Supply remains tight and there is a risk of shortfall

  • Mark Eggleton

This content is produced by The Australian Financial Review in commercial partnership with FM Global.

Alinta Energy CEO Jeff Dimery suggests Australians should prepare themselves for a long, hot summer with intermittent blackouts as the nation’s east coast energy crisis is set to continue over the coming months.

Speaking at a recent energy round table co-hosted by The Australian Financial Review and FM Global, Dimery’s opinion was “anyone with any knowledge of the market would have a large degree of discomfort.

“Nobody in their mind will say they can guarantee supply over summer.”

“There are things that, as an industry, we can do and as an operator, Australian Energy Market Operator (AEMO) can do to give us the best shot at not having supply interruptions … but without being able to control the weather patterns and consumers’ consumption levels, then, you know, the market is tight, and there is the real prospect that we will have supply interruptions (over summer),” Dimery says.

What frustrated Dimery and all of the executives at the recent round table is the issue has been brewing for a long time and it’s not as though the warning signs have not been there. Yet rather than address the nation’s energy concerns and formulate some coherent policy framework, state and federal governments have been content to play politics.

Just taking the last couple of weeks as an example, we’ve had AGL’s decision concerning the fate of its coal-powered Liddell Power Station become the latest flashpoint in an ideological battle about Australia’s energy future fuelled by a feuding Coalition Government and what was an increasingly outspoken coal lobby.

Recently the Australia Energy Market Operator (AEMO) released a report warning of a gas supply shortfall. Commenting on AEMO’s update to the 2017 Gas Statement of Opportunities, the Operator’s Managing Director and Chief Executive Officer Audrey Zibelman said based on the most recent information from industry, together with AEMO’s forecast demand, gas supply remains tight in eastern and south-eastern Australia in 2018 and 2019, and there remains a risk of a supply shortfall.

Moreover, Zibelman said: “the results of AEMO’s recent analysis and the ever-tighter integration of the electricity and gas markets, together with the increasingly dynamic character of Australia’s energy system, suggest there is a need to look at reforms to improve predictability and stability in energy markets to the benefit of consumers.”

Dimery opines the current situation, “is a bit like playing a game of football with invisible goalposts, we don’t know what we’re shooting for.”

Using South Australia as an example he cites a perfect storm of decisions that have greatly affected the market. Kicking things off, the South Australian government’s decision to invest heavily in renewable energy meant it was uneconomic for Alinta to invest further in its Northern coal-fired power station. This was followed by legislation brought in across a number of states prohibiting gas exploration. Finally, Gladstone came online and sucked up vast reserves of domestic gas for export.

“So, you had coal removed from a market. Virtually right on top of that, you then had a doubling of the input costs for gas-fired generation and, unfortunately, the nature of renewables is they’re intermittent, and so variable in output, and that led to dramatic, volatility in that particular market as well.”

Complete uncertainty

Yet rather than South Australia being used as a test case for how the future of energy might work, it became ground zero in an ideological war and the upshot is complete uncertainty. Interestingly, none of the round table participants invoked the old resources sector cry of “sovereign risk” despite there being a lot more industry uncertainty around energy than there was around the mining tax.

What every participant simply demanded was some bipartisan policy certainty so the industry could get on with framing the energy future for the Australian community and business sector.

“The investment cycle and infrastructure that we rely on is circa 25 years, so having an outcome for two or three years makes it very difficult for commercial boards to lock in and make decisions worth hundreds of millions, if not billions, of dollars,” Dimery says.

For Australian Energy Council CEO, Matthew Warren, the problem is not the market but politicians.

He suggests energy has been caught up in the wider climate change debate and that has introduced ideology to a complex system, which has “proven to be lethal”.

“If you imagine ideology running Reserve Bank decisions, that would be as equally as damaging as what we’re seeing now in this system. We have policy gridlock because of ideology and the debate is clearly polarised by two sides. We can’t seem to get a rational centrist view, which is just provide a framework and allow investment to solve the way the market works. Instead we turn on the market, we turn on the participants and we turn on individual businesses,” Warren says.

He worries where this current debate is heading and if the politicians do continue down their current path whether Australia starts “undoing the bolts of the machine” that has given us 25 years of sustained economic growth.

Seeking way forward

Warren’s sentiments were shared by most roundtable participants but it is not all doom and gloom. Grattan Institute’s energy program director Tony Wood says a combination of the Finkel Review together with some of the recommendations put forward by AEMO could provide a way forward.

He says the ball is squarely in Energy Minister Josh Frydenberg and the Prime Minister Malcolm Turnbull’s court.

“They might just find a way out. But, of course, the longer they leave this, the harder it’s going to get. They have to put together a policy that puts sufficient credibility around maintaining dispatchable capability [power plants that can be turned on and off] and maintaining the security of the system.

“It’s not exactly Finkel Mark 1 but it’s about Finkel – you know, with a couple of extra frills – it will not be a walk in the park, it needs a Turnbull with a Frydenberg to actually develop a narrative and sell it.”

A significant part of that narrative is setting a clean energy target because without it there is no policy certainty.

What is more, without policy certainty, the risks go well beyond higher electricity prices for Australian households as FM Global’s operations vice president, Australia, Lyndon Broad pointed out at the round table.

He says as insurers to some of the largest businesses in Australia, FM Global sees the consequences of policy uncertainty and volatility in the market on the supply side as well as on the demand side with some of the nation’s largest industrial energy users exposed to the consequence of a highly volatile market price.

It adds uncertainty to their base costs of production meaning “they don’t know what their investment horizon looks like either”.

This article is republished on Touchpoints with permission from The Australian Financial Review.