Will Turnbull’s Coalition stand up to Australia’s energy oligopoly?

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The era of cheap fossil fuel power in Australia is dead and buried. And unless the Coalition has the stomach to take on Australia’s energy oligopoly, the country’s chances of having a cheap renewable energy system will also be diminished.

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The conservative Coalition parties have spent much of the past decade railing against a “great big electricity tax”, and bowing to demands by powerful vested interests to can the carbon price and cut the renewable energy target.

But as the re-elected Coalition prepares to resume the business of governing the nation, it is faced with a harsh new reality: the age of cheap energy is over, at least it is with fossil fuels and current energy infrastructure.

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Consumers across Australia are facing even bigger hikes in their electricity bills this year than they might have faced with the carbon price – and nearly all these increases can be attributed to actions by Australia’s energy oligopoly in defending and promoting their incumbent fossil fuel interests. And this is over and above the huge increase in fixed network costs that are the result of massive over-investment in poles and wires over the last decade.

The challenge for the Turnbull government is how to deal with the issue and challenge the powerful market players that dominate the industry. The actions of the energy oligarchs have forced record gas and electricity prices on consumers, they are hitting the go slow button on renewable energy, and are fighting proposals that could loosen their grip on the market and encourage rival technologies.

The answer is obvious – push the necessary buttons that will accelerate the much talked about energy transition, hasten the exit of coal power, and encourage the uptake of solar, storage and other technologies that could fast-track the democratisation of the electricity supply.

But the Coalition has shown little interest in this course of action, to date, turning instead to tired old myths about the benefit of coal power, the primacy of “base load,” and even flirting with the idea of nuclear energy. All this to a chorus of approval from the bulk of mainstream media who continue to peddle myths and misinformation about renewables.

Australia, right now, is experiencing extraordinarily high electricity prices, courtesy not of growing renewable energy penetration, as many in the media will tell you, but of rising demand, supply curtailment at coal and gas plants and record gas prices that have soared to nearly 10 times the price than they were just a few years ago.

The record gas prices can be sheeted back to the gas industry’s decision to invest $200 billion in new LNG export facilities, in the hope of making a motza from selling gas to growing Asian markets. But that market is now flooded with too much supply, international prices have fallen, and they may barely make a profit.

But supply issues in Australia to satisfy contracts with the LNG plants are causing gas prices in Australia to soar to record highs, and the situation has been worsened by yet more supply blockages.

This, in turn, has caused electricity prices to also jump across the market, and the price rise has been particularly acute in South Australia, at the end of the gas grid.

Last week, as David Leitch notes in his weekly National Electricity Market report, wholesale electricity prices averaged more than $500/MWh on three days, and once averaged $1,200.

Consumers are hurting, but generators are not. Despite AGL reporting last week it would take a $100 million hit to its margins because of the rising gas prices, its coal generators are reaping huge benefits. Morgan Stanley expects AGL’s full year profits to jump 12 per cent in 2016/17 because of these price surges.

“Our regular supply and demand analysis highlights that the current decadal high pool prices are a result of growing demand (up 1.9 per cent in FY16 vs pcp), restricted supply (there were a large number of planned and unplanned outages in 2H16) and higher gas costs feeding through to gas generation bid stack,” Morgan Stanley wrote.

Yet, as this happens, the state’s most efficient gas generator, Pelican Point is not operating, saying it is not economic for it to do so. Instead, it is lobbying the South Australian government to give it a subsidy, as part of the government tender for “low emission” technologies.

It was expected that this proposal could be challenged by a rival offer to build a 110MW solar tower and storage plant in Port Augusta, replacing the closed coal generator. However, John Hewson, eager to promote his own technology, has lobbied heavily against this, describing molten salt technology as expensive, unreliable, bird killing machines that rely on gas. It may go down as one of the most unhelpful interventions in Australia’s renewable energy evolution.

What is obviously needed is a push for new policies and regulations to accelerate the uptake of new technologies such as solar towers and storage, that will not just clean up the grid, but remove fuel price risk and take it out of the control of the energy oligopoly.

There are numerous examples of how the actions of a few powerful energy players are pushing up costs. One of those issues is the market power of the big players in small markets, particularly in Queensland and South Australia, where regulators have warned that prices can be distorted by the bidding patterns of a few players.

The Melbourne Energy Institute (MEI) estimates that in Queensland last year, re-bidding practices pushed up wholesale prices by $250 million, while the AEMC estimated a separate series of re-bidding practices in Queensland pushed up wholesale prices by $170 million.

Many expect the practice is continuing, but because of the complexities of the market, it is difficult to pin blame and find fault. Recent fines, such as those imposed by the Australian Energy Regulator on Queensland’s CS Energy, have been small and come nearly two years after the incident.

Now the incumbent oligopoly is trying to force the regulators to back off from implementing new rules that loosen their grip on the market, and encourage new technologies such as battery storage, and reduce costs. The regulators argue that the current rules cause market distortions. The major generators say they see nothing wrong, and claim any changes would be unworkable.

Meanwhile, renewable energy certificates are also surging to record levels – they reached $86/MWh last week, according to Marco Stella – on the assumption that the reduced renewable energy target will not be reached, and the powerful utilities who are reluctant to sign new contracts may now push for a further weakening or delay in the target.

The big utilities and coal generators have argued that there is too much capacity in the market, and no room for more renewable energy. But it is the marginal cost of expensive gas generators that is causing these huge gyrations and enabling the coal generators to profit. Yet, they still argue that they cannot close without being paid to do so.

And along with these record high wholesale prices comes the impact on new players. Small retailers are particularly exposed to gyrations in the market.

The answer for the Coalition government is pretty obvious. It’s time Australia joined the rest of the world in adopting ambitious renewable energy and emission reductions targets, and stopped pretending that fossil fuel technologies are the only answer.

There is a suite of policy options available to them: a carbon price, a higher renewable energy target, a longer-dated RET, and a RET mechanism that imposes penalties on utilities that fail to meet targets, rather than consumers.

They could impose emissions standards on coal plants, and vehicles. They could accelerate the exit of coal plants by imposing age limits. Most of all, they could instruct regulators to do all they can to remove the obstacles in the way of new technologies, and new business models that will not just clean up Australia’s grid, but make it more accessible to competitors and emerging technologies, and also cheaper for consumers.

None of this is rocket science. The (Labor-led) states and territories have shown how it can be done. Even John Howard illustrated how a government can “reach across” and dump its ideological opposition to proposals such as the carbon price.

But it comes down to whether the Coalition is serious about “jobs and growth” and “innovation”, or is just interested in protecting the interests of the big players at the expense of consumers.

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17 Comments
  1. riley222 3 years ago

    There is zilch chance of a COALition government making any moves other than those aimed at ‘protecting the interests of the big players at the expense of consumers’.
    The only advances will be those forced upon it, probably in deals to get part of their agenda through the senate. Some small advances may be agreed to, but basically the Libs are not interested in anything other than advancing the interests of their donors. As a party at the moment they are not interested in rocking the boat by advancing renewables, its just not important enough to them to bother.
    Maybe the renewables industry should get a slush fund going to donate to the government of the day, that would start getting them a better reception and maybe some real action. Other than that, its business as usual, ie delay tactics and the milking of consumers.

  2. john 3 years ago

    I do not think any of the generators make much of a contribution to the Coalition I think it is just a mind set that { What we have now is good and any movement away from that is bad }
    It is very obvious that the input of Renewable Energy has a downward effect on the wholesale price of energy.
    There is no argument about this so implement more wind, solar and storage.
    So the problem is who is going to build this energy producer in each state especially the southern states, which are so blessed with wind?
    The northern regions have solar which should be utilized with storage to level out the production of energy as it is demanded.
    This is not some new idea it is well known I think we have a sad lacking in understanding.

  3. David Rossiter 3 years ago

    riley222 talks of a slush fund for renewables – in many marginal electorates during the election Getup provided just that service by strongly supporting renewables. May be that is where the renewable energy industry dollar should place their promotional dollar.
    On another topic surely the Liberals left could encourage the Nationals to see the benefits of “Jobs and Growth” in regional and rural electorates from renewables energy and its associated capital works. Supporting the renewable energy industry in Australia should be a no brainer for Nationals after all it meets the coalition “innovation” label as well.
    Brown coal fired power plants like Hazelwood (finished in1971) don’t look like “innovation” to me. A 45 year old plant is only a cheap producer of electricity because it is old and its fuel comes free with the power plant. Without a carbon price it will never close because its price keeps dropping as it gets older and as it continues to be traded like a hot potato by its overseas owners (recently GDF Suez to Engie). “Innovation” would be to close it by progressive regulation. This is one of those “non-innovative” base load plants that can’t be turned down as the load diminishes over night.

  4. Tim Buckley 3 years ago

    Giles – spot on, well said. If the Coalition were serious about investment and jobs, then an easy and immediate way to kick start 6,000 full time, permanent high value jobs would be to allow 1GW of renewable energy investments annually. At A$2m/MW, this is an annual investment of $2bn, and assuming salaries and direct service costs (finance, legal, accounting, engineering etc) are 30% of the total construction cost, this means 6,000 jobs. Repeat annually, and it is 6,000 jobs for a decade, then repeat again next decade. Transition underway, jobs underway, investment underway. Even the COALition could see this if they talk to anyone but the incumbent Oligarchs. These projects are queued up just waiting for the Coalition to stop putting obstacles in the way, they can start tomorrow as Canberra, Queensland and now Victoria are finding. 2GW pa would be an even better target, and that would be – wait, 12,000 jobs!

  5. Colin Edwards 3 years ago

    The Nullabor factor in play again! Some comparison with/of WA electricity market would be appreciated.

  6. MaxG 3 years ago

    The answer to the title: NO!

    • stalga 3 years ago

      I note your ongoing comments MaxG but somewhat decry your arbitrary declaration.. You either have inside information as to Malcolm Bligh Turnbull’s inner thoughts or you don’t and I guess it’s the latter.

      All I can say for gravity is that I was born at Waverly hospital and learned to play cricket at the park at Watson’s Bay, thus I have some inate faith ( still) that the people who lead my lucky Nation share my values and sense of good.

      ‘Bondi boys don’t lie’.

      • MaxG 3 years ago

        It is not about the person in power… but the fundamental underlying party approach, and how neoliberalism has undermined democracy and society at large. On a personal level, I am actually getting tired of posting (and will eventually shut up), because there are fundamental things going on for decades, people do not understand.
        I mentioned this girl, born in 2000, on some singing show in 2014, asked to sing a Beatles song, when she said, she never heard of them.
        Similar with politics, people may complain about certain events, without actually understanding where it all originated. Without going into specifics, imagine this say Holden car which had changes and repairs to it, that you cannot recognise what it originally was.
        My point is, without the historic knowledge, there is a void that would otherwise help solve the problems at hand. Democracy is gone, as I said before and elsewhere; if one still thinks it exists, it is an assessment made without understanding what democracy actually means; certainly not what we have today, which is a corporate plutocracy, with the aim to weaken (if not abolish) the government (see e.g. [and most obvious] privatisation), which is already selling out its people, with free trade, foreign ownership, free-flow of money, etc.
        If you think I am talking in hieroglyphic and arbitrary ways, it only proves my point — otherwise or the opposite would be that you would actually understand; which supports my claim that most people do not have the capacity (and this has got nothing to do with elitist thinking) to understand what is actually going on in the world (and of course in this country).

  7. Don McMillan 3 years ago

    This idea that fossil fuels are favoured by politicians is not my experience in the Natural Gas domain. The evidence is the opposite Natural Gas exploration is banned in Tasmania, Victoria and NSW. Fracking moratoriums in Victoria and soon in
    the NT. NSW for example invited CSG investment into the state and consequently kicked them out after they spent over 3 billion dollars, all lost. Based on this record the Oil & Gas lobby groups should be sacked.

    When a commodity price goes up investment flow in. So if you want cheap gas prices you must create an oversupply – Shale gas in the US drove gas prices from $13/mbtu to $2 mbtu. High gas prices normally attract investment but not here in Australia. The political risk or sovereign risk is too high. Investors in this industry do not trust politicians.

    Gas prices will come down as factories close [83,000 jobs]. To survive these manufacture firms need to move to the US. Initec Pivot has just done that opening a chemical plant in the USA and warning the market [IPL ASX 10May16] that their QLD fertiliser plant may have to shut due to natural gas issues.
    If renewables can bring the price of electricity down this would be a wonderful thing, as it would improve the living standards of the poor.

    • Brian Tehan 3 years ago

      I think that you’re flogging a dead horse. The fact that none of our gas is reserved for domestic consumption means that an artificial shortage has been created locally, increasing prices here. Your solution seems to be to frack farmland in the hope that it will create a local oversupply,even though Australia already has huge amounts of offshore gas.
      Australian market must be protected with a reservation of gas that, after all belongs to the Australian public, at the end of the day. If it’s good enough for the USA, it should be good enough for us.
      Meanwhile, we need to get rid of our dependence on gas and coal as soon as possible.
      If businesses close because of the current situation, the government and the gas companies will be responsible, not the farmers and their supporters, after all, we have plenty of gas.

      • Don McMillan 3 years ago

        Flogging a dead horse – time will tell. If we are prepared to learn from the Dutch and German’s, we may save ourselves a lot of money and make renewables more feasible.

        The idea for gas reservation only has come about post the banning of Natural Gas exploration in Tasmania, Victoria [onshore] and NSW. The financial losses incurred by investors are significant and they will not come back – Hooray I hear.

        Early 2000’s the gas production forecasts predicted a large oversupply due to LNG ramp up and NSW CSG production. No-one was calling for gas reservations. NSW Domgas expected low gas prices from locally produced gas as the pipeline tariffs would be negligible. This predicted oversupply encouraged QLD to
        export the gas. This gas was subsequently contracted. Now with the bans in Tasmania, Victoria & NSW have distorted the supply chain – Now people talk about gas reservation. Closing the
        gate after the horse has bolted.

        The propose pipeline to offshore will not help manufacturing industry [84,000 jobs] as the pipeline tariff alone makes them uncompetitive.

        Your statement that the gas resource belongs to the Australian Public is incorrect. Unlike the USA we do not teach our constitution in schools. The petroleum resources are the property of the states. NSW gas belongs to NSW, QLD gas belongs to QLD. The only gas that belongs to the Australian public are one offshore in Federal control waters.

        If business close due to natural gas supply it is somehow the gas companies fault. I spent two years endeavouring to raise finance to supply gas to a factory. The Factory was prepared to forward buy the gas; they are in survival mode. Even with these extraordinary high gas prices investors believed the sovereign risk is too high and regulations unwieldy. This factory may have to close. I did my
        best. Just cannot blame the gas companies.

        Your comment that we have “plenty of gas” is correct but to access the gas we have to drill wells.

        Farmers are not the problem this is the media focusing on antidotal evidence. Over 3000 agreements have been signed and the media focuses on two farmers who are dissatisfied. Many farmers enjoy supplementary income independent on the weather, many have
        drought proofed their lands and in doing so get lower interest rates from the banks. http://www.queenslandcountrylife.com.au/story/3842337/csg-irrigation-water-lifts-farming-limits/

        Fracturing technology is over 150 years old [Col. Roberts patent 1865]. Many millions of fracks have occurred without damaging aquifers. Trust me if an aquifer was damaged by fracking the litigation would be unrelenting. To date no legal case has been
        initiated. The film Gaslands has been a great disappointment for US Lawyer firms. Vic, NSW, NT and WA inquires all have OK’d
        Fracking as they have to base their outcomes on science and historical evidence.

        I view the environmental issues facing this planet are an engineering challenge. Reducing emissions as quickly as possible must be a priority. Engineering is the art of compromise with the
        goal of optimal design. The concept of compromise will clash with the simple unattainable ideological aspirations. There are considerable proven opportunities in energy efficiency available but all fall short of the ideological aspirations of the conservation groups. Due to the gulf between energy engineering and ideological goals it is unlikely an optimal outcome is attainable. This may backfire on renewables which would be a very bad thing as optimal design requires multiple solutions.

        • stalga 3 years ago

          I want to remind you that Australia has known for 50 years or more that we have far more gas reserves than oil. On a global scale our gas reserves and ongoing supply/export is far from insignificant, yet an Abbott government decision led to this current ‘disruption?’

          The role of gas as a medium-term emissions reduction strategy has been well understood and accepted for many years, yet Federal policy has been recently geared to create this kind of rubbish.

          Everything is relevant to the observer, my observations tell me that unrepresentative politics has facilitated the current market manipulations.

          CS energy attempting to flaunt the market? Is that the QLD government trying to steal money from QLD citizens? Somebody please tell me if my understanding is flawed.

          • Don McMillan 3 years ago

            Thank you Stalga for your response. Historically high gas prices attract investment. Normally the influx of investment enables small explorers to drill wells. Inevitably some strike natural gas which end up on the market. Historically, it is the small guys that flood the market causing natural gas prices to fall. The banning of natural gas exploration in Tasmania, Victoria and NSW eliminated the small explorers in these areas. The loss of over 3 Billion dollars of investment in NSW, right or wrong sent a strong message to the investment
            community. Result the companies with established gas assets are ironically the winners as their competition has been
            eliminated.

            The main reason for high gas prices is the investment community’s perception of sovereign risk. The activists have won, now for the unintended consequences.

            Gas prices are predicted to fall as factories close one by one [84,000 direct jobs]. Gas reservations or building pipelines to NT will not work as both would inflict heavy pipeline tariffs on the customer. Thank you for your time.

          • stalga 3 years ago

            I appreciate your reply however when you defend or explain a stance of ‘the investment community’ it means little to myself and many others because this ‘community’ is nothing more than a group of wealthy individuals who see the issue through a narrow prism.

            Back to the issue, there are regulatory and wholesale market issues, not a fundamental supply shortage or a global spike in gas prices. When local citizens are exploited to help make up for a shortfall in profit expectations from ‘the investment community’, then something is fundamentally wrong.

            I resent no person wealth but I resent entitlement and exploitation.

          • Don McMillan 3 years ago

            I deal with the investor market, the money is in the hands of fund managers of various types, including pension funds. The idea that wealthy individuals are behind the oil and gas industry is outdated. It is all on the Stockmarket and oil and gas performance is never the best as they have been outperformed by the banking, property and even agriculture industries.
            I would love the opportunity to supply the domestic market with cheap gas. The gas price has never been this high so in normal market times I would have the time to reply to your post.
            This problem is self inflicted.

    • stalga 3 years ago

      Oversupply/ undersupply? The solution lies in USA manufacturing? No investment in gas in Australia ( 200bn my economically literate friend!) ?

      Our continent, our sovereign nation has gas coming out of its clacker… literally. Why is the price ( artificially) inflated so much at wholesale level to the detriment of domestic consumers? My rhetorical answer is ‘exploitation’. Consider that word.

      • Don McMillan 3 years ago

        There is no conspiracy. The investment community has had their fingers burnt. $3 Billion plus in NSW. Pension funds, investment funds and even private equity has headed for the hills. I would not invest here – would you?

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