Lot’s of good material today on Australia’s great energy debacle. First, Thomas Parry foundation chairman of the Australian Energy Market Operator 2008-2015 does a great job of describing the history:
Why is electricity in Australia now so expensive when not that long ago it was cheap?
Following the UK privatisation model, Victoria – under a Liberal government – successfully argued that these sunk assets should be significantly revalued using a different methodology (depreciated optimised replacement cost) rather than the traditional depreciated historical asset values.
…Regardless of what was the rate of return prevailing at the time, this one-off change in valuation of the poles and wires’ asset values ramped up prices substantially.
…Rates of return on inflated existing asset values were compounded by a substantial wave of new investment, primarily in the government-owned electricity networks in NSW and Queensland over this period.
…In the last 10 years or so, it has been the generation sector (and to a lesser extent retailers) that has increasingly been driving energy costs and, hence, prices.
Policy changes and uncertainty at the national level around dealing with carbon emissions and an array of un-coordinated and usually poorly thought through state-based green schemes has made it difficult for the more carbon-intensive generation plant to plan and invest.
…Gas was expected to play a major role in the transition from the ageing coal-fired plant to a greater proportion of renewables in the mix. And effective transition is critical to managing both reliability and costs.
This has not happened. And for a variety of complex reasons, involving the way the gas export market was developed at the same time as some key states restricted exploitation of the resource, gas costs have dramatically increased.
That’s it in a nutshell. Poles and wires gold-plating followed by the LNG bubble. Both of which mis-allocated roughly $80bn each into white elephant projects.
Not much can done about the former but today the latter is the larger problem anyway. The gas cartel of BHP, Exxon, Shell, Santos and Origin are gouging everything and everyone in sight. Recall as well that it is gas that sets the marginal price in the National Electricity Market allowing generators like AGL to join the rort.
Enter Fortescue Metals’ Nev Power:
Fortescue Metals chief executive Nev Power called on governments to do more to give incentives for gas production, including instigating a “use it or lose it” policy with companies that did not develop their gas leases.
In an interview with The Australian yesterday, he said the federal government also needed to revise its energy policies to ease its short-term focus on emissions reduction and allow more use of gas for electricity generation.
“The focus on LNG exports has taken priority over domestic gas,” Mr Power said.
“I don’t think it was intended, but that is the way it has worked out, which has created a major issue around gas supply on the east coast.
“Focusing totally on emissions reduction is leading to very expensive, very unreasonable power costs for Australian families — and it’s going to get worse.”
…Fortescue’s Mr Power predicted that consumers on the east coast were facing summers of sharply rising energy prices.
…Mr Power said Fortescue was paying to import diesel fuel for its operations in the Pilbara as there was not enough domestic gas — despite the fact that WA had large offshore gas reserves.
He said governments should instigate a “use it or lose it” policy in which companies that did not develop the gas reserves in their leases would lose them.
“There are a lot of gas leases which have been rolled over under the retention system. Some of them have been rolled over for up to 30 years,” he said.
“They are typically held by large multinationals. If they don’t want to develop them, let the leases be developed by someone else.”
Quite right. Shell is especially guilty of it, sitting on giant Arrow reserves in QLD, handed to it just eighteen months ago by a gormless ACCC. It’s development plans are tiny.
Orica’s Alberto Calderon is just as pissed from Matthew Stevens:
Australian gas producers “hide behind sophisms” to defend an out-dated, contract-based market for liquid natural gas because they can rely on the security blanket of domestic market shortage to buttress their earnings through the long dark days of oil price recession.
…Orica is the biggest gas customer in NSW and a top 10 user nationwide. It transforms local gas molecules acquired from the Bass Strait joint venturers and Shell into ammonia, which becomes the raw materials for explosives used to blow up rocks in the iron ore fields of the Pilbara, the coal fields of the Bowen Basin and the Hunter Valley and at hard rock operations around our mining nation.
But the disparities between local and global gas markets mean that, these days, Orica could make more money selling its contracted Australian gas supply back into the domestic market and importing its ammonia feed stock instead.
With that, Calderon urged a solution that is structural rather that technical and that is nothing like the sledge hammer that is the Australian Domestic Gas Security Mechanism (ADGSM).
…So what should the government do? Well, Calderon has a few ideas.
First, he reckons that the government should mandate that no new LNG contract is written without the sort of supply flexibility clause that is common in just about every other bulk or terminal traded commodity supply contract.
Those clauses allow for options over the source of supply and for a claw-back of between 10 and 15 per cent of the contracted volumes.
“These clauses should be used to their maximum possibility, to liberate gas for the domestic market deficit,” he urged.
“And finally the government, the producers and eventually the consumer countries should be persuaded to allow these substitutions. What is happening today is myopic and unsustainable, cornering domestic markets with prices so much higher than the international prices will eventually lead to a bad outcome, price ceilings or other non-market measures.”
Japan has already declared these contracts illegal and no more will be written so that won’t help. What needs to happen is existing contracts get re-negotiated. Some customers would jump at the chance. This is the weirdest part of it all. Japanese and Chinese customers over-committed to contracts during the LNG bubble and they no longer want or need the gas. They are forced to take it at oil-linked prices then resell at losses in oversupplied local spot markets. The entire “take or pay” LNG contract system is a laughing stock that forces producers to ship at losses and customers to buy at losses, bearing in mind that some are one and the same.
The Australian government could perhaps try to broker a shift towards more flexible agreements with Japan for existing contracts but the commercial resistance will be enormous. The capital sunk into the LNG trains is largely written off now, but the debt remains, so the firms involved are now making free cash flow from exports and immense profits in the Australian gouge to pay off the legacy debts.
No, there is no way out of this without using a “sledgehammer”. Alas, the ADGSM is more of a feather-duster. It has not required participation from anyone but Santos and even it can still sell at high prices under the mechanism. It should be much more heavy-handed.
It’s either that or nationalisation somewhere along the supply chain. There is no market anymore so quibbling about sovereign risk is pointless. Buying Santos and shutting one LNG train is one option. Buying (or expropriating) and force developing reserves in a national gas company with mandated rates of return is another. Either of these options would benchmark local prices. Maybe the simplest solution just price controls.
But any of these solutions will take brains and actual leadership of which there is none. And so the Banana Republic reaches the preposterous point at which even bananas are priced out.
