Issue 209, September 2022
Flawed Process could be the quirky name of a racehorse, but it’s really the description of far too many poor acts of governance at federal and State levels over the past several years, exemplified by (but far from isolated to) the extraordinary Morrison secret portfolios fiasco, management of flood impacts, the robo-debt scandal, the also extraordinary New South Wales imbroglio over the state's New York trade envoy and the myriad of problems plaguing health systems across the country in the wake of the Covid pandemic. Sadly, there are a wide range of other issues that can be added to the list. Not surprisingly, there is now a manifest nation-wide mood of dissatisfaction with government. Flawed process certainly applies in spades to the goings-on related to the eastern States electricity market and also to the supply of gas to the southern States. What should now exercise our minds is whether the problems in the NEM “transition” process to date are harbingers of the mother of all governance issues — because a debacle in the reliable and affordable supply of power (beyond even recent troubles) will deliver a tsunami of woe for households, large industry and the economy, as witness the parlous state of affairs in Britain at present. The NEM steps decided by politicians in August desperately need independent, expert oversight but they will be judged in fact by the people who are plunging ahead with them under the climate change banner (a process at the global level that is itself seriously flawed and on the brink of new hoopla with another CoP in Egypt in November). Australia is not alone in this governance trap affecting a wide range of issues but the local situation is what matters most to Australians. Right now, the portents are not good at all in general – and specifically for the energy sector.
“Our climate and energy conflicts are now about the journey not the low-carbon destination” – the Australian Financial Review in an editorial.
“Federal, State and territory energy ministers, at their meeting in Canberra, effectively killed off any role for coal in a capacity mechanism. Now the question is what should replace it” – Jacob Greber of the Australian Financial Review.
“The transition can be messy or it can be smooth” – Australian Energy Regulator chair Clare Savage. “My concern now is that without (the capacity mechanism) we are in the rollercoaster ride of an energy-only market where sometimes prices are very high for long periods of time and then very low for periods of time.”
“The challenge now is to get the infrastructure in place to get the power grid ready” – Origin Energy CEO Frank Calabria.
“However high your estimate of the cost of the transition is, it will likely end up being many multiples of that” – APA chairman Michael Fraser.
A report from the Australian Energy Market Operator highlights the degree of difficulty in managing the NEM in today’s conditions, let alone those that are to come.
Violette Mouchaileh, AEMO’s executive general manager reform delivery, says the second quarter of 2022 was “one of the most complex and challenging periods” the operator has faced since the NEM was launched in the 1990s.
AEMO notes that the quarter saw supply issues, power outages and record market prices triggering the application of administered price caps, first for gas supply and then for electricity.
Wholesale electricity prices averaged $264 per megawatt-hour, more than triple the previous quarter and up 210 per cent on the same period a year earlier.
Mouchaileh says: “Wholesale energy price hikes and volatility were driven by multiple factors, including high international commodity prices, coal-fired generation outages, elevated levels of gas-fired generation, fuel supply issues, and east coast cities experiencing their coldest start to June in decades.”
AEMO notes that the market share of coal-fired generation fell to 43 per cent, its lowest second quarter return on record, while gas generation reached its highest level since 2017. Owing to outages, black coal generation for the quarter was down 8.5 per cent on the same period in 2021. Grid-scale wind and solar power went up 21 per cent quarter on quarter.
In the wake of the AEMO report, commentators are warning that there will be an inevitable flow-on in to consumers’ 2022-23 power bills.
And there are growing views that market volatility is not a passing phase for the NEM.
In an interview with the ABC, Dale Koenders, head of energy and utilities research at investment bank Barrenjoey, commented: “I think what's happening now is the amount of resilience that exists in the electricity market is reducing substantially as we force in renewables without the hydro or the batteries to back them up."
"So, until Snowy Hydro 2.0 starts in 2027, you're likely to see greater volatility and greater reliance on spot supply for coal and gas.”
Koenders also told the ABC that none of the volatility affecting the east coast energy market was good news for households or businesses, adding: ”Consumers have so far only seen a fraction of the price pain that is likely to flow from the crisis affecting the national electricity market and gas prices on the east coast. Bills will eventually have to catch up with wholesale costs.”
The new federal government moved in August to extend an emergency measure to enable it to support domestic natural gas supply.
The domestic gas security mechanism has been extended to 2030. It was due to expire next January.
Resources Minister Madeleine King says the move is needed to provide the government with a lever to ensure gas supply to households and businesses.
King adds that the measure will be reviewed again in 2025 – the mid-decade point for which market managers and the Australian Competition & Consumer Commission have strong concerns about the potential for shortfalls in the southern States during high-demand periods.
The step follows King warning gas producers earlier in August that they are “suffering a decline in their social licence” because of the present situation. She urged them to demonstrate there won’t be a gas shortfall in 2023.
King says the Albanese government “will do whatever is needed” to ensure Australians have adequate access to gas.
The Australian Petroleum Production & Exploration Association has re-iterated that it is committed to “working constructively” with the government on the domestic supply issue – while urging it to bear in mind the need of trading partners for certainty and consistency in policy.
The Australian Energy Council is warning that the proposed inclusion of an emissions objective in the national electricity objective (NEO) for the eastern electricity market – the first change for 15 years – might be good politics but it is not necessarily good policy.
In a commentary on the decision by energy ministers, the association, which represents the major power supply players, points out that, whenever previously raised over a period of years, the concept has been rejected because of the added complications it raises for market bodies.
“We have always argued that achieving emission objectives are better done outside the NEO through clear policy and regulation to avoid creating additional complications in decision making,” the association says.
It adds: “If governments set clear national policies for emissions reduction, then this will inform the work of the energy market bodies, regardless of whether the NEO references them. Multiple State policy settings, on the other hand, will not help energy market body decision-making, given that they are operating against national rules.”
The Energy Council declares: “The call for an environmental objective in the NEO reflects the ongoing frustration of many parties at the lack of stable climate change policy to drive efficient emissions reduction in Australia. But changing the NEO is not an effective substitute for sound policy settings and, if we can achieve these, it’s likely that energy market decision making will internalize those policy settings and the driver of decarbonization in any case.”
Elsewhere, the NEO decision is being greeted by some with acclamation. Greg Bourne of the Climate Council says the ministerial decision is “historic” and a “landmark” move to underpin replacing fossil fuels in the NEM with renewables. And the Clean Energy Council calls it “a clean, green light for low-cost renewables.”
Tony Wood of the Grattan Institute says that, by integrating energy and climate policies, the national electricity objective will make it more likely that the longer-term power market transition “will be delivered in the best interests of consumers.”
Federal Energy Minister Chris Bowen declares: “This is important as it sends a very clear direction to energy market operators that they must include emissions reductions in the work they do.
In an editorial, the Australian Financial Review says “this basically restores the emissions reduction target side of Malcolm Turnbull’s national electricity guarantee that fell victim to the Coalition’s climate wars in 2018.”
The Australian Industry Group warns that the wording of the new objective “will be critical” – saying there needs to be “intense consultation” to ensure it “reflects cost, equity and emission goals clearly and coherently.”
The head of the Australian Energy Regulator, Clare Savage, is concerned that, without “a proper capacity mechanism,” the NEM will be on “a rollercoaster ride.”
In a newspaper interview, Savage said the mechanism is designed to ensure “sufficient, dispatchable, flexible capacity when we need it so we keep the lights on and we keep prices low”.
Without it, she added, “essentially, you’ll see this chaotic lurching of entry and exits – power plants falling over and new plants coming in – and the price outcomes and the loss of consumer trust associated with that.”
New federal opposition leader Peter Dutton has joined the call for a discussion on removing Australia’s legislated ban on the use of nuclear power.
Using Twitter, Dutton said: "Peak business groups and unions are calling for the moratorium on nuclear power to be lifted, amid a push to ensure Australia is 'technology agnostic' during its transition to cut emissions. It's time to have the discussion."
Dutton also announced an internal Liberal review of the issue, saying “nuclear power could provide the reliable, emissions-free, base-load electricity Australia needs.”
He added: 'If we are serious about reducing emissions, while at the same time maintaining a strong economy and protecting our traditional industries, all technologies need to be on the table. The Coalition will show Australians that we are prepared to undertake this honest and informed debate, which has eluded our country for too long.”
Prime Minister Anthony Albanese, whose inner Sydney constituency is home to full-on Greens opposition to nuclear energy, has retorted to Dutton’s move that the Coalition is ignoring “the biggest nuclear reactor of them all, the sun.”
Former New South Wales Premier Bob Carr has urged the Coalition to “be specific” on offering nuclear power solutions to Australia’s market needs. He argues the option for nuclear here has “passed.”
The status quo of the NEM is now “clearly dysfunctional and unstable,” the Australian Industry Group has told the Energy Security Board in a submission.
The AiG says the market is “producing extreme price outcomes without providing a credible basis for the investment to moderate those prices.”
It adds that “governments at all levels have evidently lost confidence in the sufficiency of the current NEM design to bring on needed investment or to sustain existing assets while they are needed.”
It says extensive government intervention in the NEM has “greatly reduced the credibility of the energy-only market” at its heart as a basis for investment and disinvestment decisions.
One of AiG’s key concerns about the proposed capacity mechanism is its potential impact on user costs – “and it remains insufficiently clear what problems it is trying to solve.”
Offshore wind farming has been the flavour of the past month in Australia.
Suddenly the media is awash with talk about new development plans even while enabling legislation awaits passage through federal parliament.
As a renewables newsletter points out, a large number of major international players are pursuing concepts, some of them embracing overlapping areas.
One of the interested big name companies is resources giant Shell, which has told the media it is looking to “transform” its Australian investment portfolio and this includes the possibility of an offshore wind farm.
The coast of Gippsland in Victoria is the main focus of current attention with a range of companies considering up to 6,000 megawatts of developments.
In New South Wales, the State government’s Energy Corporation has engaged global consulting firm Arup to report on potential offshore capacity opportunities. A similar exercise undertaken by the Victorian government has led to its targetting obtaining up to a fifth of the State’s electricity supply needs by the end of the decade.
Renewables supporters claim Australia has some of the world’s best offshore wind resources but one of the issues for would-be developers will be obtaining sufficient people and infrastructure in competition with Europe, where there is a similar appetite for new projects.
Meanwhile the Tasmanian government has revealed it is fielding large numbers of renewable energy project expressions of interest, more than enough to reach its aim of 150 per cent production by 2030. It says the development proposals total some 8,000 megawatts. Most of the projects are wind farms, including offshore development.
The expressions of interest, Premier Guy Barnett says, will help design of the State’s first renewable energy zone later this year.
If Australia is to achieve a net zero future, “out-of-the-box” thinking is needed and a major economic overhaul, according to study involving the University of Queensland.
Interim modelling from the Net Zero Australia project, a collaborative partnership between UQ, Melbourne and Princeton universities and Nous Group, shows achieving a net zero future will be far more complex than popularly anticipated.
A flurry of media coverage in late August may have left the community believing the green revolution had arrived.
The facts are that, for 30 minutes in the middle of the day on 19 August, relying on capacity numbers not actual energy generated, the NEM saw solar power providing almost 40 per cent of supply sources versus 38 per cent for coal generation. At that point, solar, wind and hydro met 60 per cent of supply by megawatt capacity.
This event saw one leading newspaper run with: “Solar power has outpaced coal as the number one fuel source in the power grid in August for the first time, as the energy transition accelerates.” Another headline said: “Solar edges out coal in historic event.”
Reality check: in the seven days to 20 August, power despatched to the NEM grid comprised 8,003 gigawatt hours from black coal plants and 2,660 GWh from brown coal units. Other contributions over this week were: utility solar 753 GWh, wind power 2,759 GWh, hydro power 1,453 GWh and gas plants 1,164 GWh. The estimated use of rooftop solar was 1,185 GWh.
These are such extraordinary times that it is hard to focus on one issue at a time – and it should be obvious just from the contents of this newsletter that strong focus and exceptional governance are what energy matters absolutely must have now and down the decade.
That the Prime Minister wants to deliver fast and extensively on his climate policy promises is obvious and he and the new government have made a flying start. But the energy markets, and especially the large electricity one, are not safe playgrounds for politicians – the consequences of failed governance are dire for consumers and the economy.
It seems to me that the core of this approach, and those of other Australian governments, is a failure of perception: what eastern Australia needs to have is a reliable, affordable low-carbon power system not an exclusively renewable one. One-eyed pursuit of the latter, with all its problems, is wrong-headed and very likely to end unhappily.
Of course, approaches need to be finessed and changed over time. The NEM, one of the great macroeconomic reform projects of the 1990s (for which a politician, P.J.Keating, takes a lot of credit), is coming to the end of its usefulness in its present guise. See the Australian Industry Group comments in this newsletter for a requiem. But NEM 2.0 needs as much heavy duty expert consideration as the first format got and it requires a long view not feverish change to fit the fashion of this time.
A large number of politicians, cheered on by activists, are riding along on the hope that massive investment in wind and solar power plus transmission, accompanied by batteries, will deliver a high level of reliable and affordable power for the NEM.
This is wing and a prayer stuff. As the Energy Policy Institute pointed out in a July commentary, without maintaining a high level of dispatchable generation, from coal, gas, hydropower or nuclear, our electricity supplb system will increasingly be unbalanced. “Put another way,” EPIA said, “the higher we go with renewables, the more unreliable our power system may become.”
Or, put another way, not to accept this and to continue on the path poorly managed by the Morrison government and enthusiastically pursued by Albanese’s new regime and the Victorian and New South Wales governments (both now facing the polls, by the way), can only lead to ongoing bursts of market intervention and lots more bandaid investment – inevitably with an impact on consumers.
The present hole in which the NEM lies was dug by politicians of the first decade this century failing to come to terms practically and efficiently with the reality of immediate future needs and costs; what will the hole be in the 2030s as result of hamfisted, starry-eyed policy management in this decade?
It’s now almost inevitable, I think, that the “chaotic lurching” feared by AER’s Clare Savage (see the quotes in this newsletter) will be visited upon us all in the next few years – and the immediate key challenge will be how to limit its impacts and deliver a genuinely fit-for-purpose NEM for the Thirties.
Keith Orchison
28 August 2022
