10 October 2018
AFR 2018 National Energy Summit speech
Origin CEO Frank Calabria’s speech to The Australian Financial Review’s National Energy Summit, 10 October 2018
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Thanks for having me here today.
When I spoke here at the National Energy Summit last year, we were at a similar crossroads. We were, for better or worse, moving away from the Clean Energy Target, and one of the main topics being debated was what next?
The past 12 months …
So what’s happened in energy policy in the past 12 months?
There has been an immense amount of activity and some very good work on energy policy by industry and government, including by the Energy Security Board under Kerry Schott. But as I stand here today, we are no closer to having a coordinated view of the way forward on energy and climate policy.
Energy has dominated the national agenda and therefore media headlines all year and justifiably so – it’s been a driver of increased costs for businesses and put pressure on household budgets.
The debate has become increasingly fraught. Governments recognise the need to address affordability, and we are doing what we can to play our part. But we also need to move on from the emotive rhetoric and look to the many areas of constructive contribution.
A number of major inquiries have been completed. In the electricity market, the Finkel review made 50 recommendations for reform and the ACCC review made 56 recommendations. We also had the ACCC review of the gas market. These have turned out very sound views and a consensus of the problems we’re looking to resolve. Solving them in a coordinated way is what we need to do to put customers at the heart of what we do.
We were so close on the National Energy Guarantee. It was an incredible effort by the Energy Security board to get broad-based consensus for such a wicked problem. The goodwill and intent of industry and government gives me optimism we can get there again.
The government has been clear that the industry needs to stop waiting for policy certainty and just get on with the job of providing more affordable and reliable energy.
We’ve been getting on with it for the past decade. Not just in the absence of policy certainty, but in the absence of any policy consistency.
The closure of Hazelwood in 2017 which caused a spike in electricity prices came quickly but the genesis of problem did not.
The industry has responded to that price signal with increased generation supply to keep the lights on. This came in the form of both increased dispatchable supply from the existing coal and gas fleet as well as new renewables coming into the market.
This is flowing through to retail prices with flat or falling tariffs delivered by Origin in most of our key markets from 1 July. While short term impacts can drive the wholesale market up or down, the general trend is positive.
The same can be evidenced in the gas market. Gas supply has been boosted and AEMO has confirmed it expects the market to be sufficiently supplied in 2019. Prices have come down significantly from their peak.
Despite action by industry to lower energy prices, this year we’ve seen governments favour greater intervention in the market.
Although prices are trending in the right direction, affordability remains an issue for many customers. The modest tariff reductions or freezes we’ve passed through did not get prices back to where they were before Hazelwood closed and were not enough in the eyes of government.
You don’t have to look too far back to find a time when Australia enjoyed among the cheapest energy in the world. Back in 2004, we ranked fourth among OECD countries for the lowest energy prices.
Fast forward to 2018 and states such as South Australia, New South Wales, Queensland and Victoria rank alongside Germany, Denmark, Spain and Portugal as the highest cost energy economies.
Which brings me to the key point of my address today: can we get to a competitive cost of energy in Australia again? And if so, how?
Recent measures that have been promoted by the government focus on the symptoms and not the cause – and come on top of past interventions which have come at a cost.
Why is this a problem? If we’re not addressing the cause then we are potentially leaving ourselves exposed to shocks in the future whether they be security, reliability or affordability - and we still need to achieve emissions reduction.
And while I acknowledge the government’s message to industry to get on with it and stop waiting for policy certainty, this doesn’t negate the need for coordinated energy and climate policy to help guide the major transition underway in energy markets.
Over the coming decade or two, the majority of our coal-fired power stations that have served us so well will reach the end of their useful life – we have to make sure we can manage this transition at the least cost to the community, while maintaining security, reliability and continuing to reach our emissions targets over time.
So, while it may not be on the table today, I want to leave you with the message that we need to keep our eye on the prize and work towards a framework that sees us to 2030, 2050 and beyond so our National Electricity Market can continue to serve Australian homes and business well into the future.
The National Electricity Market
2018 marks 20 years of the National Electricity Market (NEM) and it’s a good time to take stock and consider its effectiveness given the current debate.
The NEM was created to provide reliability and interconnectivity between the east coast markets. It comprises large, centralised generators, thousands of kilometres of transmission lines and then the poles and wires that serve the electrons up to end users.
But as we know, the energy system is changing rapidly. We have a lot more decentralised generation, namely rooftop solar, happening closer to where it is being consumed and battery storage technology keeps getting better. With among the highest take-up rates of solar in the world – 1.8 million Australian households have rooftop solar – storage and distributed generation have a strong base from which to grow, which started with households and is now rapidly growing in the commercial market.
The NEM has been historically very effective at attracting private investment. Rises in the wholesale price have always been followed by investment in new capacity and this new supply in turn puts downward pressure on prices – the market at work, which is what a market should do.
The industry has also been very responsive to the signal it has been given to invest in renewables. They continue growing at pace. Last year, $10 billion of new wind and solar projects reached financial close. The Renewable Energy Target no one thought would be met has now been exceeded by at least 1,600 megawatts – capacity equivalent to a new Hazelwood. If we consider large scale solar farms, companies can permit in as little three months and build in 18 months. This is light years quicker than permitting and building a new coal plant which takes about seven years - so it also reduces investment risk.
The RET has been very successful in driving investment in renewables. But as this policy was not partnered with complementary policy that promotes investment in firm generation, we have suffered reliability concerns. South Australia has been example of what a science experiment can be not just for Australia, but the rest of the world.
We learned very quickly that we cannot have a market with too much intermittent renewables and not enough ‘firm’ capacity – but as of today, we still don’t have a policy that promotes existing firm generation either staying in the market, or new investment in firm generation. This is one of the key challenges facing our market today, which has been caused by past policy choices. That is not to say whether that policy choice is good or bad – just that we must always be cautious of the flow on effect on markets.
The challenge we have is to firm the significant variable renewable capacity now coming online to maintain reliable supply for customers. But don’t we already have plenty of coal and gas capacity in the market?
Yes, but what tends to happen is the lower cost renewables push higher cost sources of dispatchable generation like coal and gas. For example, coal gets pushed out of the market by renewables with zero short run marginal cost during the day, and that can be seen in the hollowing out of the market. This is exactly what we saw with the sudden closures of Northern and Hazelwood.
Existing coal plants can fulfil the role of firming for some time, especially the more modern coal assets that can ramp up and down quickly – for example, Eraring is very flexible and can be run more like an intermediate plant. While some members of the community would have us close all our coal assets tomorrow to achieve emissions reduction, in reality the existing fleet of coal assets will continue to be a critical part of Australia’s energy mix for some time, and are central to our ability to provide reliable and affordable power.
We need to plan now for the orderly closure of coal plants over time to avoid the price spikes we saw in 2017 with the appropriate investment in a combination of technologies – peaking gas-fired plant, pumped hydro and storage.
There is certainly no shortage of generation projects being explored that could replace capacity over time. We are currently looking at doubling the capacity of our Shoalhaven pumped hydro scheme and making Quarantine in South Australia fast-start and more flexible, EnergyAustralia is looking at pumped hydro in South Australia and gas in New South Wales, but companies are finding it hard to pull the trigger on investments right now and uncertainty is a key factor.
There are other factors at play too, such as the Integrated Systems Plan (ISP) released by the Australian Energy Market Operator. Among other things, this consider a new interconnector between New South Wales and South Australia. If this were to proceed, this would impact our thinking of an expansion of Quarantine power station.
To be clear, Origin is very supportive of the Stage 1 projects outlined in the ISP.
I do believe as prices fall, we can get back to a place where there is once again belief in the market driving the best outcomes. But we’re not there today, and in the interim we will need to navigate increasing intervention in the market.
To see the government confirm its support for reliability aspect of the NEG is encouraging. To go back to the drawing board is the wrong thing to do in the face of the disruption we’re experiencing right now.
So with the transformation underway in energy markets, what can industry and policy makers do to start getting better outcomes for customers today? First, we need to put customers at the heart of what we do.
Many consumers have switched off from energy – prices are high, offers are complex and hard to compare – they just want it to work and be easy for them.
Households are under budget pressure and costs for business are on the rise, and governments today rightly want to step in so customers start to see some relief. Their intent is good, but issues that took 10 years to worsen are not fixed overnight – industry and government can and must work together with a determination to fix issues properly.
The continued fractious debate over energy policy is not helping – there is low trust in energy companies, in government, and business generally, and people don’t know who to believe.
We need to return to a fact-based debate and focus our attention on the actual issues across the whole of the energy supply chain.
There is no quick fix or it would have already been done. We need to put the hard yards into getting policy settings right to get prices to a more sustainable level, not just policy talk and tinkering at the margins of what makes up the typical energy bill.
In addition, competition is not yet delivering benefits for everyone. Many customers have taken advantage of competitive offers to get a good deal on electricity, but for many it remains confusing and complex and this discourages them from engaging in the market.
We need to get more people comfortable engaging in the market so that the benefits of a competitive retail market are shared with the many. We must start by addressing transparency in pricing and cutting out marketing practices that have made energy deals unnecessarily opaque – on this, we are 100 per cent aligned with the ACCC:
o We should ban discounting off unanchored prices
o All retailers should quote offers in dollar-terms, which are easy for anyone to understand and compare
o The industry needs to stop door to door sales, which prey on the vulnerable and deliver a poor experience – Origin and other major retailers recognised this and exited this channel several years ago.
The ACCC recently completed a 15-month inquiry looking back through several years of commercial data. What the ACCC report showed is that a whole of industry approach is required to deliver a material and sustained reduction in energy prices.
We support many of the 56 recommendations, particularly reforms that produce good outcomes for customers by having a direct impact on prices and simplifying the market, including:
o Improving transparency in pricing, eg standardising how discounts are advertised, banning unanchored discounts, quoting deals in dollar terms
o Making conditional discounts cost-reflective
o Improving hardship framework and customer transfers.
o Phasing out the SRES by 2021
o Writing down network assets – energy efficiency and growth in rooftop solar has seen energy consumption fall and network revenue must now be recovered across a smaller volume.
The government has said that it will support the recommendation to introduce a default reference price, which we completely support as long as it is a true reference price.
There has been some confusion caused by the interchangeable use of the terms ‘default reference price’ and ‘default price’. Just to be clear, we could support a default reference price from which all retailers can discount, with sufficient headroom incorporated to enable true competition among retailers for the benefit of consumers.
We would not support a default price, which would be a return to price regulation and stifle and potentially lessen competition.
The ACCC report, and the Finkel review before it, are blueprints on how to manage the transition to a modern smarter grid. My concern is that by only cherry picking some of the recommendations we are missing a huge opportunity for reform that will deliver a structural, lasting reduction in prices across the supply chain.
And this action could restore Australia to a more competitive cost of energy. We have access to abundant energy resources, not just coal and gas, but incredible solar resources and good wind resources too.
One more review would only distract from the implementation of the existing reviews and delay the delivery of better outcomes for customers.
Where to from here
Where does all of this leave us?
I believe the best way of achieving a long-term, structural reduction in energy prices is increasing supply and delivering reforms across the supply chain, including removing subsidies that are adding to the bills of those who receive zero benefit.
Ideally, and I realise I may need to be more patient on this one, this would be aided by coordinated, long-term energy and climate policy so the industry can continue to deliver the investment required to meet growing demand, provide secure and reliable supply and lower emissions at the least cost to consumers – especially given long-dated generation assets.
It is clear that companies like Origin will not wait because we have an important part to play in keeping the lights on.
Which prompts a final and very reasonable question – why all this angst over policy if the investment will happen anyway?
The challenge is an orderly transition – firming the influx of renewable energy into the grid and ensuring that customers are not exposed to further reliability or price shocks.
We’ve seen the consequences when you let one of the objectives of energy policy get out of balance with the other three. I’m of course referring to reliability, security, affordability and sustainability.
The past decade of climate wars has been unproductive to say the least, but there’s an appetite now more than ever to get on with it.
The Australian public has sent a message loud and clear that they want leaders to sort this out – all they know is they should be paying less.
We have a once in a generation opportunity to put in place lasting energy policy using the ACCC and Finkel blueprints we already have, that takes us to 2030, 2050 and beyond.
Energy is vital to our economy, it is a key input for every business and home, it underpins industries like transport, manufacturing and resources and the industry will be leading the charge in the transition to a low carbon economy.
I am optimistic that the low points we have experienced recently on price and reliability concerns have served to steel us to get this right for the sake of customers.
My message last year was that we need to let the market work. That hasn’t changed. Industry has continued to invest despite the policy uncertainty. But delivering an orderly transition from base load coal to a flexible, modern, cleaner and smarter energy system at the lowest cost to customers will require a policy that ensures reliability at a minimum.
I’m excited and optimistic about the task ahead. Origin recognises that challenge and we’re up for that challenge. And the good news is really for customers, who are sure to see more relief in their prices if we can stay the course and get it right.