Coolibah Commentary

Issue 140, December 2016

Another year seething with incident and contention in the electricity and gas sectors is coming to a close, writes Keith Orchison, with little certainty about security of supply, pricing, regulation or policies. Economist Judith Sloan declares energy policy has “become a racket” and calls for “the madness to stop.” A law firm says “Australia is a fascinating case study in the global energy sector.”  Major industry users complain of “complicated and inconsistent” federal and State energy and climate policies that make it difficult to judge what a “fit for purpose” business model should be. We all keep commenting “it can’t go on like this” – but it does. The best that can be said about 2016 is that, after years of barrow pushing on carbon abatement above all else, events have served to put energy security issues back on media front pages in a big way. Will 2017 be the year that a durable, cohesive national strategy on energy security and sustainability at the lowest possible costs finally emerges? The need may be glaring but don’t hold your breath.

Finkel’s triangle

Australia’s Chief Scientist Alan Finkel, delivering a lecture in Sydney arranged before he was appointed chair of the task force on NEM security, said electricity supply is “a triangle with three vital points, at the centre of which is the consumer, setting expectations and ultimately deciding if they are met.”

He told the audience at the Zunz lecture that “first and foremost, supply needs to be secure and reliable; in addition it needs to be affordable and it needs to lower our (carbon) emissions over time.”

Finkel added that conversations since he was appointed to run the energy review had made it clear to him that “the objectives are understood – as is the difficulty of balancing them.”

He said his panel’s first task is to “bring existing knowledge together in a meta review” as part of a preliminary report to the Prime Minister and State and Territory leaders on 9 December.

Meanwhile the federal Industry Minister, Greg Hunt, has talked to an Australian Industry Group dinner about a “climate of energy insecurity” and State gas policies that have the potential for a “looming crisis” affecting manufacturing investment.

Unable to avoid

The Energy Policy Institute of Australia has written to the Finkel task force to say that there are five conclusions it will be “unable to avoid reaching.”

The first, EPIA says, is that energy security is paramount. “The lights must always stay on – then the market can optimize for price and emissions.

Second, it argues, the Council of Australian Governments “has only ever paid lip service to the first principle of energy security, the need to base the system on technology neutrality and diversity.”

Third, CoAG must bear collective responsibility for the weakening of system security in South Australia “by allowing it to build up an excessive level of dependence on intermittent renewable energy.”

Fourth, “Australia’s energy governance system is at risk of becoming ever more dysfunctional.” Climate policy must be integrated with energy policy, EPIA urges.

Fifth, the institute declares that CoAG has been aware of fundamental concerns about these issues “for years – and has been ineffective in addressing them” because of a lack of a national energy vision.

Risky & uncertain

The Australian Energy Council, representing 21 electricity and gas generation and retail businesses, has told the CoAG inquiry in to the regulatory investment test for new transmission projects, launched after the first SA “energy crisis” this year, that the approval process for high voltage links needs to be examined to ensure its is sufficiently flexible to cope with the market transition.

The AEC says significant energy innovation, greater energy efficiency and continuing policy uncertainty make the outlook for any investment in the supply sector risky and uncertain.

It warns against the transmission test being changed in a way that results in consumers paying more over time because the assets are under-used when proposed generation does not go ahead.

In another submission to the Senate inquiry in to the retirement of coal-fired power stations, the council has commented that, without material changes to better integrate carbon and energy policies, Australian customers will pay more for power or potentially face more supply risk.

Meanwhile the Clean Energy Finance Corporation has told the CoAG review that facilitating a higher level of renewable energy in the market will require strategic investment in new transmission and regulation of the links should aim to facilitate higher penetration of green power in the NEM.

Experience in SA over recent years, adds the CEFC, “suggests that under-investment in interconnectors is likely to see higher and more volatile electricity prices and higher consumer costs.”

Interconnection ‘vital’

The east coast power grid needs stronger interconnection to keep the wholesale market competitive, according to Energy Networks Australia.

CEO John Bradley says interconnectors “aren’t always popular with incumbent generators because they inject competition in to the wholesale market with security and cost benefits for users.”

He says the association supports government efforts through CoAG to streamline the regulatory test for interconnection development.  “Customers need the decisions on interconnection to be robust and efficient – but they need (change) quickly.”

He adds that an interconnection project will only proceed it is more efficient than other solutions in meeting market needs.

Meanwhile research undertaken for ElectraNet, the South Australian networks business, indicates that a new link between the State and eastern supply could cost between $500 million and $2.5 billion.

The report estimates the cost of building a new interconnector from central South Australia to Victoria to be $500 million to $1 billion, from mid-North SA to New South Wales $500 million to $1.5 billion; from northern SA to NSW $1.5 billion to $2 billion and from northern SA to Queensland $2 billion to $2.5 billion.

ElectraNet says that continuation of the present situation could see $500 million a year added to SA consumer costs because of inability to access cheaper wholesale electricity interstate.

SA Premier Jay Weatherill has welcomed the study and says other States should help pay the capital cost of a new link because of better connection with renewables-rich South Australia. “It shouldn’t be a burden that falls on just one State.”

Connecting

The Australian Energy Market Commission estimates that 30 to 50 large-scale generators will seek to connect to the east coast transmission system between now and 2020.

It says more competition in connection arrangements, increased transparency of the connections process and a stronger negotiating framework between stakeholders will deliver a more efficient expansion towards “a truly national grid” (within the NEM).

The AEMC claims that changes it is proposing to make to transmission connection and planning arrangements could lead to savings of more than $100 million over just the next three years while maintaining a secure and reliable system, “ultimately minimizing the long-term costs of electricity for consumers.”

The commission says the draft rule it has made available for comment should provide “more choice, control and certainty” for connecting parties.

Tornadoes to blame

South Australia’s Treasurer and Energy Minister,Tom Koutsantonis, has called on critics of renewable energy to accept the fact that the State’s September blackout was caused by a supercell storm and not the inadequacies of large amounts of wind power in the supply system.

Koutsantonis says a report by the Bureau of Meteorology “should put to rest the debate over who or what was to blame” for the 28 September blackout.

The BoM report, he says, confirms that at least seven tornadoes impacted the State and “two of these destroyed the spine of our transmission network,” causing voltage shocks that sent SA black.

Koutsantonis adds: “The report clearly and definitively states that tornadoes destroyed lines in the north of South Australia, triggering the blackout.”

Earlier he had described suggestions by the State Liberal party that the shuttered Port Augusta coal power station be bought by the government and recommissioned as “astounding” and akin to “wanting to restart the whaling industry to light street lamps.”

Transition challenge

The Australian Energy Council has published new analysis of the South Australian market that it says reinforces the challenge of managing a relatively isolated, highly intermittent grid.

AEC chief executive Matthew Warren says the SA grid faces “multiple security of supply issues” and warns that addressing them will take time and require new investment that will flow extra costs through to the State’s power customers.

The research consists of a pair of separate studies by ACIL Allen and EnergyQuest exploring options to improve SA power quality and also examining the impact of gas supply on State generation.

“This analysis tells us there are no simple or quick fixes,” says Warren. “They will be more expensive, not cheaper. This has always been the challenge of decarbonizing the energy system.”

The AEC also warns that the current lack of co-ordination in energy policy means that the issues now facing SA are likely to become more widespread.

Better integration

Tim Nelson, AGL Energy’s chief economist and general manager sustainability, speaking at a Sydney forum of the Academy of Technological Sciences & Engineering, has said it’s time for policymakers to better integrate climate change and energy policies.

Nelson told the ATSE “Beyond Coal” symposium that the current policy trajectory is putting Australia on “a collision course with customer expectations on stable supply and pricing.”

The Grattan Institute’s Tony Wood also told the meeting that a “credible, scalable, national” climate change policy is needed to reduce power sector carbon emissions in line with national abatement targets.  Today’s situation, he said, is creating “unmanageable” energy investor uncertainty. “Climate change policies are in conflict with energy markets and vice versa.”

Easier to close

EnergyAustralia executive Mark Collette has told senators that it is easier today to close power stations than to build new plant.

Appearing at the Senate inquiry in to the closure of coal-fired generation, Collette said that there are insufficient policy signals available to give a direction for investment. “There are lots of competing technologies around – gas, batteries, pumped hydro and all sorts of things – but the investments required for all of them are enormous.”

He added that energy policy today “broadly says meet the needs of the market” and warned that, with the impending closure of Hazelwood power station (in the Latrobe Valley, owned by Engie and Mitsui), “if Yallourn (owned by his company) breaks, there is no obvious way to keep the (State) system working reliably and at affordable levels.”

Collette said that replacing Australia’s coal and gas power plants with renewable energy “would involve a build of around 75,000 megawatts – if it was all wind, building two or three turbines every day for 30 years.” The capacity price tag, he added, would be “somewhere around” $100 billion to $150 billion. Overall, attracting investment to support a renewables system, would require investment “in the hundreds of billions.

At the same hearing AGL Energy’s Tim Nelson told senators that an investment of $23 billion in renewable energy capacity alone would be needed to meet the electricity sector’s share of the current Australian 2030 emissions abatement target.

Indispensable

The Australian Petroleum Production & Exploration Association has seized on the new World Energy Outlook by the International Energy Agency to promote the advantages of natural gas in a transition to lower carbon emissions.

APPEA chief executive Malcolm Roberts says the Outlook forecasts a 50 per cent increase in demand for gas worldwide over the next 25 years.

“This confirms natural gas will remain an indispensable part of the global energy mix for decades. This is good news for Australia (as) our $200 billion investment in new LNG plants is set to supply a growing global market, (delivering) a steady stream of high-paying jobs, export dollars and revenue for governments for decades.”

However, in an extremely competitive global market, Roberts adds, “Australia cannot expect to attract further investment while unjustified political restrictions on gas development remain in place.”

APPEA is calling on CoAG to take in to account the IEA report in considering next steps flowing from the current review of security in the national electricity market.

“Retaining sufficient gas-fired plant to provide for immediate back-up when renewable output falls or demand spikes is essential for reliable supply,” Roberts says. “And, to support gas-fired generation, we need development of new gas resources in eastern Australia.”

The Business Council is calling the Andrews government decision to ban exploration and extraction of gas onshore in Victoria “a missed opportunity to secure the State’s energy future along with new sources of employment.”

‘Huge potential’

South Australian Treasurer, Tom Koutsantonis, has hailed a new consultancy report he says reveals the “huge potential” of the State’s gas basins as a source of fuel for the east coast.

The Core Energy study commissioned by the government forecasts annual eastern Australian gas demand will reach 2,000 petajoules by 2018, almost triple the previous peak before the start of the Gladstone LNG developments. This requires a 40,000 PJ underlying reserve and, the consultants say, the best opportunity to build this are the gas resources in the Cooper and Otway basins within or near the existing production, transport and processing facilities in SA.

“These resources,” says Koutsantonis, “could underpin decades of gas supply for both the domestic and export LNG markets.”

Meanwhile, former Santos CEO John Ellice-Flint, now executive chairman of explorer Blue Energy, has told The Australian Financial Review that much of the east coast’s gas supply problem could be solved by construction of a 200 kilometre pipeline to enable access to 10,000 PJ of gas in Queensland’s Bowen Basin where both his company and Arrow Energy (part-owned by Shell) have untapped resources.

Ellice-Flint told the newspaper that the urgency of the need to resolve east coast’s problems means that exploration is not the immediate answer. “We need to lift more molecules now.”

The pipeline he proposes would link Moranbah to Wallumbilla in central Queensland and, he says, cost between $300 million and $500 million.

No to reactors

The South Australian government has decided not to support a recommendation from royal commissioner Kevin Scarce that it promote the removal of national prohibitions on use of nuclear generation.

The government has accepted Scarce’s recommendations relating to uranium exploration and mining in the State – Premier Jay Weatherill says this will support discovery of new deposits (which will form the basis of exports of the ore to nuclear generation users in other countries).

However, the Labor government has accepted a commission recommendation that it collaborate nationally in the development of a comprehensive energy policy to enable all technologies to contribute to a low-carbon electricity system – and that it monitors the development of new reactor designs.

Weatherill says that “in the short to medium term nuclear power is not a cost-effective source of low-carbon electricity for South Australia.”

Hardest hit

A new report on the retail market by the Australian Energy Regulator has thrown up low-income Tasmanian households as the hardest hit by power prices.

The AER finds that low-income residential customers in the State typically pay 8.5 per cent of disposable income on power bills compared with 5.7 per cent in South Australia, 5.6 per cent in Queensland, 5.2 per cent in Victoria and 4.8 per cent in New South Wales. The regulator observes that Tasmanian homes have higher electricity costs than in other States because the climate requires more heating.

The AER report also finds that SA mass market customers rank worst in the NEM among power and gas users for disconnections as a result of unpaid bills.

St Vincent de Paul’s Gavin Dufty comments that SA is the poorest mainland State with very high power charges.

NSW plan

The Baird Coalition government claims that a climate change policy framework it has issued in draft form for public comment – with 2050 as its horizon – could attract up to $3 billion in investment in the short term in energy efficiency projects and “advanced energy”.

The government’s plans include investigating a contracts-for- difference fund to guarantee a minimum price for 250 megawatts of new large-scale renewable energy

They also involve the government working with the CoAG Energy Council on how policymakers can play a role “in managing an orderly exit of the existing power station fleet.

Last word

Something not to be lost to view in an absolute torrent of comment about energy issues in November is a thought bubble from Chief Scientist Alan Finkel (who is in the chair of the task force appointed by the CoAG Energy Council to examine energy security) that the so-called national electricity market, serving the east coast, needs a “major overhaul.”

Delivering the Zunz Lecture in Sydney, Finkel commented “while the NEM has served us well, it is nevertheless under pressure from technologies and expectations that are a giant leap from what existed when it was designed (in the second half of the 1990s).”

The NEM, he added, represents in both policy and practical terms “an exemplary achievement – it is a case study in the skillful management of the transition from a government-led to a market-led system (and) has boosted productivity and delivered for consumers.”

Finkel also noted that, when the federal, State and Territory energy ministers asked him in October to lead the NEM review, “security and reliability were at the top of their minds.”

At the time of writing this newsletter we are a few days away from Finkel’s task force delivering its initial commentary to CoAG – a “meta review” he has termed it – and this will set the tone for the public debate that will take place while the process moves on to publication of a final report in the first half of 2017.

Whatever else may be in this report, it seems entirely likely that the time has come – just as it did in the 1990s with the Hilmer Report – for the market to be the key focus of policy attention.

Let’s be clear: this is a Pandora’s Box; the gamut of views of what the NEM should and should not be is long, opinions are strongly held, the issue is highly political (as it was in the 1990s but Keating, Greiner and Goss managed to ride over that) and change can only be achieved with agreement of all jurisdictions.

Andrew Stock, formerly of Origin Energy, with a 40-year history in the energy game and now a councilor of the Climate Council, made this observation at an October Grattan Institute forum in Melbourne that looked at the events in South Australia: “I don’t believe our current market model, which leaves it to the private sector to choose whether or not and when to invest capital, is going to deliver the fundamental reform that’s transformative and that we need.”

He added: “I don’t think it’s going to do this (deliver the transition) in time (or) in a system-planned way and I don’t think it’s going to do it without major, and potentially destructive, impacts on regional, State and national economies.”

This is one perspective. There are plenty of others, not least the view that the current NEM design is incompatible with the renewable energy target and that one or the other has to change.

When all is said and done, the immediate challenge facing Finkel & Co is focusing governments on how the electricity market fits (or doesn’t fit) with carbon abatement policy (which is fissiparous or factious or whatever adjective you’d like to use beginning with “F”).

Can the NEM have a social licence?

Companies and industries can – Stock, strongly on the green side of the debate, is of the view that the electricity industry is “not far away from losing its social licence” in the present environment.

Whatever, the need to integrate the wholesale market’s design with climate change policy has reached a stage where failing to manage this efficiently can have really serious consequences.  This situation is happening in parallel with the power network sector’s needs to transform and with the gas industry’s struggle to be allowed to play a major role in meeting market and consumer needs. And, if this is not enough, 2017 is also the year that an embattled federal government is committed to reviewing Australia’s carbon abatement target.

The Finkel Report could hardly be better timed – always supposing that, because of our poisonous political debate, it is not already too late to help Australia achieve the start of an orderly, cost-effective shift in this essential service over the rest of this decade.

Keith Orchison
30 November 2016

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