Coolibah Commentary

Issue 137 September 2016

Well, August was quite a month – thanks to the South Australian “energy crisis,” more hyperbole about power grid charges, the ongoing debate about domestic gas supply and more media coverage of a CoAG Energy Council meeting than ever before. The big question, of course, is “where to from here?” and there are no obvious answers to that.

Ongoing dominance

Despite rhetoric from federal Environment & Energy Minister Josh Frydenberg about coal’s share of power generation being down to 60 per cent in Australia and falling, the picture for the major markets on the east coast is quite different.

The new “Energy Quarterly Report” from analysts EnergyQuest provides a current insight in to the role of coal with data for the year to June:

“Energy Quarterly” reports that coal-fuelled generation accounted for 77 per cent of east coast production in 2015-16, slightly higher than in the 12 months to June 2015 – with gas-fired plant contributing another 10 per cent (down from 12 per cent the previous year).

The particular importance of this data relates to the four mainland eastern States accounting for more than nine million residential and business electricity accountholders, 86 per cent of the national total.

The “Energy Quarterly” report also records that hydro-electric power provided seven per cent of the NEM’s needs in 2015-16 and wind power five per cent, each unchanged from the previous 12 months.

Crisis perspective

One of the features of August was the wide range of views about the root causes of the South Australian “energy crisis.”  Among the commentaries gaining attention is one produced by PricewaterhouseCoopers as part of analysis of a potential new high voltage link between SA and New South Wales prepared for recently-privatized TransGrid.

PwC say: “One of the challenges of markets in transition is that the outcomes can be less predictable. There are multiple drivers for this including the introduction of renewable generation, the closure of fossil fuel generators and movements in commodity prices which are increasingly volatile. In a number of markets we are seeing dramatic and sudden impacts (of these drivers). The Australian electricity market is starting to see these impacts and it appears that South Australia is perhaps seeing this most acutely.”

The consultants suggest that SA is “the canary in the coalmine” because there are “early indications of other stresses across other States and Territories.”

PwC say that “ongoing higher prices are likely” in SA and the situation “will potentially worsen as additional renewable generation is added in both SA and Victoria over the next 10 years.”

The consultants add that development of new interconnection between South Australia and NSW could take advantage of the latter’s low market volatility and the NEM’s lowest number of wholesale price spikes to create “a substantial reduction in overall electricity costs for SA.”

PwC say there are “major price challenges” in SA and estimate that wholesale price spikes between January 2013 and August 2016 have cost the State economy $489 million.

Thumbs up

Origin Energy managing director Grant King has told energy analysts in a briefing following the company’s annual results declaration that its key message to the CoAG Energy Council members ahead of their August gathering was “the NEM works.”

King is reported as saying that Origin has urged ministers not to be “spooked” by the wholesale electricity and gas price spikes of the South Australian “energy crisis” because such events are “perfectly normal.” 

Industrial consumers caught out by the “crisis” should look to their risk management strategies, he said, adding that the SA events need to be seen in the light of incentives driving renewables investment to the point where the economics of baseload generation was undermined and some conventional plants closed.

“That was what the policy was designed to do.”

King also told journalists one issue is that the market is being pushed on the east coast to absorb a rising volume of variable renewable generation faster than it can do so.

Meanwhile the Australian Energy Council has expressed “serious concern” at suggestions that market re-regulation could be used to push down end-user prices.

Council CEO Matthew Warren says “the effect of competition and deregulation was given an unequivocal thumbs up by the most recent report of the Australian Energy Market Commission. The overwhelming view of our independent expert agencies is that deregulation and competition deliver the best outcomes for consumers.”

Go it alone

Senator Nick Xenophon is suggesting that the South Australian and Victorian governments establish their own joint electricity emissions trading scheme in the absence of a national carbon price regime. He claims this could drive down SA power prices.

Xenophon has told a conference in Port Pirie that he has discussed the proposal with the SA State government. He claims a scheme that imposes costs on power stations with emissions above a given level will displace more coal-fired generation – all such SA plants are now shut – and encourage greater use of gas generators.

Responding to Xenophon’s speech, SA Treasurer and Energy Minister Tom Koutsantonis said he agreed it was urgent for “ministers to take back power in (energy market) decisionmaking.”

Get smart

If governments focus on outcomes rather than picking technology winners, according to energy networks, Australia can achieve $900 million to $1.5 billion in economic savings between now and 2030 from pursuing its current carbon abatement target.

And a smart carbon policy can save mass market customers $216 a year, according to the Energy Networks Association.

ENA has released a final version of a report it commissioned from consultants Jacobs analyzing carbon policy options.

Association CEO John Bradley says that, if markets are allowed to work and each technology finds its efficient role, the power system will be in a stronger position to support more renewable energy while avoiding reliability and security risks.

“Governments,” he argues, “will achieve better integration of policy if their (approach) is focused on the same objective – carbon abatement.”

The federal government is to undertake a review of its climate policy settings and its 2030 emissions target by mid-2017.

The Jacobs’ study says the least economic cost would flow from policy focusing on carbon pricing alone while the lowest electricity bills for Australian households would occur if the existing set of technology-specific measures was expanded to include all low-emissions options and where trading was allowed within the generation sector.

The report adds that one of the beneficiaries of a technology-neutral and carbon pricing approach would be the rooftop solar PV sector – with the uptake of small systems rising from 5,000 megawatts now to between 15,000 and 18,000 MW by 2035.

ENA declares that the core design requirement of future carbon policy should be the durability and stability of frameworks based on stakeholder consensus – and focus on efficient abatement while avoiding polarization or retrospectivity.

‘Short-sighted’

The Victorian government’s negative approach to the State’s natural gas future has been slammed by energy retailers and generators as “short-sighted.”

The Australian Energy Council, which represents 22 major electricity supply and downstream gas businesses, says the government decision to block unconventional onshore developments – by banning hydraulic fracturing – “ignores the important role gas will play in supporting renewables integration and reducing carbon emissions.”

According to Premier Daniel Andrews, “Victorians have made it clear that they don’t support fracking and that the health and environmental risks involved outweigh any potential benefits,” but

AEC chief executive Matthew Warren says that development of Victoria’s gas reserves is “critical to maintaining downward pressure on both energy prices and emissions.”

He declares that the government’s plan to see more than 5,000 megawatts of new wind generation in the State means that the Victorian electricity system will rely increasingly on gas as a flexible back-up fuel.

Reduced east coast domestic gas supplies, Warren adds, will make this more challenging.

He accuses the Labor government of “succumbing to populist sentiment on fracking” and warns that its attitude “can only mean bad news for State energy prices in the future.”

Meanwhile the Australian Pipelines & Gas Association says the Andrews government has undermined its own authority in participating in east coast gas market reform.

It is leaving South Australia and other gas market participants to find a solution to the current gas demand/supply imbalance, APGA adds, calling on it to withdraw from further policy discussion because “its opinion now has no credibility.”

Among the critics of the Victorian decision is Shell Australia. Its chair, Andrew Smith, says it has been taken “without any scientific basis” and will ripple through the State economy,

impacting on all large gas users, including manufacturers, fertilizer producers and the construction industry.”

Smith adds: “Bad policy is often rewritten, but once manufacturing jobs are lost they rarely come back.”

While the federal Greens say they will use the decision to re-introduce a bill for a nationwide fracking ban in federal Parliament, the Coalition’s Resources Minister, Matthew Canavan, warns that less access to gas in eastern Australia could mean greater reliance on coal for longer.

The South Australian Labor government’s Tom Koutsantonis, Treasurer and Energy Minister, has leapt on the Victorian move to invite gas explorers to come to his State instead. “I strongly believe that the approval or otherwise of gas exploration and extraction should be left to independent experts, rather than politicians.”

High & volatile

Ratings agency Moody’s expects east coast wholesale power bills to remain above the 2015 average of $40 per megawatt hour over the next 12 to 18 months in a volatile market, reflecting the displacement of baseload generation by variable renewable energy.

One of the important influences will be increased use of gas-fired generation at a time when the fuel’s price is rising.

Moody’s Investors Service says the changing generation mix coupled with limited grid interconnection capacity will continue to impact market flexibility and sustain price fluctuations. Recent decommissioning of plant has reduced NEM ability to absorb unexpected supply and demand events.

The agency records that the past 18 months have seen 3,645 MW of thermal generation withdrawal (or earmarking for shuttering) compared with committed development of 772 MW, almost all renewables.

Moody’s adds that the situation will benefit flexible generators able to adjust output rapidly in response to price swings but threaten unviability for those that can’t. Retailers with their own production will be better positioned to manage higher prices and greater volatility as power procurement becomes riskier.

Security first

In the wake of the long-running electricity supply crisis that followed the failure of the Basslink interconnector, the Tasmanian government is defending itself against accusations from business and political opponents that it put Hydro Tasmania’s dividend protection ahead of consumer interests by not ensuring that its gas-fired generation was ready to cope with the emergency.

State Treasurer Peter Gutwein has rejected the claim in an appearance before a parliamentary inquiry in Hobart. He says energy security “has always been front and centre” in the government’s thinking.

Scrambling

The New South Wales Coalition government is scrambling to rescue its privatization of Ausgrid after the Turnbull federal government imposed a last-gasp ban on the part-sale of the network business to either China’s State Grid Corporation or Hong Kong-listed Cheung Kong Infrastructure.

The government and its advisers are reported to be taking a sale “roadshow” to North America in September to solicit new bids for the network, the largest in Australia. There is media speculation that any new offers are likely to fall well short of the $13 to $14 billion claimed to be on offer from State Grid and CKI.

Meanwhile, it is also reported that the Baird State government is considering a stockmarket float of the half share of another network business, Endeavour Energy.

‘Not true’

The Australian Petroleum Production & Exploration Association says “it is simply not true” that local consumers pay 65 per cent more for gas from this country than their counterparts do in Japan.

Reacting to widely-publicized claims by the Institute for Energy Economics & Financial Analysis, a think tank opposed to fossil fuels, APPEA says industrial gas prices in Japan, South Korea and China are much higher than in Australia despite the Australian Industry Group asserting that “Asian manufacturers can now buy Australian gas at half the price local manufacturers are paying.”

APPEA says Tokyo Gas was charging industrial customers $A10.45 per gigajoule in the first quarter of 2016, South Korean factories were paying $A16.65 and August Chinese prices ranged between $A11.48 and $A26.69/GJ, far above local charges.

The association adds that gas supplies 60 per cent of manufacturers’ energy use in Australia “but only 27 per cent of their energy costs.”

Meanwhile APPEA has welcomed the CoAG Energy Council meeting in Canberra in August for “sending a clear message: gas development is an urgent national priority to protect jobs, ease price pressures on consumers and support the transition to a cleaner national energy sector.”  However, says the association CEO, Malcolm Roberts, Victoria must lift its onshore gas moratorium for the sake of customers, warning that the east coast market is “at a tipping point” with governments being told by their own agencies that there is a risk of supply shortfall by 2019 if new reserves are not developed urgently.

Affordability

Australian television news broadcasts (and other media) frequently claim this country has one of the world’s most expensive electricity supplies, but the Australian Energy Council argues back that, when workers’ day wage comparisons are taken in to account, local bills are amongst the most affordable in the OECD and among the lowest in the world.

The council, which represents generators and retailers, says “Australians use only 2.27 per cent of their daily wages to meet their power bills with average income calculated at $US140.13 by the OECD.” It points to 18 OECD member countries meeting a higher share than this, with Britain recording 2.99 per cent, Japan 4.04 per cent, Spain 4.94 per cent and Germany 4.89 per cent.

In combination

The Australian Renewable Energy Agency is claiming a “world first” for a project it is supporting in Far North Queensland combining battery storage and large-scale solar power.

ARENA is providing $17.4 million in funding to Conergy for the construction of a 10.8 megawatt solar PV plant with lithium-ion battery storage up to 5.3 megawatt hours near the FNQ town of Lakeland. Agency CEO Ivor Frischknecht says the project is a “landmark” in its efforts to see more large-scale solar PV developments across Australia.

The total cost of the project is budgeted at $42.5 million and it is supposed to be completed by next April.

“Figuring out how solar PV and battery storage technologies best work together at a large scale will be crucial for helping more renewables enter our grids,” Frischknecht says.  “We know that battery storage will play a critical role in our future energy systems. The benefit of adding batteries to solar farms is simple; they store energy from the sun for use at peak times and overnight. They can also smooth solar energy output on cloudy days.

The ARENA chief executive adds:  “The global energy transition is happening faster than many anticipated and Australia is well placed to be a key player. Our growing expertise in integrating renewables and batteries could readily translate into economic opportunities including export dollars in world markets.”

The project will be connected to the Ergon Energy network and

ARENA says it has worked with Conergy to form a “knowledge sharing steering committee” that includes the State-owned network business, BHP Billiton and Origin Energy.

Frischknecht says: “BHP Billiton will gain valuable insights into the potential for solar and storage to assist its remote operations, Ergon is considering if the approach could help avoid network upgrade costs in other regional QLD communities and Origin is buying the power from the plant.”

Grid plan

The Clean Energy Council is calling for a long-term strategic plan to be pursued by east coast governments and the federal government to augment the NEM high voltage grid to support greater use of renewable energy.

In a submission to the CoAG Energy Council ahead of its August meeting, the CEC has declared that renewables investment are challenged at present by the grid regulatory framework , which has “limited scope to consider projects that have clear value over a much longer time horizon (in) facilitating a zero-emissions electricity sector.”

At the CoAG meeting, ministers agreed to review the regulatory test for transmission assets “to ensure it is effective in the current market environment” and have instructed officials to report back to them on the issue before the end of 2016.

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Last word

Objectivity has been in somewhat short supply in the Australian energy debate of the past month.

This is no surprise: events, including the South Australian “energy crisis” and the delayed meeting of the CoAG Energy Council, conspired to present the spectrum of stakeholders with a not-to-be-missed opportunity to push their arguments further and loudly down the road.

The question now is where are we in the wake of all this kerfuffle?

The Energy Policy Institute of Australia, for one, suggests the issue of integration of energy and climate policies has not made any apparent progress, pointing out that the Energy Council ministers are now asking their officials for advice on the potential impact of federal, State and Territory policies by the time it next meets in Melbourne in December – a full year since they committed to pursuing this integration.

Meanwhile, separately, the federal government, itself on shaky parliamentary ground since the July election and with the ALP buoyed by a thumping victory in the Northern Territory poll (with important consequences for gas development there and flow-on issues for the east coast), is gearing itself to review its climate change approach with the aim of a decision around mid-2017.

It may be a scary thought but it needs articulating: before we know it, we’ll be nearing the end of 2017 and will we be facing up to the prospect of another federal election?  The Shorten-led federal Opposition thinks so and its willingness to work with the Coalition on energy/carbon policy integration (regardless of what its State and ACT siblings voted for in the Energy Council) is questionable.

One thing that is clear from the events of the winter now ending is that gas is back on the energy agenda in a significant way and not least in terms of the fuel’s role in future electricity supply.

The Grattan Institute is of the view that “the role of gas is now a conundrum” and it asserts that current policies combined with forecasts of rising gas prices suggest that the proportion of the fuel in the power plant mix is unlike to rise to any great extent.

The institute makes a further important point: in the absence of a carbon price, generation from wind, solar and gas sources all cost more than $80 per megawatt hour while coal-fired power production is less than $50.

Having collectively turned the cost of electricity in to a political monster in the first half of this decade, how do the major political parties propose to square the circle of policy integration based on reliable, affordable power generation with a smaller environmental footprint?

Almost every aspect of the pricing imbroglio presents viciously sharp points for the mainstream body politic.

For example, having changed the network regulatory rules to wittingly drive a massive capital investment and thereby send end-user bills soaring, governments are now playing with the idea of limiting or abolishing the ability of network businesses to appeal Australian Energy Regulator determinations even when they believe them to impact on the safety and reliability of power supply…………

And, again, having agreed previously that it would be a good idea to have network charges that reflect the requirements mass market customers place on the grid – so-called cost-reflective pricing – State governments are now jibbing at the political reality and have fallen back on asking CoAG Energy Council officials for more advice about implementation…………

The Grattan Institute has produced a good line in accusing the jurisdictions of too often “talking nationally but walking parochially.”

That sums up the situation very neatly. It is, of course, far from a new phenomenon even if the rise and rise of feral social media and the decline and near-collapse of insightful mainstream journalism have made it far more dangerous in recent times – with the emergence of more splinter political groups in parliament driving home the dangers for Labor and the Coalition of governing bravely.

The gloss the CoAG Energy Council puts on all this is “the energy sector is undergoing a major transition, driven by changing technologies, increasing consumer engagement, new business models and climate change policies.”

True enough, but, as the “SA energy crisis” has demonstrated, nothing concentrates the community mind more strongly than a fear that reliable, affordable electricity and gas may be threatened.

Australians, typically, want it all: being able to depend on supply security without budget pain while sustaining a self-image of being good global citizens in terms of carbon abatement – and having their good life underpinned by major exports of fossil fuels and substantial manufacturing, itself kept viable by domestic supply of said fuels.

The risks of collective self-harm in sustaining this juggling act are not trivial and have been brought closer by the actions and failures to act of our political leaders since about 2006.

The prospect of further energy problems, in the forms of a shortage of gas supplies, the “accidental power experiment” in SA spreading east and the energy bill canaries coming home to roost, should not be ignored by our political leaders.

Unfortunately, it is not possible to view the developments of recent weeks and feel sanguine that the Energy Council ministers or their leaders have a real grip on managing all this. There may be signs that they are coming to appreciate the dangers but whether this can translate in to timely, effective, durable action is not at all clear.

Keith Orchison

1 September 2016

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