Energy market report

Recent electrical forecasts, international reports, network performance determinations, white papers and legislative change will influence the future of the energy industry. Significant events include the International Energy Agency Ministerial Meeting and Durban COP17, along with the release of a government draft energy white paper and the AER’s market report. Energy Source & Distribution looks at the major issues and views affecting our networks.

ENA and AER look for middle ground on rule improvements 

The Australian Energy Regulator (AER) has recommended a more balanced approach to capital and operating expenditure forecasts that draws on all available information when determining the efficient expenditure needed to deliver a reliable electricity supply. The Energy Networks Association (ENA) has responded by saying the AER’s proposed rule change does not appropiately address the real issues affecting the industry.

The AER’s fifth State of the energy market report provides a snapshot of policy developments for the energy industry as well as the regulator’s recent activities and reviews. Record levels of overspend in network infrastructure investment, rising retail prices and vertical integration were major issues of concern for the AER in 2011.

The report states that energy network investment in the current five-year regulatory cycle is running at historically high levels – more than $7 billion in electricity transmission, $35 billion in electricity distribution and $3 billion in gas distribution. These forecasts represent an increase on investment in the previous regulatory periods of around 82 per cent in electricity transmission, 62 per cent in electricity distribution and 74 per cent in gas distribution (in real terms).

The Energy Networks Association (ENA) said that the AER’s claims that flaws in regulation are contributing to higher network charges did not take into account all contributing factors.

“This is surprising given the AER has identified in its 17 network determinations that replacing ageing assets, rising input costs, higher reliability standards and an increase in the cost of finance are all pushing up  network charges. Changing the rules will not change these pressures,” ENA CEO Malcolm Roberts told Energy Source & Distribution.

“Mandated increases to reliability standards in Queensland and New South Wales are adding more than $3 billion to network costs. According to the AER’s own recent allowances for cost of debt, the global financial crisis has raised industry financing costs by around $800 million a year over pre-GFC levels.  Costs for materials such as copper and aluminum have soared,” he said.

“Network regulation can be improved.  ENA members are keen, for example, to see more constant  incentives for efficient capital expenditure across five-year regulatory periods. But changes need to address real problems with long-term, efficient solutions. The AER’s proposed rule change does not do that.”

Substantial price impacts from recent determinations led the AER in 2011 to conduct an internal review of the framework in the national energy rules that governs the regulatory process. While the review found many aspects of the framework operate well, the AER believed several features were leading to consumers paying more than necessary for energy services.

The review found that the current framework restricts the AER from making “holistic and independent” assessments of a network’s efficient expenditure needs; the mandatory addition of all capital expenditure to a network’s asset base creates incentives for overinvestment; inconsistent approaches to setting the cost of capital for electricity and gas network businesses, along with constraints on the AER from setting costs that reflect current commercial practices, lead to inflated cost estimates; the current consultation arrangements hinder effective stakeholder engagement.

The AER expects the the AEMC to release a draft determination by July 2012 and a final determination by October 2012.

Streamlining submissions 

The AER report states that some network businesses appear to strategically withhold key information until the final stages of a regulatory review.

“The late submission of key information impairs stakeholder engagement and limits the time available for stakeholders and the AER to analyse the late information,” the AER stated.

The AER proposed restricting network businesses from making submissions on their regulatory proposals, but retaining their right to submit revised proposals. According to the AER, this change would streamline the regulatory process, encourage businesses to submit fully formed proposals at the outset, and allow for more meaningful stakeholder engagement.

AER concerned by STTM gas data failures 

The AER is concerned about the continuing high number of data failures by Short Term Trading Market (STTM) facility operators.

“These failures can seriously impact on the efficiency of the STTM and in some cases have had adverse financial outcomes on trading participants,” the AER stated.

The AER’s strategy to date has been focused on industry engagement to promote compliance. However, given continuing failures, STTM facility operators are now on notice that in future if the AER believes that a participant has failed to provide STTM facility data consistent with the Gas Rules, the AER will consider issuing infringement notices with associated penalties and/or seek court based orders and sanctions.

The AER considers that this approach will act as a deterrent to future non-compliance.

The AER has committed to the Standing Council on Energy and Resources (SCER, formerly the Ministerial Council on Energy) to monitor the gas market for the exercise of market power in the short term trading market.


 

Draft white paper sets investment and engagement challenges

A draft federal energy white paper warns that the power industry needs $240 billion of investment in its gas and electricity industries to ensure a reliable supply and suggests state governments should deregulate their energy markets. It also advocates for deeper community engagement to teach critical energy issues.

Federal Minister for Resources, Energy and Tourism, The Hon Martin Ferguson, released the Draft Energy White Paper 2011: Strengthening the foundations for Australia’s energy future in December 2011.

The plan provides a review of Australia’s future energy needs to 2030 and defines a policy framework to guide the further development of Australia’s energy sector. The paper flags further privatisation of energy assets, the removal of retail price regulation and has dropped the introduction of a carbon capture and storage standard for future coal-fired generation investment.

Australia’s energy costs are expected to continue to rise due to the large investments needed to meet energy goals, placing pressure on energy affordability for lower-income households and energy-intensive businesses, even as average incomes rise.

According to the draft report, the energy industry must improve its engagement with communities and demonstrate that it can safely and sustainably exploit conventional and unconventional energy resources.

“There is a growing need to build further community support, understanding and engagement around critical energy sources such as coal seam gas and geothermal as well as build support and understanding of important technologies, including carbon capture and storage,” the report states.

A deeper community engagement in energy policy issues and outcomes is necessary in order to have a “mature” debate about the energy sector and implications of different decisions.

“This includes ensuring that consumers have appropriate understanding and awareness of energy issues (energy literacy) to empower them to engage and participate in energy markets,” the report states.

“Making more information accessible to households and businesses on the nature of energy costs and the options that exist to manage these costs is a critical component in improving energy use productivity. Again, building community support for new technologies and energy sources is fundamental if we are to develop the options we need to meet our climate change and energy security objectives.”

The Energy Supply Association of Australia (ESAA) welcomed the draft plan’s focus on efficient markets and regulatory stability. Esaa interim CEO Clare Savage said the draft paper highlights the $240 billion investment challenge facing the energy sector over the next 20 years and the substantial foreign and domestic capital that will be required to meet this challenge.

“While there is a lot of detail in the Energy White Paper still to be worked through, it is encouraging that the government has signalled its commitment to maintaining and improving Australia’s market and regulatory settings,” Ms Savage said.

“Investment in the sector will only be forthcoming if investors have confidence in a stable policy framework with minimum intervention in market outcomes.”

The paper encourages state and territory governments to fully deregulate retail energy prices where effective competition exists. Ms Savage said the existence of retail price regulation is one of the greatest threats to the energy system.

“The competitive market is the best way to ensure the lowest prices for consumers while supporting sufficient investment to maintain security and reliability,” she said.

“Trying to regulate competitive prices is a dangerous game that puts the whole energy system at risk.”

The paper also recognises that with the introduction of a carbon price, an emissions intensity threshold is a distortion to the market that is not required.

“Esaa has long argued that a carbon price is the least-cost mechanism for reducing Australia’s emissions,” Ms Savage said.

“A blunt regulatory instrument such as an emissions intensity threshold could prevent the electricity industry from sourcing and delivering least-cost abatement and could unnecessarily further increase electricity prices.”

Sustainable Energy Association of Australia (SEA) chief executive Professor Ray Wills said the report downgrades solar as it does not refer to the current data showing 500,000 homes in Australia, or around 4 per cent of almost 8 million Australian homes, now have solar panels.

“As solar electricity has reached domestic retail parity now in Australia, I would also suggest that by no later than 2013, almost all builders will offer new homes will have solar fitted as standard, representing at least 100,000 homes per year around Australia. As a conservative estimate, existing homes will be adding solar panels at no less than 200,000 homes per year (2.5 per cent annual take up).”

Mr Wills said there wasn’t enough emphasis placed on renewable energy and major electricity price reform was needed.

“Reform that eliminates subsidies for the use of fossil fuel in the generation of energy, and delivers cost reflective pricing that has perversely inhibited the improvement of energy efficiency, and take up of renewable energy in Australia,”

“While the draft Energy White Paper frequently mentions renewable energy, it is hardly bullish on the expected share of renewable energy in the longer term, yet there is already strong data suggesting significant moves for electricity generation from renewable sources in Australia has started,” he said.

“The Energy White Paper for 2030 needs to ambitiously plan for how we decarbonise, and provide confidence that our economy will not be stuck with a carbon legacy in energy generation as we establish a carbon price.”

Along with the release of the draft energy white paper for public consultation, Mr Ferguson unveiled the 2011 National Energy Security Assessment (NESA) and the strategic framework for alternative transport fuels.

White paper snapshot:

“Our ability to deliver this investment will critically depend on access to finance and capital. Given the relatively small pool of Australian investors with deep experience in delivering greenfield electricity generation investments, it is likely that a significant proportion of this required capital – debt and equity – will need to be sourced from overseas.”

“Continued government ownership of electricity generation assets, as well as the ongoing potential for further intervention, make attracting investment more difficult than it otherwise would be. Furthermore, retail price regulation can also reduce incentives for new competition and innovation.”


 

New South Wales distribution demand lower than expected 

The Australian Energy Regulator recently reviewed the financial and service performance of ActewAGL, Ausgrid, Endeavour Energy and Essential Energy for 2009-10 as part of its network reporting and information strategy.

The actual maximum demand for 2009-10 reported by the NSW distribution network service providers (DNSPs) was not only lower than forecast for 2009–10, but it was also lower than actual maximum demand for 2008-09.

“Forecasts of demand drive the need for additional capacity in the network. Where forecasts are inflated, it has a significant impact on the costs to consumers,” AER chairman Andrew Reeves said.

The actual energy delivered and total customer numbers of the DNSPs generally do not vary significantly from forecasts included in the AER’s 2009 determinations. Ausgrid reported the highest variation from its forecasts of approximately 3 per cent for customer numbers and -1.5 per cent for energy delivered.

Ausgrid’s revenue varied from its forecast allowance by $44.3 million, which is 3.7 per cent higher than forecast. Ausgrid considered this was attributable to the difference between forecast and actual volumes at the tariff component in 2009– 10 used in calculating the X-factor. Ausgrid further considered this could arise from temperature variations, economic developments, population growth and customer price responsiveness.

Endeavour Energy’s revenue varied from its forecast allowance by $34.5 million, which is 4.6 per cent higher than forecast. Endeavour attributed the difference to modest growth in energy delivered and customer numbers above the regulatory forecasts, movement between tariff categories with different prices, and the difference between actual and forecast CPI.

Essential Energy’s revenue varied from its forecast allowance by $45.2 million, which is 5.3 per cent higher than forecast. Essential Energy considered this was attributable to the CPI adjustment.

ACT distributor ActewAGL’s revenue varied from its forecast allowance by $3.7 million, which is 2.7 per cent higher than forecast. ActewAGL considered this was largely attributable to CPI and accounting adjustments.

Ausgrid, Endeavour Energy and Essential Energy all had actual capex less than its forecast allowance Endeavour Energy recorded the biggest capital expenditure underspend and largest difference between actual and forecast return on assets. Only ActewAGL’s capex was more than its forecast allowance, at 1.3 per cent.

The AER requested the NSW DNSPs to provide the main reasons for differences between forecast and actual capex in 2009-10. In reviewing the DNSPs’ responses the AER notes a common explanation provided by the NSW DNSPs’ for the capex underspend was due to delays in implementing projects and programs.

The report was the AER’s first DNSP performance report prepared under the National Electricity Law (NEL). The AER has begun performance reporting for the Queensland and South Australian DNSPs. Following this, the AER’s reporting framework will apply to the Victorian DNSPs. From 2012-13 the AER’s reporting framework will apply to the Tasmanian DNSP.


 

Hydro Tasmania rejects expert panel’s retail claim 

An independent expert panel tasked with reviewing Tasmania’s electricity sector released its draft report in December.

Panel chairman John Pierce, said the report proposes logical market reforms designed to deliver improved competition and choice for Tasmanian consumers.

“Large retailers that are not currently active in Tasmania would find the Tasmanian retail market potentially attractive,” he said.

Mr Pierce said the main barrier to effective retail competition is a lack of choice at the wholesale level.

“So long as Hydro Tasmania remains the dominant wholesaler, major national retailers will not enter the Tasmanian market and choice for households and small businesses will be stymied. Unlocking greater retail competition in Tasmania, and with it, effective customer choice, hinges on this issue being addressed.”

Renewable energy business Hydro Tasmania welcomed the release of an expert panel’s draft final report, but rejected the central claim that the wholesale market structure is a barrier to retail competition in the state.

Hydro Tasmania CEO Roy Adair said some of the panel’s recommendations could be effectively implemented to benefit consumers. However, others required more careful consideration to ensure they did not reduce the value of the electricity businesses to the Tasmanian community while offering little or no improvement in prices for households and small businesses.

Mr Adair said it was important to understand the real drivers of power price increases and how the wholesale market in Tasmania actually worked.

“The panel concludes that price rises over the past few years have been driven by increased network charges and, to a lesser extent, wholesale energy costs for residential and small business customers,” Mr Adair said. “Hydro Tasmania agrees with this assessment.”

Hydro Tasmania supported an initiative identified by the panel where the wholesale energy component of the household power bill could be reduced to a sustainable level with a different approach to how it is regulated. This would see less money for the electricity businesses but lower prices for consumers.

“However, to suggest that Hydro Tasmania is a barrier to retail competition is simply wrong and is not supported by the facts. Moreover, this ignores the fact that interstate retailer ERM has already successfully moved into the state, embraced local opportunities and made positive statements to the panel about the way the local market is operating,” Mr Adair said.

“Hydro Tasmania is not opposed to sensible regulation of the wholesale contract market to facilitate the entry of more retailers.

“These are simple measures to introduce, yet the panel is instead focused on risky, complex and costly changes that we strongly believe are unnecessary for Tasmanians. If pursued, the panel’s recommended changes will reduce government revenue while having little or no impact on power prices.”

Mr Adair said while there were items in the panel’s draft report with which Hydro Tasmania disagreed, there were findings that were strongly welcomed and supported.

Hydro Tasmania is pleased that the panel concluded that Basslink has enabled Tasmania’s demand for electricity to be met at a materially lower cost than would otherwise have been the case and the financial benefits to Hydro Tasmania from Basslink over the first five years of operation years are positive.

“The panel has clearly shown that Basslink continues to be beneficial to the State and not a cause of higher power prices,” Mr Adair said.

“This supports the strongly-held view that Basslink was by far the best option to ensure security of supply in a state prone to drought, while capturing the economic opportunities of being part of a national market.”


Portfolio of technologies needed for world energy demands

Energy ministers and executives met in Paris in late 2011 for the Energy Business Council (EBC) opening session of the International Energy Agency ministerial meeting. Federal Resources and Energy Minister Martin Ferguson chaired the biennial meeting of 36 energy ministers.

As part of the meeting the IEA published its World Energy Outlook 2011 report, which brings together the latest data, policy developments, and the year’s experience to provide robust analysis and insight into global energy markets. IEA chief economist Dr Fatih Birol said the report looks at growth areas, challenges and pitfalls for energy production. It also has an in-depth study of coal and its place in the global energy mix over the past 10 years.

“We analysed the demand, trade and supply of coal in-depth and looked at the polemics of coal production and the coal price evolution,” Dr Birol said.

The report also focuses on Russian domestic market supply, and the influence of oil and gas on the future global market. Additional analysis has been given to nuclear power post-Fukushima and the implications on other fuels.

The report models three scenarios based on the IEA’s assessments of key parameters that will affect global energy trends from now to 2035. These include drivers such as population growth, economic and social development patterns and availability and costs of new technologies. Many of these depend on the success of governments in providing the framework and support to promote technological innovation, and the degree to which greenhouse gas emissions policies are adopted and affect energy supply and demand.

The IEA scenarios included a ‘New Policies Scenario’, a ‘Current Policies Scenario’ and the ‘450 Scenario’, which sets out an energy pathway consistent with a limit on the long-term concentration of greenhouse gas emissions in the atmosphere to 450 parts per million (ppm), and a 50 per cent chance of limiting the increase in the average global temperature to 2°C, compared with pre-industrial levels.

Under all three IEA scenarios, world primary energy demand is expected to increase, although the strength of the global response to climate change will play a major role in determining the rate of growth, particularly after 2020. In the absence of further greenhouse gas reduction measures, energy demand grows at 1.6 per cent a year, compared to much slower growth if the world were to take concerted action (0.8 per cent a year). This difference reflects the degree to which countries enact energy efficiency measures in each scenario.

The IEA has estimated that around 80 per cent of the world’s allowable carbon dioxide emissions budget under a 450 parts per million (or 2°C global warming) scenario is already locked in through existing capital stock (such as power plants, factories and buildings). The IEA analysis emphasises that solutions must be found from a portfolio of technologies and fuels, and that the world cannot afford to limit options if we are to meet climate goals. It estimated that a 10-year delay in the development of carbon capture and storage technologies could increase the cost of meeting a 450 parts per million goal by 8 per cent to 2035. Similarly, a major reduction in the use of nuclear energy would make staying within a 450 parts per million emissions budget extremely challenging and impose similar costs.


Negotiations begin on international climate change framework 

Countries meeting in Durban, South Africa, for the United Nations’ Conference of the Parties (COP17) agreed to start negotiating a new global deal in response to climate change.

International governments will adopt a universal legal agreement on climate change no later than 2015, to be implemented in 2020. Work has begun under a new group called the Ad Hoc Working Group on the Durban Platform for Enhanced Action.

Governments, including 35 industrialised countries, agreed a second commitment period of the Kyoto Protocol from January 1, 2013. To achieve rapid clarity, parties to this second period will turn their economy-wide targets into quantified emission limitation or reduction objectives and submit them for review by May 1, 2012.

The involvement of all 194 nations with the intention to negotiate a legally binding agreement is a historic achievement, Federal Climate Change and Energy Efficiency Minister Greg Combet said.

“For the first time we have stood up in the United Nations forum and our major trading partners, the US, China and Japan and Korea and India and many others have all stood up and said yes, we’ll be part of a new deal,” Minister Combet told ABC’s chief political correspondent Sabra Lane.

Minister Combet said that Australia’s recently legislated carbon pricing mechanism placed it in a position to adapt to any future global legislation.

“If we weren’t implementing our carbon price mechanism to get us on the path of reducing emissions, where we’d be in 2020 when we were legally bound to reduce emissions. It would be like hitting the economy with the back of the axe. We need to get on with this now and start to make the adjustment in our economy to be ready for these legally binding obligations,” Minister Combet told ABC’s Chris Uhlmann.

South African Minister of International Relations and Cooperation and President of the Durban UN Climate Change Conference (COP17/CMP7) Maite Nkoana-Mashabane said the negotiations were crucial steps forward for the common good and the global citizenry.

United Nations Framework Convention on Climate Change (UNFCCC) executive secretary Christiana Figueres saluted the countries agreeing to the agreement.

“They have all laid aside some cherished objectives of their own to meet a common purpose – a long-term solution to climate change. I sincerely thank the South African Presidency who steered through a long and intense conference to a historic agreement that has met all major issues,” Ms Figueres said.

“This is highly significant because the Kyoto Protocol’s accounting rules, mechanisms and markets all remain in action as effective tools to leverage global climate action and as models to inform future agreements.”

A significantly advanced framework for the reporting of emission reductions for both developed and developing countries was also agreed, taking into consideration the common but differentiated responsibilities of different countries.

In addition to charting the way forward on reducing greenhouse gases in the global context, governments meeting in South Africa agreed the full implementation of the package to support developing nations, agreed to in 2010 in Cancun, Mexico.

“This means that urgent support for the developing world, especially for the poorest and most vulnerable to adapt to climate change, will also be launched on time,” Ms Figueres said.

The package includes the Green Climate Fund, an Adaptation Committee designed to improve the coordination of adaptation actions on a global scale, and a technology mechanism, which are to become fully operational in 2012.

Australia’s Clean Energy Council (CEC) released a report at the UN climate negotiations revealing that renewable energy provided almost 10 per cent of Australia’s electricity in the past 12 months

The 2011 Clean Energy Australia report found that more than half a million household solar power systems were now installed on Australian rooftops – around 35 times the amount just three years ago at the end of 2008.

Over one million Australians now live in a solar household. Solar power has come of age and is now a real part of Australia’s energy sector.

Clean Energy Council director Kane Thornton said the report confirms Australia is well on the way to achieving the 20 per cent renewable energy target.

As of August 2011, 1031MW of solar power was installed in Australia – representing more than 500,000 household systems. More than 230,000 of these were installed between January and August this year.

Investment figures from Bloomberg New Energy Finance show that the Australian clean energy market was worth $5.2 billion in the 2010-11 financial year.

The next major UNFCCC Climate Change Conference, COP 18/ CMP 8, is to take place November 26  to December 7, 2012 in Qatar, in close cooperation with the Republic of Korea.

Countries meeting in Durban, South Africa, for the United Nations’ Conference of the Parties (COP17) agreed to start negotiating a new global deal in response to climate change.

International governments will adopt a universal legal agreement on climate change no later than 2015, to be implemented in 2020. Work has begun under a new group called the Ad Hoc Working Group on the Durban Platform for Enhanced Action.

Governments, including 35 industrialised countries, agreed a second commitment period of the Kyoto Protocol from January 1, 2013. To achieve rapid clarity, parties to this second period will turn their economy-wide targets into quantified emission limitation or reduction objectives and submit them for review by May 1, 2012.

The involvement of all 194 nations with the intention to negotiate a legally binding agreement is a historic achievement, Federal Climate Change and Energy Efficiency Minister Greg Combet said.

“For the first time we have stood up in the United Nations forum and our major trading partners, the US, China and Japan and Korea and India and many others have all stood up and said yes, we’ll be part of a new deal,” Minister Combet told ABC’s chief political correspondent Sabra Lane.

Minister Combet said that Australia’s recently legislated carbon pricing mechanism placed it in a position to adapt to any future global legislation.

“If we weren’t implementing our carbon price mechanism to get us on the path of reducing emissions, where we’d be in 2020 when we were legally bound to reduce emissions. It would be like hitting the economy with the back of the axe. We need to get on with this now and start to make the adjustment in our economy to be ready for these legally binding obligations,” Minister Combet told ABC’s Chris Uhlmann.

South African Minister of International Relations and Cooperation and President of the Durban UN Climate Change Conference (COP17/CMP7) Maite Nkoana-Mashabane said the negotiations were crucial steps forward for the common good and the global citizenry.

United Nations Framework Convention on Climate Change (UNFCCC) executive secretary Christiana Figueres saluted the countries agreeing to the agreement.

“They have all laid aside some cherished objectives of their own to meet a common purpose – a long-term solution to climate change. I sincerely thank the South African Presidency who steered through a long and intense conference to a historic agreement that has met all major issues,” Ms Figueres said.

“This is highly significant because the Kyoto Protocol’s accounting rules, mechanisms and markets all remain in action as effective tools to leverage global climate action and as models to inform future agreements.”

A significantly advanced framework for the reporting of emission reductions for both developed and developing countries was also agreed, taking into consideration the common but differentiated responsibilities of different countries.

In addition to charting the way forward on reducing greenhouse gases in the global context, governments meeting in South Africa agreed the full implementation of the package to support developing nations, agreed to in 2010 in Cancun, Mexico.

“This means that urgent support for the developing world, especially for the poorest and most vulnerable to adapt to climate change, will also be launched on time,” Ms Figueres said.

The package includes the Green Climate Fund, an Adaptation Committee designed to improve the coordination of adaptation actions on a global scale, and a technology mechanism, which are to become fully operational in 2012.

Australia’s Clean Energy Council (CEC) released a report at the UN climate negotiations revealing that renewable energy provided almost 10 per cent of Australia’s electricity in the past 12 months

The 2011 Clean Energy Australia report found that more than half a million household solar power systems were now installed on Australian rooftops – around 35 times the amount just three years ago at the end of 2008.

Over one million Australians now live in a solar household. Solar power has come of age and is now a real part of Australia’s energy sector.

Clean Energy Council director Kane Thornton said the report confirms Australia is well on the way to achieving the 20 per cent renewable energy target.

As of August 2011, 1031MW of solar power was installed in Australia – representing more than 500,000 household systems. More than 230,000 of these were installed between January and August this year.

Investment figures from Bloomberg New Energy Finance show that the Australian clean energy market was worth $5.2 billion in the 2010-11 financial year.

The next major UNFCCC Climate Change Conference, COP 18/ CMP 8, is to take place November 26  to December 7, 2012 in Qatar, in close cooperation with the Republic of Korea.