Open letter in response to Garnaut Review Update

The latest Update to the Garnaut Review, the eighth and final in the series, is concerned with the electricity industry and its transformation in a carbon constrained world.

It is well known the industry rejected the original Garnaut Review recommendations in relation to the electricity generation sector as being unrealistic and not properly comprehending the commercial, market, and the physical realities and features of the electricity industry.

In this Update, the Garnaut Review widened its commentary to include criticisms of the economic regulatory arrangements governing the investments and returns for the monopoly electricity network sector, which the industry also contests.

However, the Update does make a number of sensible and appropriate observations and recommendations.

For example, removing subsidy programs for renewable energy sources when a carbon price is fully implemented is rational. Calling for State Governments to cease controlling retail electricity prices in markets where consumers can choose their retailer is another finding that gains our full support.

It is also somewhat reassuring the Update changes the original Review finding and accepts there is potential for financial dislocation and energy security risk arising from the application of a carbon price. This is a breakthrough.

But this risk needs to be avoided rather than treated by a distortionary mechanism after it materialises.

And this risk is easily avoided. None of the other existing international carbon trading schemes has been implemented using a material carbon price applied to the energy sector making generators bear the cost of every single ton of carbon from day one of the scheme. This is because the other jurisdictions have recognised the value to their communities of maintaining confidence in the electricity sector through a less abrupt transition than that proposed by the Review and its Update.

Instead, the Update has introduced new concepts to address the generator financial distress and energy security problem. These include an Energy Security Council and the provision of government loan guarantees for distressed assets. These initiatives would inevitably require extra bureaucratic structures and processes that amount to unwarranted interventions in an efficient market structure.

The market currently delivers least cost energy to Australians and can continue to do so if the transitional arrangements for legacy generation assets are properly constructed and implemented.

The mechanisms proposed increase risk in the electricity market as the actions of the Energy Security Council simply add to the potential for undisciplined interventions.

They also distort investment decisions and competitive neutrality mechanisms by providing the highest possible credit support to a limited few in an otherwise competitive market. These features work against the objective of improving investor confidence for constructing new capacity, and a belief in markets as the central mechanism for efficient outcomes.

But perhaps the most surprising element of the Update is the section devoted to network regulation. Put simply, this has absolutely nothing to do with greenhouse gas abatement policy and is a distraction from the main event.

Large price increases are never desirable. But unreliable electricity supply that cannot support Australia’s modern economy and lifestyles is equally undesirable and carries potentially massive financial costs to the Australian economy.

Calls for reviewing the regulatory framework for networks are not new, neither in Australia, nor internationally. It is a complex area with its own extensive global academic community. Economic regulation attempts to mimic the outcome that would be achieved if competition were present instead of a natural monopoly. Inevitably the approach and outcomes will be and are contested.

Regulation is imperfect by its nature.

Reviews of these frameworks are expensive, time consuming and require the collection and analysis of large volumes of data and the undertaking of complex modelling.

Indeed, high quality, evidence based analysis is needed before a wide ranging review could be justified. But the Update presents no such evidence or analysis. Instead, assertion and allegation are substituted for the quality academic analysis that would be required to arrive at a sound conclusion.

The electricity industry is one of the most capital intensive sectors within the global economy.

In Australia the massive re-build and re-investment required to modernise our infrastructure and reduce carbon emissions presents the sector with a capital raising challenge bigger than ever before.

The sector is trade exposed in this regard; Australia will need to attract overseas debt and equity as well as domestic investment if it is to find the capital to rebuild its energy systems over the coming decades.

The Government’s own modelling suggests the investment task could be as large as $120 billion over the next 20 years, almost three times the size of the National Broadband Network, and the equivalent of the current capital value of the Australian electricity industry.

Australia consequently must present as an attractive destination if it is to raise this capital in the volumes required and at the lowest possible cost.

For Australians to continue to enjoy a reliable, competitive electricity supply while also reducing greenhouse gas emissions, as a society we must be very careful our policy choices are backed by quality, evidence based analysis and conclusions.

- Brad Page, esaa Chief Executive Officer

6 April 2011

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April 6th, 2011

Why should energy prices rise any more than they have to?

For almost four years, Australia’s energy supply sector has argued for an efficient, national emissions trading scheme to be implemented as the cornerstone of the Federal Government’s climate change response.

We don’t yet have an emissions trading scheme in place. But in the meantime, state governments around the country – including Queensland – have been stepping into the policy vacuum with a raft of schemes and programs designed to reduce greenhouse gas emissions but which in reality mostly serve to increase energy costs for all users. 

Considering that electricity prices are rising because of the need to replace ageing infrastructure and meet rising electricity demand across the state – even before we have a carbon price – we should be aiming to find the cheapest ways to reduce emissions.

Let’s also not forget that on top of these state-based schemes is a national scheme with a small-scale renewable energy target as a further subsidy on household micro-generation systems.

The problem with the current set of feed-in tariffs and other renewable energy subsidies in place at state and federal level is that all energy users have to pay for the extra costs they create, whether they have a micro-system installed or not. That’s because governments require electricity retailers to buy all of the generated electricity from household solar generators, and those costs are passed on to everyone, usually for the life of the scheme.

In New South Wales, the government put in place the country’s most generous solar feed-in tariff at the start of year. The NSW scheme paid households 60 cents a kilowatt hour for all the electricity their solar PV panels produced, even the stuff they used themselves. Put into perspective, the standard regulated electricity tariff in metro NSW is around 20 cents a kilowatt hour. 

As well as paying the premium tariff, NSW distribution companies incurred significant back-office costs to deal with the large number of gross metering requests associated with the feed-in tariff, which they legitimately sought to recover from their customers. One NSW energy distributor recently applied to the regulator to pass on around $75 million in extra unforecasted costs associated with the tariff, having found that over a six-month period, it had a 60 per cent increase in the number of household solar generators connecting to its network and almost 15,000 connection applications.

Encouragingly, the government in NSW has moved to correct this situation, reducing its tariff from 60 cents a kilowatt hour to 20 cents. It’s a sensible decision that should inspire other states with costly greenhouse gas reduction schemes to follow suit.

In Queensland, the government implemented a 44 cent a kilowatt hour solar feed-in tariff that pays only for excess electricity fed into the grid, but will run for at least 20 years.

The government recently reviewed the scheme to decide whether it should be expanded to other forms of renewable micro-generation. Rather than expanding a flawed set of arrangements, the Queensland scheme should instead reflect Council of Australian Governments principles that micro renewable generation receives “fair and reasonable value for exported energy”.

At more than double the standard Queensland electricity tariff of almost 20 cents a kilowatt hour, the state’s solar feed-in tariff is in excess of what could be considered fair and reasonable. Applied to other types of renewable micro generation, the Queensland subsidy would ultimately lead to all energy users paying higher charges than necessary for at least two decades.

Another perhaps little-known characteristic of state-based schemes is that none – including Queensland’s – is funded “on budget”, again leaving all consumers to pick up the costs of the participants.

The energy supply sector will continue its call for a national emissions trading scheme as the cheapest way to reduce greenhouse gas emissions, but in the meantime asks state governments: why should we pay more for energy than we really have to? 

- Brad Page, esaa Chief Executive Officer

17 November 2010

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November 24th, 2010

Challenges to unlocking the smart grid potential

The smart grid is something that few in the community will have heard of as yet, let alone have any idea what it is or what it will mean for them. But this will change and quite quickly.

I am reminded that when I started in this job nearly seven years ago, an industry veteran said to me that the trouble with electricity is that it is the gyprock commodity. It’s invisible, comes from the wall anytime the customer hits the switch and when it doesn’t that’s the only time they think about it. And then it’s to complain that the power isn’t on. Oh, and politicians have a similar view – they react fast and loud when the lights are off.

That ‘expectation mentality’ has been fine for the past few decades or so with affordable and reliable electricity as the cornerstone for our economy. But with the electricity supply industry facing major restructuring with attendant cost hikes and the role for electricity changing in a carbon constrained world, can the average consumer continue to adopt a hands off approach to electricity use?

I think that the answer is no.

But to engage the consumer in active consumption decision making will need both education and friendly, enabling technology.

Welcome to the world of smart grids.

But what are smart grids? What will drive their deployment? And what could they mean for different parts of the industry?

It is clear that smart grids will be a key plank of the future energy system. But in some ways smart grids feel a bit like climate change policy right now: we know it’s coming; we know that it’s going to be a big deal for the industry; but we don’t know exactly what it looks like.

One thing I do know, however, is that there are challenges to unlocking smart grids’ potential. Regulatory challenges, commercial challenges, technological challenges. And of course, just like with climate change policy, there are political challenges.

Before talking about smart grids and the future of the electricity industry though, I think it’s worth taking a step back and reminding ourselves of the electricity industry’s past.

From the 1940s, electricity supply in Australia was dominated by state-owned monopolies. A defining feature of this supply model was vertical integration: generation, transmission, distribution and retail all in the same entity.

While these monopolies might have hidden inefficiencies, their vertical integration had the advantage of facilitating coordination – from construction through to operation – across the supply chain. As will be clear when we talk about smart grids, the ability to easily coordinate has many appeals.

The SEC model prevailed until the 1980s and early 1990s. Since then a wide-ranging reform program has fundamentally changed the electricity sector.

The state-owned, vertically integrated monopolies have been structurally separated and replaced with corporatised and in some cases privatised businesses.

Previously separate state-based power systems have been physically linked in the eastern states.

Central planning has been replaced by competitive wholesale markets in the east and west, economic regulation of monopoly networks, and contestable retail markets. In Queensland alone there are 11 licensed retailers offering supply to small customers.

Sitting atop this new decentralised electricity industry is a national regulatory framework featuring the Australian Energy Market Commission, the Australian Energy Regulator, the Australian Energy Market Operator and the National Electricity Rules.

Australia’s electricity market reform effort has been lauded internationally by the OECD as creating one of the most transparent and competitive electricity markets in the world.

The reform program is unfinished – but that’s a conversation for another time.

When I compare the electricity sector today with the past, I’m surprised at how, despite the changes, the fundamentals of supply and demand are pretty much the same.

The physical supply model is still based on large-scale generation plant connected to remote load by high voltage transmission lines and low ‘intelligence’ distribution lines.

The fuel and technology mix is pretty stable. Electricity generation remains dominated by fossil fuels. While renewables are gaining market share, this reflects government support through the Renewable Energy Target.

The demand side of the market is still mostly unresponsive, perhaps even disconnected, and not exposed to time-of-use price signals. This especially applies to households.

The electricity industry remains dominated by businesses whose core focus is supplying energy, largely because their customers are often disinterested consumers.
This mixture of reform and continuity has served Australia’s economy and community very well over the last few decades. Our system is incredibly reliable and we have some of the lowest cost electricity in the OECD.

But as I look forward to 2015, 2020, 2030 and beyond, it seems clear that the future of electricity in Australia will not be “business-as-usual”. The operating environment of the electricity sector is fundamentally changing.

Exactly how different the future will be from today is anyone’s guess. But a number of strategic challenges are emerging on the economic, policy, environmental, technological and political fronts and these will shape the sector’s future.

First and foremost, the industry must continue to meet demand – both average demand growth and peak. But as Australia’s economy continues to boom and our population surges, and new sources of load like desalinisation plants and electric vehicles emerge, keeping up with demand is no small task.

The challenges of building generation and network assets to meet load growth is compounded by the fact that networks are in a capital replacement phase as ageing assets require renewal.

The rise of green politics and environmental consciousness is also confronting the electricity industry with new challenges; perhaps more so than any other industry.
The most prominent issue is greenhouse gas emission reduction targets, most likely through some form of carbon price. This presents enormous adjustment challenges for the industry; although the transition can be managed if the policy settings are right.

At the state and territory level a host of small greenhouse policies are making their presence felt. Premium feed-in tariffs for solar PV are leading to massive take-up of small-scale solar by households. These are changing energy production and consumption patterns.

Electricity prices are a perennial issue, with politicians and the tabloid media hyper-sensitive to any cost of living pressures.

While aggregate expenditure on electricity is still a small part of the average household budget and within historically normal levels, recent increases in electricity prices significantly above the general rate of inflation have sharpened the media and political focus on the issue.

As usual, both consumers and governments are looking for someone to blame. But they are also looking for solutions to take control of household electricity bills.
All these challenges will shape the future environment for the sector in many different ways. One high-level observation I would make is that the electricity industry will increasingly find itself sandwiched between two sets of incongruent community expectations and attitudes.

On the one hand, the Australian community will expect the electricity sector to do more for it than it ever has before including:

  • Accommodate the connection of intermittent generation and seamlessly integrate electric vehicles or battery storage.
  • Give households the power to understand their greenhouse footprints and take control of their energy consumption and supply.
  • Facilitate lifestyles where multiple air conditioners, plasma televisions and pool pumps have become ‘normal’ appliances but without regard for their effect on energy consumption.

On the other hand, the community’s attitude towards the grid will remain what it always has been: apathy. Taken for granted. “Plug and play”.

The community will continue to want the power industry to do everything they need it to do with an absolute minimum of fuss and as cheaply as possible.
And of course, the tolerance for supply interruptions will remain very, very low. Because if those lights go out, well, we know how that conversation goes…

So how is the industry to manage this? How will it deliver services in a way that allows the community to keep taking it for granted?

It will take a lot of things – and good policy settings are high on the list.

But in my view, one essential ingredient for the electricity industry to continue being the cornerstone of the Australian economy and way of life is the smart grid.

So how are smart grids the key to the future? Let’s start with a definition. There are a few around, and almost every publication I’ve read has its own definition of a smart grid.

The Energy Networks Association of Australia defines the smart grid as: a dynamic network for two-way energy flows; linking widely dispersed micro-level renewable energy sources at the customer level and large-scale energy sources; facilitating greater customer choice about energy source and level of consumption; and providing real-time information on the performance of the network and optimising the network operations.

Smart grids will have the ability to pinpoint fault locations, remotely isolate faulty assets and restore power to consumers more quickly and cheaply. This is important as more than 90 per cent of the interruptions to consumer supply originate at the distribution level.

Smart grids will improve network operation and maintenance and replacement schedules, which should increase asset utilisation and lower costs.

While these features of smart grids will happen behind the scenes, other features require customers to be engaged.

Things like direct load control, or remote disconnection and reconnection through smart meters to allow consumers to change retailers easily. The success of these quite low level, perhaps elementary features will hinge on consumer engagement.

While the ENA definition is eminently workable, an alternative definition of smart grids I’ve heard that I don’t subscribe to but find amusing is: a smart grid means you plug your EV into your garage on Friday night to charge off-peak, but you cannot drive it to work on Monday morning because your teenage daughter has drained the battery by selling the power on the internet to buy credit for her i-phone.

While obviously facetious, this definition captures the idea that there are many possibilities in a smart grid world.

Of course, with many possibilities come many opportunities for things to go wrong. I’m not saying that they will. I do believe however that there are challenges for all stakeholders – the energy industry, consumers, policy makers and regulators – to be aware of. I want to talk about three of them.

As I mentioned earlier, Australia’s energy market reform program has meant that networks in the National Electricity Market are tightly regulated by the AER under Chapter 6 of the National Electricity Rules.

The philosophy underpinning the current regulatory regime is to protect consumers from the monopoly power of networks.

At its most simplistic, network businesses present the AER with a proposal for capex and opex, and the AER determines whether expenditure is allowable or not. This means that only investments in the best interests of consumers should pass the AER’s cost-benefit test.

The challenge with smart grids, however, is that they are still in demonstration stage.

In a way smart grids are like carbon capture and storage. The individual components have been demonstrated and we know how they work. But we don’t know if they can all be put together, scaled up, and be made economic. We have the puzzle pieces but we don’t know what picture they will make.

This presents challenges to the regulatory framework. If much of the benefit that is potentially available to consumers is yet to be proven or perhaps even known, or cannot be realised without other parts of the puzzle being in place, it is consequently tough to quantify those benefits.

If the benefits of new technologies cannot be quantified, the Regulator’s conservatism might try to protect consumers by not allowing risky expenditure on new technologies and practices.

But if new technologies and practices are not deployed, Australia risks being stuck in the existing ‘low intelligence’ paradigm, which could make consumers worse off in the long run.

So what is the answer? If the mindset and formulae of the current regulatory approach is not suited to managing structural shifts in technology, is a new regulatory approach warranted?

One overseas example worth examining is from British regulator OFGEM’s work on RPI-X. Under this approach, a portion of all distributors’ allowable revenues is quarantined in a dedicated RD&D fund. Businesses tender to access that pool of funds to develop new technologies.

The key is that they must share the new knowledge and insights with all network businesses, which mean the benefits of the RD&D spill over into the industry and the wider community. Can Australia learn any thing from this or other approaches overseas?

There is also a role for pilot programs. The big development in this space in Australia right now is the Smart Grid, Smart City demonstration project. This project is based in Newcastle and being undertaken by a consortium lead by EnergyAustralia.

It will be Australia’s first commercial-scale smart grid and will gather information about the costs and benefits of smart grids to inform future decisions by government, electricity providers, technology suppliers and consumers across Australia.

This is a valuable project. It is essential that the lessons from this initiative for the regulatory framework are learned and applied.

In addition to regulatory challenges, politicians will have a role to play in unlocking the potential of smart grids.

A smart grid future will require the community, industry and government to come to terms with new practices and technologies. And with all policies that change the status quo, there will be an adjustment period and likely some resistance.

To keep smart grids on track, particularly when that inevitable mishap happens, political fortitude will be required. Politicians must be able to explain the necessity of the changes to the community and to stare down a media and oppositions that will be looking for every chance to criticise governments.

We’ve already seen in Victoria that the rollout of the interval meter – which I consider the foundation for the smart grid –has hit some trouble.

It seems that the local media has decided households outlaying about a dollar a week for new technology that forms the basis of their future engagement in an energy efficient world is an unacceptable cost. The Victorian Government has responded by placing a moratorium on time-of-use tariffs, while the Opposition has ramped up the rhetoric to truly ridiculous volumes.

The really unacceptable cost would be to leave consumers without the technology to make direct and informed decisions about energy use. The short-sighted commentary on this initiative is especially disappointing.

The second challenge to unlocking the benefits of smart grids is the potential for friction between different parts of the industry.

As I touched on earlier, one consequence of electricity reform was vertical and horizontal unbundling of the integrated SECs into separate businesses.

This restructuring has meant that Australia has benefited from competitive tensions and the resulting efficiencies.

But it also meant that some of the benefits of coordination within the supply chain were lost. The industry structure has become more complex.

Of particular relevance to smart grids is the separation of retail and distribution businesses in today’s supply chain. While in the initial phases of industry separation distributors and retailers were integrated, the retail arms were soon spun off from the regulated network business areas and are now largely different businesses with established distinct roles in the supply chain.

Network businesses handle connections and the investment and operation of the network. They have almost no relationship with the customers at the residential level.

Retailers on the other hand are all about the relationship with the customer. They compete to acquire customers and manage their wholesale energy purchases, billing, marketing and so on. Network charges are simply passed through to consumers by retailers.

While these two roles co-exist comfortably today, with the features of smart grids, potential for friction exists.

Much of this potential arises from a split in incentives between retailers and distributors.

For distribution business, significant capex goes to reinforcing the network to accommodate peak demand. This can lead to inefficient outcomes, with low rates of capital utilisation and no genuine causer-pays pricing arrangements.

The distribution business therefore has incentives to find ways to shave off those needle peaks in demand. Smart grids offer possibilities to do this, for instance through direct load control of devices such as air conditioners at peak times. With enough direct load control, demand peaks could be shaved and network augmentation deferred.

This gives distributors incentives to engage with customers. But distributors do not currently have direct relationships with customers, so they may try to establish one.
On the other hand, for retailers, the focus is sufficient energy to meet customers’ load. Sufficient network capability is assumed to be available, as historically it has been.

In order to manage their price/volume risk, retailers have been investing capital in peaking generation. Naturally, they want to make a return on this investment.

But this means that the patterns of energy consumption that retailers want to see may not be the same as what distributors want.

And if distributers are actively enlisting customers to eliminate the peaks in demand that retailers’ peaking generators were built to supply, retailers are at risk of having their assets stranded. Self evidently this could lead to tension.

Another issue relates to data. With Smart Metering Infrastructure, retailers will have to deal with exponentially more data than ever before.

For retailers, this will add to their back office costs, which they will have to bear to some extent.

It’s not all cost though; the data will give retailers nuanced information on customer consumption which could be commercially valuable.

But trouble could arise if what the retailer wants to do with this data is at odds with what the distributor is trying to get the customers to do.

Pretty quickly this could bring us to the awkward conversation of: who ‘owns’ the customer? Retailers or distributors?

And with distributors controlling technology that can reach into people’s homes and turn off their appliances – and hence deny retailers of some of their energy sales – we might also find ourselves having the follow up conversation: who ‘owns’ the customer’s load? Does the distributor have the automatic ‘right’ to use direct load control technology in the competitive part of the market?

There may also be issues about a blurring of the conceptual boundaries between the regulated and merchants’ sectors of the supply chain. Networks essentially have a regulated franchise monopoly over their network area, but if they are effectively offering energy services to customers, does their privileged position give them an unfair competitive edge over retailers?

These are some of the challenges we face in Australia, given our industry structure. To clarify, I am not saying that the dismantling of the vertically integrated monopolies was misguided.

But I do note that some things would be easier if we still had fully integrated monopolies, although there would still be challenges given contestable retail markets.
Working through these potential frictions will be paramount.

The third challenge to unlocking the potential of smart grids relates to the new electrical and commercial interactions that are possible in a smart grid system.

As I said earlier, the prevailing physical supply model of a one-way flow of energy from fossil fuel deposits to homes is being disrupted. Because of federal and state technology support schemes, we are witnessing deployment of intermittent renewable generation embedded in distribution networks.

Widespread embedded intermittent generation places stresses on the grid. Smart grids will help manage these stresses, such as through integration with complementary resources like demand-side management, battery storage, distributed generation and electric vehicles.

It’s reasonably straightforward to imagine a theoretically ‘first best’ outcome where the different sources of distributed generation, storage and load are co-optimised by a central planner.

But in practice, our electricity system is not centrally planned. It relies on decentralised decision making, competitive markets and prices to coordinate supply and demand.

So will existing energy markets and players be able to cope with the new range of electrical and commercial interactions feasible under the smart grid? If not, will we be able as an industry to facilitate the necessary new markets to coordinate the new energy activities of the future?

To explore this a little, let’s return to the teenage daughter and the electric car example.

Electric vehicles could become a significant new source of load on the grid. Discussions I’ve had with the EV industry suggest that there could eventually be up to 36 TWh each year of new load from EVs. That’s a big opportunity for the electricity industry; but it poses challenges to be managed.

If everyone drives their EV home after work and tries to recharge at the same time, that will just exacerbate existing system peaks.

Alternatively, if charging was ‘smarter’, such as overnight to flatten generation load, it could have benefits for the electricity system.

But to unlock this ‘smarter’ charging potential, the right prices and signals will need to be there. If they are not, our apathetic consumers have no incentive to consider the impact of their decisions on the grid. The same thing happens with air conditioners today. It’s all about plug and play.

So the right price signals need to be made available, which means that someone needs to provide those prices and create the market for EV charging.

On the other side of the coin is reverse flows of power from your EV battery to the grid. Who is going to buy the power in your battery so your teenage daughter can buy credit for her i-phone? Will it be the retailer as energy to supply peaks? And if so will that crowd out generators in the fast start market?

Or will the network business want to buy the power as network support services, maybe to help balance out fluctuating power output from solar PVs? How will these types of payments affect network charges passed through into retailer bills?

Clearly there is a range of new markets that need to be facilitated here and there will need to be conversations between retailers and distributors along with EV manufacturers and infrastructure providers.

But in the smart grid future, with digital networks and home area networks talking to EVs, which are talking to i-phones, what we’re likely to see is an integration between the energy industry and the communications industry.

And that raises the possibility of a brand new set of business entering the field: the Googles and Microsofts of the world.

These companies are not traditionally associated with energy, but they are technologically capable and have established brands and customer relationships.

Would their entrance be a threat to established industry models? And how would they fit into the regulatory arrangements? I don’t think these possibilities are being actively worked through and the risk is that commercial activity will outstrip regulatory policy processes.

In conclusion, smart grids will be a key plank of the modern energy system of the future.

But today they are still in demonstration stage and much is unknown. Just like CCS and just like climate change policy: we know something’s coming, we know it will be big but we don’t quite know what it will be and if it will work together.

We do know however that the future of the electricity system in Australia will be very different from the past.

Smart grids will pose fundamental questions about business models, relationships within the supply chain, customer interactions, legacy and new investments and new players.

How well are regulatory and policy frameworks placed at this stage to manage these challenges? My answer, at this stage, is not well. We have much to do and need to get moving.

- This is an edited transcript of a speech delivered by Brad Page, esaa Chief Executive Officer at the NG Utilities Summit on 9 November 2010.

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November 11th, 2010

Time To Settle Greenhouse Policy

The recent extraordinary political events have highlighted the increasing need to settle an enduring greenhouse policy in Australia, and have focused a spotlight on the lack of a mature and direct conversation
on the best way forward.

A lack of political will on all sides of politics to establish a lasting and workable plan to reduce greenhouse gas emissions has resulted in a paralysing policy environment that is stymieing the energy supply sector from making the most efficient and lowest cost investments so it can move towards a low-emissions system, while meeting rising electricity demand.

Stable and efficient policy that enables companies to move from carbon-intensive to low-emissions generation over a realistic period is needed within the next one to two years. This is vital if we are to avoid pursuing an investment path that locks in sub-optimal capital equipment costing the Australian economy, business and consumers more than it needs to.

Without a policy that prices carbon, investors in the sector will make rational commercial investment decisions based on the prevailing (read: uncertain) policy environment, which will most likely result in a rash of smaller capacity, open-cycle gas turbine generators to meet incremental rises in energy demand, rather than fewer but more cost- and emission-efficient base-load combined cycle gas plants.

Making sure we have cost-effective new investments is an important consideration because energy costs will rise over the next decade – regardless of any climate change policy that is implemented – largely because of massive upgrades and expansions in network infrastructure to replace ageing equipment and meet rising demand.

Rather than fear an open and direct conversation, political leaders, ever attuned to the siren song of voter polls, should recognise the attractiveness of a sensible approach to greenhouse policy and constructively engage business, the community and, importantly, those at a party political level, to address the issues of how to efficiently price carbon and how we will move to a lower-carbon economy.

But first, our political leaders need to get Australians on board to address emissions efficiently and without unnecessary dislocation of jobs, businesses and industries. To make sure we can do it at the lowest cost possible, they need to explain all the options, their benefits and costs. Leaders will need to be particularly frank on the cost of reducing emissions – short-term and long-term – and the benefits. But a carbon price signal – for energy suppliers and consumers alike – is important, because without it, there is no incentive to reduce emissions.

For the sake of our economy, environment and, importantly, future generations, it’s time to have a mature conversation with the Australian community, because the transition to low-emissions energy supply will only begin when we have an investment-friendly greenhouse policy.

- Brad Page, esaa Chief Executive Officer

16 July 2010

July 16th, 2010

Demand Drives Need For New Energy Infrastructure

Queensland needs deregulated electricity prices to give consumers more competition for products, writes Brad Page

THE Queensland Government’s efforts to suppress electricity prices through annual regulation cannot hide the fact that the state’s ageing energy system needs renewal, expansion and diversification.

The Queensland Competition Authority has handed down its decision to increase electricity prices by a maximum of 13.29 per cent to take effect from July 1. The next essential step for a sustainable energy supply is to deregulate prices completely.

Keeping prices unsustainably low only defers the inevitable.

Prices need to rise to pay for Australia’s essential transformation to low-emissions energy, as well as to replace ageing infrastructure and expand the network to meet increasing demand.

The investment task over the next decade is enormous, with about $100 billion needed for new capital and maintenance expenditure around the country.

In Queensland, the huge increase in electricity demand is a big driver of the need for new infrastructure.

In 2008 alone, the number of customers connected to the state’s grid increased by 2.5 per cent, reaching almost 1.9 million.

A survey by Queensland energy companies Ergon Energy and ENERGEX, released last week, found that 74 per cent of Queensland homes have air conditioning installed, with each air conditioned home having an average two units.

In southeast Queensland, about three-quarters of households are expected to own an air conditioner within the next year and 81 per cent within five years.

Every new air conditioner or plasma television drives up peak load demand. Meeting that demand requires spending on new electricity generation, transmission and distribution capacity in order to maintain supply reliability.

The best way to make sure electricity demand is met and new infrastructure is built when and where it is needed, is to support competitive energy market pricing, with targeted government programs in place to ensure disadvantaged energy consumers within our community can continue to access energy.

An independent international study released recently found that Victoria has by far the most competitive market in the world. Victoria deregulated its electricity prices in early 2009 and today energy consumers there have more than a dozen energy retailers from which to choose. It has a customer switching rate for electricity and gas almost 15 per cent higher than that of Queensland and deals on offer that Queenslanders have never seen.

If more evidence is needed of the benefits of energy market competition, a recent Choice study found annual savings of up to 20 per cent between the best and worst market prices in the states where competition is strong.

Queensland allows consumers to choose their own energy retailer. But burdensome and clumsy price control arrangements ensure that there isn’t the wide choice Victorians enjoy.

For Queenslanders to have innovative and price-competitive energy products and services available, the Government has to take the next step to deregulate electricity prices and make it clear Queensland is open for new energy retail businesses.

There really is no substitute for competition if consumers are to get the best deal.

- Brad Page, esaa Chief Executive Officer

31 May 2010

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May 31st, 2010

Industry At Standstill With Power Plans On Ice

To keep the lights on, government must tell energy providers what is wanted

AUSTRALIA has the great advantage of one of the most reliable, secure and cost competitive electricity and domestic natural gas systems in the world.

Our electricity system is built around a very significant natural advantage: the massive availability of very low cost and easily accessed coal.

The Australian economy is the winner with our electricity prices consistently rated among the lowest in the developed world. Large-scale energy-intensive industry has grown in Australia as a result, employing thousands of people and paying millions in tax.

Australians pay low prices by world standards for a first-rate electricity system. But the climate change challenge is here.

This is a serious issue for Australia’s electricity and gas sector, as its emissions account for almost 50 per cent of Australia’s total greenhouse gas emissions.

Far from resisting the need to address the emissions issue, the energy supply industry has openly embraced the need for change.

In the past six years, the electricity and domestic natural gas industries have called for stable, predictable and commercially sensible greenhouse gas abatement policies that efficiently move the economy, and therefore the energy supply system, to a different, lower-emission outcome.

Why a heavily fossil fuel-based industry is calling for such measures is easily answered.

There are few, if any, more capital-intensive and consumptive industries in the world than the energy sector. The assets that deliver energy to our economy cost hundreds of millions of dollars each, last for up to 50 years and take at least 20 years to pay back their initial outlays.

With a fast-growing economy and population growth strongly exceeding the OECD average, the energy-supply industry is constantly required to invest in new assets to meet increasing demand.

But with a greenhouse issue apparent and politicians signalling their intent to respond, efficient and secure energy asset investment can only occur if this issue is positively and directly addressed by the national government.

There is also a second and generally unknown reason why the electricity and gas industries are ready to embrace change. Put simply, low carbon energy supply, especially via electricity, holds many of the answers to how the world reduces its emissions without reducing the lifestyles of citizens in developed countries, while massively improving the welfare of millions of people in the least developed nations.

Transportation will increasingly rely on electricity. Space heating and cooling requirements will most efficiently be met by innovative electrical technologies.

In a bigger Australia our drinking water supply will need supplementation from desalination plants; a new electricity consumer.

The fuels for creating this lower-emission electricity will be renewable, natural gas, and in the longer term coal with carbon capture and storage.

It is clearly in the medium to long-term interest of the energy supply industry to move to lowering its emissions. But to do this, there must be appropriate government policy in place.

The government’s Carbon Pollution Reduction Scheme had the potential to meet this requirement but failed to deliver a sensible transition path for Australia’s electricity industry.

Put simply, its effect was to harshly penalise the very companies that have delivered energy advantage to Australians for decades and who have the expertise, networks and business models to deliver the next generation of energy systems.

It sent shudders through the global debt and equity providers on which the sector relies for finance. They now view Australia as a risky location for electricity investment. The CPRS as a result is unacceptable to the electricity industry. The next policy has to redress these failings.

The government’s announcement that the CPRS is on ice until the end of 2012 is potentially good news, but only if Australia’s main political parties take the opportunity provided by the delay to work with industry to agree and legislate a stable and enduring greenhouse policy.

There is much at stake. Generation capacity at June 2009 was almost 51,000 megawatts and by 2020 we will need about 65,000 MW.

Previous analysis by the industry shows more than $100 billion in new investment will be needed by then to meet load growth, the 20 per cent renewable energy target, network development and a 5 per cent emission reduction target. And this is to come from an industry that today employs assets worth $120 billion.

It is a mammoth task.

Without an enduring carbon policy to guide investment decisions, energy businesses will defer new generation investment decisions for as long as possible, inevitably allowing the supply-demand balance to reach very tight outcomes, with resulting high prices and narrow margins for error when demand is high, such as on hot days.

And new generating plants do not magically appear overnight. Large power plants take between five and seven years to plan and construct if everything runs on schedule.

Some commentators interpret this tightening of supply as a sign Australia will run out of electricity if a carbon policy is not settled. However, almost certainly the lights will stay on, as new just-in-time, mainly gas-fired generating plant is built and with the help of inter-connectors that allow electricity to flow between the states.

But without a stable and sensible greenhouse policy this electricity will almost certainly be more expensive than it should be.

We have recently witnessed first-hand what happens when policy is poorly designed and deployed. The capital strike in the large-scale renewable generation sector graphically demonstrated that when policy is uncertain, investors stay away. As Australia’s electricity demand-supply balance tightens, it is imperative we have a stable and well-designed regime in place by 2012-13 at the latest to allow good investment decisions to be made.

Time is of the essence: the Prime Minister’s decision has brought into sharp focus the urgent need for Australia to secure bipartisan agreement on greenhouse policy and offers both sides of politics a rare opportunity.

Grasped, this opportunity will allow our government and the alternative government to put the interests of Australia and the interests of ensuring a reliable and least-cost energy supply first.

- Brad Page, esaa Chief Executive Officer

12 May 2010

May 12th, 2010