Australia’s energy crisis - whoever denied it, supplied it

Australia's energy market has been setup for failure by governments in a state of "deep denial" for more than a decade.

The suspension of the National Electricity Market on Wednesday shows it is not fit for purpose. Experts say the system has been “set up for failure” by state and federal governments operating in a state of “deep denial” for more than a decade about how the system is changing. 

“Australia’s energy market has been failing for some time on some of its key objectives and now on its essential, most basic proposition, it is failing as well,” says Richie Merzian, director of Climate & Energy at The Australia Institute.

Merzian says that the way the states engage with the market had “seriously broken down,” even before the Australian Energy Market Operator (AEMO) stepped in.

“There does seem to be a need to reexamine whether the market is fit for purpose,” he says.

Bruce Robertson, energy finance analyst at the Institute for Energy Economics and Financial Analysis says the recognition of how Australia’s energy system is changing, both in terms of shifting macroeconomic and geopolitical conditions, and the number of renewable energy generators coming online.

While AEMO has done a “good job” in anticipating and planning for these changes, it is a shame that until recently we have been operating under a government that has been attempting to do the opposite/

“The energy system was changing before their very eyes, yet they failed to provide for it,” he says.  “There has been no recognition, and no planning for that change”.

State and federal governments are very pro-gas and coal, and back them to the hilt. Huge amounts of money had been poured into subsidising oil and gas, particularly gas.

“What has that got us?,” says Robertson. “Not very much.” 

But to understand the breadth of the challenge facing the new federal government, it’s important to examine how we got here. 

Why do we have a market for electricity? 

As I wrote recently for The New Daily, The National Electricity Market (NEM) was set up to connect all the previously disparate states and territories via transmission lines - except WA which has its own grid; we’ll get to that in a second - to ensure there was ample energy supply at any one time. It was designed to make Australia’s energy system more resilient and therefore cheaper. 

However, the state government bodies that owned and controlled Australia’s energy network, from power stations to poles and wires, were subsequently corporatised and privatised in the early ‘90s, separating ownership of generation from transmission, distribution, and retail.

“As soon as they turned these bodies from state bodies to corporations, they encouraged the profit motive as the primary driver,” Robertson says. 

It effectively transformed electricity from a utility into a taxing mechanism, leading to the gold plating problems that persisted from 2012 through to 2017/18, increasing the cost of electricity dearly, increases that have continued through to today.

““Once these businesses were corporatised, they’d go to their state minister and say ‘Nice to meet you, minister. I can give you a 20% dividend which you can spend on hospitals and stuff, isn’t that wonderful?’”, Robertson says, “neglecting the fact that meant electricity prices would increase.”

The exception to the rule: What Would WA Do?

There is one exception to this story, and that is WA. 

Because of its relative isolation to the rest of Australia, WA has its own energy grid and a domestic reserve policy  in which 15% of all gas produced is reserved for domestic use.

These domestic reserves can supply around half the local market at current levels of demand, while additional supply comes from domestic-only producers who can offset their commitments by supplying gas or other energy from alternative sources, rather than from their own LNG projects. 

The reserve policy was implemented in 2006 in response to a perceived risk that the supply of domestic gas would decline. The decision was well timed because just two years later, WA lost almost a third of its gas supply to the Varanus Island Pipeline explosion. It is the government’s legislated domestic gas requirements that maintained the supply of gas to the state while the plant was shut down. 

WA planned for the worst-case scenario and acted accordingly. That AEMO had to step in shows that the other states and territories - and the federal government - have not been as forward-thinking.

“All they have to do is go to Western Australia, look at the legislation on its books, bring it back to Eastern Australia and adapt that statute for eastern Australian conditions and then enact it,” Robertson says. “Job done.”

Robertson’s proposal is neither radical, nor is it something that hasn’t been done before. Countries such as the US, Qatar, and Saudi Arabia have domestic reserve policies, countries that pay very low prices for gas.

Qatar also collects around $26 billion in LNG royalties per year, just quietly, comprising around 70% of  total revenue, and makes up 60% of GDP. While Australia collects a measly $1 billion annually. In fact, Australia's fossil fuel industry may be receiving more in government subsidies than they pay in royalties.

“This is not hard. This is policy 101. This is a simple, easy, and really quick thing to do and it would go a long way towards solving this energy crisis. 

“I'm not saying it's a total panacea, but it goes a long way.”

How did it come to this?

In a nutshell, the Australian Energy Market Operator was struggling to perform the very basic function it was designed for, which is to ensure that there is sufficient electricity at any one time. This is largely due to the ageing, unreliable, coal-fired power sector that provide the vast bulk of our energy, particularly in NSW and Queensland, at the price that was being capped. 

(Market rules have built in price-caps that kick-in when wholesale energy prices have been too high for too long. Calculated on a rolling seven-day-cycle, once prices hit $1.359 in any state, the regulator imposes a price cap of $300/MWh).

The recent heavy rains across the east coast has also affected coal generation in Queensland and New South Wales, flooding open-pit coal mines and reducing supply. 

“The third problem is that we are replacing expensive coal power with even more expensive gas, to the point where basically it was going to bankrupt the economy,” says Robertson.

Gas and coal companies decided that they weren't going to be profitable enough to continue generating energy at that price.

“That, or they were gaming the market by holding back from generating at that price,” says Merzian.

“That’s when AEMO basically stepped-in and said, 'This system is not working. We're going to suspend the market completely. We're going to go old-school, back to dispatching electricity and just telling people what to do, and we are all going to work off the same price to do it.”

Fantastic. Great move. Well done Angus

The energy crisis is a direct result of inaction, a lack of preparation, vision, and long-term planning by previous federal governments.

For an opposition party and - now former government - that claims to love oil and gas, it did a pretty piss-poor job of shoring up the domestic supply of either. 

Former energy minister Angus Taylor was supposed to deliver a liquid fuel security report in 2019, addressing the vulnerability of Australia’s domestic fuel supplies, but the former Morrison government sat on it for more than two years. 

An interim report came out in early 2018 showing that Australia had just 18 days worth of petrol and an equivalent of 22 days worth of diesel in storage, violating the International Energy Agency’s requirement to hold an equivalent of 90 days of imports. 

“There was no final report,” says Merzian.

When the LNP took office Australia had seven refineries. By the time the election came in 2022 we had two refineries left and the government was scrambling just to find a way to subsidise them, to the tune of over $2 billion just to stay open.

“It just shows how badly organised we are when Australia is arguably the world’s largest exporter of oil and liquefied natural gas, yet we can't ensure we have sufficient supply for ourselves,” says Merzian. “We have badly managed our resources across the board.”

Good thing former Treasurer, Josh Frydenberg sold off our foreign oil reserves in his last budget before losing the election.  

“It highlights a critical failure in Australia's foreign supply of oil, in that 91% of our liquid fuel is imported either directly as a final product, or as crude, then refined here,” Merzian says. 

“We are in a worse position than we were 10 years ago. We don't have any oil tankers, we have very little reserves. We don't even make petrol and diesel in any meaningful way... We've gotten worse when it comes to foreign oil and the last federal government ultimately didn't care.”

Gas problem a crisis of exports, not supply 

Gas is a different beast altogether. Contrary to popular belief, Australia does not have a gas supply problem, it has a gas export problem.

Australia is not short of gas, in fact we have tripled the supply of gas on the east coast. We're sucking more gas up out of the ground than ever before. 

But the complete lack of export restrictions has forced Australian households to compete with the international market.As I wrote for the New Daily, this outcome runs  contrary to the Environmental Impact Statements - contractual agreements signed by industry at the outset of their exploration projects - guaranteeing their activities would not affect domestic supply or prices. 

“Companies like Santos told their investors though this would definitely increase domestic prices, and that's a good thing, because then we'll get more money for our gas,” says Merzian.

“It was by design. We knew that this was going to happen.”

“Expensive gas and coal is the problem. But because we have not transitioned our electricity sector, because we are still a majority gas-and-coal powered country, we're beholden to international market prices.”

So where to now?

The most important priority for Australia is to transition away from oil and gas as soon as possible. 

“If we'd done that sooner, we wouldn't be in this crisis,” Merzian says. “If we were at 82% renewables like Labor wants to get to by 2030, we won't have this crisis again because we'll have enough renewables, and we’ll have diversified, smaller generators right across the country.” 

We’ll also have lots of energy storage because we won’t just be relying on big batteries or pumped hydro for our energy. 

In fact, Merzian says, we should already have started preparations for a future in which energy is generated at the point of consumption; because that future is already here. 

“I'm literally driving in storage right now, in my electric vehicle, which I can plug into my house and it can generate energy in both directions,” he says. “It can provide electricity, as well as suck it down from the grid.” 

Robertson says battery electric vehicles are coming “whether we like it or not”. And we all will be buying electric vehicles whether we like it, or whether we don’t, because nothing else will be being produced.

“We know this because the big car companies are telling us that they're not reinvesting in internal combustion engines -  they are investing in battery electric vehicles,” he says.

Electric vehicles are essentially batteries on wheels. An electric car battery is up to seven times larger than a Tesla Powerwall used to power homes, meaning we will be able to use our cars to power our houses. Those with solar panels on the roofs will be able to generate enough energy to keep their car going without drawing down much energy from the grid, and transmit power back into the grid when it’s called on - for a fee.

“It's capitalism at its best,” says Robertson. “You get paid for utilising your assets. This is the way things are going” - [or at least it’s the way it should be going] - “but thanks to governments that claimed the electric car was going to kill the weekend, there has been no planning for that.

“Like it or not, that's the way the world is going,” says Robertson. “It’s happening. And we've got to get with the programme.”

“Australia is a relatively small country in the world and we're not we're not really looking at the full implications.”

Robertson says the government still hasn’t quite realised that to get to net zero, coal and gas are going to be phased-out pretty quickly.

“But if you listen to the current resources minister, Madeline King, and the proposals coming out of cabinet, there's not a lot of change.”

Resources Minister Madeleine King on Wednesday pushed for the mining of new gas fields in Narrabri northern NSW, claiming it was inevitable for preventing future energy crises. Just yesterday ​​Santos announced “plans to conduct exploration activities" in the Pilliga.

“There has to be a fundamental acknowledgement that the whole system is going to change and we have to plan for that,” he sys. “We have to think about what that means and what that looks like and try to invest in the areas that drive us towards that inevitable future and try not to over-invest in the things that do not.” 

“We are going to see a more distributed grid. More power is going to be produced at the point of consumption, which has not historically been the case. That means changing the way we think about energy generation. It means a fundamental change in thinking for everyone, from government down to everyone involved in the power industry.”

Merzian says we must insulate - tighter building regulations, minimum insulation and energy efficiency standards for homes and apartments and “build a better grid”.

“Australia will always be beholden to expensive gas and coal as long as it runs on fossil fuels,” he says.

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