Australia: Some progress on implementing Finkel Blueprint but gas supply roadblocks remain

WHO SHOULD READ THIS

  • All energy and gas market participants including generators, retailers, financiers and service providers, together with gas users, producers and explorers.

The final report of the independent review into the future security of the National Electricity Market (NEM) led by Dr Alan Finkel AO – the Blueprint for the Future – was released on 9 June 2017. See our previous alert ' Blueprint for future energy security and transition to cleaner energy mix'.

The Council of Australian Governments (COAG) Energy Council comprising Commonwealth, State and Territory Energy Ministers met on 14 July 2017 and agreed a series of actions in response to the Finkel Blueprint. Ministers reaffirmed their priority for secure, reliable and affordable energy for all Australians while reducing emissions. There was substantive agreement on progressing 49 of the 50 Blueprint recommendations but the Commonwealth made it clear they were not in a position to discuss the recommendation for a Clean Energy Target (CET).

The Labor governments of Victoria, Queensland, South Australia and the ACT have however requested that the Australian Energy Market Commission (AEMC) investigate the implementation of a national CET.

The Blueprint points to the essential role gas plays in providing secure and reliable electricity for Australians and, in a message to governments stalling new gas supply, the Blueprint states that "governments should also work with communities to encourage safe exploration and production, based on best available evidence, performance data and appropriate financial rights for landholders".

However, at the Energy Council meeting, the Victorian Government made it clear that its bans and moratoria on gas exploration and development will remain in place. The Victorian government instead released its alternative proposals for gas market "reform".

Also on 14 July, the interim report of the Scientific Inquiry into Hydraulic Fracturing in the Northern Territory (the NT Fracking Inquiry) was released. A final report is to be handed down by end-2017. In the meantime the moratorium on fracking of unconventional shale gas reservoirs in the NT remains in place, bringing a halt to exploration activity.

Some more positive news on improving domestic gas supply have been the initiatives from the Queensland Government and the Commonwealth Government.

COAG Energy Council Responses to Finkel Blueprint Recommendations
Energy Ministers have agreed on a timeline to implement 49 of the 50 recommendations, which they say will deliver the key outcomes of increased security, future reliability, rewarding consumers and lower emissions through an orderly transition, system planning and stronger governance.

Preparedness for the upcoming summer
The Australian Energy Market Operator (AEMO) has put in place a comprehensive set of actions to ensure the system is ready for the coming summer, and is taking further precautions by acting on a Finkel Review recommendation by contracting an independent audit of its plan to manage the NEM through this period. AEMO is working closely with generators to move planned outages to non-peak demand periods, Transmission Network Service Providers (TNSPs) to reschedule maintenance outages and securing additional resources to meet demand on the hottest days.

Establishment of the Energy Security Board
Energy Ministers agreed to establish an Energy Security Board (ESB), a new body comprising an independent Chair, Deputy Chair and the heads of the AEMC, AEMO and the Australian Energy Regulator. The ESB will provide whole-of-system oversight for energy security and reliability of the NEM and be integral to improving long-term planning. It will report to the Energy Council on a regular basis, including an annual 'Health of the NEM' report, in addition to advising the Energy Council on strategic priorities.

Ministers agreed that where Council is unanimous in its support for ESB recommendations, they are implemented. The role of the ESB will be reviewed after an initial three-year period.

Energy Security Obligations
The introduction of energy security requirements for TNSPs and generators, and updated standards to ensure generators are sufficiently resilient, will make the system better able to withstand disruptions like generator outages or interconnector failures.

The AEMC will ensure that transmission companies have a minimum level of inertia to ensure the system is better equipped to manage rapid electrical changes in the system.

New generators will have to provide fast frequency response, which will correct electrical changes in the system and is said to be a step towards the establishment of a market for these types of services.

A rolling review process will update obligations and standards over time to ensure that they remain fit-for-purpose and relevant to changing technologies. AEMO will submit a rule change request to the AEMC in 2017 regarding connection standards.

Generator Reliability Obligation
New obligations on generators will bring more dispatchable capacity to the market and minimise the system reliability challenges flowing from an increasing share of intermittent renewable energy generation. Requiring generators to guarantee a level of dispatchable capacity before they enter the market will help ensure enough generation capacity is available to meet demand.

Following the outcome of the AEMC's Reliability Panel, Review of the Reliability Standard and Settings, and advice from AEMO on optimal levels of dispatchable capacity, the Energy Council will submit a rule change request to the AEMC to implement the Generator Reliability Obligation.

Improving transparency and demand response
The Energy Council agreed to:

  • provide greater transparency on the price and availability of long-term electricity retail contracts for large consumers who are particularly sensitive to reliability and affordability issues
  • give consumers greater real-time control over their energy consumption data to enable them to negotiate better deals from energy service providers through new rules for competitive metering under the National Energy Productivity Plan
  • provide governments greater visibility of retail electricity prices, retail margins and factors affecting prices to ensure they have appropriate policies in place to put downward pressure on prices, and
  • improve reliability and lower prices in the NEM through effective demand response:
    • AEMO and ARENA have announced plans for a three year program trialling a new voluntary demand response initiative in South Australia, Victoria and New South Wales, paying consumers who opt-in to temporarily reduce their demand to help avoid load shedding, and
    • the Energy Council will direct the AEMC to recommend a mechanism that facilitates demand response in the wholesale energy market, and ensure any rule change is in place by the summer of 2018-19.

Clean Energy Target
The Energy Council noted that the Commonwealth is "carefully considering a CET as recommended by the Finkel Review". As Council did not support tasking the AEMC to develop design options for implementation of a CET, the Council noted that Queensland, Victoria, South Australia and the ACT will separately commission the AEMC to do further work in this area.

Victoria's Alternative Gas Plan
The Resources Legislation Amendment (Fracking Ban) Bill 2016 which passed through the Victorian Parliament earlier this year:

  • permanently bans all onshore unconventional gas exploration and development, including hydraulic fracturing ('fracking') and coal seam gas, and
  • extends the moratorium on conventional onshore gas exploration and development to 30 June 2020.

The extension to the moratorium will supposedly allow the Government to carry out a comprehensive program of geo-scientific research to look closer at Victoria's prospectivity, and the potential risks, benefits and impacts of onshore conventional gas and development.

Having pulled down the shutters on being part of the solution for improving East Coast gas supply, the Victorian Government then unveiled on 14 July its plans to explore the development of an LNG import terminal in Victoria. Victoria won't be producing on-shore gas in the state in the foreseeable future, but it seems happy for others to develop their gas resources and for Victoria to then import that gas.

The Victorian government also proposed an alternative to the Australian Domestic Gas Security Mechanism, involving a cap on the total allowable gas that major companies can export in order to protect domestic needs. Under the Victorian model, all gas exporters would be captured, not just those which are not net contributors to domestic gas supply.

The NT Fracking Inquiry – tougher regulation is likely
The NT Fracking Inquiry interim report documents the results of their extensive public consultations. There are many people in the NT that believe fracking is not safe and should not be allowed. Many others argue that, if properly regulated, it can be safe and the NT can benefit from badly needed jobs and revenue to government.

The Inquiry Panel give some pointers to where their final report is heading. The Panel:

  • considers that the current system of governance for onshore unconventional gas development is deficient and needs to be strengthened
  • will consider areas which should be declared 'no go zones' in addition to national parks and areas of high conservation value e.g. farm land, sacred sites, tourism 'icons' and townships
  • is concerned about the transparency and methodology used to calculate rehabilitation bonds
  • will consider whether or not the regulatory framework should be more prescriptive, compared with the current system of focussing on environmental outcomes
  • will consider options to improve the structure, powers and resources of the regulator, and
  • believes that the land access regime needs to be improved.

The Inquiry Panel will conduct a further round of public consultations from 31 July until 1 September 2017. A draft Final Report will be published towards the end of 2017 and the Final Report handed down by the end of 2017.

The Final Report will not make recommendations on whether the current fracking moratorium should be lifted. That will be a matter for the elected government. Rather, the Panel will make recommendations on the framework for any resumption of fracking for unconventional gas.

Further release of acreage in Queensland for domestic gas supply
The Queensland Government has foreshadowed that it will soon release another 395 square kilometres of land for gas development to supply to the east coast gas market. The release will involve two parcels in the Surat Basin. Any gas produced will only be able to be sold in Australia. This comes on top of the 58 square kilometres the government released in February. The further releases may coincide with an announcement of the successful tenderer(s) for the first release.

Commonwealth's Gas Acceleration Plan
In the May budget there was a $26 million allocation "to encourage and accelerate the responsible development of onshore gas for the domestic market". Details were sketchy. The program now has a name – the Gas Acceleration Program (GAP). The Federal Resources Minister told the Energy Council that the GAP is designed to deliver new gas to the east coast gas market within three years. GAP will "complement jurisdictions' efforts to facilitate gas supply development in the short term", presumably a reference to initiatives such as the acreage releases by Queensland. GAP guidelines will be finalised prior to the next COAG Energy Council meeting, with relevant jurisdictions to settle funding agreements shortly thereafter. Gas exploration companies willing to commit gas to the domestic market may be able to supplement limited funds available from equity markets with funding from the GAP.

Where to from here – what industry should expect
As predicted in our previous note on the Finkel Report, the role of coal in the CET world has become the battleground, both with the Federal Coalition, and between the Coalition and Labor.

The Minerals Council of Australia has released a series of reports making the case for high-efficiency low emission (HELE) conventional coal plants to be part of the energy mix and they have backed the Prime Minister's request to the Australian Energy Market Operator to review the reliability of the NEM and examine how to secure investment in new continuous dispatchable power.

Federal Government enthusiasm for new HELE coal plants has been qualified in recent weeks, with Treasurer Morrison quoted as saying that "these new HELE plants would produce energy at an estimated two and a half times the cost of our existing coal-fired power stations. They would also take up to around seven years to set up." The Prime Minister clearly favours market-led solutions, stating that "there is an important role for government in energy policy, obviously, but the goal should always be for investment decisions to be made by the market, by participants in the market, on economic grounds."

It is certainly encouraging to see the recent COAG Energy Council meeting progress many of the Finkel recommendations. A circuit breaker is needed, however, for the CET and that may come in the form of a UK-style capacity tender process in which existing and new coal can compete. While conventional coal cannot compete on emissions - the Blueprint points out that ultra-supercritical black coal plants have an estimated operating emissions of 700kg CO2-e/ MWh as against 370 for combine cycle gas – it may be able to compete on being a reliable provider of capacity, alongside gas.

Also as we predicted, the near term focus is on ensuring energy security in the upcoming summer months. We have seen the bold battery storage announcement by the South Australian Government and the instruction by the Queensland Government to Stanwell Corporation to re-start Swanbank E gas-fired power plant (assuming they can source the gas).

On the gas front, the Commonwealth's gas export controls can be used from 1 January 2018, with the Commonwealth Minister for Resources to rely on assessments from AEMO, the ACCC and industry to determine whether these control measures will be instituted. The good news is that the updated AEMO Energy Supply Outlook is less alarmist on the balance of gas supply and demand. That is important because none of the positive measures by Queensland and the Commonwealth on improving gas supply will add an additional molecule of gas for 2-3 years at best.

The NT fracking inquiry would appear to be heading towards a Final Report that will pave the way for the NT Government to allow resumption of fracking under a new, tougher regulatory framework. The $64 question will be whether the moratorium will be lifted for exploration in limited areas, such as the Beetaloo Basin, pending drafting of the new framework, or whether exploration will have to stay on hold while that framework is drafted and enacted. If the latter, it may be years before unconventional gas participants in the NT can fund exploration, and longer still until that gas is available to feed into the East Coast gas market.

Victoria remains recalcitrant, keeping onshore gas exploration on hold and having the audacity to suggest that Victoria should set up an LNG import terminal.

In NSW, all eyes are on the handling of the Santos Narrabri gas project which has the potential to supply half of NSW's gas requirements. Currently NSW imports 95 percent of its gas needs.

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