Coalition government is missing the point on energy security

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Hearing Josh Frydenberg putting forward a call for coal that seems to echo the Abbott rhetoric of a few short years ago will do nothing for energy investment. It’s surprising that the political instinct is so poor.

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“Let him who is without sin cast the first stone”

Evidence based decisions lead to good policy

Energy security is an important topic. We all want the lights to stay on. We all want our internet, our mobile phones and mostly want our cars to work.

So has our electricity and gas energy security increased or reduced over the past few years? Let’s start by compared FY14 the last year of the Carbon tax with some combination of FY16 and the forward outlook measured by Futures prices.

Figure 1 Electricity prices with carbon and without. Source: NEM Review, ASX
Figure 1: Electricity prices with carbon and without. Source: NEM Review, ASX

Electricity prices are sharply higher under current policies than they were. This clearly implies lower energy security.  Despite raising $6 bn gross of Federal Govt. revenue, prices were still lower under the former system.

Figure 2 Gas and REC prices. Sources. AER, CER
Figure 2: Gas and REC prices. Sources. AER, CER

Gas and REC prices are sharply higher and this is clear evidence of lower energy security. You can certainly say that the higher gas prices are the result of policies made years ago but nothing has been done to change the situation. If the “Government” wanted to improve gas supply it could work towards a use it or lose it policy. There are undeveloped reserves in Qld.

Generation closures and investments: 3.5 GW of coal fired power closed in the last 3 years, and there was significantly reduced gas capacity factors over the last 3 years

rsz_energy-security

It pays to look at the capacity factors rather than the headline MWs. Still of the list below Wallerawang was something like 5% of the NSW energy market when closed, Hazelwood is 20% of the Victorian market and Northern Power Station was significant in South Australia. The cumulative impact is fairly significant as shown by the electricity price.

Figure 3 Coal fired genration closures last 3 years. Source ITK
Figure 3: Coal fired genration closures last 3 years. Source ITK

Gas plants have reduced output. As is being increasingly well understood, combined cycle gas plants are poor investments in Australia.  Gas is expensive and CCG is not suited to the stop start nature of wind dominated markets.

It might be different if we had a lot more gas plants but in the actual generation mix gas is a loser. Each of the plants that has reduced capacity factor has a different owner. So all those owners have come to the same conclusion. We should  add that the  170 MW Smithfield Cogen facility is scheduled to close this year.

Figure 4 Gas plants reducing output last 3 years. Source ITK
Figure 4: Gas plants reducing output last 3 years. Source ITK

The overall new generation investment picture is well  portrayed by the AER, in its “State of the Market Report”. The next edition is not due for a couple months but data up to the end of FY15 paints the following picture. This looks only at MW and not energy. Basically, in terms of energy, we need 2MW of renewable for ever 1 MW of coal closed. Nothing like that is being achieved and as a result energy security is reducing.

Figure 5 Generation capacity added. Source AER and AEMO
Figure 5: Generation capacity added. Source AER and AEMO

The last new gas capacity came on line in 2012, the last new coal capacity in FY2007 (and would have been started years earlier).  Before that for coal we have to go back to FY2003.

Other evidence

We don’t need to draw attention to the overseas developments. Anyone reading this knows that whether it’s India, China, the USA or Europe coal fired generation is being de emphasized and renewables emphasized. This is not happening in a straight line and it is not happening without a struggle in each and every region but it is happening.

We can also look at policies of the major thermal generators in Australia.

AGL, by far the largest thermal generator has a policy of closing down all its coal plants by 2050.

Engie wants to move from thermal to renewables in Australia.

CLP is on the lookout for new renewable plants.

Origin states it is in favour of decarbonization and believes its short generation strategy is an advantage.

The Queensland Govt, which owns most of the thermal generation in Qld, plans to move to 50% renewables by 2040.

COP 21 target and Ultra Super Critical emissions factor

Australia’s COP 21 target is to reduce emissions by 26-28% relative to 2005 levels. We are supposed, according to the minister, to be on track for this but in fact emissions are fractionally higher in 2016 than in 2005. So where is the evidence to support the assertion that we are on track?

What policies do we have? Only the RET target. This is definitely better than nothing but it’s not a very well thought out policy. We went through the problems with the scheme previously:  what’s wrong with the RET and nothing that has happened since would alter the conclusion that targeted reverse auctions are a far more effective way to procure new generation.

The RET target isn’t even enough in stationary energy, and stationary energy is less than 40% of Australia’s emissions. So where is the rest of the policy suite?

Instead of a policy at the moment we have the Federal Enegy and Environment Minister talking about moving to Ultra Super Critical generation. Below is a quote from the Minister as reported in today’s online version of “The Australian”

“The average amount of emissions across the Australian national electricity market today is about 820kgs of CO2 per megawatt hour produced. Now, if you were to go an ultra-supercritical black coal power plant — which means higher steam levels, greater efficiencies — you would reduce that to about 700kgs of CO2 per megawatt hour. If you were to go to a combined cycle gas power plant, then it would be under 400kgs of CO2.”

Its definitional that reducing CO2 output from 0.8 T per MWh to 0.7 T per MWh by moving everything to USC won’t achieve our COP 21 target. Not to mention the cost. And not to mention that Australia’s current COP 21 target is clearly and demonstrably not enough to do our share of keeping global warming to 2C.

If we moved the entire generation system to combined cycle gas then yes that would reduce emissions. But despite the AEMC and Frontier Economics modelling I doubt if there is even one senior management person in the Australian electricity industry that believes that is actually going to happen.

Conclusion

When the Abbott Govt was first elected it sent out a call to industry to invest in more coal generation plants and to announce that there would be substantial reduction in the Renewable Energy Target.

The result of that call has been

  • A material part of the coal generation capacity has closed
  • No new coal or gas plants have been proposed
  • A fall in industry confidence and in generation investment
  • a fall in electricity reliablity.
  • A very obvious rise in electricity prices,
  • higher gas prices (not due to that policy but impacts on policy)
  • Higher REC prices
  • A credibility gap with the electricity industry. By playing towards the “thermal lobby” the Government loses industry credibility. A loss of credibility effectively means that the industry will look elsewhere. Nearly all the Generation industry have strong international links and they see that Federal Policy is just not where the industry is going.

The major players in the generation industry have little or no intellectual support for policy directed towards USC and CCS thermal generation and certainly wouldn’t put a $ of investment towards it without lots of financial comfort and contracts.

Hearing the new Energy and Enviroment Minister, some one long on intellectual capability, putting forward a call that seems to echo the Abbott call of a few short years ago means a further erosion of support. And its surprising that the political instinct is so poor.

The industry would fall over itself to support a credible policy. On both sides of politics and certainly in business there any number of parties who can see a way forward based around renewable energy.

A nice gradual transition driven by specific and targeted quantities of new renewables backed by long term contracts that allow the industry to plan for a 20 and 30 year future and is consistent with out international obligations, our self interest and common sense. It is so easy, but seems to be so hard.


David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.

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27 Comments
  1. Don McMillan 3 years ago

    Things will get worse. Investment in gas exploration has evapourated due to exploration bans & due to investors losing $3 – 4 Billion in NSW & Vic. So the current resources are in depletion mode and therefore prices will increase until manufacturers start closing down reducing demand. Reversing exploration bans are unlikely to attract the investment required to lower gas prices. We are in deep trouble. Nationalising gas assets or gas reservation will not work due to the nature of the assets [to explain requires a lot of writing].
    Unfairly the renewables will get a lot of bad publicity & then you’ll understand how we [the gas industry] feels.

    • neroden 3 years ago

      Well, the gas industry is dead due to market forces. Get your money out while you still can (it won’t be long).

      • Don McMillan 3 years ago

        It is not dead due to market forces it is dead because the liberals in Vic & NSW, Labor in NT banned natural gas exploration. Political nothing to do with the market. The unintended consequences is that this will damage the renewables product.

    • stalga 3 years ago

      I still believe gas peaking plants should be in the medium-term energy mix, certainly longer than coal. If it’s not fracked I have no objection to more gas reserves being tapped, even if it means some subsidy.

      I’ll take your word on the complexities of nationalising or making reservation work, yet nothing is impossible.

      Anything would be better than the current debacle, your industry loses, manufacturers lose, govt royalties are very poor, manufacturers lose, retail customers lose, but overseas buyers are getting a bargain.

      This is a very informative article, thanks David Leitch.

      • Don McMillan 3 years ago

        Stalga thank-you for you reply the following may sound harsh and I apologise as your comments is a reflection of the general community. All natural gas has some frac component. People who are frighten of fracking either do not understand the process or have not studied chemistry or physics. You never hear professors of chemistry or physics oppose the process. This is why 100’s of scientific studies & inquires have OK’s the process environmentally. The real proof its safe for the environment is that over the last 150 years [Co Roberts 1865 patent] there has been no litigation. Remember Gaslands – all have been disproved. Debacle correct and I am very pessimistic as I cannot see how OZ is going to avoid a horrible recession.

        • David leitch 3 years ago

          At the risk of being controversial on this site and with one perhaps important exception I agree with your comments. There is little or no scientific evidence showing fracking damage despite more than 1 m wells being fracked in the USA. No reputable scientific study in Australia has found any “significant” my choice of words damage Pillaga scrub leaks not excepted. There is no good theory of how damage to the water table would occur if wells are properly drilled and cased.

          My view is that taken in total, including environmental issues involved in the extraction of the gas, Qld has benefitted greatly from development of the CSG industry.

          The exception to the above is fugitive carbon emissions. More work needs to be done on these to get a good understanding of them.

          All that said we need to get a very big reduction in gas emissions as well as coal, oil and cement to meet our 2 degree target. Burning gas is still CO2 contributing even if less than coal. We have passed the point where gas can be the intermediate fuel in the transition.

          • Don McMillan 3 years ago

            Be controversial, we need more critical thinkers. CO2 is not the root cause of the earth’s environmental stress. It is population. Engineering advancements have been decarbonising the energy cycle since the industrial revolution but unfortunately have not keep pace with population growth. David Attenborough we are a “plague on the earth”.
            Fugitive emissions must be included in the total full life evaluation of gas – its minor. What you must include is the social economic impact. Environment has no priority with the poor. This is the real benefit of gas.

          • Calamity_Jean 3 years ago

            “CO2 is not the root cause of the earth’s environmental stress. It is population.”

            Maybe so, population is at least a major part of the problem, but what can we do about it? There’s seven billion people on the earth already, and at least half of them are under age 20. We’ve got maybe thirty years to solve the climate change problem. There’s no way to bring the population down enough in that short of a time without murder.

            ” Environment has no priority with the poor.”

            BS. Poor people like to breathe clean air and drink clean water just as much as anyone else.

          • Don McMillan 3 years ago

            Thanks Jean. I am bewildered that no activist groups, politicians and generally concerned people even mention population. The only famous person to highlight the issue is David Attenborough. Just discussing this issue would be constructive.
            I have worked in developing nations and poor people cut down trees, burn forests etc, as this the only way they can get an income. I do not judge them.
            In OZ I believe the biggest threat to our climate is the destruction of our regional carbon sinks, that is, the forests of Indonesia and Papua. I propose to shift some focus and environmental budgets to helping our neighbours preserve and if possible expand would be more constructive. All the best. Don

          • Calamity_Jean 3 years ago

            “I am bewildered that no activist groups, politicians and generally concerned people even mention population.”

            There’s no point. As the punchline to the old joke goes, “You can’t get there from here.” A world population small enough to safely use a fossil fuels without screwing up the planet would be less than two billion, probably less than one billion. (World population in 1700 was under one billion.) The climate problem needs to be solved within fifty years. There’s seven billion people in existence right now, at least half of whom are under 20 years old. Even if everybody, all over the world, stopped having babies tomorrow, there would still be four or five billion people in existence fifty years from now. Not enough people would die of old age, accident or disease in the next fifty years to bring the population down to under two billion.

            Over population is *a* problem, but the climate problem is fossil fuels. We can stop using fossil fuels a lot faster than we can morally get rid of five billion people.

          • Don McMillan 3 years ago

            Not addressing the elephant in the room is at our peril. If you are concerned by CO2 in the atmosphere you must address degradation of forests [cause by population stress] the reason CO2 is increasing concentration is due to the fact the uptake from forests is less than what is being pumped in.. I am not say to cull the population we just have to curb the growth.
            To address emissions is very complex. Simply converting everything to renewables and batteries would bring forward emissions due to manufacturing and the costs are prohibitive [today.]. Nuclear has its positives and negatives. Natural gas though not perfect has been very cost effective in replacing US coal power stations reducing CO2 by 50%, Nitrates, sulphurs and particulates by well over 90% per replacement. No perfect but pretty good. Like everything in life there is no silver bullet. Reducing the degradation of forests is a political and social challenge and reducing emissions is an economic and engineering challenge.

          • Calamity_Jean 3 years ago

            “…the reason CO2 is increasing concentration is due to the fact the uptake from forests is less than what is being pumped in.”

            So the most important thing to do is stop pumping it in. If your bathtub is overflowing it’s easier to turn off the water than it is to enlarge the drain pipe.

            “Simply converting everything to renewables and batteries would bring forward emissions due to manufacturing and the costs are prohibitive [today.].”

            Have you read anything on this website at all? Article after article here make the point that renewables are now cheaper than fossil fuels. Solar panels and wind turbines can pay back the energy used to manufacture them in two years or less, meaning that fairly soon after they are installed, emissions are lower, and stay lower for years. I’m sorry, you are beginning to sound like a troll.

          • Don McMillan 3 years ago

            Without a carbon sink we can never get ontop of climate change.
            Manufacturing of solar panels & windfarms & especially batteries require huge quantities of fossil fuels mining, plastics, steel etc. Windfarmes never payback the CO2 generated in manufacturing but solar does [ 9 times over] . If you go to Natural Gas conferences there are batteries everywhere – they think it is the new growth area. Renewables rely on natural gas [backup]
            Cheaper. If true then there is no need for this website or debate.
            I am not a troll I am an engineer. You obviously got a passion for this why not design, develop a business plan raise the money an build the renewables and storage facilities – if you can do it cheaper than fossil fuels it will be easy to raise the money. Go for it

          • Calamity_Jean 3 years ago

            “Without a carbon sink we can never get on top of climate change. “

            True, but we will also never get on top of climate change unless we stop emitting carbon dioxide and other greenhouse gasses.

            “Windfarmes [sic] never payback the CO2 generated in manufacturing….”

            False, someone has been lying to you.

            “If you go to Natural Gas conferences there are batteries everywhere – they think it is the new growth area.”

            That’s because it is; check this out: https://reneweconomy.com.au/endeavour-energy-to-deploy-large-scale-storage-to-reduce-network-investment-84433/ Also look at items 6 and (especially) 7 in this list: https://about.bnef.com/blog/liebreich-year-hectic-change-off-target-predictions/

            “Renewables rely on natural gas [backup]”

            True for now during the transition to renewables, but this will change as more battery factories are built and large-format batteries become more common and cheaper. The “battery revolution” is just beginning.

            “Cheaper. If true then there is no need for this website or debate.”

            Wrong. Wind power only became cheaper than coal in (IIRC) 2013, and solar became cheaper than coal in 2016. This is so recent that many people haven’t learned about it yet. In addition, there’s lots of publicity supported by fossil fuel interests that continue to claim that renewables cost more, by repeating information that recently became obsolete.

            “…why not design, develop a business plan raise the money an build the renewables and storage facilities….”

            It’s already happening, all I need to do is cheer from the sidelines.

          • Don McMillan 3 years ago

            I’ll endeavour to summarize. You, this website, the greens all believe all our focus & $’s should be on reducing emissions [locally, “set the example]. I think some effort & $’s towards preservation of forests. By pure votes your view carries.

            Investment. In energy projects, coal, gas , renewables sort funding from the PE, super funds, asx & other vehicles. Many funds [super] have ceased funding fossil fuel projects. Government approvals are quick in contrast to Gas projects as most states approvals have just not slowed down they now have stopped. Renewables have the perfect situation, Investment dollars, community support, easy [relative] Gov approvals & based on this website the projects are very economic. So why the slow uptake, there is a lot of money out there?

            Where we agree. Today, next week, next year, renewables need natural gas. Replacement by storage is still many years away. The newspapers are blaming unfairly, renewables for the rise in electricity prices. This website blames the cost increases on gas price. Both are wrong. It is due to gas shortage, price is just the reflection. & this is caused by the exploration bans in Tas, Vic, NSW, southern SA and NT. The idea of nationalising QLD gas to supply the rest will not work. Cheap abundant gas must be supplied locally. I have argued that the renewables should support the gas industry until storage is inplace. Disruptions, factory closures etc will [unfairly] be blamed on renewables.
            Solutions being discussed at company board level are closing their OZ factory and moving OS, usually USA e.g [IPL ASX 10May16]. OR get government subsides [Alcoa and others] OR AGL’s idea of building LNG terminals [20 – 30 year investment] to accept USA Shale gas.
            I do not know how things are going to turn out but I just cannot see a good result. We may look back one day and say “co-operation between the renewables and gas industry would have been advisable”
            Thank you for spending the time to read and respond

          • Calamity_Jean 3 years ago

            I was under the impression that Australia was exporting natural gas, and that was why there is a shortage there. I’m in the US, so I really can’t do much research on this.

          • Don McMillan 3 years ago

            Here is a short history. Early 2000’s CSG [US CBM] boom commenced on a scale never seen before. Firstly in the state of QLD and then to NSW. Volumes projected where many multiples of Domgas market. That is when LNG stepped in. With NSW gas projects the market would be flooded with gas. .Every forecaster including myself was wondering what are we to do with the gas. Ramp-up gas to the QLD 6 LNG trains could not be flared or consumed. The Domgas guys went YA! we’ll wait and get bargain price gas. Everyone thought the same including myself. Then the anti-gas movement grew and in 2010 with the gaslands movie the movement took off!. Their success was amazing. Elections won using populous policy of banning fracking and gas exploration. The big win was banning exploration in NSW. investors lost their gas properties after spending 3 – 4 Billion dollars. Yes sovereign risk is real in OZ, the state governments can take away your property. [aside it is the State Governments that own the petroleum resources not the Australian Gov or people or the farmers etc] If you look on a map investors will not or cannot invest in Tasmania, Victoria, Southern South Australia, NSW and the Northern Territory and parts of North Queensland. Not much is left. Now we have the highest gas prices ever and no investment. Anyone surprised???
            Now we are in the blame game.
            P.S. I am very angry with the greens and activist groups for their lack of opposition to the idea of importing shale gas from the USA.

          • Calamity_Jean 3 years ago

            Thank you for the explanation. As my mother used to say, “You learn something new every day.”

          • Greg Hudson 3 years ago

            ‘there is no silver bullet’
            Sorry, you are wrong. There IS a silver bullet. Here is a picture of it…
            https://uploads.disquscdn.com/images/46155ce426c8d3f0dd44d57b651a3e2d85358a3790a5d0a03727159394a30ef1.jpg

  2. DogzOwn 3 years ago

    He’s just singing the same hymn as Greg Hunt, who even insists, face to face, that our 2020 target is already met by doing absolutely nothing. Emissions are rated per capita. Our population is increasing so fast that, as long as actual emissions stay the same, divided by more people = reduction per capita, QEDogshit. IPCC rules against this.

    Another contribution is claimed for carry over from Kyoto 1, despite being allowed 8% increase when all other countries aimed for decrease. Other countries which had carry over are not claiming it.

    Green Army ERF carbon farming tree planting(whatever) is also disallowed. Sure it will absorb CO2 but scientists are hoping that, if we ever reduce emissions, that loss of particulates, which currently block warming from incoming solar infra red, might be balanced by new tree carbon.

    No doubt the baton will be passed to successive Ministers before 2020 so that there will be nobody to blame, unless we can enact consequences, sooner or later, of dereliction of duty as crime against humanity, maybe even genocide.

  3. DogzOwn 3 years ago

    About energy SECURITY, surely biggest event of security failure is whatever AusNet did, or didn’t do, to cause failure of Alcoa Portland?

    When will Turnbull be chucking a tantrum about no news yet about cause? Is there investigation? Mr Finkel or who? When interim and when final report? And, since Alcoa and AusNet are private sector, surely they take out their own insurance or cop the consequences?

    • Malcolm M 3 years ago

      When AusNet closed one of the two circuits on the Moorabool-Heywood 500 kV line for maintenance, why was there no back-up plan to secure generation in South Australia to support the Portland plant in the event of an outage of the other circuit ? (The plant was briefly supplied by ~440 MW from South Australia until the line tripped)

      Was AusNet using cheaper maintenance methods that saved costs for them, but passed substantial risks onto Portland Aluminium, who in turn passed these costs on to the Federal government ? Now that taxpayers are paying, we’ll never find out through the courts who was liable.

      Why was the circuit due for re-energising at 4:00 pm not turned back on ?

      If the problem was in the Morrabool-Mortlake sector, why was the Mortlake-Heywood sector not re-energised so the Mortlake power station could act as a back-up ?

  4. Rod 3 years ago

    Why Abbot’s obvious lie about lower energy prices, post Carbon pricing, isn’t being yelled from the rooftops has me beat.
    Labor is obviously gun shy about anything to do with carbon pricing but surely the Greens could make some noise.

  5. Farmer Dave 3 years ago

    Great analysis, thank you David. Your list of what has happened since Tony Abbott called for more coal generation was particularly enlightening. Clearly, the coalition are not listening to people in the generation business, even though the Liberals pride themselves on being the party of business. Who are they listening too, then? Obviously the anti-renewables ideologues are prime candidates, but so too are the gas producers, both conventional and CSG.

    Have the State imposed reductions in onshore gas exploration made so much of an impact? Regardless, given that we need to keep fossil fuels safely in that ground, I have trouble criticising the reductions.

    I agree, David – this whole policy area should not be that hard. The problem for the coalition is that unless they properly accept the need for the energy transition in the first place they will not be able to start to develop sensible policy.

  6. Matt S 3 years ago

    As always, loving your work David

  7. phred01 3 years ago

    Who are the significant contributes to liberal coffers?

  8. Paul 3 years ago

    Re CCG suitability to stop start markets, also worth noting that CCG efficiency margin over OCG has shrunk as OCG efficiency has begun to approach CCG levels, making the extra capital cost of CCG harder to justify in any case

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