Chris Richardson, Deloitte Access Economics.

“Given the complexity and unique design features of the NEM, it is imperative to design a competition framework that does not unduly interfere with efficient risk management structure or distort market-clearing mechanisms and responses” – Innes Willox, CEO Australian Industry Group, in a submission to the Senate committee.

Melting moments

The late January problems in Victorian power supply flowing from a severe heatwave sparked the usual media fuss and political hyperbole – with the State’s mass market consumers left rather in the dark over how their needs were actually met when load-shedding, which lasted 2-3 hours on 25 January, was not in place.

Victorian Energy Minister Lily D’Ambrosio encapsulated the spin the recently-relected ALP government wanted to impose when she told media: “The fact is our thermal generators are aging, they are becoming less and less reliable. Wind power came through today – it produced sufficient power generation. Our large batteries were available when we needed them most. Renewable energy is the way of the future and the here and now.”

Federal Energy Minister Angus Taylor retorted that “it was gas, coal and pumped hydro that provided Victorians with the vast majority of their energy whereas solar exited just as demand was at its peak and wind was unable to increase its output to compensate.”

The actual power supply from generators in the State on a day when Melbourne’s peak temperature exceeded 42 degrees was brown coal plant 75.6 gigawatt hours, gas plants 40.7 GWh, hydro 28.9 GWh, wind power 17.3 GWh, net imports from interstate 10.5 GWh, large solar 2.4 GWh and battery power 0.06 GWh. The estimated use of rooftop solar power was 7.2 GWh. Two-thirds of the day’s supply came from the State’s coal and gas plants.

The State’s load needs at the peak of 25 January demand neared 10,000 megawatts – the record for Victoria was set 10 years ago at 10,496 MW.

Meanwhile, a week later, New South Wales capacity requirements reached 14,435 MW, just 400 MW below the 2011 State record, on a day of 39 degree coastal heat without any need for load-shedding. (Just over 193 gigawatt hours of the day’s NSW power generation came from its black coal power stations, more than 15 GWh from imports and almost 20 GWh from wind and large solar power.)

Audrey Zibelman, CEO of the Australian Energy Market Operator, told media the extent of the Victorian problem had been a “surprise,” adding “our forecasts were that this wasn’t going to be too hot a week; with all generators running it would not have been an issue.”

Energy Australia’s Yallourn power station in Gippsland had one unit under maintenance and another of 300 MW suffered a tube leak while a unit also had to be taken off-line at AGL’s Loy Yang station. Available wind capacity fell as low as 25 per cent in hot, still conditions.

Ariel Liebman, deputy director of Monash Energy Materials & Systems Institute, told the ABC that, while the day’s outages were unfortunate for those who experienced them, “they are a demonstration of the grid operating as it should.” He said outages are designed in to the system, trading cost versus reliability.

Uncertainty factor

The Australian Industry Group, representing some 60,000 businesses, says uncertainty over whether the east coast electricity system can cope with increasingly common extreme heat events “cannot be allowed to become a regular feature of the economy.”

CEO Innes Willox says the cost to business of events such as the 25 January load-shedding in Victoria in downtime, lost production and lost inventory is “highly significant.”

He adds: “After many years of sweating increasingly decrepit old generators and dissuading new investment through policy chaos, it is hard not to conclude that parts of the energy system belong in the third world. There are many possible points of failure across our interconnected electricity system when the weather is at its worst.”

The events in Melbourne and other parts of Victoria after 36 hours of hot weather, he says, demonstrate how fragile the energy system has become and how the NEM grid is struggling to meet demand.

Price spike probe

The Australian Energy Regulator will report by 26 March on what triggered Victoria’s and South Australia’s high wholesale prices in the heatwave events of late January.

The regulator notes that it is routinely required to report spikes above $5,000 per megawatt hour and in the two States in the fourth week of January the spot price reached the market cap of $14,000 a number of times.

2018 profile

Wind farms provided 7.4 per cent of generation in the NEM in calendar 2018.

Data published by Creative Analytics also shows solar farms providing one per cent of the market’s power (with rooftop solar adding 4.3 per cent) and hydro 8.6 per cent.

Almost 80 per cent of supply came from fossil-fuelled generation – led by black coal plants (54 per cent) followed by brown coal units in Victoria (17 per cent) and gas plants (8.1 per cent). Use of gas, affected by ongoing high wholesale prices for the fuel, dropped by 5,660 gigawatt hours.

The use of variable renewable energy in 2018 was 12.6 per cent versus 9.8 per cent in 2017.

‘Distorted’

Federal Energy Minister Angus Taylor says signals sent by State Labor governments “through reckless emissions targets,” together with the falling costs of variable renewable energy, especially solar, “have distorted all focus away from reliability” in power supply.

The Morrison government, he asserts, is “now sending a clear signal that we need more reliable, 24/7 generation to keep the lights on and drive down prices – we’re directly addressing the incentive to keep the lights on and keep prices down when demand is strongest.”

One step, Taylor says, is the NEM retailer reliability obligation (which he claims was “passed through a recalcitrant CoAG Energy Council”) and the other is to underwrite new generation in the NEM. He adds that the government has received 66 submissions to the underwriting scheme – “a balanced mix of coal, gas and hydro” with the strongest interest in building new gas generation.

The mooted projects reportedly add up to 29,000 megawatts of capacity, including 10 coal-related developments.

Taylor says the government approach will not favor any type of “firmed” generation over any other. “We will always encourage a commercially-driven shift to renewables,” he told media, “but not at the expense of affordability or reliability.” He aims to have the first phase of the scheme start on 1 July.

The majority of the applications for support are in New South Wales (26), Victoria (17) and Queensland (12).

Consider upgrades

The Minerals Council of Australia has criticized the Australian Energy Market Operator and CSIRO for failing to consider the value of upgrading existing power stations in their December report on generation costs.

MCA chief executive Tania Constable says: “Not surprisingly, the GenCost 2018 report confirmed the fast-evolving nature of energy technologies – particularly the falling cost of renewables. This gets a tick – a reduction in emissions is a good thing for Australia.

“What the report didn’t do was consider upgrades at existing baseload plants. This means that AEMO and CSIRO missed a golden opportunity to consider an important way of lowering power prices, ensuring reliability and lowering emissions through advanced coal technology.”

Constable says the GenCost 2018 study underpins AEMO’s integrated system plan released last year – “but this plan failed to consider whether upgrades of existing plants might provide the cheapest way to lower prices, ensure reliability and lower prices.”

She adds that “in the same way, we need to have an honest conversation about the role of nuclear power,” saying “if we are truly serious about reducing emissions in a world where energy demand is only increasing, nuclear power must be on the table.”

Battery charge

Bloomberg New Energy Finance claims that Australia will be the world’s biggest home battery mark this year as 70,000 households install them, taking advantage of an estimated $147 million of State government subsidies. And it points to a policy promise by Labor leader Bill Shorten to add a further $200 million in subsidies to support residential sector investment in another 100,000 batteries from 2020.

BNEF forecasts that Australian purchasers will account for 30 per cent of global battery demand this calendar year.

Rising renewables

The Clean Energy Council declares development of renewable energy projects in Australia “amazing,” pointing to 14,000 megawatts of new development underway, including 80 wind and solar farms budgeted to cost $20 billion.

“Add in projects completed during 2018 and the figures grow by another $6 billion,” it says.

CEC also points to the number of Australian homes with rooftop solar power reaching two million in 2018, led by Queensland where there are now almost 600,000 installations on nearly 30 per cent of the State’s dwellings.

Meanwhile the Open NEM market monitoring website, looking at 12 months from February last year to the start of this month, reports that estimated rooftop solar use was 8,405 gigawatt hours.

Of the 194,992 GWh generated to the east coast grid in this period, Open NEM reports that 2,123 GWh was provided by solar farms, 14,325 GWh by wind farms, 16,645 GWh by hydro systems, 225 GWh by biomass and 42.4 GWh by discharging batteries.

The data also shows generation of 109,856 GWh by black coal power stations in NSW and Queensland, 35,509 GWh by brown coal plants in Victoria and 16,241 GWh by gas-fueled units – plus 22 GWh from diesel generation.

‘Major shift’

A new country report by the Organisation for Economic Co-operation & Development will provide grist to Labor’s political mill in the run-up to the NSW and federal elections by its assertion of the need for renewable energy to be more effectively integrated in Australian electricity supply.

The OECD in its third environmental performance report on Australia says this country needs to develop a long-term strategy that integrates energy and climate policies, urging consideration of carbon pricing.

The report says energy taxes in Australia do not reflect the climate cost associated with fuel use.

Speaking in Canberra, OECD executive Anthony Cox pointed to coal, oil and gas making up 93 per cent of Australia’s overall energy mix compared with an average 80 per cent among the body’s 36 member countries – and to the power sector not being subject to emissions reduction constraints. He said Australia’s renewable energy use in power generation, at 16 per cent, is well below the OECD average of 25 per cent.

Cox also pointed to the power sector, responsible for 34 per cent of national emissions, continuing to rely on coal for two-thirds of generation “not subject to abatement constraints.”

The report says that, despite the national economy overall becoming less energy intensive, it remains highly carbon-intensive. The OECD recommends bringing energy taxes in line with the environmental impacts of fuel use, including extending road use pricing through distance-based and congestion charges while increasing the use of public transport.

Federal Environment Minister Melissa Price has reacted to the report by telling media that the government “has the right policies in place to meet our targets.”

Bill condemnation

Submissions to the Senate committee scrutinizing the Morrison’s attempt to take a big stick to energy retailers use quite a lot of words to send two messages: the misconduct bill isn’t needed and it won’t work.

In a capsule, the submission by Engie (owners of retailer Simply Energy) condemns in the proposition in eight points:

• The bill doesn’t set out what prohibited conduct is or isn’t.

• Where is the argument that the powers sought would have resulted in better market outcomes in the past?

• The bill may impede retailer management of wholesale pricing volatility and risk.

• Obligations it would create on generators in offering contracts are unnecessary or a duplication of existing requirements.

• The electricity contract market is very complicated and the bill requires low standards of evidence.

• Prohibitions proposed for the spot market may inadvertently make legitimate operating and commercial decisions inappropriate.

• There could be “stark” consequences from the forced divestment powers proposed.

• Proposed additional powers for the Australian Energy Regulator have been developed without consultation.

• The bill is likely to add further compliance burdens for suppliers that will see further costs transferred to consumers.

Among other submissions, the Queensland Law Society expresses concern that the government proposes to give itself or a body it sets up powers to determine electricity prices without providing a review or appeal process.

The Business Council dismisses the bill as “ad hoc and extreme intervention” in the electricity market, bringing new risks and unintended consequences – and pursuing anti-competitive behavior that is already dealt with under existing laws and rules. The approach, it says, goes well beyond what the Australian Competition & Consumer Commission proposed in its recent report. And the BCA is “alarmed” that “there have already been calls by some in parliament to extend this legislation to banks, superannuation and supermarkets.”

It declares the bill “contrary to creating an attractive investment climate” for the electricity market.

A former Labor federal minister for competition policy and consumer affairs, Craig Emerson, now an economic analyst, says the bill “would constitute the largest-ever peacetime intervention by a government in to a market.” He adds that, “by regulating retail margins at their lowest-possible levels, the bill is anti-competitive in effect, making new entry in to the electricity retail market unattractive.”

Queensland Energy Minister Anthony Lynham is calling on the Morrison government to bring the market misconduct legislation to the next CoAG Energy Council meeting for discussion, saying that, as drafted, it “provides at least three pathways” to force the sale of State-owned power assets to the private sector.

Time for a charge

“Is it time to levy location-specific network charges on all generators as a means of eliminating cross-subsidies and providing clear price signals for the location of new generation?”

Robert Barr, president of the Electric Energy Society, believes it is.

Writing an EESA column in a trade magazine, Barr says: “For many years we have seen cross-subsidies drive up costs for customers. If we can make sensible, cost-reflective changes to the way network services are levied, we have an opportunity to keep downward pressure on long-term costs.”

As a general rule, he points out, power generators across Australia do not pay network service charges. Large customers pay the cost directly while, for the mass market, the charges are essentially unseen, mixed in with many other cost components.

Bearing in mind the AEMO integrated system plan, which proposes renewable energy zones across rural and regional Australia, Barr says, continuing with the present charging approach will create new cross-subsidies “from generators with high capacity factors near load centres that achieve high network utilization to intermittent low-CF generation distant from load centres.”

‘A lot to fix’

Momentum Energy, which is owned by Hydro Tasmania, says research it commissioned shows that 82 per cent of respondents care most about retailers offering an affordable price – and 94 per cent “find it a hassle” to deal with retailers.

The survey also found 53 per cent of respondents want “simple, easy to understand rates,” 51 per cent value good customer service and 38 per cent prefer companies to be Australian-owned.

Only 49 per cent of respondents think their current energy plan suits their needs and 34 per cent think they are being “ripped off.”

Meanwhile 17 energy companies in association with Energy Consumers Australia have published what is claimed to be a world-first charter of industry behavior for the supply chain. Essential Energy CEO John Cleland says that it will “allow customers to see clearly what we are doing and us to hear about what we could do better.”

Part of the charter is an independent annual review of the supply sector. Participating companies will report on prices, reliability, customer services and emissions reductions.

Energy Consumers Australia CEO Rosemary Sinclair says the charter “represents a serious effort by the industry to address prices and reliability without the need for legislation.”

EnergyAustralia CEO Catherine Tanna says: “The charter is a good start; ultimately though we will be judged on what we do, not on what we say.” She adds: “There’s a lot to fix.”

Electrical Trade Union secretary Allen Hicks, however, dismisses the charter as “a fig leaf,” claiming it will allow “for-profit practices to continue while real problems go unaddressed.”

Last word

The Grattan Institute makes an interesting point when it poses the question of whether summer power failures are the “new normal” in eastern Australia.

After all, the institute says, summers are getting hotter and the coal power stations are getting older. On hot days, it declares, it’s very likely now that something in the power system will break and cause some consumers to lose power.

Research by the institute covering the past nine years indicates that customers are likely to be without power for 3.5 times longer on days where the maximum temperature exceeds 35 degrees.

However, as the institute says, high heat puts stress on all parts of the power system, not just generation. “Wires sag and short, fuses blow, transformers overheat and fires and storms damage power lines.”

Generation issues are at present attractive clickbait for the media – they have been especially so since events in South Australia in 2016 followed by all the political shenanigans in the Coalition over carbon abatement measures and the retirement and replacement of coal-burning power stations.

But, the Grattan Institute says, there have been generation shortfalls in Australia on only three days in the past 14 years – while there are network failures every summer all round the country every year. (And, I’d add, in other seasons as well because the grid is exposed to weather extremes, lightning strikes and so forth.)

The institute goes on to make the point that network system failures early this century led to heavy investment, especially in New South Wales and Queensland, on upgrading the “poles and wires,” feeding in to large increases in residential power bills down the track, the origin in fair part of the “energy crisis” called by Malcolm Turnbull two years ago.

Some $35 billion overall was spent on pursuit of better networks, a bone of contention today with all sorts of pundits, not least the institute, which lobbies for asset write-downs, the debate seasoned by the privatization of much of the sector.

Forgotten in a lot of this is talk are three things: (1) years of deliberate suppression by State governments of network capital spending for wholly political reasons contributed to the need to spend big when it became apparent that the run-down system could no longer cope, (2) the trade union movement played a large, venal role in pushing for very high reliability standards in Labor States where they had considerable clout with government, and (3) what situation would we have today without a lot of this outlay?

It is true that some of the network capex was driven by a widely-held view that power demand would continue an inexorable rise, especially peak demand, and, for a variety of reasons, this has not eventuated in the second decade of the century – but you would have been hard-pressed as late as 2008 to find more than a handful among leading stakeholders who did not expect the consumption line to continue trending up.

It is also true that the efficiency with which the networks pursued asset management has been called in to question, notably by the Australian Energy Regulator, and that the legal lengths the networks pursued in response to regulatory decisions eventually led to restrictions on how far they can go in this regard – to general applause.

In fact, even as the latest fuss was breaking over power failures, the AER was announcing the final outcome of the longest of disputes with the largest of the network businesses, Ausgrid.

Back in 2015 Ausgrid proposed to recover some $12 billion in revenue from consumers for the 2014-19 period and the regulator slashed this to $8.7 billion. After years of legal and other sparring, the final outcome is allowable revenue of $9.1 billion, meaning customers will get back almost $311 million in the new regulatory period ahead.

(The whole regulatory process is about as arcane as anything in Australian life and way over the heads of the customer base – which is why politicians, journalists and others opt for epithets like “goldplating” to convey their point.)

Suffice to say that, in just one network franchise area, the bill for keeping reliability as high as possible is $9 billion-ish over four years.

It’s a lot more for the NEM as a whole – and still, as the Grattan Institute points out, parts of the system fail from time to time, especially when the extremes of weather affect it.

The big thing that needs to be kept in sight is the challenge for electricity suppliers, policymakers and regulators is to deliver acceptably reliable and affordable power – then also to do so with a system that meets socially-acceptable carbon emissions. And the greater the use of intermittent generation in areas remote from load centres, the more expenditure will be needed on both augmenting the grid and then maintaining the enlarged system.

And always there will be the need to respond to the community’s reaction to heatwaves and fiercely cold spells – as, for instance, in South Australia on 25 January, when householders, suffering in a serious heatwave, helped push State demand up to 3,200 megawatts (double the average level) at noon and kept it there until 8pm.

It took significant supply effort and market management to cope with such pressure via generation, interconnection with an equally troubled Victoria and local distribution. And, until the sun started going down, from household investment in rooftop solar power (at no small collective capital cost).

The Grattan Institute’s Tony Wood has observed in a newspaper op-ed as I write this newsletter that this is a nasty problem. “People,” he declares, “are entitled to be frustrated and angry.”

Well, in my view, up to a point this is true – but people (ie the community) in their voting reactions with activists sooling them on and politicians playing populist games also bear some of the blame.

For example, the South Australian Labor government that presided over much of the electricity mess in that State was elected and re-elected over years on its great green agenda (until a light dawned and they were flung out last March).

The community, it seems to me, has an obligation to better understand the challenges of reliability, affordability and sustainability. Sure, the electricity system is highly complex, but no-one is asking Joe or Jo Citizen to operate a power station – just to think with other parts of their anatomy than their knees or hip-pocket nerves and to go a bit further to be informed than via political and activist soundbites.

Wood asserts that what is needed to deal with where we are in energy terms now is a “calm-headed, fact-based response, devoid of political positioning and/or over-reaction.”

He is, of course, 100 per cent right – but it’s an obligation that falls widely across our community as well as especially on the mainstream media and on policymakers and their advisers.

Australians need to be a lot better informed than they mostly are at present and to be a lot more skeptical about the claims constantly hurled at them. Being gullible comes at a cost.

Keith Orchison
1 February 2019

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