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Umm, didn’t anybody see energy crisis coming?

04:32pm September 25 2017

“A smooth functioning electricity system enables our economic growth and national security,” says chief scientist Alan Finkel (Getty Images).

As the national anthem goes, our land abounds in nature’s gifts and these include bounteous coal and gas reserves, ample sunshine and decent gusts of wind.

Oh and plenty or uranium, but we won’t go there just yet.

Add to the mix the fast evolving battery-storage technologies championed by Tesla’s Elon Musk and it’s baffling that the country is in a collective tizz about the prospect of blackouts on the next sizzling summer’s day.

Yet with wages flat lining, reliability isn’t the only issue worrying both consumers and businesses. According to the Australian Bureau of Statistics’ household expenditure survey, the average householder spent $41 a week on fuel and power in 2015-16, compared with $33 in 2009-10, a 25 per cent increase.

If your household consists of teenage children and hairy dogs that love puddles, the increases would seem to be that much severe. And the scary part is the worst is yet to come this quarter, after the three major retailers announcing price increases of up to 20 per cent, effective from July 1.

Faced with ratcheting “bill shock” to consumers, politicians are hopping from position to position like an Eveready bunny with fading batteries to appease angry voters.

Along the way, both sides of the renewable debate are dispending blame by the hopper load. We saw that after South Australia’s prolonged blackout last September with the devastating outage widely attributed to the evils of unreliable wind power.

The furious debate has even led to the bizarre scenario of AGL Energy – the biggest coal-fired generator but now a renewables advocate – hosting a media visit to its Liddell coal-fired plant that’s slated for closure. Not to showcase it, mind you, but just to prove how “geriatric” it is in the face of political pressure to keep it open.

But how have we managed to plumb such depths on energy policy, pricing and security? And didn’t anyone see this coming?

Well, plenty did, through various lenses. Take wholesale east coast gas prices, which several analysts were warning back in 2013 and 2014 could soar from roughly $3-$4 a gigajoule when three large Gladstone-based LNG plants began exporting last year and supply tightened. Michael Fraser, then chief executive of AGL, made similar predictions around prices and how that would hit demand. Fast forward to the first quarter of this year and east coast gas prices averaged almost $10 a gigajoule, according to consultants EnergyQuest.

We may still be cooking with gas – especially in Victoria – but vast inland resources are being diverted to Asian buyers via the mega LNG projects. While there’s still thought to be ample reserves, it seems that explorers forgot to drill them. In the case of shale gas reserves, a moratorium on hydraulic fracturing often means they can’t be exploited.

The issue was laid bare earlier this week when the government released an Australian Competition and Consumer Commission gas supply report warning of a potential east coast gas shortfall of at least 55 petajoules next year. Within days, the major gas exporters pledged to prioritise gas to the domestic market that wasn’t already contracted to be exported, resulting in the government stepping back from slapping controls on overseas shipments.

But of course, gas and LNG exports are only one piece of the nation's energy puzzle.

For at least a decade, our national energy policy has failed to keep up with the modern realities of a burgeoning population and the (generally) accepted imperative to abate carbon emissions.

“A smooth functioning electricity system enables our economic growth and national security,” says chief scientist Alan Finkel (author of the much-discussed Finkel review of the National Energy Market).

“But in recent times the system has struggled to cope with shifting policy imperatives and rapidly evolving technologies.”

Perhaps our energy policy malaise is a case of having too much of those rich and not-so-rare gifts. In the words of NSW chief scientist and Finkel review member Mary O’Kane, Australia has had it so good that it has “fallen asleep at the wheel” on energy policy.

“It is as though we put in place a good energy system and a good market, and then went to sleep while other countries which have less abundance in energy moved ahead,” she told a recent CEDA Energy Series event in Sydney.

“We have coasted for years, and then – recently –some of these things have come back at us.”

At the same CEDA conference, Westpac Institutional Bank’s global head of natural resources Patrick Cocquerel suggested action was needed quickly, adding that a 21st century energy system needs to balance the new world of intermittent generation and greater energy choices for consumers, along with the significant challenge of decarbonisation.

“You can’t teach a fish to climb trees, unless you have a million years to wait for evolution,” Cocquerel told the CEDA conference. “We don’t have that kind of time.

A root problem is that Canberra’s chopping and changing on carbon reduction policies that have ordinary folk bamboozled have made private energy providers unsure about where – and how much – to invest.

After dubbing climate change as the “greatest moral, environmental and economic challenge of our time” in 2007, then Prime Minister Kevin Rudd eventually resiled from an emissions trading scheme.

Successor Julia Gillard did introduce one before conservative Prime Minister Tony Abbott promptly abolished this impost. But the Abbott Government in 2015 did legislate a Renewable Energy Target, targeting 23.5 per cent of power generation from renewables by 2020.

Renewables last year produced 17 per cent of our power, up from the previous 14.5 per cent. However, power shortages last summer in SA and Victoria refocused attention on the RET due to criticism Australia was too quickly shifting away from coal.

Current Prime Minister Malcolm Turnbull, a one-time climate change true believer, has been thrust into the heart of the crisis, in the space of months zealously backing clean-energy schemes such as an expanded Snowy River hydro project while also condemning Labor’s “ideological obsession” with renewables.
In the background sit longer-term goals, Australia remaining a signatory to the Paris Agreement on climate change to reduce carbon emissions to 26-28 per cent below 2005 levels, by 2030. Various states have their own targets, such as Victoria’s pledge of 40 per cent from renewables by 2025.

Not to be outdone, the ACT plans to be fully reliant on renewables by 2020.

But the political imperative to focus on the here-and-now was highlighted with this month’s bunfight over energy giant AGL’s planned closure of Liddell from 2022.

Under pressure, AGL has pledged to consider other options. But as with the closure of Victoria’s Hazelwood plant by its French owner, AGL’s action reflects the pragmatic private sector sniffing the breezes of change well before government.

Longer term, AGL has pledged to exit the black stuff by 2050. According to chief finance officer Brett Redman: “Even if you don’t accept the scientific orthodoxy on climate change, it increasingly appears that technological development in renewables will outpace the efficiency of thermal energy in coming years.”

For the guardians of the National Electricity Market, the trouble is that Liddell reportedly accounts for about 10 per cent of NSW generation base and Hazelwood provided up to 20 per cent of Victoria’s needs. In the privatisation of these assets, it seems that someone neglected to include a mechanism to ensure a phased transition to renewable alternatives.

In the case of Hazelwood, the closure was announced in November last year and by March this year the last emissions had belched from the steam stacks.

Prudently, the Finkel review proposes a mandated three-year minimum notice of closure.

Faced with headlines about looming blackouts ahead of summer and soaring power bills, the government has finally acted by commissioning another review as they mull the recommendations of the flagship Finkel review, which proposes an “orderly transition” to new low-emission technologies.   

Crucially, Finkel proposes a Clean Energy Target by which renewables will gradually overtake coal-fired production. While he didn’t nominate a hard target, modelling in the report points to coal reducing to 53 per cent of all generation by 2030.

The CET, which would replace the current RET, is based on an “agnostic” approach by which the government doesn’t favour any technology over another.

No wonder energy has become such a supercharged political issue and with a magic wand – wind powered or otherwise -- nowhere to be seen.

The views expressed are those of the authors and do not reflect the Westpac Group.

Tim has been a business journalist for more than 30 years, working for The Australian, Business Review Weekly and the Melbourne Herald. At The Australian he covered banking for seven years and authored the Criterion investment column for more than a decade. Boreham is now an investment analyst at the Under The Radar Report small-caps newsletter and separately has founded The New Criterion as a separate weekly column. He also writes a column on biotechnology stocks for Biotech Daily.

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