On August 14, a clear majority of the federal Coalition party room endorsed the National Energy Guarantee being promoted by then Energy Minister Josh Frydenberg.
Designed by the nation’s top energy regulators, the NEG was designed to encourage the market to provide a mix of power that would reduce Australia’s carbon emissions but would be reliable enough to avoid blackouts – and reduce household power bills. With the strong backing from business, the NEG appeared to be a policy that could attract bipartisan support and provide a stable framework for investment to end a decade of damaging “climate wars”.
But the Coalition partyroom endorsement did not extend to a minority of Liberal and National MP’s, including former prime minister Tony Abbott, who fiercely opposed the NEG, because it privileged renewable energy over coal. Their opposition fed into the conservative push against Malcolm Turnbull’s leadership that climaxed 10 days later with a Liberal party vote to install Scott Morrison as prime minister. Along the way, the NEG was dumped, to the general dismay of the power industry and business users.
In Mr Morrison’s new ministry, energy policy and climate policy were separated and energy policy became focused on the pressing political target of reducing household electricity bills while keeping the lights on. And new Energy Minister, former management consultant Angus Taylor turned to an alternative policy blueprint delivered in July by Australian Competition and Consumer Commission chairman Rod Sims.
While the NEG sought use the National Energy Market to incentivise investment in a cleaner and more stable electricity grid, Mr Sims’ ACCC report broke from the other energy regulators to claim that the NEM itself was “largely broken and needs to be reset”.
What’s not in dispute is that a decade of policy division has left Australia with some of the highest electricity and gas prices in the advanced world, along with outages and volatile prices that have shaken industry’s confidence. Typical residential retail bills have increased 35 per cent after inflation in a decade, with tariffs up 56-58 per cent for residential, commercial and industrial users alike, the ACCC found.
“Over the last two years, steelmaker BlueScope’s energy bill in Australia has almost doubled, increasing by over $50 million. These significant increases just can’t be good for consumers and certainly not for the international competitiveness of Australian manufacturing,” says BlueScope’s managing director and CEO, Mark Vassella.
Two big events over the past few years have sharpened debate over how the energy system should contribute to Australia’s agreement – endorsed under the Abbott government – to reduce carbon emissions by 26-28 per cent on 2005 levels by 2030.
First, was the September 2016 state-wide power black out in South Australia. While massive storms were to blame for bringing down power lines and towers, the blackout thew the spotlight on South Australia’s extreme reliance, within the NEM, on wind and solar energy. It it sharpened the debate over the grid was not prepared to handle the force-feeding of so much force-fed unreliable renewable energy through the federal Renewable Energy Target.
A couple of months later, French power company Engie announced that it would soon close its old brown-coal-fired Hazelwood power station in the Latrobe Valley that accounted for up to one-quarter of Victoria’s baseload power supply.
The relatively sudden loss of reliable or “dispatchable” supply that could keep the lights on 24-hours a day led to a spike in wholesale prices – and claims from the ACCC that incumbent energy companies were profiting at the expense of energy users. The federal government even called energy companies “bandits”.
The ACCC analysis points to a range of culprits behind its claimed failure of the NEM.
Privatised energy markets have become too concentrated, it claims, and regulators have allowed too much expensive gold-plating of electricity network infrastructure.
Among various green schemes, state governments brought in generous subsidies for household rooftop solar. Ironically as the price of solar photovolaic installation has fallen sharply, the rapid uptake has increased the cost of generous feed-in payments to households for supplying the grid. These costs are spread across other household power consumers.
The surge of wind and solar power mandated by the RET put commercial pressure on ageing baseload coal generators as their profitability is undermined by cheap, but intermittent renewables. But the price of the alternative dispatchable power source – gas – also jumped amid the boom in liquefied natural gas projects in Queensland and bans on gas development in Victoria and NSW. Now there’s even plans to import LNG by ship into Sydney and Melbourne.
On the consumer side, electricity retailers have made pricing structures too confusing and opaque for households to shop around.
Backed by the ACCC report, Taylor has proposed a regulated “fair market default price” that would allow households to compare discounts from different suppliers.
And, also backed by the ACCC, he has proposed government underwriting of private investment in baseload generation – including gas and coal – to help guarantee supply.
If it looks interventionist and a return to regulation, Taylor defends use of “the big stick” on the basis that the energy market is already so distorted that heavy handed counter measures are required.
“Underwriting new generation is one of the most effective measures to reduce wholesale prices through increased competition and to improve reliability and security by increasing the level of firm and firmed capacity in the system,” he says.
“Setting a competitive default price for electricity is one of the most effective measures to drive down power bills.”
Maverick energy investor Trevor St Baker sees government underwriting as a boon for new coal plant. While AGL Energy isn’t budging on plans to close its NSW Liddell coal fired power station in 2022, big generators aren’t betting on a speedy exit of existing coal plants.
Alinta Energy chief executive Jeff Dimery, who is spending $170 million to refurbish his Loy Yang B coal plant in Victoria so it can run for another 20 years, says both sides of politics are aware of the need for a reliable and affordable electricity supply. To Dimery that means a role for coal for many years to come.
“There’s been valuable lessons learnt from what happened in South Australia in both sides of government. I don’t think anyone will be taking eye off the ball soon,” Dimery says. Alinta’s $1.2 billion purchase of Loy Yang early this year is “an intermediate solution as we transition to a lower carbon economy”, he says, and we will still rely heavily on coal-fired power for several years to come to help deliver low-cost energy.
EnergyAustralia envisages its two coal generators at Yallourn in Victoria and Mt Piper in NSW lasting until 2032 and 2042, respectively. Origin’ Energy’s Eraring should last until 2033, AGL’s Bayswater plant until 2035 and Loy Yang A until 2048.
While the political debate remains unsettled and rancorous, energy suppliers and users are getting on with their own revolution.
BlueScope’s energy costs in its US plants are about a third of its Australian energy costs. The company aims to cut its energy bills here by striking a seven-year Power Purchase Agreement with ESCO Pacific that covers a fifth of its power needs, cuts 300,00 tonnes of carbon dioxide emissions a year and helps get a large solar farm in NSW built.
The steelmaker is one of a rapidly growing list of large energy users taking advantage of plunging solar and wind energy costs to get relief from high energy prices. Telstra, Mars Australia, National Australia Bank, Sydney Airports, University of NSW, machine-tool maker ANCA, Telstra, Coca-Cola Amatil, data centre operators Equinix and NEXTDC, National Australia Bank, Australia Post and a group of Sydney councils round out the list.
Energetics, a consultancy, says these corporate-backed solar and wind projects now underwrite about $3 billion of wind and solar projects which could deliver around half the Renewable Energy Target 33 million megawatt hours quota in 2020.
The case for the clean energy revolution is that Australia is blessed with an abundance of wind and solar energy resources and cheap capital that can replicate the nation’s traditional advantage in cheap fossil fuels.
“It is realistic to see Australia as the natural energy superpower of the low-carbon world economy,” says Ross Garnaut, president of Sanjeev Gupta’s SIMEC ZEN Energy and a veteran academic economist and policy adviser.
“Renewables and storage are mainly capital with few operating costs, so that, from a resource of the same quality, they generate energy more cheaply in advanced than poor developing countries. Amongst advanced countries, Australia has by far the richest endowment per person of renewable energy resources. It follows that as the whole world makes the transition to mainly renewable energy, Australia can be the country with the world’s lowest energy costs. Together with our mineral resources, this would make us the natural home of energy intensive industry.”
In other words, the plunging cost of wind and solar energy, the increasingly attractive economics of batteries and pumped hydro storage, and new technologies and market solutions that can knit them all together into virtual power stations are the solution, and not just the problem.
Still, Garnaut says, coherent national policy is needed.
“Sound policy, supportive of the energy transition, is necessary for Australia’s potential to be realised. Is it over-optimistic to expect Australia to regain normally sound policy, after the incoherence of recent years? I don’t think so. The raucous proclamation of ignorance may be an aberration that is left in the back lanes of history,” he says.
Policy should include a technology neutral ACCC mechanism open to all dispatchable – or “firm” supply options including renewables backed by storage and peaking power, Garnaut says.
Yet policy uncertainty is also driving renewables takeup, says Andrew Tipping, head of business development at Energetics.
“The RET has been a significant factor in making these deals attractive to business, but so has the lack of government policy certainty – large energy users see a power purchase agreement with a renewable energy project as an opportunity to mitigate a range of energy market and climate risks,” Tipping says.
What’s getting done
Energy market agencies are forging ahead with measures to help the grid work better. Energy Security Board chair Kerry Schott is trying to keep the NEG’s reliability obligation alive. But with elections in Victoria in November, NSW in March and national elections due by May 18 that may resolve the whole mess, it isn’t clear any level of government wants to revisit the NEG now.
The market bodies that work under the ESB are working on other measures to make the grid more reliable and efficient: a transmission investment road map or Integrated System Plan that aims to boost the grid’s resilience; minimum notice periods for coal plant closures; strategic reserves to avoid blackouts; and a market rule to encourage more “demand response” – a key way to balance grid supply and demand that’s been little used in Australia until now.
Australian Energy Market Operator chief executive Audrey Zibelman says the end game is cheaper prices for consumers.
“With the abolishment of the NEG in its proposed form, AEMO will continue to move forward with managing the security and reliability of the power system during transition,” Ms Zibelman says.
“Our focus is to continue to strive to be faster, more efficient, smarter and more secure in all that we do, to drive the value to consumers. In particular, we look forward to integrating distributed energy resources (DER) in a way that maximises consumer value through price, greater choice and the provision of a secure and reliable system.”
Investors are steering clear of new coal-fired power stations – which could end up “stranded” under future climate policies. Ms Zibelman says the least-cost approach is to keep existing resources, such as coal-fired power stations, operating as long as possible but they will be “most economically replaced with a portfolio of utility-scale renewable generation, storage, DER, flexible thermal capacity and transmission”.
Distributed energy boom
For all the flux, investment in renewable energy is powering ahead, driven by plunging costs – wind and solar energy are now the cheapest form of new generation – and rising efficiency. Last month the federal Clean Energy Regulator counted nearly 9000MW of mostly wind and solar projects under construction, financed or “probable” – and due to come on line by 2020. This will more than fill the RET target for 2020.
The futures price of large-scale Generating Certificates, the RET’s currency or subsidy, show prices in the $20-$30 range per MWh after 2020, down from $71 today.
On top of this, Bloomberg New Energy Finance (BNEF) tallies up 16,600 MW worth of wind and solar projects worth an estimated $27.7 billion that have secured planning permits but not finance, 30,000 MW worth $46 billion seeking planning approvals, and more than 10,000 MW of pumped hydro and battery storage projects in development.
Not all of these would get built even under normal circumstances. But only a fraction need to get up for another huge wave of renewable energy and storage to come onto the grid in the 2020s.
Small-scale rooftop solar photovoltaic is also going gangbusters. Sunwiz, a consultancy, says installations of rooftop solar systems of less than 100 kilowatts had reached 974 MW at the end of August. That’s more than any other full year apart from 2017, when about 1100 MW was installed, and nearly 50 per cent more than the previous record to that time of year.
BNEF projected the Australian market from now to 2050 in its New Energy Outlook 2018. It excluded the NEG and the Queensland renewable energy target (QRET) but included legislated schemes such as the Victorian RET (VRET), the federal RET – which peaks in 2020 – and the commissioning of Snowy Hydro 2.0 (a 2000 MW expansion costing at least $4 billion).
What it found makes startling reading. Pure economics is driving the renewables boom. Solar PV panel costs have fallen 83 per cent since 2010, and could fall another 37 per cent by 2025. Wind turbine costs have fallen 32 per cent since 2010, and better technology means the capacity utilisation of a typical turbine could increase from about 35 per cent to day to over 45 per cent by 2040. Lithium ion battery costs have fallen 80 per cent since 2010 and will continue to fall. The cost of energy from a battery charged from a solar system will fall below the cost of power from a new coal or gas plant in the next decade, and below the cost of power existing gas plant in the 2030s.
More than four-fifths of new investment in generation from here to 2050 will be in renewables. Of the $US144 billion invested in generation in Australia, just $US1 billion will go to coal, in the form of plant life extensions; $US16.4 billion will be spent on batteries. The rooftop solar boom will continue through the 2020s and into the 2030s, with commercial installations taking over as the growth engine followed by larger industrial systems.
Combined residential, commercial and industrial rooftop solar “behind the meter” – on households’ and business’ premises – will top a massive 40,000 MW by the early 2030s.
Renewables projects continue to be announced even after the government’s abandonment of the NEG. ASX-listed Genex bought a second solar development – the 50 MW Jemalong project near Forbes, NSW – after the NEG fell casualty to the government’s leadership chaos. “I guess the economics won out at the end of the day,” said Simon Kidston, Genex executive director.
But this also leads to a startling fact. Within a few years, Australia will be the most decentralised energy market in the world in terms of the distribution of generating capacity – and by a long shot.
By this score, Australia may be out in front on the energy market of the future. But it has come with the loss of the economy’s traditional advantage in reliable cheap power.
Wind and solar power are becoming cheaper. But, ironically, they may also be destabilising a power grid based on centralised coal-fired electricity, lifting costs. With a federal election in sight Labor promises to accelerate the process by ramping up Australia’s target for emissions cuts – to 45 per cent by 2030. Without a settled policy framework, Australia’s carbon wars are a long way from settled.