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Coolibah Commentary

Issue 135, July 2016

Well, thank goodness that’s over! Except it isn’t over. The marathon election campaign has failed to immediately (and possibly at all) deliver a government with a clear mandate. How this all pans out may not be clear until August, allowing for the Senate count. Meanwhile, we start the new financial year with many demands on all nine governments to get their energy acts together and a real prospect that we may be back to the polls nationally well before 2019 with all that implies for durable policymaking. Of all the scenarios one could wish for, this is the worst. And it poses a major challenge to the energy sector to create an adult public debate about its issues (see Last Word in this issue).

Back to future

After the indecisive and nationally destabilizing federal election, Australia looks to have a political re-run of 2010, this time probably with a Coalition government on the high wire, another opposition with no interest in bipartisanship on key issues, a splintered Senate, a prime minister under pressure from all sides and populism rampant in policymaking.

Former prime ministerial chief of staff Peta Credlin describes it as a situation where both the Coalition and Labor are finding it hard to get 40 per cent of the national vote “from an electorate that knows what it doesn’t want but struggles to know what it does.”

The prospect for the new Senate are that the mainstream parties may hold only 57 seats (Coalition 30, Labor 27) out of 76.

The resources and energy sector probably needs to get used to the idea of many more essentially antagonistic Senate committee inquiries over the next 2-3 years – and to ongoing problems in resolving the reform issues confronting electricity supply.

Priorities

In the run-up to the federal election, the Grattan Institute published a set of priorities for energy markets.

The institute urges the incoming government to:

The institute argues that policy and regulations are “badly lagging” behind electricity technology and consumer choice.

It wants jurisdictions to revitalize the reform agenda via the Energy Council with a focus on issues rather than process.

Lack of credible, long-term climate change policy has threatened investment in the energy sector for most of this century, the institute adds. “A dog’s breakfast of unstable and unpredictable policies at federal and State levels has been a poor substitute.”

Boom not over

On the eve of the federal election the Minerals Council and the Australian Petroleum Production & Exploration Association came together to urge, through a commentary in a national newspaper, understanding that the resources boom isn’t over – “By some benchmarks, it is only beginning” – and to decry the fact that the political debate is not recognizing the crucial roles of the sectors they represent.

MCA chief executive Brendan Pearson and APPEA chief executive Malcolm Roberts say the resources industries are shifting from $400 billion of project construction to an operating phase that “will deliver economic benefits for several decades.”

The recent wave of new projects, they declare, is a springboard for strengthening and diversifying the Australian economy. “We have the resources, infrastructure and expertise. But can our governments provide policies needed to attract further investment? Can Australia provide a regulatory environment that makes us competitive with hungry rivals?”

Pearson and Roberts complain that the political environment has “seen investment-killing policies (pursued) to win support from noisy groups.” And they add that “our political culture appears incapable of sustaining rational discussion about much-needed economic reform.”

They warn that “the consequences of policy complacency will become painfully clear” if reform is not embraced.

Show time

The Queensland Labor government has been sitting on its Productivity Commission electricity pricing report since 31 May and now also has the agency’s report on solar feed-in tariffs in its hands.

There is no indication of when either will be made publicly available – the government has six months in each case before release is required under legislation.

The State opposition is urging the government to release the power price report, saying that, if it doesn’t do so until late 2016, it will be two years that Queenslanders have waited for a policy to reduce their bills.

Retail deregulation for the south-east Queensland mass market took effect on 1 July.

Sunshine State

Queensland Productivity Commission chair Kim Woods told the Australian Energy Week conference in Melbourne in mid-June that modelling commissioned by the agency showed the State’s residential rooftop solar PV capacity will exceed 5,000 megawatts by 2035.

Taken with commercial installations of rooftop arrays, the State’s total PV capacity is expected to reach 3,000 MW by the end of this decade, 4,000 MW by 2027 and 5,700 MW by 2035, almost four times its present level.

As well, the Australian Energy Market Operator has released estimates that the east coast level of rooftop PV (in the NEM) could reach 17,000 MW by 2030.

In a presentation to Energy Week, AEMO said NEM grid-connected generation could be reduced by 25,400 gigawatt hours a year by 2035 as a result of PV take-up.

The operator exhibited a scenario at the conference in which residential power consumption in the NEM fell from 57,074 GWh annually to less than 43,000 GWh over 20 years while manufacturing demand rose from 50,684 GWh to almost 54,000 GWh and the rest of business demand rose from 85,911 GWh to more than 95,300 GWh.

Wrestling with reform

A new paper by AGL Energy economists Tim Nelson and Fiona Orton urges policymakers to expedite the introduction of contestable metering plus cost-reflective network and retail prices in the east coast market and to defer plans to promote demand-side management to pursue the best “customer value proposition.”

They say a contestable metering and retail framework should have been a policy priority at the start of the NEM and it is “puzzling” why, 16 years after the start of market competition, energy metering in Australia is only now being deregulated despite rapid technology development in the early years of the century.

Writing in “The Australian Economic Review,” Nelson and Orton say the east coast wholesale energy market has not contributed materially to higher consumer costs – with $35 billion in network capital outlays since 2007 heavily outweighing $5 billion in generation development – and they question why policymakers are using scarce resources to facilitate greater wholesale demand response when it is not the component of the supply chain causing the greatest end-use price pressures.

They point out that NEM over-capacity could range between 5,000 megawatts and 12,000 MW within 10 years and argue that a demand-response mechanism is unlikely to be successful in this environment.

They urge a focus on end-use metering and pricing contestability as reforms that will reduce consumer bills by shifting consumption to lower-than-average pricing periods, allowing greater use of existing generation and network infrastructure and a reduction in average system costs.

Higher wholesale prices, they add, do not occur at times of peak household power demand and pursuit of DRM “will not be useful for incentivizing households to reduce (this) demand.”

Basslink back

The interconnector between Tasmania and Victoria has finally returned to service – but not without a hiccup.

Power flows resumed after a long outage from late December to mid-June but then stopped again for 36 hours because of an equipment problem at the link’s onshore Victorian converter station.

The operators were quick to stress that the latest mechanical outage was not related to the major failure caused by damage to the cable under Bass Strait.  That fault was eventually located 90 kilometres from the Tasmanian coast but the cause of the problem has still not been established.

Hydro Tasmania has told the Tasmanian parliament’s public accounts committee that the government-owned business incurred between $140 million and $180 million in costs in shoring up the State’s energy security during the major outage.

The business says that its supply problems have also been eased by recent heavy rain returning its dam storage to almost 30 percent.

Meanwhile a preliminary feasibility study in to a second Basslink, kicked along by the federal election, has promoted the project and led to a promise from the Coalition and Labor to support this development at a national level subject to a positive final business case.

At the same time the South Australian government continues to press for a bipartisan plan to explore options for transmission augmentation in the eastern States.

Ian Hunter, SA’s Minister for Sustainability, Environment and Conservation, told the Australian Energy Week conference in Melbourne in mid-June that the State Premier, Jay Weatherill, has written to both the federal Coalition and Labor urging consideration of a plan to boost the links from the NEM’s west (where his government continues to promote wind and solar power) to the east.

Hunter says the SA government wants NEM rules changed to enable energy to be traded across the market more flexibly and to allow States to “develop and leverage renewable resources.”

Weatherill later told national media that the NEM should be “more than separate State systems clipped together.”

The SA Treasurer and Energy Minister, Tom Koutsantonis, said separately that the Coalition government in NSW is “very keen” to have more interconnection developed.

Manufacturers are also calling for South Australia and Victoria to hold talks about a further link between the States, in part to facilitate the latter’s brown coal and gas generation flowing in to SA.

Brawling over bills

While electricity prices didn’t figure in the 2016 federal election debate, after being front and centre in 2013, the issue remains contentious at regional level as wholesale costs now impact on power bills.

Eastern Australian households are facing prices rises in 2016-17 of between $100 and $300 a year (depending on consumer patterns and location), largely the result, says the Grattan Institute, of gas generation affecting the market.

Inevitably, the 1 July price announcements have been attacked politically and by consumer groups, with the Public Interest Advocacy Centre claiming New South Wales bills are likely to further “skyrocket” when the long-running legal dispute over the latest Australian Energy Regulator ruling on State network revenue raising is finally resolved in the Federal Court.

Gavin Dufty, policy director at St Vincent de Paul Society, says that, in the case of South Australia, with price falls last year and rises this year, households can’t get stability in their budgets. “This is undermining the credibility of energy markets, which is no good for anybody. Energy ministers need to come together to look at measures to help the stabilize the situation.”

Inertia factor

Despite the fact that most east coast mass market electricity consumers know they have the option to switch suppliers to save money, 50 per cent of them have not changed retailer in the past five years to take advantage of better deals.

This is the headline finding of the latest Australian Energy Market Commission review of NEM retail competition, published at the end of June.

The AEMC says the number of energy retailers has risen to 22 in New South Wales and Victoria this year and nine out of 10 residential consumers know they can shop around. NEM-wide, 73 per cent of them say they are satisfied with their current retailer (up from 66 per cent in 2014) and seven per cent are dissatisfied.

The commission wants east coast governments to improve consumer understanding of the benefits they can pursue in electricity and gas markets and to make energy shopping easier.

The AEMC says there are opportunities for consumers to make “significant savings” by comparing price offers and switching to a better one.

Switching from the electricity standing or default offer to competitive offers could saving residential users $140 a year in south-east Queensland, $256 in NSW, $383 in Victoria and $312 in South Australia.

Green jobs

The Victorian government is claiming that its plan to incentivize the installation of 5,400 megawatts of renewable energy in the State by 2025 will create 4,000 extra jobs – but the Australian Energy Council says only 660 will be fulltime, ongoing positions; the rest are construction phase jobs.

In a website commentary, the AEC says full-time jobs in running renewable operations are likely to be “significantly lower” than ongoing employment in conventional thermal generation they are touted to replace.

The association estimates that around 1,611 permanent jobs will be lost in conventional generation closures up to 2025 versus 398 gained in new, large-scale renewable developments and the equivalent of 579 full-time construction jobs.

It adds that rooftop solar PV installation involved 7,480 full-time jobs in 2014-15.

The AEC says that the purpose of climate and energy policy should be to reduce greenhouse gas emissions at the lowest possible cost – and “employment outcomes are likely to be mixed” when impacts across the economy are taken in to account.

Solar standards

Establishing standards for battery storage installation safety and performance measure must be a priority for the national energy system, according to the Energy Networks Association.

Appropriate standards, it says, can speed up safe and efficient battery adoption and its potentially significant role in the future energy mix.

In a submission to Standards Australia, ENA calls for storage standards to avoid technology issues as far as possible and says they should be “technology neutral.”

ENA chief executive John Bradley says Australia is a “global hot spot for battery storage” with the local markets a focus for international storage development leaders.

Last word

What seemed relatively straightforward in mid-June – a Coalition victory in the federal election, albeit with a loss of up to 12 seats as the political pendulum swung back from the extreme community reaction of 2013 – has turned instead in to another fine mess, with not only the poll outcome still in doubt as this newsletter is published but the prospect of a further House of Representatives election well before the due date of mid-2019 something not to be lightly dismissed.

The media hills as a result are alive with the songs of pundits, who, with hindsight, can see very clearly why things turned out like this – just as they have done in the UK post the “Brexit” referendum.

Some of the lessons should have been obvious earlier, but somehow political hope (and hype) again triumphed over experience.

Others, like the failure of the Coalition to shore up its strong 2013 performance in Tasmania and western Sydney, can be attributed as much to a mismanaged campaign as some deep and meaningful shift in community sentiment.

These losses alone represent the difference between a relatively comfortable return to the House for the Coalition and its current desperate thrashing about in the political deep end.

The most fundamental lesson from the election, and it has been on display for a while, is, to quote the ABC’s political editor, Chris Uhlmann, the fact that “politics as usual is being rejected by a growing number of voters.”

This is especially clear when one looks at the Senate vote – a double dissolution election designed (by the Coalition) to clear out political fringe-dwellers has delivered only a more diverse and difficult to manage chamber.

This trend does not represent a huge shift among supporters of traditional parties – with about three-quarters of the House vote counted as I write, the Coalition and Labor have garnered about eight million adherents versus a million for the Greens, the usual half million voting informal and about 1.5 million for all the other players – but, in an environment where up to a fifth of Representatives seats are marginal, it signals danger for the mainstream duo. In 2013, these voters kicked Labor where it hurt – in 2016 it is the Liberals’ turn.

This situation is deeply frustrating for the business community and nowhere more so than in the resources and energy sectors (see the report in this newsletter of the joint MCA and APPEA complaint – “Boom not over,” above – of the failure of the political debate to appreciate the ongoing benefits of their companies’ investment).

APPEA separately published a media statement in late June in which it urged the community to “vote for progress, not protest,” declaring that support for independents and minor parties “who oppose the responsible development of natural gas” is a vote for “energy insecurity and higher costs for families and businesses.”

This message is not resonating with those to whom it is directed – roughly one in 10 of those eligible to vote, bearing in mind that close to another million Australians, many of them young, did not register to vote this time – as even the incomplete House tally shows.

While one priority for the resource sector associations and their members after the election outcome is finalized obviously will be to work their way through the new political swamp to deal with immediate threats to their interests, the no less important challenge is to devise and implement strategies to overcome (or reduce) the disaffection of a community segment that is roughly bigger than the population of Adelaide and its environs.

Speaking at the Australian Energy Week conference I co-chaired in Melbourne last month, Paul Broad, CEO of Snowy Hydro, urged the electricity industry to pursue a more adult debate with the community. This is an admonition that can be applied more broadly (sorry!) to the resources and energy sectors.

One of the messages from 2 July’s disappointing election outcome is that bringing on this adult debate is rather more urgent business than some in industry may think.

Working through what constitutes an “adult debate” and how to prosecute it is still more urgent business.

Keith Orchison

4 July 2016

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