Origin CEO Frank Calabria’s speech to The Australian Financial Review’s National Energy Summit, 10 October 2017
Thanks for having me here today to open Day 2 of the AFR’s National Energy Summit.
Before starting, I would like to acknowledge the Gadigal people of the Eora Nation, the traditional custodians of this land, and pay my respects to their Elders both past and present.
Energy makes the front page almost daily – rising electricity prices, AEMO’s predicted gas shortfall, blackout concerns, the closure of ageing coal fired power stations – and that’s just this week’s headlines.
Australian homes and businesses are feeling the strain of the cost of energy. Many want to know why energy prices have risen so suddenly and by so much.
Despite many attempts by industry and governments to work together to develop a cohesive national energy policy for Australia over the past decade, we have not been able to agree on a genuine, coordinated and national approach to the challenge of transitioning to a more modern and cleaner energy system.
As we are now witnessing, this failure is costing ordinary Australian people and Australia as a nation.
This situation has prompted more questions to Origin from our stakeholders than probably ever before. Tough questions – from the groups most important to us – our customers, our shareholders, our communities and our employees.
They want to know:
- What we are doing to reduce power prices?
- How we are making sure there is enough power generation so we won’t have blackouts?
- How are we supporting Australia’s transition to net zero emissions?
- How will we make sure Australia is not short of gas so manufacturers are not only well supplied, but can afford it?
- How are we adopting new customer-centric technology propelling us towards smarter energy future?
What this demonstrates is Australians are looking for leadership from industry and politicians on energy. They are not interested in how we got here, just how we move forward.
So where do we start?
Australians overwhelmingly expect industry and governments to not only play a part, but to lead the transition to a cleaner energy supply.
They also have an expectation that we will manage this transition in a way that maintains energy security and affordability for Australian homes and businesses. Not necessarily an easy task, but a clear expectation.
We are at a major crossroads for our energy system.
With the NEM approaching its 20th birthday, it’s a fitting time to ask some key questions: whether the market is still delivering the best outcomes, whether long-term policy uncertainty and in some instances, interventions have impacted its effectiveness and can its current structure facilitate the transition to lower emissions?
I’d now like to make a few important points.
Firstly, the market works – if you let it.
If you look at the history of the NEM, the wholesale price has acted as a strong signal to invest. Investment in new supply usually follows an increase in wholesale prices, which then results in prices moderating.
If we are to deliver a sustained drop in energy prices, we must get the right investment flowing. But we should resist the urge to intervene with short-term policy and instead focus on getting the long-term energy and climate change settings right – if we do this, it will attract the investment required to maintain a secure and affordable supply of energy to Australian homes and businesses.
Of course, you can see why some people are questioning whether the market still works and if it can take us to where we need to get to.
We have already had a comprehensive review of the energy market completed this year to look at this question, and Origin has stated our support for the full package of Finkel recommendations as a workable solution. Finkel was a very thorough and scientific review which made a number of important points, including that you can’t lower emissions by increasing renewables without also firming supply. We believe the recommendations we have through the Finkel package can provide the appropriate safeguards to guide the firming needed to maintain a reliable and secure electricity market for customers.
As for the 50th recommendation, the CET, we have never said that this is the best solution or that it is the only solution. But it is a workable solution and it has been the only option on the table in recent times.
Some have questioned why we need a CET at all when renewables are already the lowest cost investment in new generation. Unlike the RET, which is a blunt target for a fixed volume of renewable generation to be introduced, the role of the CET is to provide a technology-neutral investment signal that sets a trajectory for reduced emissions over time.
There are always other ways of getting to the same place. But the bottom line is we really need a signal to invest with confidence and in a planned way. With a signal in place, the market will respond with timely investment and deliver the lowest cost outcomes, which ultimately delivers the lowest prices to energy users.
But we have to acknowledge that without an overarching policy mechanism, this means investment is less coordinated and timely than it otherwise might be. It is also likely to come at a higher cost – a cost ultimately borne by energy users.
Now I am very confident that energy companies are ready and willing to continue investing the substantial capital required to modernise our energy system and ensure security of supply
Origin has an industry leadership role to play and it is important to me that we continue to actively work to be part of the solution. We have continued to do this in the current environment. We have committed to 1,200 MW of new large scale solar and wind generation since March 2016 to help meet the RET. We also worked with Engie to supply gas to its Pelican Point power station in South Australia, which bought 240 MW of capacity back online to help meet the challenge of electricity security. We are also investing to boost coal supply to increase the output from the Eraring power station, so it can play a greater role in helping to meet electricity demand following the closure of ageing coal fired plant.
So let’s get the energy and climate change policy settings right and provide some much needed certainty. This is the leadership Australian homes and businesses are looking for.
It’s a similar situation with gas, where there are criticisms that the market is not working due to concerns over gas supply and price.
Encouraging supply is again the critical solution to putting downward pressure on prices. Yet the market is constrained in its ability to develop new gas supply due to drilling bans in various states on the east coast.
In addition, we need to acknowledge that there has been fundamental and structural change in the east coast gas market.
Australia has exhausted lower cost gas supply that delivered the historical low prices for customers and are now accessing resources with a much higher cost of production. The gas being developed for export would never have been considered at those prices to meet domestic demand.
As we’ve seen more supply brought into the market in recent months as east coast LNG projects have responded, we have seen gas prices come down quickly and substantially from their peak of around $16/GJ in April to below $10/GJ at Wallumbilla and getting close to export parity – this is the market working. There’s potential for prices to come down further but we will need new supply to help do this and we also need to stop creating the expectation that we can return to historical low levels of pricing.
Origin has again demonstrated our willingness to be a part of the solution to the east coast gas market challenges, and we have continued to offer gas to customers and write contracts, and we have also made clear that we are currently working to bring on more gas supply for FY2018.
There are already reforms underway to improve the functioning of the gas market. We support the measures under way to make the market more transparent and improve trading liquidity, and development of a forward price curve.
These reforms, combined with a signal to invest and the lifting of blanket gas development restrictions, will encourage more supply into the domestic market and put downward pressure on prices, contributing to better outcomes for customers.
Second point: Customers want simplicity and control.
Many people have until now, thought very little about their energy use.
With rising energy prices, we have seen an unprecedented number of customers contacting us to make sure they are on the best deal, as well as looking to products like Predictable Plan where they can lock in a fixed price for their energy.
We are continuing to promote our competitive offers to existing and new customers.
We continue to notify customers before their discount period ends and advise them of new offers available. We are again writing to many of these customers and now also to those on standing offers so they are aware of the offers available to them.
We strongly support the development of an industry wide comparator rate to make it easy for customers to compare energy offers.
We made sure hardship customers did not pay the most recent price increases, as well as continuing to support our customers experiencing hardship through our industry leading program.
In the past, we had a one-way relationship with customers that consisted of little more than quarterly communication via a bill. We have already come a very long way since then, and now new technology is enabling the next major change in the relationship between customer and retailer. Technology allows for real-time data transfer and the delivery of innovative solutions that put the power back into the hands of customers.
We will continue to respond to these changing customer needs and investing in new technology to give customers greater transparency in energy use and ability to control their costs.
Some of these technology advancements include: disaggregation, where customers can see a breakdown of where energy is used in the home; demand management which can help us to manage load and use energy supply more efficiently; and connected home solutions, which can help us make better use of all of the smart devices starting to fill our homes.
Storage and other distributed energy solutions like solar will continue to grow as the price imperative will be what will push technology like this past the early adopters and into the mainstream.
Thirdly and the reason I’m here today: You cannot address energy security and affordability without also addressing carbon reduction.
Twelve months ago, the focus was on emissions and how we meet our Paris commitment. There has definitely been a recalibration of priorities since the blackout in South Australia 12 months ago, when energy security became the focus.
More recently, the retirement of Hazelwood with little notice had a significant effect on wholesale electricity prices and sent retail prices up suddenly.
It’s understandable the immediate focus has moved to reliability and price, but we also cannot walk away from our Paris commitments, which take us to 2030. But as we are steering through the most major structural change in the energy market for decades, we should be thinking beyond the 2030 horizon and stretching ourselves to 2050, which would require more ambitious targets over time but put us in a stronger overall position once it’s done.
Coal-fired power stations have been the foundation of cheap, reliable baseload electricity for Australia, but many of our coal-fired power stations are now ageing. They also require a minimum level of output and are not able to ramp production up and down rapidly.
And coal will continue to play an important role in maintaining reliability and prices during the transition – for example, we are running Eraring power station harder to meet demand and plan to increase output by another 5-10 per cent this year.
However, new coal is not likely to be the answer.
Renewable energy is now the lowest cost and lowest risk new build power generation. A new solar farm can start generating energy in as little as a year.
A new coal plant would take at least seven years to be built and a new baseload gas plant at least five years – and both would be subject to coal and gas prices for fuel supply once built.
What we need to do is get back to focusing on getting things right for our customers – that means getting prices down, but not at the expense of reliability and emissions reduction.
The truth is we need to achieve lower cost and a reliable and secure energy supply, and also reduce emissions.
The number one priority has to be encouraging greater investment in new supply. We need policy certainty that provides a signal to invest.
There is no energy policy that takes us beyond the 2020 RET – which is no longer some distant point in the future, it is just over two years away. There is no plan or policy direction for meeting our 2030 Paris commitments.
Wholesale prices doubled earlier this year from $60/MWh to around $120/MWh due to policy uncertainty, plant closure and high demand. With over 4,000 MW of new renewable generation investment being committed over the last 18 months progressively coming online to meet the RET, wholesale electricity prices we can see are starting to decline. Forward electricity prices that we are quoting customers in Queensland are around $80/MWh next year and $70/MWh for calendar year 2019. In NSW, we are quoting around $90/MWh next year and $80/MWh for the following year.
An investment signal beyond 2020 will maintain downwards pressure on prices. Doing nothing will see prices again move in an upwards direction.
As Rod Sims said recently, there is no silver bullet to achieving affordability, reliability and sustainability. But we do need to find a way forward with a whole of industry approach at its centre as retailers can’t act without generation, distribution and markets moving in the same direction.
All of the elements are there to fix this situation. We desperately need some strong leadership – on all sides of politics. We need to put ideology aside. We need to adapt and improve our markets so they can better meet the challenges of our transitioning energy system and then let markets work – they are almost always the best way to deliver the lowest cost outcome.
Australian households and businesses are looking for leadership from our politicians and industry on prices and managing the transition to a cleaner, smarter energy system.
We need credible, bipartisan energy and climate change policy beyond 2020 to unlock supply and propel investment to make energy markets, once again, work for our customers.