Coolibah Commentary

Issue 159, July 2018

After another month of frenetic political and media debate on energy issues, Australia starts a new financial year where the outcome of August’s CoAG Energy Council’s decision on the “national energy guarantee” will set the scene for the east coast market in the rest of the decade. The underlying economic and political issue of energy prices looms ever larger, with a new Australian Competition & Consumer Commission report piling pressure on both retailers and the federal government to relieve users’ pain – while debate continues on gas availability, with the Australian Energy Market Operator’s new-found confidence that east coast needs next year and out to 2030 are now covered coming under challenge.

Top dog

Which is the most used energy source in Australia?

That it is oil (53 per cent on federal government analysis) is probably no surprise, but the Australian Pipelines & Gas Association is pointing out that the second largest source is gas (22 per cent) not electricity (20 per cent).

APGA chief executive Steve Davies is using the point to argue that it is an over-simplification for the public energy debate to boil down to coal versus renewables. “Electricity and energy,” he says, “are increasingly thought of as the same thing and this is far from the case. Gas provides more usable energy to Australians than electricity does.”

Coal ascendant

Despite ongoing loud noises about its demise, east coast black coal generation rose in the 12 months to the end of March.

EnergyQuest data shows that the black coal plants in New South Wales and Queensland delivered 110,842 gigawatt hours of electricity in the year – compared with 105,507 GWh in the same period of 2016-17.

However, overall coal-based power production in the NEM fell because of the closure of Victoria’s Hazelwood power station in March last year, resulting in total coal-based output of 146,939 GWh versus 151,288 GWh in 2016-17.

With hydro system output also falling in the 12 months to March this year and wind farm production almost static, gas generation played a larger role: its NEM contribution rising to 20,762 GWh from 16,760 GWh.

In Western Australia, black coal generation remains the leading source of power in the south-west integrated system although, in the 12 months to March, as reported in EnergyQuarterly, electricity demand fell back, compared with the same period of 2016-17.

SWIS generation dropped to 17,609 GWh (compared with 19,312 GWh in 2016-17) – coal plant providing 8,092 GWh, gas 6,705 GWh and wind farms 1,429 GWh.

Quotes of month

“Changes in the gas markets have improved the east coast’s supply outlook with the 2018 Gas Statement of Opportunities now showing no supply shortfalls in the short term. However, risks remain that natural variances in weather-driven consumption and gas-powered generation demand could still tighten the supply/demand balance” – the Australian Energy Market Operator.

“(The AEMO forecast) is based on assumptions of major investments to develop new fields and gas resources that are yet to come. None of this is certain; as far as I am aware none of those projects has been sanctioned. It’s just industry’s view or hope that gas may be available – but import terminal gas is actually there” – James Baulderstone, Australian Industrial Energy consortium.

“I have extreme doubts about the accuracy of the AEMO report of the absence of a shortage. I am not seeing it in the market. I believe in a much more Boy Scout-ish approach: be prepared” – Richard Cottee, managing director, Central Petroleum.

“Even with the reduced demand forecast from AEMO, we still see a gas shortfall starting between 2023 and 2025. This is significantly earlier than 2030 which their outlook indicates” – Nicholas Browne, head of Asia-Pacific gas and LNG, Wood Mackenzie.

Be honest

Politicians should be honest with consumers about a harsh truth – “high electricity wholesale prices are the new normal.”  This is the message from the Grattan Institute’s new report on energy costs.

The commentary, written by Tony Wood and David Blowers, asserts that, as a result, “high electricity prices are here to stay.” They add that it is impossible for politicians to fix the issue because most of the rises have been caused by issues beyond their control.

Part of the problem, Wood and Blowers assert, is that generators “game the system,” using market power to create artificial scarcity of supply. They claim this has mainly occurred in Queensland and South Australia “with signs of it in Victoria” and add it could occur in New South Wales after the closure of Liddell power station. “Gaming,” they declare, “appears to be permitted by the current NEM rules,” calling for changes to at least limit it.

They says wholesale prices are “very unlikely” to return to previous levels around $50 per megawatt hour because historic NEM over-supply has disappeared, gas prices will stay higher and new generation technologies cost more.

NEG wars

June provided another month of swirling arguing about the future of the “national energy guarantee” culminating in a Senate vote before the federal parliament rose for the winter recess in which a One Nation motion calling on the government to “facilitate the building of new coal-fired power stations and the retrofitting of existing baseload power stations” was defeated 34-32, with the Coalition voting for the proposal.

Later Prime Minister Malcolm Turnbull answered a Labor question in the House of Representatives by asserting that the NEG “is technology agnostic and facilitates investment in all forms of generation.”

Environment & Energy Minister Josh Frydenberg told a radio station: “Seventy per cent of our power today comes from coal. By 2030, under the NEG, it will still be 60 per cent.”

PVs on the up

Estimated production of electricity from rooftop PV systems exceeded 8,000 gigawatt hours over 12 months for the first time in the year to March 2018, according to EnergyQuest reporting.

The analysts’ EnergyQuarterly bulletin shows an estimated 7,068 GWh of rooftop power in the NEM States compared with 6,050 GWh in the 12 months to March 2017 and 5,182 GWh in this time frame in 2015-16.

The bulletin records 1,269 GWh in Western Australia’s SWIS market for the year to March compared with 1,000 GWh in the same period in 2016-17.

The Australian Energy Market Commission in its latest review of energy retail competition comments that electricity bill shocks and lack of trust in retailers are pushing householders increasingly towards generating their own power on their rooftops.

“There were 154,877 residential solar installations in 2017,” the AEMC says, “an increase of 25 per cent from 2016.” It adds that 1.8 million homes across the country now have solar panels – and between 41 and 62 per cent of households in the NEM have installed PVs or are considering doing so.

Don’t exaggerate

Confronted with growing pressure on energy retailers, their lobby group, the Australian Energy Council, is urging that the debate focus on facts.

AEC’s incoming CEO, currently its general manager, Sarah McNamara says claims the retailers have a profit margin on New South Wales household bills of 15 to 20 per cent are exaggerated. Their margins across the NEM, she argues, were found in October last year to range from five to nine per cent and were eight per cent in NSW. The key drivers for higher electricity bills, she adds, have been past network spending and more recent higher wholesale power prices.
Meanwhile Origin Energy CEO Frank Calabria, in a newspaper op-ed ahead of the Australian Competition & Consumer Commission’s report on the NEM, has argued that the decision by his company, AGL and EnergyAustralia to have flat or falling end-user rates from 1 July – after double digit increases for 2017-18 – “is not a blip.” Calabria asserts this is a turning point and there will be further downward pressure on NEM wholesale prices as more wind and solar capacity is built and the “national energy guarantee” provides more investor certainty.

Rate of return

A key component of the controversial revenue-raising allowances for electricity networks is being put under scrutiny.

The Australian Energy Regulator has set up an independent panel, chaired by Natalia Southern, a former Victorian senior public servant, to review its rate-of-return approach – the forecast of the cost of funds networks need to attract investment.

AER says the rate of return makes up about half of networks’ allowed revenue – and this, in turn, represents up to half of consumer bills.

Another link

South Australian transmission company ElectraNet is promoting a new $1.5 billion interconnector between the State and New South Wales as offering $1 billion over two decades.

The SA government has allocated $200 million to fast-track the link, aimed to allow the State’s excess renewables power output to be exported and it to have further access to interstate electricity capacity.

The proposed operational date for the line is between 2022 and 2024.

The Labor opposition, despatched from office in March, is opposing the project on the grounds that South Australia must “strive for energy self-sufficiency.”

Within two years

With a project to set up a LNG terminal at Port Kembla given “critical State significant” status by the New South Wales government, the proponents, the Australian Industrial Energy consortium, is claiming that gas imports can “deliver competitive supply certainty for NSW within two years.”

AIE lead investor Andrew Forrest says the consortium aims to “smartly” overcome “sky-rocketing prices” threatening manufacturing viability by developing the terminal in the shortest possible time frame.

The consortium claims the Port Kembla development will provide more than 70 per cent of annual NSW gas needs and will have enough capacity to meet all the State’s requirements for 10-12 days in the event of interstate supply disruptions.

The Port Kembla plan is just one of the efforts now being made to pursue sales to the 600 petajoules-a-year east coast domestic gas market at a time of consumer stress and federal government pressure to resolve the on-again-off-again threat of a supply crisis.

ExxonMobil has announced that, like AGL Energy, it is considering LNG imports to Victoria. The plan is to have a terminal operational by 2022.

ExxonMobil says that it also has a new offshore gas field in Bass Strait, close to existing production, under consideration for development.

AGL is working on a project to import more than 130 PJ a year of gas in to Victoria via a floating terminal at Crib Point, Westernport, at a capital cost of $250 million.

At what price?

Chemistry Australia CEO Samantha Read says that, while the energy market operator is now talking about a better east coast gas supply balance after 2019, the big issue for chemical manufacturers, for whom the fuel is an essential raw material, remains the fuel’s price after two years of significant rises.

Read has told media: “For chemical makers and manufacturers to be competitive, they need access to affordable and reliable supplies of gas and electricity.”

‘Middle of the pack’

The Australian Petroleum Production & Exploration Association says a new report confirms local wholesale gas prices are among the lowest in Asia.

Pointing to the International Gas Union’s 2018 survey, APPEA says the Australian price ($US4.62 per MMBTU) is about 40 per cent less than the average for the Asia-Pacific and a third less than the Asian average.

Globally, the Australian price ranks 29th out of 54 countries surveyed and remains in “the middle of the pack.”

APPEA chief executive Malcolm Roberts says the report demonstrates that claims Australian prices are higher than in countries buying LNG from here are wrong. Japan, South Korea and China pay on average between $7 and $8 per MMBTU.

Network challenges

Speaking at the Energy Networks Australia biennial conference in Sydney in June, CEO Andrew Dillon claimed that existing east coast gas systems have an energy storage equivalent to six billion Tesla Powerwalls.

However, he said, the power networks “can’t just absorb endless local generation electricity,” adding “networks have limits (and) when they are reached fuses may blow or systems overheat, causing reliability and safety issues.”

Dillon argues that “orchestration” of renewable sources is needed to support their integration in to the grid and to unlock the true value of household solar and storage.

Another crucial area of reform, he told the conference’s 1,000 attendees, is pricing structures. “Our current pricing structures are fundamentally unfair and in desperate need of reform. We need governments to step up and work with us to deliver this.”

Later in June, helping to launch a consultation paper on integrating solar and storage in to the NEM, in collaboration with the Australian Market Operator, Dillon said the “huge uptake” of rooftop solar systems and the increasing growth of use of batteries by households as well as of electric vehicles is creating “significant challenges” for distribution and transmission businesses.

“Until now our networks have done a remarkable job as a sponge, soaking up all this solar generation and managing the growing two-way flows of electricity. However, parts of the network already can’t handle any more solar and as many early adopters also install batteries and buy EVs, we will see major electricity flows that reverse in a millisecond and could cause major problems.”

He adds that “if no action is taken, it will be bad news for everyone, especially consumers” with distributors potentially being forced to make costly investments in infrastructure and charges to households being forced up.

Talking to the media at the ENA conference, Dillon called for “a combination of carrots and sticks” to change the network system, including encouragement for shifting household power usage to overnight or around midday when surplus renewable electricity can be generated.

Energy Security Board deputy chair Clare Savage, adds that policymakers have long recognized the need for cost-reflective network prices to drive consumer behavior. “Customers need the right price signals,” she says. “That’s economics 101.”

Intervention risk

TransGrid chief executive Paul Italiano is warning regulatory interventions in energy network operations have to balanced against the need to sustain long-term investment despite the upheaval caused by the shift to weather-driven renewables and distributed energy.

Speaking at the Energy Networks Australia conference, he said he found himself at market roadshows having to defend the stability of the political system and the integrity of the regulatory system because concurrent change is “converging on investors.”

NSW strategy

The New South Wales government is exploration a high voltage transmission strategy with the aim of attracting $18 billion in renewable energy investment to the State.

Energy Minister Don Harwin told the Energy Networks Australia conference in Sydney that the review will address how much transmission capacity will be needed and market barriers to its development.

Harwin says “The strategy is straightforward: to ensure NSW can access the low-cost power it needs.”

The NSW government has identified three zones for priority attention: New England, the State’s central west around Dubbo and its south-west around Hay. The government says there is “a significant pipeline” of 14,000 MW of renewable projects that are proposed or already have development approval.

Boutique solutions

Retiring Australian Energy Council CEO Matthew Warren says “boutique solutions” are emerging in the east coast power market “that are likely to be far more elegant and efficient than any government regulation or rule.”

Warren argues that sustained falls in wind and solar power costs place the technologies “at the core of most new investment.”  He says: “In response to this change, participants in the NEM are innovating to extract more value from existing assets while delivering value to the growing pool of new market entrants – this is exactly what markets are supposed to do.”

Products now on offer will help renewable generators to sell power in the NEM’s forward contract market, “effectively by guaranteeing price protection when intermittent generation is not expected to be operating.”

Such new developments, he adds, have potential to disrupt the wholesale market by enabling more new entrants, improving price visibility and introducing new ways of transaction between generators and customers.”

‘Will it be enough?’

The Minerals Council says a key point for judging the value of the proposed “national energy guarantee” is will it be enough to replace 8,000 megawatts of low-cost baseload power likely to close in eastern Australia before 2030?

In a statement on the latest draft of the NEG issued by the Energy Security Board ahead of the defining CoAG Energy Council discussion of the measure next month, the MCA says it remains unclear whether the plan will provide the degree of policy and commercial certainty to enable investment in a broad range of power generation, including lowest-cost dispatchable plant available 24/7 or whether it will incentivize only development of renewables, fast-response generation and energy storage?

Meanwhile the National Farmers Federation has declared the NEG “the best game in town at the moment” for energy-dependent agriculture even if it “doesn’t give us everything we want,” saying farmers do not want to see its development politicized.

The Australian Industry Group says the ESB “has given us a lot of confidence with its approach to date – including energy users as well as suppliers in working groups, listening to feedback and acting upon it.”

Loud & clear

Energy consumers are saying “loud and clear” that they need retailers to do more for them, according to John Pierce, chairman of the Australian Energy Market Commission, noting that concerns about retail behavior are driving a rise in the number of requests for NEM rule changes.

Pierce, launching the rule-maker’s 2018 review of energy retail competition, says consumer confidence that the market is working in their long-term interest is now down to 25 per cent, 10 per cent less than last year – and confidence in the information provided by retailers has slumped to 50 per cent.

Despite this, the AEMC finds satisfaction with the level of customer service in the electricity sector has risen in the past year and now stands at 61 per cent.

The commission’s report, Pierce adds, shows a strong majority of residential energy consumers would be willing to reduce usage if they received an incentive to do so. “Retailers are able to provide such incentive schemes, but most do not.”

Pierce also says “significant differences” are emerging in how “mum and dad businesses” are being affected by the energy market transition. There is a growing divide between small and medium businesses in dealing with the complexities of dealing with retailers.

“Those with more than 100 employees are more connected with their energy consumption and management options, more confident in finding the right information and spend more time shopping around to get the benefit of savings now available.” More than half of smaller businesses have absorbed energy price rises rather than pass them on to customers.

Pierce says small business satisfaction with energy services has been decreasing since 2016 and is now at its lowest level since the commission started the reviews in 2014. “The message is clear: the way retailers choose to do business remains too complex.”

Pumped prospects

Federal Environment & Energy Minister Josh Frydenberg says there are 14 “high potential” sites for pumped hydro energy storage on eight lakes in Tasmania that, if pursued to development, could have a combined capacity of 4,800 megawatts – and cost $5 billion in investment.

Frydenberg says the sites will be the subject of feasibility assessment over 12 months. “Be it Snowy 2.0, large-scale batteries in Victoria and South Australia or pumped hydro in Tasmania, SA and Queensland, the Turnbull government is exploring, upgrading and expanding energy storage projects across the country.”

Hydro Tasmania claims that new analysis demonstrates the State’s “battery of the nation” concept is “one of the most achievable and competitive solutions to Australia’s energy challenge.”  The Tasmanian government-owned business says the report shows the State has a high quality and diverse wind resource able to produce electricity at different times to mainland farms and “able to fill a vital gap in the future east coast market.”

CEO Stephen Davy adds that, even with the cost of interconnection across Bass Strait, the analysis shows the concept is a “national frontrunner” for the energy transition.

Last word

When he wasn’t dodging efforts by a minority of federal Coalition MPs spearheaded by Tony Abbott to drag the “national energy guarantee” back in to the Canberra partyroom before it could be put to the CoAG Energy Council in August, Josh Frydenberg spent June putting the nation’s energy retailers on notice that they are running increasing political risks in the present market environment.

In a television interview, Frydenberg declared “The companies have not served their customers well. They have a lot of explaining to do – and they need to lift their game.”

He told the Energy Networks Australia conference the federal government “is unambiguously focused” on pushing down prices.

In a radio interview, he added: “My message to the retailers is that, unless they get prices down and they pick up their act, you will see more intervention because that is what the public will demand of their political leaders.”

With elections looming in Victoria, New South Wales and federally, the businesses are no doubt well aware they are on a slippery slope. Retail sector leaders, like Catherine Tanna of EnergyAustralia, are signalling that they are getting Frydenberg’s message. She has acknowledged to a newspaper that “the industry needs to demonstrate change.”

Frank Calabria from Origin Energy is also urging policymakers to resist the growing calls for major intervention in the market. “Don’t throw the baby out with the bathwater,” he tells them. Customers are starting to see the benefit of competition and the growing investment in weather-driven renewables will pay off in lower wholesale power prices.
The very large issue for Tanna, Calabria and their fellow CEOs is whether there is much they can do in a relatively short time – at most this financial year, maybe only months – to change the “vibe” only too clear in reports piling up on political leaders’ desks about consumer sentiment with respect to their energy services.

As the Australian Energy Market Commission says in its 2018 report on energy retailing, just published: “After a period of stable or improving customer satisfaction, levels of residential and small business consumer confidence and satisfaction with retail energy market have declined significantly over the past year.” That’s rotten timing in terms of politics.

The commission notes that, while retail competition and price deregulation have brought some benefits, “the market is currently not delivering the desired outcomes.” Polite language for signalling that there are a lot of seriously teed-off householders and small business owners out there in voter-land, territory where few MPs and no governments feel safe in these times.

Some of the sentiment in suburbia is reflected in a commentary by a senior Fairfax journalist after the commission report appeared: “Imagine the outcry if households were paying $574 (annually) more than necessary because of a climate change policy? Instead, they are paying this as a result of a deliberately confusing marketplace that also offers annual price hikes and, depending on where you live, brownouts and blackouts.”

Not surprisingly, the media has seized in particular on the AEMC observation that the energy sector now ranks behind banking, insurance and services for water supply, mobile phones and the Internet in service satisfaction. Consumer sentiment about value for money was 30 per cent higher in April for banking than electricity supply.

Energy Consumers Australia CEO Rosemary Sinclair, speaking at a conference back in May, said that “the days where the consumer just pays to solve problems in the energy market are over,” adding “what we’ve seen in the market in the past 10 years is a growing distance between prices and services on one hand and consumer outcomes and expectations on the other” – and concluding “the rubber band has stretched and now, finally, has snapped.”

In this environment, rhetoric is not going to rescue the retailers nor the likes of Frydenberg from voter/consumer backlash and the tennis-playing minister is now the one preparing to serve. It may turn out to be not much fun on the other side of the net.

Keith Orchison
30 June 2018