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Coolibah Commentary

Issue 136, August 2016

After being moribund throughout the federal election, the national energy policy discussion has revved in to high gear as a result of power price problems in South Australia – and, as a result, the next Council of Australian Governments’ meeting of energy ministers is being called for 19 August with electricity supply stability and security at the top of its agenda.

NEM failings

In an obituary-cum-commentary, former Australian Energy Market Operator chairman Tom Parry has strongly criticized management of east coast market policy.

Parry, chairman of AEMO from its inception until late last year, has written a newspaper tribute to the operator’s foundation chief executive, Matt Zema, whose sudden death in mid-July shocked industry stakeholders. In it, Parry laments that Zema’s and AEMO’s best efforts have not so far resolved the failings of the market.

“Zema’s and AEMO’s agenda is far from complete,” says Parry. “Indeed many of the failings that Zema worked so hard to drive to the top of the policy agenda are becoming more apparent.”

High on the list of issues, he writes, is the lack of a robust transmission network to serve the NEM. From the market’s beginning, he says, the operator and its CEO pointed to this weakness but “our concerns fell on policy-deaf ears.” Too often, he adds, commercial self-interest by governments has over-ridden any interest in good policy. “And the failure of the Commonwealth to drive the policy agenda didn’t help.”

The framework for paying for transmission services is another part of the problem, he declares.

The current South Australian experience, says Parry, “highlights the combined impact of environmental policies encouraging large-scale wind generation in the State with a failure to develop a robust network.”

He argues that the “inevitable transition” from a carbon-intensive to less carbon-intensive generation fleet requires “clear and consistent national policy – (and) this too has been largely missing in action.”

In Parry’s view, “a coherent and consistent national policy should sensibly be focusing on large-scale commercial wind and solar farms that, together with a proper national transmission network and transmission service framework, (will) fit much better with managing the network for reliability and frequency control.”

Blame game

The shock of July’s market events in South Australia, where the wholesale electricity price rose far beyond average levels and required State government intervention to bring on mothballed gas plant, has produced an outpouring of argument about the causes – with boosters of renewable energy complaining their sector is being “scapegoated,” accusations that the fossil-fuelled sector has contrived the problem and the SA Treasurer declaring the need to “smash the NEM in to a thousand pieces.”

A CoAG Energy Council meeting scheduled for Darwin in early July had to be postponed because of the lack of a clear outcome of the federal election – eventually declared for the Coalition, albeit with the most slender of majorities – and has now been convened “urgently” in Canberra by Josh Frydenberg, made federal Environment & Energy Minister in the revamped Turnbull cabinet, for 19 August.

Frydenberg says the meeting “will look at how higher shares of wind and solar energy and new technologies such as batteries can be integrated in to the energy mix in a way that keeps markets stable and secure.”  The Council will “also look at how to ensure energy investments are in the long-term interests of consumers.”

Meanwhile the SA Treasurer and Energy Minister, Tom Koutsantonis, has declared in Adelaide that “If I owned the (privatized electricity) assets, I could make decisions about when we produce, about our energy mix, about what kind of fuel we’re using and when. Any politicians who says they can fix a national electricity market with a wave of their hand is lying.”

Also in Adelaide, the Nick Xenophon Team, fresh from federal election success, has called for a Senate inquiry in to electricity prices “to get the arguments on the table and look for a solution.”

And in Sydney the AGL Energy CEO, Andy Vesey, has told journalists that consideration should be given to moving the NEM from an energy-only market to a capacity market – where generators are paid to keep plants on stand-by. Vesey said issues of intermittency, gas availability and market design require leadership from governments and regulators.

Pitt & Sherry consultant Hugh Saddler argues that: “What has happened to SA electricity prices during this month is a stark demonstration of the need for a fundamental rethink of the design of the National Electricity Market, which was designed at a time when Australia had very little gas generation and no wind. Demands to limit the growth of wind (and also solar) generation are in effect demands to renege on national emissions reduction commitments, for the sake of preserving a set of outdated and dysfunctional institutions.”

Subsidy grows

The Queensland subsidy for regional State electricity consumers to ensure they pay no more than users in the south-east corner will total $561.2 million in financial year 2016-17, says Energy Minister Mark Bailey.

The State budget papers indicate that the annual subsidy will rise to more than $660 million over the following three financial years.

The money is paid to Ergon Energy.

Role of coal

The Minerals Council says the ongoing instability of electricity supply highlights the need for stable, reliable generation – and declares that access to coal-fired power continues to be essential to ensure that Australian households, businesses, heavy industry, schools, hospitals and transport networks such as trains can operate reliably and efficiently.

In a statement drawing attention to a winter morning snapshot showing that 91.8 per cent of New South Wales and Queensland load was being met by black coal generation at 6.30am – and 97.9 per cent of all NEM load at that point by fossil-fuelled capacity – the MCA says South Australia has chosen to disproportionately rely on intermittent power and a lack of diversity has exposed consumers to high prices, supply instability and greater reliance on electricity imported from over its borders.

“Contrary to alarmist assessments,” the council adds, “there is no crisis in the NEM and in the big energy-consuming States of NSW, Victoria and Queensland who continue to have access to coal-fired electricity. The unfolding SA situation, however, highlights what can happen with imprudent, politically-driven energy policy options.”

Huge potential

Ivor Frischknecht, CEO of the Australian Renewable Energy Agency, says there is “huge potential” in co-locating wind and solar farms.

Announcing $9.9 million in support for a $26 million solar photovoltaic plant of 10 megawatts to be built adjacent to the Cullen Range wind farm near Canberra, Frischknecht says wind developers across Australia can benefit from adding solar to their operations to provide more continuous generation, saving money on grid connections, approval expenses and construction costs while also reducing environmental impacts.

ARENA estimates that the co-location savings for the Cullen Range PV plant could be as high as $6 million or 20 per cent of total project cost.

Frischknecht adds that research supported by ARENA indicates that 1,000 MW of solar PV could be added to existing wind farms and that this could double when work required to meet the 2020 RET is completed.

The Cullen Range development is scheduled for completion in mid-2017.

Second NT line

The Northern Territory Chief Minister, Adam Giles, who faces an election on 27 August, wants a second gas pipeline built to the east coast.

Development of a new line from Tennant Creek to Mt Isa in Queensland at a cost of $600 million is in the planning stages at present – and Giles argues that another to Moomba in South Australia could help relieve the State’s energy problems and its manufacturers’ ongoing fears.

Giles wants the federal government to call a “national energy summit” and for consideration to be given to connecting the Territory to the NEM. South Australia’s problems, he says, highlight the need for a more measured transition to greater use of renewable energy and the Territory can provide low-emission, low-cost supplies.

The Giles government is also about to release a report on the viability of constructing a gas-to-liquids plant in the Territory. At present the NT imports 630 million litres of diesel fuel a year.

‘Honest discussion’

The Clean Energy Council is another entity seeking a national summit on energy market reform.

The CEC says it wants to see “the record set straight on what is occurring in South Australia,” arguing there is a need for “an honest discussion” about the issues that led the State government to intervene and request mothballed gas generation to be brought on line.

The lobby group adds that it is “unfortunate the complexity of the issue has resulted in some commentators settling on renewable energy as the root cause of all the challenges in South Australia – this is simply untrue.”  It believes the recent problems relate to fluctuating prices while the interconnector to Victoria was down and gas was in short supply.

Basslink 2

The Tasmanian government says South Australia’s “energy woes” highlight a growing case for development of a second Basslink cable to enable the island State to export more renewable energy to the mainland.

Tasmanian Energy Minister Matthew Groom opines that greater interconnection in the NEM is “more likely to deliver a solution of lowest sustainable (power) prices as well as reliable and secure supply.”

Groom has written to the SA government urging it to support Tasmania’s campaign for Basslink 2.

The government in Adelaide, meanwhile, is more focused on greater interconnection between SA and New South Wales and Victoria, not least, according to State Treasurer Tom Koutsantonis, because this would enable a flow of more “clean, cheap renewables from South Australia to green up the rest of the country.”

A preliminary feasibility study, supported by the federal government and Labor during the recent election campaign, has backed further work on assessing the commercial viability of Basslink 2 if supported by private enterprise, the Clean Energy Finance Corporation and the Tasmanian government.

Question of value

Energy Consumers Australia says a survey of consumer sentiment among householders and small businesses across the country shows high marks for electricity reliability and service standards – but low ones for value for money.

The survey indicates only 29 per cent of residential respondents in Tasmania believe they are getting value compared with 52 per cent in New South Wales, 49 per cent in Victoria and 43 per cent in Queensland. Forty-two per cent of small businesses surveyed reacted positively to the question.

In the West, consumer value for money satisfaction was found to be 44 per cent. Almost a third of households have bought solar panels and another third say they are considering doing so.

By comparison, according to ECA, Australian consumer satisfaction for value for money for gas supply ranged between 43 and 66 per cent.

The survey found that 32 per cent of Queensland householders survey had invested in solar panels and 27 per cent intend to do so. In NSW, the response was 20 per cent investors and 34 per cent considering doing so – and in Victoria 17 per cent and 38 per cent.

The poll also found that 52 per cent of Victorian households, the highest level in the country, were satisfied with the level of energy competition in their State compared with 48 per cent in NSW. Each State has 22 energy retailers pursuing their business.

Promoting gas

The Australian Petroleum Production & Exploration Association is using TV commercials to counter claims by Labor and anti-gas advocates in the Northern Territory election that hydraulic fracturing threatens the NT’s tourism and fishing industries.

Media see the debate about fracking as a key issue in the 27 August Territory poll. The ALP is proposing to impose a moratorium on the issue of the technology if its wins the election.

APPEA argues onshore natural gas development will create “significant employment” in the Territory as well as creating opportunities for landowners.

Meanwhile the association has also bought in to the fierce debate about the South Australian “energy crisis.”  CEO Malcolm Roberts says policymakers should accept that, for the foreseeable future, Australia needs a mix of generation technologies.

“Reducing carbon intensity is more complicated than just force-feeding more renewable capacity in to a flat market,” he argues. “When renewable output fails to meet demand, as in SA and Tasmania, the solutions are energy imports from other States and a hasty return to service of retired gas plant.”

Policymakers, he adds, should recognize that technologies complement as well as compete with each other. “It may seem contradictory but Australia needs more gas-fired generation because we need more renewable generation. Treating generation as a zero-sum game between popular and unpopular technologies is not sensible policy.”

Gas plants, he says, are being squeezed out of the east coast market. In June, gas-fuelled power accounted for only 10.5 per cent of NEM production, its lowest level since March 2010 and down from 12 per cent in 2012.

“If this trend continues,” Roberts says, “other States will find themselves in South Australia’s position.”

Compact ‘a priority’

The Energy Networks Association is urging Australia’s governments to pursue a “national compact on energy and carbon policies,” saying there is “an enormous opportunity” to integrate them but competing State and federal approaches “are increasing risks to customers at a time of dynamic change.”

The association’s CEO, John Bradley, says the current policy uncertainty is creating “an unfortunate layer of price and security hazards” for energy consumers, warning that the NEM “could drown” under the weight of this competition.

Bradley argues that many necessary reforms have been left in the “too hard basket” while individual States fail to take account of the flow-on impacts of their actions at a national level.

Among the steps ENA is urging on the CoAG Energy Council is implementation of governance reforms promised in December last year and the removal of “unnecessary roadblocks” to the timely development of new gas supplies to reduce price risk for business and households.

Security review

The Australian Energy Market Commission and the Australian Energy Market Operator are to work together on a review seeking to address the issues confronting the east coast market that are increasing with the shift from conventional, synchronous generation to non-synchronous and variable wind and solar capacity.

The system security market frameworks review is intended, says the AEMC, to identify arrangements that “lead to more efficient outcomes for consumers while delivering a secure operating system.”

It adds that challenges in maintaining power system security are emerging because of the physics sustaining technical parameters like voltage and grid frequency.

It explains: “Conventional generation, like hydro, coal and gas, operate with large spinning turbines that are synchronized to the frequency of the grid. (They) support the stability of the power system by working together to maintain a consistent operating frequency. (Generators such as) wind and rooftop solar are not synchronized to the grid and are limited in their ability to dampen rapid changes in frequency or to respond to sudden large changes in electricity supply or consumption.”

The AEMC comments that the shift to less conventional forms of generation has been more pronounced in some NEM regions than others, notably South Australia – which has become increasingly dependent on power flows from Victoria for system security. “Where there is an outage of this interconnector, the risks to (SA) system security increase significantly. As the generation mix changes in a similar way across (the rest of the) NEM, these risks may become more widespread.”

The commission adds that “solutions should not favor any particular technology – the uptake of new technologies in the NEM in recent years has highlighted how (they) can change.”

The inquiry is supposed to deliver an interim report to the CoAG Energy Council by the year’s end.

Last word

Tipping points, by definition, do not come by often – but Australia may have reached one in July with the energy developments in South Australia and the reaction to them.

We have had years of repetition of the mantra that the energy sector here is undergoing a major transition, but few weeks when the degree of difficulty in achieving this has been really addressed – and fewer still when the urgency of getting the process right has been front and centre in the national debate.

As the Grattan Institute, looking at the SA situation, observed in July: “Transitions tend to be painful” – and the job of policymakers is to make them as painless as possible.

The South Australia “energy crisis” looks to have changed the game; whether it really has remains to be seen.

For a range of reasons, including a toxic political environment and a large amount of energy illiteracy in the media, all the supposed new beginnings of the past several years have ended up in the same dead-end alley. But this time things may be different – and the CoAG Energy Council meeting in Canberra on 19 August will be an important pointer to whether this is the case.

To say that many of the serious contributors to the energy debate are fed-up with procrastination, platitudes, posing and pursuit of populism would be an under-statement. The Grattan Institute is far from alone in seeing the current situation as “dismal” and “a policy mess with no clear direction forward.”

It is hardly surprising that even serious stakeholders differ in their views of what should be done to extricate ourselves from this mess, but this is where policy leadership comes to the fore. Having heard all the opinions and proposals, it is the job of our government leaders to adopt a way forward and to implement it efficiently.

In this respect, as I keep trying to highlight through my own media writings and in chairing conferences, the recent SA royal commission has written the template: what we need, its report said, is development of a comprehensive national policy that enables all technologies, including nuclear (and, I add, including fossil fuels), to contribute to a reliable, low-carbon electricity network at the lowest possible cost.

Commissioner Kevin Scarce also told us that the transition should be “based on evidence not emotion” – and he warned that decisions about generation “should not rely solely on what is presently popular.”

To this the Grattan Institute has added in commentary on SA that States should not “go off in their own direction without considering the consequences of their actions on all States and consumers.”

The behavior of governments in this sector has been so parochial and short-sighted that it has moved some (notably the Energy Policy Institute) to argue for the creation of an independent statutory body, a National Energy Commission, to manage the integration of energy and carbon policies – and to suggest that the first step in this direction could be the establishment of a National Energy Council with an independent chair and stakeholder representatives, responsible to CoAG first ministers with a secretariat managed out of the Department of Prime Minister and Cabinet.

Whether this achievable in today’s political arena is open to debate, but it surely must be undeniable that we need a circuit breaker to resolve the present “dismal” situation. It is in this respect that the SA “energy crisis” may prove the tipping point, sufficiently frightening political leaders that they accept we can’t go on as we are today.

If they need further persuading of the seriousness of the situation they could try reading a paper recently published by two AGL managers, Tim Nelson and Fiona Orton – which poses the question “Is the SA electricity market the canary in the coalmine?” If they don’t have the time, then just reading the study’s final paragraph may do:

“The current trajectory of climate and electricity policy puts Australia on a long-term collision course with real-world financing constraints and customer expectations in relation to stable pricing outcomes being unmet. If Australia persists with an energy-only market, it likely that aspects of the SA experience may be replicated in other regions with the market price cap in the NEM needing to be lifted to between $60,000 and $80,000 per megawatt hour. In a practical sense, this means that new electricity generators will receive little revenue for most of the year, with their high fixed costs recovered through a handful of extreme pricing periods. Investors would likely baulk at investments with such extreme pricing risk, causing new investment to become intractable. This would result in the compromising of public policy goals in relation to affordability, reliability and improved environmental outcomes.”

Self interest, never mind national interest, should persuade first ministers that, after they and their predecessors having wasted a whole decade in getting us to this worrying stage, the focus now must be on durable, efficient outcomes that provides investors and consumers with certainty well in to the future and not on more process and populism.

South Australia has been characterized by the Australian Energy Council has “an accidental experiment” in integration of renewable energy in to large electricity grids. As recent events have shown, this is bad enough; creating a “global test case” of the whole east coast would be a serious piece of foolishness.

Keith Orchison
1 August 2016

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