Coolibah Commentary

Issue 167, March 2019

Right now, it’s all about politics, writes Keith Orchison, with the New South Wales election on 23 March, the federal Budget in early April and then the gallop to the national poll in May – energy issues high on the agenda all along the way. En route, the worrying state of gas supply for the east coast, and NSW manufacturing businesses in particular, also will be in strong focus via the Australian Domestic Gas Outlook conference in the first week of March. Meanwhile the wrangling over retail electricity pricing on the east coast is set to be front and centre of the politicking until May following the Morrison government making good on its threat to impose regulation via a default market price, a move the retailers insist is likely to make things worse for most mass market customers because of its claimed impact on discounting.

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Quotes

“It’s a fine line to tread” – Gavin Dufty of St Vincent de Paul Society, warning that too much regulation may cause more harm than good. “If they regulate too hard, people who shop around might not get as good a deal.”

“For 86 per cent of customers already on a cheaper market deal, this announcement will not lower prices” – Sarah McNamara, Australian Energy Council CEO. “This a rushed and sub-optimal response that does not address the cost issues in the market.”

“These reforms will bring down electricity prices significantly for over half a million consumers on excessive standing offers. Requiring energy providers to advertise discounts against this ‘default’ price will make it easier for consumers to choose between competing offers” – Rod Sims, chairman, Australian Competition & Consumer Commission.

“Over the past 10 years Australian energy policy has deteriorated virtually to the point of failure” – Robert Pritchard, executive director, Energy Policy Institute of Australia. “This has been caused by the struggle to integrate energy and climate policy and has highlighted our governance problems.”

“Australia is being convulsed by its contradictory identity: a fossil fuel-endowed nation enriched by its resources set against a middle-class moralism hooked on climate change action” – Paul Kelly, editor-at-large, The Australian newspaper.

“Populist policy interventions have destroyed political consensus and given rise to unsustainable energy policy; politicians need reliable evidence about costs to make choices between the destruction of sectors of the economy and minimizing the risk from climate change” – John McDonnell in an EPIA public policy paper.

“We need a new power system plan that passes the engineering and economic commonsense test and we need it quickly” – Robert Barr, national president, Electric Energy Society of Australia. “Such a plan needs to ensure sufficient dispatchable MW capacity is available for the NEM at all times of the year.”

High spot

The Australian Energy Market Operator says average electricity spot prices in the east coast mainland States in the final quarter of 2018 – running at $82 to $96 per megawatt hour – were the highest on record.

They are notable, AEMO adds, because they occurred despite mainland operational demand for the quarter falling to its lowest level since 2002 and a lack of spot prices above $300/MWh.

The market operator says one of the factors influencing the outcome was the closure of 4,000 megawatts of coal-fired capacity between 2013 and 2017. Another was lower use of gas-fired generation and high average gas spot prices, especially in Victoria.

It adds that black coal generators remain the dominant wholesale price-setter in the NEM, particularly in Queensland and New South Wales where they were the marginal plants more than 60 per cent of the time in the fourth quarter.

Brown coal production in this period was at its lowest since the market began operating, with planned and unplanned outages at Victorian power stations seeing output fall to 8,227 gigawatt hours for the quarter. Wind and large-scale solar generation was 4,563 GWh across the market.

AEMO notes that average operational demand in the NEM has been falling since 2009 as a result of the decline of energy-intensive industries, rising uptake of rooftop solar PV and energy efficiency improvements.

Expecting rises

The Australian Industry Group has told the federal government in its 2019 Budget submission that 68 per cent of its member CEOs expect energy input costs to rise further this year after two-thirds of them experienced increases in 2018.

Five per cent of its CEOs anticipate lower energy costs.

AiG says that “rising energy prices and the reliability of energy supply are becoming a key risk area for an increasing number of businesses and across an increasing range of industries.”

The association, which represents 60,000 Australian businesses, adds that “energy prices are a serious challenge to the competitiveness of many trade-exposed businesses which are otherwise well positioned for growth.”

A “more durable framework” for Australian energy and climate policy is “urgent,” it argues.

Role of coal

New South Wales and Queensland contributed 65.15 per cent of electricity sent to the east coast grid in calendar 2018 – and 84.14 per cent of this supply was generated by black coal plants.

In Victoria (which accounted for another 23.2 per cent of power to the grid), the remaining brown coal generation after the closure of Hazelwood in 2017 provided 77.6 per cent of in-State supply.

Data provided by analysts Green Energy Markets also show that wind farms met five per cent of the three-State generation in 2018 while gas plant (affected by the fuel’s high price) accounted for 5.3 per cent and hydro 3.8 per cent. The total coal share of production in these States (146,275 gigawatt hours) was 82.4 per cent.

The GEM analysis also records that estimated rooftop solar power use in the three States reached 6,796 GWh.

Meanwhile the Australian Energy Council reports that black coal generation last year was at its highest in the first quarter (15,311 gigawatt hours, dropping back in the middle quarters of 2018 to just under 14,000 GWh and reaching 14,305 GWh in  the final quarter. 

By comparison, variable generation (wind and large solar power) peaked in the last quarter of 2018 at 1,294 GWh and was at its lowest in the second quarter at 810 GWh.

Link benefits

ElectraNet says the high voltage interconnector it wants built between South Australia and New South Wales – at an estimated cost of $1.53 billion for the preferred route – can be completed between 2022 and 2024, depending on the regulatory approval process, and will deliver “substantial economic benefits.”

The project targets greater security and reliability of electricity supply in SA in the near term and, it is claimed, will help facilitate the transition of the NEM to low-emission energy sources.

ElectraNet says evaluation of the proposed development demonstrates it can deliver $6.4 billion in economy-wide benefits for the two States over two decades.

The future of the project is now subject to evaluation by the Australian Energy Regulator with SA Energy Minister Dan van Holst Pellekaan declaring it “nation-building” and opening greater opportunity for his State’s weather-dependent renewable resources.

Meanwhile Prime Minister Scott Morrison has announced a $56 million grant to help fast-track work on the so-called Project Marinus – feasibility investigation of the proposed second high voltage power link across Bass Strait. The latest work on the project, released in late February, estimates a capital cost of up to $1.7 billion for a 600 MW capacity line and up to $3.1 billion for a 1,200 MW interconnector.

The new latest feasibility study says: “The largest single influencing factor in the economic viability and timing of Project Marinus is the trajectory of coal-fired generation retirement in the NEM.”

The benefits, it adds, are likely to be greater than the costs when 7,000 MW of coal plant retires “which could occur from the mid-2020s to the mid-2030s.” The planning envisages the first 600 MW of the interconnector capacity being commissioned in 2025.

The project is seen as having the potential to bring up to 1,200 MW of additional renewable capacity in to the NEM.

Green light

The Morrison government has committed “up to $1.38 billion” to support the development of the proposed Snowy 2.0 project.

Prime Minister Scott Morrison says the decision “green lights” the project to proceed to the early works stage. He also says responsibility for the extensive transmission infrastructure needed to support the project, estimated to cost $2 billion in addition to the capital outlay on Snowy 2.0, will fall to the New South Wales and Victorian governments.

Federal Finance Minister Mathias Cormann says he is “confident” the Snowy 2.0 cost will fall between $3.8 billion and $4.5 billion.

Snowy Hydro CEO Paul Broad says the government-owned business is targeting 2024 for completion of the project.

Labor climate and energy policy spokesman Mark Butler is calling on the federal government to release the full business case for Snowy 2.0. “We do want to be able to kick the tyres on this thing.”

Renewables scene

The Australian Energy Council reports that South Australia has 463 megawatts of committed renewables generation development and 6,353 MW under consideration – to add to the 2,300 MW of wind and large solar power now on line.

In addition, AEC notes, there will be increased distributed generation in the State in the form of rooftop solar PV and domestic batteries.

New South Wales has 2,100 MW of large-scale solar and wind capacity at present and 3,000 MW of hydro capacity – plus a development pipeline of 1,520 MW of renewables and 14,337 MW of proposed renewables projects.

Scant information

Energy Networks Australia is highlighting the lack of information available in the New South Wales election about the impact on grid of renewable energy growth promises.

Andrew Dillon, CEO of the association, says political commitments contain “scant information” about how huge increases in solar power and energy storage can be properly integrated in to the system to ensure security and reliability of supply.

“Renewables are a vital part of our energy future but present their own challenges if not properly planned and managed” in a grid not designed for a two-way energy flow, Dillon adds.

NSW Labor has promised to deliver 4,000 megawatts of large-scale renewable capacity in the State over the next four years – and 7,000 MW by 2030.

Concerted effort

The Minerals Council of Australia complains that there is “a concerted effort by some people to deny (this country) the opportunities, jobs and community prosperity that come from supplying energy to the world.”

Speaking to the Energy Policy Institute forum in Sydney in late February on decarbonisation, MCA chief executive Tania Constable said activists “have themselves benefitted greatly from the supply of cheap and reliable power but want to deny these benefits to others.”

“Comforted by their cosy existence and a distorted view of social justice, they want to stop women and children from being lifted out of poverty by access to abundant and affordable energy.

“Those who argue we shouldn’t sell our coal, uranium or gas to the developing world have no answer when asked what (these countries) should do if denied these resources.”

She added “it is fundamentally unethical for rich Westerners to promote policies condemning people in South Asia and Africa to continuing poverty.”

Constable said the MCA “strongly agrees that wind and solar are important elements of the global energy mix and fundamental to a transition to clean energy – but, while storage technology remains in relative infancy, renewables won’t meet the energy needs of developing countries or support their legitimate aspirations for economic development.”

Constable pointed to a list of energy supply and application innovation activities – including advanced nuclear reactors, power grid modernization and carbon capture, use and storage – and said it is “a sad reflection on Australia” that most items on it “barely rate a mention in our public discourse.”

She said miners use 14 per cent of the electricity produced in the NEM and queried “why Australia has jettisoned its competitive advantage on energy for some of the highest costs in the developed world?”

She told the EPIA forum that a key element missing from the current national energy debate “is that we should expect more power stations to close sooner than people expect because older baseload plants (will be) made uncommercial as the level of intermittent renewable energy sources increase.”

The MCA believes that, in addition to Liddell closing in 2022, “it is likely that Yallourn, Vales Point, Gladstone C and Torrens A power stations could close much earlier than some people think.”

Between them, Constable said, these plants contribute 30 per cent of NEM “low-cost, 24/7 power.”

Suggestions that fast-tracking Australian energy system decarbonisation can be “easy, painless or quick,” she added, “are based on a heady combination of delusion and denial.”

A single wind turbine

Minerals Council CEO Tania Constable told the EPIA decarbonisation forum that a single three megawatt wind turbine needs 335 tonnes of steel (“which means 200 tonnes of metallurgical coal”), 4.7 tonnes of copper, 1,200 tonnes of concrete, three tonnes of aluminium, two tonnes of rare earth elements, zinc and molybdenum.

Mind the noose

Leading energy analysts EnergyQuest are warning that Queensland faces the partial shutdown of a third of its $84 billion coal seam gas export business by the middle of the next decade because of supply shortages.

Graeme Bethune, EneryQuest CEO, says: “Underpinning the production noose is an emerging forward reliance for feedstock on reserve estimates that could fall well below delivery expectations.”

The Queensland LNG developments operated at only an average 82 per cent capacity in 2018.

Bethune says: “Current export levels are likely to be as good as it gets and maintaining them will require (drilling) more than 18,000 wells.”

He points out that, with dwindling production from gas fields, including Bass Strait, in southern States, political pressure on the Gladstone LNG companies to divert gas to the domestic market is likely to intensify.  Queensland coal seam gas supplied 25 per cent of east coast demand last year.

However, he adds, there are limits to how much of the Queensland gas can be diverted to the domestic market because of infrastructure constraints and the requirements of international contracts.

Bethune asserts that stresses on winter east coast supply may emerge as early as 2023. He says there is now an urgent need to start importation of LNG to the east coast. “The southern States need a new permanent source of supply which can only be met by the proposed LNG projects after 2026.”

Bethune said timing is critical and it is “concerning” that regulatory processes for the new terminals in Melbourne and Sydney “dragging out.”

Meanwhile a report for the federal government by ACIL-Allen says a 2,900 kilometre pipeline from Karratha in Western Australia to eastern States would cost $5.8 billion and take six to seven years to design and build.

Narrabri imbroglio

The Narrabri gas project has emerged as a prominent issue in the New South Wales election this month as the State Labor party pledges to block the development even as the promoters, Santos, sign a deal to feed fuel to a new ammonium plant.

Among the first to attack the Labor promise has been the Australian Workers Union, national secretary Daniel Walton describing the declaration by opposition leader Michael Daley as “disappointing to say the very least.”

The project, a topic of controversy for years, is due to be subjected to Independent Planning Commission approval but Daley says that he, in government, will over-rule any decision in favor of development.

Walton says “factories are already buckling under rising gas prices.”

Santos says Narrabri gas could meet half NSW’s needs – 96 per cent of which are currently provided from interstate.

Malcolm Roberts, CEO of the Australian Petroleum Production & Exploration Association, says both Labor and the Coalition in NSW “have dug themselves a big hole by choosing to play politics with energy supply and the environment.”

Roberts adds that “NSW gas customers are paying a premium for short-term decisions that have blocked safe local projects.”

The State has 1.3 million households and 33,000 businesses, employing 250,000 people, relying on affordable gas, he points out. “More than 40 per cent of the gas used in NSW supports manufacturing. In most cases (they) have no substitute for gas.”

Big switch

Roy Morgan market research company says 1.46 million gas customers and 2.07 million electricity accountholders could switch energy providers in the next 12 months.

The claim is based on a survey of 50,000 Australians and the company says there has been a relatively small rise in the percentage of consumers considering switching suppliers compared with a year ago – 9.9 per cent of those surveyed for gas supply (versus 9.7 per cent) and 10.2 per cent for electricity (versus 10.1 per cent).

According to Roy Morgan, Aurora Energy, ActewAGL and Ergon Energy are the electricity businesses with householders least likely to switch while the two biggest market players, Origin Energy and AGL Energy, recorded 12.3 per cent and 12.7 per cent respectively. The worst two performers in the survey were Alinta (14.7 per cent) and EnergyAustralia (14.2 per cent).

Norman Morris of Roy Morgan says the survey outcomes highlight the need for retailers to retain existing customers in a highly competitive market rather than pursue new ones. The consumer mood, he adds, reflects a continual negative news environment for both electricity and gas focusing on such issues as prices increases and confusion over pricing comparisons.

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Last word

In cricket, bad light can stop play. In the energy world, the players have to soldier on – and there is little in the current environment to encourage them as the murk of politics envelops the arena.

In a paper published by the Energy Policy Institute in February, veteran policy adviser John McDonnell observes that populist policy interventions have destroyed political consensus in this sector of the economy; at present, he asserts, neither of the major political parties has an energy policy that can last past one electoral cycle.

His argument, one I support, is that stakeholders in this game need reliable evidence about costs to help them make difficult choices about both energy supply and Australia’s role in pursuing carbon abatement as part of the global push on decarbonisation.

Perhaps the most bothersome aspect of the current situation is that it has been allowed by legislators to deteriorate to an exceptional degree, with concerns about demand destruction among commercial and industrial consumers of electricity and gas rising steadily.

More than two years ago, the Productivity Commission published advice that the energy sector, especially on the east coast, was in “a fragile state” and calling on governments, federal, State and Territory, to work co-operatively to resolve the issues.

Developments since then have been of the “one step forward, two steps back” nature and the thrashing about in energy matters over recent months by the Coalition federal government has only served to exacerbate the fragility to which the commission referred.

The concerns of businesses engaged in supply were epitomized in February by comments made to a Senate committee by Catherine Tanna, managing director of EnergyAustralia and also a member of the Reserve Bank board.

She described the efforts of the Coalition to wave a “big stick” at electricity suppliers as “desperate and dangerous,” characterizing the proposal to force divestment of energy assets as adding a layer of uncertainty on top of the policy vacuum affecting the power sector.

“It’s like adding a house of cards on a foundation of quicksand,” she said.

Now there are plenty of others available to tell Tanna and her retailer colleagues that the state of electricity prices in this country is unacceptable to consumers and to blame this to a greater or lesser extent on major suppliers using their strength in the market to the detriment of consumers.

The retailers have accepted that “there is a lot to fix” – to quote Tanna again – by formulating an “energy charter” for prices, reliability, customer service and carbon emissions reductions, a step acknowledging the bleeding obvious: suppliers have lost the trust of the community to a significant extent, a situation they tend to blame on the policy turmoil and its repercussions.

Whatever the make-up of the federal government after the May election, it is hard to see a sea change in the east coast energy market in the financial year 2019-20 but it may be possible to carry some of the work now being pursued – in the wake of 49 Finkel task force and 56 ACCC recommendations – to the point where the playing light is no longer so murky.

If we reach July 2020 and this environment has not improved to a considerable degree, then the risks of still more political intervention will be real and the lack of public trust in both policymakers and energy suppliers can only get worse.

One doesn’t have to be the Delphic oracle to see that the outcome of such a downward spiral may well be a consensus that the NEM is a basket case, leading to a new convulsion in policy- and rule-making to create “NEM 2.0” in which even more generation and network investment, as well as abatement measures, are supported by governments and taxpayers.

This is all the more reason for initiating as quickly as possible, as McDonnell has proposed, a Productivity Commission review of national energy policy.

Keith Orchison

28 February 2019