Energy, Systems, Resilience and Sustainability: the innovation imperative

This paper is presented as a series of blog posts. It has grown out of an address I gave at the Onsite Energy Conference, Hilton Hotel, Brisbane Tuesday 24 September 2013.

Introduction: a dynamic and unpredictable energy system

“Queensland’s electricity system must change. It must become more adaptable, more resilient and more efficient to help avoid the unsustainable electricity price shocks we have seen in recent years. We will need to think beyond the short-term, beyond band-aid solutions, so that we can effectively tackle the big issues. We need lasting reform so our electricity supply system can meet the needs of Queenslanders now and into the future”

“The Vision: Queensland’s electricity supply system will be resilient, cost-effective and customer-focused to support the economic and lifestyle aspirations of Queensland customers”.

– Premier Campbell Newman and Energy Minister Mark McArdle, Foreword, “The 30-year electricity strategy: Discussion paper”, September 2013.
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“Solar plans burning hole in family finances” trumpeted the headline in The Weekend Australian (14 December 2013)(1). Five years ago when we were setting up Queensland’s now defunct Office of Clean Energy such collateral damage arising from the take up of clean energy was not considered even a remote possibility. Much has changed in the Australian energy system since then with major investments in an export gas industry, upgrades to electricity distribution systems, installation of renewable energy infrastructure, and increased uptake of energy efficiency. On top of all that a carbon tax was introduced in 2011 by the Gillard Government and while the recently elected Abbott Government proposes to scrap it, the pricing of carbon has not been without some impact on the cost of electricity – translating to as much as a 9% increase in the average Queensland household bill.

In its end of year overview of the national energy market, the Australian Energy Regulator (AER) summed up the 2013 Australian energy sector:

The energy market landscape has shifted considerably over the past 12–18 months. Rising energy prices were a major focus for the community and policy makers in 2012, but the dynamics of underlying cost drivers are shifting. A trend of rising electricity demand—which exerted upward pressure on wholesale and network costs for several years—has now reversed. The change is causing surplus generation capacity and removing the impetus for a number of network expansions. Further, the instability in global financial markets has eased, bringing down finance costs for energy businesses.(2)

This softer cost assessment was paralleled recently by the Australian Energy Market Commission (AEMC) which pointed to a substantial moderating of  record electricity price increases to levels less than the expected inflation at just over 1% a year up to 2015-16 . AEMC credited the flat-lining in electricity price hikes to a “stabilising” of “ regulated network costs” and the imminent removal of the carbon tax. The cost tag for the mishmash of federal and state green schemes AEMC estimated to be “around 17 per cent of the national average residential electricity price”.(3)

Importantly, there is one notable exception to the general stabilising cost trend– the Queensland market where AER expects the regulated single-rate residential tariff to rise by 20.4 per cent over 2013 and 2014. In the AER’s view “the rise passes through two years of network cost increases following the Queensland Government’s price freeze for this tariff in 2012–13” . Note there is no mention of the carbon tax as a being more than a single digit contributor. (4)

Scape-goating the inglorious carbon tax instead is better left to the LNP and Queensland’s Energy Minister Mark McArdle who claims the independent local regulator, the Queensland Competition Authority (QCA), found the carbon tax was costing the average Queensland family $300 in higher electricity bills over the past two years. The Minister reported QCA estimates of the tax accounting for more than half of the projected electricity price hike in 2014. But if the tax was scrapped immediately, according to McArdle, potential bill savings in the order of $116 would flow through to the typical Queensland household, rising to $240 for a family with four children. Businesses would save between 7 and 10 per cent on their electricity bills depending on which tariff they used. (5)

The Minister’s argument might not have gathered as much political traction had not there been the perfect storm of the cumulative impact of carbon pricing, the renewable energy target, the Queensland Solar Bonus Scheme and the Queensland Gas scheme. Together these emissions reductions initiatives next year will account for 20% of the average Queensland electricity bill. And in the middle of it all is the solar PV subsidy that is haemorrhaging most, begging a solution that either involves retrospective laws to reset a very generous feed-in-tariff or impose additional network charges targeted at generators of renewable energy.

The extent and pace of adoption of household solar PV is not unique to Queensland but with a 44c feed-in-tariff through to 2028 its impact is deepest here. With expected electricity price increases in the Sunshine State averaging 8.6% over the next three years, besides pointing to network costs catching up after the Newman Government froze the tariff for 12 months in 2011, AEMC attributes the other main cause “to the catch up in under-recovered costs associated with the closed premium Queensland Solar Bonus scheme” .

AEMC claims solar subsidies will be the “largest driver of electricity prices” through to 2016 with outlays on the solar scheme to increase by about 104% a year. Incredibly, the solar PV subsidy scheme which now makes up about 3% of the average annual electricity cost will account for 17% of total average prices by 2016 – nearly one in every five dollars spent on electricity. (6)

So what happened? Why did we not see this happening back in 2008? And what are the broader options and considerations that governments, taxpayers, the energy sector and consumers should be thinking about in planning our energy system for the future. The answer in short is it is what happens when relevant facts are omitted from the assessment and decision-making process – in this case insufficient attention was given to the impacts of social, entrepreneurial and technological innovation – in a dynamic policy context.

The cost of lower emissions fuels is just one factor bringing into question the capacity of the national electricity industry to innovate and with it the willingness of the Australian consumer to pay. As John Pierce, the chairman of the Australian Energy Market Commission (AEMC) reported recently:

The industry now faces greater challenges and uncertainties than at any time since the NEM started [December 1998]. Government environmental policies, a fall in demand growth, significant rises in retail prices and higher cost of capital since the GFC have changed the landscape of the energy industry in recent years and made forecasting the future more difficult for customers and investors. (7)

And while much of the political and public focus has been on the carbon tax, solar subsidies and upgrades to electricity poles and wires, lurking in the background is the real sleeper the sudden shock potentially to be caused by gas market turbulence in NSW and Queensland. The Australian Energy Regulator provides a cautionary observation in its annual overview:

Gas production in eastern Australia is forecast to treble over the next three to five years to satisfy a rapid expansion in LNG export demand. While Queensland’s LNG proponents each have dedicated gas reserves and pipeline infrastructure, difficulties in developing some gas fields are requiring them to source additional supplies from elsewhere. By doing so, they have reduced reserves that would otherwise have been available to the domestic market, leaving few producers in a position to sell gas under medium to longer term contracts.(8)

The Abbot Federal Government has initiated a national energy white paper process due for completion by September 2014 and closer to home the Queensland Government is preparing a 30 year strategy for its electricity industry.  The Australian energy sector context is dynamic and unpredictable providing good reason to focus on the innovation necessary to bolster its resilience at all levels from national to local.

Premier Campbell Newman correctly insists that resilience is included as a core performance factor in framing Queensland’s energy future. He knows the concept is crucial to the sustainability of any number of complex systems including our national energy market.

In a series of posts over the next few weeks I will explore the utility of resilience theory in advising energy policy and systems.
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Notes

1. Annabel Hepworth, “Solar plans burning hole in family finances,” The Weekend Australian (14-15 December 2013) p 8.
2. See Australian Energy Regulator “State of the energy market review 2013” (December 2013) http://www.aer.gov.au/sites/default/files/746_SOEM_Chapters_Singles_3.pdf

3. Australian Energy Market Commission 13 December 2013 2013 Residential Electricity Price Trends Final Report see also Information Sheet at http://www.aemc.gov.au/market-reviews/completed/retail-electricity-price-trends-2013.html
4. AER “State of the energy market” 2013 p 4.
5. Media Release 11 December 2013, Hon Mark McArdle Minister for Energy and Water. See http://statements.qld.gov.au/
6. http://www.aemc.gov.au/Media/docs/Queensland-fact-pack-34a6fe1b-3b0d-4c18-bd10-467861a85f7d-0.PDF
7. Australian Energy Market Commission (Oct 2013) Strategic Priorities for Energy Market Development 2013 p 2. http://www.aemc.gov.au/Market-Reviews/Completed/strategic-priorities-for-energy-market-development-20123.html
8. AER “State of the energy market” 2013 p 10.

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