Threats to Gas Supply Deal

Aerial view of an LNG tanker docked at a coastal industrial facility with distinctive spherical storage tanks and infrastructure for natural gas.

Chris Bowen, the Energy and Climate Change minister, announced a plan to address looming supply issues for east coast homes and businesses by securing commitment from two big gas exporters (APLNG and Senex) to divert 300 petajoules of gas into the east coast domestic market by 2023. This amount is equivalent to about half of the annual East Coast domestic market demand or two years’ worth of industrial usage.

However, this new deal is already under threat from the Greens, who plan to challenge the government’s industry code of conduct in parliament. Should the coalition support the Greens’ motion, the deal could fall through, increasing the risk of gas supply shortages in the future.

The deal gives exemptions to APLNG and Senex from the $12/GJ price cap under the code of conduct. Chris Bowen stated that “This supply is critical for households, industry and gas power generation as the Bass Strait fields deplete”.

The gas price cap was introduced by the government last year, which triggered a freeze in new supply investments. After negotiations, the government revised the code of conduct, allowing exemptions for gas developers who committed to selling into the domestic market. Bowen has criticised the Greens for potentially disrupting the deal, highlighting the critical role gas will play in the energy transition and for grid reliability.

In related news, Australia’s annual climate change statement projects emissions to be 42% below 2005 levels by 2030, slightly below Labor’s election commitment of 43%.

Additionally, Chris Bowen has declined to specify the potential financial impact on taxpayers from the newly expanded Capacity Investment Scheme. The scheme involves the Australian government underwriting 32GW of new power generation through two auctions per year.

While industry experts anticipate this could cost billions annually, Bowen stated, “It is quite standard budget treatment to say we will not indicate our pricing expectations as we’re about to enter an auction”. He assured that the government’s strategy aims to maximise taxpayer benefits and maintain competitive bidding.

The scheme does not intend to “subsidising negative pricing”. Instead, it requires project proponents to state their minimum required profit and a maximum price point for sharing profits with the government. The government will retain control over bid acceptance and the total amount of gigawatts allocated.

AEMO’s Summer Readiness Briefing

Close-up of a document with the term 'El Niño' highlighted in pink.

On Monday the 13th, AEMO held their annual Summer Readiness briefing. The purpose of this report is to highlight risks and address how they will be combatted in the upcoming summer. The report highlights the well-known risks of El Niño, such as extreme peak demand due to heat (potential for POE10), and the potential for reduced wind generation. In addition to the following covered within the briefing:

  • Weather & Climate outlook
  • Electricity & Gas System Readiness
  • Network Readiness
  • Victorian Bushfire Readiness

The briefing also noted that scheduled generation availability is up across all states compared to last summer, it also points out the risk that several generators are on longer-term outages in the November–December period. Specifically, in coal generation, the following outages were highlighted:

  • QLD: Callide B1/B2, C3/C4, Gladstone 1/2, and Tarong 4
  • NSW: Bayswater 1, Eraring 2
  • VIC: Loy Yang A2, Newport, Yallourn 2

The report highlighted the effects of the positive El Niño, combined with a positive Indian Ocean Dipole (IOD) which would amplify the effects of the El Niño. The El Niño is currently expected to persist into Autumn with the positive IOD forecasted to last into at least early summer.

Additionally, there is also a number of planned high-impact network outages scheduled for the summer. However, AEMO highlights that these outages are only allowed to proceed if they do not pose any system security issues.

TransGrid presented a Bushfire Risk Management Plan which outlined the proactively management and mitigation of our exposure to bushfires. This includes risk of bushfires affecting transmission lines. Proactive management and mitigation involved vegetation management and identifying any high priority defects prior to the start of the season. Ultimately, TransGrid’s assessment indicated strong organisational preparedness for the 2023/24 bushfire season.

The report also notes needed increases in Reliability Emergency Reserve Trader (RERT) participants, specifically to the reliability gap outlined in the latest ESOO (118MW and 120MW in SA and Vic respectively).

Transmission Requires Community Engagement Realisation

Back view of two children and an adult walking towards wind turbines, the adult holding a colourful pinwheel up in the air

With the government ploughing ahead with the re-wiring the nation rhetoric and discussions about $10,000/km costs for land the attention of the AEMC and others have naturally been drawn to the requirement for community engagement.

Many panels and speakers at this years’ All Energy conference in Victoria honed in on the requirements for the local communities to be brought into the fold regarding Renewable Energy Zones, Transmission and the benefit this could bring to those communities.

The AEMC have taken this a step further and on Thursday released the final requirements which are required for any transmission projects to get through the regulatory investment test (RIT-T). They are expecting for this engagement to be across all affected parties from councils to local landowners and will ensure they not only have clear information about the proposals but they are aware of the rights they hold.

Taking directly from the AEMC announcement the main changes being made include:

  • Stakeholders are to receive information that is clear, accessible, accurate, relevant and timely and explains the rationale for the proposed project.
  • Engagement consultation materials, methods of communication and participatory processes must be tailored to the needs of different stakeholders.
  • The stakeholders’ role in the engagement process must be clearly explained to them, including how their input will be taken into account.
  • Stakeholders are provided with a range of opportunities to be regularly involved throughout the planning of ‘actionable’ or ‘future’ Integrated System Plan (ISP) projects and Renewable Energy Zones (REZs).

This is timely given the announcement from Chris Bowen who was speaking at the Future Energy conference in Adelaide this week who amongst his optimistic speech stated that “a properly constructed renewable grid is a reliable grid… is one that we can count on in difficult times,” and that access to transmission or delays in building new infrastructure would be the main contributor to Australia not meeting its targets.

These targets are now set to 82% of Australia’s energy coming from renewable sources by the end of the decade, and GHG emissions cut by 45% (in comparison to 2005 levels) by the same time.

However, with the focus of the government squaring in on transmission as the key messaging to Australia missing its targets and not the lack of cohesive renewable energy strategy for the past 10 years or the governments approvals of new gas fields, you do wonder if that is part of the reason our Minister for Climate Change and Energy is ducking the hard questions at this years COP28 in Dubai which starts at the end of the month.

The announcement that he is dispatching his Assistant Minister, Jenny McAllister has not gone unnoticed, especially by the pacific islands our Prime Minister is trying to woo this week. With those nations key to Australia being announced as the COP31 hosts, Turkey is stating they would also be interested, they intend to firmly hold Australia to its climate promises and pointing the finger will not wash with their nations at the forefront of recent climate disasters.

 

Egypt’s Gas Woes: Blackouts, Regional Tensions, and Global Market Challenges

Offshore gas drilling platform at sea, visible against the horizon under a hazy sky.

Egypt’s increasing reliance on gas has led to struggles with blackouts as domestic gas consumption soared, particularly during summer when high demand for cooling drained domestic reserves. Despite a strong start earlier in the year due to surging pipelined gas imports from Israel, the recent war between Israel and Hamas has impacted regional gas supplies adversely. The tensions led to a redirection of Israeli gas supplies through Jordan, instead of the direct subsea pipeline to Egypt, causing a temporary halt in gas imports. However, as of early November, gas imports from Israel have resumed, albeit in smaller volumes.

The disruption to supplies came at a time where Egypt had already ceased exports of LNG due to high domestic demand, with abandoned plans to resume exports in early October. Egyptian PM Mostafa Madbouly’s announcement of zero gas imports from Israel was reflective of the harsh reality, as Egypt’s cabinet confirmed a drop in gas imports from 800 million cubic feet per day, contributing to a power generation deficit and prolonged blackouts.

According to Reuters, the attacks by Hamas towards central Israel have caused US owned Chevron to cease operating their Tamar field, which resides close to the Gaza strip. This field produces in the region of 40% of all Israeli gas.

Egypt’s status as an LNG exporter is likely in jeopardy, with its only other gas rich neighbour, Cyprus, without a pipeline to directly supply Egypt. These LNG exports are a crucial supply of foreign currency earnings for Egypt, as their debt to GDP ratio was expected to peak at 97% over the Q2/Q3 period.

With the EU cutting ties to Russian gas, there are few suppliers left outside of the United States to provide crucial energy fuel supplies to the EU. The EU will be forced to reassess its energy diversification strategy should it have shortfalls over winter.

This shortage is likely to drive up LNG prices globally, with the Asian market also having fewer options to choose from. The question remains as to whether Australian LNG suppliers will be able to take advantage of a market with fewer competing sources.

Australia’s Safeguard Reforms: New Amendments and the Path Forward for Emission Regulations

Interlocking metal gears with words such as 'RULES', 'REGULATIONS', 'COMPLIANCE', 'STANDARDS', and 'POLICIES'

On Friday the Department of Climate Change, Energy the Environment and Water released the amendment to the Safeguard rule which was largely expected, but still another blow to large emitters. This came into force as of the 7th October 2023 which was the day after it was registered.  

In the latest update to the regulation default emission intensity numbers have been updated and new production variables established. This will be another blow to those Safeguard entities who will now be set to international best practice standards for the default emission intensities.  

Further to the above and also on Friday, the Climate Active certification process had a paper released, following its roundtable and workshop earlier this year. In this consultation paper they are looking to strengthen the certification process which has slipped against industry standards since its inception in 2010.  

One key concept the reforms are looking to address is that currently there is no mandatory gross emission reductions (i.e. reduction of emissions prior to offsetting) required under the legislation.  

The proposals are looking to enforce that “meaningful direct emissions reductions” are undertaken and strategised before offsetting occurs. It would also look to ensure they are tracking their performance against meaningful targets to assist them in this. This requirement will form part of the audit and will be required for them to meet and maintain their Climate Active certification.  

Interestingly they are including all scopes (1, 2, and 3) within their boundary and emission reductions although the “boundary” for this will surely be amended to allow for those outside of their direct control, especially for those within the Scope 3 targets.  

The second part of the consultation paper is looking to tighten the availability of international credits as per the Chubb review paper in late 2022. The proposal will be met by the green lobby as a half measure I am sure as they are stating that vintage requirements on international certification is put in as 5-Years which is loose to say the least. But let’s see if that has any impact at all on price or requirements before we make that call.  

The other interesting proposal is that any ACCUs used as a voluntary requirement will count towards Australia’s national emissions reduction target under the Paris Agreement. It does make you wonder how we will meet these targets at all if this is a scramble for a few voluntary certificates.  

What will be a real key item to watch is if this could this be the first step towards vintage limits on all Carbon Credits, and if so, what will that do to an already tightening supply market. With Safeguard reforms coming in and baselines declining the market is anticipating strength and vintage limits may be the catalyst to the government $75/tonne cap.  

Consultations close on this paper on the 15th December with implementation of changes from 2024 expected.  

Could We Finally Have a Post-2030 Plan?

Wind turbines at sunset overlooking a coastal landscape

You would be forgiven for missing the nuances released in the multiple papers released by the Department of Climate Change, Energy, the Environment and Water in late September. Under the heading of ‘Australian Hydrogen News’ there was a glimmer of hope we may indeed have some post RET certainty on the horizon.

In what was the smallest of the 4 papers, was the Renewable Energy Guarantee of Origin (REGO) scheme paper, which is associated with tracking renewable electricity generation.

Following on from the December 2022 paper which set out a framework for the REGO scheme, this paper is seeking views on timing, implementation and design of the scheme which is looking like it will come into effect in January 2025.

But it goes further, it strongly insinuates, that the aim of this new legislation is to provide certainty that the scheme will allow for the creation of renewable energy certificates, as per the current LGC and STC legislation but with additions post 2030. Thus, the REGO scheme will enhance the Renewable Energy Targets (RET) post 2030 when it will supersede the current legislations, but co-exist for the 5 years prior, “noting there are benefits to moving towards a single, enduring certificate creation framework.” and further it confirms the CER will continue to be the body which will administer it.

This news will be welcomed by many as the concerns around a combined “carbon equivalent” scheme both brought back memories of the old carbon taxes as well as concerns for the demand of ACCUs under the safeguard reforms exacerbating that value of carbon. If you were to include the Scope 2 emissions into that demand mix the governments proposed ceiling of $75/certificate (escalating annually) would in no doubt be reached.

Now the REGO scheme will not be changing any requirements under the RET scheme before 2030. But it is likely to remain in place until at least 2050, as such the investment certainty the market has been looking for may soon be in place. The two will co-exist with the RET liability still being required to be met by the LGC / STC component of your liability, but any voluntary surrenders above that level could be met via the REGO scheme. This could be beneficial as the changes could allow many more of these REGO certificates to be produced and thus hold the price at a softer level than the under demand LGC market. With voluntary surrenders also able to be moved out of this LGC market the demand for these certificates could also be reduced, with the hope these additional certificated could bring the value back to pre-social licence demand levels.

The changes being proposed will allow all electricity generation to be eligible to produce a REGO. This would include below baseline generation. It is noted whilst the REGO may be produced under this certain accounting methodologies, such as GreenPower would not use any of these certificates and schemes such as RE100 are likely to make changes which include further exclusion provisions for older generation power stations.

Another interesting inclusion into the REGO scheme is the further information around the inclusion of STC’s. With the increase in aggregated VPPs and orchestrated DERs the likelihood is post 2030, when most STC deeming periods expire, there is an opportunity to include these smaller schemes within the larger REGO scheme which could in turn create further issues. The reason being is a REGO will have a time stamp and the likelihood of us moving to a hourly matching requirement, is becoming much stronger in some industries. As such the consideration that the REGO is produced when 1MW is reached will not ultimately “match” the offtake it is matching which may cause issues for some stakeholders. However, it has to be assumed that if that is such a strong consideration for your internal stakeholders, they will not be matching their offtake from an aggregated small site portfolio?

One throw away comment in the paper but directly linked to this is “once the REGO scheme is in place with locational and temporal attributes, this could be used as the basis for further refinements to the NGERs market-based methodology.” Could we see post 2030 a requirement for NGERs reporting to move to hourly matching and if so at what cost to businesses? This is absolutely one to watch for in future papers.

Another interesting area being discussed is around offshore generation or export of generation which may be outside of Australia’s territorial waters. Whilst the paper defers a decision on this to the future paper “Electricity and Energy Sector Plan” they cannot defer for long as Sun Cables development shows the scenario will be emerging possibly before the legislation.

The one area they did elaborate on in slightly more detail is the position around how storage will have eligibility within the scheme. We are all acutely aware that no renewable grid can exist without significant increases in storage capability but with this comes significant opportunity for the owners of these facilities to participate in schemes such as this. The Department have on a high level proposed that the certificates produced will be “proportional to the certificates surrendered relative to the charging debit”. A fair definition, but as with all things the devil is in the detail, and we will be watching for the subordinate legislation which will outline this more comprehensively.

Overall, the paper offers little additional substance to what we knew in December, it offers slight clarifications but with the anticipated enactment of the legislation in 2024, and commencement on the 1st January 2025 businesses need to be aware of the changes being discussed and that they are not only applicable to the Hydrogen Industry, regardless of where the Department have decided to place them in consultation.

AER’s State of the Energy Market in 2023

The AER released their annual ‘State of the Energy Market’ report last Thursday for 2023 for Australia’s electricity and gas markets. This included some relatively good news as the energy system in 2023 has “experienced fewer shocks and better outcomes than in 2022”. The 2023 wholesale electricity market prices have declined from the record prices in 2022, largely due to the government interventions in the coal and gas markets. Despite the decline, prices remain high by historical standards.

A media release by the AER accompanying the report stated, “Increases in wholesale energy prices were evident in retail prices, with estimated electricity bills rising between 9% and 20% in all NEM jurisdictions in 2022-23, impacting households already experiencing broader cost-of-living pressures. “

The report highlighted the pressures for investment in renewables to permit the retirement of coal generation. The report also commented on Liddell’s retirement in April 2023 going smoothly due to the new renewable generation and recent favourable market conditions.

The transition to new energy infrastructure faces several challenges:

  • The vast scale and required coordination of investments.
  • Rising costs in the infrastructure sector.
  • The need for community engagement in infrastructure planning and development.

The report highlighted the government involvement and support in investments including joint initiatives between Australia Government and state and territory governments.

The dynamic between electricity and gas markets is increasingly interconnected. As regions shift from gas demand to electricity demand (like replacing gas heating with electric air conditioning), it’s anticipated that pressure on gas markets will decrease, while electricity demand will surge. Factors like electric vehicle adoption will further influence electricity demand and the necessity for new infrastructure.

Furthermore, planning will now also factor in emissions reduction to serve the long-term interests of energy consumers, integrating it with other goals such as price, reliability, and supply security.

An interesting comment was made in the report executive summary highlighting concerns in the industry surrounding issues of competition in the market and market power outlined below.

“Our concerns are around the reduced liquidity of exchange-traded hedging products, the declining number of clearing service providers for electricity derivatives, and the levels of concentration of ownership of flexible generation capacity, particularly in NSW and Victoria. The AER’s anticipated new powers in relation to contract market monitoring will allow us to better monitor participant behaviour and gain sharper insights on issues of competition and market power.”

Powering Up: How Australia Is Revolutionising Its Electricity Grid

The launch of the Very Fast FCAS markets on 9 October 2023, 1300 (market time) will add two new FCAS markets, “very fast” Raise Contingency FCAS, and “very fast” Lower Contingency FCAS. These markets will enable frequency control by providing full active power response within 2 seconds, as opposed to the existing 6 seconds with the “fast” services. With the ability to respond to changes in power supply and demand within a second, these markets will provide a much-needed boost to the resilience of the National Electricity Market (NEM). As we move towards a future increasingly powered by renewable energy sources, the importance of maintaining a stable and secure power supply becomes even greater.

However, not everyone is convinced that the introduction of Very Fast FCAS markets is a positive development. Some critics argue that the increased competition created by these markets could drive down prices, potentially leading to lower revenues for generators and less investment in new capacity. There are also fears that the faster response times required by Very Fast FCAS markets may introduce technical challenges and increase the risk of errors or failures in the system. Furthermore, some stakeholders worry that the introduction of Very Fast FCAS markets represents a case of “scope creep,” where changes to the Market Ancillary Services System (MASS) exceed the original intent of the review and encroach on other areas of the NEM.

Despite these concerns, many see the benefits of Very Fast FCAS markets outweighing the drawbacks. By preparing for these changes now, businesses can take advantage of the opportunities presented by a more responsive and agile power grid.

In addition, the Department of Climate Change, Energy, the Environment, and Water is currently seeking feedback on its proposed Renewable Electricity Guarantee of Origin (REGO) scheme, which was originally proposed in Q4 2022, and aims to provide a stable framework for investors in the renewable energy sector.

The REGO scheme builds upon the existing Large-scale Generation Certificate (LGC) model but includes several key improvements. Firstly, it allows for greater transparency in reporting Scope 2 electricity emissions, making it easier for companies to demonstrate their commitment to sustainability. Secondly, it provides a long-term vision for the integration of offshore energy generation, improved electricity storage solutions, and distributed energy resources. Finally, it enables policymakers to adapt to changing market conditions and implement new policies as needed.

Another important development in the NEM is the Australian Energy Market Commission’s (AEMC) draft report on the Retailer Reliability Obligation (RRO). The RRO was introduced in 2019 to address concerns about the reliability of the power grid as the NEM transitions away from traditional fossil fuel-based generation towards cleaner, more intermittent sources of energy. Under the RRO, retailers must hold sufficient supplies of reliable generation and demand management resources, such as battery storage, pumped hydro storage, and demand response mechanisms, to meet customer demand during periods of peak usage.

While the RRO has been successful in encouraging retailers to invest in reliable resources, certain issues remain that need to be addressed. For instance, the current triggers for the RRO can create perverse incentives for retailers to over-invest in expensive peaking generators rather than cheaper, more efficient alternatives. Additionally, there are concerns that the RRO does not adequately account for the variability of renewable energy sources, leading to unnecessary expenditure on backup generation.

To address these problems, the AEMC’s draft report proposes several changes to the RRO. One suggestion is to replace the existing T-1 trigger, which is based solely on forecast demand, with a hybrid trigger that takes into consideration both forecast demand and actual supply. This change should help prevent situations where retailers are incentivised to overspend on backup generation due to overly conservative demand forecasts. Other recommended adjustments include allowing retailers to use non-generation sources of supply, such as demand response, to meet their obligations, and introducing an explicit mechanism for determining the reliability standard. Feedback on the draft is due by 2 November 2023, with the final report expected to be released in February 2024.

Overall, the launch of the Very Fast FCAS markets, the development of the REGO scheme, and the proposed modifications to the RRO form part of a broader effort to create a more reliable, resilient, and sustainable power grid for all Australians. While there may be disagreement around the specifics of each proposal, few dispute the urgent need for reform if we are to achieve our climate goals while keeping the lights on and the economy humming.

Queensland’s SuperGrid Infrastructure Blueprint: A Bold Vision or a Tall Order?

Engineers in safety vests and helmets discussing renewable energy solutions on a laptop at a wind turbine electricity plant during twilight

In September 2022, the Queensland government unveiled its SuperGrid Infrastructure Blueprint, a comprehensive plan aimed at transforming the state’s energy landscape. With ambitious targets of achieving 70% renewable energy by 2032 and 80% by 2035, the blueprint sets out to revolutionise the state’s historically coal-dependent energy sector. But, as the initial excitement subsides, concerns regarding feasibility and practicality have begun to surface.

At the heart of the blueprint are six Renewable Energy Zones (REZs), designed to harness the state’s abundant wind and solar resources. These zones have been hailed as the cornerstone of Queensland’s renewable energy future, yet the involvement of various stakeholders, including First Nations people and local farmers, introduces complexities that may impede progress.

One of the primary concerns surrounding the blueprint is the intermittency of renewable energy sources. To address this issue, the plan proposes a significant investment in long-duration storage, complemented by an additional 3 GW of grid-scale storage. However, questions linger regarding the sufficiency of these measures to ensure a stable power supply during periods of high demand. With further delays to Snowy 2.0, the optimism of pumped hydro projects being completed on time has plummeted.

Furthermore, while the blueprint mentions low to zero emission gas-fired generation, the vagueness surrounding the term “low to zero” raises doubts about the commitment to truly reducing emissions. This ambiguity could undermine public trust in the project and create uncertainty for investors.

Another point of contention is Queensland’s continued reliance on its connection with New South Wales. Although this relationship provides a safety net, it also suggests a possible lack of confidence in the state’s independent capability to meet its energy needs.

Powerlink, the entity responsible for facilitating community engagement, faces the daunting task of balancing diverse interests and opinions. While the blueprint’s emphasis on collaboration is laudable, experienced observers may view this approach as a potential hindrance to timely decision-making.

Despite reservations, the SuperGrid Infrastructure Blueprint offers numerous opportunities for innovation and growth, particularly for those familiar with navigating regulatory frameworks. Nevertheless, the magnitude of the challenges ahead cannot be ignored. Bureaucratic obstacles, coupled with the weight of expectation placed upon Renewable Energy Zones, leaves room for doubt regarding Queensland’s ability to deliver on its promises.

In conclusion, the SuperGrid Infrastructure Blueprint represents a bold vision for Queensland’s energy future, but its success hangs in the balance. Either the state will emerge as a leader in the global transition to renewables, or it will serve as a cautionary tale of overambition. Only time will tell if Queensland has taken a confident step forward or a tentative shuffle into the unknown.

Retailers, Retailers Everywhere, and not a Lesson Learned

In August, AEMO received five registrations for new customer status customers to come into the market as a Market Customer, the latest and most publicised of these being Tesla Energy Ventures Australia Pty Ltd. Now, this wouldn’t be their first foray into the energy markets, they already have their energy arm out of the US and are expanding rapidly within the Australian space.

But Tesla is not alone; the AER has seen 22 new electricity retail licence applications since 2020, including the newly formed Ampol Energy, Smartest, and Telstra.

Now whilst competition is great for any market, I am absolutely not a monopolist, I do view this market penetration with slight concern.

With the UK seeing over 27 Energy Suppliers going under since January 2021, unregulated and “low cost”, usually spot exposed participants, with little to no risk profiling, can cause burden and costs to our market, never mind eroding the confidence of consumers. The UK offers a valuable lesson in this space and is one I fear has not been headed by our regulators.

With the cost of Retailer of Last Resort passed through to consumers who have had no dealings with those companies, but the market operator forced to share the burden, where does the responsibility for the failure sit? I would note the AEMC have released improvements papers to try and address some of these questions, but with the increasing number of these retailers entering the energy markets is it going to be too little too late.

With this summer promising some significant volatility, between RRO in SA, the ESOO stating the risk of shortages in both Victoria and South Australia now exceeds the strictest benchmark this coming summer, an all but certain El Niño bringing heat and reduced wind generation, and AEMO searching for Reserve Energy Markets across the NEM, including TAS for the first time, the volatility could expose some of these participants to more credit calls than their cash flow can handle.

Only time will tell, and luckily most of these retailers do not have a significant market share at this time, but this summer could be the spotlight the regulators need to tighten the requirements for new retailers. Or maybe not.