Dec 15 2017

The year in review

2017 has been a challenging year for the energy industry. The effects of policy uncertainty materialised this year in the National Electricity Market (NEM) in the form of higher prices and reduced reliability.

The focus on energy policy escalated in 2017 following rising prices in 2016 and increased concerns about reliability following a series of blackouts in South Australia, including a system black in September 2016. The closure of Northern in South Australia and Hazelwood in Victoria tightened the wholesale market. Coupled with increased demand from LNG exports in Queensland and tight coal supply in New South Wales pushed up wholesale prices across the NEM. 

This year we have seen two attempts at national climate/energy policy, an Australian Competition and Consumer Commission (ACCC) inquiry into retail electricity prices and two Prime Ministerial reform packages with retailers, two similar meetings with gas suppliers, moves to re-regulate electricity prices in Victoria, government intervention to suppress wholesale prices in Queensland and government purchases and installation of new temporary generation and storage in South Australia and Victoria.

Here we look at a few of the key issues, events and analysis that formed public and political debate during 2017.

January

Summer is the time of heatwaves in many parts of Australia. In South Australia, the temperature hit 46 degrees Celsius in some outback areas of the state. Due to the extreme weather, load was shed to cope with demand and 55,000 South Australian households experienced blackouts on 20 January.

Mass resignation threatened the viability of AGL’s Loy Yang power station following the Fair Work Commission’s decision to abolish existing pay conditions. Later that same week, one third of employees called in sick, threatening Victoria’s energy supply, of which approximately 30 per cent comes from Loy Yang. The plant operated at half capacity due to the staff shortages, until 19 January when the Fair Work Commission ordered workers and the CFMEU to stop the industrial action.

February

South Australia experienced further load shedding on 8 February with 90,000 households going black following orders from the Australian Energy Market Operator (AEMO) to cut supply due to ‘lack of available generation supply’. The event sparked finger pointing between the South Australian Government, the market operator, and the Federal Government. Continuing media interest in South Australia’s electricity “challenges” followed, and the state became ‘ground zero’ of national energy policy debate throughout the year.

Load shedding of Tomago Aluminium smelter in New South Wales occurred on 10 February, further highlighting that the NEM was operating at its limits. ‘Clean coal’ became front and centre of the energy debate as the Turnbull government prepared to overhaul the Clean Energy Finance Corporation and hinted that they may invest in new clean coal generation. This sparked media debate with Matthew Warren calling the plants ‘uninvestable and unbankable’, while Alan Finkel also refused to back tax payer subsidies for any high efficiency low emissions coal plant.

March

In March, West Australians went to the polls. Energy was front and centre in the state, particularly when the elected Labor Government showed interest in transitioning its retail electricity market to full competition over time – sparking debate about whether the transition to retail competition would decrease or increase WA’s household electricity prices.

The South Australian government also announced its $550M energy plan, which focussed on increasing firm generation in the state by the government building and owning a thermal generator and 100MW of storage. Both the battery and diesel-gas generators are ready to be operated this summer.

Snowy Hydro 2.0 was also announced by the Turnbull government. It is expected to increase capacity of the scheme by 50 per cent to add firm generation to the NEM, which has increasing variable renewable capacity. While on 31 March, Hazelwood power station closed, ending its 50 year life. The announcement of the closure resulted in a spike in wholesale electricity prices.

April

During April it was reported that the South Australian government received over 90 expressions of interest to build a $100M battery as part of their energy plan. Companies from over 10 countries put in bids to build the grid scale battery to improve reliability of supply in the highly wind dependent state.

While rising gas prices and a feared shortfall resulted in the Prime Minister imposing tough new restrictions on gas exports to shore up domestic supply. The sweeping new powers mean exports can be blocked if there is insufficient supply in the domestic market.

May

AEMO announced a 100 MW three year demand response pilot for South Australia and Victoria, in conjunction with the Australian Renewable Energy Agency (ARENA). The program will provide capacity payments for energy users who make their energy available for periods of extreme demand. It will be open to both commercial and residential consumers, as well as aggregators.

The Federal Government also signalled possible intervention in the market, offering to buy the New South Wales and Victorian Government’s stake in Snowy Hydro before the planned upgrades to the scheme.

June

Professor Alan Finkel’s highly anticipated Independent Review into the Future Security of the National Electricity Market (better known as the Finkel Review) was released in June. The Review provided an effective blueprint for reform and highlighted four key benefits for the NEM: future reliability, increased security, rewarding consumers, and lower emissions. The Finkel Review and its key recommendations offered a degree of certainty that had been lacking for some time. The Federal Government supported 49 of 50, rejecting the key Clean Energy Target.

Political arm wrestling followed and the recommendation that attracted the most media coverage and debate was the final recommendation of the review: the Clean Energy Target.

July

In July Elon Musk announced that South Australia would become home to the world's largest lithium ion battery, in a ‘100 days or it's free’ pledge. The widely publicised countdown officially began on 29 September when the grid interconnection agreement was signed. The 100 MW Tesla battery in Jamestown is now in place alongside French company Neoen's Hornsdale wind farm, coming in days ahead of the 1 December operation deadline.

Victoria also received a visit from former United States Vice President Al Gore. Gore, alongside Minister for Energy, Environment and Climate Change Lily D’Ambrosio, launched a renewable energy action plan after riding one of Melbourne’s trams, which they announced will soon be powered by solar energy.

August

The energy industry in Victoria received the Andrew Government’s much awaited Independent Review of the Electricity and Gas Retail Markets in Victoria. Led by former Deputy Premier John Thwaites, the Review’s 11 recommendations included the proposal that prices be effectively re-regulated and the standing offer abolished. The Victorian Government said it will consider the Review, before delivering a finalised government response at the end of 2017.

During August major energy retailers also had two meetings with the Prime Minister. Retailers committed to contact customers whose fixed term benefits have ended, to encourage them to engage with the retail market. While the second meeting saw electricity retailers commit to contact more than one million customers on default offers by Christmas to advise them they can get a better deal. A range of other measures were agreed, including development of a comparator tariff and greater engagement with customers coming off fixed term discounts.

While retailers were willing to improve transparency, they argued that the best solution to long-term, reliable power is investment certainty. Media reported that in the weeks following the meetings, more than 100,000 families secured a better power deal.

September

Throughout September everybody was asking, ‘can there be life at the end of a coal-fired power station?’ AEMO produced two reports which effectively showed that after a decade of policy uncertainty, Australia is at increasing risk of not having enough electricity when needed.

AGL’s planned closure of Liddell power station in 2022 gained scrutiny, and political debate ensued. Media focussed on the absence of a national energy strategy, and if an owner of a coal-fired power station should reinvest millions of dollars to extend its life.  

AGL asked the government for 90 days' so it could prepare a plan to replace the lost electricity generation caused by the closure of the Liddell. Four weeks before the 90-day deadline, AGL reported on plans to the Prime Minister. In December AGL publicly announced that it will replace the power station with gas, wind and solar.

During September Malcolm Turnbull also vowed to bring gas prices down after reaching a provisional deal with three gas exporters and he stepped back from imposing controls on overseas shipments. East coast gas exporters committed to provide reasonably priced gas to fill any short-term gas shortage.

October

In October the Federal Government announced that it had accepted the advice of the new Energy Security Board (ESB) and would adopt its recommendations to establish a Reliability Guarantee and an Emissions Guarantee, together forming a “National Energy Guarantee” (NEG). The development of the NEG headlined November’s COAG Energy Council meeting, where the ESB provided some of the first formal planning of a design scheme - an important step in setting the context of the NEG design, yet the detail of the scheme is still to be formulated. The ESB will finalise the basic design on the NEG mechanism by March 2018 to report and get sign off from the COAG Energy Council in April 2018. 

The ACCC also released its interim report, the Retail Electricity Pricing Review. The report supported the case made by industry: margins are not inflated and competition is active. What emerged from the Review was the higher cost of servicing customers in highly competitive markets like Victoria. The ACCC will release its final report in the second half of 2018.

November

With a year of increasing retail prices, the Australian Energy Regulator revealed a rise in the levels of energy debt held by customers not in a formal retail hardship program. The Regulator announced that it will be reviewing retailer hardship policies over the following year to ensure that all retailers are identifying, engaging with and providing appropriate assistance to customers.

During November, Queensland also went to the polls to re-elect the Palaszczuk government. The party has stated its interest to create a state-owned retailer and has committed to more renewable generation. The progress of CleanCo, a third ‘clean’ generator in Queensland is likely to proceed.

At the end of the month, as Victoria experienced a mini-heat wave, media started to focus on the upcoming summer and risk of blackouts.

December

Power of Choice - a package of reforms to the NEM designed to give consumers more options and control of the way in which they use and manage their electricity expenditure - came into effect on December 1.

The AER also released its review into the “step change” in wholesale electricity prices in New South Wales. The first review under the AER’s new wholesale market monitoring powers, so it was an important opportunity to shed a clearer light on what is driving up wholesale electricity prices. Effectively it showed that there has been a noted “step change’’ in the state’s wholesale electricity prices since October 2016. The rising cost of coal and gas, coupled with the limited number of generators in New South Wales and plant closures in Victoria, was found to be the reason for the increased prices.

Summer 2017/2018

With a hot summer forecast, AEMO has identified a potential supply shortfall in the NEM particularly for Victoria and South Australia, increasing the risk for blackouts in both states.

AEMO has already contracted more than 1,000 MW under the Reliability and Reserve Trader provisions and is exploring demand response options with ARENA.  An increased incidence of Lack of Reserve conditions has already been reported, and this is likely to increase further on 9 January 2018 when the methodology changes.

Next year

With a busy year ahead, 2018 will deliver a basic design on the NEG which is likely to require more detailed consideration to deliver the most efficient and workable outcome, particularly in the context of the five minute settlement rule change which will be progressing in parallel. While the ACCC will make its final report into retail pricing in the second half of 2018.

Energy will also be front and centre in the lead up to state elections in South Australia (March), Tasmania (May) and Victoria (November). While a Federal election as early as late 2018 is also a possibility.

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