7 March 2017
Meeting the challenges of a transitioning energy sector
Presented by Origin CEO Frank Calabria at the Committee for Economic Development of Australia (CEDA) on 7 March 2017.
There’s no doubt that Australia needs a new direction in energy.
The front page of today’s Australian Financial Review neatly encapsulates some of the challenges we’re collectively facing.
And last week, Australia’s biggest company, BHP, said “The need for change is urgent. Increasing energy prices and supply disruptions hinder the competitiveness of Australian businesses and threaten future investment particularly given the global mobility of capital in the manufacturing and resources sectors.”
The energy system is under pressure. Electricity supply is not always available when needed and this is hurting homes and businesses. Renewables are increasing, coal plants are being retired, and prices are rising.
Add to that the growing scrutiny of the east coast gas market, with its tightening supply, rising prices, and challenges to boosting production, and it is easy to see why the headlines in our papers and on the news are very much about an energy crisis.
The reality is up until now, reliable and reasonably priced electricity is something most Australians, quite rightly, have taken for granted.
Households and businesses are paying a high price in terms of reliability and affordability, from poor policy and regulatory decisions over the past decade. And this is forcing Australians to think a lot about their energy.
They want to know it will always be available when they flick the switch. They want more energy to come from renewable sources. And they want to know they aren’t going to have to pay more for their energy.
But the time has passed for Australia spinning its wheels on energy action.
Right now, the industry and the government need to urgently work together to make sensible – and swift – decisions to ensure energy security, for the benefit of all Australians.
To do this, we need to give some certainty to investment, so we can achieve the equally important objectives of making energy affordable, and moving Australia towards a cleaner supply.
It’s really important to understand that our energy market is in transition, as are energy markets around the world.
If industry and governments work together and follow a three-point plan, we believe we can restore the balance between energy security, affordability and sustainability in Australia.
First, we need to restore security. I’ll explain how we can adapt the National Electricity Market to ensure a more secure supply to households and businesses.
Second, we need to improve affordability. We must place downwards pressure on electricity and gas prices. I’ll explain the importance of getting our policy settings right now and for the future, the role of energy efficiency and adopting new technologies and, finally, the need to encourage investment in gas development, so that Australians don’t pay more for energy than they need to.
And third, we must build sustainability. I’ll discuss how we can achieve this by encouraging investment in renewables and low-carbon solutions to meet our climate change goals.
And we must have a national, integrated approach to achieving these three things: energy security, affordability and emissions reductions.
I’ll now go through the steps in a little more detail.
First, adapting the National Electricity Market.
Recent outages in South Australia have served as a wake-up call that customers large and small will not accept widespread blackouts – and nor should they have to.
As well as having very real consequences for homes, schools and hospitals, the impact of the outages was quantifiable. Business SA stated that the cost of the September blackout was $450 million.
There’s no doubt Australia must transition to a low-carbon electricity supply system, but given the intermittency of renewables, we also must make sure this is done in a planned and coordinated way. Customers, both households and businesses, need to be able to rely on their electricity supply. The current COAG Finkel review into Energy Security provides a perfect opportunity.
So, what will we be recommending to Dr Finkel?
We need to recognise that South Australia generates a greater percentage of variable renewable energy than probably any other place in the world. As we increase the proportion of renewables across our entire electricity supply, we should learn from recent experience particularly with respect to reliability and security.
The National Electricity Market has served us well and can continue to in the future, even as we transition to a low carbon energy supply. Our view is that the cost and complexity of redesigning the NEM would far outweigh the benefits. Instead, we should quickly adapt the NEM to meet our broader energy goals.
· Immediately operating the NEM to cope with the high levels of variability from renewable energy and the decline of coal and gas generation. Sufficient synchronous – or coal and gas – generation must be physically available in each state at all times and interconnector flows must be managed so the system is resilient to sudden changes in generation and demand;
· Developing ancillary service markets relatively quickly. These are the services that keep the system voltage and frequency stable, so they can deliver efficient and technology-neutral system security as the generation mix continues to change and new technologies emerge; and,
· Over the medium term, identifying how emerging technologies such as distributed generation, storage, smart meters and demand response will further test the NEM, but also provide opportunities to improve security.
Since the blackouts, industry has already taken action to improve security:
· EnergyAustralia has announced a pumped hydro storage project in South Australia;
· AGL has announced a virtual battery storage array across homes in Adelaide;
· Origin has invested to supply additional system security services into South Australia. We announced a new solar farm near Port Augusta – a more predictable alternative than wind; and,
· We are also looking at initiatives to utilise our gas position to ensure generation is available and secure when it is most needed.
We must combine sensible market rules and policy signals with action by industry to ensure Australians enjoy the highest possible standards of energy security and reliability.
The second step in the energy plan is to apply downward pressure on energy prices.
Given how central energy is to our way of life and its crucial role in underpinning Australian business, we must ensure electricity and gas remain affordable.
Stable and sensible policy plays an important role. We are only too aware of how poor decisions in the past have led to poor cost outcomes for customers.
· Over-investment in monopoly poles and wires assets added substantial costs to electricity prices;
· Barriers to developing gas resources such as drilling moratoria have contributed to the current east coast supply issues and driven up gas prices; and,
· Poorly coordinated and integrated energy and climate change policies have led to a high cost of carbon abatement and muted investor confidence.
When we get policy and regulatory settings wrong, the impact on customers becomes very clear as has been highlighted in today’s news. Large customers are paying higher prices that reflect the current tight supply-demand balance, the rising costs of green schemes, and the planned retirement of coal.
Energy efficiency is an important part of the solution as it reduces cost and reduces carbon emissions. Coordinated and integrated policy will encourage technology and innovation, and stimulate energy efficiency.
But it is the affordability of gas – for large businesses in particular - which needs to be addressed as a priority. The important role of gas in fuelling electricity generation is also a key consideration, particularly as coal plant such as Hazelwood exits the market.
Australia has abundant reserves of natural gas. It is crucial to the security of our electricity system, particularly in supporting the introduction of variable renewable energy. It also has a pivotal role to play in meeting ambitious climate change targets – both in Australia and worldwide
Australia’s undeveloped gas resources can offer reliable energy that will last us decades into the future, and we have rich experience and world-leading gas development expertise.
Recent events in South Australia have shown just how important gas is to security of electricity supply. Gas normally supplies around 50% of electricity generated in South Australia. But when wind and solar generation fell just as demand was peaking on 9 February, gas filled the void – supplying over 90% of electricity generated in the state.
We know gas has a key role but market conditions on the east coast show a tight supply-demand balance over coming years. Some customers have been vocal about the challenges they’ve faced to secure supply. Prices have risen and there’s no doubt that’s hurting some customers.
On the face of it, these issues should be able to be fixed. Australia has the resources readily available to boost production and put downward pressure on prices. Yet in reality, this is a far harder nut to crack because the gas industry cannot access the resources needed to boost supply.
The recent Beetaloo Basin gas discovery is a perfect example. Initial estimates place the resource at a substantial 6 TCF – enough to supply domestic customers on the east coast and feed LNG facilities for years to come.
Yet Origin’s work to understand and develop this resource will be curtailed by the current moratorium on gas development in the Northern Territory. Although we respect the NT Government’s process, such bans and delays are widespread in Australia, and they discourage the exploration and development of much-needed gas resources.
Gas reservation is sometimes touted as a solution, but this is poor policy that will not deliver the best economic results for Australia. Reservation will not encourage investment. It will not result in better prices for domestic customers over the long term. And it will not meet our needs for energy security.
The way to increase gas supply and reduce prices for customers is not through market interventions, but to lift barriers to exploration and development.
Our track record together with strict regulatory oversight demonstrates that we can produce onshore gas safely.
In Queensland, we can point to over 20 years and more than 1,000 coal seam gas wells as an example of co-existing with farming. This has also provided substantial benefits to landholders. The Australia Pacific LNG project has committed $400 million to our first one hundred landholders over the life of the project. All these landholders continue to use their land for farming and grazing purposes, demonstrating that gas development and farming are not mutually exclusive.
There is more than enough gas for both domestic use and export. Indeed, although LNG projects need a lot of gas they also increase our domestic energy security by developing large volumes of gas in the field and building the processing facilities and pipelines that can readily supply domestic markets if needed.
Now is the time for sensible policy that reignites investment in gas development for the benefit of all Australians.
The third plank in our plan is to encourage investment in renewables and low-carbon solutions to meet our climate change objectives.
Australia’s investment in renewables is accelerating. It is happening – but it’s happening in the absence of bipartisan agreement on national climate policy to meet our 2030 targets. Imagine what we could achieve if we had an effective, future focussed climate policy with all of us working together.
In the past 12 months alone, we have seen commitment or constructing commencing on 1,000 MW of new utility scale renewable energy supply – 500 MW of that backed by Origin. This has happened faster than expected.
Our customers continue to take up rooftop solar at high rates. Systems are getting larger, product innovation is growing, and affordable battery storage and electric vehicles are on the horizon.
Renewables are the lowest risk investment in generation right now. Technology costs continue to decline, making them more competitive even as subsidies are unwound. And consumers feel strongly about the need for cleaner energy.
Despite these positive developments, there is an urgent need for sound policy to meet our international climate change targets. Fulfilling our commitment under the Paris Agreement is critical to maintaining our reputation with the international community and our trading partners.
In the absence of leadership at the federal level, state governments are implementing their own policy – mainly through ambitious renewable targets. While these are effective at stimulating investment in renewables, they increase electricity costs and risk security.
The best approach for the electricity sector is an emissions intensity scheme that would price carbon at the margin. Such a scheme would have a relatively low impact on electricity prices and industry competitiveness. It would provide an incentive for investment in renewable and low-carbon electricity and promote the progressive winding-down of high emissions coal generation. Unfortunately, this mechanism has been ruled out by the Government, despite widespread support from the energy industry and others.
So today, Origin joins a growing chorus of companies calling for the Government to put an emissions intensity scheme for the electricity sector back on the table. Of course, this is not the only solution – but it is the lowest cost. Why travel down the path of ‘next best’ solutions which will only drive up the cost of carbon abatement?
Long-term, integrated energy and carbon policy is essential if we’re to drive investment in renewables and low-carbon electricity generation – and it’s something that can only benefit from industry and government working together.
So, to wrap up, we need to do three things to meet the challenges of our changing energy sector.
One, give households and businesses a more secure supply by adapting the National Electricity Market.
Two, improve energy affordability by getting our policy settings right and increasing investment in gas supply.
And three, build sustainability by encouraging investment in renewables and low-carbon solutions to meet our climate change objectives.
All of this, however, is easier said than done. The three-point plan is simple, but its implementation is not.
But that doesn’t mean we don’t start. Now’s the time to put aside ideological differences and make some important decisions.
As industry representatives and policymakers, we must be aware that the people and businesses we serve are relying on us.
I am enormously optimistic about the future – particularly a future where renewables and natural gas provide most of Australia’s power. I’m also looking forward to seeing Australian resources like natural gas contribute to reducing carbon emissions in other nations around the world.
As a nation rich not just in energy reserves but also in energy expertise, we have a role to play on the global stage.
But first up we all need to work together to serve the people who matter most – our customers.
They deserve a secure, reliable and affordable supply of energy.
Thank you, and I look forward to hearing your questions.