THE SOUTH AUSTRALIAN ELECTRICITY CRISIS; IT’S REALLY ABOUT THE GAS.

Along with many South Australians, I read with interest on Tuesday the announcement made by the Premier and Treasurer in relation to our energy future. It is hard to imagine how our State Government can actually make the situation worse, however, as a result of their blind commitment to ideology that is exactly what I anticipate will happen under their plan. Their plan fails to take adequate action on the one critical aspect of energy security in South Australia: The ready and affordable supply of natural gas. Their plan will also lead to significant cost increases for consumers and I do not believe that it will achieve its aims of increasing energy security.

The Premier’s announcement had six main components, as follows;


1. BATTERY STORAGE

The State Government will establish a $150 million renewable technology fund to assist in the commissioning of battery storage that will provide additional capacity in times of peak demand. Apart from the obvious errors in terminology in the announcement they do not understand the difference between the megawatt and the megawatt hour. Battery storage is a long way from being commercially viable, hence the need to invest $150 million of our money in order to drive the ideological campaign. I have no doubt that battery storage will become an important part of the energy mix in the future, however, at this stage it is premature and the costs associated simply do not work. By entering into this area now, instead of in five years we are locking ourselves into the higher point of the cost curve. Logic dictates that the cost of these batteries will have to flow through to consumers meaning that this additional grid security and continuity of supply will come at a significant cost to the consumer.


2. NEW GOVERNMENT OWNED GAS POWER PLANT

Regardless of your views on whether government should be competing with private enterprise for the supply of this electricity, there is one glaring problem with their proposal; there are not readily available sources of gas to fire the plant. All the gas that is currently produced in South Australia is fully committed and with the development of major export channels for our natural gas, the price has risen significantly. Despite what has been stated by the Premier, it is unlikely that the small incentive being offered for gas producers to provide the South Australian electricity generators with first use of gas will be in any way successful. It is also important to note that there are constraints upon the pipe line that delivers gas from Moomba to Adelaide, as it appears that this line is fully utilised. There does not appear to be much point in building in a new gas fired electricity generator when you do not have any gas, and even if you did, you cannot transport it to the generator. The Prime Ministers meeting with the Gas industry yesterday may go some way to freeing up gas supply, so if this is the case, why do we need to spend the $48 million committed to new exploration?


3. GAS EXPLORATION INCENTIVES

The $48 million of incentives that are being offered by the State Government for the exploration and exploitation of gas reserves in South Australia are insignificant and will not provide enough incentive for State Governments’ objectives to be achieved. The announcement is silent upon cost issues, simply stating that South Australian Energy generators industry and households will have first call upon the gas extracted. They offered $24 million of incentives in October 2016, but clearly they have not had sufficient takers and have doubled down to see if anyone comes out of the woodwork. Gas and mining industry participants that I have spoken to about this incentive believe that this approach is highly likely to be unsuccessful.


4. LOCAL POWER OVER THE MARKET

This area presents a significant question for the legal profession. The announcement states that Minister for Energy will be given strong new powers to direct the National Market in the case of an electricity supply shortfall. I am unclear as to how a State Government can order a Federal Regulator where to direct energy, especially as it is highly likely that when there is a shortage of supply in South Australia, that there will also be shortage of supply in Victoria if a major weather events straddles the two states. If the Victorian Energy Minister were to want the same powers, he could direct that Victorian electricity not be made available to SA through the interconnector, which would of course have disastrous consequences for our own electricity requirements.


5. NEW GENERATION AND MORE COMPETITION

The State Government contract that the Premier has stated will underpin bringing a new electricity generator to South Australia is not a significant load and will not do anything to attract a new generator. More importantly, however, is the fact that there is no gas to fire the plant. From an investment point of view, I cannot see how a power generation company would consider investing in the development of a gas fired plant in South Australia given the contradictory polices between the Federal Government and State Government. Gas fired power stations have useful life of 40-50 years, meaning that there has to be absolute policy certainty in order for a company to make this type of investment. This is not the case in South Australia and the unreliable state of gas supply would mean that it is highly unlikely that anyone would have a serious look at building such an expensive asset in this market. This situation is likely to get worse in the medium term, with the AGL gas fired power plant at Torrens Island reaching the end of its useful life. Without a ready supply of gas it is unlikely that a business case that is economically viable can be developed for the replacement of this plant.


6. ENERGY SECURITY TARGET

Making it more difficult for electricity generators and retailers to operate in South Australia is not going to achieve anything. Barriers to entry need to be reduced, red tape minimized and an appropriate policy environment developed rather than the overtly socialist approach of burdening business.

WHAT DOES THIS ALL MEAN?

The glaring omission from these announcements is the lack of any strategy to reduce cost for businesses and consumers. Everything that is being put forward by the Premier has cost associated, and these costs will need to be pass through to consumers. The cost of standby generation, the cost of expensive batteries, the cost of the State Government providing contracts for their energy usage at uncommercial rates in order to cross subsidised capital investment and the cost implication on the national grid by South Australia taking a go it alone approach and trying to dictate to the Australian Energy Market Operator has to do their job will result in cost increases. When this is all overlaid by the fact that these steps are unlikely to actually work, we have significant additional cost with no corresponding benefit.

Australia is the only gas exporting country in the world that does not have a gas reserve policy, meaning that a proportion of gas extracted is kept for domestic use. Australia does not have any such gas reserve, with Western Australia being the only state to have implemented such action. The availability of gas must be the key component of any energy strategy for both South Australia and Australia. By implementing a gas reserve policy, the supply of electricity would increase and pricing would reduce without the need for any other form of intervention or subsidy. Whilst I understand that there are many complex issues in relation to a gas reserve policy, I see as the only viable option in order to provide the energy security that is necessary for developed economy to operate.

Until the root cause of these issues (ie gas supply) is addressed, the State Governments plans are doomed to fail. If a long term ready supply of gas at a viable price can be secured, then the State Governments plans are not necessary. We already have under utilized gas fired generation here in SA, however this is not being used due to a lack of gas. Save the money and use legislation, policy and political pressure to get the major gas producers to ensure readily available and economic gas supplies and the problem disappears. Let’s put that $550m to better use than to support the re election of the Labor Party in their desperation to fix the problems that they should have seen coming years ago, but failed to act upon.

Should we steer clear of renewable’s to improve security and cost?

  • In short, absolutely not. Renewables are a very important mix to our energy needs. However, blind pursuit of aggressive renewable targets has created the long list of issues.
    A move from reliance on fossil fuels to renewables is a long term slow moving transition that needs to be managed in line with technological advancements, economic cost v benefit, and most importantly low risk to the consumer and the economy. This is the failure of the Weatherill government.
  • • Electricity prices are already higher as they contain levies that are being used to fund aggressive expansion of renewables.
  • • In turn, traditional power plants have become economically unviable as demand has become intermittent rather than constant. Shut downs have led to job losses, with a major impact on local economies.
  • • Net generating capacity in SA has therefore declined, driving electricity prices higher
  • • When renewables are not producing, they are unable to despatch in periods of high demand. With limited local generation, SA relies on the interconnector with Victoria. With coal plant shut downs scheduled in months ahead in Victoria, NSW there will be less electricity available to flow through this interconnector.
  • • In periods of high demand, spot prices spike by thousands of percent, because the rei sno supply, leaving industry to shut down, and large areas blacked out to shed electricity demand.
  • • This volatility in spot market prices, result in sizeable risk premiums being added to business contract prices (these have almost tripled in last 3 years), bringing our local businesses to their knees in terms of electricity costs, to the point where cost and reliability of power is resulting in shut down and relocation of national businesses away from SA.

The solution…..manage the transition to renewables. Ensure reliable, dispatchable and affordable power generation is available when renewable based supply is not. The answer is gas fired generation, but you must have a plentiful and cheap supply of gas. As technology improves and can be proven, and renewable generation can also be dispatchable, then SA can look to wind down its reliance on Gas fired generation over time.

The solution per Weatherill is simply spending more taxpayers money, for a solution that will not work. Focus on the gas Jay. Secure the supply and long term price of gas with a government backed reserve, and market participants will flow in to SA to build generation capacity. The government does not need to own and fund generation, they do not need to intervene and bully the national market, they just need to focus on sound energy policy and security, that allows the market the freedom to operate efficiently. Reduce the uncertainty, reduce the risk, reduce price and balance demand/supply with natural market forces. Only then will the market return to normal, and South Australians will be back to paying reasonable prices for electricity that will stay on 24 hours a day.