Coolibah Commentary

Issue 164, December 2018

Twelve months ago this newsletter opened its December issue with the comment that, as we edged towards the end of a spectacularly messy year for energy on Australia’s east coast, there were more reasons to be concerned about what 2018 would bring than there were for hope that stakeholders’ most cherished wishes for durable policy solutions would be realized – well, we got that right! And now, with a federal election looming, to what extent can Australians hope that the opening months of 2019 will see more focus by the political class on the substance of the energy debate rather than the headlines they can engender? Given recent events, and especially the Coalition’s State election debacle in Victoria, it’s a fair bet that energy investors’ focus will be ever more strongly on the direction of federal Labor’s policy intentions. In this environment, the importance of proper consultation with stakeholders and rigorous evaluation of policy moves needs strong emphasis.

One more time

The CoAG Energy Council will hold its last meeting for 2018 in Adelaide a week before Christmas amid confusion over the fate of the “national energy guarantee,” declared dead by the Morrison government but seemingly now on life support via interventions from across the political spectrum.

Formally, the Energy Security Board is on notice to produce draft legislation for CoAG on providing a NEM reliability mechanism without the NEG.

Queensland Energy Minister Anthony Lynham says his government will continue to press for “the integrated climate and energy direction offered by the NEG and the ALP.”

The Australian Energy Council says the NEG remains “credible policy” and the “best available framework.”

Federal Labor, which dubbed the measure a “Frankenstein monster” earlier this year, is now calling for bipartisan support for the NEG – but Prime Minister Morrison has told federal parliament the ALP is being “shifty” and he will not accept the measure being used as a “Trojan horse” for a 45 per cent emissions reduction target.

As a law firm put it at November’s end, “the NEG isn’t alive but doesn’t seem to be quite dead either – let’s call it a zombie.”

Pressure pays

The Morrison government’s high-profile pressure on energy retailers to cut household power prices from 1 January appears to be paying off ahead of what is widely assumed to be a May election but could occur as early as March.

Two moves to take effect on New Year’s Day have been announced by leading retailers.

After AGL Energy said that it will provide an automatic 10 per cent discount for customers who have been on a standing offer for more than a year, reportedly benefitting 150,000 households, EnergyAustralia has said pensioners, veterans and healthcare card holders on “default offers” will receive a 15 per cent discount on electricity and gas from 1 January. This is reported to represent an average saving on electricity bills of $270 annually for concession customers.

Matter of opinion

A new Fairfax/Ipsos poll sees Coalition and One Nation voters putting the level of household power bills first when it comes to energy policy while Labor and Greens supporters put emissions abatement before costs.

The Australian Financial Review reports 47 per cent of those polled believe energy prices should be the main priority of energy policy versus 39 per cent opting for abatement and 13 per cent for reducing the risk of electricity blackouts.

The poll also finds that younger voters are more likely to support prioritizing carbon abatement (55 per cent among those aged 18 to 24 and 45 per cent among those 25 to 39 versus 34 per cent among voters 55 and older).

Meanwhile an Essential Report poll in late November found 43 per cent of respondents listed “transitioning to renewable energy” among the three most import tasks for government.

Quotes of the month

“We are all still paying the cost of our politicians’ inability to establish a long-term cost path for carbon and then get out of the way indefinitely” – Global-Roam analyst Paul McArdle.

“Labor claims its energy policy will drive power prices down; the government says it will drive them up – in fact, no-one can be sure what will happen in the next few years in a situation where we are undergoing a major transition to a different energy mix” – veteran political commentator Michelle Grattan.

“Forty-seven per cent of voters nominate cutting their power bills as their priority (for government action) over 39 per cent preferring to reduce carbon emissions” – the Australian Financial Review in a late-November editorial commenting on a poll it commissioned.

“An energy policy that brings prices down is imperative. The market has failed, successive governments have failed to act and our prosperity is genuinely threatened. (In the Victorian election) our good policies were drowned by a perceived ideological opposition to renewable energy. We underestimated our electorates – Victorians place a high value on their environment” – Liberal senator Jane Hume in a newspaper op-ed after the State election rout.

“The (federal) government needs to consider energy policy through the prism of securing bipartisan agreement with Labor” – former Liberal deputy leader Julie Bishop MP.

“Business will warmly welcome any move to step back from the partisan abyss; good policy can be good politics” – Innes Willox, Australian Industry Group CEO, reacting to Bishop’s comments.

Risks & rewards

The Investor Group on Climate Change, representing asset managers handling $2 trillion worth of infrastructure, says the just-announced reworking of federal Labor’s energy policy “presents significant risks and rewards” in pursuit of net-zero carbon emissions in Australia.

CEO Emma Herd says “unlocking investment in the electricity sector requires robust investment-grade emissions policy in line with the objectives of the Paris agreement.”

However, Herd adds that Labor’s proposal to directly underwrite clean energy projects “should be approached with caution” as the impact of such intervention in the power market “will be significant.”  It risks, she says, undermining the long-term signals that investors need and increasing investor uncertainty.

Ultimately, she argues, transparently pricing carbon emissions “remains the best option.” She suggests this could be achieved through “building on the ‘national energy guarantee’ and bipartisan agreement between federal and State governments.”

‘Veritable powerhouse’

Labor leader Bill Shorten says his party has a plan to “make our nation a veritable powerhouse for new jobs, new industries and new investment driven by renewable, cleaner power.”

In a major speech on energy policy in late November, Shorten, ahead of the ALP national conference in December, has declared plans to increase renewable energy in power supply to 50 per cent by 2030 and cut national carbon emissions by 45 per cent while “cutting power bills by hundreds of dollars a year and creating tens of thousands of new renewable energy jobs.”

Pointing to electricity price increases of “nearly 19 per cent in the past three years” and “disastrously” high gas prices, Shorten pledges to introduce a “10-year energy investment plan guided by experts” and using the integrated system plan put forward by the Australian Energy Market Operator as a blueprint.

The Labor approach includes giving the Clean Energy Finance Corporation another $10 billion to spend over five years and establishing a $5 billion Energy Security & Modernization Fund.

Useful steps, but....

The Australian Industry Group sees the Labor energy policy as containing useful steps in dealing with a power system that “combines high prices with high emissions and declining reliability” – but warns the proposals “accrue significant risks for energy users without careful design and bolder thinking.”

Chief executive Innes Willox says business users want assurance that pursuit of Labor’s higher emissions target will deliver globally competitive electricity costs.

Willox says a “national energy guarantee” is still achievable through agreement with the States and is preferable to an approach where the federal government directly underwrites new power generation. Both the government and Labor now propose versions of intervention, he adds, and this risks undermining the NEM, “slugging taxpayers” and raising long-term electricity costs.

However, AiG is supportive of government aid for strategically important transmission projects and for energy efficiency activity.

As for Labor’s “populist handouts” for batteries for residential solar systems, Willox says they “could be genuinely helpful if they come with incentives” for use in ways that “support the wider grid.”

‘Reality check’ needed

The Minerals Council of Australia says rapidly increasing intermittent renewable energy generation, leading to early closure of low-cost 24/7 power stations, possibly within six years, “should not be a cause for celebration.”

MCA chief executive Tania Constable says closure of Liddell and Vales Point power stations in New South Wales, Yallourn in Victoria and Gladstone C in Queensland will cut baseload supply in these States by 25 per cent, 22 per cent and 15 per cent respectively.

Constable urges Labor to consult widely with industry to ensure the “real-world impact” of its proposals is fully understood. “A reality check is needed.”

Just good politics?

The Grattan Institute asks whether federal Labor’s proposal to give rebates of up to $2,000 each to 100,000 households to support installation of energy storage batteries is good policy “or just middle-class welfare.”

The institute’s Guy Dundas says that, in a perfect world, households would have enough private incentive to install batteries.

“But governments are reluctant to mandate that households pay higher prices during peak periods and retailers find it hard to convince households to accept more complex tariffs.”

He believes it unlikely that cost-reflective pricing will become widespread “any time soon” and says this means there is a case for public subsidy of batteries – “providing the subsidies are capped and end when battery prices inevitably fall.”

On balance, Dundas asserts “Labor’s policy appears to be a sensible step towards a smarter, lower-emissions electricity grid.”

He adds: “It can be tweaked to maximize benefits to the whole system, not just to the lucky households that get government assistance – and its cost is capped, reducing the risk of the sort of cost blowouts that have plagued solar subsidy schemes.”

Andrews’ promises

After a strong victory in Victoria at the end of November, Daniel Andrews’ Labor government is committed to a major program supporting solar photovoltaics.

Its solar homes program announced in August offered a rebate on PV installation costs for 24,000 homes and Labor committed in the election to expanding this to 700,000 homes, starting next July.

The government has committed as well to providing half-price batteries to 10,000 Victorian homes that already have solar installations.

Andrews has also pledged to lift the State renewable energy target from 40 per cent in 2040 to 50 percent in 2030. The defeated Coalition opposition promised to remove VRET if it won the election.

Fracking

Western Australia’s Labor government has lifted its moratorium on hydraulic fracturing in gas fields in the Kimberley, Pilbara and mid-west areas of the State for existing petroleum leases – but it has given landowners and traditional owners veto rights. It has also declared that royalties accrued from these areas will go in to a fund to support renewable energy.

Premier Mark McGowan says a blanket ban on fracking would undermine the State’s reputation as a safe place to invest. “I believe the government has struck the right balance between supporting economic development, the environment and landowners.”

He declares “98 per cent of the State will be frack-free.”

The WA Chamber of Minerals & Energy says the government has missed an opportunity “to tap in to potentially massive shale and tight gas assets.”

Meanwhile the Australian Petroleum Production & Exploration Association has attacked the Victorian Labor government’s pledge to enshrine a ban on hydraulic fracturing in the State’s constitution as “absurd,” accusing Premier Daniel Andrews of “deliberately driving up gas prices.”

APPEA chief executive Malcolm Roberts says the government “should recognize that the cheapest gas available to Victorian homes and businesses is the gas it is standing on.”

Connecting

Federal Labor’s promise to set up a $5 billion fund to aid electricity transmission developments has been quickly supported by Energy Networks Australia.

ENA chief executive Andrew Dillon says: “Australia needs better connection as grids modernize to integrate more variable renewable generation.” A key benefit, he adds, will be more competition in wholesale power markets.
ENA also welcomes Labor’s promised support for households to acquire batteries – with the caveat that it must be accompanied by “smarter power pricing.”

Dillon says: “Battery storage can help smooth electricity demand and reduce grid pressure at peak times – but batteries could make things worse if we haven’t got incentives to encourage people to save money by using less power at peak times.”

Green brick road

The New South Wales Coalition government, which faces an election next March, says it is processing more than 20,000 megawatts of power projects through its planning system, representing more than $27 billion in potential investment.

Energy Minister Don Harwin, releasing the State’s transmission infrastructure strategy, says the projects include wind, solar, bio-energy, coal plant upgrades and pumped hydro.

“However,” he says, “for every 20 projects looking to connect to the grid, only one can. Companies simply will not invest if they can’t connect. (This is) about making the NEM work better and putting downward pressure on prices.”

The State government is committed to supporting early development of four transmission developments proposed by TransGrid at a cumulative cost of some $2.5 billion.

The projects in the generation pipeline include “Snowy 2.0” proposed by the federal government.

The transmission developments supported involve upgrading the interconnector with Queensland by 2022, building a $1.28 billion high voltage line from South Australia to Wagga Wagga by 2023 and constructing a new line from Snowy Hydro at a cost of $1.15 billion by 2024. TransGrid also proposes upgrading the existing interconnector with Victoria by 2022.

The government claims these projects “align closely” with needs identified in the Australian Energy Market Operator’s integrated system plan and are “identified as least-cost options to ensure ongoing energy security for NSW.”
TransGrid managing director Paul Italiano says the NSW government proposal to accelerate investment “makes sense,” given growing recognition that Liddell and other State coal-fired plants may close fully or in part ahead of present schedules.

‘Game-changer’

Federal government owned Snowy Hydro believes a renewable energy deal it has signed is a “game-changer” that will push down future prices.

Snowy has accepted eight wind and solar contracts for projects in Victoria and New South Wales with a combined capacity of 888 MW (and ability to produce 2,800 GWh annually) that it says will bring “much-needed competition” to the NEM.

“We are energy short, meaning we do not generate enough energy from our own power stations to cover all our customers,” the company says in a statement, “so we are one of the largest wholesale energy buyers in the NEM and are exposed to high prices.”

Snowy says it was “overwhelmed” by the response to its renewable energy procurement plan and received bids totaling 17,600 MW – from which it chose eight expected to come on line within two years.

The company owns two retailers, Red Energy and Lumo Energy, with more than a million customers.

Leaking artery

The chairman of a New South Wales parliamentary committee declares it is “concerning” that the ACCC has found electricity retail profit margins in the State are “very high compared with other jurisdictions both domestically and internationally.”

Paul Green MLC, chair of the Legislative Council select committee on electricity supply, demand and prices, says the cost impact on household and businesses in the State is “unacceptable and unsustainable,” describing the situation as a “slowly leaking artery that will eventually be fatal to economic growth and employment.”

He says the committee has found that “certain retailers may have leveraged the complexity of the electricity market to charge higher prices.” Its final report calls the profit margins for big vertically-integrated retailers in NSW “excessive” and urges the State government to “develop and implement a legislative mechanism to oversight the level of profit.”

Lower & slower

In a submission on plans to underwrite new generation in the NEM, being pushed by the Morrison government as part of its last-gasp efforts to remain in power, the Australian Industry Group warns that investment beyond the existing renewable energy target is “likely to be lower and slower if there is no improvement in policy uncertainty.”

Investor concerns, it adds, have deepened since the Coalition abandoned the emissions obligation element of the “national energy guarantee.”

AiG adds that the underwriting program now on the table “may have merit but presents significant risks to the public purse (and therefore the burden of taxation).”

The lobby group is particularly concerned about the speed at which the federal government is trying to move. “An underwriting program could prove to be a good idea,” it says, “if developed along the modest lines proposed by the ACCC – but it is unlikely to be effective, efficient or responsible if pursued in a crashing hurry.”

Meanwhile, the Australian Energy Council, in its submission on the issue, says that, for many years, it has maintained government intervention in the investment process distorts the wholesale electricity market. ”We have expressed this view most frequently in respect of subsidies granted to specific technologies but, equally, such distortion can come about through the de-risking of new generation through underwriting.”

The AEC, representing gentailers, warns that the intervention proposed by the Morrison government creates concern that “consumers will bear the costs of the action chilling investment and drawing the government in to a spiral of further interventions.”

‘Not a dollar more’

Energy Consumers Australia is demanding a strategic framework for transformation of the energy system that ensures investment – on networks, generation and retail – must be based on “not a dollar more being spent than is necessary and not one day earlier than is needed.”

In a submission to the Morrison government on the underwriting issue, ECA says affordability must be an explicit criterion in decisionmaking up and down the supply chain.

Rising solar

The Clean Energy Regulator says it expects 1,600 megawatts of small-scale solar PV will be installed in Australia by the end of December, a 44 per cent rise on the previous record for the technology’s capacity, set in 2017.

The news comes as analysts say that the federal small renewable energy scheme will add $1.08 billion to consumer costs in calendar 2018 and that this will rise to $1.64 billion in 2019.

Be serious about nuclear

Liberal senator Jim Molan asserts that, if Australians are serious about achieving the triple goals of power affordability, supply reliability and carbon emissions abatement, “there is no choice but to give full consideration to nuclear energy along with all other developing technologies.”

Molan, in a newspaper op-ed, says the progress being made in nuclear must be acknowledged. “The future of nuclear lies in small modular reactors only the size of a shipping container that can be used as permanent or temporary power sources or combined to produce as much as a Liddell or Hazelwood.”

Meanwhile former foreign minister Julie Bishop has also spoken out on nuclear power. “The country should be talking about it,” she told a forum at the end of November. “It’s low-emissions based.”

‘Huge battery’

En masse, electric vehicles could become a significant part of the electricity grid if used like a huge battery, research at Sydney’s Macquarie University claims.

A typical car park at a large shopping centre, with 4,500 vehicles plugged in to the grid, could store almost twice as much power as the Tesla battery in South Australia, according to Graham Town of the university’s school of engineering.

Professor Town says car parks could “effectively become a power plant right in the city.” He adds: “Most people only think of electric vehicles raining energy but they are actually a large storage resource especially when they are stationary 95 per cent of the time.”

Town says that embracing electricity vehicles represents a “golden opportunity” for Australia; converting all fossil-fuelled transport could reduce national greenhouse gas emissions by about 20 per cent.”

Last word

In a recent speech, Greg Clark, the British business and energy minister, mused that being in political charge of a country’s energy policy is a bit like the game of pass the parcel – “you know there is a great prize but will you get to unwrap it; will the gift actually get in to your hands (when the music stops)?”

This is a thought that surely must resonate with Scott Morrison, Josh Frydenberg and Angus Taylor as they strive in a “crashing hurry” – see the Australian Industry Group comment earlier in this newsletter – to deliver something, anything that will both attract sufficient votes and deliver energy affordability and reliability, let alone an advance in reduction of carbon emissions.

Given the state of the Liberals’ party relationships, this challenge looked pretty darned hard when Malcolm Turnbull lost his way and his job as prime minister, dropping the “national energy guarantee” as he fell. It seemed harder still after the Wentworth by-election and, in the wake of the Liberals’ severe defeat in November’s State election in Victoria, it looks increasingly like mission impossible.
So, when the music stops on federal election day 2019, will the parcel be in Bill Shorten’s hands – the political commentariat is convinced he will win – and can he unwrap “gifts” to the community in the shape of affordability and power supply reliability as well as a higher level of carbon emissions abatement?

While watching more political misery being heaped on Morrison & Co during November, I also read a sensible commentary by Robert Barr, president of the Electric Energy Society of Australia, in Energy Source & Distribution magazine, reflecting on the Australian Energy Market Operator’s integrated system plan, which is a driving influence for both Labor and the Coalition government in New South Wales (as reported above in this newsletter).

Barr observes that the NEM today has an average load of about 22,000 megawatts and the operator’s ISP has a central case for market development involving about 50,000 MW of solar PV and 15,000 MW of wind, meaning that the conjectured peak renewable output will be three times the current average – AEMO is relying on firming capacity coming from investment in utility storage, some older coal plants, combined cycle gas generation and other sources.

Barr poses the question: “Is a system of this generation mix technically feasible and does it pass the commonsense test?”

And he suggests the plan appears to be very expensive in terms of both the generation mix and transmission costs “as well as being problematic from a technology feasibility viewpoint.”

Given the thrust of the apparently incoming federal Labor government, the great green bent of the triumphant Andrews government in Victoria, the plans of the Palaszczuk government in Queensland and the likelihood that even a re-elected Coalition government in NSW will go strongly for wind and solar development, Barr’s point is very important.

The Minerals Council of Australia, as reported in this issue, is right to call for a “reality check” on the very ambitious Labor proposals. This, it seems to me, applies equally to State and federal plans. It is also right to point out that, if the flood of renewable energy envisaged eventuates, there could be early closure of what it terms “low-cost 24/7 generation,” that is more than Liddell, which AGL intends to shut in 2022.

The consequences of this are no matter for light attention regardless of how happy the event would make green boosters (and some marginal seat voters).

It is, as the MCA asserts, crucial that federal Labor consults widely “to ensure the real-world impact of its proposals is fully understood.”

Whether, riding on the crest of a victory that could see it in office for at least six years, Bill Shorten’s cabinet can summon the inner fortitude to do this is one of the big questions investors in electricity and key consumers now face.

The jittery state of at least some suppliers is illustrated by an Australian Energy Council media statement, reacting to Shorten’s headland speech. It welcomes the “positive signs” Labor has heard the concerns of gentailers, approves gestures towards bipartisanship and cautions against both direct support favoring renewables and against a headlong rush to expand high voltage networks.

In this environment, investors will be watching the outcomes and the atmospherics of the December national convention of Labor in Adelaide with more than normal interest.

Keith Orchison
30 November 2018

 

 

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