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Coolibah Commentary

Issue 142, February 2017

Welcome to the second newsletter issue for 2017, writes Keith Orchison. For energy, this year has already got off to a noisy and disputatious start with a resurrected debate over renewables targets, wrangling over prospects for “clean coal” and renewed carrying-on about electricity prices – while recurrent heatwaves have challenged the power system’s ability to maintain reliable supply. Perhaps most importantly, there is a new groundswell of concern about east coast domestic gas supply. February is also the month in which the Finkel review of energy security shifts in to a higher gear.

Finkel roadshow

The task force reviewing the security of the NEM, chaired by Alan Finkel, has set out on a tour of Australia to consult businesses, consumer groups and policy specialists, as well as the community at large, during this month while setting 21 February as the deadline for submissions to it.

The task force will hold meetings in each of the east coast State capitals.

In a newspaper op-ed in Adelaide, the starting point for the tour, Finkel says: “It is not for me to tell Australians what they want. It is for Australians to decide what our electricity network should provide and then for the review panel of the National Electricity Market (myself and four others) to recommend how the pieces can best be arranged.”

He adds: “Every minister, premier and business leader I have met approaches this mission in the knowledge that we have a once-in-a-generation opportunity for reform.”

In the op-ed, Finkel identifies two key questions to “guide” stakeholder input to the inquiry: what immediate actions can be taken to reduce risks to electricity supply reliability – and how can policymakers ensure consumers retain choice and control throughout the transition to an affordable, reliable lower-carbon power supply system?

A nation like Australia, he says, “should aspire to nothing less than the world’s best electricity network.”

Meanwhile the South Australian chief scientist, Leanna Read, facilitator of the first task force forum in Adelaide, has told local media that “everything including nuclear power” should be included in the national discussion about long-term energy supply.

‘Pragmatic’

Prime Minister Malcolm Turnbull has told media that his government’s approach to energy is “absolutely pragmatic and practical.”

He says “Renewables have a role. Fossil fuels have a role. Every type of energy – storage, all of it – has an important role to play.”

Turnbull adds that it is “wrong” to be ideological about Australia’s energy mix.

Another SA issue

The Australian Energy Market Operator has found a “potential stability issue” in its analysis of a gradual increase of capacity on the refurbished high voltage transmission link between Victoria and South Australia.

AEMO says the issue relates to high power imports by SA coinciding with high levels of wind generation in the State.

The market operator is reviewing transfer limits on the Heywood interconnector and, for the time being, will allow only a maximum of 600 megawatts for imports from Victoria and a peak of 500 MW for exports of wind energy from SA. The notional capacity of the upgraded link is 650 MW – up from 460 MW.

Meanwhile the Business SA industry association has called on politicians to “stop the blame-fest” over the problems besetting the State’s electricity supply and to work on solutions.

And Liberal leader Steven Marshall says the State’s community is “sick to death of paying the highest power prices in the nation when we’ve got the worst reliability.”

RET ruckus rolls on

The summer holidays have seen the national row over the renewable energy target’s existence resurrected from within the ruling federal Coalition’s membership despite efforts at ministerial level to hose down the latest ruckus.

Both ex-PM Tony Abbott and Liberal senator Cory Bernardi have argued for the RET to be scrapped while Deputy Prime Minister Barnaby Joyce, under media questioning, has declined to commit the federal government to maintaining the scheme.

Abbott argues that the Turnbull government can’t credibly attack federal Labor for its proposed 50 per cent RET when it supports a 23 per cent target. “We can’t credibly attack Labor merely for being worse than us. Our first big fight this year must be to stop further use of mandatory renewable power.”

However, Environment & Energy Minister Josh Frydenberg says the government “has no plans” to change the current target (which requires 33,000 gigawatt hours of electricity supply to be met from eligible renewables by 2020), calling it “balanced but not cost free,” saying it adds an average of $63 dollars annually (or almost $600 million in aggregate) to Australian household power bills.

Frydenberg adds that integration of variable renewable energy in to the power grids is “very challenging” and says “stability of the system is the government’s main objective.”

The minister has rejected claims by Abbott and other conservative MPs that the RET will “destroy Australia’s heavy industry,” pointing out that trade-exposed, energy-intensive businesses are exempt from the requirements of the target legislation.

Frydenberg says as well: “If we are going to be serious about our emissions reduction targets we should not be technology specific. We need to ensure more affordable power but we also need a stable, secure system.”

A University of Melbourne energy researcher, Dylan McConnell, claims that achieving a 27 per cent reduction in coal-fired generation emissions through high efficiency coal technology will require investment in 20,000 megawatts of new plant at a capital cost of $62 billion – while, he says, this level of abatement could be achieved by building 13,000 to 19,000 MW of wind and solar plant at a cost of between $24 billion and $34 billion. (This is not a total system cost, but the capital cost of variable new plant.)

Meanwhile ERM Power founder, Trevor St Baker, has told the Australian Financial Review that there is “no chance” of the 2020 federal RET being met and that plant sufficient to deliver 20,000 GWh a year is all that can be “reasonably” expected to be built over the next 3-4 years.

The company has opted to pay the Clean Energy Regulator $123 million in penalty charges rather than meet its share of the RET for calendar 2016, a decision ERM says has been made for tax reasons, predicting other power retailers will follow its example “because of the commercial realities of the renewable energy market.”

An energy consultancy, RepuTex, claims that implementation of the renewable energy targets embraced by Labor governments in the ACT, Queensland, South Australia and Victoria will have the equivalent effect of raising the federal RET to 35 per cent by 2030 – but also says that reliance on these targets to achieve abatement is “far from ideal” since it doesn’t provide certainty to the electricity market or put downward pressure on end-user power prices. RepuTex adds that not implementing a national emissions intensity scheme is a policy failure for Australia.

50c a week

A Victorian newspaper has estimated that the State government’s RET plan will cost householders $1.2 billion over 20 years.

This is based on a claim by State Energy Minister Lily D’Ambrosio that the impact of the scheme will be “a modest 50 cents a week over its life.”

D’Ambrosio has refused to publicly release the Andrews government’s modelling of VRET, citing cabinet confidentiality.

The government proposes that a quarter of electricity generated in the State by 2020 should come from renewable energy and 40 per cent by 2025. Federal Environment & Energy Minister Josh Frydenberg says the plan is “diabolical” and will hurt consumers.

It is estimated $9 billion will need to be spent in Victoria on wind and solar farms to meet the VRET.

Pointless

The Australian Energy Council has told media that abolishing the renewable energy target would be “pointless.”

CEO Matthew Warren says that what generators and retailers want to see is a national energy strategy “to manage the transformation of the sector and a co-ordinated policy to support it.”

He acknowledges a problem with generation investment in all power projects, renewable and fossil-fuelled. “Clearly there is something wrong. The RET is not working and the wholesale price is not working. We need a national strategy.”

‘Must go’

The upstream petroleum industry says 2.2 million Victorian household gas customers can’t wait until 2020 for the State government to find the political courage to reconsider its five-year moratorium on development of onshore resources.

Australian Petroleum Production & Exploration Association CEO Malcolm Roberts says January claims by the Andrews government that its moratorium will not affect Victorian prices for gas consumers “defy common sense and market realities.”

Roberts asserts that “there is nothing novel or unusual about developing conventional gas,” saying it has been done safely in Australia for decades.

There are proven quality gas reservoirs in the State, he adds, but the Andrews government has “killed off exploration and possible future development.”

Roberts says that production of offshore basins supplying Victoria with gas under present development – the Gippsland, Otway and Bass basins – is likely to peak this year and then fall by 15 per cent by 2020 and 40 per cent by 2025.

“There is no doubt Victorians will face higher gas prices as supply tightens and supplies, if available, have to be bought from South Australia and Queensland. Local supply is a cheaper option than buying gas from fields thousands of kilometres away.”

He accuses the Andrews government of “seeming to be intent on playing green politics by sticking with an unjustified ban on hydraulic fracturing” and urges it to step back from the “bizarre decision” to ban exploration and development of gas resources that do not require fracturing. “This issue goes beyond the government surrendering to the activists’ fear campaign.”

Meanwhile the Victorian government has derided as “ridiculous” a claim by the chairman of petroleum industry giant Shell Australia, Andrew Smith, that transporting gas to the State from other regions will add “at least 30 per cent” to the retail cost of the fuel. The government says it will “continue to encourage development of Victoria’s offshore gas resources and gas storage to assist future supply and mitigate price increases.”

There has been a new groundswell of industry concern about domestic supply issues in south-eastern Australia in the opening weeks of 2017, triggered in part by a warning that demand will outstrip annual contracted gas production by as much as 50 petajoules within 18 months, equivalent to about nine per cent of current south-east coast needs.

The Australian Industry Group says the supply shortage and government attempts to stymie development of new resources are “casting a long shadow” over jobs, competitiveness and investment in chemical, metals and food production industries.

AiG chief executive Innes Willox declares gas is now “not just a lost advantage” for manufacturers but an “active disadvantage” to these businesses.

Willox adds that Queensland and South Australia have acted responsibly to encourage more gas supply, but New South Wales, Victoria and the Northern Territory need to “get the balance right.”

The Australian Chamber of Commerce & Industry says “there is no place for blanket bans on energy projects or exploration – we need a risk-based, project-by-project approach to approving developments.”

IEA forum

Brisbane will be the venue on 24 February for an International Energy Agency forum on unconventional gas.

The Paris-based agency says the purpose of the annual forum, the fifth of its kind to be held around the world, is to “enable global governments to share insights, alongside input from industry and other key stakeholders, on operational best practices and regulatory action towards securing the economic, security and other benefits of increasing unconventional gas output.”

Bearing the load

The importance of black coal in supporting secure electricity supply in New South Wales and Queensland, home to 60 per cent of the NEM’s system energy flow, has been underscored in the eastern seaboard’s summer heatwaves.

On 14 January cumulative NEM demand reached 34,396 megawatts, just 1,000 MW short of the market record set on 29 January 2009 before “Black Saturday.”

Of this, NSW demand peaked at 13,745 MW (still 900 MW below the State record of 14,649 MW in 2011) and Queensland load reached 8,941 MW. (A Queensland record peak of 9,477 MW was established four days later.)

A major factor in the two-State system being able to cope with heat stress was the role of black coal generation – running in excess of 72 per cent on most days of recurring heatwaves and achieving as much as 95 per cent of the load early on hot and humid days when there was relatively little solar PV and a low contribution from wind in NSW.

At the height of the two-State peak demand on 14 January, the NEM-wide instantaneous reserve plant margin was 13 per cent, raising questions among industry experts about future market security after Hazelwood brown coal power station in Victoria (1,600 MW) closes at the end of next month.

According to the new ElectricityGasAustralia yearbook, black coal plant delivered 81.6 per cent of the total power generation in NSW and Queensland in the financial year 2014-15. Gas plant contributed another 15.4 per cent.

Heat impact

Sydney-based energy retailer Mojo Power estimates that use of air-conditioning saw a 7.5 per cent increase in electricity usage in New South Wales in January compared with the same month of 2016.

Other analysis estimates NSW consumption over 30 days of high heat and humidity at around 6,000 gigawatt hours out of 16,000 GWh in the east coast market overall – with Queensland accounting for some 4,900 GWh and Victoria 3,400 GWh, highlighting the dominance of the three States in the NEM.

In addition, a new review of NEM activity by consultants Green Energy Markets finds that market consumption rose by 0.8 per cent in calendar 2016 following a 1.1 per cent rise in 2015. The consultants say carbon emissions in the NEM fell by 1.3 per cent in 2016.

Their analysis shows that black coal plants contributed 104,049 GWh of power in 2016 (up from 100,570 GWh in calendar 2015) while brown coal plants provided 47,017 GWh (down from 50,438 GWh) with a fall in gas plant production (down 3,693 GWh) almost matched by a rise in hydro output (up 3,714 GWh).

Green Energy Markets calculates wind farm production in 2016 as 11,188 GWh out of a market total production of 197,176 GWh.

NEM demand in 2016 was 191,777 gigawatt hours, the highest since 2012 but still well below the peak of 206,961 GWh in 2006. Most of the increase compared with 2015 occurred in Queensland.

Cleaner coal

The Minerals Council of Australia has welcomed federal government analysis that, it says, demonstrates “new coal generation technologies can reduce Australia’s emissions sharply while providing reliable and affordable energy to households and businesses.”

The MCA says research by the Department of Industry, Innovation & Science lends support to the argument that, when ageing current generation is replaced, the option of “high efficiency, low emissions” (HELE) coal plant “must be on the table” as a competitive option. “It can deliver baseload power and it can deliver 50 per cent lower emissions with the promise of further substantial emissions reductions with the deployment of carbon capture and storage.”

The association argues that, if the ability of HELE technology is ignored in Australia (when 725 such plants are in operation in East Asia), “then the costs of the energy transition will be higher and reliability of energy systems will be lower.”

High wind

Wind generation in South Australia contributed almost half of the total wind farm output in the NEM in 2014-15, according to ElectricityGasAustralia.

The State’s wind turbine output was 4,247 gigawatt hours – compared with 9,522 GWh from this source for the east coast market as a whole.

The yearbook also reports that the share of wind in SA generation increased from 3,038 GWh (22 per cent of State production) in 2011-12 to 4,316 GWh (38 per cent) in 2015-16.

‘Blind spot’

In a commentary published on The Conversation website, Alan Pears, senior industry fellow at Melbourne’s RMIT University, says Australian policymakers seem to have a blind spot on energy efficiency.

It can, he argues, play a key role in managing energy demand but, for example, “it did not rate a mention following the South Australian blackout.”

The preliminary Finkel task force report to the Prime Minister and other first ministers, he adds, mentions energy efficiency 10 times – “but only in passing.”

Pears contrasts this with the International Energy Agency describing energy efficiency as “the first fuel” because cutting demand is the same as building more power supply and cheaper.

Pursuit of the measures, he says, “could make the biggest contribution” to cutting Australian carbon emissions between now and 2030.

He expresses the hope that a much stronger focus on improving energy productivity may be an outcome of the federal government’s 2017 climate policy review. To do so, Pears adds, will require “strong leadership, cultural change and policy intervention beyond past levels.”

Last word

Few issues better illustrate the national energy illiteracy than the ongoing shenanigans over gas supply and cost.

When the Australian Domestic Gas Outlook conference is held in Sydney in mid-March, it will be the fifth successive year in which the need to resolve this situation have been debated – and, if anything, the problem is growing worse.

The core issue can be summed up by a panel discussion I will moderate on the conference opening morning. Featuring Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, Innes Willox, CEO of the Australian Industry Group, Ian Davis, MD of Senex Energy and Mike Lawson, deputy secretary of the federal Department of Industry, it will address the “triple whammy” of LNG exports, low commodity prices and blanket moratoriums on gas development and asks “Is there a way out?”

The opening days of 2017 have seen prominence in the mainstream media for the issue and the conference question, with Willox warning that an impending supply shortage is “casting a long shadow over jobs, competitiveness and investment” in key industries.

The federal Environment & Energy Minister, Josh Frydenberg, opted for an op-ed in The Australian newspaper to wring his hands over “unhelpful constraints” imposed on the gas supply side in Victoria, New South Wales and the Northern Territory (not mentioning that his own Liberal Party is threatening to go down the same path in South Australia should it win government at the State election in March next year).

What Frydenberg wants is for the States to “adopt a more sensible and nuanced approach” by assessing the environmental and economic merits of each gas exploration proposal rather than pursue blanket bans and moratoriums. This is echoed by James Pearson, CEO of the Australian Chamber of Commerce & Industry, who accuses governments of “taking a sledgehammer rather than a scalpel” to the issue.

Needless to say, the Australian Workers Union has leapt back in to the fray to press its gas reservation approach (embraced by Bill Shorten and federal Labor) that would favor domestic users over further exports.

The irony of the situation is that Australia has gas resources in abundance. The looming crisis in supply, as APPEA argues, is “manufactured” by politicians and activists opposed to fossil fuels. Roberts declares that governments “have a clear choice between playing politics or solving real problems.”

Where I think the energy illiteracy aspect comes in to play is that there is no real pressure on the body politic to resolve the present impasse because the population at large simply does not appreciate the scope and scale of our actually falling off this cliff in, say, winter this year or next.

Compare and contrast this with the degree of political urgency in dealing with electricity security in the wake of the 2016 South Australian blackout – which sent a jolt through the community at large and accordingly has engaged the collective attention of the Prime Minister and other first ministers.

The reaction to the power “crisis” in South Australia versus the public inertia over what could be something of a national catastrophe if the worst happens in gas supply calls to mind that Crocodile Dundee line of “call that a knife, this is a knife.”

The perception problem lies in a lack of community understanding of the importance of gas to jobs despite employment being probably the single biggest tender spot in the Great Australian Psyche – and this all comes down to one word: manufacturing.

How many of our fellow citizens, do you suppose, appreciate that a third of the gas consumed in this country is used by manufacturers, a $100 billion industry employing 890,000 people directly?

More to the point 225,000 of these workers are employed in factories heavily dependent on gas – and another half million Australians work for companies dependent on doing business with these manufacturers.

How many understand that, as explained by Shell’s Andrew Smith, bad policy can be changed but, once lost, manufacturing jobs rarely come back?

In an emergency, governments will act to shield households and essential services from as much of the impact as possible, but the ripples of the gas problem, for example in an area like ammonia-based urea production (every tonne of urea needs 21 gigajoules of gas, the same amount an average New South Wales household uses in a year), will flow all the way to farmers and therefore to the community at large.

The daftest aspect of the situation is the Andrew government’s moratorium on conventional natural gas development in Victoria until 2020. Late last year I saw a commentator deride this as government “self harm” (because of its impact on local manufacturing) but it is well beyond that – the potential (should that now be probable?) harm is widespread.

As the ACCC’s Rod Sims said at a conference last year, “it is difficult at this stage to envisage where new gas supply will come from in the short to medium term to alleviate the high prices looming for gas users in the south.”

An ABC commentator last September said the situation has “domestic consumers, big and small, caught in a nasty place.” That’s not wrong.

Keith Orchison
1 February 2017

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