Issue 94, February 2013
Welcome to the second issue of the newsletter for the new year, writes Keith Orchison, with energy questions expected to take a prominent role in the federal election called for September.
Australia’s energy ministers are trying to drive the establishment of a national energy consumer advocacy body, which the Council of Australian Governments has identified as a priority project.
The ministers have appointed two of Australia’s most experienced energy bureaucrats – John Tamblyn, former chairman of the Australian Energy Market Commission and former chairman of Victoria’s Essential Services Commission, and John Ryan, now executive director of Cloon Economics and previously the most senior federal government public servant dealing directly with energy for six years – to advise on an appropriate model for the body.
They are required to produce a final report by 30 April.
The Networks NSW chief executive, Vince Graham, has rejected a claim by trade unions that thousands of jobs are to be cut from three distribution businesses between now and the 2015 State election.
Networks NSW has been set up by the O’Farrell government to oversee the activities of Ausgrid, Endeavour Energy and Essential Energy. Last year the government announced that 780 jobs in the businesses would be cut as part of the pursuit of cost savings.
The Electrical Trades Union and the United Services Union won tabloid headlines at the end of January by claiming that the Networks NSW board is considered a plan to slash the trio’s employment by 60 per cent – a further 7,000 jobs.
Graham says their claim is “completely wrong”.
February is expected to see the row over power asset privatisation intensify in Queensland when the State government’s commission of audit produces its final report.
The commission, chaired by former federal Treasurer Peter Costello, is expected to recommend sale of the two government-owned generation businesses, CS Energy and Stanwell Corporation, as well as of the power delivery businesses, Powerlink Queensland, Energex and Ergon Energy as part of a drive to keep State debt below $100 billion.
Queensland Treasurer Tim Nicholls says State taxpayers have spent $300 million over two years to keep CS Energy solvent, money, he argues, that could be better spent on schools, health services and police.
The State government also contributes $400 million a year to subsidise power purchases in the Ergon franchise area (97 per cent of Queensland).
The Newman government is pledged not to move to power asset privatisation before taking the issue to the 2015 State election.
Media have speculated that the generation businesses could be sold for $10 billion but by far the biggest value for the State government would be received from sale of the network assets.
Trade unions have vowed to campaign against any privatisation move.
The Energy Supply Associated hailed 1 February as “discount day” for South Australian electricity customers and has urged the New South Wales and Queensland governments to deregulate retail power as well.
The SA government became the second (after Victoria) to deregulate electricity prices and the NSW government is waiting on a report on the issue late this year from the Australian Energy Market Commission.
ESAA chief executive Matthew Warren says electricity prices in Melbourne have risen 60 per cent less than in Sydney and 50 per cent less than in Adelaide over the past 15 years.
Federal Resources & Energy Minister Martin Ferguson has also welcomed the SA government move and encouraged other States “to take note of South Australia’s major achievement.”
“Retail price deregulation,” Ferguson says, “provides opportunities for new and existing retailers to offer consumers not only competitive prices but also innovative supply arrangements so they can better understand and manage their use and costs.”
Meanwhile, in Western Australia, where a State election will be held on 9 March, the Chamber of Commerce & Industry is calling for small businesses to be allowed to choose their own electricity supplier.
CCI executive director James Pearson acknowledges that WA power prices need to rise to reflect the true cost of supply but argues that small businesses are missing out on discounts of up to 20 per cent because of the present regulatory arrangements.
Energy Policy Institute of Australia executive director Robert Pritchard has called for consideration of the establishment of a National Energy Commission to replace the current system of energy industry governance “that is tied up by so much government red tape that it cannot be understood.”
For 20 years, Pritchard says, domestic electricity and gas industries have been governed by neither federal nor State governments but through the Council of Australian Governments. The present system is “sub-optimal,” he adds with CoAG’s deliberations protracted and “punctuated by long delays,” its agendas dominated by pressing issues of the twice-a-year time it meets, by a low level of transparency and by “lacking real accountability to anyone except itself.”
Pritchard says a national commission should be established to report to all jurisdictions and stakeholders, “with a wider brief than the current role of the Australian Energy Regulator as a policeman enforcing market rules,” to ensure efficient and reliable delivery of energy services.
A more independent commission, Pritchard argues, will be able to initiate reviews of energy issues as they emerge, deal with them “in a more pragmatic and timely way” and consult stakeholders, including consumers, more effectively than under the present arrangements.
Under pressure from the Coalition State governments, CoAG has agreed to an independent review of the AER.
The Energy State of the Nation forum in Sydney on 22 March will start with a keynote address by federal Resources & Energy Minister Martin Ferguson on “What we have learned and failed to learn about energy markets and regulation.”
With a federal election called for 14 September, discussion at ESON has “never been so challenged,” says organiser Robert Pritchard, executive director of the Energy Policy Institute of Australia.
Pritchard nominates four “hot issues” for electricity: the battle to contain network prices, the timing of retail price deregulation, the privatisation of State-owned assets and whether the renewable energy target can trigger a new round of investments.
In the gas sector, he says, questions are even more contentious. They include whethere security of gas supply is at risk in NSW, whether Australian LNG exports are being seriously challenged by new developments in the US and elsewhere and how the continuing public row over fraccing can be resolved.
“The list goes on and on,” Pritchard adds. “It includes the future for carbon pricing in Australia, what will happen to the Clean Energy Finance Corporation and whether all energy options are really open. Will our capital markets cope? Will there be enough finance available on affordable terms?”
It also includes, he notes, the state of the manufacturing sector and of trade-exposed industries like aluminium. “Will a further decline of local energy-intensive industries have major implications for electricity and gas suppliers?”
The NSW Resources & Energy Minister, Chris Hartcher, says the State faces possible “catastrophic consequences” if it cannot secure supplies of affordable gas.
Hartcher has told Sydney media that current gas contracts begin to run out next year and that gas prices could double in five years unless the present imbroglio over exploiting the State’s coal seam gas resources can be resolved.
Hartcher accuses “green groups with an anti-mining agenda” of spreading misinformation about CSG development and he says NSW is already losing manufacturers who are concerned about future gas supplies and prices.
“One third of all the State’s energy needs come from gas,” he says.
In October last year, Hartcher told an Australian Petroleum Production & Exploration Association conference that the industry had to do a better job of selling its proposed operations in NSW. He said a failure to promote the CSG developments effectively had created a vacuum “and the green movement has moved in.”
The environmental movement, in turn, accuses Hartcher of “scaremongering, arguing that CSG developers “have lost their social licence to operate.”
Meanwhile, the gas industry has told east coast consumers that higher prices are inevitable after 10 years of relatively low costs.
Santos vice-president for eastern Australia, James Baulderstone, predicts that gas prices will rise to $6 to $9 per gigajoule and rejects as “an exaggeration” claims by manufacturers that they will be forced to pay as much as users in Japan later this decade. Baulderstone says Japenese prices are about $15/gj and “no-one is talking those sort of levels.”
NSW consumes about 140 petajoules of gas a year, with 95 per cent of supplies coming via contracts with producers in the Cooper and Gippsland basins of South Australia and Victoria.
Meanwhile, in the Northern Territory, the local Mills government and mining giant Rio Tinto continue their talks over the company’s gas needs for its Arnhem Land alumina operations.
Rio Tinto says a gas supply must be found for its bauxite mine and aluminium refinery to enable cost reductions or the plant will be closed with the loss of 800 jobs.
Chris Hartcher and Queensland Energy & Water Resources Minister Mark McArdle will be keynote speakers at the Australian Domestic Gas Outlook conference in Sydney on 10-11 April.
Hartcher will outline the O’Farrell government’s plan for averting a gas supply crisis in NSW later this decade.
With federal election looming, there will be special interest in the views of the Coalition’s resources and energy spokesman, Ian Macfarlane.
Leading gas industry speakers will include AGL Energy managing director Michael Fraser, Santos’ James Baulderstone, Origin Energy’s Frank Calabria, CEO energy markets, APA Group’s Ross Gersbach, chief executive strategy and development, and EnergyAustralia’s Mark Collette, group executive manager, energy markets.
Delegates will have particular interest in hearing from Duncan Fraser, vice-president of the National Farmers Federation, and a string of speakers from the large consumers’ side.
The conference is being supported by the Energy Supply Association, the Energy Retailers Association and the Plastics & Chemical Industries Association.
One of the world’s biggest players in the energy industry, Royal Dutch Shell chief executive Peter Voser, will be the star industry speaker at the annual conference of the Australian Petroleum Production & Exploration Association in Brisbane at the end of May.
The vibrant health of the export gas industry in Australia and its long-term prospects to be a world-leading LNG exporter are underlined by APPEA’s expectation that well over 3,000 delegates from here and overseas will attend the three-day conference – while the event’s exhibition had sold out all 180 booths by mid-December.
Voser, who has been global CEO of Shell since 2009, overseas what the “Wall Street Journal” describes as a “modern corporate colossus,” with operations in 44 countries and $US470 billion in annual revenue.
Summing up Shell’s view of the world, Voser told the “Journal” in January that he assumes energy demand will double over the next 40 years year, with renewable resources accounting for roughly a third of supply, nuclear power holding between five and 10 per cent of the global market and the rest being met by oil, coal and gas.
In another commentary, Voser estimated that energy demand could increase 40 per cent between now and 2030, driven by rising world population and improving standards of living in developing countries led by China and India.
As for the immediate health of the global economy, Voser says Shell expects Asia to recover better in 2013 than the rest of the world with “good potential” for the United States but a “very slow growth year” in Europe.
Macquarie Bank says that the installation of electricity smart meters in Australia should be a competitive roll-out led by energy retailers.
In a submission to the Productivity Commission report on electricity network regulation, which is due to be finalised in April, Macquarie argues that, on the basis of results in a similar British exercise, a roll-out led by retailers will deliver greater benefits, more innovation and more choice for consumers.
The bank points out that smart meter technology is one of the fastest-developing areas in the energy sector with rewpect to innovation and cost reduction. Given Australia’s varying geographic, economic and regulatory environments, it says, using benchmarking and regulation to drive the process is “problematic.”
Macquarie argues that the network distribution businesses are “not organisations that traditionally work well with customer-facing entities and do not appear to be particularly innovative or fast adapators of new technologies and services.”
Master Electricians Australia, providers of accreditation for electrical contractors, has spoken out against a broad-scale roll-out of advanced metering infrastructure.
While smart meters can provide savings to some customers in a position to alter their usage patterns, many consumers cannot, it argues.
It claims a national mandatory roll-out is “likely” to have a detrimental impact on many households, especially families with young children and the elderly, who have no choice about usinmg power in peak times.
MEA says the take-up of smart meters should be a choice, not a mandatory imposition.
The Energy Retailers Association has come to a similar landing.
In its submission to the commission, ERAA asserts that government-mandated, network-led roll outs of smart meters can be high cost and “may not gain the support of the customers they are intended to benefit.”
Arguing for a market-driven roll-out, ERAA claims that competitive metering will deliver better outcomes for customers – including lower costs, better services and faster delivery of such services in forms users want.
No market participate will initiate a commercial deployment of smart meters if there is a risk of a future mandated requirements by a government, it adds.
In its submission to the Productivity Commission, Origin Energy has warned of the dangers of a consumer backlash over cost-reflective networking pricing if governments do not play a major role in educating consumers.
The company, which services 4.4 million electricity, gas and LPG customers, says it supports network pricing that is cost-reflective and economically efficient and accepts that it and other energy retailers have to play a major communications role over price changes – “but, without a clear message from governments, a consumer backlash is reasonably likely.”
Origin adds that, where cost-reflective pricing is implemented, it is important for special arrangements to be put in place to mitigate the impacts on vulnerable customers who may not be able to switch their consumption from peak periods.
It argues that the compensation should be the province of government “on a means-tested basis with payments linked to electricity bills.”
Origin says it agrees with the commission that current cross-subsidised usage charges do not support customers in hardship.
The Sydney-based Public Interest Advocacy Centre is warning that key reforms to network regulation may not be in place in time for the next round of determinations of network revenues.
PIAC’s concern co-incides with the view of the NSW Independent Pricing & Regulatory Tribunal, which is undertaking a determination of regulated electricity prices for the State from 2013 to 2016 and is due to publish its determinations in May.
In its issues paper for the review, IPART says “at this stage it is not clear which policy and regulatory settings will apply over the next three years and what the associated impacts on electricity prices will be.”
PIAC, in its submission to the Productivity Commission networks study, says the reforms being pursued through the Council of Australian Governments’ process, “need to be put in place as soon as possible.”
The centre says the reforms also have to focus on the long-term interests of consumers. “Our concern is that, with so many reports and conflicting interests, the outcome could be piecemeal reform that benefits neither consumers nor the networks.”
PIAC says the essential problem of the current regulatory regime is that it focusses on assets and not the services delivered to consumers.
In another submission to the commission GDF Suez Energy Australia (previously International Power) has agreed that the over-arching objective of the regulatory regime is to advance the long-term interests of customers, but warns that moves to reinforce the customer focus could contribute to their detriment if policymakers focus on short-term gains.
Major Energy Users Inc, a lobby group for large consumers of energy,is arguing to the Productivity Commission that east coast high voltage interconnection is inadequate – and claiming that constraints have enabled generators in some areas to exercise market power “frequently and persistently,” resulting in “massive wealth transfers from consumers to generators.”
The Energy Supply Association has pushed back at continuing claims about “gold-plating” electricity networks.
In its submission to the Productivity Commission, ESAA says little evidence has been provided to back the accusation despite its widespread use.
“The suggestion that, because they earn a return on their asset base, networks will build incessantly is usually made without any serious (attempt) to substantiate it,” the association says. “Such assertions overlook the fact that asset bases must be approved by the regulator, the returns on investments are dependent on a series of regulatory decisions over 40 to 50 years and that networks do not have access to an endless supply of finance.”
ESAA warns that assumptions that changing the regulatory rules will be a panacea for pricing issues should be treated with caution. “The cost of under-estimating network costs are far greater than the cost of over-estimating.”
The Melbourne-based Consumer Action Law Centre has spoken up for keeping the Australian Energy Regulator under the umbrella of the Australian Competition & Consumer Commission.
CUAC says the Productivity Commission draft report analysis supporting separation of the pair “lack rigor.” It argues that most of those seeking the break-up are energy market participants regulated by the AER.
CUAC says that there are operational efficiencies available from the AER and ACCC sharing resources and having them work closely together enables them to share market knowledge and draw on a “great pool of experience” to protect consumers from poor business practices and promote energy market competition.
The Australian Energy Regulator has strongly supported the proposed changes to east coast network regulation that are now being processed by CoAG’s energy ministers’ committee.
Giving evidence at a public hearing staged by the Productivity Commission as part of its current networks review, the AER chairman, Andrew Reeves, has said the proposed changes will promote the interest of consumers. “While networks will be rewarded for undertaking efficient and necessary investment, consumers will not be required to foot the bill for over-investment.”
Under the reforms, he says, the AER will have greater ability to form its own views on expenditures networks require to deliver efficient and necessary services.
Changes to incentive arrangements will allow the regulator to prevent networks receiving returns on inefficient over-investment.
Changes to the approach for setting rates of return on borrowings will allow the AER to set rates that better reflect actual financing practices.
Changes to consultation arrangements will require networks to consult energy users in drawing up spending proposals.
Reeves has also strongly rejected suggestions that it is not an independent regulator because of its links with the ACCC.
Reeves also told the commission that the AER intends to put out a guideline this year to shape best practice consumer engagement by the networks.
Energex put more than 400 line crews to work at the end of January to deal with power failures in south-east Queensland caused by the impacts of ex-Cyclone Oswald.
At its peak, the network was dealing with some 300,000 power outages, almost one in three of its accountholders, caused by 3,600 fallen powerlines.
Peter Price, Energex’s executive general manager asset management, described the impact of Oswald as the biggest in his 31 years working in the industry.
Energex’s distribution area stretches from Gympie to the NSW border and west to the Great Dividing Range, including the Sunshine Coast, Brisbane and the Gold Coast.
Meanwhile, the second Queensland network business, Ergon Energy, serving 97 per cent of the State, had up to 200 workers at a time in the field dealing with the flooding created by Oswald. Their challenges included rebuilding two powerlines near the stricken town of Bundaberg.
Queensland Treasurer Tim Nicholls has denied trade union claims that the industry’s response to the fwild weather had been affected by job cuts.
Nicholls says that Ergon and Energex have undertaken restorations faster in 2013 than in the major floods of 2010-11.
The subsidiary of a major Chinese government business is extending its reach in a Tasmanian renewables venture.
Hydro Tasmania has announced that it has cut a new deal with Shenhua Clean Energy Holdings to expand the previous arrangement over the Bluff Point and Studland Bay wind farms in the State’s north-west to include the $394 million Musselroe project in the north-east.
SEC’s immediate parent is the world’s tenth largest wind farm developer, Guohau Energy Investment Corporation. In turn, it is owned by the giant Shenhua Group, which is under the direct supervision of the Chinese central government and holds nearly 43,000 MW of power capacity among other energy interests.
SEC has paid $89 million for its Musselroe participation, a deal that also removes $270 million in debt from Hydro Tasmania’s books.
Hydro chairman David Crean says the 160 MW Musselroe project is on track for completion in mid-2012. The State government-owned generator will retain a 25 per cent interest in the development.
The Year of the Water Snake begins on Sunday, 10 February.
For Australians at large, this will be the year of an important federal election, for Western Australians two elections as they go to the polls at a State level on 9 March.
For the energy supply industry, this has the potential to be a year of significant change or one of lost opportunity.
In the energy sphere, so many things may or may not get resolved in 2013.
The ground may be laid for developments of benefit to the national economy for the rest of the decade, perhaps longer, or churned up to create fresh hurdles to investment and efficient supply.
Because it is a federal election, we are stuck with an even larger amount of political spin than usual, most of it oriented to claims about power prices and looking after consumer interests.
Momentum Energy, a part of the State government-owned Hydro Tasmania, makes an interesting point in its submission to the review being undertaken in New South Wales of electricity prices from 2013 to 2016 by the Independent Pricing & Regulatory Tribunal (which is due to produce a final report in May, an awkward time for the federal government if, as expected, IPART delivers further price rises for regulated customers).
Momentum says: “Whilst normative concepts like fairness are prominent in Australian consumer protection law, in reality notions of fairness typically vary across cultures and can differ across demographic groups or other socio-economic groups within them.
“In short, what might be considered fair for one demographic group of consumers might be less so for others.”
This goes to the heart of the electricity industry’s push for retail price deregulation, the mass use of smart meters and the introduction of time-of-use prices to help cut the top off ever-growing peak demands.
It also goes to the heart of the Prime Minister’s promise to voters that household prices can be cut $250 a year from 2014 – because this pledge is based on a draft Productivity Commission report (the final version of which will appear in April) that pushes for deregulation, a widespread roll-out of new meter technology and the introduction of flexible pricing.
For reasons that are hard to explain except by making pejorative comments about journalists and their approach to really informing their readers, viewers and listeners, the Australian media have failed to grasp what lies behind Julia Gillard’s widely-publicised price promise, so the public has yet to understand what they have to accept to achieve the benefit – which, in any event, the Productivity Commission says will be between $100 and $250 annually after consumers have met the cost of the meters.
Going down this path for the east coast requires NSW and Queensland to embrace retail price deregulation as Victoria and South Australia have now done.
It requires all the east coast States and the Australian Capital Territory to embrace widespread use of smart meters and ToU tariff regimes.
Integral to being able to achieve this outcome is an acceptance by consumers that they will be protected in the new energy environment.
Here again is Momentum Energy: “Consumers are best served when they have access to proper information on how to choose the energy offer which best suits their needs (and this depends on) the ease of understanding the information available to them.”
The political and supplier challenge is to win the understanding of residential and small business consumers about what is happening in power supply and how they can avoid some of the impact of higher charges.
Opinion polling by the McKell Institute last year threw up a rather contentious claim that, in Sydney, householders are more worried about their electricity bills than their mortgage, the cost of petrol or concerns over the presence of police or doctors in their area.
Given that, on average, the cost of electricity represents a charge of about $6.30 a day for householders and, even though in nominal terms this is double what it was in 2007, given that the power bill has remained at about 2.5 per cent of disposable income because average incomes have risen, this is a curious assertion.
Nevertheless, belive that this is so is a political reality and represents a serious shadow over how policymakers at both federal and State levels will deal with the reform processes now before them.
The situation is not helped in NSW, Queensland and Tasmania (as well as in Western Australia and the Northern Territory) by governments continuing to own the bulk of electricity supply businesses.
Apart from NSW, where the generation assets are up for sale, shifting the assets in to private hands, leaving governments to manage regulation, remains, it seems, a bridge too far for most politicians, even those on the Coalition side.
With all this in mind, a key question for the Year of the Water Snake is why it should be different from a number of recent years in which policy short-termism in the energy sector has held sway over predictability in decision-making and, therefore, encouragement for investors?
The past year saw more talk about energy than any other in my 30-year experience of the sector. In fairness, it also saw as much work at the coalface of policy and regulatory design as has occurred since the national electricity market was being launched in the mid-1990s.
The acid test now is whether the talk and the reviews and the modelling can be turned in to a new environment for electricity supply that will deliver an efficient and competitive east coast market able to satisfy consumer requirements.
A cynic will say “Don’t hold your breath” while an optimist will point to the hard yards already achieved and say the platform is laid for a good outcome.
It’s a situation crying out for a cliché: time will tell.
Keith Orchison
6 February 2013
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