Finally there is good reason to praise Angus Taylor rather than to bury him.
Having spent Wednesday morning in tense and theatrical conversation with the power retailers, the minister for getting electricity prices down went into an afternoon session with a broader church of Australian energy to thrash out just how the Commonwealth might encourage investment in new system-firming generation.
Taylor arrived sans Scott Morrison’s big stick, clutching instead a paper that had been circulated with those attending the meeting. It described the impressively active state of the government’s thinking on a proposal that emerged from the Australia Competition and Consumer Commission’s review of retail electricity markets.
In the name of renewed network security and a broader base of competition in Australian power generation, the ACCC invited policy that would see governments underwrite the out-years of the long supply contracts that are the established building blocks of bulk commodity businesses.
Taylor’s paper made it clear the government understood the problem the ACCC had divined but doubted the light-touch innovation it recommended was the most sensible solution.
The agreed starting point was that government should offer a helping hand to projects that served to firm a National Energy Market left vulnerable by the helter-skelter that has been, and continues to be, our national embrace of renewable energy.
But Taylor wondered to the meeting why the ACCC might want to reinvent the wheel in designing an answer to the problem. His preference is to look at what has worked elsewhere around the electricity globe and to adapt it to whatever circumstances might be unique to Australia.
Taylor is said to be attracted to something like the capacity payment system that is relatively common across Europe, the US and some Asian electricity geographies. The way that works is the owner of firming capacity is paid for just providing readily available latency to the system.
Let me explain. Firming or peaking generation is generation of last resort. The whole point is it does not work all the time. So, across a first world host of unstable power markets, governments or networks make capacity payments to encourage utilities to maintain a reserve of material, match-fit generation.
Alan Finkel looked at capacity payments in his 2017 review of the future security of the electricity market. In the end, he steered away from the idea because it was a step away from the pure energy market model that is preferred by the market regulators and the national market operator, AEMO.
The obvious problem with capacity payments is they can lead to the installation of economically inefficient levels of generation that only serves to undermine returns from sunk capital and to contain future investment in innovation.
Part of the answer to that problem lies in the way any government contracting is capped. The ACCC recommended that public support only be offered to those whose projects arrived with a bank of at least three of four customer contracts.
The same neatly designed hurdle would work pretty well in the regime that Taylor is understood to have proposed.
The ACCC proposed a second barrier to entry, which was that incumbent operators ought not to earn government assistance. Taylor is not so keen on this idea. Whatever support is offered in the future, it will be open to incumbents as well as those new to the sector and it seems certain it will be biased towards generation rather than storage.
Taylor’s second Wednesday meeting was a room of four commercial corners, each with differing points of view on both the need to invite new generation and the need to offer it the helping hand of government investment. The Energy Minister gave good hearing to delegations from the very old, the very new, the incumbents and the wannabes. And each time he was asked for insights in the government’s thinking, he deferred to those delegations saying he was there to listen, learn and assess.
The renewables sector advised that whatever firming capacity is needed will increasingly arrive in neat symbiosis with new solar and wind projects. From this corner the meeting heard that the future lay not with new gas-fired peaking generation but rather with the growing variety of storage options, which stretch from large and small pumped hydro generation to industrial and retail sized battery storage, and with rapidly evolving new technologies that better connect and manage the network flows.
All of that may be true. But the reason our national network is not as secure as it should be is that renewable generation has been rolled out without reinforcement and Taylor was not alone in wondering if we could afford a Field of Dreams strategy.
As you might imagine, this was a position strongly promoted by the coal-fired corner of Taylor’s squared ring and by the proponents of the gas-fired generation projects that sit umbilicals of some liquid natural gas import terminal proposals.
The coal dudes reckon that baseload is the answer while the LNG-landers reckon that $1 billion worth of modern, combined cycle gas generation would deliver the large volumes of dispatchable firming power at half the cost of the current generation of peaking plants.
And, what of the incumbents? Well, quite fairly, they warned Taylor that government intervention was essentially disruptive and might risk both their investment and disinvestment intentions.
Take AGL, for example. It has a circa $2 billion plan to progressively replace the baseload capacity of the Liddell coal-fired plant in NSW, which will close by 2022. But those intentions might be made much less attractive if the Andrew Forrest-based plan to connect an LNG regas terminal to, say, a 1000MW power plant whose investment is secured by government support.
There is a lot for the minister to ponder here. But all the feedback since Wednesday’s second meeting closed has reflected well on Taylor and his capacities to imagine answers, to listen rather than opine and moderate effective, open discussion.
Given how firm seems Josh Frydenberg’s disinclination to allow control of APA to pass to CK Infrastructure, Australia’s biggest gas pipeliner needs to sort two things out quite quickly. The first is succession and the second value.
An enriched retreat to the farm by chief executive of hard-earned legend, Mick McCormack, was one of the natural products of APA’s decision to recommend CKI’s $13 billion, $11 a share takeover offer.
Given CKI is unable to retrofit its offer to suit the subtleties of the Treasurer’s delicately drafted statement of an intent to reject, then McCormack will be needed for a good deal longer yet. But the straight-talking McCormack has indicated in the recent past that Mrs McCormack will be more than irritated should the demands of executive life extend too much longer.
That said, McCormack is intensely proud of his business and personally attached to the people that have helped him make it so.
And why might the board want to review value? Well, there is at least one other potential bidder out there and there well might be more as a result of the McCormack roadshow through North America earlier this year to bang the drums on a counter offer. But whatever interest is out there, it is at a price well to the south of CKI’s monster offer.
The question for the board and its advisers, then, is how low might they be prepared to go to recommend another transaction.
Meanwhile Team CKI is reading the runes of Frydenberg’s statement to work out whether the issues described are addressable. The core problem would seem to be that the Treasurer does not want CKI to control APA.
So, would CKI be open to retaining a minority stake in APA and parking the rest and operatorship with its Australian listed partner in electricity, Spark Infrastructure?
Just finally, what do we make of the Treasurer’s foreshadowed conclusion? Well, for what it is worth, I don’t like the decision but, at the same time, I cannot disagree with it.
This was always going to be a delicate political matter. And, while the security issues have been predictably over-played by the foreign affairs hawks, it must also be acknowledged that the issues of the aggregation of control of the national pipeline network into foreign hands are complex and unavoidably profound.