Origin of the energy species: Will our utilities ever evolve?

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Grant King’s new attack on renewables – and the carbon price – was expected by most in the industry. It underlines the fear that Australia’s utilities are not ready to evolve, unless there is strong political leadership. Sadly, there is not much chance of that.

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Grant King, the CEO of Origin Energy, the country’s largest energy utility, may have been a little underwhelmed with the breadth of coverage in today’s newspapers after his renewed attack on Australia’s green energy policies on Monday, his branding of the carbon price as ineffectual and the renewable energy target as expensive.

It seemed that even News Ltd papers were too busy doing battle with an oxymoron (a “Bolzhevic Czar”) and the threat of media regulation to give too much space to scare stories about electricity prices.

But at least Fairfax fell in line, “More pain to come on power prices“, reported SMH.com.au, while the AFR’s Chanticleer columnist cheered from the sidelines, saying King’s 40 minute speech to a luncheon event hosted by the Committee for Economic Development of Australia had exposed the “fundamental failings” of the RET and the carbon tax. “His 17-page powerpoint presentation … will go down as a classic for its use of statistical facts to demolish more than 12 months of government rhetoric,” he wrote.

Well, actually, it probably won’t.

King’s purpose from the outset was clear, to give new momentum for his two-year campaign to dilute the renewable energy target, a position that now enjoys the support of most brown coal generators, the conservative state governments and the coal-fired power companies and network operators that they own, and a bunch of manufacturers whose view of the world means they would rather be spotted naked in the member’s bar than associated with anything that could be seen as green.

The Australian electricity market – like others around the world – finds itself at a fascinating juncture. A carbon price, a renewable energy target, and falling technology costs have combined to help trigger the start of what could be a rapid transition from fossil fuels to a new, decentralised system that relies more heavily on renewables such as wind and solar, as well as energy storage. The government’s Clean Energy Future promises not only to be Clean, but Cheap as well – at least compared to business as usual.

It is a transition that is being experienced in various stages in other countries, and throughout the world there is fierce resistance from the incumbents whose business models could be trashed by this new energy paradigm. Some have given up and are openly talking about the “solar revolution.” In the US, the two largest generators speak in these terms in anticipation of what’s coming. In Germany, the two largest generators are doing it post factum. But in Australia, the incumbents are being encouraged to resist and cherish the past by the one key ingredient that is likely missing from the domestic equation – that of political resolve.

And so it is – with an election ahead and a likely change of government – that utilities and generators such as Origin Energy are keen to exploit the fears and the prejudices of the conservative elite, who are readily convinced that renewables are – as King inferred on Monday – unreliable, expensive and, ultimately, all rather pointless.

King claimed at the opening of his speech – and we have reproduced it in full here – that he wanted to “present some facts as we see it,” and set them in out three parameters defined as energy reliability, emissions abatement, and energy cost. Renewables were causing the first to be reduced, the second to be astronomically expensive, and the third to rise unnecessarily. He said the carbon price had been ineffective because it was not high enough to change the “merit order.” He wondered why all abatement could not be sourced in cheaper overseas markets. “It does beg the question whether our policies are serving us appropriately,” he said.

King’s claims, as he suggests, talk Origin’s book, which is mostly gas. And they are entirely contestable by another group of “facts,” and  have been done so by the Climate Change Authority, which rejected the claims by Origin Energy, EnergyAustralia and others that the RET would cause electricity prices to soar. King is still not happy about that.

Screen Shot 2013-03-19 at 12.35.52 PMHis claim that there had been little coal generation displaced is contradicted by other findings that show coal generation for electricity is at its lowest levels since the NEM was created. It’s hard to attribute load reduction specifically to the RET, reduced demand or the carbon price, but at just over 75 per cent, there has been a hit amidships. His argument was not helped by an accidental confusion of tables in his presentation that actually showed the amount of coal use rising rather than falling. (The corrected graph is shown above). Even so, the carbon price could hardly be expected to act more decisively in the first six months, particularly given the generous compensation given to brown coal. It’s a little like Barnaby Joyce wondering why the climate hasn’t changed since the carbon price was introduced.

King said Australian enjoyed a high level of reliability and that blackouts were expensive. But Michelle Groves, from the Australian Energy Market Regulator, said at the same meeting that there had clearly been some overbuilding. King’s claim that the “abatement price” is soaring above $700 also has to be taken at face value, because there is little explanation. More contestable was his assertion that carbon and green energy schemes account for 30 per cent of the consumer price for industrial users, and could soon be “more than the wholesale.” That’s based on a price of around 12c/kWh. Some industrial users are lucky to negotiate those sort of rates, or even less, as retailers sacrifice margins. Others – particularly in the SME market that King said was being affected by this – are paying double that or more, particularly if they are on time-of-use tariffs.

King attacked wind farms on three counts: they are intermittent, and so complicate management of supply; the cost will rise as the industry scrambles to meet RET target; and they are “not supported by communities.” Experience in South Australia, where wind accounts for well over 20 per cent of electricity generation, shows little problem in accommodating this energy source, according to the Australian Energy Market Operator, and no need for additional gas generation. And it has helped bring down wholesale energy prices.

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The industry also disagrees with King’s costs estimates. There is enough wind in the pipeline to deliver generation at around $100/MWh, and if second-tier or more expensive generation is required later in the decade, it is more likely to be displaced by large-scale solar PV. The graph he used, seen above, is a little breathtaking. It suggests no new construction until after 2016 – perhaps as a result of the continuing policy uncertainty that has bedevilled the industry. But it’s a useful device to suggest a train crash and to confirm what many had expected – there is an effective capital strike on renewables while the politicians sort themselves out.

King’s comments on costs and community acceptance appear to be informed by Origin’s experience with Stockyard Hill, which has run into local opposition, and connection challenges. Origin tried late last year to attract other developers to build the wind farm, but they were underwhelmed by the conditions and the price of the off-take agreement.

But even residents around Origin’s own Cullerin Range wind farm, despite a core of noisy opponents, display a near 90 per cent support for wind energy, according to this poll in the Yass Tribune. A new survey by WWF released today says the majority of the Australian public wants politicians and stakeholders to do more to boost the nation’s renewable energy generation. Analysis by Bloomberg New Energy Finance shows that wind energy is already cheaper to build than coal- and gas-fired generation, a fact overlooked by King.

King made one interesting admission on Monday: that solar PV is the main cause of reduced demand from the grid. In a “door-stop” with journalists after the luncheon, King suggested that overall demand had not reduced, but demand from the grid had. That’s because more households are producing their own electricity with rooftop solar PV. Origin knows all about this because, according to a flyer that arrived with my electricity bill last week, Origin is “big in solar.” Indeed it is, ranking as one of the biggest installers in the country and offering attractive financing options for a 1.5kW systems. It is still recording a brisk and increasingly profitably business in solar PV, despite the phasing out of tariffs.

Solar, it must confess, is here to stay. But King’s admission that solar is the cause for at least a significant piece of demand reduction will be grist for the mill for his opponents, who have questioned Origin’s calculations that the fixed GWh target will deliver 27 per cent of renewables by 2020.

Furthermore, King also admitted that solar was displacing gas-fired generation. This is the fundamental issue faced by utilities like Origin and other generators: their business model was built on the need for expensive gas to be brought in at times of high demand, lifting revenue for all generators operating at the time. When gas is sidelined by solar, or coal by wind for that matter, that revenue pie is much reduced. In Germany, at times, that revenue pie has been entirely removed. And UBS noted last week that 50GW of fossil fuel generation in Germany may have to close because of the impacts of renewables, falling demand and high gas prices – three factors that are also likely to play out in the Australian market.

Large-scale wind energy, particularly in South Australia, has also brought down wholesale prices – a situation recognised by the industry as the “merit order effect.” That has contributed in keeping a lid on wholesale prices. It is not simply the virtue of a deregulated wholesale market, as King suggested.

King can clearly see the future of energy, as some of his comments revealed, particularly relating to solar and distributed generation. But a Coalition victory would suit Origin and other generators in the short- to medium-term because it’s more likely to dilute the RET, which means bigger profits for the incumbents. This speech served to pump-prime the Coalition in the case of a victory.

The Coalition has already indicated they will acquiesce, saying they too would be focusing on demand in the next RET review of 2014, by which time they may have already abolished the CCA, the one independent institution that stands in the way of these claims. (A Coalition may also suit Origin and other generators for other reasons: It could mean greater consumption of energy on just ideological grounds – if this  survey of energy usage in the US is any guide.)

King’s position is well understood in the electricity industry. After investing (and losing) a lot of money in hot rock geothermal and cutting edge solar PV, King has retreated to conventional technologies – coal, gas, volcanic geothermal and run-of-river hydro – and with other companies has invested heavily in LNG, which will probably make a squillion, but in the domestic context serves mostly to make gas-fired generation more expensive as supplies rise to export parity prices.

Even King’s opponents concede that they would do much the same in his place. The lesson from Germany and elsewhere is that utilities will only evolve if there is strong political leadership. In Australia, despite having the ingredients in place, there is not much of the vision thing happening. The likely marginalisation of the Greens at the next election means even the resolve of the Labor Party in the face of powerful vested interests will be tested, and the Coalition has shown that cheap politics will triumph over sound policy in addressing climate change and clean energy issues. The generators have seen that chasm and are seeking to exploit it.

That’s a shame, because if, as the AFR noted, King is a powerful communicator and a “master at demolishing” government policy, then he could be just as powerful at promoting government policy. But given his past comments about the need for some sort of carbon pricing, it’s hard to imagine him as some sort of captain in Abbott’s Green Army.

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17 Comments
  1. Greg Barber 6 years ago

    Not a total capital strike, it would seem. From the Pyrenees Advocate.

    Construction of the Shire’s second wind farm is due to start in the middle of the year.

    Pacific Hydro was given a permit to install up to 72 turbines at Crowlands in 2010, however an extensive engineering and geographical study of the region has seen the project scaled back.

    Pacific Hydro’s General Manager, Lane Crockett, told the Advocate this week the company would proceed with 41 wind turbines at Crowlands.

    “We’re in the process of going back to the community to inform them of what is happening. We’ll be talking to council, community groups and landholders about the project,” he said.

    Mr Crockett said the Crowlands project had been complex for a number of reasons.

    “It has been around a while, I do admit. It has been a complex site, it is very steep and we’ve been trying to work out the best spot for turbines and how we go about construction,” Mr Crockett said.

    “We’re planning to start construction in July or August,” he said.

  2. David 6 years ago

    I find a gross distortion of fact or logic in virtually every paragraph of the speech.

    He manages to twist a $23 carbon price into an abatement cost of more than $700 per ton via some very dodgy maths and even dodgier logic.

    The $23 is in no way a cost, it is just a transfer of money from one area to another via the tax system (it happens all the time). The cost comes in when someone actually responds by altering their practices or invests in response to the $23. What seems to have happened is that the community has responded by reducing their demand for electricity by several percent although Grant King seems incapable of associating a rise in price with a reduction in demand. (Thats how markets work Grant) What this reduction has cost is virtually impossible to tell, but one can reasonably assume it is less than about $20 /MWh else why would people have done it.

  3. Anthony 6 years ago

    Nice wrap Giles.

    Highlights the need for a strong industry leader to kick through the mainstream media (and Canberra) miss-information on the real potential for energy market reform via renewables.

    Not the scripted PR from a sinking fossil-fuel Co CEO.

    Maybe instead of publishing Origin’s media release verbatim, the papers could have put his speech into the context of a tactical response of a CEO trying to defend a 34 per cent drop in net profit, (6 mths to Dec 31), and a forecast slump in full-year earnings.

    His investment chart are skewed because of Origin’s capital constraints due to over-committing to Gas, (ie: Standard & Poor’s has cut their credit rating to BBB and all their money is going to gas).

    Pollies wont lead.

    Incumbents wont lead.

    The punter (and the entrepreneurial new Co’s bringing new products & services to them) will need to show the way.

  4. John Bowman 6 years ago

    Dads Army is reluctant to change, they should retire with their super and dignity. Younger generations will ensure there is no turning back.

  5. Ben Courtice 6 years ago

    Pacific Hydro have to commence their Crowlands wind farm before August, or the permit expires – and under current Victorian anti-windfarm planning laws it would be unlikely to be renewed easily.

    A number of wind farm developers in Vic have now “started construction” in the technical sense – beginning site works – but only to keep their planning permit. Actually ordering turbines (the expensive part!) really requires a power purchase agreement or similar.

    If Grant King’s graph is correct, showing that serious wind farm construction only reocmmences in about 2016, many of the existing permits (including projects that have “started construction”) may still have passed deadlines and fallen by the wayside.

    That’s ignoring the difficulty of going from basically zero wind farm industry to full tilt in a year; by 2016, the construction crews used to building wind farms will probably have all departed for other jobs and states (expecially from Vic). How are those kind of construction figures to be sustained in such a short, intense burst?

    Grant King probably knows these limitations. Obviously, he’s banking on the RET being substantially watered down and not needing to build this much capacity. Perhaps even on paying the fines for not building RE as the cheaper/easier option?

  6. Mr Mauricio 6 years ago

    Grant King is just another one to add to the panoply of persons who sought to deny the reality of climate change and the action needed to deal with it-AND in the process dealt himself out of the future game-WHAT A LEADER!!!!

  7. Michael 6 years ago

    I think Grant King is quite objective and reasonable in his analysis of the situation. I don’t want these monster windmills in my backyards. How about all the roof tops paying tariff for access to the grid? At the moment they are getting not only a free ride but also subsidy from the government. I don’t really think it’s fair for those families without rooftops to subsidize those who have the solar rooftops.

    • Louise 6 years ago

      Michael,
      Your view points are often advanced by people who advocate the use of dirty fossil fuels.

      I have a five kilo watt solar system installed and have roof space sufficient to install another 7 kilowatt. My utility informed me that 5 kW is all I am allowed to do. If I wanted to install more, I would need to get a power purchase agreement, which I am unlikely to get.

      What we need is regulation that gives any person in Australia a right to upload as much renewable energy to the grid as they want.

      We also need a mechanism, like an auction/share market, where the price for the electricity is determined by supply and demand, and any person has a legislated right to supply electricity at the going rate, time based usage/supply, or use it themselves.

      Renewable energy should have legislated priority and thus the electricity share market would only allow fossil fuel produced electricity to be sold when 100% of the available renewable energy has already been sold.
      In other words first comes the renewable energy and only the shortfall is provided by non-renewable dirty energy.

      I would be willing to pay a fair price for grid access.

      The way the current system works is flawed.

      The current system favours large companies whose only motivation is maximising profits at the expense of the general public.
      Who pays for the medical costs if a person suffers lung decease?
      The regional monopolies privatise the profits and socialise the expenses. This needs to change!

      .

      • Andrew Thaler, Cooma 6 years ago

        Louise, you forgot that you most likely, and I definitely, pay a “daily connection fee” in the order of $1.10 for my residential solar and $1.50 for my 3 commercial solar systems…and that this fee is totally outside and separate to usage costs/credits.

        If that is not a grid access fee of some sort, well, what it is then?

    • Louise 6 years ago

      “I don’t want these monster windmills in my backyards.”

      I would love a windmill in my back yard but currently I would not be able to sell the electricity.

      I have always said that donation to political parties come with hidden, invisible and un-provable strings attached.

      Why do so many politicians help to enact legislation that is contrary to public interest and then when these politician get voted out of office, they find jobs with the very same companies who are the beneficiaries of the fraudulent legislation they help to create.

      It’s called legalised bribes, or delayed payment terms.

      Enact today and get paid after losing the next election.

  8. Ron Barnes 6 years ago

    Why not all Wind Farm Developers Get together and put up the Facts For Wind Farms as Alternate Energy source. Bombard this Person Grant King With Factual Information. On Saves And Safety of these Projects To this Climate Change Disbeliever.
    People Need to understand it Is good for the enviourement . Not like Massive Open cuts never Reclaimed Properly. Destroying Valuable Rural land Never to be Reblilitated, back to what it origanly was.
    When a Wind Farms Ceases to be profitable and is Removed their is little land Disturbed an it does not polute the Soil or The water table.

    • Louise 6 years ago

      “Why not all Wind Farm Developers Get together and put up the Facts For Wind Farms as Alternate Energy source. Bombard this Person Grant King With Factual Information.”

      It is amazing how “information resistant” a person can become, if his livelihood and bonus payments depend on being “information resistant”.

      • swinging voter 6 years ago

        why bother validating Grant King as a perceived leader on energy and reducing carbon emissions? just replace him

  9. swinging voter 6 years ago

    with the intention of generating some creativity on energy storage and reducing carbon emissions….. it might be time for Grant King to move on from his perceived “safe as a bank” public service directorship position and hand over the reigns to some new blood

  10. John D 6 years ago

    The average price paid to generators is dropping while distribution costs are souring because the power companies used a crude, costly approach to overcome distribution bottlenecks. Perhaps it is time for power companies to bear the cost of their incompetence and lies and for consumers to be compensated for power company overcharging?

  11. Cris 6 years ago

    Kenya is shifting from hydropower to geothermal energy as its base load. Already over a billion investments have already been introduced in the hub of rapidly growing East Africa. That is why, the 4th annual World Geothermal Energy Summit will be held in Nairobi, Kenya on 12-13 December 2013 to dig deep into the issues of regulatory and private sector support, introduction of investment and equipment and requirements important to investors and developers. Site tour at the KenGen Geothermal Plant already confirmed on 13 December 2013! Call our Secretariat for more info at +65 6818 6344 or email [email protected]. Visit http://www.arcmediaglobal.com/geothermal

  12. Ron Barnes 6 years ago

    John D,s Comments are spot on.

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