Regions and Energy

From coal, oil and gas to renewable energy, new storage technologies, emission reduction and efficiency options, and new distribution and retail business models

From coal, oil and gas to renewable energy, new storage technologies, emission reduction and efficiency options, and new distribution and retail business models

Does Energy Security require a shift back to Government Ownership?

Some remarkable shifts in policy have occurred as a result of the "system-black" experienced during the wild storms that hit South Australia on 28 September last year. The Government-commissioned Finkel Review into the Security of the National Electricity Market was required to respond with measures to address the security, affordability and (environmental) sustainability of the national electricity grid and its component elements.

Much of the debate both before and after the release of the Finkel Report prioritised the issue of security, and indeed implied that both security and affordability could be inconsistent with and possibly put at risk by attempting to address sustainability (aka achieve Paris Agreement greenhouse gas emissions reduction targets) too aggressively or at all.

However, just as the deregulation of the electricity market that ushered in the unpredicted instabilities and uncertainties the national grid is now experiencing, the clamour to address security and affordability by swinging the pendulum back to public ownership, could unleash its own set of unforeseen effects. Witness the sub-optimal NBN roll out, an initiative which itself was aimed at plugging the gap in the quality of service which the 'free' market in telecommunications could not deliver. 

The key common demoninator in all these systems failures is policy uncertainty and inertia. In the absence of clear government policy, chaos will happily fill the vacuum. Sound, stable and consistent government policy instruments provide both investment certainty and direction, and its comcomitant economic prosperity.

It is clear that the loss of intellectual and technical capacity once held by Governments to run centralised energy grids has not been offset by sufficient similar skill in regulating the deregulated industry. The exposure to negative economic and social impacts of thess changes is often greatest in the Regions where Government-owned enterprise provided both jobs and security of affordable electricity supply. In some Regions, jobs have been lost and supply made potentially less secure. The loss of affordability is writ large for all to see. 

Overlay this with the inevitable shift in technology to more economically competitive, distributed systems for energy generation and delivery characterised by renewable energy technologies, it is easy to see why neither government institutions nor independent regulators are able to keep up with the changing environment in which the 'trifecta' of desirable criteria of an effective electricity market are supposed to be delivered. 

How governments navigate this minefield of change without making bold and sure-footed decisions underpinned by solid policy foundations will be the real test of Australia's place as either a leader or laggard in the global energy transition, not to mention all the economic opportunity that emerges in such times of high flux. 

A useful economic commentary on these phenomena can be found here, in a recent article by economist Prof John Quiggin of the University of Queensland. 

 

 

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Australia's Energy - a Future in the Balance

Few other sectors of the Australian economy have undergone a more dramatic transformation than the energy sector  .

It has seen the privatisation of the public electricity utilities, the freeing up of the gas market, the opening up of huge overseas LNG sales contracts, the emergence of a complicated regulatory regime for managing the National Electricity Market (NEM) and the connecting of all state energy grids on the eastern seaboard of Australia. In the meantime, national energy policy has been left adrift without clear direction, electricity prices to consumers have more than doubled, household installations of rooftop solar PV now exceeds all expections with over 1.6 million installations nation-wide, and overlaying all of this, governments have scrambled to wrestle with the political debates over the impact of threatened climate change, driven by greenhouse gas emissions, against a backdrop of progressively more active international diplomatic efforts to coordinate a global response. 

In a nutshell, you couldn't ask for a more challenging, complicated yet exciting time to find opportunities to contribute to the solutions needed to these significant national and global issues. 

It is timely therefore, that the RED platform opens the discussion about Regions and Energy. It will provide an opportunity to draw out the best ideas and solutions to the role and needs of energy in Australia at a time when public policy direction is thin on the ground - scuttling investment certainty while aging electricity generating assets are retired - and governments are confounded by the regulatory, economic and environmental challenges which such policy must ultimately address.

Where to start? Well, that depends on who's interest you want to satisfy.

The latest salvo in the national debate has come with the release of the much awaited "Finkel Report" by Australian Government Chief Scientist, Dr Alan Finkel, and his expert panel to the Council of Australian Governments (COAG) Leaders Meeting on 9 June 2017. This Final Report of the Independent Review into the Future of the Electricity Market was first commissioned by COAG Energy Ministers on 7 October last year. 

After several reports and reviews, culminating in the now discarded report of the ill-fated Climate Change Authority in its joint report with the Australian Energy Market Operator, "Towards the next Generation: delivering afforable, secure and lower emissions power", much hanged on the authority of Dr Finkel and his report to break the deadlock over how to to address the "energy trilemma' of security, affordability and sustainability in the transition to what national Energy Minister, Josh Fryderberg, called "a low emissions future." The 'trilemma' concept is that these three desirable priorities are not always compatible, pulling policy proposals in competing directions, with greater security and the costs of transiiton potentially adding rather than reducing costs onto the affordability of electricity supplies to consumers. 

The emphasis on security was triggered by the "system black" suffered by the South Australian electricity system in the midst of a wild storm in February this year. The pressure to address affordability has been mounting for years but the deregulation of most of the industry has left little room for governments to intervene beyond making plaintive claims that 'competition' from deregulation was putting "downward pressure" on what consumers were experiencing as spriralling electricity prices and bills. In the meantime, the Government appears well off track in its stated aim of meeting Australia's commitents to the Paris Climate Agreement by reducing emissions by 26-28 per cent by 2030. 

So did the Finkel report finally provide the badly-needed breakthrough that would give the Government a way forward in addressing the dreaded energy trilemma? Well, yes ... and no. 

Yes, the report spoke to all limbs of the trilemma, making numerous recommendations on each of them. But the recommendations often fell short of specific direction. For example, knowing the Government would never entertain an emissions trading scheme, and had then retreated from a previously-floated emissions intensity scheme for the electricty industry, Finkel has proposed a "Clean Energy Target" (CET) as the now lowest cost pathway to a lower emissions electricity grid. The CET would mandate that electricity retailers source a certain amount of their wholesale energy purchases from 'clean energy' sources. A framework of tradeable certificates, required to be purchased by generators not meeting a 'clean energy' threshold would fund incentives for new investment in large scale clean energy generation technologies to supply the grid. 

There's only one, not insignificant, problem: Finkel recommends a CET as the mechanism but without setting what the actual target level should be! Instead, ther report acknowledges that "the specific emissions reduction trajectory that shoud be set for the electricity sector is a question for governments" to agree within 6 months (based on the Paris Agreement commitment to reduce emissions by 28% by 2030). That's no small task given that those same governments haven't been able to agree on any similar target for the last 6 years!

It is a similar story with the recommendation that Governments should agree on a "whole of economy emissions reduction strategy" within 3 years. What the Government really needed from the Finkel report was a recommended CET and concrete emissions reduction strategy to support it right now, rather than leaving these things hanging in the wind to be mulled over, debated, smothered in conflict and withered over time. It's not rocket science. The current level of emissions are known. The level of emission reductions requried by 2030 to meet the 2030 target is also known . So the annual transition to clean energy is simply a question of mathematics, if not political will.

Furthermore, under the Finkel definition, "clean energy" can still include gas or coal fired power generation, providing its emissions remain less than 0.6 tonnes per Megawatt hour of electricity generated. This is designed to ensure that the target for 'clean' energy is "technology neutral", eventhough it is unlikely coal emissions could ever be clean enough to reach the threshold required. 

Amidst the quagmire of bureacracies already dealing with energy market regulation, the Australian Energy Market Commission (AEMC), the Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO), Finkel recommends yet another one, an Energy Security Board (ESB), to address the issue of security. Thus, another issue is effectively buck-passed to another quango to contemplate for who knows how long. 

When it comes to the 'reliability' limb of the so-called trilemma, an equally odd approach is taken, namely to insist that all additional investments in clean energy beyond 2020 (when the CET would come into effect) should be obligated to provide "firm capacity" dispatchable at any time by having back-up batteries or contracts for altenative supply to cover the "variable" or "intermittent" supply capacity of solar and wind. However, no similar obligation is imposed on any coal fired power station should one of them fail to maintain dispatchable capacity for some reason. The recommendation appears to confuse issues of the system with those of indivitual source generation. The grid system as a whole should be reliable regardless of the variability or reliability of individual generators supplying to it. Reserve capacity should be sourced or purchased on behalf of the system as a whole, not imposed on each incremental system input. 

Why have these shortcomings emerged in a report that held so much promise? There are likely two reasons: politics and time.

The politics of climate change and energy in Australia at present is toxic. The energy system, freed up by deregulation, is out of government control and fundamentally broken. The vacuum in any direction from a clear national energy policy keeps it that way. Even within the Government itself there is intense division. Finkel is trying to deliver a report tame enough not to have it ignored or rejected outright, but reassuring enough so that the Government might at least have something with which it could move forward. On the other hand, the ambiguity of the recommendations potentially leaves it open to 'death by negotiation', just at a time when the Government needed some sure-footed, authoritative direction which it could seize upon to fend off efforts to compromise the outcomes and to provide certainty for industry investment sooner rather than later. 

Secondly, it was probably unrealistic to expect Finkel to solve all the details needed to manage the NEM and the ramp up and integration of renewables into the grid in the space of a modest 9 month review. There's just too much devil in the detail. So in the meantime, debate will continue to rage and the uncertainties around the details will provide fertile ground for campaigns to be waged by those who want to cast suspicion and doubt on the direction to which the report points. 

One thing is certain. The Energy Minister is right to say "doing nothing is not an option". The world of energy services is changing fast. The prices of renewable energy technologies are plummeting such that big lumpy capital investments in large centralised fossil fuelled power plants are now virtually unfundable and energy from renewables is cheaper than traditional sources, despite the vast reserves of 'cheap' coal in Australian soils. Both solar hardware and software are progressing at a galloping pace and the opportunities they open up for more efficient, cost effective and customisable energy services are immense.

In the face of this technological and economically transformational onslaught, no matter what the Prime Minister or the Government manages to agree on, we are on the threshold of massive change. Hold on and enjoy the ride. It will be nothing if not exciting!

 

 

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Stephen Alexander
Thank you for such a thoughtful and insightful article that lays down a wonderful backdrop for some intelligent discussion and hop... Read More
Friday, 16 June 2017 10:32
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